Cohen & Company Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Amounts below are in millions unless noted. Cohen & Company is a financial services company with Capital Markets, Asset Management and Principal Investing segments.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $18.6 | $8.8 |
| Operating loss | $(3.4) | $(7.5) |
| Income (loss) before tax | $24.0 | $(9.5) |
| Consolidated net income (loss) | $23.5 | $(10.1) |
| Net income (loss) attributable to Cohen & Company Inc. | $2.0 | $(2.6) |
| Basic and diluted EPS | $1.28 | $(1.77) |
| Cash provided by (used in) operating activities | $5.1 | $(27.7) |
- Revenue rose 110%. New issue and advisory revenue increased to $24.4 million from $0.9 million, primarily from CCM. Net trading revenue rose 20% to $9.8 million; asset management revenue rose 34% to $2.7 million.
- Principal transactions and other income were a loss of $18.4 million, versus a loss of $2.3 million. The filing attributes much of the deterioration to valuation losses on investments in public companies, including Zoomcar, Next.e.GO and Semilux.
- Equity-method affiliate income was $29.0 million, compared with a $0.4 million loss. The increase primarily reflected SPAC sponsor-related investments; notable reported gains included Murano Global, Brand Engagement Network and Critical Metals, partly offset by losses in other holdings. This contributed substantially to reported net income despite the operating loss.
- Operating expenses increased 35% to $21.9 million, led by compensation and benefits, up 41% to $14.8 million, and professional fees and other operating expense, up 57% to $3.4 million. Management cited changes in incentive compensation among the drivers of higher compensation.
Balance sheet, liquidity and financing
- At March 31, 2024, total assets were $1,061.3 million, liabilities $948.0 million, and total equity $113.3 million. Cash and cash equivalents were $11.8 million, versus $10.7 million at year-end 2023.
- Resale-agreement receivables were $692.4 million and repurchase-agreement liabilities $690.9 million, both substantially higher than at year-end and largely associated with the gestation repo business. These short-term financing balances are presented gross; the Company reports matching collateral value of $698.6 million.
- Debt carrying value was $29.7 million. It included $4.5 million of 2020 Senior Notes, amended in January 2024 to extend maturity to January 2026 and increase the rate to 12%, plus junior subordinated notes with $49.6 million aggregate par value and a substantial unamortized discount. The reported combined yield to maturity on the junior notes was 21.67% under the stated rate assumption.
- The $15 million Byline Bank credit facility had no amount drawn at quarter-end and was available for draws only until June 18, 2024, when borrowings would mature. The Company said it was compliant with the facility’s financial covenants. A separate legacy covenant violation on Alesco Capital Trust I debt restricts issuance of additional debt pari passu with or junior to that debt; management said it does not expect a material adverse impact.
- JVB reported $53.9 million of net capital against a $0.25 million minimum; CCFESA reported $1.6 million of net liquid capital against a $0.7 million minimum. Management stated that available cash and its trading portfolio and borrowing capacity should meet near-term operating needs, while cautioning that replacement or additional financing may not be available on favorable terms.
- AUM was $2.31 billion at quarter-end, including $983 million in company-sponsored CDOs; management reported CDOs represented 43% of AUM. CDO fees declined slightly, while fees from other vehicles increased, primarily from recognition of deferred performance fees.
Cash flow and other developments
- Investing activities used $2.9 million and financing activities used $1.0 million. Operating cash flow benefited from trading-related cash movements, including repo activity; it should be assessed alongside the significant noncash investment and affiliate earnings items.
- The Company recognized $8.6 million of new issue and advisory revenue in public-company shares rather than cash. It also disclosed that advisory instruments can be restricted or illiquid and may later generate valuation losses.
- The January 2024 Section 382 rights plan is intended to protect the potential use of tax loss carryforwards. The Company also had an at-the-market equity program, but had sold no shares under it by March 31, 2024.
- The board declared a $0.25-per-share quarterly dividend on May 2, 2024, payable June 5, 2024. The filing cautions that future dividends are discretionary and may be reduced or discontinued.
Outlook, risks and contingencies
- Management emphasizes that results are volatile and not predictable. New issue and advisory revenue depends on a limited number of transactions closing, and principal investment and SPAC-related results are exposed to public equity prices and valuation changes.
- Management described ongoing margin and volume pressure in parts of fixed-income brokerage and sensitivity to interest rates, inflation, mortgage origination activity, market volatility and competition. It noted that a further decline in SPAC and post-combination company share prices could cause additional losses.
- The gestation repo business is concentrated on the demand side, with seven reverse-repo counterparties at quarter-end. Repo and clearing arrangements can require additional collateral; a default or inability to meet margin calls could disrupt operations or create losses. A 100-basis-point rise across the yield curve was estimated to reduce the value of net interest-rate-sensitive assets by $2.1 million.
- The Company’s investment adviser, CCFM, is subject to an SEC Enforcement Division investigation concerning disclosure practices around conflicts of interest and other matters. The Company is cooperating, cannot predict the outcome, and says related costs could be material.
- Management reported disclosure controls were effective as of March 31, 2024, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the unusually large $29.0 million equity-method gain and associated SPAC sponsor valuations are sustainable, realizable, and supported by subsequent-period results.
- How much of advisory revenue was received in noncash or restricted instruments, and the timing and recoverability of those holdings.
- The status and outcome of the SEC investigation, including potential costs or remedies.
- The status of the Byline facility after its June 18, 2024 draw and maturity dates, and the Company’s other near-term financing needs.
- Repo counterparty concentration, collateral and margin requirements, regulatory capital available for distribution, and the capacity to maintain dividends.