EX-99.2 3 ex99210qq12019recast.htm EXHIBIT 99.2 Exhibit

Exhibit 99.2
Cowen Inc.
Part 1 Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements

Notes to Unaudited Condensed Consolidated Financial Statements
22. Segment Reporting
The Company conducts its operations through two segments: the Op Co segment which consists of Cowen Investment Management (“CIM”), Investment Banking, Markets and Research, and the Asset Co segment which consists of the Company’s private investments, private real estate business and other legacy multi-sector long/short equity strategies.
The performance measure for these segments is Economic Income (Loss), which management uses to evaluate the financial performance of and make operating decisions for the segments including determining appropriate compensation levels. Expenses not directly associated with specific segments are allocated based on the most relevant measures applicable, including headcount, square footage and other factors.
In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for Consolidated Funds and excludes (ii) goodwill and intangible impairment (iii) certain other transaction-related adjustments and/or reorganization expenses and (iv) certain costs associated with debt. Economic Operating Income (Loss) represents Economic Income (Loss) before depreciation and amortization expenses. In addition, Economic Income (Loss) revenues include investment income that represents the income the Company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For US GAAP purposes, these items are included in each of their respective line items. Economic Income (Loss) revenues also include management fees, incentive income and investment income earned through the Company's investment as a general partner in certain real estate entities and the Company's investment in the activist business and certain investment funds. For US GAAP purposes, all of these items, are recorded in other income (loss). Economic Income (Loss) recognizes (a) incentive fees during periods when the fees are not yet crystallized for US GAAP reporting and (b) retainer fees, relating to investment banking activities, earned during the period that would otherwise be deferred until closing for US GAAP reporting. In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for US GAAP purposes is presented gross as part of revenue.
As further stated below, one major difference between Economic Income (Loss) and US GAAP net income (loss) is that Economic Income (Loss) presents the segments' results of operations without the impact resulting from the full consolidation of any of the Consolidated Funds. The consolidation of these investment funds' results include the pro rata share of the income or loss attributable to other owners of such entities which is reflected in net income (loss) attributable to redeemable non-controlling interest in consolidated subsidiaries in the accompanying condensed consolidated statements of operations. This pro rata share has no effect on the overall financial performance for the segments, as ultimately, this income or loss is not income or loss for the segments themselves. Included in Economic Income (Loss) is the actual pro rata share of the income or loss attributable to the Company as an investor in such entities, which is relevant in management making operating decisions and evaluating financial performance. The Company does not disclose total asset information for its business segments as the information is not reviewed by the CODM.
The following tables set forth operating results for the Company's Op Co and Asset Co segments and related adjustments necessary to reconcile the Company's Economic Income (Loss) measure to arrive at the Company's consolidated US GAAP net income (loss):



Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
Adjustments
 
 
 
 
 
Operating Company
 
Asset Company
 
Total Economic Income (Loss)
 
Funds
Consolidation
 
Other
Adjustments
 
 
 
US GAAP Net Income (Loss)
 
(dollars in thousands)
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment banking
$
82,991

 
$
—

 
$
82,991

 
$
—

 
$
(2,885
)
 
(a)
 
$
80,106

Brokerage
105,157

 
—

 
105,157

 
—

 
(7,694
)
 
(b)
 
97,463

Management fees
9,728

 
703

 
10,431

 
(501
)
 
(2,789
)
 
(c)
 
7,141

Incentive income (loss)
16,637

 
110

 
16,747

 
(544
)
 
(16,188
)
 
(c)
 
15

Investment income (loss)
16,142

 
842

 
16,984

 
—

 
(16,984
)
 
(d)
 
—

Interest and dividends
—

 
—

 
—

 
—

 
29,092

 
(b)(d)
 
29,092

Reimbursement from affiliates
—

 
—

 
—

 
(34
)
 
322

 
(f)
 
288

Reinsurance premiums
—

 
—

 
—

 
—

 
6,591

 
(g)
 
6,591

Other revenue
1,123

 
36

 
1,159

 
—

 
(98
)
 
(g)
 
1,061

Consolidated Funds revenues
—

 
—

 
—

 
2,340

 
—

 
 
 
2,340

Total revenues
231,778

 
1,691

 
233,469

 
1,261

 
(10,633
)
 
 
 
224,097

Interest expense (Economic Income/(Loss)) / Interest and dividend expense (US GAAP)
5,317

 
1,247

 
6,564

 
—

 
22,520

 
(b)(d)
 
29,084

Total net revenues
226,461

 
444

 
226,905

 
1,261

 
(33,153
)
 
 
 
195,013

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Non interest expense
205,753

 
1,432

 
207,185

 
—

 
12,122

 
(a)(f)(h)(i)
 
219,307

Consolidated Funds expenses
—

 
—

 
—

 
1,482

 
—

 
 
 
1,482

Total expenses
205,753

 
1,432

 
207,185

 
1,482

 
12,122

 
 
 
220,789

Total other income (loss)
—

 
—

 
—

 
621

 
40,321

 
(c)(d)(i)
 
40,942

Income taxes expense / (benefit)
—

 
—

 
—

 
—

 
3,177

 
(h)
 
3,177

Income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and investment funds
1,801

 
947

 
2,748

 
400

 
(942
)
 
 
 
2,206

Income (loss) attributable to Cowen Inc.
18,907

 
(1,935
)
 
16,972

 
—

 
(7,189
)
 
 
 
9,783

Less: Preferred stock dividends
1,375

 
323

 
1,698

 
—

 
—

 
 
 
1,698

Economic income (loss) / Income (loss) attributable to Cowen Inc. common stockholders
17,532

 
(2,258
)
 
15,274

 
$
—

 
$
(7,189
)
 
 
 
$
8,085

Add back: Depreciation and amortization expense
4,939

 
17

 
4,956

 
 
 
 
 
 
 
 
Economic operating income (loss)
$
22,471

 
$
(2,241
)
 
$
20,230

 
 
 
 
 
 
 
 



Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
Adjustments
 
 
 
 
 
Operating Company
 
Asset Company
 
Total Economic Income (Loss)
 
Funds
Consolidation
 
Other
Adjustments
 
 
 
US GAAP Net Income (Loss)
 
(dollars in thousands)
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment banking
$
93,924

 
$
—

 
$
93,924

 
$
—

 
$
4,064

 
(a)
 
$
97,988

Brokerage
114,071

 
—

 
114,071

 
—

 
(8,338
)
 
(b)
 
105,733

Management fees
11,279

 
1,847

 
13,126

 
(1,203
)
 
(4,506
)
 
(c)
 
7,417

Incentive income (loss)
3,039

 
2,158

 
5,197

 
(9
)
 
(5,172
)
 
(c)
 
16

Investment income (loss)
18,233

 
(3,932
)
 
14,301

 
—

 
(14,301
)
 
(d)(e)
 
—

Interest and dividends
—

 
—

 
—

 
—

 
25,954

 
(b)(d)
 
25,954

Reimbursement from affiliates
—

 
—

 
—

 
(68
)
 
445

 
(f)
 
377

Aircraft lease revenue
—

 
—

 
—

 
—

 
715

 
(e)
 
715

Reinsurance premiums
—

 
—

 
—

 
—

 
8,647

 
(g)
 
8,647

Other revenue
664

 
224

 
888

 
—

 
448

 
(g)
 
1,336

Consolidated Funds revenues
—

 
—

 
—

 
3,201

 
—

 
 
 
3,201

Total revenues
241,210

 
297

 
241,507

 
1,921

 
7,956

 
 
 
251,384

Interest expense (Economic Income/(Loss)) / Interest and dividend expense (US GAAP)
4,528

 
1,430

 
5,958

 
—

 
18,582

 
(b)(d)
 
24,540

Total net revenues
236,682

 
(1,133
)
 
235,549

 
1,921

 
(10,626
)
 
 
 
226,844

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Non interest expense
206,375

 
2,958

 
209,333

 
—

 
13,982

 
(a)(f)(h)(i)
 
223,315

Consolidated Funds expenses
—

 
—

 
—

 
2,431

 
—

 
 
 
2,431

Total expenses
206,375

 
2,958

 
209,333

 
2,431

 
13,982

 
 
 
225,746

Total other income (loss)
—

 
—

 
—

 
10,047

 
23,787

 
(c)(d)(i)
 
33,834

Income taxes expense / (benefit)
—

 
—

 
—

 
—

 
6,923

 
(h)
 
6,923

Income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and investment funds
2,140

 
18

 
2,158

 
9,537

 
(539
)
 
 
 
11,156

Income (loss) attributable to Cowen Inc.
28,167

 
(4,109
)
 
24,058

 
—

 
(7,205
)
 
 
 
16,853

Less: Preferred stock dividends
1,290

 
408

 
1,698

 
—

 
—

 
 
 
1,698

Economic income (loss) / Income (loss) attributable to Cowen Inc. common stockholders
26,877

 
(4,517
)
 
22,360

 
$
—

 
$
(7,205
)
 
 
 
$
15,155

Add back: Depreciation and amortization expense
2,929

 
57

 
2,986

 
 
 
 
 
 
 
 
Economic operating income (loss)
$
29,806

 
$
(4,460
)
 
$
25,346

 
 
 
 
 
 
 
 

The following is a summary of the adjustments made to US GAAP net income (loss) for the segment to arrive at
Economic Income (Loss):
Funds Consolidation: The impacts of consolidation and the related elimination entries of the Consolidated Funds are not included in Economic Income (Loss). Adjustments to reconcile to US GAAP net income (loss) included elimination of incentive income and management fees earned from the Consolidated Funds and addition of investment fund expenses excluding management fees paid, investment fund revenues and investment income (loss).
Other Adjustments:
(a)
Economic Income (Loss) presents underwriting expenses net of investment banking revenues, expenses reimbursed from clients within their respective expense category. Economic Income (Loss) also records retainer fees, relating to investment banking activities, collectible during the period that would otherwise be deferred until closing for US GAAP reporting.



Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


(b)
Economic Income (Loss) brokerage revenues included net securities borrowed and securities loaned activities which are shown gross in interest income and interest expense for US GAAP.
(c)
Economic Income (Loss) recognizes revenues (i) net of distribution fees paid to agents, (ii) records income from uncrystallized incentive fees and (iii) the Company's proportionate share of management and incentive fees of certain real estate operating entities, the healthcare royalty business and the activist business.
(d)
Economic Income (Loss) recognizes Company income from proprietary trading (including interest and dividends).
(e)
Aircraft lease revenue is shown net of expenses in investment income for Economic Income (Loss).
(f)
Reimbursement from affiliates is shown as a reduction of Economic Income expenses, but is included as a part of revenues under US GAAP.
(g) Economic Income (Loss) recognizes underwriting income from the Company's insurance related activities, net of expenses, within other revenue.
(h) Economic Income (Loss) excludes income taxes and acquisition related adjustments as management does not consider these items when evaluating the performance of the segment.
(i) Economic Income (Loss) recognizes the Company's proportionate share of expenses, for certain real estate operating entities and the activist business, for which the investments are recorded under the equity method of accounting for investments.



Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Segment Analysis and Economic Income (Loss)
Segments
The Company conducts its operations through two segments: an Operating Company segment ("Op Co") and an Asset Company ("Asset Co") segment. For a more detailed discussion regarding the Company's segments, see Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations "Overview" section.
Economic Income (Loss)
The performance measure used by the Company for each segment is Economic Income (Loss), which management uses to evaluate the financial performance of and to make operating decisions for the Company as a whole and each segment. Accordingly, management assesses its business by analyzing the performance of each segment and believes that investors should review the same performance measure that it uses to analyze its segment and business performance. In addition, management believes that Economic Income (Loss) is helpful to gain an understanding of its segment results of operations because it reflects such results on a consistent basis for all periods presented.
Our Economic Income (Loss) may not be comparable to similarly titled measures used by other companies. We use Economic Income (Loss) as a measure of each segment's operating performance, not as a measure of liquidity. Economic Income (Loss) should not be considered in isolation or as a substitute for operating income, net income, operating cash flows, investing and financing activities, or other income or cash flow statement data prepared in accordance with US GAAP. As a result of the adjustments made to arrive at Economic Income (Loss), Economic Income (Loss) has limitations in that it does not take into account certain items included or excluded under US GAAP, including our Consolidated Funds. Economic Income (Loss) is considered by management as a supplemental measure to the US GAAP results to provide a more complete understanding of each segment's performance as measured by management. For a reconciliation of Economic Income (Loss) to US GAAP net income (loss) for the periods presented and additional information regarding the reconciling adjustments discussed above, see Note 22 to the Company's condensed consolidated financial statements included elsewhere in this Form 10-Q.
In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for Consolidated Funds and excludes (ii) goodwill and intangible impairment (iii) certain other transaction-related adjustments and/or reorganization expenses and (iv) certain costs associated with debt. Economic Operating Income (Loss) represents Economic Income (Loss) before depreciation and amortization expenses. In addition, Economic Income (Loss) revenues include investment income that represents the income the Company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For US GAAP purposes, these items are included in each of their respective line items. Economic Income (Loss) revenues also include management fees, incentive income and investment income earned through the Company's investment as a general partner in certain real estate entities and the Company's investment in the activist business and certain investment funds. For US GAAP purposes, all of these items, are recorded in other income (loss). Economic Income (Loss) recognizes (a) incentive fees during periods when the fees are not yet crystallized for US GAAP reporting and (b) retainer fees, relating to investment banking activities, earned during the period that would otherwise be deferred until closing for US GAAP reporting. In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for US GAAP purposes is presented gross as part of revenue.


Economic Income (Loss) Revenues
The Company's principal sources of Economic Income (Loss) revenues are derived from activities in the following business segments:
The Op Co segment generates revenue through five principle sources: investment banking revenue, brokerage revenue, management fees, incentive income and investment income from the Company's own capital.
The Asset Co segment generates revenue through three principle sources: management fees, incentive income and investment income from the Company's own capital.
Economic Income (Loss) Expenses
The Company's Economic Income (Loss) expenses consist of non-interest expenses and interest expense. Non-interest expenses consist of compensation and benefits and non-compensation expenses (fixed and variable), less reimbursement from affiliates.
Non-controlling Interests


Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the partners of such entities.
Three Months Ended March 31, 2019 Compared with Three Months Ended March 31, 2018
 
Three Months Ended March 31,
 
Total
Period-to-Period
 
2019
 
2018
 
 
Operating Company
 
Asset Company
 
Total
 
Operating Company
 
Asset Company
 
Total
 
$ Change
 
% Change
 
(dollars in thousands)
Economic Income Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment banking
$
82,991

 
$
—

 
$
82,991

 
$
93,924

 
$
—

 
$
93,924

 
$
(10,933
)
 
(12
)%
Brokerage
105,157

 
—

 
105,157

 
114,071

 
—

 
114,071

 
(8,914
)
 
(8
)%
Management fees
9,728

 
703

 
10,431

 
11,279

 
1,847

 
13,126

 
(2,695
)
 
(21
)%
Incentive income (loss)
16,637

 
110

 
16,747

 
3,039

 
2,158

 
5,197

 
11,550

 
222
 %
Investment income (loss)
16,142

 
842

 
16,984

 
18,233

 
(3,932
)
 
14,301

 
2,683

 
19
 %
Other income (loss)
1,123

 
36

 
1,159

 
664

 
224

 
888

 
271

 
31
 %
Total economic income revenues
231,778

 
1,691

 
233,469

 
241,210

 
297

 
241,507

 
(8,038
)
 
(3
)%
Interest expense
5,317

 
1,247

 
6,564

 
4,528

 
1,430

 
5,958

 
606

 
10
 %
Total net revenues
$
226,461

 
$
444

 
$
226,905

 
$
236,682

 
$
(1,133
)
 
$
235,549

 
$
(8,644
)
 
(4
)%
Economic Income (Loss)
Operating Company Segment Revenues
Op Co Segment Economic Income (Loss) revenues were $231.8 million for the three months ended March 31, 2019, a decrease of $9.4 million compared to Economic Income (Loss) revenues of $241.2 million in the prior year period.
Investment Banking.    Investment banking revenues decreased $10.9 million to $83.0 million for the three months ended March 31, 2019 compared with $93.9 million in the prior year period. During the three months ended March 31, 2019, the Company completed 30 capital markets transactions and nine strategic advisory transactions. During the three months ended March 31, 2018, the Company completed 36 underwriting transactions, five strategic advisory transactions and one debt capital markets transaction. The implied average underwriting fee per transaction was 13.3% lower for the three months ended March 31, 2019 as compared to the prior year period.
Brokerage.    Brokerage revenues decreased $8.9 million to $105.2 million for the three months ended March 31, 2019, compared with $114.1 million in the prior year period. This was attributable to decreases in cash equity commissions, prime services revenue, commission management revenue, and non-US commissions. Customer trading volumes across the industry (according to Bloomberg) decreased 1% for the quarter ended March 31, 2019 compared to the prior year period.
Management Fees.    Management fees for the segment decreased $1.6 million to $9.7 million for the three months ended March 31, 2019 compared with $11.3 million in the prior year period. This decrease in management fees was primarily related to a decrease in management fees from activist business.
Incentive Income (Loss).    Incentive income for the segment increased $13.6 million to $16.6 million for the three months ended March 31, 2019 compared with $3.0 million in the prior year period. This increase was related to an increase in performance fees from the activist business.
Investment Income (Loss).    Investment income for the segment decreased $2.1 million to $16.1 million for the three months ended March 31, 2019 compared with $18.2 million in the prior year period. The decrease primarily relates to a decrease in performance of the Company's own invested capital.
Other Income (Loss).    Other income (loss) for the segment increased $0.4 million to $1.1 million for the three months ended March 31, 2019 compared with $0.7 million in the prior year period. The increase primarily relates to an increase in income from the Company's reinsurance business.
Asset Company Segment Revenues
Asset Co segment Economic Income (Loss) revenues were $1.7 million for the three months ended March 31, 2019 an increase of $1.4 million compared with Economic Income (Loss) revenues of $0.3 million in the prior year.


Management Fees.    Management fees for the segment decreased $1.1 million to $0.7 million for the three months ended March 31, 2019 compared with $1.8 million in the prior year period. This decrease in management fees was primarily related to a decrease in management fees from the real estate business.
Incentive Income (Loss).    Incentive income for the segment decreased $2.0 million to $0.1 million for the three months ended March 31, 2019 compared with $2.2 million in the prior year period. This decrease was related to a decrease in performance fees from the multi-strategy business.
Investment Income (Loss).    Investment income for the segment increased $4.7 million to $0.8 million for the three months ended March 31, 2019, compared with a loss of $3.9 million in the prior year period. The increase primarily relates to an increase in performance of the Company's own invested capital.
Other Income (Loss).    Other income (loss) for the segment decreased $0.2 million for the three months ended March 31, 2019, compared to the prior year period.