Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. COWEN INC. (1466538) 10-Q published on Aug 01, 2019 at 7:42 am
Reporting Period: Jun 29, 2019
The Company determines if an arrangement is or contains a lease at inception. The Company’s operating lease arrangements are primarily for real estate and facility leases as well as office equipment. The Company has applied an accounting policy election to combine its lease and nonlease components for its real estate and facility leases. ROU assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company's variable lease payments consist of nonlease services related to the lease. Variable lease payments are excluded from the right-of-use asset and lease liabilities to the extent they are not based on consumer priced index or a market index and are recognized in the period in which the obligation for those payments is incurred. As most of the Company's leases do not provide an implicit rate and the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Right-of-use assets also include any lease payments made and exclude lease incentives. Many of the Company's operating lease agreements include options to extend the lease, which the Company does not include in the determination of the minimum lease term unless the options are reasonably certain to be exercised. Expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
obligation as the services are not separately identifiable in the context of the contract. Commission revenues associated with combined trade execution and clearing services on a standalone basis, are recognized at a point in time on trade-date. Commissions revenues are generally paid on settlement date and the Company records a receivable between trade-date and payment on settlement date. The Company permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as "soft dollar arrangements". The Company also offers institutional clients the ability to allocate a portion of their gross commissions incurred on trades executed with various brokers to pay for research products and other services provided by third parties by entering into commission sharing arrangements. The Company acts as an agent in the soft dollar and commission sharing arrangements as the customer controls the use of the soft dollars and directs payments to third-party service providers on its behalf. Accordingly, amounts allocated to soft dollar arrangements are netted against commission revenues and recorded on trade date. Commissions on soft dollar brokerage are recorded net of the related expenditures. The costs of commission sharing arrangements are recorded for each eligible trade and shown net of commission revenue.
The Company may also make loans to employees or other affiliates, excluding executive officers of the Company. These loans are interest bearing and settle pursuant to the agreed-upon terms with such employees or affiliates, and are included in due from related parties in the accompanying condensed consolidated statements of financial condition. As of June 30, 2019 and December 31, 2018, loans to employees of $14.6 million and $17.0 million, respectively, were included in due from related parties on the accompanying condensed consolidated statements of financial condition. Of these amounts $7.3 million and $8.8 million, respectively, are related to forgivable loans. These forgivable loans provide for a cash payment up-front to employees, with the amount due back to the Company forgiven over a vesting period. An employee that voluntarily ceases employment, or is terminated with cause, is generally required to pay back to the Company any unvested forgivable loans granted to them. The forgivable loans are recorded as an asset to the Company on the date of grant and payment, and then amortized to compensation expense on a straight-line basis over the vesting period. The vesting period on forgivable loans is generally one to three years. The Company recorded compensation expense of $0.9 million and $0.8 million for the three months ended June 30, 2019 and 2018, and $1.8 million and $1.4 million for the six months ended June 30, 2019, and 2018, respectively. This expense is included in employee compensation and benefits in the accompanying condensed consolidated statement of operations. For the three and six months ended June 30, 2019, the interest income was $0.1 million for these related party loans and advances, respectively, and are included in interest and dividends in the accompanying condensed consolidated statement of operations. For the three and six months ended June 30, 2018, the interest income was immaterial for these related party loans and advances, respectively, and are included in interest and dividends in the accompanying condensed consolidated statement of operations.
The Company invests a significant portion of its capital base to help drive results and facilitate the growth of Op Co and Asset Co business segments. Within Op Co, Management allocates capital to three primary investment categories: (i) broker dealer capital and related trading strategies; (ii) liquid alternative trading strategies; and (iii) public and private health care strategies. Broker dealer capital and related trading strategies include capital investments in the Company’s broker dealers as well as securities finance and SPAC trading strategies to grow liquidity and returns within operating businesses. Much of the Company’s public and private healthcare strategies and liquid alternative trading strategies portfolios are invested alongside the Company's investment management clients. The Company’s liquid alternative trading strategies include merger arbitrage and activist fund strategies. In addition from time to time, the Company makes investments in private capital raising transactions of its investment banking clients.
In conjunction with the Company’s change in segments, the Company restructured its historical investment management reporting unit between the Op Co’s CIM division reporting unit and the Asset Co reporting unit. Based on the change in segments and restructuring of reporting units, the Company determined that it was necessary to perform a quantitative impairment test. The Company estimated the fair value of its reporting units immediately before and after the change in segments and restructuring of reporting units using the income and market approach which involves estimates of future cash flows, discount rates, economic forecast and other assumptions which are then used in the market approach (earnings and / or transactions multiples) and / or income approach (discounted cash flow method). Based on the results of the impairment analysis as of June 30, 2019, the Company recognized a goodwill impairment in the amount of $4.1 million within the Asset Co reporting unit.