Item 1A. Risk Factors
Item 1A. Risk Factors
In addition to the information set forth in this Quarterly Report on Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 , that could materially and adversely affect our business, financial condition, and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. There have been no material changes in the significant factors that may affect our business and operations as described in “Item 1A—Risk Factors” of the Annual Report on 10-K for the year ended December 31, 2019 .
The effects of the outbreak of the novel coronavirus (“COVID-19”) have negatively affected the global economy, the United States economy and the global financial markets, and may disrupt our operations and our clients’ and counterparties’ operations, which could have an adverse effect on our business, financial condition and results of operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of individuals infected with COVID-19. All states have declared states of emergency. Similar impacts have been experienced in every country in which we do business. Impacts to our business could be widespread and global, and material impacts may be possible, including the following:
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Our employees contracting COVID-19;
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Reductions in our operating effectiveness as our employees work from home or disaster-recovery locations;
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Unavailability of key personnel necessary to conduct our business activities;
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Unprecedented volatility in global financial markets;
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Reductions in revenue across our operating businesses;
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Closure of our offices or the offices of our clients; and
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De-globalization.
While the Company cannot fully assess the impact COVID-19 will have on all of its operations, at this time, there are certain impacts that the Company has identified:
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The unprecedented volatility of the financial markets experienced in March 2020, has caused the Company to operate JVB, the Company’s wholly owned U.S. broker-dealer subsidiary, at a lower level of leverage than prior to the pandemic. Specifically, the Company has reduced the size of its GCF repo operations and the volume of its TBA trading. The Company determined that at its pre-pandemic levels in these businesses, it was exposed to a high level of counterparty credit risk and was experiencing too much volatility in its available liquidity to meet capital requirements and margin calls in these businesses. The Company expects to operate at lower volumes in both these businesses for a significant period of time, which will impact the operating profitability of JVB.
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The financial market volatility, as well as the reduction in volumes in the GCF repo and TBA businesses, that resulted from COVID-19 required the Company to reassess the goodwill it had recorded related to JVB. The Company determined that the fair value of JVB was less than the carrying value (including the goodwill). As a result, the Company recorded an impairment loss of $7.9 million in the three months ended June 30, 2020 .
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The Company expects that its asset management segment will also be adversely impacted by the pandemic. While it is difficult to determine the extent of the impact at this time, the Company expects that raising capital for new funds may become more challenging. In addition, lower returns earned by funds will adversely impact the Company’s asset management fees, and investors’ need for liquidity may result in reductions in assets under management.
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The Company’s mortgage group’s operations are centered on serving the financial needs of mortgage originators and institutions that invest in mortgage backed securities. Prolonged high unemployment will most likely impact mortgage originations and demand for and supply of mortgage backed securities, which may have a significant impact on the revenue earned by JVB’s mortgage group.
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The Company has taken decisive actions to protect employees and mitigate the impact of COVID-19, including transitioning employees to remote work and limiting onsite presence. To date, the Company has been able to avoid layoffs and furloughs of employees.
As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.
The further spread of the COVID-19 outbreak may materially disrupt banking and other financial activity generally and in the areas in which we operate. This would likely result in a decline in demand for our products and services, which would negatively impact our liquidity position and our business strategies. Any one or more of these developments could have a material adverse effect on our and our consolidated subsidiaries’ business, operations, consolidated financial condition, and consolidated results of operations.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as COVID-19, or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks, extreme terrestrial or solar weather events or other natural disasters, could create economic and financial disruptions, and could lead to operational difficulties (including travel limitations) that could impair our ability to manage our businesses.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.