Notes to Condensed Consolidated Financial
Statements
1. Organization
ZAIS Group Holdings, Inc.
(“ZAIS”, and collectively with its consolidated subsidiaries, as the context may require, the “Company”)
is a holding company conducting substantially all of its operations through ZAIS Group, LLC (“ZAIS Group”), an investment
advisory and asset management firm focused on specialized credit which commenced operations in July 1997 and is headquartered in
Red Bank, New Jersey. ZAIS Group also maintains an office in London. ZAIS Group is a wholly-owned consolidated subsidiary of ZAIS
Group Parent, LLC (“ZGP”), a majority-owned consolidated subsidiary of ZAIS. ZAIS is the managing member of ZGP.
ZAIS Group is registered
with the SEC under the Investment Advisors Act of 1940 and with the Commodity Futures Trading Commission as a Commodity Pool Operator
and Commodity Trading Advisor. ZAIS Group provides investment advisory and asset management services to private funds, separately
managed accounts, structured vehicles (collateralized debt obligation vehicles and collateralized loan obligation vehicles, together
referred to as “CLOs”) and, through October 31, 2016, ZAIS Financial Corp. (“ZFC REIT”), a publicly traded
mortgage real estate investment trust (collectively, the “ZAIS Managed Entities”).
On February 15, 2017,
the Board of Directors of the Company (the “Board of Directors”) established a Special Committee of independent and
disinterested directors to consider any proposals by management or third parties for strategic transactions. The Board of Directors
has been undertaking a strategic review of the Company’s business in order to enhance shareholder value, and has engaged
a financial advisor for this purpose. Various alternatives have been and are being considered, including a possible sale or combination
or other similar transaction, or a going private transaction which would result in the termination of the registration of ZAIS
Class A common stock (“Class A Common Stock”) so as to cease periodic and other public company compliance and reporting.
The Company has received from and provided to potential counterparties certain due diligence information. In addition, the Company’s
management and financial advisor have held and expect to continue to hold preliminary discussions with potential counterparties
and participants. There is no assurance that any of the preliminary discussions which have taken place or may in the future take
place will result in any transaction or that any of the strategic alternatives under consideration will be implemented. The Company
does not intend to provide periodic public updates on any of these matters except as required by law or regulation
The ZAIS Managed Entities
predominantly invest in a variety of specialized credit instruments including corporate credit instruments such as CLOs, securities
backed by residential mortgage loans, bank loans and various securities and instruments backed by these asset classes. ZAIS Group
had the following assets under management (“AUM”):
Reporting Period
|
|
Approximately
(in
billions)
|
|
As of June 30, 2017
(1)
|
|
$
|
3.752
|
|
As of December 31, 2016
|
|
$
|
3.444
|
|
(1)
On
April 19, 2017, the ZAIS Opportunity Fund, Ltd. received a redemption request for a redemption of approximately $68.3 million
(value date of June 30, 2017) from a European investor impacted by regulatory constraints. This redemption is expected to
be effectuated on August 31, 2017. The AUM amount presented has not been reduced for this redemption request.
ZAIS Group also serves
as the general partner to certain ZAIS Managed Entities, which are generally organized as pass-through entities for U.S. federal
income tax purposes.
The Company’s primary sources of
revenues are (i) management fee income, which is based predominantly on the net asset values of the ZAIS Managed Entities and (ii)
incentive income, which is based on the investment performance of the ZAIS Managed Entities. Any management fee income and incentive
income earned by ZAIS Group from the consolidated ZAIS Managed Entities (the “Consolidated Funds”) is eliminated in
consolidation.
Additionally,
a significant source of the Company’s revenues and other income is derived from income of Consolidated Funds, net gains
of Consolidated Funds’ investments and net gains on beneficial interests in collateralized financing entities which
invest in bank loans. A portion of income of Consolidated Funds and net gains of Consolidated Funds’ investments are allocated to non-controlling interests in Consolidated Funds.
2. Basis of Presentation and Summary of Significant
Accounting Policies
Basis of Presentation
The accompanying
unaudited, interim, consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles ("U.S. GAAP") as contained within the Financial Accounting Standards Board’s
("FASB") Accounting Standards Codification ("ASC") and the rules and regulations of the SEC for interim
reporting. In the opinion of management, all adjustments considered necessary for a fair statement of the Company's financial
position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating
results presented for the interim periods are not necessarily indicative of the results that may be expected for any other
interim period or for the entire year. Certain information and note disclosures normally included in financial statements
prepared in accordance with U.S. GAAP as contained in the ASC have been condensed or omitted from the unaudited interim
condensed consolidated financial statements according to the SEC rules and regulations. The information and disclosures
contained in these unaudited interim condensed consolidated financial statements and notes should be read in conjunction with
the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K. Certain comparative amounts in the consolidated financial statements have been reclassified to conform to
the current period presentation.
Segment Reporting
The Company currently
is comprised of one reportable segment, the investment management segment, and substantially all of the Company’s operations
are conducted through this segment. The investment management segment provides investment advisory and asset management services
to the ZAIS Managed Entities.
Use of Estimates
The preparation of the
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that
the estimates used in preparing the consolidated financial statements are reasonable and prudent, actual results may ultimately
materially differ from those estimates.
Principles of Consolidation
The consolidated financial
statements included herein are the financial statements of ZAIS, its subsidiaries and the Consolidated Funds. All intercompany
balances and transactions are eliminated in consolidation, including ZAIS’s investment in ZGP and ZGP’s investment
in ZAIS Group. The Company's fiscal year ends on December 31.
The consolidated financial
statements include non-controlling interests in ZGP which is comprised of Class A Units of ZGP (“Class A Units”) held
by Christian Zugel, the former managing member of ZGP and the founder and Chief Investment Officer of ZAIS Group, and certain related
parties (collectively, the “ZGP Founder Members”).
The Company’s consolidated
financial statements also include variable interest entities for which ZAIS Group is considered the primary beneficiary, and certain
entities that are considered voting interest entities in which ZAIS Group has a controlling financial interest.
The Consolidated Funds
include the following entities for the reporting periods presented:
|
|
As of
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
Entity
|
|
June 30,
2017
|
|
December 31,
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAIS Zephyr A-6, LP (“Zephyr A-6”)
|
|
ü
|
|
ü
|
|
ü
|
|
ü
|
|
ü
|
|
ü
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAIS CLO 5, Limited
(“ZAIS CLO 5”)
|
|
ü
|
|
ü
|
|
ü
|
|
—
|
|
ü
|
|
—
|
The Consolidated Funds,
except for consolidated CLOs, are deemed to be investment companies under U.S. GAAP, and therefore, the Company has retained the
specialized investment company accounting of these consolidated entities in its consolidated financial statements. The economic
interests which are held by third-party investors are reflected as non-controlling interests in Consolidated Funds.
The Company has
elected the fair value option for the assets and liabilities held by the Consolidated Funds that otherwise would not have been
carried at fair value. See Notes 4 and 5 for further disclosure on the assets and liabilities of the Consolidated Funds for which
the fair value option has been elected.
For consolidated
CLOs, the Company uses the measurement alternative included in the collateralized financing entity guidance (the
“Measurement Alternative”). The Company measures both the financial assets and financial liabilities of the
consolidated CLO in its consolidated financial statements using the fair value of the financial assets of the consolidated
CLO, which are more observable than the fair value of the financial liabilities of the consolidated CLO. As a result, the
financial assets of the consolidated CLO are measured at fair value and the financial liabilities are measured in
consolidation as: the sum of the fair value of the financial assets and the carrying value of any non-financial assets that
are incidental to the operations of the CLO less (ii) the sum of the fair value of any beneficial interests retained by the
reporting entity (other than those that represent compensation for services) and the Company’s carrying value of any
beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial
liabilities (other than the beneficial interest retained by the Company) using a reasonable and consistent methodology. Under
the Measurement Alternative, the Company’s consolidated net income reflects the Company’s own economic interests
in the consolidated CLO including changes in the (i) fair value of the beneficial interests retained by the Company and (ii)
beneficial interests that represent compensation for collateral management services. Such changes are presented in Net gain
(loss) on beneficial interest of collateralized financing entity in the Consolidated Statements of Comprehensive Income
(Loss).
The majority of
the economic interests in the CLOs are held by outside parties, and are reported as notes payable of
consolidated CLOs in the consolidated financial statements. The notes payable issued by the CLOs are backed by diversified
collateral asset portfolios consisting primarily of loans or structured debt. In exchange for managing the collateral for the
CLOs, ZAIS Group may earn investment management fees, including, in some cases, subordinated management fees and contingent
incentive fees. All of the management fee income, incentive income and Net gain (loss) on investments earned by ZAIS Group
from the Consolidated Funds are eliminated in consolidation.
Reimbursement Revenue
ZAIS Group may pay research
and data services expenses relating to the management of the ZAIS Managed Entities directly to vendors and may allocate a portion
of these costs to the respective ZAIS Managed Entities per the terms of the related agreements (the “Research Costs”).
These amounts may be reimbursable by the respective ZAIS Managed Entities and are recorded as Reimbursement revenue in the Consolidated
Statements of Comprehensive Income (Loss) to the extent the Company is the primary obligor for such expenses and if the costs are
charged back to the respective funds. The amounts for the three and six months ended June 30, 2016 were not material and therefore
were not separately reported in the Consolidated Statements of Comprehensive Income (Loss).
Income of Consolidated Funds
Income of
Consolidated Funds reflects the interest income recognized by Zephyr A-6 related to its investments in unconsolidated CLOs. Any
di
sc
o
un
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s
and
pre
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i
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f
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.
The effective interest rates are calculated using projected cash flows including the impact of paydowns on each of the aforementioned
securities.
Non-Controlling Interests
The non-controlling interests
within the Consolidated Statements of Financial Condition may be comprised of (i) redeemable non-controlling interests reported
outside of the permanent capital section when investors have the right to redeem their interests from a Consolidated Fund or ZAIS
Group, (ii) equity attributable to non-controlling interests in Consolidated Funds (excluding CLOs) reported inside the permanent
capital section when the investors do not have the right to redeem their interests and (iii) equity attributable to non-controlling
interests in ZGP inside the permanent capital section, if applicable.
The Company records non-controlling
interests in the Consolidated Funds (excluding CLOs) to reflect the economic interests in those funds held by investors other than
interests attributable to ZAIS Group. Income allocated to non-controlling interests in ZGP includes the portion of management fee
income received from ZFC REIT that was payable to holders of Class B interests in ZAIS REIT Management, LLC (“ZAIS REIT Management”),
a majority owned subsidiary of ZAIS Group which was the external adviser to ZFC REIT prior to October 31, 2016 (see Note 6 –
“Management Fee Income and Incentive Income”).
Recent Accounting Pronouncements
Since May 2014, the FASB
has issued ASU Nos. 2014-09, 2015-14, 2016-08, 2016-10 and 2016-12,
Revenue from Contracts with Customers
. The objective
of the guidance is to clarify the principles for recognizing revenue and supersedes most current revenue recognition guidance,
including industry-specific guidance. The guidance is to be applied retrospectively to all prior periods presented or through a
cumulative adjustment in the year of adoption, for interim and annual periods beginning after December 15, 2017. The Company currently
recognizes incentive income subject to contingent repayment once all contingencies have been resolved. Whereas the new guidance
requires an entity to recognize such revenue when it concludes that it is probable that a significant reversal in the cumulative
amount of revenue recognized will not occur when the uncertainty is resolved. As such, the adoption of the new guidance may require
the Company to recognize incentive income earlier than as prescribed under current guidance. The Company is currently evaluating
the impact of adopting this new standard.
In January 2016,
the FASB issued ASU No. 2016-01,
Financial Instruments─Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities
(“ASU 2016-01”). The amendments, among other things, (i)
requires equity investments (except those accounted for under the equity method of accounting, or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii)
requires public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; (iii) requires separate presentation of financial assets and financial liabilities by measurement
category and form of financial asset (i.e., securities or loans and receivables) and (iv) eliminates the requirement for
public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is
required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for public companies
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is
currently evaluating the impact of adopting this new standard. The adoption of ASU 2016-01 is not expected to have a
material effect on the Company’s consolidated financial statements.
In February 2016, the
FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). Under the new guidance, lessees are required
to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases.
The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including
interim periods within that reporting period with early adoption permitted. The Company is currently evaluating the impact of adopting
this new standard.
In August 2016, the
FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU
2016-15”). This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant
in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business
combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance
policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance
principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early application is permitted, including adoption in an interim period. The
adoption of ASU 2016-15 is not expected to have a material effect on the Company's consolidated financial statements.
In
December 2016 the FASB issued ASU 2016-19,
Technical Corrections and Improvements
. As part of this guidance, ASU 2016-19
amends FASB ASC 820 to clarify the difference between a valuation approach and a valuation technique. The amendment also requires
an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. ASU 2016-19
is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2016. The Company has adopted ASU 2016-19 on its consolidated financial
statements and disclosures. The adoption of ASU 2016-19 has not had a material impact on its consolidated financial statements.
3. Investments in Affiliates
In February 2017, ZAIS Group made a $5.0 million
commitment to a ZAIS Managed Entity which focuses on investing in non-ZAIS managed CLOs, none of which has been called as of August
14, 2017.
In June 2017, ZAIS Group made a $5.0 million
commitment to a ZAIS Managed Entity which carries first loss risk. ZAIS Group funded its entire $5.0 million commitment on June
29, 2017.
At June 30, 2017 and December
31, 2016, the Company held investments in six and five unconsolidated ZAIS Managed Entities (excluding an investment in a ZAIS
Managed Entity for which no capital has been called as of August 14, 2017), respectively.
The Company applied the
Fair Value Option to its investments in the ZAIS Managed Entities that are not consolidated. The Company believes that reporting
the fair value of these investments is more indicative of the Company’s financial position than historical cost.
The fair value of these investments was as
follows:
June
30,
2017
|
|
|
December
31,
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
$
|
10,288
|
|
|
$
|
5,273
|
|
The Company recorded a
change in unrealized gain (loss) associated with the investments still held at the end of each respective period as follows:
Three Months Ended
|
|
|
Six Months Ended
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2
|
|
|
$
|
25
|
|
|
$
|
15
|
|
|
$
|
(22
|
)
|
Such amounts are included in Net gain (loss)
on investments in the Consolidated Statements of Comprehensive Income (Loss).
At June 30, 2017 and December
31, 2016, no equity investment, individually or in the aggregate, held by the Company exceeded 20% of its total consolidated assets.
Additionally, the Company did not have any income related to these investments, individually or in the aggregate, which exceeded
20% of its total Consolidated net income net of tax for the six months ended June 30, 2017 or June 30, 2016. As such, the Company
did not present separate or summarized financial statements for any of its investees.
4. Fair Value Measurements
ASC 820 Fair Value Measurements
defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements
under U.S. GAAP. Specifically, this guidance defines fair value based on exit price, or the price that would be received upon the
sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date.
Fair value under U.S. GAAP represents an exit price in the normal course of business, not a forced liquidation price. If the Company
was forced to sell assets in a short period to meet liquidity needs, the prices it receives could be substantially less than their
recorded fair values.
The Company follows the
fair value measurement and disclosure guidance under U.S. GAAP, which establishes a hierarchical disclosure framework. This framework
prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability
is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state
of the marketplace including the existence and transparency of transactions between market participants. Investments with readily
available active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally
will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. In all cases,
an instrument’s level within the hierarchy is based upon the market pricing transparency of the instrument and does not necessarily
correspond to the Company’s perceived risk or liquidity of the instrument.
The Company considers
observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary,
and provided by independent sources that are actively involved in the relevant market. In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within
the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the
fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires significant judgment and considers factors specific to the investment.
Assets and liabilities
that are measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 — Fair value is determined
based on quoted prices for identical assets or liabilities in an active market at measurement date. Assets and liabilities included
in Level 1 include listed securities. As required in the fair value measurement and disclosure guidance under U.S. GAAP, the Company
does not adjust the quoted price for these investments. The hierarchy gives highest priority to Level 1.
Level 2 — Fair value is determined
based on inputs other than quoted prices that are observable for the asset or liability either directly or indirectly as of the
reporting date. Assets and liabilities which are generally included in this category include corporate bonds and loans, less liquid
and restricted equity securities and certain over-the-counter derivatives, including foreign exchange forward contracts whose values
are based on the following:
|
•
|
Quoted prices for similar assets or liabilities in active markets.
|
|
•
|
Quoted prices for identical or similar assets or liabilities in non-active markets.
|
|
•
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
|
|
•
|
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
|
Level 3 — Fair value
is determined based on inputs that are unobservable for the investment and includes situations where there is little, if any, market
activity for the asset or liability. The inputs into the determination of fair value require significant management judgment or
estimation and the Company may use models or other valuation methodologies to arrive at fair value. Investments that are included
in this category generally include distressed debt, less liquid corporate debt securities, non-investment grade residual interests
in securitizations, collateralized debt obligations and certain derivative contracts. The hierarchy gives the lowest priority to
Level 3.
The Company has established
a valuation process that applies for all levels of investments in the valuation hierarchy to ensure that the valuation techniques
are consistent and verifiable. The valuation process includes discussions between the valuation team, portfolio management team
and the valuation committee (the “Valuation Committee”). The Valuation Committee consists of senior members of ZAIS
Group and is chaired by the Chief Financial Officer of ZAIS Group. The Valuation Committee meets to review and approve the results
of the valuation process which are used in connection with the preparation of quarterly and annual financial statements. The Valuation
Committee is responsible for oversight and review of the written valuation policies and procedures and ensuring that they are applied
consistently.
The lack of an established,
liquid secondary market for some of the Company’s holdings may have an adverse effect on the market value of those holdings
and on the Company’s ability to dispose of them. Additionally, the public markets for the Company’s holdings may experience
periods of volatility and periods of reduced liquidity and the Company’s holdings may be subject to certain other transfer
restrictions that may further contribute to illiquidity. Such illiquidity may adversely affect the price and timing of liquidations
of the Company’s holdings.
The following is a description
of the valuation techniques used to measure fair value:
Investments in Bank Loans
The Company uses a nationally
recognized pricing source to provide pricing for the bank loans held by the Consolidated Funds.
Investments in CLOs
ZAIS determined the fair
value of the investments in CLOs generally with input from a third party pricing source. ZAIS verifies that the quotes
received from the valuation source are reflective of fair value as defined in U.S. GAAP, generally by comparing trading activity
for similar asset classes, pricing research provided by banks and brokers, indicative broker quotes and results from an external
cash flows analytics tool.
Collateralized Loan Obligation – Warehouses
A Collateralized Loan
Obligation Warehouse ("CLO Warehouse") is an entity organized for the purpose of holding syndicated bank loans, also
known as leveraged loans, prior to the issuance of securities from that same vehicle. During the warehouse period, a CLO
Warehouse will secure investments and build a portfolio of primarily leveraged loans and other debt obligations. The warehouse
period terminates when the collateralized loan obligation vehicle issues various tranches of securities to the market. At this
time, financing through the issuance of debt and equity securities is used to repay the bank financing.
The fair value of a CLO
Warehouse is determined by adding the excess spread (accrued interest plus interest received less financing cost) to the CLO Warehouse
equity contribution made by the Consolidated Funds, unless ZAIS Group determines that the securitization will not be achieved,
in which case, the fair value of a CLO Warehouse will be established based on the fair value of the underlying bank loan positions
which are valued in a manner consistent with ZAIS Group’s valuation policy and procedures. CLO warehouses can be exposed
to credit events, mark to market changes, rating agency downgrades and financing cost changes. Changes in the fair value of a CLO
Warehouse are reported in Net gain (loss) of Consolidated Funds’ investments in the Consolidated Statements of Comprehensive
Income (Loss).
Investment in Affiliates
Under U.S. GAAP, the Company
is permitted, as a practical expedient, to estimate the fair value of its investments in other investment companies using the net
asset value (or its equivalent) of the related investment company. Accordingly, the Company utilizes the net asset value in valuing
its investments in the unconsolidated ZAIS Managed Entities, which is an amount equal to the sum of the Company’s proportionate
interest in the capital accounts of the affiliated entities at fair value. The fair value of the assets and liabilities of the
ZAIS Managed Entities are determined by the Company in accordance with its valuation policies described above. Investments measured
at fair value using the practical expedient are not required to be categorized within the fair value hierarchy. The resulting net
gains or losses on investments are included in Net gain (loss) on investments in the Consolidated Statements of Comprehensive Income
(Loss).
The valuation of the Company’s
investments in unconsolidated ZAIS Managed Entities represents the amount the Company would receive at June 30, 2017 and December
31, 2016, respectively, if it were to liquidate its investments in these entities. ZAIS Group has the ability to liquidate its
investments according to the provisions of the respective entities’ operative agreements.
Notes payable of Consolidated CLO
The fair value of
notes payable of Consolidated CLO is determined by applying the Measurement Alternative.
The following tables summarize
the Company’s assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy levels or
based on net asset values, as applicable:
|
|
June 30,
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Net Asset
Value
|
|
|
Total
|
|
Assets, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
16,103
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliates, at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,288
|
|
|
|
10,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
|
—
|
|
|
|
—
|
|
|
|
396,408
|
|
|
|
—
|
|
|
|
396,408
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
|
—
|
|
|
|
—
|
|
|
|
18,998
|
|
|
|
—
|
|
|
|
18,998
|
|
Mezzanine notes
|
|
|
—
|
|
|
|
—
|
|
|
|
3,950
|
|
|
|
—
|
|
|
|
3,950
|
|
Subordinated notes
|
|
|
—
|
|
|
|
—
|
|
|
|
2,346
|
|
|
|
—
|
|
|
|
2,346
|
|
Warehouse
|
|
|
—
|
|
|
|
—
|
|
|
|
25,005
|
|
|
|
—
|
|
|
|
25,005
|
|
Total – investments, at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
446,707
|
|
|
|
—
|
|
|
|
446,707
|
|
Total assets, at fair value
|
|
$
|
16,103
|
|
|
$
|
—
|
|
|
$
|
446,707
|
|
|
$
|
10,288
|
|
|
$
|
473,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of Consolidated CLO, at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
384,519
|
|
|
|
—
|
|
|
|
384,519
|
|
Total liabilities, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
384,519
|
|
|
$
|
—
|
|
|
$
|
384,519
|
|
|
|
December
31, 2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Net Asset
Value
|
|
|
Total
|
|
Assets, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
36,971
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliates, at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,273
|
|
|
|
5,273
|
|
Assets of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
|
—
|
|
|
|
—
|
|
|
|
389,329
|
|
|
|
—
|
|
|
|
389,329
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse
|
|
|
—
|
|
|
|
—
|
|
|
|
15,036
|
|
|
|
—
|
|
|
|
15,036
|
|
Total – investments, at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
404,365
|
|
|
|
—
|
|
|
|
404,365
|
|
Total assets, at fair value
|
|
$
|
36,971
|
|
|
$
|
—
|
|
|
$
|
404,365
|
|
|
$
|
5,273
|
|
|
$
|
446,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of Consolidated CLO, at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
384,901
|
|
|
|
—
|
|
|
|
384,901
|
|
Total liabilities, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
384,901
|
|
|
$
|
—
|
|
|
$
|
384,901
|
|
The following tables summarize the changes
in the Company’s Level 3 assets:
|
|
Six Months Ended June 30, 2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
Beginning
Balance
January 1,
2017
|
|
|
Purchases/
Issuances
|
|
|
Sales/
Redemptions/
Settlements
|
|
|
Total
Realized
and
Change in
Unrealized
Gains
(Losses)
|
|
|
Amortization
of Discounts/
Premiums
|
|
|
Transfers
to (from)
Level 3
|
|
|
Ending
Balance
June 30, 2017
|
|
|
Change in
Unrealized
Gains/Losses
Relating to
Assets and
Liabilities
Still Held at
June 30,
2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
$
|
389,329
|
|
|
$
|
211,967
|
|
|
$
|
(201,635
|
)
|
|
$
|
(3,939
|
)
|
|
$
|
686
|
|
|
$
|
—
|
|
|
$
|
396,408
|
|
|
$
|
(2,655
|
)
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
|
—
|
|
|
|
19,000
|
|
|
|
—
|
|
|
|
(106
|
)
|
|
|
104
|
|
|
|
—
|
|
|
|
18,998
|
|
|
|
(106
|
)
|
Mezzanine notes
|
|
|
—
|
|
|
|
3,950
|
|
|
|
—
|
|
|
|
(44
|
)
|
|
|
44
|
|
|
|
—
|
|
|
|
3,950
|
|
|
|
(44
|
)
|
Subordinated
notes
|
|
|
—
|
|
|
|
6,072
|
|
|
|
(3,872
|
)
|
|
|
113
|
|
|
|
33
|
|
|
|
—
|
|
|
|
2,346
|
|
|
|
(111
|
)
|
Warehouse
|
|
|
15,036
|
|
|
|
55,000
|
|
|
|
(45,000
|
)
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
25,005
|
|
|
|
(5
|
)
|
Total
investments, at fair value
|
|
$
|
404,365
|
|
|
$
|
295,989
|
|
|
$
|
(250,507
|
)
|
|
$
|
(4,007
|
)
|
|
$
|
867
|
|
|
$
|
—
|
|
|
$
|
446,707
|
|
|
$
|
(2,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable of Consolidated CLO, at fair value
|
|
$
|
384,901
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(382
|
)
|
|
|
$
|
|
|
$
|
—
|
|
|
$
|
384,519
|
|
|
$
|
(382
|
)
|
Total
liabilities, at fair value
|
|
$
|
384,901
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(382
|
)
|
|
|
$
|
|
|
$
|
—
|
|
|
$
|
384,519
|
|
|
$
|
(382
|
)
|
|
|
Six Months
Ended June 30, 2016
|
|
|
|
( Dollars in thousands )
|
|
|
|
Beginning
Balance
January 1,
2016
|
|
|
Purchases/
Issuances
|
|
|
Sales/
Redemptions/
Settlements
|
|
|
Total
Realized
and
Change in
Unrealized
Gains
(Losses)
|
|
|
Transfers
to (from)
Level 3
|
|
|
Ending
Balance
June
30,
2016
|
|
|
Change in
Unrealized
Gains/Losses
Relating to
Assets and
Liabilities
Still Held at
June 30,
2016
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse
|
|
$
|
30,509
|
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
3,692
|
|
|
$
|
—
|
|
|
$
|
44,201
|
|
|
$
|
3,692
|
|
Total investments, at fair value
|
|
$
|
30,509
|
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
3,692
|
|
|
$
|
—
|
|
|
$
|
44,201
|
|
|
$
|
3,692
|
|
The Company’s policy is to record transfers
between Level 1, Level 2 and Level 3, if any, at the beginning of the period. There were no transfers between Level 1, Level 2
and Level 3 during the six months ended June 30, 2017 or June 30, 2016.
The tables below summarize
information about the significant unobservable inputs used in determining the fair value of the Level 3 assets and liabilities
held by the Consolidated Funds:
Investment Type
|
|
Fair Value
at
June
30, 2017
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Amount/
Percentage
|
|
Min
|
|
|
Max
|
|
|
Weighted
Average
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of Consolidated Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
$
|
396,408
|
|
|
Third party pricing source
|
|
Not
applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
|
18,998
|
|
|
Third party pricing source
|
|
Not
applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mezzanine notes
|
|
|
3,950
|
|
|
Third party pricing source
|
|
Not
applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subordinated notes
|
|
|
2,346
|
|
|
Third party pricing source
|
|
Not
applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Warehouse
|
|
|
25,005
|
|
|
Cost plus excess spread
|
|
Excess
spread
|
|
0.02%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total – Investments, at fair value
|
|
$
|
446,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Consolidated Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of Consolidated CLO, at fair value
|
|
$
|
384,519
|
|
|
Measurement Alternative
|
|
Not
applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total – Notes payable of Consolidated CLO, at fair value
|
|
$
|
384,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Type
|
|
Fair Value
at
December
31, 2016
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Amount/
Percentage
|
|
Min
|
|
|
Max
|
|
|
Weighted
Average
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of Consolidated Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
$
|
389,329
|
|
|
Third party valuation source
|
|
Not applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse
|
|
|
15,036
|
|
|
Cost plus excess spread
|
|
Excess spread
|
|
0.2%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total – Investments, at fair value
|
|
$
|
404,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Consolidated Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of Consolidated CLO, at fair value
|
|
$
|
384,901
|
|
|
Measurement Alternative
|
|
Not applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total – Notes payable of Consolidated CLO, at fair value
|
|
$
|
384,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Variable Interest Entities
In the ordinary course
of business, ZAIS Group sponsors the formation of variable interest entities (“VIEs”) that can be broadly classified
into the following categories: hedge funds, hybrid private equity funds and CLOs. ZAIS Group generally serves as the investment
advisor or collateral manager with certain investment-related, decision-making authority for these entities. The Company has not
recorded any liabilities with respect to VIEs that are not consolidated.
Funds
The Company has determined
that the fee it receives from several of the hedge funds and hybrid private equity funds ZAIS Group manages do not represent a
variable interest, because ZAIS Group’s fee arrangements are commensurate with the level of effort performed and include
only customary terms that do not represent variable interests. The Company considered investments its related parties have in these
entities when determining if ZAIS Group’s fee represented a variable interest.
ZAIS Group owns 51% of
a majority-owned affiliate, Zephyr A-6, which was formed to invest in collateralized loan obligation vehicles, including
during the related warehouse period of such vehicles. The Company has determined that ZAIS Group is the primary beneficiary
of Zephyr A-6 and therefore has consolidated Zephyr A-6 in its consolidated financial statements at June 30, 2017 and
December 31, 2016 and for the three and six months ended June 30, 2017 and June 30, 2016. ZAIS Group is the primary
beneficiary since it is deemed to have (i) the power to direct activities of the entity that most significantly impact its
economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity
that could potentially be significant to the entity.
Zephyr A-6’s investments
are as follows:
ZAIS CLO 5
ZAIS CLO 5, which priced
on September 23, 2016 and closed on October 26, 2016, invests primarily in first lien senior secured bank loans and had a total
capitalization of $408.5 million at the time of closing, which consisted of senior and mezzanine notes with an aggregate par amount
of $368.0 million and subordinated notes of $40.5 million. The CLO matures in October 2028. In connection with the closing, Zephyr
A-6 recognized a dividend of $8.8 million which represents gains that were realized under the terms of the CLO Warehouse agreement.
Zephyr A-6’s initial
investment in ZAIS CLO 5 was $20.3 million ($20.5 million par), which represented approximately a 2.1% economic interest in the
senior and mezzanine notes and approximately 31.8% economic interest in the subordinated notes. The Company determined that it
is the primary beneficiary of ZAIS CLO 5 based on (i) its ability to impact the activities which most significantly impact ZAIS
CLO 5’s economic performance as collateral manger and (ii) Zephyr A-6’s significant investment in the subordinated
notes of ZAIS CLO 5. Therefore, the Company consolidated ZAIS CLO 5 in its financial statements at June 30, 2017 and December 31,
2016 and for the three and six months ended June 30, 2017.
In February 2017 Zephyr A-6 sold its interest
in the Class A-1 tranche of ZAIS CLO 5 for a sales price of approximately $5.4 million and recognized a loss of approximately $81,000.
Such amount is included in Net gain (loss) on beneficial interest of collateralized financing entity in the Consolidated Statements
of Comprehensive Income (Loss).
Zephyr A-6 had an
investment of $12.7 million and $19.5 million in ZAIS CLO 5, at fair value, at June 30, 2017 and December 31, 2016,
respectively. These investments represent approximately a 0.6% economic interest in the senior and mezzanine notes and a
31.8% economic interest in the subordinated notes of ZAIS CLO 5 at June 30, 2017. These investments represent approximately a
2.1% economic interest in the senior and mezzanine notes and a 31.8% economic interest in the subordinated notes of ZAIS CLO
5 at December 31, 2016.
ZAIS CLO 5 was in the
warehouse phase during the three and six months ended June 30, 2016 and continued to finance the majority of its loan purchases
using its warehouse facility (the “ZAIS CLO 5 Warehouse Period”). The Company was not required to consolidate ZAIS
CLO 5 during the ZAIS CLO 5 Warehouse Period.
ZAIS CLO 6,
Limited (“ZAIS CLO 6”)
ZAIS CLO 6, which
priced on May 3, 2017 and closed on June 1, 2017 (the “ZAIS CLO 6 Closing Date”), invests primarily in first lien
senior secured bank loans and had a total capitalization of $512.0 million on the ZAIS CLO 6 Closing Date, which consisted of
senior and mezzanine notes with an aggregate par amount of $460.0 million and subordinated notes of $52.0 million. The CLO
matures in July 2029. In connection with the closing, Zephyr A-6 recognized a dividend of $2.7 million which represents gains
that were realized under the terms of the CLO Warehouse agreement. Zephyr A-6’s initial investment of $29.0 million in
ZAIS CLO 6 represented approximately a 5.0% economic interest in the senior and mezzanine note tranches and approximately a
13.5% economic interest in the equity tranche.
In May 2017 Zephyr A-6 sold a portion of its
interest in the subordinated notes of ZAIS CLO 6 for a sales price of approximately $3.9 million and recognized a gain of approximately
$223,500. Such amount is included in Net gain (loss) on beneficial interest of collateralized financing entity in the Consolidated
Statements of Comprehensive Income (Loss).
Zephyr A-6’s investment
in ZAIS CLO 6 was $25.3 million at fair value, at June 30, 2017 ($25.6 million par), which represented approximately a 5.0% economic
interest in the senior, mezzanine and subordinated notes based on notional value. The Company determined that it is not the primary
beneficiary of ZAIS CLO 6 based on Zephyr A-6’s minimal investment in the subordinated notes of ZAIS CLO 6. Therefore, the
Company was not required to consolidate ZAIS CLO 6 in its financial statements at June 30, 2017 or for the three and six months
ended June 30, 2017.
ZAIS CLO 6 was in the
warehouse phase from its inception date through the ZAIS CLO 6 Closing Date (the “ZAIS CLO
6 Warehouse Period”). During this time ZAIS CLO 6 continued to finance the majority of its loan purchases using its warehouse
facility. The Company was not required to consolidate ZAIS CLO 6 during the ZAIS CLO 6 Warehouse Period.
ZAIS CLO 7,
Limited (“ZAIS CLO 7”)
ZAIS CLO 7 was
formed in June 2017 and is in the warehouse phase at June 30, 2017. During the warehouse phase, ZAIS CLO 7 continues to finance
the majority of its loan purchases using its warehouse facility (the “ZAIS CLO 7 Warehouse Period”).
Zephyr A-6 had an investment
of $25.0 million in ZAIS CLO 7, at fair value, at June 30, 2017.
The Company was not required
to consolidate ZAIS CLO 7 during the ZAIS CLO 7 Warehouse Period.
Net gain (loss) of
Consolidated Funds’ Investments
Net gain (loss) related
to Zephyr A-6’s investments in ZAIS CLO 5, ZAIS CLO 6 and ZAIS CLO 7 for the period which the investments were not consolidated
by the Company includes the following:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
ZAIS CLO 5:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain or loss
|
|
$
|
—
|
|
|
$
|
2,176
|
|
|
$
|
—
|
|
|
$
|
3,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAIS CLO 6:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain or loss
|
|
|
(1,370
|
)
|
|
|
—
|
|
|
|
(263
|
)
|
|
|
—
|
|
Realized gains
|
|
|
2,972
|
|
|
|
—
|
|
|
|
2,972
|
|
|
|
—
|
|
Total – ZAIS CLO 6
|
|
|
1,602
|
|
|
|
—
|
|
|
|
2,709
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAIS CLO 7:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain or loss
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total – Net gain (loss) of Consolidated Funds’ investments
|
|
$
|
1,607
|
|
|
$
|
2,176
|
|
|
$
|
2,714
|
|
|
$
|
3,693
|
|
Securitized Structures
ZAIS Group and certain
of its wholly owned subsidiaries act as collateral manager for CLOs that are VIEs. These CLOs are entities that issue collateralized
notes which offer investors the opportunity for returns that vary commensurately with the risks they assume. The notes issued by
the CLOs are generally backed by asset portfolios consisting of loans, other debt or other derivatives. For acting as the collateral
manager for these structures, ZAIS Group receives collateral management fees comprised of senior collateral management fees, subordinated
collateral management fees and incentive collateral management fees (subject to hurdle rates). In some cases, all of the collateral
management fees are waived as a result of certain ZAIS Managed Entities owning equity tranches of the related CLO.
For CLOs in which the
Company has no economic interests other than its fee arrangement, the Company has determined that the fee it receives from the
CLOs does not represent a variable interest because ZAIS Group’s fee arrangements are commensurate with the level of effort
performed and include only customary terms that do not represent variable interests. The Company considered investments its related
parties have in the CLOs when determining if ZAIS Group’s fee represented a variable interest. The Company will continue
to assess its investments in the CLOs to determine whether or not the Company is required to consolidate the CLOs in its financial
statements.
The Dodd-Frank credit
risk retention rules, which became effective on December 24, 2016, apply to any newly issued CLOs or certain cases in which an
existing CLO is refinanced, issues additional securities or is otherwise materially amended. The risk retention rules specify that
for each CLO, the relevant collateral manager must purchase and hold, unhedged, directly or through a majority-owned affiliate,
either (i) 5% of the face amount of each tranche of the CLO’s securities, (ii) an amount of the CLO’s equity equal
to 5% of the aggregate fair value of all of the CLO’s securities or (iii) a combination of the two for a total of 5%. The
required risk must be retained until the latest of (i) the date that the CLO has paid down its securities to 33% of their original
principal amount, (ii) the date that the CLO has sold down its assets to 33% of their original principal amount or (iii) the date
that is two years after closing.
The Company determined
that it is not the primary beneficiary of CLO Warehouses, which are VIEs, because the financing counterparty must approve all significant
financing requests and, as a result, the Company does not have the power to direct activities of the entity that most significantly
impacts its economic performance.
VIEs
Consolidated
VIEs
At June 30, 2017 and December
31, 2016 the Consolidated Funds consist of Zephyr A-6 and ZAIS CLO 5. Both entities are VIEs.
The assets and
liabilities of the consolidated VIEs are presented on a gross basis prior to eliminations in the tables in Note 16 –
“Supplemental Financial Information” under the columns titled “Consolidated Funds.”
The assets presented belong
to the investors in Zephyr A-6 and ZAIS CLO 5, are available for use only by the entity to which they belong and are not available
for use by the Company. The Consolidated Funds have no recourse to the general credit of ZAIS Group with respect to any liability.
Unconsolidated VIEs
At June 30, 2017 and December
31, 2016, the Company’s unconsolidated VIEs consisted of the Company’s investments in certain ZAIS Managed Entities
as well as the Consolidated Fund’s investments in certain collateralized financing entities.
The carrying amounts of
the unconsolidated VIEs are as follows:
Investment In
|
|
Financial Statement
Line Item
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
|
(Dollars in thousands)
|
|
Certain ZAIS Managed Entities
|
|
Investment in affiliates, at fair value
|
|
$
|
288
|
|
|
$
|
273
|
|
CLOs
|
|
Assets of Consolidated Funds – Investments at fair value
|
|
|
25,294
|
|
|
|
—
|
|
CLO Warehouses
|
|
Assets of Consolidated Funds – Investments at fair value
|
|
|
25,005
|
|
|
|
15,036
|
|
|
|
Total
|
|
$
|
50,587
|
|
|
$
|
15,309
|
|
Such amounts are
included in the Consolidated Statements of Financial Condition.
ZAIS Group has a minimal
direct ownership, if any, in the unconsolidated VIEs and its involvement is generally limited to providing asset management services.
ZAIS Group’s exposure to loss from these entities is limited to a decrease in the management fee income and incentive income
that has been earned and accrued, as well as any change in fair value of its direct equity ownership in the VIEs.
Zephyr A-6, one of the
Consolidated Funds, contributed the following amounts to ZAIS CLO 5, ZAIS CLO 6 and ZAIS CLO 7 during the warehouse periods:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAIS CLO 5
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,000
|
|
ZAIS CLO 6
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
—
|
|
ZAIS CLO 7
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
—
|
|
Total
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
$
|
55,000
|
|
|
$
|
10,000
|
|
Notes Payable of Consolidated CLO
Notes payable of ZAIS
CLO 5, the consolidated CLO, are collateralized by the assets held by the ZAIS CLO 5. This collateral primarily consists of bank
loans.
The fair value of the
assets and liabilities of ZAIS CLO 5 and the eliminations for the Consolidated Fund’s investment in ZAIS CLO 5 are as follows:
|
|
June 30,
2017
|
|
|
December
31,
2016
|
|
|
|
(Dollars in thousands)
|
|
Cash and cash equivalents
|
|
$
|
12,634
|
|
|
$
|
23,987
|
|
Investments, at fair value
|
|
|
396,407
|
|
|
|
389,329
|
|
|
|
|
409,041
|
|
|
|
413,316
|
|
|
|
|
|
|
|
|
|
|
Other assets (liabilities), net
|
|
|
(11,488
|
)
|
|
|
(8,909
|
)
|
Notes payable of consolidated CLO, at fair value
|
|
|
397,553
|
|
|
|
404,407
|
|
Elimination of Consolidated Funds’ investments in CLO
|
|
|
(13,034
|
)
|
|
|
(19,506
|
)
|
Notes payable of consolidated CLO, at fair value (net of eliminations)
|
|
$
|
384,519
|
|
|
$
|
384,901
|
|
The Company has elected
to carry these notes at fair value in its Consolidated Statements of Financial Condition. Accordingly, the Company measured the
fair value of the notes payable (as a group including both the senior and subordinated notes) as (1) the sum of the fair value
of the financial assets and the carrying value of any non-financial assets, less (2) the sum of the fair value of any beneficial
interests retained by the Company (other than those that represent compensation for services) and the Company’s carrying
value of any beneficial interests that represent compensation for services. The Company allocated the resulting amount to the different
classes of notes based on the CLO’s waterfall on an as liquidated basis.
The tables below
present information related to ZAIS CLO 5’s notes payable outstanding. The subordinated notes have no stated interest rate,
and are entitled to any excess cash flows after contractual payments are made to the senior notes.
|
|
June 30, 2017
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal
Outstanding
|
|
|
Fair
Value
|
|
|
Weighted
Average
Interest
Rate
|
|
|
Weighted
Average
Maturity
(in Years)
|
|
|
Stated
Maturity
Dates
|
Senior and Mezzanine Secured Notes
|
|
$
|
365,745
|
|
|
$
|
357,507
|
|
|
|
3.35
|
%
|
|
|
11.33
|
|
|
October 2028
|
Subordinated Notes
|
|
|
27,635
|
|
|
|
27,012
|
|
|
|
N/A
|
|
|
|
11.33
|
|
|
October 2028
|
Total
|
|
$
|
393,380
|
|
|
$
|
384,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal
Outstanding
|
|
|
Fair
Value
|
|
|
Weighted
Average
Interest
Rate
|
|
|
Weighted
Average
Maturity
(in Years)
|
|
|
Stated
Maturity
Dates
|
Senior and Mezzanine Secured Notes
|
|
$
|
360,395
|
|
|
$
|
357,489
|
|
|
|
2.97
|
%
|
|
|
11.83
|
|
|
October 2028
|
Subordinated Notes
|
|
|
27,635
|
|
|
|
27,412
|
|
|
|
N/A
|
|
|
|
11.83
|
|
|
October 2028
|
Total
|
|
$
|
388,030
|
|
|
$
|
384,901
|
|
|
|
|
|
|
|
|
|
|
|
6. Management Fee Income and Incentive Income
ZAIS Group earns management
fees for the funds and accounts which are generally based on (i) the net asset value of these funds and accounts prior to the accrual
of incentive fees/allocations or (ii) drawn capital during the investment period.
Management fee income
earned for the CLOs which ZAIS Group manages are generally based on the par value of the collateral and cash held in the CLOs.
Additionally, subordinated management fees may be earned from CLOs for which ZAIS Group and certain of its wholly owned subsidiaries
act as collateral manager. The subordinated management fee is an additional payment for the same collateral management service,
but has a lower priority in the CLOs’ cash flows and is contingent upon the economic performance of the respective CLO. If
the CLOs experience a certain level of asset defaults, these fees may not be paid. There is no recovery by the CLOs of previously
paid subordinated fees.
Prior to October 31, 2016,
ZAIS Group earned management fee income from ZFC REIT, quarterly, based on ZFC REIT's stockholders' equity, as defined in the amended
and restated investment advisory agreement between ZAIS REIT Management and ZFC REIT. Twenty percent of the management fee income
received from ZFC REIT was paid to holders of Class B interests in ZAIS REIT Management. The payment to the Class B interests in
ZAIS REIT Management was recorded as distributions to non-controlling interests in ZAIS Group Parent, LLC. The income was recorded
as Management fee income in the Consolidated Statements of Comprehensive Income (Loss), and the portion of the management fees
allocated to the holders of Class B interests in ZAIS REIT Management was included in the Allocation of Consolidated Net Income
(Loss) to Non-controlling interests in ZAIS Group Parent, LLC. On October 31, 2016, the management agreement with ZFC REIT was
terminated upon the completion of the merger between ZFC REIT and Sutherland Asset Management Corp (the “Termination Agreement”).
Pursuant to the Termination Agreement, ZAIS REIT Management received a termination payment in the amount of $8.0 million.
Management fees are generally
collected on a monthly or quarterly basis.
ZAIS Group manages certain
ZAIS Managed Entities from which it may earn incentive income based on hedge fund-style and private equity-style fee arrangements.
ZAIS Managed Entities with hedge fund-style fee arrangements are those that pay ZAIS Group, on an annual basis, an incentive fee/allocation
based on a percentage of net realized and unrealized profits attributable to each investor, subject to a hurdle (if any) set forth
in each respective entity’s operative agreements. Additionally, all ZAIS Managed Entities with hedge fund-style fee arrangements
are subject to a perpetual loss carry forward, or a perpetual “high-water mark,” meaning that the relevant ZAIS Managed
Entity will not pay incentive fees/allocations with respect to positive investment performance generated for an investor in any
year following negative investment performance until that loss is recouped, at which point an investor’s capital balance
surpasses the high-water mark. ZAIS Managed Entities with private equity-style fee arrangements are those that pay an incentive
fee/allocation based on a priority of payments under which investor capital must be returned and a preferred return must be paid,
as specified in each related ZAIS Managed Entity’s operative agreement, to the investor prior to any payments of incentive-based
income to ZAIS Group. For CLOs, incentive income is earned based on a percentage of cumulative profits, subject to the return of
contributed capital, payment of subordinate management fees (if any) and a preferred inception to date return as specified in the
respective CLOs’ collateral management agreements. The advisory agreement between ZAIS REIT Management and ZFC REIT did not
provide for incentive fees.
The following tables represent
the gross amounts of management fee income and incentive income earned prior to eliminations due to consolidation of the Consolidated
Funds and the net amount reported in the Company’s Consolidated Statements of Comprehensive Income (Loss):
|
|
|
|
Three
Months Ended
June
30, 2017
|
|
|
|
|
|
(
Dollars in thousands )
|
|
|
|
Fee Range
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
Management
Fee Income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
0.50% - 1.25%
|
|
$
|
2,745
|
|
|
$
|
(329
|
)
|
|
$
|
2,416
|
|
CLOs
|
|
0.15% - 0.50%
|
|
|
1,273
|
|
|
|
—
|
|
|
|
1,273
|
|
Total
|
|
|
|
$
|
4,018
|
|
|
$
|
(329
|
)
|
|
$
|
3,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Income
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
10% - 20%
|
|
$
|
2,784
|
|
|
$
|
—
|
|
|
$
|
2,784
|
|
CLOs
|
|
20%
|
|
|
100
|
|
|
|
—
|
|
|
|
100
|
|
Total
|
|
|
|
$
|
2,884
|
|
|
$
|
—
|
|
|
$
|
2,884
|
|
|
|
|
|
Three
Months Ended
June
30, 2016
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Fee Range
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
Management Fee Income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
0.50% - 1.25%
|
|
$
|
2,373
|
|
|
$
|
—
|
|
|
$
|
2,373
|
|
CLOs
|
|
0.15% - 0.50%
|
|
|
425
|
|
|
|
—
|
|
|
|
425
|
|
ZFC REIT
(3)
|
|
1.50%
|
|
|
773
|
|
|
|
—
|
|
|
|
773
|
|
Total
|
|
|
|
$
|
3,571
|
|
|
$
|
—
|
|
|
$
|
3,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Income
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
10% - 20%
|
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
143
|
|
CLOs
|
|
20%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
143
|
|
|
|
|
|
Six
Months Ended
June
30, 2017
|
|
|
|
|
|
( Dollars in thousands )
|
|
|
|
Fee Range
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
Management Fee Income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
0.50% - 1.25%
|
|
$
|
5,358
|
|
|
$
|
(329
|
)
|
|
$
|
5,029
|
|
CLOs
|
|
0.15% - 0.50%
|
|
|
1,767
|
|
|
|
—
|
|
|
|
1,767
|
|
Total
|
|
|
|
$
|
7,125
|
|
|
$
|
(329
|
)
|
|
$
|
6,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Income
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
10% - 20%
|
|
$
|
3,071
|
|
|
$
|
—
|
|
|
$
|
3,071
|
|
CLOs
|
|
20%
|
|
|
110
|
|
|
|
—
|
|
|
|
110
|
|
Total
|
|
|
|
$
|
3,181
|
|
|
$
|
—
|
|
|
$
|
3,181
|
|
|
|
|
|
Six
Months Ended
June
30, 2016
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Fee Range
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
Management Fee Income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
0.50% - 1.25%
|
|
$
|
4,769
|
|
|
$
|
—
|
|
|
$
|
4,769
|
|
CLOs
|
|
0.15% - 0.50%
|
|
|
830
|
|
|
|
—
|
|
|
|
830
|
|
ZFC REIT
(3)
|
|
1.50%
|
|
|
1,541
|
|
|
|
—
|
|
|
|
1,541
|
|
Total
|
|
|
|
$
|
7,140
|
|
|
$
|
—
|
|
|
$
|
7,140
|
|
Incentive Income
(1)
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
10% - 20%
|
|
$
|
295
|
|
|
$
|
—
|
|
|
$
|
295
|
|
CLOs
|
|
20%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
|
$
|
295
|
|
|
$
|
—
|
|
|
$
|
295
|
|
|
(1)
|
Certain management and incentive fees have been and may in the future be waived and therefore the actual fees rates may be lower than those reflected in the range.
|
|
(2)
|
Incentive income earned for certain of the ZAIS Managed entities is subject to a hurdle rate of return as specified in each respective ZAIS Managed Entity’s operative agreement.
|
|
(3)
|
On October 31, 2016, the management agreement with ZFC REIT was terminated pursuant to the Termination Agreement.
|
The Company may give credits for management
fee income and/or incentive income to investors which invest in ZAIS Managed Entities that invest in other ZAIS Managed Entities
where fees are also charged. The Company recorded all credits relating to management fee income and incentive income as Fees payable
in the Consolidated Statements of Financial Condition and a reduction of either Management fee income or Incentive income in the
Consolidated Statements of Comprehensive Income (Loss). The management fee income and incentive income amounts above are net of
the following credits:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee income credit
|
|
$
|
63
|
|
|
$
|
50
|
|
|
$
|
126
|
|
|
$
|
104
|
|
Incentive income credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
63
|
|
|
$
|
50
|
|
|
$
|
126
|
|
|
$
|
104
|
|
Zephyr A-6 invests in certain
CLOs managed by ZAIS. ZAIS earns fees from these CLOs. Any Senior Fee in excess of 0.15%, the Subordinate Fee and the Incentive
Fee (collectively, the “Rebated Fees”) paid to the Company by these CLOs are subsequently paid to Zephyr A-6 by the
Company and allocated among the limited partners of Zephyr A-6 pro rata based on their percentage interests in Zephyr A-6. As a
result of its interest in Zephyr A-6, ZAIS is allocated a substantial portion of the Rebated Fees. The fee rebate income and related
expense are eliminated in consolidation. The amounts allocable to the non-ZAIS partner of Zephyr A-6 are included in Non-controlling
interest in Consolidated Funds in the Consolidated Statements of Comprehensive Income (Loss).
The following table presents
the gross amount of the rebated fees prior to eliminations due to the consolidation of Zephyr A-6 and the net amount reported in
the Company’s Consolidated Statements of Comprehensive Income (Loss):
|
|
Three
and Six Months Ended
June
30, 2017
|
|
|
|
( Dollars in thousands )
|
|
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
Rebated Fees
|
|
$
|
290
|
|
|
$
|
(290
|
)
|
|
$
|
—
|
|
Total
|
|
$
|
290
|
|
|
$
|
(290
|
)
|
|
$
|
—
|
|
Management fee income and incentive income
which was accrued, but not received is as follows:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Management fee income
|
|
$
|
1,278
|
|
|
$
|
1,284
|
|
Incentive income
|
|
|
591
|
|
|
|
7,521
|
|
Total
|
|
$
|
1,869
|
|
|
$
|
8,805
|
|
Such amounts are included
in Income and fees receivable in the Consolidated Statements of Financial Condition.
The Company did not recognize
any bad debt expense for the three and six months ended June 30, 2017 or June 30, 2016. The Company believes all income and fees
receivable balances are fully collectible.
7. Notes Payable
On March 17, 2015, in
conjunction with the contribution of cash by HF2 Financial Management, Inc. to ZGP in exchange for newly issued Class A Units,
representing a majority financial interest in ZGP (the “Business Combination”), ZAIS issued two promissory notes with
an aggregate principal balance of $1.25 million to EarlyBirdCapital, Inc. and Sidoti & Company, LLC. The notes accrued interest
at an annual rate equal to the annual applicable federal rate as published by the Internal Revenue Service (“AFR”)
until the principal amount of, and all accrued interest on, the notes were paid in full. The notes matured on March 17, 2017 at
which time the principal balance and accrued interest was paid in full. The notes were issued in lieu of paying certain underwriting
costs at the closing of the Business Combination and, accordingly, treated as a direct cost attributable to the Business Combination
and capitalized to equity.
The carrying amount of
the Company’s notes payable approximates their fair value at December 31, 2016.
Total interest expense is included in Other
income (expense) in the Consolidated Statements of Comprehensive Income (Loss) and was as follows:
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
8. Compensation
The following table presents a detailed breakout
of the Company’s compensation expense:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
2,293
|
|
|
$
|
2,593
|
|
|
$
|
4,629
|
|
|
$
|
5,873
|
|
Bonus
|
|
|
2,966
|
|
|
|
3,502
|
|
|
|
6,143
|
|
|
|
7,400
|
|
Severance
|
|
|
—
|
|
|
|
119
|
|
|
|
72
|
|
|
|
762
|
|
Equity-Based Compensation
|
|
|
56
|
|
|
|
1,339
|
|
|
|
1,168
|
|
|
|
1,682
|
|
Payroll taxes and benefits
|
|
|
294
|
|
|
|
443
|
|
|
|
1,021
|
|
|
|
1,286
|
|
Commissions
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
Total
|
|
$
|
5,609
|
|
|
$
|
7,999
|
|
|
$
|
13,033
|
|
|
$
|
17,006
|
|
A summary of the Company’s compensation
arrangements are as follows:
Bonus
Incentive Cash Compensation
Employees are eligible
to receive discretionary incentive cash compensation (the “Bonus Award”) on an annual basis and certain employees may
also be eligible to receive guaranteed incentive compensation (the “Guarantees”). The amount of the Bonus Award is
based on, among other factors, both individual performance and the financial results of ZAIS Group. For certain employees, as documented
in an underlying agreement (the “Bonus Agreements”), the Bonus Award may be further subject to a retention-based payout
schedule that generally provides for 30% of the Bonus Award to vest and be paid incrementally over a three-year period. The Company
expenses all current cash incentive compensation award payments ratably in the first year. All future payments are amortized equally
over the required service period over the remaining term of the Bonus Award as defined in the Bonus Agreements. Any Guarantees
that are paid upon an employee commencing employment are expensed immediately by the Company. All future payments related to Guarantees
are amortized equally over the required service period over the remaining term as defined in the agreements for the Guarantees
(“Guarantee Agreement”). In the event an award is forfeited pursuant to the terms of the Bonus Agreement or Guarantee
Agreement, the corresponding accruals will be reversed.
Levels of incentive compensation
will vary to the extent they are tied to the performance of certain ZAIS Managed Entities or the financial and operating performance
of the Company. The compensation payable balance includes accrued incentive compensation and severance.
During the period from
January 1, 2017 through June 30, 2017, the Company paid approximately $9.0 million related to year-end Bonus Awards issued in 2016,
Bonus Awards that vested through February of 2017 pursuant to the Bonus Agreements related to a prior year and Guarantees that
vested through February 2017 pursuant to Guarantee Agreements related to a prior year and the current year. A portion of these
amounts had been accrued at December 31, 2016.
On May 9, 2017, the Board
of Directors approved an amendment to the Compensation Committee’s charter to better enable the Company to retain its employees
and to attract additional employees. The amendment removed the prior compensation guidelines set forth in the charter that by its
terms applied to compensation paid through 2019. These compensation guidelines had provided that, subject to modification or waiver
by the Compensation Committee, the Company’s total compensation expense on a consolidated basis calculated in accordance
with U.S. GAAP for all cash and non-cash compensation paid to employees of the Company and its operating subsidiaries and affiliates
for any given year would not exceed a certain percentage of the Company’s consolidated revenue for such year calculated in
accordance with U.S. GAAP.
Retention Payment Plan
On March 29, 2016, the
Compensation Committee of the Board of Directors adopted a retention payment plan for certain employees of ZAIS Group (the "Retention
Payment Plan"). The Retention Payment Plan applied to approximately 60 employees of ZAIS Group all of whom had an annual base
salary of less than $300,000. The purpose of the Retention Payment Plan was to enable ZAIS Group to retain the services of its
employees in order to ensure that ZAIS Group was not disrupted or adversely affected by the possible loss of personnel or their
commitment to ZAIS Group. Under the Retention Payment Plan, the participating employees were entitled to receive cash retention
payments on each of April 15, 2016, August 15, 2016 and November 15, 2016, if the employee remained employed by ZAIS Group on such
dates. The Company paid an aggregate amount of approximately $4.6 million to all participants pursuant to the Retention Payment
Plan during the year ended December 31, 2016.
There were no amounts
payable under the Retention Payment Plan at June 30, 2017 or December 31, 2016.
Other
On March 1, 2016, the
Compensation Committee of the Board of Directors approved a retention payment of $900,000 to Howard Steinberg, the Company's former
General Counsel, which was paid on March 15, 2016. This retention payment is included in Compensation and benefits in the Consolidated
Statements of Comprehensive Income (Loss) for the six months ended June 30, 2016.
On April 5, 2017, the
Company provided a retention award (the “Retention Award”) to Michael Szymanski, the Company’s Chief Executive
Officer in recognition of the importance of retaining his services as the Chief Executive Officer of the Company and its operating
subsidiary, ZAIS Group, and in connection with the Company’s review of strategic alternatives to enhance shareholder value.
Under the Retention Award, which has been approved by the Compensation Committee of the Board of Directors of the Company, Mr.
Szymanski is entitled to receive a cash retention payment of $500,000 on each of June 30, 2017, September 30, 2017 and a date within
five business days following the closing date of a “Transaction” as defined in the Retention Award or otherwise as
determined by the Board of Directors of the Company. Mr. Szymanski would be entitled to such payments provided he remains employed
by the Company on such dates, or if he has been removed as the Company’s Chief Executive Officer or his employment terminated
for reasons other than for cause prior to such dates. The aggregate amount of retention payments that may be paid to Mr. Szymanski
under the Retention Award is $1.5 million.
Points
ZAIS Group had entered
into agreements with certain of its employees whereby certain current and former employees were granted rights to participate in
a portion of the incentive income received from certain ZAIS Managed Entities (referred to as “Points Agreements”).
There are currently outstanding Points Agreements relating to one ZAIS Managed Entity and ZAIS Group does not anticipate awarding
additional Points Agreements. The Company did not incur any compensation expense relating to the Points Agreements for the three
or six months ended June 30, 2017 or June 30, 2016.
Severance
On March 8, 2016, the
Company commenced a reduction in force which resulted in a decrease of 23 employees of ZAIS Group. The Company had incurred total
severance charges of approximately $762,000 related to this reduction in force which was recognized and paid during the year ended
December 31, 2016.
Equity-Based Compensation
Class B-0 Units
ZGP authorized 1,600,000
Class B-0 Units eligible to be granted to certain employees of ZAIS Group. The Class B-0 Units were subject to a two year cliff-vesting
provision, whereby all Class B-0 Units granted to an employee would be forfeited if the employee resigned or was terminated prior
to March 17, 2017. Subsequent to this date, an employee would only forfeit vested Class B-0 Units if the employee was terminated
for cause. Until the time that such Class B Units became vested, the Class B-0 Units were not entitled to any distributions from
ZGP (and thus would not participate in, or be allocated any, income or loss) or other material rights. Upon vesting, the Class
B-0 Units would have had the same rights as Class A Units and were exchangeable on a one for one basis for shares of Class A Common
Stock or cash (or a combination of shares and cash), at the Company’s election, subject certain restrictions. This compensation
expense was amortized equally over the two-year vesting period and was cumulatively adjusted for changes in estimated forfeitures
at each reporting date.
On December 1, 2016,
the Board of Directors authorized ZGP to offer the 28 employees holding unvested Class B-0 Units the right to receive in consideration
for the cancellation of their Class B-0 Units, at the holder’s option, either (a) Restricted Stock Units (“RSUs”)
of ZAIS, on a one-for-one basis, or (b) an amount of cash per Class B-0 Unit cancelled (the “Cash Amount”) equal to
$1.92, which was the average of the daily closing prices of Class A Common Stock of ZAIS for the three calendar months ended November
30, 2016 (the “Proposal”). The RSUs and the Cash Amount were both subject to vesting requirements and, collectively,
are referred to as the “Election Consideration”. The offer period expired on December 30, 2016.
All holders of Class
B-0 Units decided to accept the Proposal to receive either RSUs or the Cash Amount. Upon the expiration of the offer period, the
holders’ Class B-0 Units were cancelled. For those holders of Class B-0 Units who elected to receive RSUs, ZAIS granted the
RSUs under the ZAIS 2015 Stock Incentive Plan (the “2015 Stock Plan”). The RSUs vested on March 17, 2017, the same
date that the Class B-0 Units were scheduled to vest. The RSUs entitled the holders to receive ZAIS Class A Common Stock, which
was issued, subject to applicable wage withholding requirements, immediately upon the vesting of the RSUs. In consideration of
the issuance of such stock by ZAIS to the employees of ZGP’s subsidiary, ZAIS Group, ZGP issued a number of Class A Units
to ZAIS equal to the number of shares of stock that were issued to the holders of RSUs. If the B-0 Unit holder elected to receive
the Cash Amount, provided the holder remained employed by ZAIS Group or its subsidiaries through the date of vesting, the Cash
Amount was paid by ZAIS Group to the holder, subject to applicable wage withholding requirements, on March 22, 2017
.
See
disclosures below for additional information relating to the issuance of the RSUs in exchange for the cancellation of the B-0 Units.
The number of Class
B-0 Units cancelled and Election Consideration provided as a result of the Proposal is as follows:
Total number of Class B-0 Units cancelled in substitution for:
|
|
|
|
|
RSUs
|
|
|
899,674
|
|
Cash
|
|
|
133,559
|
|
Total number of Class B-0 Units cancelled
|
|
|
1,033,233
|
|
|
|
|
|
|
Class B-0 Units not cancelled
|
|
|
—
|
|
|
|
|
|
|
Total Cash Amount paid in March 2017 (in thousands)
|
|
$
|
256
|
|
The Company
accounted for the cancellation of B-0 Units as follows:
RSUs Provided as a Replacement
for the Cancellation of B-0 Units
The Company accounted for
the issuance of RSUs as a modification of the award pursuant to ASC 718, “Compensation - Stock Compensation”, treating
it as a cancellation of the limited liability company units accompanied by the concurrent grant of RSUs. The Company determined
that the fair value of the RSUs and the Class B-0 Units at the modification date were equal and therefore there was no incremental
compensation cost required to be recognized. ZAIS completed the amortization of the related compensation expense equally over the
two-year vesting period subject to cumulative adjustment for changes in estimated forfeitures at each reporting date.
Cash Provided
as a Replacement for the Cancellation of Class B-0 Units
The Company accounted for
the cash payment to be made in consideration for the cancellation of certain B-0 Units described above as a modification of the
award pursuant to ASC 718, “Compensation - Stock Compensation”. However the modification of these awards changed the
classification from equity awards to a liability awards. The fair value of the modified award at the time of the modification was
approximately $256,000. The Company recognized a liability of approximately $230,000 at December 31, 2016 which reflects the vested
amount of the modified award’s measurement date fair value. The remaining fair value of approximately $26,000 was amortized
ratably over the remaining vesting period which ended on March 17, 2017.
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Number of
B-0 Units
|
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
|
|
Number of
B-0 Units
|
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
|
Balance at beginning of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,288,778
|
|
|
$
|
9.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(156,565
|
)
|
|
|
9.70
|
|
Balance at end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,132,213
|
|
|
$
|
9.36
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Number of
B-0 Units
|
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
|
|
Number of
B-0 Units
|
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
|
Balance at beginning of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,337,486
|
|
|
$
|
9.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
6.34
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(305,273
|
)
|
|
|
9.70
|
|
Balance at end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,132,213
|
|
|
$
|
9.36
|
|
The Company incurred compensation
expense relating to the Class B-0 Units (including Class B-0 Units cancelled in consideration for the receipt of RSUs or cash)
as follows:
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,296
|
|
|
$
|
1,059
|
|
|
$
|
1,566
|
|
The estimated forfeiture rates of Class B-0
Units, including those cancelled in exchange for Class A Common Stock, were as follows:
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—%
|
|
|
|
29.6
|
%
|
|
|
—%
|
|
|
|
29.6
|
%
|
The expense relating to
the Class B-0 Units (pre-modification of the award) is included in Compensation and benefits in the Consolidated Statements of
Comprehensive Income (Loss).
RSUs
The Company may grant
up to 2,080,637 shares of Class A Common Stock pursuant to the 2015 Stock Plan.
Non-employee directors
of ZAIS receive RSUs pursuant to the 2015 Stock Plan as a component of compensation for their service as directors of ZAIS. The
awards are unvested at the time they are granted and, as such, are not entitled to any dividends or distributions from ZAIS or
other material rights until such RSUs vest. The RSUs vest in full on the one-year anniversary of the grant date. Upon vesting ZAIS
will issue the recipient shares of Class A Common Stock equal to the number of vested RSUs. In accordance with ASC 718, “Compensation
- Stock Compensation”, the Company is measuring the expense associated with these awards based on the fair value on the grant
date adjusted for estimated forfeitures. This expense is being amortized equally over the one-year vesting period and adjusted
on a cumulative basis for changes in estimated forfeitures at each reporting date. The weighted average grant date fair value of
these RSUs is based on the market value of the Company’s shares on the grant date.
On April 21, 2016, the
Company issued 30,942 RSUs to the Company’s non-employee directors with a grant date fair value of $3.22 per share. The RSUs
vested on April 21, 2017.
On November 1, 2016, the
Company issued 74,331 RSUs to the Company’s non-employee directors with a grant date fair value of $1.73 per share. The RSUs
are scheduled to vest on November 1, 2017.
On May 9, 2017, the Company
issued 63,219 RSUs to the Company’s non-employee directors with a grant date fair value of $2.19 per share. The RSUs are
scheduled to vest on May 9, 2018.
Additionally, pursuant to
the Proposal (see “Class B-0 Units” above), the Company issued 899,674 RSUs on December 30, 2016. The weighted average
grant date fair value of these RSUs is equal to the fair value of the related B-0 Units at the time the units were issued.
On March 17, 2017, the
899,674 RSUs granted in connection with the Proposal vested. The fair value of the consideration was $2.1 million based on the
closing stock price of the Company’s Class A Common Stock on March 17, 2017 and the gross amount of RSUs that vested. The
Company issued 548,923 shares of its Class A Common Stock, on a net basis (to account for applicable wage withholding requirements),
to the holders who elected to cancel their Class B-0 Units in substitution for RSUs. The applicable wage withholding requirement
of approximately $0.8 million was recorded as a reduction of Additional paid-in-capital and Non-controlling interest in ZGP in
the Consolidated Statements of Changes in Equity and Non-controlling Interests.
Additionally, ZAIS Group
paid the Cash Amount of approximately $256,000 to the holders who elected the Cash Amount (subject to applicable wage withholding
requirements) on March 22, 2017.
The following table presents
the RSU activity for non-employees as well as employees that agreed to the cancellation of their Class B-0 Units:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Number of
RSUs
|
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
|
|
Number of
RSUs
|
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
|
Balance at beginning of period:
|
|
|
105,273
|
|
|
$
|
2.17
|
|
|
|
30,000
|
|
|
$
|
9.85
|
|
Grants during period to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee directors
|
|
|
63,219
|
|
|
|
2.19
|
|
|
|
30,942
|
|
|
|
3.22
|
|
Vested
|
|
|
(30,942
|
)
|
|
|
3.22
|
|
|
|
(30,000
|
)
|
|
|
9.85
|
|
Balance at end of period
|
|
|
137,550
|
|
|
$
|
1.94
|
|
|
|
30,942
|
|
|
$
|
3.22
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Number of
RSUs
|
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
|
|
Number of
RSUs
|
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
|
Balance at beginning of period:
|
|
|
1,004,947
|
|
|
$
|
8.60
|
|
|
|
30,000
|
|
|
$
|
9.85
|
|
Grants during period to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee directors
|
|
|
63,219
|
|
|
|
2.19
|
|
|
|
30,942
|
|
|
|
3.22
|
|
Vested
|
|
|
(930,616
|
)
|
|
|
9.13
|
|
|
|
(30,000
|
)
|
|
|
9.85
|
|
Balance at end of period
|
|
|
137,550
|
|
|
$
|
1.94
|
|
|
|
30,942
|
|
|
$
|
3.22
|
|
The Company incurred compensation
expense relating to the non-employee RSUs as follows:
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
56
|
|
|
$
|
43
|
|
|
$
|
109
|
|
|
$
|
116
|
|
The expense relating
to these RSUs is included in Compensation and benefits on the Consolidated Statements of Comprehensive Income (Loss).
9. Income Taxes
ZAIS is taxable as a corporation
for U.S. tax purposes while ZGP and its subsidiaries operate as pass-through entities for U.S. income tax purposes not subject
to entity level taxes. Accordingly, the Company’s consolidated financial statements include U.S. federal, state and local
income taxes on ZAIS’ allocable share of the consolidated results of operations, as well as taxes payable to jurisdictions
outside the U.S related to the foreign subsidiaries.
The Company recorded an
income tax (benefit) expense of $5,000 and $10,000 for the three months and six months ended June 30, 2017, respectively, related
solely to foreign taxes payable to jurisdictions outside the U.S. related to Company’s foreign subsidiaries. The Company
recorded income tax expense of $4,000 and $9,000 for the three and six months ended June 30, 2016, respectively, related solely
to foreign taxes.
As a result of the variations
each quarter in the relationship between pre-tax income and income tax expense, the Company utilizes the actual effective tax rate
for each interim period being presented to calculate the tax (benefit) or expense. The following is a reconciliation of the U.S.
statutory federal income tax to the Company’s effective tax:
|
|
Three Months
Ended
June 30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense at the U.S. federal statutory income tax rate
|
|
$
|
148
|
|
|
|
(1,676
|
)
|
|
|
(1,698
|
)
|
|
|
(3,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income tax, net of federal benefit
|
|
|
(37
|
)
|
|
|
(242
|
)
|
|
|
(270
|
)
|
|
|
(529
|
)
|
Foreign tax
|
|
|
5
|
|
|
|
4
|
|
|
|
10
|
|
|
|
9
|
|
Effect of permanent differences
|
|
|
2
|
|
|
|
56
|
|
|
|
3
|
|
|
|
58
|
|
Income attributable to non-controlling interests in Consolidated Funds not subject to tax
|
|
|
(475
|
)
|
|
|
(358
|
)
|
|
|
(750
|
)
|
|
|
(607
|
)
|
Income attributable to non-controlling interests in ZGP not subject to tax
|
|
|
107
|
|
|
|
649
|
|
|
|
814
|
|
|
|
1,430
|
|
Equity Compensation “Shortfall” DTA Adjustment
|
|
|
(16
|
)
|
|
|
|
|
|
|
1,932
|
|
|
|
|
|
Valuation allowance
|
|
|
271
|
|
|
|
1,571
|
|
|
|
(31
|
)
|
|
|
3,498
|
|
Total
|
|
|
5
|
|
|
|
4
|
|
|
|
10
|
|
|
|
9
|
|
The Company’s effective
tax for the periods presented above includes a rate benefit attributable to the fact that the Company’s subsidiaries operate
as limited liability companies and limited partnerships which are treated as pass-through entities for U.S. federal and state income
tax purposes. Accordingly, the Company’s consolidated financial statements include U.S. federal, state and local income taxes
on the Company’s allocable share of the consolidated results of operations. The tax liability or benefit related to the partnership
income or loss not allocable to the Company rests with the equity holders owning such non-controlling interests in ZAIS subsidiaries.
For the three and six
months ended June 30, 2017 and June 30, 2016, the net effective tax represents the taxes accrued related to the Company’s
operations in jurisdictions outside the U.S. as a full valuation allowance has been established for the tax benefit related to
U.S. federal, state and local income taxes on the Company’s allocable share of the consolidated results of operations as
well as Company’s net operating losses and development stage start-up expenses incurred during the period from its inception
and prior to the closing of the Business Combination with ZGP. Additionally, for the three and six months ended June 30, 2017,
the net effective tax is impacted due to a shortfall adjustment for equity compensation primarily related to the exchange of the
Class B-0 Units discussed in Note 8 – “Compensation”.
Deferred income taxes
are provided for the effects of temporary differences between the tax basis of an asset or liability and are reported in the Consolidated
Statements of Financial Condition. These temporary differences result in taxable or deductible amounts in future years.
As of each of June 30,
2017 and December 31, 2016, the Company had total deferred tax assets (“DTA”) of approximately $7.0 million, related
to net operating losses and other temporary differences related to the Company’s allocable share of the consolidated results
of operations as well as Company’s net operating losses and development stage start-up expenses incurred during the period
from its inception and prior to the closing of the Business Combination with ZGP. The Company has established a full valuation
allowance on the DTA at June 30, 2017 and December 31, 2016.
As of June 30, 2017, the
Company has estimated federal and state income tax net operating loss carryforwards of approximately $13.4 million which will expire
as follows:
|
|
(Dollars in
thousands)
|
|
2032
|
|
$
|
1
|
|
2033
|
|
|
83
|
|
2034
|
|
|
122
|
|
2035
|
|
|
5,990
|
|
2036
|
|
|
1,640
|
|
2037
|
|
|
5,569
|
|
Total
|
|
$
|
13,405
|
|
As of each reporting date,
management considers new evidence, both positive and negative, that could affect its view of the future realization of DTA. As
of June 30, 2017, the Company has determined that the most recent management business forecasts do not support the realization
of net DTA recorded for the Company. The Company has recorded a book loss for the three and six months ended June 30, 2017 excluding
income attributable to Consolidated Funds, and it is anticipated that expenses will continue to exceed revenues in 2017. Although
management intends to pursue various initiatives with potential to alter the operating loss trend, there is no specific plan that
has been implemented at this point in time that will alter the negative earnings trend.
Accordingly, management
continues to believe that it is not more likely than not that its DTA will be realized and the Company has continued to maintain
full valuation allowance against the DTA at June 30, 2017. The Company has recorded a change in valuation allowance of approximately
$271,000 and $(31,000) in the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30,
2017, respectively, and approximately $1.6 million and $3.5 million for the three and six months ended June 30, 2016 respectively.
The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence
to support the reversal of all or some portion of these allowances.
The Company does not believe it has any significant
uncertain tax positions. Accordingly, the Company did not record any adjustments or recognize interest expense for uncertain tax
positions for the three and six months ended June 30, 2017 and June 30, 2016, respectively. In the future, if uncertain tax positions
arise, interest and penalties will be accrued and included in Income tax (benefit) expense in the Consolidated Statements of Comprehensive
Income (Loss).
10. Related Party Transactions
ZAIS Managed Entities
ZAIS Group offers a range
of alternative and traditional investment strategies through the ZAIS Managed Entities. ZAIS Group earns all of its management
fee income and incentive income from the ZAIS Managed Entities, which are considered related parties as the Company manages the
operations of, and makes investment decisions for, these entities. The Company considers ZAIS Group’s principals, executives,
employees and all ZAIS Managed Entities to be affiliates and related parties.
ZAIS Group invests in
its subsidiaries and some of the ZAIS Managed Entities. Investments in subsidiaries and certain ZAIS Managed Entities that are
consolidated are eliminated. Investments in certain ZAIS Managed Entities that are not consolidated are further described in Note
3.
ZAIS Group did not charge
management fees or earn incentive income on investments made in the ZAIS Managed Entities (excluding CLOs and ZFC REIT) by ZAIS
Group’s principals, executives, employees and other related parties. The total amount of investors’ capital balances
that are not being charged fees were approximately as follows:
June
30,
2017
|
|
|
December
31,
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
$
|
22,934
|
|
|
$
|
21,713
|
|
Additionally,
certain ZAIS Managed Entities, with existing fee arrangements, have investments representing 100% of the equity tranche
of ZAIS CLO 2, Limited (“ZAIS CLO 2”) at June 30, 2017 and December 31, 2016 and ZAIS CLO 1, Limited
(“ZAIS CLO 1”) for the period from January 1, 2017 through June 7, 2017 and at December 31, 2016. Therefore, ZAIS
Group did not earn management fees or incentive fees from certain ZAIS managed CLOs for the period which certain ZAIS Managed
Entities with existing fee arrangements held investments representing 100% of the equity tranche of such CLOs. The total
amounts of AUM that are not being charged fees were approximately as follows:
June
30,
2017
|
|
|
December
31,
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
$
|
296,452
|
|
|
$
|
560,272
|
|
The amounts due
from the ZAIS Managed Entities for Research Costs and other costs paid to vendors by ZAIS on behalf of the ZAIS Managed Entities
(the “Other Direct Costs”) are as follows:
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Research Costs
|
|
$
|
788
|
|
|
$
|
581
|
|
Other Direct Costs
|
|
|
313
|
|
|
|
117
|
|
Total
|
|
$
|
1,101
|
|
|
$
|
698
|
|
These amounts are included
in Due from related parties in the Consolidated Statements of Financial Condition.
Consulting Agreements
RQSI, Ltd.
Certain affiliates of Mr. Neil Ramsey (“Mr.
Ramsey”) are significant stockholders of ZAIS.
ZGP entered into a two-year
Consulting Agreement (the “Consulting Agreement”) with Mr. Ramsey through RQSI, Ltd., an entity controlled by Mr. Ramsey.
Under the terms of the Consulting Agreement, Mr. Ramsey provided consulting services to ZGP, ZAIS Group’s senior management
team and ZAIS, from time to time during the 24-month period beginning on the closing of the Business Combination and expiring on
March 17, 2017. Mr. Ramsey agreed not to compete against ZGP during the term of the Consulting Agreement, and for two years following
its termination. In consideration for his undertakings under the Consulting Agreement, ZGP agreed to pay Mr. Ramsey a consulting
fee of $500,000 per annum payable in monthly installments. The Consulting Agreement terminated on March 17, 2017.
The Company has recorded the following expense
related to the Consulting Agreement:
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
105
|
|
|
$
|
250
|
|
The expense is included
in General, administrative and other expenses in the Consolidated Statements of Comprehensive Income (Loss).
There were no amounts
payable to Mr. Ramsey pursuant to the Consulting Agreement at June 30, 2017 or December 31, 2016.
ZAIS Group has agreed
to use certain statistical data generated by RQSI, Ltd. models. ZAIS Group may use this information for trading futures on behalf
of the ZAIS Managed Entities.
ZAIS Group entered
into a month to month lease agreement with an affiliate of RQSI, Ltd dated February 1, 2016 to occupy space in the
Company’s London office. The agreement was terminable upon 30 days’ notice. There was no charge to RQSI,
Ltd. or its affiliate for use of the space prior to March 1, 2017. From March 1, 2017 through May 31,
2017, the date the lease was terminated, the monthly rate was 4,167 GBP.
Ms. Tracy Rohan
ZAIS Group is a party
to a consulting agreement with Ms. Tracy Rohan (“Ms. Rohan”), Mr. Zugel’s sister-in-law, pursuant to which Ms.
Rohan provides services to ZAIS Group relating to event planning, promotion, web and print branding and related services. Pursuant
to the consulting agreement, Ms. Rohan earns 76,000 GBP annually. The Company recognized the following amounts for her services:
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
27
|
|
|
$
|
48
|
|
|
$
|
54
|
|
The expense is included
in General, administrative and other expenses in the Consolidated Statements of Comprehensive Income (Loss).
Amounts payable to Ms. Rohan pursuant to the
consulting agreement are as follows:
June
30,
2017
|
|
|
December
31,
2016
|
|
(Dollars in thousands)
|
|
$
|
8
|
|
|
$
|
16
|
|
Such amounts are included
in Other liabilities in the Consolidated Statements of Financial Condition.
11. Property and Equipment
Property and equipment consist of the following:
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
3,246
|
|
|
$
|
3,098
|
|
Leasehold improvements
|
|
|
692
|
|
|
|
684
|
|
Furniture and fixtures
|
|
|
572
|
|
|
|
572
|
|
Software
|
|
|
412
|
|
|
|
409
|
|
|
|
|
4,922
|
|
|
|
4,763
|
|
Less accumulated depreciation and amortization
|
|
|
(4,603
|
)
|
|
|
(4,489
|
)
|
Total
|
|
$
|
319
|
|
|
$
|
274
|
|
The Company recognized depreciation and amortization
expense as follows:
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71
|
|
|
$
|
64
|
|
|
$
|
111
|
|
|
$
|
127
|
|
12. Commitments and Contingencies
Engagement Agreement with Berkshire Capital
On April 22, 2016, the Company entered into
an investment banking engagement agreement with Berkshire Capital Securities, LLC (“Berkshire Capital”), an affiliate
of Mr. R. Bruce Cameron, a former director of the Company, pursuant to which Berkshire Capital will provide financial advisory
services in connection with the Company’s strategic planning. Pursuant to the engagement letter, Berkshire Capital received
a $100,000 retainer and is entitled to receive a monthly retainer of $15,000 beyond the initial three month term of the engagement,
reimbursements for its expenses and a success fee in the event of covered transactions equal to no more than the greater of $750,000
and 2% of the total consideration paid.
The Company incurred the following expenses
pursuant to the engagement agreement:
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45
|
|
|
$
|
76
|
|
|
$
|
91
|
|
|
$
|
76
|
|
Legal Advisor Agreement
On February 27, 2017,
ZAIS Group entered into an agreement (the “Legal Advisor Agreement”) with Howard Steinberg, the Company’s former
General Counsel, pursuant to which Mr. Steinberg resigned as General Counsel effective March 31, 2017 and was retained as Senior
Legal Advisor to the Company effective April 1, 2017. Under the Legal Advisor Agreement, which was approved by the Compensation
Committee of the Board of Directors, Mr. Steinberg receives $150,000 per calendar quarter for his services, plus additional compensation
of $900 per hour if he is requested to devote more than 20 hours during any week to advising the Company. In addition, under the
Legal Advisor Agreement, Mr. Steinberg is entitled to reimbursement of reasonable out-of-pocket expenses incurred in connection
with performing services for the Company, an allowance or reimbursement for the reasonable cost of suitable office space in Manhattan
should Mr. Steinberg require it, 70% of the premiums for COBRA health and medical insurance coverage for Mr. Steinberg and his
spouse paid for by the Company and, after COBRA coverage lapses, up to 70% of the costs of Medicare supplementary health insurance
coverage for Mr. Steinberg and his spouse, for as long as he provides legal advisory services to the Company, capped at $3,450
per quarter. Pursuant to the Legal Advisor Agreement, Mr. Steinberg also received a payment of $450,000 on February 28, 2017. The
Legal Advisor Agreement is terminable by the Company or Mr. Steinberg on 30 days’ prior written notice. If the Legal Advisor
Agreement is terminated by the Company other than due to Mr. Steinberg’s failure to perform services, Mr. Steinberg is entitled
to a payment of $300,000.
The Company incurred the following expenses
pursuant to the Legal Advisor Agreement:
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
192
|
|
|
$
|
—
|
|
|
$
|
642
|
|
|
$
|
—
|
|
Capital Commitments
At June 30, 2017 and December
31, 2016, the Company has committed $51.0 million of equity capital to Zephyr A-6, a Consolidated Fund, which has been established
to invest in ZAIS Group managed CLOs and thereby satisfy the risk retention requirements of the Dodd-Frank Act. The Company’s
cumulative contributions to Zephyr A-6 were as follows:
June 30,
2017
|
|
|
December 31,
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
$
|
26,597
|
|
|
$
|
20,477
|
|
There is no assurance
that the full commitments will be required to be funded by ZAIS Group or as to the period of time during which these commitments
may be required to be funded. ZAIS Group serves as the investment manager to these ZAIS Managed Entities and determines when, and
to what extent, capital will be called.
In February 2017, ZAIS
Group made a $5.0 million commitment to a ZAIS Managed Entity which focuses on investing in non-ZAIS managed CLOs, none of which
has been called as of August 14, 2017.
Lease Obligations
ZAIS Group currently
leases office space in New Jersey and London under operating lease agreements. On June 9, 2017, ZAIS Group extended its
existing lease agreement for its office space in New Jersey until July 2018. On June 5, 2017, ZAIS Group (UK) Limited,
the Company’s London subsidiary, provided notice that the lease of its London office premises would terminate on
September 7, 2017. On July 26, 2017, ZAIS Group (UK) Limited entered into an agreement to lease office space in London,
commencing on September 11, 2017 and which may be cancelled on each anniversary subject to the provision of at least 3
months’ notice. The Company recognizes rent expense related to its operating leases on a straight-line basis over the
lease term and is included in General, administrative and other in the Consolidated Statements of Comprehensive Income
(Loss). The Company incurred rent expense as follows:
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
222
|
|
|
$
|
263
|
|
|
$
|
437
|
|
|
$
|
507
|
|
Aggregate future minimum
annual rental payments for the period from July 1, 2017 to December 31, 2017 and the period subsequent to December 31, 2017 are
approximately as follows:
Period
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
Six months ended December 31, 2017
|
|
|
310
|
|
|
|
|
|
|
January 2018 through September 2018
|
|
|
278
|
|
Effective September 30,
2016, the Company terminated a portion of its lease and reduced its office space in New Jersey by approximately 2,600 square feet.
In connection with the lease termination, the Company paid a lease termination fee of approximately $20,000 pursuant to the terms
of the lease.
Litigation
From time to time, ZAIS
Group may become involved in various claims, formal regulatory inquiries and legal actions arising in the ordinary course of business.
The Company discloses information regarding such inquiries if disclosure is required pursuant to accounting and financial reporting
standards.
Other Contingencies
In the normal course of
business, ZAIS Group enters into contracts that provide a variety of indemnifications. Such contracts include those with certain
service providers, brokers and trading counterparties. Any exposure to ZAIS Group under these arrangements could involve future
claims that may be made against ZAIS Group. Currently, no such claims exist or are expected to arise and, accordingly, the Company
has not accrued any liabilities in connection with such indemnifications.
Gain Contingencies
In April 2016 the Company
received notification from one of its insurance providers that its claim for reimbursement of certain legal and other costs relating
to a formal regulatory inquiry had been approved.
The Company had paid approximately
$0.02 million and $3,000 during the three months ended June 30, 2017 and June 30, 2016, respectively, and $0.04 million and $0.2
million during the six months ended June 30, 2017 and June 30, 2016, respectively, for legal and other costs incurred in excess
of its insurance deductible.
The cumulative insurance
reimbursements that the Company has received through June 30, 2017 and December 31, 2016 were approximately $0.9 million and $0.9
million, respectively. Pursuant to the guidance under ASC 450,
"Contingencies – Gain Contingencies”
, approximately
$0.55 million of the insurance reimbursements received was recorded in Other income (expense) in the Consolidated Statements of
Comprehensive Income (Loss) for the six months ended June 30, 2016 for the portion that related to 2015.
At June 30, 2017 and December
31, 2016, the remaining amount submitted to the insurance provider for reimbursement was approximately $0.02 million and $0.02
million, respectively and is included in Other assets in the Consolidated Statements of Financial Condition.
13. Segment
Reporting
The investment management
segment is currently the Company’s only reportable segment, and represents the Company’s core business, as substantially
all of the Company’s operations are conducted through this segment. The investment management segment provides investment
advisory and asset management services to the ZAIS Managed Entities.
14. Stockholders’ Equity
Preferred Stock
The Company is authorized
to issue 2,000,000 shares of preferred stock with a par value of $0.0001 per share with such designation, rights and preferences
as may be determined time to time by the Board of Directors. No shares of preferred stock have been issued or are outstanding.
Class A Common Stock
The Company is authorized
to issue 180,000,000 shares of Class A Common Stock with a par value of $0.0001 per share. Holders of record of Class A Common
Stock are entitled to one vote for each share held on all matters to be voted on by stockholders.
The Company issued the
following Class A Common Stock related to RSUs which vested:
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,942
|
|
|
|
30,000
|
|
|
|
579,865
|
|
|
|
30,000
|
|
Class B Common Stock
The Company is authorized
to issue 20,000,000 shares of Class B Common Stock with a par value of $0.000001 per share. The Class B Common Stock has no economic
rights and therefore is not considered participating securities for purposes of allocation of net income (loss). Holders of record
of Class B Common Stock are entitled to ten votes for each share held on all matters to be voted on by stockholders.
At June 30, 2017 and December
31, 2016, 20,000,000 shares of Class B Common Stock are held by an irrevocable voting trust of which Mr. Zugel is the sole trustee
(the “ZGH Class B Voting Trust”). There were no shares of Class B Common Stock issued during the three or six months
ended June 30, 2017 or June 30, 2016. Consequently, in his capacity as trustee of the ZGH Class B Voting Trust, Mr. Zugel has effective
voting control over the election of directors and generally on all other matters submitted for approval by the Company’s
stockholders.
Class A Units
At June 30, 2017 and December
31, 2016, ZAIS’ ownership of the Class A Units was 67.4% and 66.5%, respectively. The remaining Class A Units of ZGP are
held by the ZGP Founder Members.
During the first five
years following the closing of the Business Combination, ZGP will release up to an additional 2,800,000 Class A Units to the ZGP
Founder Members if the sum of the average per share closing price over any 20 trading-day period of the Class A Common Stock plus
cumulative dividends paid on the Class A Common Stock between the closing of the Business Combination and the day prior to such
20 trading-day period meets or exceeds specified thresholds, ranging from $12.50 to $21.50.
There were 30,942 Class
A Units issued to ZAIS during the three months ended June 30, 2017 and 30,000 Class A Units issued during the three months ended
June 30, 2016. There were 579,865 Class A Units issued to ZAIS during the six months ended June 30, 2017 and 30,000 Class A Units
issued during the six months ended June 30, 2016.
Class B Units
ZGP may issue up to 6,800,000
Class B units (“Class B Units”) at any time during the five year period following the closing of the Business Combination,
a portion of which (the Class B-0 Units) were awarded but subsequently cancelled (see Note 8 – “Compensation”).
These units are still available for re-issuance. The remaining 5,200,000 Class B Units are designated as Class B-1, Class B-2,
Class B-3 and Class B-4 Units (together the “Additional Employee Units”), which, once issued, vest in three equal installments
only if the Class A Common Stock of ZAIS achieves certain average closing price thresholds within five years after the closing
of the Business Combination ranging from $12.50 to $21.50 as follows: one-third of such award vests upon achieving the applicable
threshold, one-third of such award vests upon the first anniversary of such achievement and the final one-third of such award vests
upon the second anniversary of such achievement, unless otherwise provided in the restricted unit agreement granting the Class
B unit. Although the Class B Units are outstanding when issued, the Class B Units are not entitled to any distributions from ZGP
(and thus will not participate in, or be allocated any, income or loss) or other material rights until such Class B Units vest.
Subject to certain restrictions,
the ZGP Founder Members’ Class A Units and, if any, all of the vested Class B Units (but not any unvested Class B Units)
may be exchanged for shares of Class A Common Stock of ZAIS on a one-for-one basis (subject to certain, if any, adjustments to
the exchange ratio) or, at ZAIS’s option, cash or a combination of Class A Common Stock and cash, pursuant to the Exchange
Agreement that ZAIS entered into with ZGP, the ZGP Founder Members and the other parties thereto.
There were no Class B-1,
Class B-2, Class B-3 or Class B-4 Units awarded for the three or six months ended June 30, 2017 or June 30, 2016 and no Class B
Units currently are issued and outstanding.
On December 1, 2016,
the Board of Directors authorized ZGP to offer the employees who agreed to the cancellation of their unvested Class B-0 Units the
right to receive in substitution for the cancellation of their Class B-0 Units, at the holder’s option, either (a) RSUs of
ZAIS, on a one-for-one basis, or (b) an amount of cash per Class B-0 Unit cancelled (See Note 8 – “Compensation”).
Both were subject to vesting requirements.
15. Earnings Per Share
Shares of Class B Common
Stock have no impact on the calculation of consolidated net income (loss) per share of Class A Common Stock as holders of Class
B Common Stock do not participate in net income or dividends, and thus, are not participating securities.
The following table presents
a reconciliation of the earnings and shares used in calculating basic and diluted earnings per share:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands, except shares and per share
data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Income (Loss), net of tax, attributable to ZAIS Group Holdings, Inc. Class A common stockholders (Basic)
|
|
$
|
(652
|
)
|
|
$
|
(4,076
|
)
|
|
$
|
(4,814
|
)
|
|
$
|
(8,910
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Income (Loss), net of tax, attributable to non-controlling interests in ZGP
|
|
|
(315
|
)
|
|
|
(1,911
|
)
|
|
|
(2,398
|
)
|
|
|
(4,210
|
)
|
Less: Consolidated Net (Income) Loss, net of tax, attributable to ZAIS REIT Management Class B interests
(1)
|
|
|
—
|
|
|
|
(142
|
)
|
|
|
—
|
|
|
|
(284
|
)
|
Income tax (benefit) expense
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consolidated Net Income (Loss), net of tax, attributable to stockholders, after effect of dilutive securities
|
|
$
|
(967
|
)
|
|
$
|
(6,129
|
)
|
|
$
|
(7,212
|
)
|
|
$
|
(13,404
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Class A Common Stock
|
|
|
14,473,642
|
|
|
|
13,892,016
|
|
|
|
14,231,320
|
|
|
|
13,881,466
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Class A Units
|
|
|
7,000,000
|
|
|
|
7,000,000
|
|
|
|
7,000,000
|
|
|
|
7,000,000
|
|
Dilutive number of Class B-0 Units and RSUs
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average shares outstanding
(4)
|
|
|
21,473,642
|
|
|
|
20,892,016
|
|
|
|
21,231,320
|
|
|
|
20,881,466
|
|
Consolidated Net Income (Loss), net of tax, per Class A common share – Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.64
|
)
|
Consolidated Net Income (Loss), net of tax, per Class A common share – Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.64
|
)
|
(1)
|
|
Amount represents portion of the management fee income received from ZFC REIT that was payable to holders of Class B interests in ZAIS REIT Management.
|
(2)
|
|
Income tax (benefit) expense is calculated using an assumed tax rate of 41.73% and 38.56% for the three months ended June 30, 2017 and June 30, 2016, respectively, and (0.64)% and 39.29% for the six months ended June 30, 2017 and June 30, 2016, respectively, which is fully offset by a 100% valuation allowance in each year. See Note 9 – “Income Taxes” for details surrounding income taxes.
|
(3)
|
|
The treasury stock method is used to calculate incremental Class A common shares on potentially dilutive Class A common shares resulting from unvested Class B-0 Units granted in connection with and subsequent to the Business Combination and unvested RSUs granted to non-employee directors of ZAIS and employees of ZAIS Group. These Class B-0 Units and RSUs are anti-dilutive and, consequently, have been excluded from the computation of diluted weighted average shares outstanding.
|
(4)
|
|
Number of diluted shares outstanding takes into account non-controlling interests of ZGP that may be exchanged for Class A Common Stock under certain circumstances.
|
16. Supplemental Financial Information
The following supplemental
financial information illustrates the consolidating effects of the Consolidated Funds on the Company’s financial condition
and results of operations:
|
|
June 30,
2017
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
( Dollars in thousands )
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,970
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,970
|
|
Income and fees receivable
|
|
|
2,198
|
|
|
|
—
|
|
|
|
(329
|
)
|
|
|
1,869
|
|
Investments in affiliates, at fair value
|
|
|
42,986
|
|
|
|
—
|
|
|
|
(32,698
|
)
|
|
|
10,288
|
|
Due from related parties
|
|
|
1,101
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,101
|
|
Property and equipment, net
|
|
|
319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
319
|
|
Prepaid expenses
|
|
|
1,907
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,907
|
|
Other assets
|
|
|
385
|
|
|
|
—
|
|
|
|
—
|
|
|
|
385
|
|
Assets of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
—
|
|
|
|
13,416
|
|
|
|
—
|
|
|
|
13,416
|
|
Investments, at fair value
|
|
|
—
|
|
|
|
459,416
|
|
|
|
(12,709
|
)
|
|
|
446,707
|
|
Due from broker
|
|
|
—
|
|
|
|
12,095
|
|
|
|
—
|
|
|
|
12,095
|
|
Other assets
|
|
|
—
|
|
|
|
1,320
|
|
|
|
(313
|
)
|
|
|
1,007
|
|
Total Assets
|
|
$
|
65,866
|
|
|
|
486,247
|
|
|
|
(46,049
|
)
|
|
|
506,064
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation payable
|
|
$
|
4,594
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,594
|
|
Due to related parties
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
Fees payable
|
|
|
289
|
|
|
|
—
|
|
|
|
(289
|
)
|
|
|
—
|
|
Other liabilities
|
|
|
1,147
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,147
|
|
Liabilities of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of Consolidated CLO
|
|
|
—
|
|
|
|
397,229
|
|
|
|
(12,710
|
)
|
|
|
384,519
|
|
Due to broker
|
|
|
—
|
|
|
|
21,974
|
|
|
|
—
|
|
|
|
21,974
|
|
Other liabilities
|
|
|
—
|
|
|
|
2,930
|
|
|
|
(351
|
)
|
|
|
2,579
|
|
Total Liabilities
|
|
|
6,061
|
|
|
|
422,133
|
|
|
|
(13,350
|
)
|
|
|
414,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Class A Common Stock
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Class B Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in-capital
|
|
|
64,210
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,210
|
|
Retained earnings (Accumulated deficit)
|
|
|
(23,779
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,779
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(44
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(44
|
)
|
Total stockholders’ equity, ZAIS Group Holdings, Inc.
|
|
|
40,388
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,388
|
|
Non-controlling interests in ZAIS Group Parent, LLC
|
|
|
19,417
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,417
|
|
Non-controlling interests in Consolidated Funds
|
|
|
—
|
|
|
|
64,114
|
|
|
|
(32,699
|
)
|
|
|
31,415
|
|
Total Equity
|
|
|
59,805
|
|
|
|
64,114
|
|
|
|
(32,699
|
)
|
|
|
91,220
|
|
Total Liabilities and Equity
|
|
$
|
65,866
|
|
|
|
486,247
|
|
|
|
(46,049
|
)
|
|
|
506,064
|
|
|
|
December 31, 2016
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
( Dollars in thousands )
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38,712
|
|
Income and fees receivable
|
|
|
8,805
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,805
|
|
Investments in affiliates, at fair value
|
|
|
29,554
|
|
|
|
—
|
|
|
|
(24,281
|
)
|
|
|
5,273
|
|
Due from related parties
|
|
|
734
|
|
|
|
—
|
|
|
|
—
|
|
|
|
734
|
|
Property and equipment, net
|
|
|
274
|
|
|
|
—
|
|
|
|
—
|
|
|
|
274
|
|
Prepaid expenses
|
|
|
906
|
|
|
|
—
|
|
|
|
—
|
|
|
|
906
|
|
Other assets
|
|
|
348
|
|
|
|
—
|
|
|
|
—
|
|
|
|
348
|
|
Assets of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
—
|
|
|
|
37,080
|
|
|
|
—
|
|
|
|
37,080
|
|
Investments, at fair value
|
|
|
—
|
|
|
|
423,871
|
|
|
|
(19,506
|
)
|
|
|
404,365
|
|
Due from broker
|
|
|
—
|
|
|
|
16,438
|
|
|
|
—
|
|
|
|
16,438
|
|
Other assets
|
|
|
—
|
|
|
|
1,254
|
|
|
|
(44
|
)
|
|
|
1,210
|
|
Total Assets
|
|
$
|
79,333
|
|
|
$
|
478,643
|
|
|
$
|
(43,831
|
)
|
|
$
|
514,145
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
1,263
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,263
|
|
Compensation payable
|
|
|
7,836
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,836
|
|
Due to related parties
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
Fees payable
|
|
|
2,439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,439
|
|
Other liabilities
|
|
|
1,127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,127
|
|
Liabilities of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of Consolidated CLO
|
|
|
—
|
|
|
|
404,407
|
|
|
|
(19,506
|
)
|
|
|
384,901
|
|
Due to broker
|
|
|
—
|
|
|
|
24,462
|
|
|
|
—
|
|
|
|
24,462
|
|
Other liabilities
|
|
|
—
|
|
|
|
2,165
|
|
|
|
(44
|
)
|
|
|
2,121
|
|
Total Liabilities
|
|
|
12,696
|
|
|
|
431,034
|
|
|
|
(19,550
|
)
|
|
|
424,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Class A Common Stock
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Class B Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in-capital
|
|
|
63,413
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63,413
|
|
Retained earnings (Accumulated deficit)
|
|
|
(18,965
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,965
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(70
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(70
|
)
|
Total stockholders’ equity, ZAIS Group Holdings, Inc.
|
|
|
44,379
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,379
|
|
Non-controlling interests in ZAIS Group Parent, LLC
|
|
|
22,258
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,258
|
|
Non-controlling interests in Consolidated Funds
|
|
|
—
|
|
|
|
47,609
|
|
|
|
(24,281
|
)
|
|
|
23,328
|
|
Total Equity
|
|
|
66,637
|
|
|
|
47,609
|
|
|
|
(24,281
|
)
|
|
|
89,965
|
|
Total Liabilities and Equity
|
|
$
|
79,333
|
|
|
$
|
478,643
|
|
|
$
|
(43,831
|
)
|
|
$
|
514,145
|
|
|
|
Three
Months Ended
June
30, 2017
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
( Dollars in thousands )
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee income
|
|
$
|
4,018
|
|
|
|
—
|
|
|
|
(329
|
)
|
|
|
3,689
|
|
Incentive income
|
|
|
2,884
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,884
|
|
Reimbursement revenue
|
|
|
383
|
|
|
|
—
|
|
|
|
—
|
|
|
|
383
|
|
Other revenues
|
|
|
77
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77
|
|
Income of Consolidated Funds
|
|
|
—
|
|
|
|
3,413
|
|
|
|
(3,009
|
)
|
|
|
404
|
|
Total Revenues
|
|
|
7,362
|
|
|
|
3,413
|
|
|
|
(3,338
|
)
|
|
|
7,437
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
5,609
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,609
|
|
General, administrative and other
|
|
|
4,169
|
|
|
|
—
|
|
|
|
(290
|
)
|
|
|
3,879
|
|
Depreciation and amortization
|
|
|
71
|
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
Expenses of Consolidated Funds
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
30
|
|
Total Expenses
|
|
|
9,849
|
|
|
|
30
|
|
|
|
(290
|
)
|
|
|
9,589
|
|
Other Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments
|
|
|
1,493
|
|
|
|
—
|
|
|
|
(1,454
|
)
|
|
|
39
|
|
Other income (expense)
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32
|
|
Net gains (losses) of Consolidated Funds’ investments
|
|
|
—
|
|
|
|
(532
|
)
|
|
|
2,139
|
|
|
|
1,607
|
|
Net gain (loss) on beneficial interest of collateralized financing entity
|
|
|
—
|
|
|
|
—
|
|
|
|
909
|
|
|
|
909
|
|
Total Other Income (Loss)
|
|
|
1,525
|
|
|
|
(532
|
)
|
|
|
1,594
|
|
|
|
2,587
|
|
Income (loss) before income taxes
|
|
|
(962
|
)
|
|
|
2,851
|
|
|
|
(1,454
|
)
|
|
|
435
|
|
Income tax (benefit) expense
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
Consolidated net income (loss), net of tax
|
|
|
(967
|
)
|
|
|
2,851
|
|
|
|
(1,454
|
)
|
|
|
430
|
|
Other Comprehensive Income (Loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
Total Comprehensive Income (Loss)
|
|
$
|
(958
|
)
|
|
|
2,851
|
|
|
|
(1,454
|
)
|
|
|
439
|
|
|
|
Three months Ended
June 30, 2016
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
( Dollars in Thousands )
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee income
|
|
$
|
3,571
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,571
|
|
Incentive income
|
|
|
143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
143
|
|
Other revenues
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
Total Revenues
|
|
|
3,793
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,793
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
7,999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,999
|
|
General, administrative and other
|
|
|
2,950
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,950
|
|
Depreciation and amortization
|
|
|
64
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64
|
|
Expenses of Consolidated Funds
|
|
|
—
|
|
|
|
29
|
|
|
|
—
|
|
|
|
29
|
|
Total Expenses
|
|
|
11,013
|
|
|
|
29
|
|
|
|
—
|
|
|
|
11,042
|
|
Other Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments
|
|
|
1,150
|
|
|
|
—
|
|
|
|
(1,095
|
)
|
|
|
55
|
|
Other income (expense)
|
|
|
87
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87
|
|
Net gains (losses) of Consolidated Funds’ investments
|
|
|
—
|
|
|
|
2,176
|
|
|
|
—
|
|
|
|
2,176
|
|
Total Other Income (Loss)
|
|
|
1,237
|
|
|
|
2,176
|
|
|
|
(1,095
|
)
|
|
|
2,318
|
|
Income (loss) before income taxes
|
|
|
(5,983
|
)
|
|
|
2,147
|
|
|
|
(1,095
|
)
|
|
|
(4,931
|
)
|
Income tax (benefit) expense
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Consolidated net income (loss), net of tax
|
|
|
(5,987
|
)
|
|
|
2,147
|
|
|
|
(1,095
|
)
|
|
|
(4,935
|
)
|
Other Comprehensive Income (Loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(147
|
)
|
Total Comprehensive Income (Loss)
|
|
$
|
(6,134
|
)
|
|
$
|
2,147
|
|
|
$
|
(1,095
|
)
|
|
$
|
(5,082
|
)
|
|
|
Six
Months Ended
June
30, 2017
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
( Dollars in thousands )
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee income
|
|
$
|
7,125
|
|
|
|
—
|
|
|
|
(329
|
)
|
|
|
6,796
|
|
Incentive income
|
|
|
3,181
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,181
|
|
Reimbursement revenue
|
|
|
877
|
|
|
|
—
|
|
|
|
—
|
|
|
|
877
|
|
Other revenues
|
|
|
170
|
|
|
|
—
|
|
|
|
—
|
|
|
|
170
|
|
Income of Consolidated Funds
|
|
|
—
|
|
|
|
3,618
|
|
|
|
(3,214
|
)
|
|
|
404
|
|
Total Revenues
|
|
|
11,353
|
|
|
|
3,618
|
|
|
|
(3,543
|
)
|
|
|
11,428
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
13,033
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,033
|
|
General, administrative and other
|
|
|
7,838
|
|
|
|
—
|
|
|
|
(290
|
)
|
|
|
7,548
|
|
Depreciation and amortization
|
|
|
111
|
|
|
|
—
|
|
|
|
—
|
|
|
|
111
|
|
Expenses of Consolidated Funds
|
|
|
—
|
|
|
|
73
|
|
|
|
—
|
|
|
|
73
|
|
Total Expenses
|
|
|
20,982
|
|
|
|
73
|
|
|
|
(290
|
)
|
|
|
20,765
|
|
Other Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments
|
|
|
2,411
|
|
|
|
—
|
|
|
|
(2,297
|
)
|
|
|
114
|
|
Other income (expense)
|
|
|
16
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
Net gains (losses) of Consolidated Funds’ investments
|
|
|
—
|
|
|
|
960
|
|
|
|
1,754
|
|
|
|
2,714
|
|
Net gain (loss) on beneficial interest of collateralized financing entity
|
|
|
—
|
|
|
|
—
|
|
|
|
1,498
|
|
|
|
1,498
|
|
Total Other Income (Loss)
|
|
|
2,427
|
|
|
|
960
|
|
|
|
955
|
|
|
|
4,342
|
|
Income (loss) before income taxes
|
|
|
(7,202
|
)
|
|
|
4,505
|
|
|
|
(2,298
|
)
|
|
|
(4,995
|
)
|
Income tax (benefit) expense
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
Consolidated net income (loss), net of tax
|
|
|
(7,212
|
)
|
|
|
4,505
|
|
|
|
(2,298
|
)
|
|
|
(5,005
|
)
|
Other Comprehensive Income (Loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
Total Comprehensive Income (Loss)
|
|
$
|
(7,173
|
)
|
|
|
4,505
|
|
|
|
(2,298
|
)
|
|
|
(4,966
|
)
|
|
|
Six
months Ended
June
30, 2016
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
( Dollars in Thousands )
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee income
|
|
$
|
7,140
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,140
|
|
Incentive income
|
|
|
295
|
|
|
|
—
|
|
|
|
—
|
|
|
|
295
|
|
Other revenues
|
|
|
159
|
|
|
|
—
|
|
|
|
—
|
|
|
|
159
|
|
Total Revenues
|
|
|
7,594
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,594
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
17,006
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,006
|
|
General, administrative and other
|
|
|
6,160
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,160
|
|
Depreciation and amortization
|
|
|
127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127
|
|
Expenses of Consolidated Funds
|
|
|
—
|
|
|
|
48
|
|
|
|
—
|
|
|
|
48
|
|
Total Expenses
|
|
|
23,293
|
|
|
|
48
|
|
|
|
—
|
|
|
|
23,341
|
|
Other Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments
|
|
|
1,896
|
|
|
|
—
|
|
|
|
(1,859
|
)
|
|
|
37
|
|
Other income (expense)
|
|
|
692
|
|
|
|
—
|
|
|
|
—
|
|
|
|
692
|
|
Net gains (losses) of Consolidated Funds’ investments
|
|
|
—
|
|
|
|
3,693
|
|
|
|
—
|
|
|
|
3,693
|
|
Total Other Income (Loss)
|
|
|
2,588
|
|
|
|
3,693
|
|
|
|
(1,859
|
)
|
|
|
4,422
|
|
Income (loss) before income taxes
|
|
|
(13,111
|
)
|
|
|
3,645
|
|
|
|
(1,859
|
)
|
|
|
(11,325
|
)
|
Income tax (benefit) expense
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
Consolidated net income (loss), net of tax
|
|
|
(13,120
|
)
|
|
|
3,645
|
|
|
|
(1,859
|
)
|
|
|
(11,334
|
)
|
Other Comprehensive Income (Loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(201
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(201
|
)
|
Total Comprehensive Income (Loss)
|
|
$
|
(13,321
|
)
|
|
$
|
3,645
|
|
|
$
|
(1,859
|
)
|
|
$
|
(11,535
|
)
|
17. Subsequent Events
In July 2017, ZAIS began the liquidation of
the ZAIS Atlas Master Fund, LP and its feeder fund (together, the “Atlas Fund”), a ZAIS Managed Entity. At June 30,
2017, the Atlas Fund had AUM of $32.8 million. Additionally, ZAIS earned the following management fees and incentive income from
Atlas Fund:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
$
|
14
|
|
|
$
|
12
|
|
|
$
|
27
|
|
|
$
|
33
|
|
Incentive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
14
|
|
|
$
|
12
|
|
|
$
|
27
|
|
|
$
|
33
|
|
ZAIS’s aggregate investment in the Atlas
Fund was $0.1 million at June 30, 2017. Such amount is included in Investment in affiliates, at fair value in the Consolidated
Statements of Financial Condition.
On August 10, 2017, Zephyr A-6 sold all of its interests in
ZAIS CLO 5 for a sale price of approximately $12.1 million. The sale is expected to settle on August 15, 2017.