Notes
to Condensed Consolidated Financial Statements
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”).
Commencing
in 2015, the Company’s management and its Board of Directors (the “Board”) have been conducting periodic strategic
reviews of the Company’s business in order to enhance shareholder value. On February 15, 2017, the Board established a Special
Committee of independent and disinterested directors (the “Special Committee of the Board of Directors”) to consider
any proposals by management or third parties for strategic transactions. On September 5, 2017, Z Acquisition LLC entered into
a share purchase agreement with Ramguard LLC pursuant to which Z Acquisition LLC will acquire 6,500,000 shares of Class A Common
Stock (“Class A Common Stock”) of the Company at a purchase price of $4.00 per share for a combination of cash and
a note (the “Ramguard Agreement”). After giving effect to the Ramguard Agreement, Christian Zugel would hold, directly
or indirectly, 6,800,000 shares of the Class A Common Stock and 3,325,000 Class A Units of ZGP (“Class A Units”).
Also, on September 5, 2017, the Special Committee of the Board of Directors received a letter (the “Letter”) from
Christian Zugel seeking to pursue discussions with the Special Committee of the Board of Directors to take the Company private
by acquiring through a merger the remaining issued and outstanding shares of Class A Common Stock of the Company
, other
than shares held by Christian Zugel and his affiliates, at $4.00 per share in an all cash transaction. The Company and Christian
Zugel are negotiating the terms of an agreement for such a merger, which agreement will be subject to the approval of the Special
Committee of the Board of Directors, the Board and the Company’s shareholders. If such merger is consummated, the Company
expects to terminate the registration of ZAIS Class A Common Stock under the Securities Exchange Act of 1934, as amended, and
to cease periodic and other public company compliance and reporting. There is no assurance that the discussions and negotiations
between the Company and Christian Zugel which have taken place or may in the future take place will result in any agreement with
respect to a merger. The Company intends to make a public announcement in the event, and at the time, of the approval of a merger
agreement by the Board and the Special Committee of the Board.
The
ZAIS Managed Entities predominantly invest in a variety of specialized credit instruments including corporate credit instruments
such as CLOs, securities backed by residential mortgage loans, bank loans and various securities and instruments backed by these
asset classes. ZAIS Group had the following assets under management (“AUM”):
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Reporting Period
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Approximately
(in billions)
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As of September 30, 2017
(1)
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$
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4.144
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As of December 31, 2016
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$
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3.444
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(1)
In order to finance the purchase of the Company’s Class A Common Stock pursuant to the Ramguard Agreement, Christian
Zugel and various trusts for which relatives of Christian Zugel are the beneficiaries have submitted a redemption request to redeem
approximately $5.4 million (value date of September 30, 2017) of interests effective December 31, 2017, from ZAIS Opportunity
Domestic Feeder Fund, LP, which serves as the feeder fund to ZAIS Opportunity Master Fund, Ltd, a ZAIS Managed Entity. The AUM
presented has not been reduced to account 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 of consolidated 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.
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2.
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Basis of Presentation and
Summary of Significant Accounting Policies
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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 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:
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As
of
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Three
Months Ended
September 30,
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Nine
Months Ended
September 30,
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Entity
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September
30,
2017
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December
31,
2016
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2017
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2016
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2017
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2016
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ZAIS
Zephyr A-6, LP (“Zephyr A-6”)
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ü
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ü
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ü
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ü
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ü
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ü
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ZAIS CLO
5, Limited (“ZAIS CLO 5” or “Consolidated CLO”)
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—
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ü
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ü
(1)
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—
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ü
(1)
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—
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(1)
ZAIS CLO 5 is consolidated from the beginning of the period through August 10, 2017, the date which ZAIS CLO 5 was deconsolidated.
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 consolidated 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 pays 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 applicable related agreements
(the “Research Costs”). Certain of 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 nine
months ended September 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 discounts and premiums on fixed income securities purchased are accreted or amortized into income or expense using the effective
interest rate method over the lives of such securities. 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. However,
a decision on the adoption method has not been made as of the date of this Report. 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 does not anticipate a significant
change in the amount and timing of revenue recognition for management fee and reimbursement revenue. The Company continues to
assess the impact of the rule changes on required disclosures. The above includes the Company’s findings through the
current report date.
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 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.
Adopted Accounting
Pronouncements
In
March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payments Accounting
("ASU
2016-09"). ASU 2016-09 simplifies accounting for employee share-based payment transactions including the
accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the
consolidated statement of cash flows. The Company adopted ASU 2016-09 as of January 1, 2017 with no significant impact
on the consolidated financial statements.
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3.
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Investments in Affiliates
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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 November 13, 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.
In
July 2017, ZAIS liquidated the ZAIS Atlas Master Fund, LP and its feeder fund (together, the “Atlas Fund”), a ZAIS
Managed Entity. ZAIS’s remaining amount due from the Atlas Fund was approximately $0.014 million at September 30, 2017.
Such amount is included in Other assets in the Consolidated Statements of Financial Condition. At December 31, 2016, the Company’s
investment in the Atlas Fund was $0.1 million. Such amount is included in Investments in affiliates in the Consolidated Statements
of Financial Condition.
At
September 30, 2017 and December 31, 2016, the Company held investments in four and five unconsolidated ZAIS Managed Entities (excluding
an investment in a ZAIS Managed Entity for which no capital has been called as of November 13, 2017), respectively.
The
Company applied the fair value option to its investments in the ZAIS Managed Entities that are not consolidated. The Company believes
that reporting the fair value of these investments is more indicative of the Company’s financial position than the equity
method of accounting.
The
fair value of these investments was as follows:
September
30,
2017
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December
31,
2016
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(Dollars in thousands)
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$
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10,153
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$
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5,273
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The
Company recorded a change in unrealized gain (loss) associated with the investments still held at the end of each respective period
as follows:
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Three Months Ended
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Nine Months Ended
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September 30,
2017
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|
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September 30,
2016
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September 30,
2017
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September 30,
2016
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(Dollars in thousands)
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$
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2
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$
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(32
|
)
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$
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12
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$
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(55
|
)
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Such
amounts are included in Net gain (loss) on investments in the Consolidated Statements of Comprehensive Income (Loss).
At
September 30, 2017 and December 31, 2016, neither the Company’s equity investment, individually or in the aggregate,
nor the Company’s proportionate share of the total assets of unconsolidated ZAIS Managed Entities in which the
Company invested, exceeded 20% of the Company’s 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 three or nine months ended September 30, 2017 and September 30, 2016. As such, the Company did not
present separate or summarized financial statements for any of these investees.
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4.
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Fair Value Measurements
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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:
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•
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Quoted
prices for similar assets or liabilities in active markets.
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•
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Quoted
prices for identical or similar assets or liabilities in non-active markets.
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•
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Pricing
models whose inputs are observable for substantially the full term of the asset or liability.
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•
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Pricing
models whose inputs are derived principally from or corroborated by observable market
data for substantially the full term of the asset or liability.
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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 fair
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 information used to determine the price for the bank loans
held by the consolidated CLOs.
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 and delayed compensation plus interest
received less financing cost, cost of carry and any applicable expenses) 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 (excluding CLOs), 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).
ZAIS
Group has the ability to liquidate its investments according to the provisions of the respective entities’ operating 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:
|
|
|
September
30, 2017
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Net
Asset
Value
|
|
|
Total
|
|
|
Assets, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
14,870
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliates, at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,153
|
|
|
|
10,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
|
—
|
|
|
|
—
|
|
|
|
36,604
|
|
|
|
—
|
|
|
|
36,604
|
|
|
Mezzanine notes
|
|
|
—
|
|
|
|
—
|
|
|
|
21,971
|
|
|
|
—
|
|
|
|
21,971
|
|
|
Subordinated notes
|
|
|
—
|
|
|
|
—
|
|
|
|
5,032
|
|
|
|
—
|
|
|
|
5,032
|
|
|
Total – investments, at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
63,607
|
|
|
|
—
|
|
|
|
63,607
|
|
|
Total assets, at fair value
|
|
$
|
14,870
|
|
|
$
|
—
|
|
|
$
|
63,607
|
|
|
$
|
10,153
|
|
|
$
|
88,630
|
|
|
|
|
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:
|
|
|
Nine
Months Ended September 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
|
|
|
Effect
of
Deconsolidation
|
|
|
Transfers
to (from)
Level 3
|
|
|
Ending
Balance
September
30, 2017
|
|
|
Change in
Unrealized
Gains/Losses
Relating to
Assets and
Liabilities
Still Held
at
September
30, 2017
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
loans
|
|
$
|
389,329
|
|
|
$
|
231,203
|
|
|
$
|
(231,296
|
)
|
|
$
|
(4,236
|
)
|
|
$
|
848
|
|
|
$
|
(385,848
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
notes
|
|
|
—
|
|
|
|
36,600
|
|
|
|
—
|
|
|
|
(265
|
)
|
|
|
269
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36,604
|
|
|
|
(265
|
)
|
|
Mezzanine
notes
|
|
|
—
|
|
|
|
21,916
|
|
|
|
—
|
|
|
|
(59
|
)
|
|
|
114
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,971
|
|
|
|
(59
|
)
|
|
Subordinated
notes
|
|
|
—
|
|
|
|
8,541
|
|
|
|
(3,872
|
)
|
|
|
257
|
|
|
|
106
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,032
|
|
|
|
140
|
|
|
Warehouse
|
|
|
15,036
|
|
|
|
68,700
|
|
|
|
(87,820
|
)
|
|
|
4,084
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
investments, at fair value
|
|
$
|
404,365
|
|
|
$
|
366,960
|
|
|
$
|
(322,988
|
)
|
|
$
|
(219
|
)
|
|
$
|
1,337
|
|
|
$
|
(385,848
|
)
|
|
$
|
—
|
|
|
$
|
63,607
|
|
|
$
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable of consolidated CLO, at fair value
|
|
$
|
384,901
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,362
|
)
|
|
|
—
|
|
|
|
(376,539
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
liabilities, at fair value
|
|
$
|
384,901
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8,362
|
)
|
|
$
|
—
|
|
|
$
|
(376,539
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Nine
Months Ended September 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
September
30, 2016
|
|
|
Change in
Unrealized
Gains/Losses
Relating to
Assets and
Liabilities
Still Held at
September
30, 2016
|
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse
|
|
$
|
30,509
|
|
|
$
|
10,000
|
|
|
$
|
(48,317
|
)
|
|
$
|
7,808
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
ZAIS CLO
5
|
|
|
—
|
|
|
|
20,348
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,348
|
|
|
|
—
|
|
|
Total
investments, at fair value
|
|
$
|
30,509
|
|
|
$
|
30,348
|
|
|
$
|
(48,317
|
)
|
|
$
|
7,808
|
|
|
$
|
—
|
|
|
$
|
20,348
|
|
|
$
|
—
|
|
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 nine months ended September 30, 2017 or September 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
September 30,
2017
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Amount/
Percentage
|
|
Min
|
|
|
Max
|
|
|
Weighted
Average
|
|
|
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of Consolidated Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
$
|
36,604
|
|
|
Third party pricing source
|
|
Not applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Mezzanine notes
|
|
|
21,971
|
|
|
Third party pricing source
|
|
Not applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Subordinated
notes
|
|
|
5,032
|
|
|
Third party pricing source
|
|
Not applicable
|
|
Not applicable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
– Investments, at fair value
|
|
$
|
63,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
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
and Voting 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
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. 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 September 30, 2017 and December
31, 2016 and for the three and nine months ended September 30, 2017 and September 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.
ZAIS
Group’s ownership interest in Zephyr A-6 was reduced on October 12, 2017 (see Note 17 – “Subsequent Events”).
Zephyr
A-6’s investments are as follows:
ZAIS
CLO 5
ZAIS
CLO 5 was in the warehouse phase from June 29, 2016, its inception date, through October 26, 2016 (the “ZAIS CLO 5 Closing
Date”). During this period (the “ZAIS CLO 5 Warehouse Period”), ZAIS CLO 5 financed the majority of its loan
purchases using its warehouse facility. The Company was not required to consolidate ZAIS CLO 5 during the ZAIS CLO 5 Warehouse
Period.
ZAIS
CLO 5 which priced on September 23, 2016 and closed on the ZAIS CLO 5 Closing Date, 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 was 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 manager and (ii) Zephyr A-6’s significant investment in the subordinated
notes of ZAIS CLO 5. Therefore, the Company initially consolidated ZAIS CLO 5 in its financial statements on the ZAIS CLO 5 Closing
Date.
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 consolidated
collateralized financing entity in the Consolidated Statements of Comprehensive Income (Loss).
On
August 10, 2017 Zephyr A-6 sold all of its remaining interests in ZAIS CLO 5 for a sales price of approximately $12.1 million
and recognized a loss of approximately $0.2 million. Such amount is included in Net gain (loss) on beneficial interest of consolidated
collateralized financing entity in the Consolidated Statements of Comprehensive Income (Loss). The sale was not to a related party.
Subsequent to the sale of its interests in ZAIS CLO 5, Zephyr A-6 did not have any investment in ZAIS CLO 5 and therefore the
Company deconsolidated ZAIS CLO 5 as of August 10, 2017. A wholly owned subsidiary of ZAIS continued as the collateral manager
for ZAIS CLO 5 subsequent to the deconsolidation.
The
Company consolidated ZAIS CLO 5 in its financial statements for the period from October 26, 2016 through December 31, 2016 and
for the period from January 1, 2017 through August 10, 2017 and as of December 31, 2016. Zephyr A-6 had an investment of $19.5
million in ZAIS CLO 5, at fair value, at December 31, 2016. This investment represents 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 6, Limited (“ZAIS CLO 6”)
ZAIS
CLO 6 was in the warehouse phase from November 18, 2016, its inception date, through June 1, 2017 (the “ZAIS CLO 6 Closing
Date”). During this period (the “ZAIS CLO 6 Warehouse Period”), ZAIS CLO 6 financed the majority of its loan
purchases using its warehouse facility. ZAIS CLO 6 did not meet the consolidation criteria during the ZAIS CLO 6 Warehouse Period.
ZAIS
CLO 6, which priced on May 3, 2017 and closed on 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.
Prior
to the ZAIS CLO 6 Closing Date, 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 $0.2 million. Such amount is included in Net gain (loss)
of Consolidated Funds’ investments in the Consolidated Statements of Comprehensive Income (Loss). This transaction reduced
Zephyr A-6’s economic interest in the subordinated notes from 13.5% to 5.0%. The Company determined that it was not the
primary beneficiary of ZAIS CLO 6 on the ZAIS CLO 6 Closing Date 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 as of the ZAIS
CLO 6 Closing Date.
Zephyr
A-6’s investment in ZAIS CLO 6 was $25.5 million at fair value, at September 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 at September 30, 2017. Therefore, the Company was not required to consolidate ZAIS CLO 6 in its financial statements
at September 30, 2017 or for the three and nine months ended September 30, 2017.
ZAIS
CLO 7, Limited (“ZAIS CLO 7”)
ZAIS
CLO 7 was in the warehouse phase from June 12, 2017, its inception date, through September 30, 2017. During this period (the “ZAIS
CLO 7 Warehouse Period”), ZAIS CLO 7 financed the majority of its loan purchases using its warehouse facility. ZAIS CLO
7 did not meet the consolidation criteria during the ZAIS CLO 7 Warehouse Period.
ZAIS
CLO 7, which priced on September 11, 2017 (the “ZAIS CLO 7 Pricing Date”), invests primarily in first lien senior
secured bank loans and has a total capitalization of $564.0 million, which consists of senior and mezzanine notes with an aggregate
par amount of $506.0 million and subordinated notes of $58.0 million. The CLO matures in April 2030.
At
the ZAIS CLO 7 Pricing Date, Zephyr A-6 had (i) an investment of approximately $35.5 million in the senior and mezzanine
notes and an investment of approximately $2.5 million in the subordinated notes of ZAIS CLO 7 and a corresponding payable of $38.0
million for its obligation to purchase the securities and (ii) a receivable for securities sold of $38.7 million for the return
of its initial investment in ZAIS CLO 7 while it was in the warehouse period. Zephyr A-6’s investment of $38.1 million
in ZAIS CLO 7, at fair value, represents approximately 5.0% economic interest in the senior note tranches, 16.4% economic interest
in the mezzanine note tranches and 5.0% economic interest in the subordinated note tranches. In total, Zephyr A-6 held a 6.78%
economic interest in the total capital structure of ZAIS CLO 7 on the ZAIS CLO 7 Pricing Date.
The
Company determined that it was not the primary beneficiary of ZAIS CLO 7 at the ZAIS CLO 7 Pricing Date or at September 30, 2017
because ZAIS CLO 7 was still in the warehouse phase. Therefore, the Company was not required to consolidate ZAIS CLO 7 in its
financial statements as of the ZAIS CLO 7 Pricing Date or at September 30, 2017.
ZAIS
CLO 7 closed on October 19, 2017 (see Note 17 – “Subsequent Events”).
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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
ZAIS CLO 5:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain or loss
|
|
$
|
—
|
|
|
$
|
4,115
|
|
|
$
|
—
|
|
|
$
|
7,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAIS CLO 6:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain or loss
|
|
|
(58
|
)
|
|
|
—
|
|
|
|
(321
|
)
|
|
|
—
|
|
|
Realized gains
|
|
|
(106
|
)
|
|
|
—
|
|
|
|
2,867
|
|
|
|
—
|
|
|
Total
– ZAIS CLO 6
|
|
|
(164
|
)
|
|
|
—
|
|
|
|
2,546
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAIS CLO 7:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain or loss
|
|
|
95
|
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
Realized gains
|
|
|
1,373
|
|
|
|
—
|
|
|
|
1,372
|
|
|
|
—
|
|
|
Total
– ZAIS CLO 7
|
|
|
1,468
|
|
|
|
—
|
|
|
|
1,472
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
– Net gain (loss) of Consolidated Funds’ investments
|
|
$
|
1,304
|
|
|
$
|
4,115
|
|
|
$
|
4,018
|
|
|
$
|
7,808
|
|
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 ZAIS Group’s 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. 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
September 30, 2017 the Consolidated Funds consist of Zephyr A-6. At December 31, 2016 the Consolidated Funds consist of Zephyr
A-6 and ZAIS CLO 5. Both Zephyr A-6 and ZAIS CLO 5 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
September 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
|
|
September
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Certain
ZAIS Managed Entities
|
|
Investment in affiliates, at fair value
|
|
$
|
5,153
|
|
|
$
|
272
|
|
|
CLOs
|
|
Assets of Consolidated Funds – Investments
at fair value
|
|
|
63,607
|
|
|
|
—
|
|
|
CLO Warehouses
|
|
Assets of Consolidated Funds
– Investments at fair value
|
|
|
—
|
|
|
|
15,036
|
|
|
|
|
Total
|
|
$
|
68,760
|
|
|
$
|
15,308
|
|
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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
ZAIS CLO 5
|
|
$
|
—
|
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
10,000
|
|
|
ZAIS CLO 6
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
—
|
|
|
ZAIS CLO 7
|
|
|
13,700
|
|
|
|
—
|
|
|
|
38,700
|
|
|
|
—
|
|
|
Total
|
|
$
|
13,700
|
|
|
$
|
10,000
|
|
|
$
|
68,700
|
|
|
$
|
10,000
|
|
Notes Payable
of consolidated CLO
The
Company did not consolidate ZAIS CLO 5 at September 30, 2017. Therefore, there are no notes payable of consolidated CLOs at September
30, 2017.
Notes
payable of ZAIS CLO 5, the consolidated CLO, are collateralized by the assets held by ZAIS CLO 5. As of December 31, 2016, 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 is as follows:
|
|
|
December
31,
2016
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
23,987
|
|
|
Investments,
at fair value
|
|
|
389,329
|
|
|
|
|
|
413,316
|
|
|
|
|
|
|
|
|
Other
assets (liabilities), net
|
|
|
(8,909
|
)
|
|
Notes payable of consolidated
CLO, at fair value
|
|
|
404,407
|
|
|
Elimination
of Consolidated Funds’ investments in CLO
|
|
|
(19,506
|
)
|
|
Notes
payable of consolidated CLO, at fair value (net of eliminations)
|
|
$
|
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 using the Measurement Alternative as described in Note 2.
The
table below presents information related to ZAIS CLO 5’s notes payable outstanding as of December 31, 2016. 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.
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated Voting Interest Entities
(“VOEs”)
At
September 30, 2017 and December 31, 2016, the Company’s unconsolidated VOEs consisted of the Company’s investment
in one ZAIS Managed Entity which carries first loss risk.
The
carrying amounts of the unconsolidated VOEs are as follows:
|
Investment
In
|
|
Financial
Statement Line Item
|
|
September
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Certain
ZAIS Managed Entities
|
|
Investment in affiliates, at fair
value
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Such
amounts are included in the Consolidated Statements of Financial Condition.
|
|
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 fees
are generally collected on a monthly or quarterly basis.
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.
Zephyr
A-6 invests in certain CLOs managed by ZAIS Group. ZAIS Group earns fees from these CLOs. Any senior management fees
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 ZAIS Group 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 Group is
allocated a 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 restructuring of Zephyr A-6 on October 12, 2017 modified the
calculation of the Rebated Fees for the period subsequent to the restructuring (see Note 17 – “Subsequent
Events”).
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 in October 2016.
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
September
30, 2017
|
|
|
|
|
|
|
( Dollars in thousands )
|
|
|
|
|
Fee Range
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
|
Management
Fee Income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
0.50% - 1.25%
|
|
$
|
2,748
|
|
|
$
|
—
|
|
|
$
|
2,748
|
|
|
CLOs
|
|
0.15% - 0.50%
|
|
|
1,653
|
|
|
|
(178
|
)
|
|
|
1,475
|
|
|
Total
|
|
|
|
$
|
4,401
|
|
|
$
|
(178
|
)
|
|
$
|
4,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
Income
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
10% - 20%
|
|
$
|
4,548
|
|
|
$
|
—
|
|
|
$
|
4,548
|
|
|
CLOs
|
|
20%
|
|
|
11
|
|
|
|
—
|
|
|
|
11
|
|
|
Total
|
|
|
|
$
|
4,559
|
|
|
$
|
—
|
|
|
$
|
4,559
|
|
|
|
|
|
|
Three
Months Ended
September
30, 2016
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Fee Range
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
|
Management
Fee Income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
0.50% - 1.25%
|
|
$
|
2,669
|
|
|
$
|
(218
|
)
|
|
$
|
2,451
|
|
|
CLOs
|
|
0.15% - 0.50%
|
|
|
481
|
|
|
|
—
|
|
|
|
481
|
|
|
ZFC
REIT
(3)
|
|
1.50%
|
|
|
722
|
|
|
|
—
|
|
|
|
722
|
|
|
Total
|
|
|
|
$
|
3,872
|
|
|
$
|
(218
|
)
|
|
$
|
3,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
Income
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
and accounts
|
|
10% - 20%
|
|
$
|
3,614
|
|
|
$
|
—
|
|
|
$
|
3,614
|
|
|
Total
|
|
|
|
$
|
3,614
|
|
|
$
|
—
|
|
|
$
|
3,614
|
|
|
|
|
|
|
Nine
Months Ended
September
30, 2017
|
|
|
|
|
|
|
( Dollars in thousands )
|
|
|
|
|
Fee Range
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
|
Management
Fee Income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
0.50% - 1.25%
|
|
$
|
8,106
|
|
|
$
|
—
|
|
|
$
|
8,106
|
|
|
CLOs
|
|
0.15% - 0.50%
|
|
|
3,420
|
|
|
|
(507
|
)
|
|
|
2,913
|
|
|
Total
|
|
|
|
$
|
11,526
|
|
|
$
|
(507
|
)
|
|
$
|
11,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
Income
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
10% - 20%
|
|
$
|
7,619
|
|
|
$
|
—
|
|
|
$
|
7,619
|
|
|
CLOs
|
|
20%
|
|
|
121
|
|
|
|
—
|
|
|
|
121
|
|
|
Total
|
|
|
|
$
|
7,740
|
|
|
$
|
—
|
|
|
$
|
7,740
|
|
|
|
|
|
|
Nine
Months Ended
September
30, 2016
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Fee Range
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
|
Management
Fee Income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
0.50% - 1.25%
|
|
$
|
7,438
|
|
|
$
|
(218
|
)
|
|
$
|
7,220
|
|
|
CLOs
|
|
0.15% - 0.50%
|
|
|
1,311
|
|
|
|
—
|
|
|
|
1,311
|
|
|
ZFC
REIT
(3)
|
|
1.50%
|
|
|
2,263
|
|
|
|
—
|
|
|
|
2,263
|
|
|
Total
|
|
|
|
$
|
11,012
|
|
|
$
|
(218
|
)
|
|
$
|
10,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
Income
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds and accounts
|
|
10% - 20%
|
|
$
|
3,909
|
|
|
$
|
—
|
|
|
$
|
3,909
|
|
|
Total
|
|
|
|
$
|
3,909
|
|
|
$
|
—
|
|
|
$
|
3,909
|
|
|
|
(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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
Management fee income
credit
|
|
$
|
61
|
|
|
$
|
52
|
|
|
$
|
187
|
|
|
$
|
156
|
|
|
Total
|
|
$
|
61
|
|
|
$
|
52
|
|
|
$
|
187
|
|
|
$
|
156
|
|
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
Months Ended
September
30, 2017
|
|
|
|
|
( Dollars in thousands
)
|
|
|
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
|
Rebated
Fees
|
|
$
|
374
|
|
|
$
|
(374
|
)
|
|
$
|
—
|
|
|
Total
|
|
$
|
374
|
|
|
$
|
(374
|
)
|
|
$
|
—
|
|
|
|
|
Nine
Months Ended
September
30, 2017
|
|
|
|
|
( Dollars in thousands
)
|
|
|
|
|
Gross
Amount
|
|
|
Elimination
|
|
|
Net
Amount
|
|
|
Rebated
Fees
|
|
$
|
664
|
|
|
$
|
(664
|
)
|
|
$
|
—
|
|
|
Total
|
|
$
|
664
|
|
|
$
|
(664
|
)
|
|
$
|
—
|
|
There were no Rebated
Fees for the three or nine months ended September 30, 2016.
Management fee
income and incentive income which was accrued, but not received is as follows:
|
|
|
September
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Management fee income
|
|
$
|
2,634
|
|
|
$
|
1,284
|
|
|
Incentive income
|
|
|
3,630
|
|
|
|
7,521
|
|
|
Total
|
|
$
|
6,264
|
|
|
$
|
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 nine months ended September 30, 2017 or September 30, 2016. The
Company believes all income and fees receivable balances are fully collectible.
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
6
|
|
The following table
presents a detailed breakout of the Company’s compensation expense:
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
2,362
|
|
|
$
|
2,497
|
|
|
$
|
6,991
|
|
|
$
|
8,370
|
|
|
Bonus
|
|
|
3,068
|
|
|
|
2,808
|
|
|
|
9,211
|
|
|
|
10,208
|
|
|
Severance
|
|
|
—
|
|
|
|
27
|
|
|
|
72
|
|
|
|
789
|
|
|
Equity-Based Compensation
|
|
|
68
|
|
|
|
1,269
|
|
|
|
1,236
|
|
|
|
2,951
|
|
|
Payroll taxes and benefits
|
|
|
277
|
|
|
|
307
|
|
|
|
1,298
|
|
|
|
1,593
|
|
|
Commissions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
Total
|
|
$
|
5,775
|
|
|
$
|
6,908
|
|
|
$
|
18,808
|
|
|
$
|
23,914
|
|
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 Agreements”). In the event an award is forfeited pursuant to the
terms of the Bonus Agreements or Guarantee Agreements, 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 September 30, 2017, the Company paid approximately $9.5 million related to year-end Bonus
Awards issued in 2016, Bonus Awards and Guarantees that vested through February of 2017 pursuant to the Bonus Agreements and Guarantee
Agreements related to a prior year and Guarantees pursuant to Guarantee Agreements related to the current year. A portion of these
amounts had been accrued and recognized as an expense at December 31, 2016 and for the year ended December 31, 2016, respectively.
On
May 9, 2017, the Board of Directors approved an amendment to the charter of the Compensation Committee of the Board of Directors
of the Company (the “Compensation Committee”) 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 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 $1.5 million and $3.0 million during the three and nine months
ended September 30, 2016, respectively, to all participants pursuant to the Retention Payment Plan.
There
were no amounts payable under the Retention Payment Plan at September 30, 2017 or December 31, 2016.
Other
On
March 1, 2016, the Compensation Committee 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 nine months ended September 30, 2016.
Pursuant
to the Legal Advisor Agreement, Mr. Steinberg also received a payment of $450,000 on February 28, 2017 (see Note 12 – “Commitments
and Contingencies”). This payment is included in Compensation and benefits in the Consolidated Statements of Comprehensive
Income (Loss) for the nine months ended September 30, 2017.
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, 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. On November 7, 2017, the Compensation Committee determined that Mr. Szymanski would receive
the final $500,000 Retention Award payment on February 28, 2018. 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. For the three and nine months ended September 30, 2017, $0.5
million and $1.0 million, respectively have been paid and are included in Compensation and benefits in the Consolidated Statements
of Comprehensive Income (Loss).
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 nine months ended September 30, 2017 or September 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 to
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 accepted 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 Class 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 cash payments and the issuance of RSUs in consideration 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
September
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
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,132,213
|
|
|
$
|
9.36
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(16,327
|
)
|
|
|
9.70
|
|
|
Balance at end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,115,886
|
|
|
$
|
9.36
|
|
|
|
|
Nine
Months Ended
September
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
|
|
|
—
|
|
|
|
—
|
|
|
|
(321,600
|
)
|
|
|
9.70
|
|
|
Balance at end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,115,886
|
|
|
$
|
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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,310
|
|
|
$
|
1,059
|
|
|
$
|
2,876
|
|
The
estimated forfeiture rates of Class B-0 Units, including those cancelled in consideration of the issuance of RSUs, were as follows:
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—%
|
|
|
|
29.6
|
%
|
|
|
—%
|
|
|
|
29.6
|
%
|
The
expense relating to the Class B-0 Units, including those cancelled in consideration of the issuance of RSUs, is included in Compensation
and benefits in the Consolidated Statements of Comprehensive Income (Loss).
RSUs
Non-employee
directors of ZAIS receive RSUs pursuant to the 2015 Stock Plan as a component of annual 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.
The
following table presents the RSU activity for non-employee directors during the three and nine months ended September 30, 2016
and September 30, 2017:
|
RSU Grant
Date
|
|
Number
of
RSUs Issued
|
|
|
Fair
Value per
RSU on
Grant Date
|
|
|
RSU Vesting
Date
|
|
April 30, 2015
|
|
|
10,000
|
|
|
$
|
9.85
|
|
|
April 21, 2016
|
|
April 30, 2015
|
|
|
20,000
|
|
|
$
|
9.85
|
|
|
April 30, 2016
|
|
April 21, 2016
|
|
|
30,942
|
|
|
$
|
3.22
|
|
|
April 21, 2017
|
|
November 1, 2016
|
|
|
74,331
|
|
|
$
|
1.73
|
|
|
November 1, 2017
|
|
May 9, 2017
|
|
|
63,219
|
|
|
$
|
2.19
|
|
|
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 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
September
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:
|
|
|
137,550
|
|
|
|
1.94
|
|
|
|
30,942
|
|
|
|
3.22
|
|
|
Grants during period to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee directors
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance at end of period
|
|
|
137,550
|
|
|
|
1.94
|
|
|
|
30,942
|
|
|
|
3.22
|
|
|
|
|
Nine
Months Ended
September
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
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67
|
|
|
$
|
(41
|
)
|
|
$
|
177
|
|
|
$
|
75
|
|
The
expense relating to these RSUs is included in Compensation and benefits on the Consolidated Statements of Comprehensive Income
(Loss).
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 expense of $9,000 and $19,000 for the three months and nine months ended September 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 (benefit) of $(21,000) and $(12,000) for the three and nine months ended September 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense at the U.S. federal statutory income tax rate
|
|
$
|
538
|
|
|
$
|
542
|
|
|
$
|
(1,160
|
)
|
|
$
|
(3,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income tax, net of federal benefit
|
|
|
23
|
|
|
|
13
|
|
|
|
(247
|
)
|
|
|
(516
|
)
|
|
Foreign tax
|
|
|
9
|
|
|
|
(21
|
)
|
|
|
19
|
|
|
|
(12
|
)
|
|
Effect of permanent differences
|
|
|
16
|
|
|
|
—
|
|
|
|
19
|
|
|
|
58
|
|
|
Income attributable to non-controlling interests in Consolidated Funds not subject to tax
|
|
|
(333
|
)
|
|
|
(647
|
)
|
|
|
(1,083
|
)
|
|
|
(1,254
|
)
|
|
Income attributable to non-controlling interests in ZGP not subject to tax
|
|
|
(67
|
)
|
|
|
2
|
|
|
|
747
|
|
|
|
1,433
|
|
|
Provision to return adjustment
|
|
|
1
|
|
|
|
301
|
|
|
|
1
|
|
|
|
301
|
|
|
Equity Compensation “Shortfall” DTA Adjustment
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
1,930
|
|
|
|
—
|
|
|
Adjustment of tax rate used to value deferred taxes
|
|
|
—
|
|
|
|
42
|
|
|
|
—
|
|
|
|
42
|
|
|
Valuation allowance
|
|
|
(176
|
)
|
|
|
(253
|
)
|
|
|
(207
|
)
|
|
|
3,245
|
|
|
Total
|
|
$
|
9
|
|
|
$
|
(21
|
)
|
|
$
|
19
|
|
|
$
|
(12
|
)
|
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 nine months ended September 30, 2017 and September 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 nine
months ended September 30, 2017, the net effective tax is impacted due to a shortfall adjustment for equity compensation primarily
related to the cancellation 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 September 30, 2017 and December 31, 2016, the Company had total deferred tax assets (“DTA”) of approximately $6.75
million and $7.0 million, respectively, 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 September 30, 2017 and December 31, 2016.
As
of September 30, 2017, the Company has estimated federal and state income tax net operating loss carryforwards of approximately
$12.9 million which will expire as follows:
|
|
|
(Dollars in
thousands)
|
|
|
2032
|
|
$
|
1
|
|
|
2033
|
|
|
83
|
|
|
2034
|
|
|
122
|
|
|
2035
|
|
|
5,990
|
|
|
2036
|
|
|
1,703
|
|
|
2037
|
|
|
5,033
|
|
|
Total
|
|
$
|
12,932
|
|
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 September 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 nine months
ended September 30, 2017 excluding income attributable to Consolidated Funds, and it is anticipated that expenses will continue
to exceed revenues for the remainder of 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 September 30, 2017. The Company has recorded a change in valuation allowance
of approximately $(0.18) million and $(0.21) million in the Consolidated Statements of Comprehensive Income (Loss) for the three
and nine months ended September 30, 2017, respectively, and approximately $(0.25) million and $3.2 million for the three and nine
months ended September 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 nine months ended September 30, 2017 and September
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:
September
30,
2017
|
|
|
December
31,
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
$
|
17,746
|
(1)
|
|
$
|
21,713
|
|
(1)
In order to finance the purchase of the Company’s Class A Common Stock pursuant to the Ramguard Agreement, Christian
Zugel and various trusts for which relatives of Christian Zugel are the beneficiaries have submitted a redemption request to redeem
approximately $5.4 million (value date of September 30, 2017) of interests effective December 31, 2017, from ZAIS Opportunity
Domestic Feeder Fund, LP, which serves as the feeder fund to ZAIS Opportunity Master Fund, Ltd, a ZAIS Managed Entity. The capital
balances presented have not been reduced to account for this redemption request.
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 September 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 these 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:
September
30,
2017
|
|
|
December
31,
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
$
|
295,938
|
|
|
$
|
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:
|
|
|
September
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Research Costs
|
|
$
|
685
|
|
|
$
|
581
|
|
|
Other Direct Costs
|
|
|
272
|
|
|
|
117
|
|
|
Total
|
|
$
|
957
|
|
|
$
|
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 ending 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
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
105
|
|
|
$
|
375
|
|
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 September 30, 2017 or December 31, 2016.
ZAIS
Group had agreed to use certain statistical data generated by RQSI, Ltd. models. ZAIS Group had used this information for trading
futures on behalf of the ZAIS Managed Entities through August 2017.
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
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
26
|
|
|
$
|
72
|
|
|
$
|
78
|
|
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:
September 30,
2017
|
|
|
December 31,
2016
|
|
|
(Dollars in thousands)
|
|
|
$
|
17
|
|
|
$
|
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:
|
|
|
September
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
3,272
|
|
|
$
|
3,098
|
|
|
Leasehold improvements
|
|
|
695
|
|
|
|
684
|
|
|
Furniture and fixtures
|
|
|
572
|
|
|
|
572
|
|
|
Software
|
|
|
412
|
|
|
|
409
|
|
|
|
|
|
4,951
|
|
|
|
4,763
|
|
|
Less accumulated depreciation and amortization
|
|
|
(4,729
|
)
|
|
|
(4,489
|
)
|
|
Total
|
|
$
|
222
|
|
|
$
|
274
|
|
The Company recognized
depreciation and amortization expense as follows:
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118
|
|
|
$
|
79
|
|
|
$
|
229
|
|
|
$
|
206
|
|
|
|
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
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47
|
|
|
$
|
58
|
|
|
$
|
138
|
|
|
$
|
134
|
|
The
expense is included in General, administrative and other expenses in the Consolidated Statements of Comprehensive Income (Loss).
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, 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
“February 2017 Payment”). 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
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
171
|
|
|
$
|
—
|
|
|
$
|
813
|
|
|
$
|
—
|
|
The
expense, except for the February 2017 Payment, is included in General, administrative and other expenses in the Consolidated Statements
of Comprehensive Income (Loss). The February 2017 Payment is included in Compensation and benefits in the Consolidated Statements
of Comprehensive Income (Loss) for the nine months ended September 30, 2017.
Engagement Agreement
with Houlihan Lokey Capital, Inc.
On
September 27, 2017, the Company and the Special Committee of the Board of Directors entered into an investment banking engagement
agreement with Houlihan Lokey, Inc. (“Houlihan Lokey”) pursuant to which the Special Committee of the Board of Directors
retained Houlihan Lokey as its financial adviser in connection with a potential transaction between the Company and Christian
Zugel. Pursuant to the engagement letter, Houlihan Lokey is entitled to receive a retainer payment in the amount of $250,000 (the
“Houlihan Lokey Retainer”). Additionally, Houlihan Lokey is entitled to receive $350,000 at the time Houlihan Lokey
renders its opinion on the potential transaction and $200,000 upon consummation of the potential transaction.
The
Houlihan Lokey Retainer is included in Other liabilities in the Consolidated Statements of Financial Condition and General, administrative
and other in the Consolidated Statements of Comprehensive Income (Loss).
Capital Commitments
At
September 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:
|
September
30,
2017
|
|
|
December
31,
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
$
|
26,597
|
|
|
$
|
20,477
|
|
In
connection with the restructuring of Zephyr A-6 on October 12, 2017 (see Note 17 – “Subsequent Events”), the
partners’ capital commitments to Zephyr A-6 were amended.
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 November 13, 2017.
Lease Obligations
ZAIS
Group currently leases office space in New Jersey and London under operating lease agreements.
New
Jersey
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. Such amount is included in General, administrative and other in the Consolidated Statements
of Comprehensive Income (Loss).
On
June 9, 2017, ZAIS Group extended its existing lease agreement for its office space in New Jersey until July 2018.
On
August 31, 2017, ZAIS Group executed a lease for new office space in Holmdel, New Jersey (the “New Lease”). Rent will
commence upon the day which the landlord delivers possession of the space to the Company and has an 84 month term. The lease provides
for the Company to extend the lease term for one five year period commencing on the first day following the expiration of the
lease. The fixed rent during the renewal period will be based on the fair market rent at the time of the renewal. The Company
expects to take possession of the space in April 2018.
London
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
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237
|
|
|
$
|
270
|
|
|
$
|
675
|
|
|
$
|
777
|
|
Aggregate
future minimum annual rental payments for the period from October 1, 2017 to December 31, 2017 and the five years subsequent to
December 31, 2017 and thereafter, including rental payments due under the New Lease, are approximately as follows:
|
Period
|
|
(Dollars
in
thousands)
|
|
|
|
|
|
|
|
Three months ended December 31, 2017
|
|
|
179
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
2018
|
|
|
472
|
|
|
2019
|
|
|
327
|
|
|
2020
|
|
|
399
|
|
|
2021
|
|
|
406
|
|
|
2022
|
|
|
412
|
|
|
Thereafter
|
|
|
951
|
|
|
Total
|
|
|
3,146
|
|
Bonus Agreements and Guarantee Agreements
Aggregate
future payments pursuant to the Bonus Agreements and Guarantee Agreements (see Note 8 – “Compensation”) for
the period from October 1, 2017 to December 31, 2017 and the four years subsequent to December 31, 2017, are approximately as
follows:
|
Period
|
|
(Dollars
in
thousands)
|
|
|
|
|
|
|
|
Three months ended December 31, 2017
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
2018
|
|
|
2,765
|
|
|
2019
|
|
|
482
|
|
|
2020
|
|
|
482
|
|
|
2021
|
|
|
25
|
|
|
Total
|
|
$
|
3,754
|
|
At September 30,
2017, there are no future payments due subsequent to February 2021.
The
amount to be paid during 2018 in the table above includes approximately $1.3 million which has been recognized as an expense for
the nine months ended September 30, 2017. Such amount is included in Compensation payable and Compensation and benefits in the
Consolidated Statements of Financial Condition and Consolidated Statements of Comprehensive Income (Loss), respectively. The remaining
balance of approximately $1.5 million will be recognized as an expense during the five month period ending February 28, 2018.
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. The Company has received a claim for indemnification from R.
Bruce Cameron, a former director of the Company, in connection with a complaint that was filed by Parsifal Partners B, LP against
Christian Zugel, Michael Szymanski, R. Bruce Cameron, the Company and Berkshire Capital Securities LLC.
The
Company incurred the following expenses related to the indemnification claim:
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
198
|
|
|
$
|
—
|
|
Such
amounts are included in General, administrative and other expenses in the Consolidated Statements of Comprehensive Income (Loss).
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 did not incur any additional material costs in connection with the regulatory inquiry during the three months ended September
30, 2017. The Company had paid approximately $0.1 million during the three months ended September 30, 2016 and $0.06 million and
$0.3 million during the nine months ended September 30, 2017 and September 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 September 30, 2017 and December 31, 2016 were approximately
$1.0 million and $0.9 million, respectively. Pursuant to the guidance under ASC 450,
"Contingencies – Gain Contingencies”
,
approximately $0.58 million of the insurance reimbursements received was recorded in Other income (expense) in the Consolidated
Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2016 for the portion that related to 2015.
There
were no amounts due from the insurance provider for reimbursement at September 30, 2017. At December 31, 2016, the remaining amount
submitted to the insurance provider for reimbursement was approximately $0.02 million and is included in Other assets in the Consolidated
Statements of Financial Condition.
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.
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
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
579,865
|
|
|
|
30,000
|
|
2015 Stock Plan
A summary of the Class A Common Stock
which the Company may issue pursuant to the 2015 Stock Plan is as follows:
|
Total shares which may be issued pursuant to the plan
|
|
|
2,080,637
|
|
|
|
|
|
|
|
|
Total shares issued through September 30, 2017
|
|
|
609,865
|
|
|
|
|
|
|
|
|
Total shares available for
issuance at September 30, 2017
|
|
|
1,470,772
|
|
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
September 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 nine months ended September 30, 2017 or September 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
September 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 no Class A Units issued to ZAIS during the three months ended September 30, 2017 and September 30, 2016. There were 579,865
Class A Units issued to ZAIS during the nine months ended September 30, 2017 and 30,000 Class A Units issued during the nine months
ended September 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 nine months ended September 30, 2017 or September
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.
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
September 30,
|
|
|
Nine
Months Ended
September
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)
|
|
$
|
403
|
|
|
$
|
(286
|
)
|
|
$
|
(4,411
|
)
|
|
$
|
(9,196
|
)
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Income
(Loss), net of tax, attributable to non-controlling interests in ZGP
|
|
|
195
|
|
|
|
—
|
|
|
|
(2,203
|
)
|
|
|
(4,210
|
)
|
|
Less:
Consolidated Net (Income) Loss, net of tax, attributable to ZAIS REIT Management Class B interests
(1)
|
|
|
—
|
|
|
|
(144
|
)
|
|
|
—
|
|
|
|
(429
|
)
|
|
Income
tax (benefit) expense
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consolidated
Net Income (Loss), net of tax, attributable to stockholders, after effect of dilutive securities
|
|
$
|
598
|
|
|
$
|
(430
|
)
|
|
$
|
(6,614
|
)
|
|
$
|
(13,835
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Class A Common Stock
|
|
|
14,480,782
|
|
|
|
13,900,917
|
|
|
|
14,315,387
|
|
|
|
13,887,997
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of Class A Units
(4)
|
|
|
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
|
|
|
21,480,782
|
|
|
|
20,900,917
|
|
|
|
21,315,387
|
|
|
|
20,887,997
|
|
|
Consolidated
Net Income (Loss), net of tax, per Class A common share – Basic
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.66
|
)
|
|
Consolidated
Net Income (Loss), net of tax, per Class A common share – Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.66
|
)
|
|
(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 43.15% and 29.87% for the three months ended September 30, 2017 and September 30, 2016, respectively,
and (4.72)% and 38.98% for the nine months ended September 30, 2017 and September 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:
|
|
|
September
30, 2017
|
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Consolidating
Entries
|
|
|
Consolidated
|
|
|
|
|
( Dollars in thousands )
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,241
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,241
|
|
|
Income and fees receivable
|
|
|
6,264
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,264
|
|
|
Investments in affiliates, at fair value
|
|
|
43,868
|
|
|
|
—
|
|
|
|
(33,715
|
)
|
|
|
10,153
|
|
|
Due from related parties
|
|
|
958
|
|
|
|
—
|
|
|
|
—
|
|
|
|
958
|
|
|
Property and equipment, net
|
|
|
222
|
|
|
|
—
|
|
|
|
—
|
|
|
|
222
|
|
|
Prepaid expenses
|
|
|
1,457
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,457
|
|
|
Other assets
|
|
|
371
|
|
|
|
—
|
|
|
|
—
|
|
|
|
371
|
|
|
Assets of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
—
|
|
|
|
37
|
|
|
|
—
|
|
|
|
37
|
|
|
Investments, at fair value
|
|
|
—
|
|
|
|
63,607
|
|
|
|
—
|
|
|
|
63,607
|
|
|
Receivable for securities sold
|
|
|
—
|
|
|
|
38,700
|
|
|
|
—
|
|
|
|
38,700
|
|
|
Other assets
|
|
|
—
|
|
|
|
2,033
|
|
|
|
(413
|
)
|
|
|
1,620
|
|
|
Total Assets
|
|
$
|
69,381
|
|
|
|
104,377
|
|
|
|
(34,128
|
)
|
|
|
139,630
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation payable
|
|
$
|
7,162
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,162
|
|
|
Due to related parties
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
Fees payable
|
|
|
474
|
|
|
|
—
|
|
|
|
(413
|
)
|
|
|
61
|
|
|
Other liabilities
|
|
|
1,251
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,251
|
|
|
Liabilities of Consolidated Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of consolidated CLO
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Payables for securities purchased
|
|
|
—
|
|
|
|
38,034
|
|
|
|
—
|
|
|
|
38,034
|
|
|
Other liabilities
|
|
|
—
|
|
|
|
236
|
|
|
|
—
|
|
|
|
236
|
|
|
Total Liabilities
|
|
|
8,918
|
|
|
|
38,270
|
|
|
|
(413
|
)
|
|
|
46,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Class B Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Additional paid-in-capital
|
|
|
64,278
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,278
|
|
|
Retained earnings (Accumulated deficit)
|
|
|
(23,376
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,376
|
)
|
|
Accumulated other
comprehensive income (loss)
|
|
|
(49
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(49
|
)
|
|
Total stockholders’ equity, ZAIS Group Holdings,
Inc.
|
|
|
40,854
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,854
|
|
|
Non-controlling interests in ZAIS Group Parent,
LLC
|
|
|
19,609
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,609
|
|
|
Non-controlling interests
in Consolidated Funds
|
|
|
—
|
|
|
|
66,107
|
|
|
|
(33,715
|
)
|
|
|
32,392
|
|
|
Total Equity
|
|
|
60,463
|
|
|
|
66,107
|
|
|
|
(33,715
|
)
|
|
|
92,855
|
|
|
Total Liabilities and Equity
|
|
$
|
69,381
|
|
|
|
104,377
|
|
|
|
(34,128
|
)
|
|
|
139,630
|
|
|
|
|
December
31, 2016
|
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Consolidating
Entries
|
|
|
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
September
30, 2017
|
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Consolidating
Entries
|
|
|
Consolidated
|
|
|
|
|
( Dollars in thousands )
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fee income
|
|
$
|
4,401
|
|
|
|
—
|
|
|
|
(178
|
)
|
|
|
4,223
|
|
|
Incentive income
|
|
|
4,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,559
|
|
|
Reimbursement revenue
|
|
|
418
|
|
|
|
—
|
|
|
|
—
|
|
|
|
418
|
|
|
Other revenues
|
|
|
77
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77
|
|
|
Income
of Consolidated Funds
|
|
|
—
|
|
|
|
2,163
|
|
|
|
(2,078
|
)
|
|
|
85
|
|
|
Total
Revenues
|
|
|
9,455
|
|
|
|
2,163
|
|
|
|
(2,256
|
)
|
|
|
9,362
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
5,775
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,775
|
|
|
General, administrative
and other
|
|
|
4,085
|
|
|
|
—
|
|
|
|
(373
|
)
|
|
|
3,712
|
|
|
Depreciation and amortization
|
|
|
118
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118
|
|
|
Expenses
of Consolidated Funds
|
|
|
—
|
|
|
|
210
|
|
|
|
—
|
|
|
|
210
|
|
|
Total
Expenses
|
|
|
9,978
|
|
|
|
210
|
|
|
|
(373
|
)
|
|
|
9,815
|
|
|
Other
Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments
|
|
|
1,098
|
|
|
|
—
|
|
|
|
(1,017
|
)
|
|
|
81
|
|
|
Other income (expense)
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32
|
|
|
Net gains (losses) of Consolidated
Funds’ investments
|
|
|
—
|
|
|
|
41
|
|
|
|
1,263
|
|
|
|
1,304
|
|
|
Net
gain (loss) on beneficial interest of consolidated collateralized financing entity
|
|
|
—
|
|
|
|
—
|
|
|
|
620
|
|
|
|
620
|
|
|
Total
Other Income (Loss)
|
|
|
1,130
|
|
|
|
41
|
|
|
|
866
|
|
|
|
2,037
|
|
|
Income
(loss) before income taxes
|
|
|
607
|
|
|
|
1,994
|
|
|
|
(1,017
|
)
|
|
|
1,584
|
|
|
Income
tax (benefit) expense
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
Consolidated
net income (loss), net of tax
|
|
|
598
|
|
|
|
1,994
|
|
|
|
(1,017
|
)
|
|
|
1,575
|
|
|
Other Comprehensive Income
(Loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
Total
Comprehensive Income (Loss)
|
|
$
|
590
|
|
|
|
1,994
|
|
|
|
(1,017
|
)
|
|
|
1,567
|
|
|
|
|
Three
months Ended
September
30, 2016
|
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Consolidating
Entries
|
|
|
Consolidated
|
|
|
|
|
( Dollars in Thousands )
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee
income
|
|
$
|
3,872
|
|
|
$
|
—
|
|
|
$
|
(218
|
)
|
|
$
|
3,654
|
|
|
Incentive income
|
|
|
3,614
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,614
|
|
|
Other
revenues
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
|
Total Revenues
|
|
|
7,565
|
|
|
|
—
|
|
|
|
(218
|
)
|
|
|
7,347
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
6,908
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,908
|
|
|
General, administrative and
other
|
|
|
2,963
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,963
|
|
|
Depreciation and amortization
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
|
Expenses
of Consolidated Funds
|
|
|
—
|
|
|
|
234
|
|
|
|
(218
|
)
|
|
|
16
|
|
|
Total Expenses
|
|
|
9,950
|
|
|
|
234
|
|
|
|
(218
|
)
|
|
|
9,966
|
|
|
Other Income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments
|
|
|
2,025
|
|
|
|
—
|
|
|
|
(1,979
|
)
|
|
|
46
|
|
|
Other income (expense)
|
|
|
53
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
Net gains
(losses) of Consolidated Funds’ investments
|
|
|
—
|
|
|
|
4,115
|
|
|
|
—
|
|
|
|
4,115
|
|
|
Total Other Income (Loss)
|
|
|
2,078
|
|
|
|
4,115
|
|
|
|
(1,979
|
)
|
|
|
4,214
|
|
|
Income
(loss) before income taxes
|
|
|
(307
|
)
|
|
|
3,881
|
|
|
|
(1,979
|
)
|
|
|
1,595
|
|
|
Income
tax (benefit) expense
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(21
|
)
|
|
Consolidated
net income (loss), net of tax
|
|
|
(286
|
)
|
|
|
3,881
|
|
|
|
(1,979
|
)
|
|
|
1,616
|
|
|
Other Comprehensive Income
(Loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(61
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(61
|
)
|
|
Total
Comprehensive Income (Loss)
|
|
$
|
(347
|
)
|
|
$
|
3,881
|
|
|
$
|
(1,979
|
)
|
|
$
|
1,555
|
|
|
|
|
Nine
Months Ended
September
30, 2017
|
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Consolidating
Entries
|
|
|
Consolidated
|
|
|
|
|
( Dollars in thousands )
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fee income
|
|
$
|
11,526
|
|
|
|
—
|
|
|
|
(507
|
)
|
|
|
11,019
|
|
|
Incentive income
|
|
|
7,740
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,740
|
|
|
Reimbursement revenue
|
|
|
1,295
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,295
|
|
|
Other revenues
|
|
|
247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
247
|
|
|
Income
of Consolidated Funds
|
|
|
—
|
|
|
|
5,781
|
|
|
|
(5,292
|
)
|
|
|
489
|
|
|
Total
Revenues
|
|
|
20,808
|
|
|
|
5,781
|
|
|
|
(5,799
|
)
|
|
|
20,790
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
18,808
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,808
|
|
|
General, administrative
and other
|
|
|
11,924
|
|
|
|
—
|
|
|
|
(664
|
)
|
|
|
11,260
|
|
|
Depreciation and amortization
|
|
|
229
|
|
|
|
—
|
|
|
|
—
|
|
|
|
229
|
|
|
Expenses
of Consolidated Funds
|
|
|
—
|
|
|
|
283
|
|
|
|
—
|
|
|
|
283
|
|
|
Total
Expenses
|
|
|
30,961
|
|
|
|
283
|
|
|
|
(664
|
)
|
|
|
30,580
|
|
|
Other
Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments
|
|
|
3,510
|
|
|
|
—
|
|
|
|
(3,315
|
)
|
|
|
195
|
|
|
Other income (expense)
|
|
|
48
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48
|
|
|
Net gains (losses) of Consolidated
Funds’ investments
|
|
|
—
|
|
|
|
1,001
|
|
|
|
3,017
|
|
|
|
4,018
|
|
|
Net
gain (loss) on beneficial interest of consolidated collateralized financing entity
|
|
|
—
|
|
|
|
—
|
|
|
|
2,118
|
|
|
|
2,118
|
|
|
Total
Other Income (Loss)
|
|
|
3,558
|
|
|
|
1,001
|
|
|
|
1,820
|
|
|
|
6,379
|
|
|
Income
(loss) before income taxes
|
|
|
(6,595
|
)
|
|
|
6,499
|
|
|
|
(3,315
|
)
|
|
|
(3,411
|
)
|
|
Income
tax (benefit) expense
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
|
Consolidated
net income (loss), net of tax
|
|
|
(6,614
|
)
|
|
|
6,499
|
|
|
|
(3,315
|
)
|
|
|
(3,430
|
)
|
|
Other Comprehensive Income
(Loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
Total
Comprehensive Income (Loss)
|
|
$
|
(6,583
|
)
|
|
|
6,499
|
|
|
|
(3,315
|
)
|
|
|
(3,399
|
)
|
|
|
|
Nine
months Ended
September
30, 2016
|
|
|
|
|
ZAIS
|
|
|
Consolidated
Funds
|
|
|
Consolidating
Entries
|
|
|
Consolidated
|
|
|
|
|
( Dollars in Thousands )
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee
income
|
|
$
|
11,012
|
|
|
$
|
—
|
|
|
$
|
(218
|
)
|
|
$
|
10,794
|
|
|
Incentive income
|
|
|
3,909
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,909
|
|
|
Other
revenues
|
|
|
238
|
|
|
|
—
|
|
|
|
—
|
|
|
|
238
|
|
|
Total Revenues
|
|
|
15,159
|
|
|
|
—
|
|
|
|
(218
|
)
|
|
|
14,941
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
23,914
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,914
|
|
|
General, administrative and
other
|
|
|
9,123
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,123
|
|
|
Depreciation and amortization
|
|
|
206
|
|
|
|
—
|
|
|
|
—
|
|
|
|
206
|
|
|
Expenses
of Consolidated Funds
|
|
|
—
|
|
|
|
282
|
|
|
|
(218
|
)
|
|
|
64
|
|
|
Total Expenses
|
|
|
33,243
|
|
|
|
282
|
|
|
|
(218
|
)
|
|
|
33,307
|
|
|
Other Income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on investments
|
|
|
3,921
|
|
|
|
—
|
|
|
|
(3,838
|
)
|
|
|
83
|
|
|
Other income (expense)
|
|
|
745
|
|
|
|
—
|
|
|
|
—
|
|
|
|
745
|
|
|
Net gains
(losses) of Consolidated Funds’ investments
|
|
|
—
|
|
|
|
7,808
|
|
|
|
—
|
|
|
|
7,808
|
|
|
Total Other Income (Loss)
|
|
|
4,666
|
|
|
|
7,808
|
|
|
|
(3,838
|
)
|
|
|
8,636
|
|
|
Income
(loss) before income taxes
|
|
|
(13,418
|
)
|
|
|
7,526
|
|
|
|
(3,838
|
)
|
|
|
(9,730
|
)
|
|
Income
tax (benefit) expense
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
Consolidated
net income (loss), net of tax
|
|
|
(13,406
|
)
|
|
|
7,526
|
|
|
|
(3,838
|
)
|
|
|
(9,718
|
)
|
|
Other Comprehensive Income
(Loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(262
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(262
|
)
|
|
Total
Comprehensive Income (Loss)
|
|
$
|
(13,668
|
)
|
|
$
|
7,526
|
|
|
$
|
(3,838
|
)
|
|
$
|
(9,980
|
)
|
Zephyr A-6 -
Restructuring
On
October 12, 2017 (the “Restructuring Date”), ZAIS Group and the non-ZAIS partner in Zephyr A-6 (see Note
5 – “Variable Interest Entities and Voting Interest Entities”) entered into an Agreement of Purchase and
Sale whereby the non-ZAIS partner purchased a portion of ZAIS Group’s interest in Zephyr A-6, including a portion of
its unfunded capital commitments.
An estimated purchase price of approximately $24.1 million was paid to ZAIS Group
on the Restructuring Date for the interest sold. The estimated purchase price was based on the net asset value of the
interest sold as of June 30, 2017. A true-up payment will be made once the final purchase price is determined based on
the net asset value of the interest sold as of the Restructuring Date. In connection with the restructuring of Zephyr
A-6, the limited partners of Zephyr A-6 also amended the limited partnership agreement. On the Restructuring Date, both ZAIS
Group and the non-ZAIS partner made additional capital commitments to Zephyr A-6 resulting in the total capital commitments
to Zephyr A-6 set forth below. The partners’ ownership interests and capital commitments were amended as follows:
|
|
|
Prior to the
Amendment
|
|
|
Subsequent
to the
Amendment
|
|
|
Ownership Interest:
|
|
|
|
|
|
|
|
|
|
ZAIS Group
|
|
|
51.0
|
%
|
|
|
13.33
|
%
|
|
Non-ZAIS Partner
|
|
|
49.0
|
%
|
|
|
86.67
|
%
|
|
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Capital Commitments:
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|
|
|
|
|
|
|
|
|
ZAIS Group
|
|
$
|
51.0 million
|
|
|
$
|
20.0 million
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|
|
Non-ZAIS Partner
|
|
$
|
49.0 million
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|
|
$
|
130.0 million
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Capital Commitments funded to date:
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|
|
|
|
ZAIS Group
|
|
$
|
26.6 million
|
|
|
$
|
7.0 million
|
|
|
Non-ZAIS Partner
|
|
$
|
25.6 million
|
|
|
$
|
45.2 million
|
|
|
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|
|
|
|
|
|
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|
|
Remaining Capital Commitments to be funded:
|
|
|
|
|
|
|
|
|
|
ZAIS Group
|
|
$
|
24.4 million
|
|
|
$
|
13.0 million
|
|
|
Non-ZAIS Partner
|
|
$
|
23.4 million
|
|
|
$
|
84.8 million
|
|
|
|
|
|
|
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Zephyr
A-6 will continue to invest in CLOs managed by ZAIS. A portion of the senior fees and all of the subordinate fee and the incentive
fee paid to the Company by the ZAIS Group managed CLOs in which Zephyr A-6 invests are subsequently paid to Zephyr A-6 by ZAIS
and allocated among the limited partners of Zephyr A-6 pro rata based on their percentage interests in Zephyr A-6. The senior
fees which will be paid to Zephyr A-6 by the Company are as follows:
|
|
|
Prior
to the
Amendment
|
|
Subsequent
to the
Amendment
|
|
Senior Fees
|
|
In excess of 0.15%
|
|
In excess of 0.20%
|
The
Company has determined that ZAIS Group will continue to be the primary beneficiary of Zephyr A-6 and therefore will continue to
consolidate Zephyr A-6 in its consolidated financial statements subsequent to the purchase and sale transaction. ZAIS Group remains
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.
Master
Repurchase Agreement
On
October 16, 2017, Zephyr A-6 entered into a Master Repurchase Agreement with a lender for a maximum of $200.0 million of financing.
Subject to the terms and conditions of the Master Repurchase Agreement, the parties may enter into transactions for the lender
to purchase eligible securities from Zephyr A-6 on such terms agreed upon by the parties. During the term of a transaction entered
into under the Master Repurchase Agreement, Zephyr A-6 will deliver cash or additional securities acceptable to the lender if
the value of purchased securities declines below the specified margin for the transaction. Upon termination of a transaction,
Zephyr A-6 will repurchase the previously sold securities from the lender at a previously determined repurchase price. The Master
Repurchase Agreement may be terminated at any time by either party upon providing the requisite notice to the other party.
On
October 19, 2017 and November 1, 2017, Zephyr A-6 sold securities in the amount of approximately $21.9 million and $24.1 million,
respectively, under the Master Repurchase Agreement.
As
of November 13, 2017, the available funding under the Master Repurchase Agreement is approximately $154.1 million.
ZAIS CLO 7
ZAIS
CLO 7, which priced on September 11, 2017 (see Note 5 – “Variable Interest Entities”), closed on October 19,
2017. At the CLO closing, the following amounts, which are included in the Company’s consolidated statement of financial
position at September 30, 2017, were settled: (i) the payable for securities purchased of $38.0 million (ii) the receivable for
securities sold of $38.7 million and (iii) the dividend receivable of $1.4 million. As of the closing date, the Company has determined
that it will not be required to consolidate ZAIS CLO 7 in its financial statements.
Atlas Fund
On
October 20, 2017, the Company received the final liquidation distribution from the Atlas Fund in the amount of approximately $14,000.
ZAIS CLO 8,
Limited (“ZAIS CLO 8”)
ZAIS
CLO 8 was formed on October 16, 2017 and is in the warehouse phase (the “ZAIS CLO 8 Warehouse Period”). During the
ZAIS CLO 8 Warehouse Period, ZAIS CLO 8 is financing the majority of its loan purchases using its warehouse facility. Zephyr A-6
funded $30.0 million to ZAIS CLO 8 through November 13, 2017.
RSUs
On
November 1, 2017, the Company issued 74,331 shares of Class A Common Stock to the Company’s non-employee directors in connection
with the vesting of the awards which were issued on November 1, 2016 (see Note 8 – “Compensation”).
On
November 7, 2017 the Company issued an aggregate of 40,464 RSUs to the non-employee directors of ZAIS at a grant date
fair value of $3.67 per share pursuant to the 2015 Stock Plan (see Note 8 - Compensation”). These RSUs will vest on
November 7, 2018.
Retention
Award
On
November 7, 2017, the Compensation Committee determined that Mr. Szymanski would receive the final $500,000 payment under the
Retention Award on February 28, 2018.