ZAIS Zais Grp. Holdings, Inc. (delisted)

Notes to Condensed Consolidated Financial Statements

1. Organization

ZAIS Group Holdings, Inc. (“ZAIS”, and collectively with its consolidated subsidiaries, as the context may require, the “Company”) is a holding company conducting substantially all of its operations through ZAIS Group, LLC (“ZAIS Group”), an investment advisory and asset management firm focused on specialized credit which commenced operations in July 1997 and is headquartered in Red Bank, New Jersey. ZAIS Group also maintains an office in London. ZAIS Group is a wholly-owned consolidated subsidiary of ZAIS Group Parent, LLC (“ZGP”), a majority-owned consolidated subsidiary of ZAIS. ZAIS is the managing member of ZGP.

ZAIS Group is registered with the Securities and Exchange Commission 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 and structured vehicles (collateralized debt obligation vehicles and collateralized loan obligation vehicles, together referred to as “CLOs”) (collectively, the “ZAIS Managed Entities”).

Commencing in 2015, the Company’s management and its board of directors (“Board of Directors”) have been conducting periodic strategic reviews of the Company’s business in order to enhance shareholder value. On February 15, 2017, the Board of Directors established a special committee of independent and disinterested directors (the “Special Committee”) to consider any proposals thereafter by management or third parties for strategic transactions, as well as to consider all other strategic options for the Company. On September 5, 2017, Z Acquisition LLC (“Z Acquisition”), an entity in which Christian Zugel (“Mr. Zugel”), the former managing member of ZGP and the founder and Chief Investment Officer of ZAIS Group, is the managing member , entered into a share purchase agreement with Ramguard LLC (“Ramguard”), pursuant to which Z Acquisition LLC agreed to 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, which was amended and restated on January 11, 2018 (as amended and restated, the “Share Purchase Agreement”) to, among other things, increase the purchase price to $4.10 per share. After giving effect to the Share Purchase Agreement, Mr. 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 received a letter (the “Letter”) from Mr. Zugel seeking to pursue discussions with the Special Committee 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 Mr. Zugel and his affiliates, at $4.00 per share in an all cash transaction. On January 11, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Z Acquisition, and ZGH Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a subsidiary of Z Acquisition. Mr. Zugel is the sole managing member of Z Acquisition, and Daniel Curry, the Company’s Chief Executive Officer, President and a Director, is a member of Z Acquisition. At the effective time of the Merger, shares of Class A Common Stock, other than shares held by Mr. Zugel, affiliates of Mr. Zugel, and certain other shareholders, will be converted into the right to receive $4.10 per share in cash without interest, subject to any required withholding taxes. All outstanding restricted stock units (“RSUs”) are held by the Company’s independent directors and will also be converted in the Merger into the right to receive $4.10 per share in cash for the number of shares of Class A Common Stock underlying such RSUs. The proposed Merger is a “going private transaction” under SEC rules. There is no assurance that the Merger will be consummated.

The Company filed a Definitive Proxy Statement on March 30, 2018. The Company established April 2, 2018 as the record date for stockholders entitled to vote at its 2017 Annual Meeting of Stockholders (the “Annual Meeting”), which has been scheduled for May 17, 2018. Stockholders of record at the close of business on April 2, 2018 may vote at the Annual Meeting. At the Annual Meeting, stockholders will be asked to consider and vote upon a proposal to adopt the Merger Agreement. Stockholders will also be asked to elect the Company’s Board of Directors, approve the adjournment of the Annual Meeting, if necessary, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve adoption of the Merger Agreement, and vote on any other matter properly brought before the Annual Meeting.

The ZAIS Managed Entities predominantly invest in a variety of specialized credit instruments including corporate credit instruments such as leveraged bank loans and CLOs, real estate, securities backed by residential and commercial mortgage loans and asset backed securities collateralized by a range of consumer loan products. ZAIS Group’s assets under management (“AUM”) is primarily comprised of (i) total assets for mark-to-market funds and separately managed accounts; (ii) uncalled capital commitments, if any, for funds that are not in liquidation; and (iii) for issued structured vehicles, all assets being managed calculated per the management fee basis methodology defined in the respective vehicles’ indenture, although in certain circumstances some or all of the referenced management fees may be waived.  AUM also includes assets in the warehouse phase for new structured credit vehicles and is based on actual assets managed without reductions for leverage and most other liabilities and includes all assets regardless of whether management fees are being earned.

ZAIS Group had the following AUM:

⁽¹⁾ In order to finance a portion of the purchase of the Company’s Class A Common Stock pursuant to the Share Purchase Agreement, Sonia Zugel, Mr. Zugel’s spouse, has indicated an intention to withdraw approximately $1.7 million of interests from the ZAIS Opportunity Domestic Feeder Fund, LP (the “Domestic Feeder”), which serves as the feeder fund to ZAIS Opportunity Master Fund, Ltd, a ZAIS Managed Entity, effective September 30, 2018. The AUM presented has not been reduced for this withdrawal 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 funds and accounts managed by ZAIS Group or par values of the collateral and cash held by CLOs managed by ZAIS Group (“ZAIS CLOs”) and (ii) incentive income, which is based on the investment performance of the ZAIS Managed Entities.

Additionally, a significant source of the Company’s revenues and other income is derived from the underlying investments of certain ZAIS Managed Entities (including CLOs) which are consolidated by the Company (the “Consolidated Funds”). This income is comprised of interest, dividends and net gains from the underlying investments in CLOs and net gains on beneficial interests of consolidated collateralized financing entities which invest in first lien, senior secured loans. A portion of income of Consolidated Funds and net gains of Consolidated Funds’ investments are allocated to non-controlling interests in Consolidated Funds.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, interim, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("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 condensed consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K. Certain comparative amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation.

Fair Value Option

U.S. GAAP permits entities to choose to measure certain eligible financial assets, financial liabilities and firm commitments at fair value (the “Fair Value Option”), on an instrument-by-instrument basis. The election to use the Fair Value Option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. The Fair Value Option is irrevocable and requires changes in fair value to be recognized in earnings. The Company has elected the Fair Value Option for Investments in affiliates and Investments in affiliated securities, at fair value.

Specifically, the Company has applied the Fair Value Option to consolidated CLOs as described more fully below. See Note 4 for further disclosure on the assets and liabilities of consolidated CLOs for which the Fair Value Option has been elected.

The Company has also 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. See Note 3 for further disclosure on investments in affiliates for which the Fair Value Option has been elected.

Segment Reporting

The Company currently is comprised of one reportable segment, the investment management segment, and 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 condensed 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 disclosures at the date of the condensed 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 condensed consolidated financial statements are reasonable and prudent, actual results may ultimately materially differ from those estimates.

Principles of Consolidation

The condensed 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 condensed consolidated financial statements include (i) non-controlling interests in ZGP which is comprised of Class A Units held by Mr. Zugel and certain related parties (collectively, the “ZGP Founder Members”) and (ii) the non-controlling interests in the Consolidated Funds. The Company’s condensed consolidated financial statements also include (i) ZGP, a voting interest entity in which the Company has a controlling financial interest; (ii) ZAIS Group, a voting interest entity in which ZGP has a controlling financial interest and (iii) the following Consolidated Funds which are VIEs for which ZAIS Group is considered the primary beneficiary during the reporting periods presented:

  ⁽¹⁾ ZAIS CLO 5 was consolidated from October 26, 2016 through August 10, 2017 (see Note 5 – “Variable Interest Entities”).

The Consolidated Funds, except for the consolidated CLO, 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 condensed consolidated financial statements.

For the consolidated CLO, the Company used the measurement alternative included in the collateralized financing entity guidance (the “Measurement Alternative”). The Company measured both the financial assets and financial liabilities of the consolidated CLO in its condensed consolidated financial statements using the fair value of the financial assets of the consolidated CLO, which were more observable than the fair value of the financial liabilities of the consolidated CLO. As a result, the financial assets of the consolidated CLO were measured at fair value and the financial liabilities were measured in consolidation as: the sum of the fair value of the financial assets and the carrying value of any non-financial assets that were 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 represented compensation for services. The resulting amount was 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).

Non-Controlling Interests

The non-controlling interests within the Consolidated Statements of Financial Condition are comprised of (i) 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 (ii) equity attributable to non-controlling interests in ZGP inside the permanent capital section.

Changes in the Company’s ownership interest while the Company retains its controlling financial interest in its subsidiary are accounted for as equity transactions. Therefore, no gain or loss is recognized in the Company’s consolidated statements of comprehensive income (loss). The carrying amount of the non-controlling interest is adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the non-controlling interest is adjusted is recognized in equity attributable to ZAIS Group.

Allocations of income and loss to non-controlling interests follow the contractual provisions of the pertinent agreements. Accordingly, amounts of incentive compensation due to ZAIS from Consolidated Funds are not deducted from non-controlling interest holders’ capital accounts until the applicable legal conditions for incentive income have been fulfilled.

Revenue Recognition

ZAIS Group’s primary sources of revenue are (i) management fee income, (ii) incentive income and (iii) income of Consolidated Funds. The management fee income and incentive income are derived from ZAIS Group’s advisory agreements with the ZAIS Managed Entities, which ZAIS considers to be its clients. Certain investments held by employees, executives and other related parties in the ZAIS Managed Entities are not subject to management fees or incentive fees/allocations and therefore do not generate revenue for ZAIS Group. All of the management fee income and incentive income earned by ZAIS Group from the Consolidated Funds are eliminated in consolidation.

Management Fee Income

ZAIS Group earns management fee income for investment advisory and asset management services provided to the ZAIS Managed Entities. ZAIS Group earns management fees from the funds and accounts it manages. Such management fees are generally based on a fixed percentage of (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 calculated and collected on a monthly or quarterly basis, depending on the applicable agreement.

Management fee income earned for ZAIS CLOs is generally based on a fixed percentage of the par value of the collateral and cash held in the CLOs. Additionally, subordinated management fee income may be earned from the ZAIS CLOs for which ZAIS Group and certain of its wholly owned subsidiaries act as collateral manager. Subordinated management fees are additional payments, but have a lower priority in the CLOs’ cash flows than non-subordinated management fees and are contingent upon the economic performance of the respective CLOs. 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.

A fixed percentage asset-based management fee is considered a type of variable consideration. The amount of revenue recognized is limited to the amount for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in future periods. The Company updates its estimate of the variable consideration each reporting period. Any uncertainty related to the variable consideration will be resolved as of the end of each reporting period. The Company attributes the management fee income to the services provided during the period because the fee relates specifically to the entity’s efforts to transfer the services for that period.

In the event management fee income is received before it is earned, deferred revenue is recorded and is included in Other liabilities in the Consolidated Statements of Financial Condition .

Incentive Income

ZAIS Group earns incentive income for investment advisory and asset management services provided to the ZAIS Managed Entities. Incentive income typically arises from investment management activities that were initially undertaken in prior reporting periods and is recognized when it is (i) contractually receivable and (ii) the Company concludes that it is probable that a significant reversal in the cumulative amount of revenue recognized will not occur when any uncertainty, which existed at the time the revenue was recognized, is resolved, which generally occurs in the quarter of, or the quarter immediately prior to, payment of the incentive income to ZAIS Group by the ZAIS Managed Entities.

The criteria for revenue recognition related to incentive income is typically met only after all contributed capital and the preferred return, if any, on that capital have been distributed to the ZAIS Managed Entities’ investors for vehicles with private equity style fee arrangements, and is typically met only after (i) any profits exceed a high-water mark for vehicles with hedge fund style fee arrangements, (ii) all contributed capital and the preferred return, if any, have been distributed to the investors in vehicles with private equity-style fee arrangements and (iii) all contributed capital and the preferred return, if any, have been distributed to the investors and subordinate management fees (if any) have been paid to the collateral manager for CLOs.

The Company primarily considers the type of assets held by each ZAIS Managed Entity, cash held by the entity, estimated future expenses and potential fluctuations in the expected realizable value of investments held by the ZAIS Managed Entity when determining whether or not it is probable that a significant reversal in the cumulative amount of revenue recognized from the entity will not occur when the uncertainty is resolved.

Reimbursement Revenue

Research and data services expenses (the “Research Costs”) and other costs (the “Other Direct Costs”) relating to the management of the ZAIS Managed Entities are paid by ZAIS Group directly to vendors for which ZAIS Group is the principal. Certain of these amounts may be reimbursable by the respective ZAIS Managed Entities per the terms of the applicable agreement. Reimbursed amounts are recorded as Reimbursement revenue in the Consolidated Statements of Comprehensive Income (Loss). Research Costs and Other Direct Costs which have not yet been collected are included in Due from related parties in the Consolidated Statements of Financial Condition.

Other Revenue

Other revenue primarily consists of consulting fees. Such consulting services are transferred over time.

Income of Consolidated Funds

Income of Consolidated Funds reflects the interest and dividend 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.

Income and Fees Receivable

Income and fees receivable primarily includes management fee income and incentive income due from ZAIS Managed Entities, excluding the Consolidated Funds. The Company evaluates the collectability of the amounts receivable to determine whether any allowance for doubtful accounts is necessary.

Recently Issued Accounting Pronouncements Adopted by the Company

Revenue Recognition

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 , which superseded previous revenue recognition guidance, including industry specific guidance. The objective of the new standard and related guidance is to clarify the principles for recognizing revenue. The Company has elected to apply the modified retrospective transition approach on January 1, 2018, the effective date of the new standard. Following this approach, the Company has applied the new standard to contracts which were open at the adoption date and will not adjust prior reporting periods. The adoption of the new standard did not result in a change in the amount and timing of revenue recognition for management fee income, incentive income, reimbursement revenue or other revenue for open contracts at the adoption date. No cumulative adjustment to revenue was required under the modified retrospective transition approach for applicable contracts at the adoption date.

Financial Instruments

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments─Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The amendments, among other things, (i) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) and (iv) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 as of January 1, 2018. The adoption of ASU-2016-01 did not have any impact on the Company’s condensed consolidated financial statements.

Share-Based Payments

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. The adoption of ASU 2016-09 did not have any impact on the Company’s condensed consolidated financial statements.

Statement of Cash Flows

Classification of Certain Receipts and Cash Payments

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 Company adopted ASU 2016-15 as of January 1, 2018. The adoption of ASU 2016-15 did not have any impact on the Company’s Consolidated Statements of Cash Flows.

Presentation of Change in Cash and Cash Equivalents of Consolidated Funds

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. ASU 2016-18 is effective for fiscal years and interim periods within those years beginning after December 15, 2017 and requires a retrospective approach to adoption.

The Company adopted ASU 2016-18 as of January 1, 2018. After the adoption of ASU 2016-18, changes in cash and cash equivalents of the Consolidated Funds will no longer be presented as a component of the Company's Net Cash Provided by (Used in) Operating Activities. Instead, the changes in cash and cash equivalents of the Consolidated Funds will form part of the reconciliation of the cash and cash equivalents of both the Company and the Consolidated Funds for the reporting period. The adoption of this standard does not impact the Company’s cash and cash equivalents (excluding Consolidated Funds) but is a change in presentation within the Consolidated Statements of Cash Flows. The presentation of the Consolidated Statement of Cash Flows for the three months ended March 31, 2017 has been revised to conform to the presentation for the three months ended March 31, 2018.

The impact on the presentation of the Company’s Consolidated Statements of Cash Flows for the three months ended March 31, 2017 was as follows:

Recently Issued Accounting Pronouncements Pending Adoption by the Company

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 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.

3. Investments in Affiliates, at fair value

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 May 10, 2018.

The Company had investments at December 31, 2017 in two ZAIS Managed Entities that carried first loss risk in the aggregate amount of approximately $10.0 million and such amount is included in Investment in affiliates, at fair value in the Consolidated Statements of Financial Condition at December 31, 2017.

On March 12, 2018, ZAIS Group sent notice to terminate its management contracts for these two ZAIS Managed Entities effective March 16, 2018. In connection with the termination of these management contracts, ZAIS Group also requested a complete withdrawal of its investment amounts as of March 30, 2018. The withdrawals were recorded using trade date accounting. The withdrawal receivable of approximately $9.4 million is included in Withdrawals receivable in the Consolidated Statements of Financial Condition at March 31, 2018. ZAIS Group received the majority of the proceeds from the withdrawals in the second quarter of 2018 (see Note 17 – “Subsequent Events”).

At March 31, 2018 and December 31, 2017, the Company held investments in one and four unconsolidated ZAIS Managed Entities (excluding an investment in a ZAIS Managed Entity for which no capital has been called as of May 10, 2018), respectively.

The Company recorded a change in unrealized gain (loss) associated with the investments still held at the end of each period as follows:

Such amounts are included in Net gain (loss) on investments in affiliates in the Consolidated Statements of Comprehensive Income (Loss).

At March 31, 2018 and December 31, 2017, neither the Company’s equity investment, nor the Company’s proportionate share of the total assets of unconsolidated ZAIS Managed Entities in which the Company invested, individually or in the aggregate, 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, for the three months ended March 31, 2018 and March 31, 2017. As such, the Company did not present separate or summarized financial statements for any of these investees in the notes to its condensed consolidated financial statements.

4. Fair Value Measurements

ASC 820 Fair Value Measurements defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements under U.S. GAAP. Specifically, this guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value under U.S. GAAP represents an exit price in the normal course of business, not a forced liquidation price. If the Company was forced to sell assets in a short period to meet liquidity needs, the prices it receives could be substantially less than their recorded fair values.

The Company follows the fair value measurement and disclosure guidance under U.S. GAAP, which establishes a hierarchical disclosure framework. This framework prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. In all cases, an instrument’s level within the hierarchy is based upon the market pricing transparency of the instrument and does not necessarily correspond to the Company’s perceived risk or liquidity of the instrument.

The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires significant judgment and considers factors specific to the investment.

Assets and liabilities that are measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 — Fair value is determined based on quoted prices for identical assets or liabilities in an active market at measurement date. Assets and liabilities included in Level 1 include listed securities. As required in the fair value measurement and disclosure guidance under U.S. GAAP, the Company does not adjust the quoted price for these investments. The hierarchy gives highest priority to Level 1.

Level 2 — Fair value is determined based on inputs other than quoted prices that are observable for the asset or liability either directly or indirectly as of the reporting date. Assets and liabilities which are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives, including foreign exchange forward contracts whose values are based on the following:

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, collateralized loan 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 Affiliated Securities, at fair value

CLOs - Senior Notes, Mezzanine Notes and Subordinated Notes

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.

CLO Warehouses

A collateralized loan obligation vehicle is an entity formed for the issuance of securities backed by first lien, senior secured loans, also known as leveraged loans. Prior to the issuance of the securities, the collateralized loan obligation vehicle enters into a financing arrangement with a bank (the “CLO Warehouse”).  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 and the underlying assets held by the CLO Warehouse are securitized. 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 and any realized gain/(loss) from the sale of any loan positions during the warehouse period less financing cost, cost of carry and any applicable warehouse expenses) to the CLO Warehouse equity contributions. If it is determined, at any given time, that the securitization will not be achieved, the fair value of the CLO Warehouse will be determined based on the fair value of the underlying 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.

Investment in Affiliates, at fair value

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.

ZAIS Group has the ability to liquidate its investments according to the provisions of the respective entities’ operating agreements.

Notes payable of Consolidated CLO, at fair value

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:

The following tables summarize the changes in the Company’s Level 3 assets and liabilities:

The Company’s policy is to record transfers between Level 1, Level 2 and Level 3, if any, at the end of the period. There were no transfers between Level 1, Level 2 and Level 3 during the three months ended March 31, 2018 or March 31, 2017.

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:

At March 31, 2018 and December 31, 2017, the senior notes, mezzanine notes and subordinated notes of the ZAIS CLOs which were held by the Company were valued using independent third party pricing sources.

5. Variable Interest Entities

In the ordinary course of business, ZAIS Group sponsors the formation of VIEs and VOEs 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.

Risk Retention

The Dodd-Frank credit risk retention rules (the “U.S. Risk Retention Rules”), which became effective on December 24, 2016, apply by their terms to any newly issued CLOs or certain cases in which an existing CLO is refinanced, issues additional securities or is otherwise materially amended. The U.S. 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.

On February 9, 2018, the U.S. Court of Appeals for the District of Columbia Circuit held (the “DC Circuit Ruling”) that the federal agencies responsible for the U.S. risk retention rules (the “Applicable Agencies”) exceeded their statutory authority when designating the collateral manager of an open-market CLO as the securitizer of the open-market CLO. The DC Circuit Ruling became effective on April 5, 2018, after the Applicable Agencies failed to seek a rehearing from the Court of Appeals. Although the Applicable Agencies could still file a petition with the Supreme Court to review the DC Circuit Ruling no later than May 10, 2018, the Supreme Court does not grant most petitions for review and the mere filing of such a petition does not stay the effectiveness of a lower court’s ruling. Accordingly, the U.S. Risk Retention Rules do not now apply to open-market CLOs.

There have also been proposals to modify the U.S. Risk Retention Rules legislatively to eliminate their application to CLO transactions. Notwithstanding the foregoing, Congress could legislatively reverse the DC Circuit Ruling. If the U.S. Risk Retention Rules were reapplied to open-market CLOs, it can be anticipated that various unresolved questions and interpretive ambiguities would exist in their application.

The impact of the U.S. Risk Retention Rules on the loan securitization market and the leveraged loan market generally has been uncertain due to the unpredictable effects of the Rules on market expectations and the relative appeal of alternative investments not impacted by the Rules. The Rules may have resulted in a reduction of the number of collateral managers active in managing open-market CLOs, which may have resulted in fewer new issue CLOs and a reduction in the liquidity provided by CLOs to the leveraged loan market generally. However, as a result of the DC Circuit Ruling, the barriers to entry for becoming a CLO manager may be reduced. This could result in more CLO managers and increased competition for ZAIS Group. ZAIS Group is evaluating the potential impact of the DC Circuit Ruling on its business and operations.

Zephyr A-6 was formed to invest predominantly in ZAIS CLOs, including during the related warehouse period of such CLOs, in a manner compliant with the U.S. Risk Retention Rules. 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. 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).

Structure

ZAIS Group owned 51% of Zephyr A-6, a “majority-owned affiliate” (as such term is defined in the Dodd-Frank Act), at December 31, 2016. On October 12, 2017 (the “Restructuring Date”), ZAIS Group and the non-ZAIS partner in Zephyr A-6 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. The total purchase price was approximately $25.0 million based on the net asset value of Zephyr A-6 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. The partners’ ownership interests and capital commitments were as follows:

During the three months ended March 31, 2018 and March 31, 2017, Zephyr A-6 received capital contributions from ZAIS Group and the Non-Controlling Interest in Zephyr A-6 as follows:

Pursuant to the terms of the limited partnership agreement of Zephyr A-6, a portion of the senior fees and all of the subordinate fees and the incentive fees paid to ZAIS Group by the ZAIS CLOs in which Zephyr A-6 invests are subsequently paid to Zephyr A-6 by ZAIS Group (the “Rebated Fees”) 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:

The Company has determined that Zephyr A-6 is a VIE and that ZAIS Group is the primary beneficiary of Zephyr A-6 at March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and March 31, 2017. Therefore the Company consolidated Zephyr A-6 in its condensed consolidated financial statements during these periods. ZAIS Group is the primary beneficiary because it is deemed to have (i) the power to direct activities of Zephyr A-6 that most significantly impacts its economic performance and (ii) the obligation to absorb losses of Zephyr A-6 and the right to receive benefits from Zephyr A-6 that could potentially be significant to Zephyr A-6.

Investments in ZAIS CLOs

As of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and March 31, 2017, all of Zephyr A-6’s investments consisted of ZAIS CLOs. The ZAIS CLOs invest primarily in first lien, senior secured loans.

The following is a summary of Zephyr A-6’s investments in ZAIS CLOs at the respective closing date of the ZAIS CLO:

In February 2018, Zephyr A-6 sold its preferred shares of ZAIS CLO 8 which it held during the warehouse period. On March 8, 2018, Zephyr A-6 received sales proceeds of $50.0 million and a dividend of approximately $2.6 million relating to income and gains during the ZAIS CLO 8 warehouse period.

The Company determined that ZAIS CLO 6, ZAIS CLO 7 and ZAIS CLO 8 were VIEs and that the Company is not the primary beneficiary of these ZAIS CLOs based on Zephyr A-6’s minimal investment in the subordinated notes of the ZAIS CLOs and the fee arrangement not constituting a variable interest. Therefore, the Company was not required to consolidate these ZAIS CLOs in its financial statements as of March 31, 2018 and December 31, 2017 or for the three months ended March 31, 2018 and March 31, 2017.

ZAIS CLO 5

Zephyr A-6 had an investment in ZAIS CLO 5 during the three months ended March 31, 2017.

The Company determined that ZAIS CLO 5 was a VIE and 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) for the three months ended March 31, 2017. The sale was not to a related party.

The Company consolidated ZAIS CLO 5 in its financial statements for the period from October 26, 2016 through August 10, 2017. On August 10, 2017 Zephyr A-6 sold all of its remaining interests in ZAIS CLO 5, to an unrelated party. Subsequent to the sale, a wholly owned subsidiary of ZAIS continued as the collateral manager for ZAIS CLO 5. Since the fee arrangement with ZAIS CLO 5 does not constitute a variable interest on its own, ZAIS Group deconsolidated ZAIS CLO 5 as of August 10, 2017, the date on which ZAIS sold its remaining interests in the entity.

Warehouse Periods

During the warehouse periods, the ZAIS CLOs finance the majority of their loan purchases using warehouse facilities. 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. Therefore, Zephyr A-6’s investments in the ZAIS CLOs did not meet the consolidation criteria during the respective warehouse periods.

ZAIS Upsize Acquisition 1, Ltd. (“ZAIS Upsize Acquisition 1”)

ZAIS Upsize Acquisition 1 was formed on January 10, 2018 for the purpose of refinancing the notes issued by an existing ZAIS CLO 1, Limited. ZAIS Upsize Acquisition 1, which invests primarily in first lien senior secured loans, was in the warehouse phase from its inception date, through May 10, 2018. During this period, ZAIS Upsize Acquisition 1 financed the majority of its loan purchases using its warehouse facility. On January 24, 2018, Zephyr A-6 contributed $2.5 million to ZAIS Upsize Acquisition 1 and on March 15, 2018 it sold its interest in ZAIS Upsize Acquisition 1 to the other initial investor in ZAIS Upsize Acquisition 1 and as a result received proceeds of $2.5 million. The sale was not to a related party.

Zephyr A-6 contributed the following amounts to the following ZAIS CLOs during their warehouse periods:

Master Repurchase Agreement

On October 16, 2017, Zephyr A-6 entered into a master repurchase agreement with a single counterparty for a maximum of $200.0 million of financing (the “Master Repurchase Agreement”). Subject to the terms and conditions of the Master Repurchase Agreement, the parties may enter into transactions for the counterparty 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 counterparty if the securities sold are in default. Upon termination of a transaction, Zephyr A-6 will repurchase the previously sold securities from the counterparty at a previously determined repurchase price. Upfront fees associated with the Master Repurchase Agreement in the amount of approximately $459,000 were prepaid of which approximately $9,000 was expensed during the three months ended March 31, 2018. The unamortized upfront fees of approximately $443,000 are reported as a direct deduction from the outstanding borrowings of the repurchase agreement in the Consolidated Statements of Financial Condition at March 31, 2018. The Master Repurchase Agreement may be terminated at any time by either party upon providing the requisite notice to the other party.

As of March 31, 2018 and December 31, 2017, the available funding under the Master Repurchase Agreement was approximately $154.1 million.

The following table presents the remaining contractual maturity of Zephyr A-6’s Master Repurchase Agreement and the amounts outstanding as of March 31, 2018 and December 31, 2017:

⁽¹⁾ Maturities are set to match the maturities of the underlying collateral and are greater than one year.

⁽²⁾ Amounts represent the outstanding borrowings before deducting unamortized upfront fees.

The fair value of the securities pledged as collateral under the Master Repurchase Agreement was approximately $46.2 million and $46.1 million at March 31, 2018 and December 31, 2017, respectively. The Company includes the fair value of the securities pledged by Zephyr A-6 in Investments in affiliated securities, at fair value in the Consolidated Statements of Financial Condition. Zephyr A-6 receives the coupon payments for the pledged securities.

Due to the short term nature of these borrowings at variable interest rates, the carrying amount approximates fair value (if fair valued, the carrying amount would be classified as level 2 in the fair value measurement hierarchy described above). Zephyr A-6 pays interest to the counterparties at a rate based on the weighted average interest rate of the underlying securities that have been pledged as collateral plus a spread of 0.50% on the periodic roll over dates.  As of March 31, 2018 and December 31, 2017, the accrued interest due to the counterparty was approximately $369,000 and $299,000, respectively. Such amounts are included in Liabilities of Consolidated Variable Interest Entities – Other Liabilities in the Consolidated Statements of Financial Condition.

In general, Zephyr A-6 can sell any of the underlying securities that have been pledged as collateral at any time, subject to certain fees.  Other than margin requirements, the Master Repurchase Agreement is not subject to additional terms or contingencies which would expose Zephyr A-6 to additional obligations based upon the performance of the securities pledged as collateral. The weighted average effective interest rate for repurchase agreements entered into under the Master Repurchase Agreement was approximately 3.9% and 3.6% at March 31, 2018 and December 31, 2017, respectively.

The following tables present both gross and net information regarding the repurchase agreements, entered into under the Master Repurchase Agreement including amounts eligible for offset with the related collateral in the Consolidated Statements of Financial Condition in the event of default:

Consolidated VIEs

At March 31, 2018 and December 31, 2017 the Consolidated Funds consist of only Zephyr A-6. All of the assets and liabilities of the Consolidated Funds are presented separately in the Consolidated Statements of Financial Condition.

The assets presented belong to the investors of Zephyr A-6 and are available for its use. These assets are not available for use by the Company. Zephyr A-6 does not have recourse to the general credit of ZAIS Group with respect to any liability.

Unconsolidated VIEs

At March 31, 2018 and December 31, 2017, the Company’s unconsolidated VIEs consist of the Company’s investments in certain ZAIS Managed Entities as well as the Consolidated Fund’s investments in certain ZAIS CLOs.

The assets recognized in the Company’s Consolidated Statements of Financial Condition for unconsolidated VIEs in which the Company has a variable interest and the Company’s maximum exposure to loss from these entities are as follows:

Such amounts are included in the Consolidated Statements of Financial Condition.

ZAIS Group has a minimal direct ownership 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.

6. Management Fee Income and Incentive Income

The Company’s management fee income and incentive income are recognized in accordance with its revenue recognition policies disclosed in Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies”. The amounts of revenue recognized for the three months ended March 31, 2018 under the new revenue standard adopted on January 1, 2018 were the same as those that would have been recognized under the previous revenue recognition guidance.

The following tables present the general fee ranges earned, 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):

Management fee income and incentive income which was accrued, but not received is as follows:

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 related to the management fee income or incentive income for the three months ended March 31, 2018 and March 31, 2017. The Company believes all income and fees receivable balances are deemed to be fully collectible.

Fee Rebates

The following tables present 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):

There were no Rebated Fees for the three months ended March 31, 2017.

As a result of its ownership 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).

Fees Payable

Fees payable represents a fee credit due to an investor in one of the ZAIS Managed Entities for the fees charged to that investor on their investment balance in another ZAIS Managed Entity. The following credits are recorded as a direct reduction to Management fee income and Incentive income in the Consolidated Statements of Comprehensive Income (Loss):

7. Notes Payable

On March 17, 2015, in conjunction with the contribution of cash by HF2 Financial Management, Inc. to ZGP in exchange for newly issued Class A Units, representing a majority financial interest in ZGP (the “Business Combination”), ZAIS issued two promissory notes with an aggregate principal balance of $1.25 million to EarlyBirdCapital, Inc. and Sidoti & Company, LLC. The notes accrued interest at an annual rate equal to the annual applicable federal rate as published by the Internal Revenue Service 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.

Total interest expense is included in Other income (expense) in the Consolidated Statements of Comprehensive Income (Loss) and was as follows:

8. Compensation

The following table presents a detailed breakout of the Company’s compensation expense:

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, if applicable.

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.

Aggregate future payments pursuant to the Bonus Agreements and Guarantee Agreements for the period from April 1, 2018 to December 31, 2018 and the three years subsequent to December 31, 2018, are approximately as follows:

As of March 31, 2018, there are no future payments due subsequent to February 2021.

The amount to be paid during 2019 in the table above includes approximately $0.11 million which has been recognized as an expense for the three months ended March 31, 2018. Such amount is included in Compensation payable in the Consolidated Statements of Financial Condition and Compensation and benefits in the Consolidated Statements of Comprehensive Income (Loss). The remaining balance of approximately $1.25 million will be recognized as an expense during the period from April 1, 2018 through February 28, 2019 subject to forfeitures as described above.

  Other

Pursuant to the Legal Advisor Agreement (see Note 12 – “Commitments and Contingencies”), Howard Steinberg, the Company’s former General Counsel, received a payment of $450,000 on February 28, 2017. This payment is included in Compensation and benefits in the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 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 was approved by the Compensation Committee, Mr. Szymanski received a cash retention payment of $500,000 on each of June 30, 2017 and September 30, 2017 and was entitled to receive a cash retention payment of $500,000 on 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 remained employed by the Company on such dates, or if he had been removed as the Company’s Chief Executive Officer or his employment terminated for reasons other than for cause prior to such dates. Effective January 5, 2018, Mr. Szymanski resigned as Chief Executive Officer, President and a Director of the Company. In connection with his resignation, Mr. Szymanski entered into a Release Agreement with ZAIS Group (the “Szymanski Release Agreement”) wherein he agreed to a full release of claims against, and covenant not to sue, ZAIS Group and its affiliates, in exchange for the Company’s agreement to (i) pay the last installment of Mr. Szymanski’s Retention Award which he would have otherwise forfeited and (ii) waive the six-month covenant not to compete and modify the 12-month covenant not to solicit otherwise applicable to Mr. Szymanski. The aggregate amount of retention payments paid to Mr. Szymanski under the Retention Award was $1.5 million. The last installment of $500,000 was paid on February 28, 2018 and the portion related to the service period from January 1, 2018 to February 28, 2018, approximately $200,000, is included in Compensation and benefits in the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018.

Points

ZAIS Group had entered into agreements in previous years 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 months ended March 31, 2018 and March 31, 2017.

Equity-Based Compensation

Class B-0 Units