ZAIS Group Holdings, Inc. Reports Fourth Quarter And Full Year 2016 Results

RED BANK, N.J., March 24, 2017 /PRNewswire/ -- ZAIS Group Holdings, Inc. (NASDAQ: ZAIS) ("ZAIS"), today reported financial results for the three and twelve months ended December 31, 2016. ZAIS conducts substantially all of its operations through ZAIS Group, LLC ("ZAIS Group"). ZAIS Group provides investment advisory and asset management services to private funds, separately managed accounts, structured vehicles and, until October 31, 2016, to ZAIS Financial Corp. ("ZFC REIT"), a publicly traded real estate investment trust (collectively, the "ZAIS Managed Entities"). References to the "Company" herein refer to ZAIS, together with (where the context requires) its consolidated subsidiaries and affiliates.

Michael F. Szymanski, Chief Executive Officer, said "In 2016, we produced strong investment performance for our clients across our Securitized Credit, Leveraged Finance, and Credit Trading products and platforms. Our fourth quarter results, while positive, reflect one material non-recurring item, our receipt of an $8.0 million termination fee as a result of the termination of our investment management agreement with ZFC REIT in connection with the merger of ZFC REIT with Sutherland Asset Management Corp. ("SAM"). We believe that we are making progress with our fund raising activities as a result of our investment in business development staffing and our strong investment performance. Our return to sustained profitability remains challenging and will depend on our success in attracting and retaining assets under management."

FOURTH QUARTER 2016 HIGHLIGHTS

A summary of the Company's results for the three and twelve months ended December 31, 2016 and December 31, 2015 are below. All dollar amounts are presented in millions, with the exception of figures presented on a per share basis.


Three Months Ended

Twelve Months Ended

December 31,
2016

December 31,
2015

December 31,
2016

December 31,
2015

U.S. GAAP





 

Net income/(loss)

$5.9

$(11.8)

$(3.8)

$(23.9)

 

Net Income/(loss) per diluted
weighted average share outstanding
applicable to ZAIS Group
Holdings, Inc.

$0.29

$(0.68)

$(0.37)

$(1.37)

Net Income/(loss)before income
taxes

$5.9

$(7.5)

$(3.8)

$(23.7)

Non-GAAP





Net income/(loss) (excluding
Consolidated Funds of ZAIS
Group)

$6.1

$(11.9)

$(7.3)

$(24.0)

Net income/(loss) (excluding
Consolidated Funds of ZAIS
Group) per diluted weighted
average share outstanding

$0.29

$(0.68)

$(0.37)

$(1.37)

 

Adjusted EBITDA

$7.5

$(3.4)

$(1.9)

$(14.3)

The consolidated financial statements include non-controlling interests of the members of ZAIS Group Parent, LLC ("ZGP") (the "ZGP Founder Members") which represent Class A Units of ZGP held by the ZGP Founder Members. ZGP, a majority-owned consolidated subsidiary of ZAIS, is the sole member, and owns all of the equity, of ZAIS Group.

STRATEGIC REVIEW

The Company's Board of Directors has been undertaking a strategic review of the Company's business in order to enhance shareholder value and has engaged a financial advisor for this purpose. Various alternatives have been and are being considered, including a possible sale, combination or other similar transaction or going private transaction which would result in the termination of the registration of our Class A Shares so as to cease periodic and other public company compliance and reporting. The Company has received from and provided to potential counterparties certain due diligence information. In addition, the Company's management and financial advisor have held and expect to continue to hold preliminary discussions with potential counterparties and participants. There is no assurance that any of the preliminary discussions which have taken place or may in the future take place will result in any transaction or that any of the strategic alternatives under consideration will be implemented. The Company does not intend to provide updates on any of these matters unless and until there is a definitive agreement or action by the Board of Directors with respect thereto.

CONSOLIDATED GAAP RESULTS

Operating Results – Fourth Quarter Ended December 31, 2016

The Company recorded GAAP net income for the three months ended December 31, 2016 of $5.9 million compared with a GAAP net loss of $(11.8) million for the three months ended December 31, 2015. The increase of $17.7 million in net income was driven by an increase in revenues of $11.7 million, an increase in other income of $2.0 million and a decrease in tax expense of $4.3 million, offset by an increase in expenses of $0.3 million.

The $11.7 million increase in revenues was comprised of a net increase of $7.4 million in management fee income and $4.3 million in incentive income. The net increase in management fee income was primarily due to receiving an $8.0 million termination fee as a result of terminating the management agreement with ZFC REIT upon completion of the merger between ZFC REIT and SAM on October 31, 2016, partially offset by a decrease in management fee income resulting from a year-over-year reduction in average AUM. The net increase of $4.3 million in incentive income was primarily driven by increased performance results during the three months ended December 31, 2016 as compared to the three months ended December 31, 2015 for certain funds and accounts, offset by incentive income recognized during the three months ended December 31, 2015 that was not recognized during the three months ended December 31, 2016 for certain accounts which liquidated during 2015.

The $2.0 million increase in other income was primarily due to a $2.7 million decrease in impairment loss on goodwill relating to an impairment loss recognized in 2015 as a result of the decline in fair value of ZAIS Group which was not recognized in 2016 and a $0.2 million increase in net gain on investments as a result of gains on the Company's investments. These amounts totaling $2.9 million are offset by $0.8 million of loss due to a change in net gain (loss) on beneficial interest that the Company's Consolidated Fund, ZAIS Zephyr A-6, LP ("Zephyr A-6"), has in ZAIS CLO 5 Limited, a structured vehicle for which a wholly owned subsidiary of ZAIS Group serves as the collateral manager.

The $4.3 million decrease in tax expense was primarily the result of a full valuation allowance recorded in the fourth quarter of 2015 on deferred tax assets as the Company did not project taxable income for the next several years.

Operating Results – Year Ended December 31, 2016

For the full year 2016, GAAP net loss was $(3.8) million compared with GAAP net loss of $(23.9) million for the full year of 2015. The year over year decrease in the Company's net loss of $20.1 million was driven primarily by an $8.4 million increase in revenues, a $1.0 million decrease in expenses, a $10.5 million increase in other income/(loss), and a $0.2 million increase in income tax benefit.

The $8.4 million increase in revenues was comprised of a net increase of $6.2 million in management fee income and $2.2 million in incentive income. The net increase in management fee income was primarily due to receiving an $8.0 million termination fee as a result of terminating the management agreement with ZFC REIT upon completion of the merger between ZFC REIT and SAM on October 31, 2016, partially offset by a decrease in management fee income resulting from a year-over-year reduction in average AUM. The net increase of $2.2 million in incentive income was primarily driven by increased performance results during 2016 as compared to 2015 for certain funds and accounts, offset by incentive income recognized during 2015 that was not recognized during 2016 for certain accounts which liquidated during 2015 and residual incentive income received during 2015 which related to 2014 fund performance.

The $1.0 million decrease in expenses was primarily due to a $4.4 million increase in compensation and benefits, a $4.8 million decrease in general, administrative and other expenses and a $0.5 million decrease in depreciation and amortization. The $4.4 million increase in compensation and benefits was primarily due to a $9.6 million increase in incentive compensation relating to the accrual for the year-end and guaranteed bonuses in 2016 and the payment of retention and sign-on bonuses during 2016. This was offset by a $3.9 million decrease in salaries and associated payroll taxes and other employee benefits due to a reduction in force and other restructuring during 2016 and a $0.8 million decrease in equity compensation relating to an increase in the estimated forfeiture rate on ZGP Class B-0 Units. Employee holders cancelled all outstanding ZGP Class B-0 Units on December 30, 2016 in consideration, at the election of the employee, of cash paid by ZGP or restricted stock units of the Company provided by the Company. The $4.8 million decrease in general, administrative and other expenses was due to a $3.3 million decrease in professional fees and a $1.5 million decrease primarily related to a focused expense reduction during 2016. The $0.5 million decrease in depreciation and amortization was due to a change in the useful life assumptions for leasehold improvements in 2015.

The $10.5 million increase in other income/(loss) was primarily comprised of a net increase of $7.8 million in net gain on Consolidated Funds' investments related to a Consolidated Fund, Zephyr A-6, which launched in the fourth quarter of 2015 and a $2.7 million decrease in impairment loss on goodwill relating to an impairment loss recognized in 2015 due to the decline in fair value of ZAIS Group which was not recognized in 2016.

CONSOLIDATED NON-GAAP RESULTS

Please see the discussion of "Non-GAAP Financial Measures", including the definitions of net income (loss) (excluding Consolidating Funds of ZAIS Group) and Adjusted EBITDA, and reconciliations of such Non-GAAP financial measures to the respective GAAP net income (loss) and pre-tax GAAP net income (loss) measures for the periods discussed above at the end of this press release.

The Company's GAAP net income (loss) and non-GAAP measures of income (loss) may fluctuate materially depending upon the performance of ZAIS Managed Entities as well as other factors. Accordingly, the GAAP net income (loss) and non-GAAP measures of income (loss) in any particular period should not be expected to be indicative of future results.

LIQUIDITY & CAPITAL RESOURCES

As of December 31, 2016, the Company had cash and cash equivalents of $38.7 million and debt obligations of $1.3 million.

FOURTH QUARTER 2016 SUPPLEMENTAL INFORMATION

The Company's Fourth Quarter 2016 Supplemental Information – December 31, 2016, is available on ZAIS's website at www.zaisgroupholdings.com. To access the information, go to the "ZAIS Shareholders" section of the website.

USE OF NON-GAAP FINANCIAL INFORMATION

In addition to the results presented in accordance with generally accepted accounting principles ("GAAP"), this press release includes certain non-GAAP financial information, including net income (loss) (excluding Consolidated Funds of ZAIS Group) and Adjusted EBITDA (and per share measures). Net income (loss) (excluding Consolidated Funds of ZAIS Group) is a non-GAAP financial measure that the Company defines as GAAP net income (loss) excluding the consolidating effects of the Consolidated Funds of ZAIS Group. Adjusted EBITDA is a non-GAAP financial measure that the Company defines as GAAP net income (loss), excluding consolidating effects of Consolidated Funds of ZAIS Group, compensation expense related to a portion of net operating income of ZAIS Group payable to certain employees of ZAIS Group, compensation expense related to incentive income in the form of percentage interests being recorded before related incentive income is recognized, equity-based compensation, severance, taxes, interest expense, depreciation and amortization expenses, goodwill impairment, foreign currency and certain other non-cash and non-operating items.

The Company believes that providing investors with this non-GAAP financial information, in addition to the related GAAP measures, gives investors greater transparency to the information used by management in its financial and operational decision-making. However, because net income (loss) (excluding Consolidated Funds of ZAIS Group) and Adjusted EBITDA are incomplete measures of the Company's financial performance and involve differences from net income (loss) computed in accordance with GAAP, they should be considered along with, but not as alternatives to, the Company's net income (loss) computed in accordance with GAAP as a measure of the Company's financial performance. In addition, because not all companies use identical calculations, the Company's presentation of net income (loss) (excluding Consolidated Funds of ZAIS Group) and Adjusted EBITDA may not be comparable to other similarly-titled measures of other companies.




ZAIS GROUP HOLDINGS, INC. AND SUBSIDIARIES


Consolidated Statements of Financial Condition

(Dollars in thousands, except share amounts)




December 31,




2016



2015











Assets









Cash and cash equivalents


$

38,712



$

44,351


Income and fees receivable



8,805




2,529


Investments, at fair value






8,169


Investments in affiliates, at fair value



5,273




5,242


Due from related parties



734




748


Property and equipment, net



274




544


Prepaid expenses



906




776


Other assets



348




310


Assets of Consolidated Funds









Cash and cash equivalents



37,080




33


Investments, at fair value



404,365




30,509


Due from broker



16,438





Other assets



1,210





Total Assets


$

514,145



$

93,211











Liabilities and Equity









Liabilities









Notes payable


$

1,263



$

1,255


Compensation payable



7,836




3,575


Due to related parties



31




175


Fees payable



2,439




756


Other liabilities



1,127




1,546


Liabilities of Consolidated Funds









Notes payable of consolidated CLO, at fair value



384,901





Due to broker



24,462





Other liabilities



2,121




101


Total Liabilities



424,180




7,408











Commitments and Contingencies


















Equity









Preferred Stock, $0.0001 par value; 2,000,000 shares authorized; 0 shares issued and
  outstanding.







Class A Common Stock, $0.0001 par value; 180,000,000 shares authorized; 13,900,917 and
   13,870,917 shares issued and outstanding at December 31, 2016 and December 31, 2015,
   respectively.



1




1


Class B Common Stock, $0.000001 par value; 20,000,000 shares authorized; 20,000,000 shares
   issued and outstanding at December 31, 2016 and December 31, 2015.







Additional paid-in capital



63,413




60,817


Retained earnings (Accumulated deficit)



(18,965)




(13,805)


Accumulated other comprehensive income (loss)



(70)




158


Total stockholders' equity, ZAIS Group Holdings, Inc.



44,379




47,171


Non-controlling interests in ZAIS Group Parent, LLC



22,258




23,716


Non-controlling interests in Consolidated Funds



23,328




14,916


Total Equity



89,965




85,803


Total Liabilities and Equity


$

514,145



$

93,211





ZAIS GROUP HOLDINGS, INC. AND SUBSIDIARIES


Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands, except share and per share amounts)




Three
Months Ended
December 31,
2016



Three
Months Ended
December 31,
2015



Year Ended
December 31,
2016



Year Ended
December 31,
2015


Revenues

















Management fee income


$

11,221



$

3,793



$

22,015



$

15,802


Incentive income



5,437




1,140




9,346




7,131


Other revenues



78




80




316




298


Income of Consolidated Funds













Total Revenues



16,736




5,013




31,677




23,231


Expenses

















Compensation and benefits



7,466




6,552




31,380




26,971


General, administrative and other



3,140




3,593




12,263




17,064


Depreciation and amortization



61




77




267




730


Expenses of Consolidated Funds



18




206




82




206


Total Expenses



10,685




10,428




43,992




44,971


Other income (loss)

















Net gain (loss) on investments



190




(2)




273




32


Other income (expense)



17




59




762




147


Impairment loss on goodwill






(2,655)







(2,655)


Net gains (losses) of Consolidated
  Funds' investments



525




509




8,333




509


Net gain (loss) on beneficial interest of
   collateralized financing entity



(842)







(842)





Total Other Income (Loss)



(110)




(2,089)




8,526




(1,967)


Income (loss) before income taxes



5,941




(7,504)




(3,789)




(23,707)


Income tax (benefit) expense



7




4,267




(5)




155


Consolidated net income (loss), net of tax



5,934




(11,771)




(3,784)




(23,862)


Other comprehensive income (loss), net of
  tax:

















Foreign currency translation adjustment



(81)




(85)




(343)




238


Total Comprehensive Income (Loss)


$

5,853



$

(11,856)



$

(4,127)



$

(23,624)


Allocation of Consolidated Net Income 
  (Loss), net of tax

















Non-controlling interests in Consolidated
  Funds


$

(183)



$

149



$

3,505



$

149


Stockholders' equity, ZAIS Group
  Holdings, Inc.



4,036




(9,468)




(5,160)




(13,805)


Non-controlling interests in ZAIS Group
  Parent, LLC



2,081




(2,452)




(2,129)




(10,206)




$

5,934



$

(11,771)



$

(3,784)



$

(23,862)


Allocation of Total Comprehensive
  Income (Loss)

















Non-controlling interests in Consolidated
  Funds


$

(183)



$

149



$

3,505



$

149


Stockholders' equity, ZAIS Group
  Holdings, Inc.



3,982




(9,525)




(5,388)




(13,647)


Non-controlling interests in ZAIS Group
  Parent, LLC



2,054




(2,480)




(2,244)




(10,126)




$

5,853



$

(11,856)



$

(4,127)



$

(23,624)



















Consolidated Net Income (Loss), net of
  tax per Class A common share
  applicable to ZAIS Group Holdings,
  Inc. – Basic


$

0.29



$

(0.68)



$

(0.37)



$

(1.26)


Consolidated Net Income (Loss), net of
  tax per Class A common share
  applicable to ZAIS Group Holdings,
  Inc. – Diluted


$

0.29



$

(0.68)



$

(0.37)



$

(1.37)



















Weighted average shares of Class A
  common stock outstanding:

















Basic



13,900,917




13,870,917




13,891,245




10,982,726

(1)

Diluted



21,033,275




20,870,917

(1)



20,891,245




17,982,726

(1)




(1)    Pro-rated based on the portion of the period preceding and following the Business Combination

The following supplemental financial information illustrates the consolidating effects of the Consolidated Funds on the Company's financial position and results of operations:



At December 31, 2016




ZAIS



Consolidated
Funds



Eliminations



Consolidated




( Dollars in thousands )


Assets

















Cash and cash equivalents


$

38,712



$



$



$

38,712


Income and fees receivable



8,805










8,805


Investments, at fair value













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


































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




At December 31, 2015




ZAIS



Consolidated
Funds



Eliminations



Consolidated




( Dollars in thousands )


Assets

















Cash and cash equivalents


$

44,351



$



$



$

44,351


Income and fees receivable



2,529










2,529


Investments, at fair value



8,169










8,169


Investments in affiliates, at fair value



20,767







(15,525)




5,242


Due from related parties



748










748


Property and equipment, net



544










544


Prepaid expenses



776










776


Other assets



310










310


Assets of Consolidated Funds

















Cash and cash equivalents






33







33


Investments, at fair value






30,509







30,509


Total Assets


$

78,194



$

30,542



$

(15,525)



$

93,211


Liabilities, Equity

















Liabilities

















Notes payable


$

1,255



$



$



$

1,255


Compensation payable



3,575










3,575


Due to related parties



175










175


Fees payable



756










756


Other liabilities



1,546










1,546


Liabilities of Consolidated Funds

















Other liabilities






101







101


Total Liabilities



7,307




101







7,408



















Commitments and Contingencies


































Equity

















Preferred Stock













Class A Common Stock



1










1


Class B Common Stock













Additional paid-in-capital



60,817










60,817


Retained earnings (Accumulated deficit)



(13,805)










(13,805)


Accumulated  other comprehensive income (loss)



158










158


Total stockholders' equity, ZAIS Group Holdings, Inc.



47,171










47,171


Non-controlling interests in ZAIS Group Parent, LLC



23,716










23,716


Non-controlling interests in Consolidated Funds






30,441




(15,525)




14,916


Total Equity



70,887




30,441




(15,525)




85,803


Total Liabilities and Equity


$

78,194



$

30,542



$

(15,525)



$

93,211




Three months Ended December 31, 2016




ZAIS



Consolidated
Funds



Eliminations



Consolidated




( Dollars in thousands )


Revenues

















Management fee income


$

11,258



$



$

(37)



$

11,221


Incentive income



5,437










5,437


Other revenues



78










78


Income of Consolidated Funds













Total Revenues



16,773







(37)




16,736


Expenses

















Compensation and benefits



7,466










7,466


General, administrative and other



3,140










3,140


Depreciation and amortization



61










61


Expenses of Consolidated Funds






55




(37)




18


Total Expenses



10,667




55




(37)




10,685


Other Income (loss)

















Net gain (loss) on investments









190




190


Other income (expense)



17










17


Net gains (losses) of Consolidated Funds' investments






(316)




841




525


Net gain (loss) on beneficial interest of collateralized
  financing entity









(842)




(842)


Total Other Income (Loss)



17




(316)




189




(110)


Income (loss) before income taxes



6,123




(371)




189




5,941


Income tax (benefit) expense



7










7


Consolidated net income (loss), net of tax



6,116




(371)




189




5,934


Other Comprehensive Income (Loss), net of tax













Foreign currency translation adjustment



(81)










(81)


Total Comprehensive Income (Loss)


$

6,035



$

(371)



$

189



$

5,853























































Three months Ended December 31, 2015




ZAIS



Consolidated
Funds



Eliminations



Consolidated




( Dollars in thousands )


Revenues

















Management fee income


$

3,793



$



$



$

3,793


Incentive income



1,140










1,140


Other revenues



80










80


Income of Consolidated Funds













Total Revenues



5,013










5,013


Expenses

















Compensation and benefits



6,552










6,552


General, administrative and other



3,593










3,593


Depreciation and amortization



77










77


Expenses of Consolidated Funds






206







206


Total Expenses



10,222




206







10,428


Other Income (loss)

















Net gain (loss) on investments



152







(154)




(2)


Other income (expense)



59










59


Impairment loss on goodwill



(2,655)










(2,655)


Net gains (losses) of Consolidated Funds' investments






509







509


Net gain (loss) on beneficial interest of collateralized
  financing entity













Total Other Income (Loss)



(2,444)




509




(154)




(2,089)


Income (loss) before income taxes



(7,653)




303




(154)




(7,504)


Income tax (benefit) expense



4,267










4,267


Consolidated net income (loss), net of tax



(11,920)




303




(154)




(11,771)


Other Comprehensive Income (Loss), net of tax













Foreign currency translation adjustment



(85)










(85)


Total Comprehensive Income (Loss)


$

(12,005)



$

303



$

(154)



$

(11,856)





















Year Ended December 31, 2016




ZAIS



Consolidated
Funds



Eliminations



Consolidated




( Dollars in thousands )


Revenues

















Management fee income


$

22,271



$



$

(256)



$

22,015


Incentive income



9,346










9,346


Other revenues



316










316


Income of Consolidated Funds













Total Revenues



31,933







(256)




31,677


Expenses

















Compensation and benefits



31,380










31,380


General, administrative and other



12,263










12,263


Depreciation and amortization



267










267


Expenses of Consolidated Funds






338




(256)




82


Total Expenses



43,910




338




(256)




43,992


Other Income (loss)

















Net gain (loss) on investments



3,921







(3,648)




273


Other income (expense)



762










762


Net gains (losses) of Consolidated Funds' investments






7,491




842




8,333


Net gain (loss) on beneficial interest of collateralized
  financing entity









(842)




(842)


Total Other Income (Loss)



4,683




7,491




(3,648)




8,526


Income (loss) before income taxes



(7,294)




7,153




(3,648)




(3,789)


Income tax (benefit) expense



(5)










(5)


Consolidated net income (loss), net of tax



(7,289)




7,153




(3,648)




(3,784)


Other Comprehensive Income (Loss), net of tax

















Foreign currency translation adjustment



(343)










(343)


Total Comprehensive Income (Loss)


$

(7,632)



$

7,153



$

(3,648)



$

(4,127)





















Year Ended December 31, 2015




ZAIS



Consolidated
Funds



Eliminations



Consolidated




( Dollars in thousands )


Revenues

















Management fee income