ZAIS Group Holdings, Inc. Reports Fourth Quarter and Full Year 2015 Results

RED BANK, N.J., March 10, 2016 /PRNewswire/ -- ZAIS Group Holdings, Inc. (NASDAQ: ZAIS) ("ZAIS"), today reported financial results for the three and twelve months ended December 31, 2015. ZAIS conducts substantially all of its operations through ZAIS Group, LLC ("ZAIS Group"). References to the "Company" herein refer to ZAIS, together with its consolidated subsidiaries and affiliates.

Michael F. Szymanski, Chief Executive Officer, said, "2015 was a difficult year in the markets, impacting our results. Looking forward, the structured credit market looks attractive to us given recent market volatility, and we will continue to invest in business development to capitalize on investor interest in our offerings and capabilities.  On the expense front, we concluded that a planned expansion in our capabilities in the residential whole loan market will no longer be part of our strategy, and we identified additional expense reductions.  We expect these initiatives will lead to improved results in 2016." 

CONSOLIDATED GAAP RESULTS

The Company recorded GAAP net loss for the three months ended December 31, 2015 of $(11.8) million compared with GAAP net income of $8.0 million for the three months ended December 31, 2014.  For the full year 2015, GAAP net loss was $(23.9) million compared with GAAP net income of $74.5 million for the full year of 2014.  GAAP net income (loss) includes results of certain investment vehicles managed by ZAIS Group that are required to be consolidated under GAAP (the "Consolidated Funds of ZAIS Group"). In 2015 this impact for both the three and twelve months ended December 31, 2015 was $149 thousand and in 2014, this impact for the three and twelve months ended December 31, 2014 was $(21) thousand and $39.4 million, respectively.  The Company recorded pre-tax GAAP net loss for the three months ended December 31, 2015 of $(7.5) million compared with pre-tax GAAP net income for the three months ended December 31, 2014 of $8.4 million. For the full year 2015, pre-tax GAAP net loss was $(23.7) million compared with pre-tax GAAP net income of $74.8 million for the full year of 2014.  The Company has elected to implement ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02") using the modified retrospective method, which results in an effective date of January 1, 2015, and will not require the restatement of prior period results. As a result, certain ZAIS Managed Entities which were required to be consolidated in periods prior to January 1, 2015 are no longer being consolidated. Accordingly, current period revenues and expenses on a consolidated basis will not be comparable to prior periods presented. ZAIS Group Parent, LLC ("ZGP"), a majority-owned consolidated subsidiary of ZAIS, is the sole member, and owns all of the equity, of ZAIS Group.

The consolidated financial statements include non-controlling interests of the members of ZGP other than ZAIS (the "ZGP Founder Members") which represent Class A Units of ZGP held by the ZGP Founder Members.

As of December 31, 2015, a portion of the proceeds of the business combination ZAIS completed in March 2015 (the "Business Combination") had been committed to expand existing business lines and, consequently, the Company's results for this quarterly period may not be representative of future financial results once the proceeds from the Business Combination are fully deployed. To provide ZAIS Group with the opportunity to continue to expand its corporate CLO business, up to $51 million of equity capital has been committed to a majority owned subsidiary of ZAIS Group which would allow the subsidiary to invest in ZAIS Group managed CLO vehicles and thereby satisfy the risk retention requirements for CLO managers under the Securities Exchange Act of 1934. As of December 31, 2015, $15.4 million had been contributed. ZAIS Group contributed an additional $5.1 million in January 2016.

In addition, we are conducting a strategic review of our business and fund activities with a view towards improving our profitability through organic growth, reduction in expenses, acquisitions, dispositions of assets or the sale or termination of product lines, including our residential whole loan activities, which are currently incurring losses or not otherwise meeting our expectations for contributing to our earnings. To date, we have concluded that a planned expansion in our capabilities in the residential whole loan market will no longer be a part of our future strategy, and we will be exiting those activities in an orderly fashion. In connection with this decision and to reduce expenses related to other infrastructure staffing, on March 8, 2016, the Company commenced a reduction in force which will result in a decrease of 22 employees of ZAIS Group. This includes six employees that will be departing over the next two months. This reduction will result in an annualized run rate savings of approximately $3.5 million in base compensation and benefits. We expect to record total severance charges in the amount of $628,000 during the six months ended June 30, 2016.

CONSOLIDATED NON-GAAP RESULTS

The Company recorded a net loss (excluding Consolidated Funds of ZAIS Group) for the three months ended December 31, 2015 of $(11.9) million, or $(0.68) per diluted weighted average Class A common share outstanding compared with a net income (excluding Consolidated Funds of ZAIS Group) of $8.1 million, or $1.15 per diluted weighted average Class A common share outstanding for the three months ended December 31, 2014. The Company recorded a net loss (excluding Consolidated Funds of ZAIS Group) for the twelve months ended December 31, 2015 of $(24.0) million, or $(1.37) per diluted weighted average Class A common share outstanding compared with a net income (excluding Consolidated Funds of ZAIS Group) of $35.0 million, or $4.47 per diluted weighted average Class A common share outstanding for the twelve months ended December 31, 2014. The Company's earnings per share for all periods prior to the Business Combination was calculated on the basis of 7,000,000 shares of common stock with reference to the equity interests of the ZGP Founder Members.

The decrease in the Company's net income (excluding Consolidated Funds of ZAIS Group) for  both the three and twelve months ended December 31, 2015,  was driven primarily by the liquidation of several private equity style funds in 2014 and 2015, and the reduced performance on ZAIS Group's hedge fund style funds in 2015, which resulted in a $31.1 million and $77.6 million decrease in incentive income for the three months and twelve months ended December 31, 2015 respectively; and a decrease in management fee income of $1.1 million and $12.5 million for the three months and twelve months ended December 31, 2015 respectively.  The quarter ended December 31, 2015 was also impacted by a $2.7 million impairment charge taken on goodwill as a result of a decline in the fair value of ZAIS Group; and a $3.9 million increase in tax expense, primarily the result of a 100% valuation allowance on deferred tax assets, as the Company does not project taxable income in the next several years. There were no comparable US federal or local tax expenses in 2014. These decreases in net income (excluding Consolidated Funds of ZAIS Group) were partially offset by a decrease in expenses of $18.7 million and $35.2 million for the three months and twelve months ended December 31, 2015, respectively, primarily related to lower incentive compensation.

For the three months ended December 31, 2015, the Company reported negative Adjusted EBITDA of $(3.4) million, compared with positive Adjusted EBITDA of $14.8 million for the three months ended December 31, 2014. Adjusted EBITDA for the year ended December 31, 2015 was negative ($14.3) million, compared with Adjusted EBITDA of $41.1 million, for the same period in 2014. 

Additionally, the Company had $5.3 million in gross undistributed, unrecognized incentive income across investment vehicles managed by ZAIS Group as of December 31, 2015. This income has not been recognized in net income (loss) under GAAP or other Non-GAAP measures of income (loss) and remains at risk and subject to reduction or elimination based on the investment performance of the related ZAIS Group managed investment vehicle until the contractual measurement period for incentive fees is reached.   

Please see the discussion of "Non-GAAP Financial Measures", including the definitions of net income (loss) (excluding Consolidating Funds of ZAIS Group), 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 other Non-GAAP measures of income (loss) may fluctuate materially depending upon the performance of investment vehicles managed by ZAIS Group as well as other factors. Accordingly, the GAAP net income (loss) and other 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, 2015, the Company had cash and cash equivalents of $44.4 million and debt obligations of $1.3 million.

INVESTOR CONFERENCE CALL

Management will host a conference call today, March 10, 2016, at 10:00 a.m. Eastern time to review the Company's financial results.  The number to call for this interactive teleconference is (412) 317-0790. 

A replay of the conference call will be available through Thursday, March 17, 2016, by dialing (412) 317-0088 and entering the confirmation number, 10081798. 

The live broadcast of the ZAIS quarterly conference call will also be available online at ZAIS's website, www.zaisgroupholdings.com on Thursday, March 10, 2016, beginning at 10:00 a.m. Eastern time.  The online replay will follow shortly after the call and will be available for approximately one year.

FOURTH QUARTER 2015 SUPPLEMENTAL INFORMATION 

The Company's Fourth Quarter 2015 Supplemental Information – December 31, 2015, is available on ZAIS's website at www.zaisgroupholdings.com. To access the presentation, 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.

The following table presents the reconciliation of the Company's GAAP net income (loss) to its non-GAAP financial measure of net income (loss) (excluding Consolidated Funds of ZAIS Group) for the periods presented in this Earnings Release.

The following tables present the reconciliations of the Company's GAAP pre-tax consolidated net income (loss) to its non-GAAP financial measures and Adjusted EBITDA for the periods presented in this Earnings Release.

The following supplemental financial information illustrates the consolidating effects of the Consolidated Funds of ZAIS Group on the Company's financial position at December 31, 2015 and December 31, 2014, and results of operations for the three months and years ended December 31, 2015 and December 31, 2014: