OREANDA-NEWS. May 17, 2016.  Fifth Street Asset Management Inc. (NASDAQ:FSAM) ("FSAM" or "we") today announced its financial results for the first quarter ended March 31, 2016.

First Quarter 2016 Highlights

  • Pro Forma Adjusted Net Income of \\$6.1 million, or \\$0.12 per share, versus Net Loss of \\$(11.1) million, or \\$(0.22) per share;
  • Fee-earning Assets Under Management ("AUM") of \\$4.3 billion; and
  • Total revenues of \\$19.0 million, 89.7% of which were represented by management fees.

“Despite some volatility in the broader credit markets, we remain encouraged by and expect to benefit from the diversified positioning of the portfolios of our two BDCs, which have limited energy and no CLO exposure,” stated Leonard M. Tannenbaum, Chairman and Chief Executive Officer, adding, “As we have previously discussed, during the March quarter we continued to incur costs at FSAM, FSC and FSFR related to activist investors and litigation.  In part due to these costs, we generated pro forma adjusted net income of \\$0.12 per share, substantially below our normalized level.  Going forward, we expect FSAM's profitability to improve, as the costs related to activist investors roll off.”

Results of Operations

Total revenues for the quarter ended March 31, 2016 were \\$19.0 million, representing a \\$5.9 million, or 23.7%, decrease from \\$25.0 million for the quarter ended March 31, 2015.  Management fees (which include base management fees and Part I fees) for the quarter ended March 31, 2016 were \\$17.1 million, or 89.7% of total revenues.  The decrease in revenues was primarily due to elevated litigation-related costs at our funds, which resulted in lower management fees earned.

Total expenses for the quarter ended March 31, 2016 were \\$16.5 million, and include amounts reimbursed by our funds of \\$1.9 million, IPO-related compensation charges of \\$1.6 million, and operating expenses attributable to MMKT of \\$0.6 million.  After adjusting for these items, net expenses were \\$12.4 million for the quarter ended March 31, 2016, which included litigation-related costs of \\$3.2 million.  Net expenses increased by \\$2.6 million, or 27.2%, as compared to \\$9.7 million for the quarter ended March 31, 2015, due to the litigation-related costs in the current period.  Excluding these litigation-related costs, net expenses decreased by \\$0.6 million, or 6.0%, as compared to the quarter ended March 31, 2015.

Pro Forma Adjusted Net Income was \\$6.1 million, or \\$0.12 per share, for the quarter ended March 31, 2016, which represented a \\$2.9 million, or 32.2%, decrease as compared to \\$9.1 million, or \\$0.18 per share, for the quarter ended March 31, 2015.  The decrease in Pro Forma Adjusted Net Income was primarily due to the revenue decline described above.  Net Income (Loss) for the quarters ended March 31, 2016 and March 31, 2015 was \\$(11.1) million, or \\$(0.22) per share, and \\$10.5 million, or \\$0.21 per share, respectively.  The decline in Net Income (Loss) was primarily driven by the items described above, as well as \\$13.4 million of net unrealized and other charges in the current period.

Dividend Declaration

On May 11, 2016, our Board of Directors declared a quarterly dividend of \\$0.10 per share of our Class A common stock. The declared dividend is payable on July 15, 2016 to stockholders of record at the close of business on June 30, 2016.

Key Performance Metrics

  Three months ended March 31,
  2016 2015
         
  (dollars in thousands, except per share amounts)
Total revenues \\$19,048  \\$24,959 
Net income (loss) \\$(11,100) \\$10,479 
Net income (loss) per share \\$(0.22) \\$0.21 
Pro Forma Adjusted Net Income(1) \\$6,149  \\$9,065 
Pro Forma Adjusted Net Income Per Share \\$0.12  \\$0.18 
     
Management Fees as % of total revenues 89.7% 92.6%
     
AUM at end of period(2) \\$5,222,209  \\$6,275,209 
Fee-earning AUM at end of period(3) \\$4,302,560  \\$5,323,341 
__________________        
(1) Please refer to Exhibit A for a reconciliation of net income and income before provision for income taxes to Adjusted Net Income and Pro Forma Adjusted Net Income.
(2) AUM refers to assets under management of our funds and material control investments of these funds and represents the sum of the net asset value of such funds and investments, the drawn debt and unfunded debt and equity commitments at the fund or investment level (including amounts subject to restrictions) and uncalled committed debt and equity capital (including commitments to funds that have yet to commence their investment periods).
(3) Fee-earning AUM refers to the AUM on which we directly or indirectly earn management fees and represents the sum of the net asset value of our funds and their material control investments and the drawn debt and unfunded debt and equity commitments at the fund or investment level (including amounts subject to restrictions).
 

Recent Developments

On May 11, 2016, our Board of Directors re-authorized a share repurchase program for the repurchase of up to \\$20 million of our Class A common stock. Under the repurchase program, we are authorized to repurchase shares through open market purchases or block trades, as conditions permit and in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The repurchase program will terminate on May 11, 2017, unless earlier terminated or extended by our Board of Directors, and may be suspended for periods or discontinued at any time.

Non-GAAP Financial Measures and Operating Metrics

Certain of the terms used in this press release, including AUM, fee-earning AUM, Adjusted Net Income and Pro Forma Adjusted Net Income, may not be comparable to similarly titled measures used by other companies. In addition, our definitions of AUM and fee-earning AUM are not based on any definition of AUM or fee-earning AUM that is set forth in the agreements governing the investment funds that we manage and may differ from definitions of AUM set forth in other agreements to which we are a party from time to time. Further, Adjusted Net Income and Pro Forma Adjusted Net Income are not performance measures calculated in accordance with GAAP.  Adjusted Net Income has been included in this press release to adjust for certain one-time, non-recurring or non-operating items. Pro Forma Net Adjusted Net Income has been included in this press release to reflect certain tax adjustments in connection with our IPO and excludes the financial results of MMKT.  We use Adjusted Net Income and Pro Forma Adjusted Net Income as measures of our operating performance, not as measures of liquidity. We believe that Adjusted Net Income and Pro Forma Adjusted Net Income provide investors with a meaningful indication of our core operating performance and Adjusted Net Income and Pro Forma Adjusted Net Income are evaluated regularly by our management as decision tools for deployment of resources. We believe that reporting Adjusted Net Income and Pro Forma Adjusted Net Income is helpful in understanding our business and that investors should review the same supplemental non-GAAP financial measures that our management uses to analyze our performance. Adjusted Net Income and Pro Forma Adjusted Net Income have limitations as analytical tools and should not be considered in isolation or as a substitute for analyzing our results prepared in accordance with GAAP. The use of Adjusted Net Income or Pro Forma Adjusted Net Income without consideration of related GAAP measures is not adequate due to the adjustments described herein. Income before income tax benefit (provision) is the GAAP financial measure most comparable to Adjusted Net Income and net income is the GAAP financial measure most comparable to Pro Forma Adjusted Net Income. Please refer to Exhibit A for a reconciliation of net income and income before income tax benefit (provision) to Adjusted Net Income and Pro Forma Adjusted Net Income.

Conference Call Information

We will host a conference call at 10:00 a.m. (Eastern Time) on Tuesday, May 17, 2016 to discuss our first quarter 2016 financial results. All interested parties are welcome to participate. Domestic callers can access the conference call by dialing (855) 791-2033. International callers can access the conference call by dialing +1 (631) 485-4910. All callers will need to enter the Participant Passcode Number 92643237 and reference "Fifth Street Asset Management Inc." after being connected with the operator. All callers are asked to dial in 10-15 minutes prior to the call so that name and company information can be collected. An archived replay of the call will be available shortly after the end of the conference call through May 24, 2016, to domestic callers by dialing (855) 859-2056 and to international callers by dialing +1 (404) 537-3406. For all replays, please reference Passcode Number 92643237. An archived replay will also be available online in the "Investor Relations" section of FSAM's website under the "News & Events - Calendar of Events" section.

About Fifth Street Asset Management Inc.

Fifth Street Asset Management Inc. (NASDAQ:FSAM) is a nationally recognized credit-focused asset manager. The firm has over \\$5 billion of assets under management across two publicly-traded business development companies, Fifth Street Finance Corp. (NASDAQ:FSC) and Fifth Street Senior Floating Rate Corp. (NASDAQ:FSFR), as well as multiple private investment vehicles. The Fifth Street platform provides innovative and customized financing solutions to small and mid-sized businesses across the capital structure through complementary investment vehicles and co-investment capabilities. With over an 18-year track record focused on disciplined credit investing across multiple economic cycles, Fifth Street is led by a seasoned management team that has issued billions of dollars in public equity, private capital and public debt securities. Fifth Street's national origination strategy, proven track record and established platform are supported by approximately 65 professionals across locations in Greenwich and Chicago. For more information, please visit fsam.fifthstreetfinance.com.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to, among other things, future events and financial performance. Words such as "believes," "expects," "will," "estimates," "projects," "anticipates," and "future" or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. New risks and uncertainties arise over time, and it is not possible for the company to predict those events or how they may affect it. Therefore, you should not place undue reliance on these forward-looking statements. The company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Exhibit A. Calculation of Adjusted Net Income (Loss) and Pro Forma Adjusted Net Income

Income before income tax benefit (provision) is the GAAP financial measure most comparable to Adjusted Net Income and net income is the GAAP financial measure most comparable to Pro Forma Adjusted Net Income.  The following table provides a reconciliation of net income (loss) and income before income tax benefit (provision) to Adjusted Net Income and Pro Forma Adjusted Net Income (shown in thousands, except per share amounts):

  Three months ended March 31,
  2016 2015
Net income (loss) \\$(11,100) \\$10,479 
Provision (benefit) for income taxes (265) 1,188 
Income before provision for income taxes (11,365) 11,667 
Adjustments:    
Compensation-related charges (a)(b) 1,618  1,485 
Unrealized gain on MMKT Notes (c) (2,582) — 
Unrealized loss on beneficial interests in CLOs (d) 848  — 
Lease termination charges (e) —  (71)
Loss on settlement (f) 10,419  — 
Unrealized loss on derivatives (g) 4,676  — 
Adjusted Net Income before adjustment for litigation-related costs (h) 3,614  13,081 
Litigation-related costs 3,229  — 
Adjusted Net Income (h) \\$6,843  \\$13,081 
     
Net loss attributable to MMKT (i) 1,393  — 
Pro Forma income tax provision (j) (3,225) (5,177)
Pro Forma tax receivable agreement benefit (j) 1,138  1,161 
Pro Forma Adjusted Net Income \\$6,149  \\$9,065 
     
Pro Forma weighted average shares outstanding (k) 49,798  50,000 
Pro Forma Adjusted Net Income, before adjustment for litigation-related costs, per Class A common share (k) \\$0.08  \\$0.18 
Pro Forma Adjusted Net Income per Class A common share (k) \\$0.12  \\$0.18 
_________________        
(a)  For the quarters ended March 31, 2016 and 2015, this amount includes \\$0.3 million of amortization expense relating to the conversion and vesting of member interests in connection with our 2014 reorganization.
(b)  For the quarters ended March 31, 2016 and 2015, this amount includes \\$1.4 million and \\$1.2 million, respectively, of amortization expense relating to stock-based compensation that was awarded to certain of our employees in connection with our IPO.
(c)  Represents the change in fair value of MMKT Notes.
(d)  Represents the change in fair value on our beneficial interests in CLOs on which we have elected the fair value option.
(e)  Includes non-recurring charges and refunds for termination payments and related exit costs accrued at present value relating to our office leases.
(f)  Represents the loss recognized by us in connection with the premium paid on our and our principal shareholder's purchase of FSC shares in connection with the RiverNorth settlement.
(g) Represents unrealized losses on a warrant and swap agreement issued by us to RiverNorth in connection with the settlement.
(h)  Adjusted Net Income is presented on a pre-tax basis.
(i)  Represents net loss attributable to the operations of MMKT, a consolidated subsidiary of FSAM that was formed to develop technology related to the financial services industry.
(j)  Based on our estimated statutory tax rate and includes an adjustment for pro forma tax benefits related to basis adjustments due to our IPO.
(k)  Presented with the assumption that 100% of the limited partnership interests in Fifth Street Holdings L.P. were converted on a one-for-one basis into shares of our Class A common stock.
 

Exhibit B. Consolidated Statements of Financial Condition as of March 31, 2016 and December 31, 2015

  As of
  March 31, 2016 December 31, 2015
Assets    
Cash and cash equivalents \\$5,409,314  \\$17,185,204 
Management fees receivable (includes Part I Fees of \\$4,938,068 and \\$(555,663) at March 31, 2016 and December 31, 2015, respectively) 17,369,944  4,879,785 
Performance fees receivable 104,484  224,618 
Prepaid expenses (includes \\$676,789 related to income taxes at March 31, 2016 and December 31, 2015) 2,486,596  1,284,759 
Investments in equity method investees 427,824  6,427,272 
Investments in available-for-sale securities (cost March 31, 2016: \\$48,706,292; cost December 31, 2015: \\$26,389,015) 43,392,583  26,771,258 
Beneficial interests in CLOs at fair value: (cost March 31, 2016: \\$24,770,260; cost December 31, 2015: \\$24,617,568) 22,842,057  23,537,629 
Due from affiliates 2,675,657  3,943,384 
Fixed assets, net 8,936,040  9,893,521 
Deferred tax assets 51,690,338  51,180,237 
Deferred financing costs 1,806,726  1,929,433 
Other assets 3,889,952  3,976,420 
Total assets \\$161,031,515  \\$151,233,520 
Liabilities and Equity    
Liabilities    
Accounts payable and accrued expenses \\$5,434,432  \\$5,324,842 
Accrued compensation and benefits 3,047,600  10,448,260 
Income taxes payable 28,559  28,559 
Loans payable (including \\$2,247,740 and \\$4,738,026 at March 31, 2016 and December 31, 2015, respectively, of MMKT Notes at fair value) 19,220,354  21,710,640 
Credit facility payable 90,000,000  65,000,000 
Dividend payable 1,651,149  1,748,062 
Derivative liabilities 4,676,019  — 
Due to affiliates 26,296  24,257 
Deferred rent liability 3,099,150  3,146,210 
Payable to related parties pursuant to tax receivable agreements 45,486,114  45,486,114 
Total liabilities 172,669,673  152,916,944 
Commitments and contingencies    
Equity (deficit)    
Preferred stock, \\$0.01 par value; 5,000,000 shares authorized; none issued and outstanding as of March 31, 2016 and December 31, 2015 —  — 
Class A common stock, \\$0.01 par value 500,000,000 shares authorized;  5,822,672 shares issued and 5,798,614 shares outstanding as of March 31, 2016 and December 31, 2015, respectively 58,227  58,227 
Class B common stock, \\$0.01 par value 50,000,000 shares authorized; 42,856,854 shares issued and outstanding as of March 31, 2016 and December 31, 2015 428,569  428,569 
Additional paid-in capital 3,050,844  2,661,253 
Accumulated other comprehensive income (loss) (372,262) 27,276 
Accumulated deficit (1,403,466) — 
  1,761,912  3,175,325 
Less: Treasury stock, at cost: 24,058 shares as of March 31, 2016 and December 31, 2015 (180,064) (180,064)
Total stockholders' equity, Fifth Street Asset Management Inc. 1,581,848  2,995,261 
Non-controlling interests (13,220,006) (4,678,685)
Total deficit (11,638,158) (1,683,424)
Total liabilities and deficit \\$161,031,515  \\$151,233,520 
         

Exhibit C. Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015

  For the Three Months Ended
March 31,
  2016 2015
Revenues    
Management fees (includes Part I Fees of \\$4,938,068 and \\$8,021,134 for the three months ended March 31, 2016 and 2015, respectively) \\$17,087,545  \\$23,099,278 
Performance fees 25,764  89,602 
Other fees 1,934,422  1,769,735 
Total revenues 19,047,731  24,958,615 
Expenses    
Compensation and benefits 8,768,625  9,307,686 
General, administrative and other expenses 7,301,492  3,272,820 
Depreciation and amortization 417,722  402,706 
Total expenses 16,487,839  12,983,212 
Other income (expense)    
Interest income 339,602  12,108 
Interest expense (1,114,999) (371,181)
Unrealized gain on MMKT Notes 2,582,405  — 
Unrealized loss on beneficial interests in CLOs (848,264) — 
Unrealized loss on derivatives (4,676,019) — 
Loss on settlement (10,419,274) — 
Other income (expense), net 211,587  51,048 
Total other income (expense), net (13,924,962) (308,025)
Income (loss) before provision (benefit) for income taxes (11,365,070) 11,667,378 
Provision (benefit) for income taxes (265,412) 1,188,832 
Net income (loss) (11,099,658) 10,478,546 
Net (income) loss attributable to non-controlling interests 9,860,273  (9,181,944)
Net income (loss) attributable to Fifth Street Asset Management Inc. \\$(1,239,385) \\$1,296,602 
     
Net income (loss) per share attributable to Fifth Street Asset Management Inc. Class A common stock - Basic \\$(0.21) \\$0.22 
Net income (loss) per share attributable to Fifth Street Asset Management Inc. Class A common stock - Diluted \\$(0.24) \\$0.21 
Weighted average shares of Class A common stock outstanding - Basic 5,798,614  6,000,033 
Weighted average shares of Class A common stock outstanding - Diluted 5,798,614  6,042,777