Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ☐ Yes ☒ No
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). ☒ Yes ☐ No
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K
or any amendment to this Form
10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
12b-2
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No ☒
At June 30, 2016, the aggregate market value of the registrant’s Common Stock held by
non-affiliates
(computed by reference to the closing sale price of such shares on the NASDAQ Global Select Market on June 30, 2016) was $1,120,852,597. At February 17, 2017, there were 136,622,560
shares of the registrant’s Common Stock outstanding.
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the
registrant’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held in 2017, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.
In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations
include, among other things, those listed in the section entitled “Risk Factors” and elsewhere in this Report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or
results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and
have filed with the Securities and Exchange Commission, or the SEC, as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these
forward-looking statements.
In particular, forward-looking statements in this Report include statements about:
The forward-looking statements
in this Report represent our views as of the date of this Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the
future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this Report.
PART I
Our Company
We are the only publicly-traded asset management company that focuses exclusively on ETPs. We were the tenth largest ETP sponsor in the world
based on assets under management, or AUM, with AUM of $41.3 billion globally as of December 31, 2016. An ETP is a pooled investment vehicle that holds a basket of securities, financial instruments or other assets and generally seeks to
track (index-based) or outperform (actively managed) the performance of a broad or specific equity, fixed income or alternatives market segment, or a basket of or a single commodity or currency (or an inverse or multiple thereof). ETPs are listed on
an exchange with their shares traded in the secondary market at market prices, generally at approximately the same price as the net asset value of their underlying components. ETP is an umbrella term that includes ETFs, exchange-traded notes and
exchange-traded commodities.
Our U.S. listed ETFs make up the vast majority of our global AUM. As of December 31, 2016, we were the
seventh largest ETF sponsor in the U.S. by AUM. Our family of ETFs includes funds that track our own indexes, funds that track third party indexes and actively managed funds. We distribute our ETFs through all major channels within the asset
management industry, including brokerage firms, registered investment advisers and institutional investors.
We focus on creating ETFs for
investors that offer thoughtful innovation, smart engineering and redefined investing. Most of our index-based funds employ a fundamentally weighted investment methodology, which weights securities on the basis of factors such as dividends or
earnings, whereas most other ETF industry indexes use a capitalization weighted methodology. In June 2016, 19 of our U.S. listed ETFs established a
10-year
track record, all of which employed a fundamentally
weighted investment methodology and most of which outperformed their comparable benchmarks. We also offer actively managed ETFs, which are ETFs that are not based on a particular index but rather are actively managed with complete transparency into
the ETF’s portfolio on a daily basis. Our broad regulatory exemptive relief enables us to use our own indexes for certain of our ETFs and actively manage other ETFs.
Business Segments
We operate as an ETP
sponsor and asset manager providing investment advisory services in the U.S., Europe, Canada and Japan. These activities are reported in our U.S. Business and International Business segments, as follows:
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U.S. Business segment
: Our U.S. business and Japan sales office, which primarily engages in selling our U.S. listed ETFs to Japanese institutions; and
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International Business segment
: Our European business which commenced in April 2014 in connection with our acquisition of U.K. based ETP sponsor Boost ETP, LLP (“Boost”) and our Canadian business which
launched its first six ETFs in July 2016.
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2
The following charts reflect key operating and financial metrics for our businesses:
U.S. Business Segment
International Business Segment
Consolidated Operating Results
3
The following charts reflect the distribution and asset mix of our U.S. listed ETFs, which make
up the vast majority of our global AUM as of December 31, 2016:
Approximately 43% of our AUM have been gathered in two of our U.S. listed ETFs – WisdomTree Europe
Hedged Equity Fund (HEDJ) and WisdomTree Japan Hedged Equity Fund (DXJ) – which invest in European or Japanese equities, respectively, using our fundamentally weighted approach and, in addition, hedge exposure to the Euro or Yen. These two
products also accounted for approximately 50% of our revenues in 2016.
Our Industry
An ETF is an investment fund that holds securities such as equities or bonds and/or other assets such as derivatives or commodities, and
generally trades at approximately the same price as the net asset value of its underlying components over the course of the trading day. ETFs offer exposure to a wide variety of asset classes and investment themes, including domestic, international
and global equities, and fixed income securities, as well as securities in specific industries and countries. There are also ETFs that track certain specific investments, such as commodities, real estate or currencies.
We believe ETPs, the vast majority of which are comprised of ETFs, have been one of the most innovative investment products to emerge in the
last two decades in the asset management industry. As of December 31, 2016, there were approximately 2,000 ETPs in the U.S. with aggregate AUM of $2.5 trillion.
4
The chart below reflects the AUM of the global ETP industry since 2001:
Source: BlackRock
As of December 31, 2016, we were the seventh largest ETF sponsor in the U.S. and the tenth largest ETP sponsor in the world by AUM:
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Rank
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ETP Sponsor
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AUM (in billions)
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1
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iShares
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$
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1,293
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2
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Vanguard
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$
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647
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3
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State Street
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$
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539
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4
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PowerShares
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$
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116
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5
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Nomura
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$
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82
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6
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Deutsche Bank
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$
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73
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7
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Charles Schwab
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$
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60
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8
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Lyxor/Soc Gen
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$
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54
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9
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First Trust
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$
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42
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10
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WisdomTree
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$
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41
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Source: BlackRock
ETFs have become more popular among a broad range of investors as they come to understand the benefits of ETFs and use them for a variety of
purposes and strategies, including low cost index investing and asset allocation, access to specific asset classes, protective hedging, income generation, arbitrage opportunities and diversification.
While ETFs are similar to mutual funds in many respects, they have some important differences as well:
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Transparency
. ETFs disclose the composition of their underlying portfolios on a daily basis, unlike mutual funds, which typically disclose their holdings every 90 days.
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Intraday trading, hedging strategies and complex orders
. Like stocks, ETFs can be bought and sold
on exchanges throughout the trading day at market prices. ETFs update the indicative values of their
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underlying portfolios every 15 seconds. As publicly-traded securities, ETF shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using limit orders,
allowing investors to specify the price points at which they are willing to trade.
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Tax efficiency
. In the U.S., whenever a mutual fund or ETF realizes a capital gain that is not balanced by a realized loss, it must distribute the capital gain to its shareholders. These gains are taxable
to all shareholders, even those who reinvest the gain distributions in additional shares of the fund. However, most ETFs typically redeem their shares through
“in-kind”
redemptions in which
low-cost
securities are transferred out of the ETF in exchange for fund shares in a
non-taxable
transaction. By using this process, ETFs avoid the transaction fees and tax
impact incurred by mutual funds that sell securities to generate cash to pay out redemptions.
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Uniform pricing
. From a cost perspective, ETFs are one of the most equitable investment products on the market. Investors, regardless of their size, structure or sophistication, pay identical advisory
fees. Unlike mutual funds, U.S. listed ETFs generally do not have different share classes or different expense structures for retail and institutional clients and ETFs typically are not sold with sales loads or
12b-1
fees. In many cases, ETFs offer lower expense ratios than comparable mutual funds.
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ETFs are used in various ways by a range of investors, from conservative to speculative uses including:
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Low cost index investing
.
ETFs provide exposure to a variety of broad-based indexes across equities, fixed income, commodities and other asset classes and strategies, and can be used as both
long-term portfolio holdings or short term trading tools. ETFs offer an efficient and less costly method by which to gain exposure to indexes as compared to individual stock ownership.
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Improved access to specific asset classes
. Investors often use ETFs to gain access to specific market sectors or regions around the world by investing in an ETF that holds a portfolio of securities in that
region or segment rather than buying individual securities.
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Asset allocation
. Investors seeking to invest in various asset classes to develop an asset allocation model in a cost-effective manner can do so easily with ETFs, which offer broad exposure to various
asset classes in a single security.
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Protective hedging
. Investors seeking to protect their portfolios may use ETFs as a hedge against unexpected declines in prices of securities arising from market movements and changes in currency and
interest rates.
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Income generation
. Investors seeking to obtain income from their portfolios may buy fixed income ETFs that typically distribute monthly income or dividend-paying ETFs that encompass a basket of
dividend-paying stocks rather than buying individual stocks.
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Speculative investing
. Investors with a specific directional opinion about a market sector may choose to buy or sell (long or short) an ETF covering or leveraging that market sector.
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Arbitrage
. Sophisticated investors may use ETFs in order to exploit perceived value differences between the ETF and the value of the ETF’s underlying portfolio of securities.
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Diversification
. By definition, ETFs represent a basket of securities and each fund may contain hundreds or even thousands of different individual securities. The “instant diversification” of
ETFs provides investors with broad exposure to an asset class, market sector or geography.
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ETFs are one of the fastest growing sectors of
the asset management industry. According to the Investment Company Institute, from January 1, 2014 through December 31, 2016, U.S. listed equity ETFs have generated positive inflows of approximately $550 billion while long-term equity
mutual funds have experienced outflows of approximately $310 billion. U.S. listed ETF fixed income flows also have surpassed long-term fixed income mutual fund flows as fixed income ETFs have generated positive inflows of approximately
$189 billion
6
compared to $125 billion of inflows for long-term fixed income mutual funds during this same period. We believe this trend is due to the inherent benefits of ETFs, that is: transparency,
liquidity and tax efficiency.
We believe our growth, and the growth of the ETF industry in general, will continue to be driven by the
following factors:
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Education and greater investor awareness
. Over the last several years, ETFs have been taking a greater share of inflows and AUM from mutual funds. We believe as a result of market downturns during the
economic crisis, investors have become more aware of some of the deficiencies of mutual funds and other financial products. In particular, we believe investors are increasing their focus on important characteristics of their traditional
investments—namely transparency, tradability, liquidity, tax efficiency and fees. Their attention and education focused on these important investment characteristics may be one of the drivers of the shift in inflows from traditional mutual
funds to ETFs. We believe as investors become more aware and educated about ETFs and their benefits, ETFs will continue to take market share from traditional mutual funds and other financial products or structures such as hedge funds, separate
accounts and individual stocks.
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Move to
fee-based
models
. Over the last several years, many financial advisers have changed the revenue model that they charge clients from one that is
“transaction-based,” that is, based on commissions for trades or receiving sales loads, to a
“fee-based”
approach, where an overall fee is charged based on the value of AUM. This
fee-based
approach lends itself to the adviser selecting
no-load,
lower-fee
financial products, and in our opinion, better aligns
advisers with the interests of their clients. Since ETFs generally charge lower fees than mutual funds, we believe this model shift will benefit the ETF industry. As major brokerage firms and asset managers encourage their advisers to move towards
fee-based
models, we believe overall usage of ETFs likely will increase.
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Innovative product offerings
. Historically, ETFs tracked traditional equity indexes, but the volume of ETF growth has led to significant innovation and product development. As demand increased, the number
of ETFs has also increased and today, ETFs are available for virtually every asset class including fixed income, commodities, alternative strategies, leveraged/inverse, real estate and currencies. We believe, though, that there remain substantial
areas for ETF sponsors to continue to innovate, including alternative- and investment theme-based strategies, hard and soft commodities, and actively managed strategies. We believe the further expansion of ETFs will fuel further growth and
investments from investors who typically access these products through hedge funds, separate accounts, stock investments or the futures and commodity markets.
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New distribution channels
. Online retail discount brokers now offer free trading and promotion of select ETFs. We believe the promotion of ETF trading by discount brokers and their marketing of ETFs to a
wider retail channel will contribute to the future growth of ETFs. Increasingly, institutional investors such as pensions, endowments and even mutual funds are using ETFs as trading tools as well as core holdings.
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Changing demographics
. As the “baby boomer” generation continues to mature and retire, we expect that there will be a greater demand for a broad range of investment solutions, with a particular
emphasis on income generation and principal protection, and that more of these investors will seek advice from professional financial advisers. We believe these financial advisers will migrate more of their clients’ portfolios to ETFs due to
their lower fees, better fit within
fee-based
models, and their ability to (i) provide access to more diverse market sectors, (ii) improve multi-asset class allocation, and (iii) be used for
different investment strategies, including income generation. Overall, we believe ETFs are well-suited to meet the needs of this large and important group of investors. In addition, since many younger investors and financial advisers have
demonstrated a preference for the ETF structure over traditional product structures, we believe that wealth transfers from one generation to another will also have a positive effect on ETF industry growth.
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International Markets.
We believe the growth of ETFs is a global phenomenon. While the U.S.
currently represents the vast majority of global ETF assets, Europe, Canada, Asia and Latin America
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are growing. Many of the same growth drivers powering the U.S. ETF industry are gradually taking hold in global markets. Additionally, there is an increasing trend of
non-U.S.
institutional investors investing in U.S.-listed ETFs.
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Regulation
. In April 2016, the Department of Labor, or DOL, published its final rule to address conflicts of interest in retirement advice, commonly referred to as the Fiduciary Rule. The Fiduciary Rule is
scheduled to become effective in April 2017. However, in February 2017, President Trump issued a presidential memorandum instructing the DOL to conduct an economic and legal analysis of the rule’s potential impact. As a result, the DOL has
formally proposed a
60-day
delay to the effective date. Also in February 2017, a Texas district court upheld the rule. In response to the Fiduciary Rule, industry experts predict an acceleration in the shift
from commission to
fee-based
advisory models. Already, we have seen several large asset management firms announce changes to their platforms and policies in response to the Fiduciary Rule which favor fee based
account structures. Also, in response to the Fiduciary Rule, several fund sponsors have implemented further fee reductions which have occurred primarily in commoditized exposures based upon third party indexes. If the Fiduciary Rule is ultimately
implemented, we believe that ETFs’ competitiveness generally will increase due to the inherent benefits of ETFs – transparency and liquidity; and while we are not immune to fee pressure, we believe our proprietary approach and
self-indexing differentiates us from the competition. Even if the Fiduciary Rule is not implemented, we believe certain large firms nevertheless will move forward with changes that were developed to comply with the rule.
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Additionally, while the shift toward
fee-based
models continues to take hold in the U.S. market as
described above, regulatory initiatives in international markets are accelerating this trend in new markets. We believe regulations that discourage a commission model and mandate transparency of fees are conducive for ETF growth.
Our Competitive Strengths
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Well-positioned in large and growing markets
.
We believe that ETFs are well positioned to grow significantly faster than the asset management industry as a whole, making our focus on ETFs a
significant advantage versus other traditional asset management firms. At December 31, 2016, we were the seventh largest ETF sponsor in the U.S. by AUM. Within the ETF industry, being a first mover, or one of the first providers of ETFs in a
particular asset class, can be a significant advantage. We believe that our early leadership in a number of asset classes positions us well to maintain a leadership position.
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Strong performance
. We create our own indexes, most of which weight companies in our equity ETFs by a measure of fundamental value and are rebalanced annually. By contrast, traditional indexes are market
capitalization weighted and tend to track the momentum of the market. In addition, we also offer actively managed ETFs, as well as ETFs based on third party indexes. In evaluating the performance of our U.S. listed equity, fixed income and
alternative ETFs against actively managed and index based mutual funds and ETFs, 95% of the $37.1 billion invested in our ETFs and 69% (52 of 75) of our ETFs covered by Morningstar outperformed their comparable Morningstar average since
inception as of December 31, 2016.
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Differentiated product set, powered by innovation
. We have a broad and diverse product set. Our products span a variety of traditional and high growth asset classes, including equities, fixed income,
currencies and alternatives, and include both passive and actively managed funds. Our innovations include launching the industry’s first emerging markets
small-cap
equity ETF, the first actively managed
currency ETFs, one of the first international local currency denominated fixed income ETFs, the first managed futures strategy ETF, the first currency hedged international equity ETFs in the U.S. and the first smart beta corporate bond suite.
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Our product development strategy comes from two competitive advantages:
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Self-indexing
. The majority of our ETFs are based on proprietary WisdomTree indexes which we believe gives us several advantages. First, it minimizes our third party index licensing fees, which increases our
profitability. Second, because we develop our own intellectual property, we are intimately familiar with our strategies and able to effectively communicate their value proposition in the market with research content and support. Third, it can
enhance our speed to market and first mover advantage. Fourth, because these indexes are proprietary to WisdomTree, we may face similar competition, but we never face exact competition. Our competitors license similar third party indexes and
need to compete on price to differentiate their offerings.
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Broad regulatory relief.
Our broad exemptive relief also allows us to bring unique products to markets, including actively managed funds.
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We believe that our expertise in product development combined with our self-indexing capabilities and regulatory exemptive relief provides a
strategic advantage, enabling us to launch innovative ETFs that others may not be able to launch as quickly.
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Extensive marketing, research and sales efforts
. We have invested significant resources to establish the WisdomTree brand through targeted television, print and online advertising, social media, as well as
through our public relations efforts. The majority of our employees are dedicated to marketing, research and sales. Our sales professionals are the primary points of contact for financial advisers, independent advisory firms and institutional
investors who use our ETFs. Their efforts are enhanced through value-added services provided by our research and marketing efforts. We have strong relationships with financial advisers at leading national brokerage firms, registered investment
advisers and high net worth advisers. We believe that by strategically aligning these adviser relationships and marketing campaigns with targeted research and sales initiatives and products that align with market sentiment, we differentiate
ourselves from our competitors.
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Efficient business model with lower risk profile
. We have invested heavily in the internal development of our core competencies with respect to product development, marketing, research and sales of ETFs.
We outsource to third parties those services that are not our core competencies or may be resource or risk intensive, such as the portfolio management responsibilities and fund accounting operations of our ETFs. In addition, since we create our own
indexes for most of our ETFs, we usually do not incur many licensing costs.
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Strong, seasoned and creative management team
. We have built a strong and dedicated senior leadership team. Most of our leadership team has significant ETF or financial services industry experience in fund
operations, regulatory and compliance oversight, product development and management or marketing and communications. We believe our team, by developing an ETF sponsor from the ground up despite significant competitive, regulatory and operational
barriers, has demonstrated an ability to innovate as well as recognize and respond to market opportunities and effectively execute our strategy.
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Our Growth Strategies
Our goal is to
become one of the top five ETF sponsors in the world. We believe our continued execution will enable us to increase trading volumes and build longer performance track records, which should allow us to attract additional investors and, in turn,
further grow our AUM. We will seek to increase our market share and build additional scale by continuing to implement the following growth strategies:
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Increase penetration within existing distribution channels and expand to new distribution channels.
We believe there is an opportunity to increase our market share by further penetrating existing
distribution channels, expanding into new distribution channels and by cross-selling additional WisdomTree ETFs. To achieve these objectives, we intend to continue our strategy of targeted advertising and direct marketing, coupled with our
research-focused sales support initiatives, to enhance product awareness.
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In addition, in November 2016, we made a $20.0 million strategic investment for a 36% fully
diluted equity interest in AdvisorEngine, Inc., formerly known as Vanare, Inc., an
end-to-end
digital wealth management platform which enables individual customization
of investment philosophies. We and AdvisorEngine also entered into a strategic agreement whereby our asset allocation models are made available through AdvisorEngine’s open architecture platform and we actively introduce the platform to our
distribution network. AdvisorEngine offers an array of distinct product offerings that provide advisors with new client prospecting tools, online client onboarding, institutional grade analytics, trading, performance reporting and billing. Its
technology is distinctive in that it provides these features from an advisor-centric point of view, allowing advisors to deepen their engagement with clients and demonstrate the value of the advisory relationship. We believe this investment will
enable us to expand our relationships with advisors and actively participate in the digitization of the wealth management industry.
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Launch innovative new products that diversify our product offerings and revenues
. We believe our track record has shown that we can create and sell innovative ETFs that meet market demand. In 2017, we
intend to target the retirement sector by leveraging our existing intellectual property to offer collective investment funds under the WisdomTree Collective Investment Trust, or CIT. The CIT is exempt from registration with the SEC as a
bank-maintained collective investment fund established for employee benefit trusts. We believe that continued launches of new products will strengthen our business by allowing us to realize new inflows, maintain and grow our AUM and generate
revenues across different market cycles as particular investment strategies move in and out of favor.
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Grow our international business.
To date, our sales and marketing have been principally focused on the domestic U.S. market. However, we have taken steps to broaden our reach around the world.
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Europe
. In April 2014, we acquired a majority stake in our European business and accelerated the buyout of the remaining minority interest in May 2016. Through this platform, we currently have listed 16
WisdomTree branded UCITS ETFs, and for some have created additional currency-hedged share classes, on the London Stock Exchange, Borsa Italiana, Deutsche Börse and SIX Swiss Exchange, and we continue to manage and grow the Boost lineup ETPs
under the Boost brand.
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Latin America
. We have cross-listed certain of our ETFs on the Mexican stock exchange, targeting institutional investors trading foreign securities in Mexico. We are also party to a marketing arrangement with the
Compass Group to market WisdomTree ETFs in Latin America.
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Australia, New Zealand and Israel
. In 2014, we entered into a marketing arrangement with BetaShares to market our U.S. listed ETFs in Australia and New Zealand, and in 2015, we entered into a similar arrangement
in Israel.
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Japan
. In February 2016, we began selling our U.S. listed ETFs to the institutional market through our sales office in Japan. Moreover, we made regulatory filings in Japan which permit 27 of our U.S. listed ETFs
to be marketed to retail investors in Japan. In addition, key personnel from our Japan office travel globally to market our Japan themed ETFs to institutional investors outside of Japan.
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Canada
. In April 2016, we established an office in Toronto and in July 2016 began distributing a select range of locally listed ETFs. We currently have listed six WisdomTree branded Canadian ETFs.
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China
. In July 2016, we entered into a global product partnership with ICBC Credit Suisse Asset Management (International) Company Limited to launch, market and distribute ETFs that track the S&P China 500
Index. A Luxembourg UCITS ETF listed in Europe marked the first product in this collaboration.
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As ETFs are increasingly
traded globally, we believe that international expansion of our marketing, communication and sales strategies will provide significant new growth avenues to participate in new regional markets as well as increasing cross-border investments by non
U.S. institutional investors.
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Selectively pursue acquisitions or partnerships.
We may pursue acquisitions or enter into partnerships or other commercial arrangements that will enable us to strengthen our current business, expand and
diversify our product offering, increase our AUM or enter into new markets. We believe entering into partnerships or pursuing acquisitions is a cost-effective means of growing our business and AUM. For example, in November 2016, we made a strategic
investment in and entered into a strategic agreement with AdvisorEngine. In January 2016, we acquired the managing owner of the GreenHaven Continuous Commodity Index Fund, which has been renamed the WisdomTree Continuous Commodity Index Fund (NYSE
Arca: GCC) to add commodities to our product set. In April 2014, we acquired a majority stake in our European business and accelerated the buyout of the remaining minority interest in May 2016.
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Regulatory Framework of the ETF Industry
Not all ETPs are ETFs. ETFs are a distinct type of security with features that are different than other ETPs. ETFs are
open-end
investment companies or unit investment trusts regulated in the U.S. by the Investment Company Act of 1940, or the Investment Company Act. This regulatory structure is designed to provide investor
protection within a pooled investment product. For example, the Investment Company Act requires that at least 40% of the Trustees for each ETF must not be affiliated persons of the fund’s investment manager, or Independent Trustees. If the ETF
seeks to rely on certain rules under the Investment Company Act, a majority of the Trustees for that ETF must be Independent Trustees. In addition, as discussed below, ETFs have received orders from the staff of the SEC which exempt them from
certain provisions of the Investment Company Act; however, ETFs generally operate under regulations that prohibit affiliated transactions, are subject to standard pricing and valuation rules and have mandated compliance programs. ETPs can take a
number of forms in addition to ETFs, including exchange traded notes, grantor trusts or limited partnerships. In the U.S. market, a key factor differentiating ETFs, grantor trusts and limited partnerships from exchange traded notes is that the
former hold assets underlying the ETP. Exchange traded notes, on the other hand, are debt instruments issued by the exchange traded note sponsor. Also, each of these structures has implications for taxes, liquidity, tracking error and credit risk.
Because ETFs do not fit into the regulatory provisions governing mutual funds, ETF sponsors need to obtain “exemptive relief”
from the SEC from certain provisions of the Investment Company Act in order to operate ETFs. This exemptive relief allows the ETF sponsor to bring to market the specific products or structures for which the relief was requested and obtained.
Applying for exemptive relief can be costly and take several months to several years depending on the type of exemptive relief sought. See “Business—Regulation” below.
Our U.S. Listed Products
As of
December 31, 2016, we offered a comprehensive family of 94 ETFs.
International Hedged Equity ETFs
In December 2009, we launched the U.S. industry’s first currency hedged equity ETFs and currently have 24 such ETFs in the market. These
ETFs provide exposure to a specified international equity market while hedging the currency exposure of that market relative to the U.S. dollar. In 2016, we launched dynamic currency hedged ETFs, including the Dynamic Currency Hedged International
Equity ETF (DDWM), which was the most successful ETF launched in the U.S. in 2016 based on total AUM. Our international hedged equity ETFs are
sub-advised
by Mellon Capital, a subsidiary of The Bank of New
York Mellon Corporation, or BNY Mellon.
Equity ETFs
We offer equity ETFs that provide access to the securities of large, mid and
small-cap
companies
located in the U.S., international developed markets and emerging markets, as well as particular market sectors and styles.
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Our equity ETFs track our own indexes, the majority of which are fundamentally weighted as opposed to market capitalization weighted indexes, which assign more weight to stocks with the highest
market capitalizations. These fundamentally weighted indexes focus on securities of companies that pay regular cash dividends or on securities of companies that have generated positive cumulative earnings over a certain period. We believe weighting
equity markets by dividends and income, rather than by market capitalization, can provide investors with better risk-adjusted returns over longer term periods in core equity exposures. In 2016, we experienced a record year of net inflows of
$1.9 billion into our U.S. equity ETFs. Our equity ETFs are
sub-advised
by Mellon Capital.
Fixed
Income ETFs
In 2010, we began launching international fixed income ETFs. Currently, these ETFs invest in emerging market
countries, Asia Pacific
ex-Japan
countries or Australia and New Zealand. These ETFs are denominated in either local or U.S. currencies. We intend to launch additional fixed income bond funds and broaden our
product offerings in this category. In December 2013, we launched a suite of rising rate bond ETFs based on leading fixed income benchmarks we license from third parties. In July 2015, we launched an ETF that seeks to track a yield-enhanced index of
U.S. investment grade bonds and in 2016 we launched the industry’s first smart beta corporate bond suite. Our fixed income ETFs are
sub-advised
by either Mellon Capital, Western Asset Management, a
subsidiary of Legg Mason, or Voya Investment Management, a subsidiary of Voya Financial Inc.
Currency ETFs
We launched the industry’s first currency ETFs in May 2008 using our regulatory exemption for actively managed funds. We offer currency
ETFs that provide investors with exposure to developed and emerging markets currencies, including the Chinese Yuan and the Brazilian Real. In December 2013, we launched a U.S. Dollar Bullish Fund licensing a new Bloomberg index. Currency ETFs
invest in U.S. money market securities, forward currency contracts and swaps and seek to achieve the total returns reflective of both money market rates in selected countries available to foreign investors and changes to the value of these
currencies relative to the U.S. dollar. Our currency ETFs are
sub-advised
by Mellon Capital and Western Asset Management.
Alternative Strategy ETFs
In
2011, we launched the industry’s first managed futures strategy ETF and a global real return ETF. In 2015, we launched a dynamic long/short U.S. equity ETF and a dynamic bearish U.S. equity ETF. In 2016, we launched a collateralized put write
strategy ETF on the S&P 500 index. We also intend to explore additional alternative strategy products in the future. Our managed futures strategy ETF and dynamic long/short and bearish U.S. equity ETFs are
sub-advised
by Mellon Capital and our global real return ETF is
sub-advised
by Western Asset Management.
Commodity ETFs
In January 2016,
we acquired the managing owner of the GreenHaven Continuous Commodity Index Fund, which has been renamed the WisdomTree Continuous Commodity Index Fund (NYSE Arca: GCC).
Our International Listed Products
WisdomTree UCITS
ETFs
In connection with our acquisition of our European business in April 2014 and its subsequent build out, we have launched 16
UCITS ETFs, and for some have created additional currency-hedged share classes, on the London Stock Exchange, Borsa Italiana, Deutsche Börse and SIX Swiss Exchange, providing exposure to large and
small-cap
U.S., European and emerging markets equities, as well as a diversified commodities strategy.
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Boost ETPs
As part of the acquisition of our European business in April 2014, we acquired Boost’s equity, commodity, fixed income and currency ETPs,
which are listed in Europe. As of December 31, 2016, there were 68 ETPs on the European platform.
Canadian ETFs
In April 2016, we established an office in Toronto and in July 2016 began distributing a select range of locally listed ETFs. We currently have
listed six WisdomTree branded Canadian ETFs.
Sales, Marketing and Research
We distribute our ETFs through all major channels within the asset management industry, including brokerage firms, registered investment
advisers and institutional investors. Our primary sales efforts are not directed towards the retail segment but rather are directed towards the financial or investment adviser who acts as the intermediary between the
end-client
and us. We do not pay commissions nor do we offer
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fees to financial advisers to use or recommend the use of our ETFs.
We have developed an extensive network and relationships with financial advisers and we believe our ETFs and related research are well
structured to meet their needs and those of their clients. Our sales professionals act in a consultative role to provide the financial adviser with value-added services. We seek to consistently grow our network of financial advisers and we
opportunistically seek to introduce new products that best deliver our investment strategies to investors through these distribution channels. We have our own team of approximately 70 sales professionals globally as of December 31, 2016. We
plan to incrementally add to our sales force and invest in sales-related resources over the course of 2017 to further penetrate existing sales channels, and to better service new emerging distribution channels.
In addition, we have agreements with third parties to serve as the external marketing agents for the WisdomTree ETFs in Latin America,
Australia, New Zealand and Israel as well as with certain brokerage firms to allow certain of our ETFs to trade commission free on their brokerage platforms in exchange for a percentage of our advisory fee revenues from certain AUM. We believe these
arrangements expand our distribution capabilities in a cost-effective manner and we may continue to enter into such arrangements in the future.
Our marketing efforts are focused on three objectives: generating new clients and inflows to our ETFs; retaining existing clients, with a
focus on cross-selling additional WisdomTree ETFs; and building brand awareness. We pursue these objectives through a multi-faceted marketing strategy targeted at financial advisers. We utilize the following strategies:
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Targeted advertising.
We create highly targeted multi-media advertising campaigns limited to established core financial media. For example, our television advertising runs exclusively on the cable networks
CNBC, Fox Business and Bloomberg Television; online advertising runs on investing or
ETF-specific
web sites, such as www.seekingalpha.com and www.etfdatabase.com; and print advertising runs in core financial
publications, including
Barron’s
,
Pensions
& Investments
and
Investor’s Business Daily
.
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Media relations.
We have a full time public relations team who has established relationships with the major financial media outlets including:
The Wall Street Journal
,
Barron’s
,
Financial Times
,
Bloomberg
,
Reuters
,
New York Times
and
USA Today
. We utilize these relationships to help create awareness of the WisdomTree ETFs and the ETF industry in general. Several members of our management
team and multiple members of our research team are frequent market commentators and conference panelists.
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Direct marketing
. We have a database of financial advisers to which we regularly market through targeted and segmented communications, such as
on-demand
research
presentations,
ETF-specific
or educational events and presentations, quarterly newsletters and market commentary from our senior investment strategy adviser, Professor Jeremy Siegel.
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Social media
. We have implemented a social media strategy that allows us to connect directly with financial advisers and investors by offering timely access to our research material and more general market
commentary. Our social media strategy allows us to continue to enhance our brand reputation of expertise and thought leadership in the ETF industry. For example, we have established presence on LinkedIn, Twitter and YouTube, and our blog content is
syndicated across multiple business-oriented websites.
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Sales support
. We create comprehensive materials to support our sales process including whitepapers, research reports, webinars, blogs, podcasts, videos and performance data for our ETFs.
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We will continue to evolve our marketing and communication efforts in response to changes in the ETF industry, market
conditions and marketing trends.
Our research team has three core functions: index development and oversight, investment research and
sales support. In its index development role, the research group is responsible for creating the investment methodologies and overseeing the maintenance of our indexes that the WisdomTree ETFs are designed to track. The team also provides a variety
of investment research around these indexes and market segments. Our research is typically academic-type research to support our products, including white papers on the strategies underlying our indexes and ETFs, investment insights on current
market trends, and types of investment strategies that drive long-term performance. We distribute our research through our sales professionals, online through our website and blog, targeted emails to financial advisers, or through financial media
outlets. On some occasions, our research has been included in
“op-ed”
articles appearing in
The Wall Street Journal
. Shorter research notes are also developed to promote our ideas, which are
distributed online through social media channels. Finally, the research team supports our sales professionals in meetings as market experts and through custom analysis on client portfolio holdings. In addition, we consult with our senior investment
strategy adviser, Professor Jeremy Siegel, on product development ideas and market commentaries.
Product Development
We are focused on driving continued growth through innovative product development. Due to our broad based regulatory exemptive relief,
proprietary index development capabilities and a strategic focus on product development at the senior management level, we have demonstrated an ability to launch innovative and differentiated ETFs. When developing new funds, we seek to introduce
product that can be first to market, offer improvement in structure or strategy relative to an incumbent product or offer some other key distinction relative to an incumbent product. In short, we want to add choice in the market and seek to
introduce thoughtful investment solutions by avoiding commoditized products. Lastly, when launching new products, we seek to expand and diversify our overall product line.
Competition
The asset management
industry is highly competitive and we face substantial competition in virtually all aspects of our business. Factors affecting our business include fees for our products, investment performance, brand recognition, business reputation, quality of
service and the continuity of our financial adviser relationships. We compete directly with other ETF sponsors and mutual fund companies and indirectly against other investment management firms, insurance companies, banks, brokerage firms and other
financial institutions that offer products that have similar features and investment objectives to those offered by us. The vast majority of the firms we compete with are subsidiaries of large diversified financial companies and many others are much
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larger in terms of AUM, years in operations and revenues and, accordingly, have much larger sales organizations and budgets. In addition, these larger competitors may attract business through
means that are not available to us, including retail bank offices, investment banking, insurance agencies and broker-dealers.
The ETF
industry is becoming significantly more competitive. There has been increased price competition in not only commoditized product categories such as traditional, market capitalization weighted index exposures, but also in fundamental or other
non-market
cap weighted or factor-based exposures. In addition, existing players have broadened their suite of products to different strategies that are, in some cases, similar to ours. Lastly, large traditional
asset managers are also launching ETFs, some with similar strategies to ours.
We do not know what effect, if any, the launch of these
ETFs or price cuts may have on our business. Within the ETF industry, being a first mover, or one of the first providers of ETFs in a particular asset class, can be a significant advantage, as the first ETF in a category to attract scale in AUM and
trading liquidity is generally viewed as the most attractive ETF. We believe that our early launch of ETFs in a number of asset classes or strategies, including fundamental weighting and currency hedging, positions us well to maintain our position
as one of the leaders of the ETF industry. Additionally, we believe our affiliated indexing or “self-indexing” model enables us to launch proprietary products which do not have exact competition.
We believe our ability to successfully compete will depend largely on our competitive product structure and our ability to offer exposure to
compelling investment strategies, develop distribution relationships, create new investment products, build trading volume, AUM and outperforming track records in existing funds, offer a diverse platform of investment choices, build upon our brand
and attract and retain talented sales professionals and other employees.
U.S. Regulation
The investment management industry is subject to extensive regulation and virtually all aspects of our business are subject to various federal
and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of registered investment companies. These laws generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the conduct of our business and to impose sanctions for failure to comply with these laws and regulations. Further, such laws and regulations may provide the basis for examination, inquiry,
investigation, enforcement action and/or litigation that may also result in significant costs to us.
We are currently subject to the
following laws and regulations, among others. The costs of complying with such laws and regulations have increased and will continue to contribute to the costs of doing business:
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The Investment Advisers Act of 1940
(Investment Advisers Act). The SEC is the federal agency generally responsible for administering the U.S. federal securities laws. One of our subsidiaries, WisdomTree
Asset Management, Inc., or WTAM, is registered as an investment adviser under the Investment Advisers Act and, as such, is regulated by the SEC. The Investment Advisers Act requires registered investment advisers to comply with numerous and broad
obligations, including, among others, recordkeeping requirements, operational procedures, registration and reporting and disclosure obligations.
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The Investment Company Act of 1940 (ICA)
. Nearly all of our WisdomTree ETFs are registered with the SEC pursuant to the Investment Company Act. These WisdomTree ETFs must comply with the requirements of
the Investment Company Act and other regulations related to publicly offering and listing shares, as well as conditions imposed in the exemptive orders received by the ETFs, including, among others, requirements relating to operations, fees charged,
sales, accounting, recordkeeping, disclosure and governance. In addition, the SEC has proposed new and/or revised provisions under the ICA that may impact current and future ETF investments and/or operations.
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Broker-Dealer Regulations
. Although we are not registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934, as amended, or Exchange Act, nor are we a member firm of the Financial
Industry Regulatory Authority, or FINRA, many of our employees, including all of our salespersons, are licensed with FINRA and are registered as associated persons of the distributor of the WisdomTree ETFs and, as such, are subject to the
regulations of FINRA that relate to licensing, continuing education requirements and sales practices. FINRA also regulates the content of our marketing and sales material.
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Internal Revenue Code
. The WisdomTree Trust generally has obligations with respect to the qualification of the registered investment company for pass-through tax treatment under the Internal Revenue Code.
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U.S. Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA)
. In 2012, the CFTC adopted regulations that have required us to become a member of the NFA and register as a
commodity pool operator for a select number of our ETFs. In addition, in January 2016, we acquired the ownership interest in two commodity pool operators (one of which has since been dissolved) to ETFs that are not registered under the ICA and are
thereby subject to additional requirements imposed by the CFTC and NFA. Each commodity pool operator is required to comply with numerous CFTC and NFA requirements.
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Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
. This comprehensive overhaul of the financial services regulatory environment requires federal agencies to implement numerous new rules,
which, as they are adopted, may impose additional regulatory burdens and expenses on our business, and also may negatively impact WisdomTree ETFs.
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Employee Retirement Income Security Act of 1974 (ERISA)
. As investment adviser to the CIT, WTAM will be subject to the fiduciary responsibility standards and prohibited transaction restrictions of ERISA
and will be required to comply with certain requirements under ERISA to satisfy those standards and avoid liability.
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With
respect to ETFs registered under the ICA, because such ETFs do not fit into the regulatory provisions governing mutual funds, ETF sponsors need to obtain from the SEC exemptive relief from certain provisions of the ICA in order to operate ETFs. This
exemptive relief allows the ETF sponsor to bring products to market for the specific products or structures for which the relief was requested and obtained. Applying for exemptive relief can be costly and take several months to several years
depending on the type of exemptive relief sought. In addition, each WisdomTree ETF is listed on a secondary market, (each, an Exchange) and any new WisdomTree ETF will seek listing on an Exchange. While the SEC has already approved rules for
Exchanges to allow index-based ETFs and active ETFs to list that meet prescribed requirements (e.g., minimum number, market value and trading volume of securities in the new ETF’s benchmark index or in its portfolio, as applicable), these rules
do not allow ETFs that do not meet the prescribed requirements without specific SEC approval. The SEC approval process has historically taken months to complete and, in some cases, years. The SEC may ultimately determine not to allow such potential
new WisdomTree ETFs or may require strategy modifications prior to approval.
FINRA rules and guidance may affect how WisdomTree ETFs are
sold by member firms. Although we currently do not offer
so-called
leveraged ETFs in the U.S., which may include within their holdings derivative instruments such as options, futures or swaps to obtain
leveraged exposures, recent FINRA guidance on margin requirements and suitability determinations with respect to customers trading in leveraged ETFs may influence how member firms effect sales of certain WisdomTree ETFs, such as our currency ETFs,
which also use some forms of derivatives, including forward currency contracts and swaps, our international hedged equity ETFs, which use currency forwards, and our rising rates bond ETFs and alternative strategy ETFs, which use futures or options.
In September 2015, FINRA issued an investor alert to help investors better understand “smart beta” products, or products that are linked to and seek to track the performance of alternatively weighted indices.
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Finally, our common stock is traded on the NASDAQ Global Select Market and we are therefore also
subject to its rules including corporate governance listing standards, as well as federal and state securities laws. In addition, the WisdomTree ETFs are listed on NYSE Arca, the NASDAQ Market and the BATS Exchange, and accordingly are subject to
the listing requirements of those exchanges.
International Regulation
Our operations outside the U.S. are subject to the laws and regulations of various
non-U.S.
jurisdictions and
non-U.S.
regulatory agencies and bodies. As we have expanded our international presence, a number of our subsidiaries and international operations have become subject to regulatory systems,
in various jurisdictions, comparable to those covering our operations in the U.S. Regulators in these
non-U.S.
jurisdictions may have broad authority with respect to the regulation of financial services
including, among other things, the authority to grant or cancel required licenses or registrations.
Irish and European Regulation
In connection with our acquisition of Boost and the subsequent build out of our European business, we are subject to Irish and European
regulation of our WisdomTree UCITS ETFs and Boost ETPs as follows:
WisdomTree UCITS ETFs
The investment management industry in Ireland is subject to both Irish domestic law and European Union law. The Central Bank of Ireland, or the
Central Bank, is responsible for the authorization and supervision of collective investment schemes, or CIS, in Ireland. CIS’s are also commonly known as funds/schemes. There are two main categories of funds authorized by the Central Bank,
UCITS (Undertaking for Collective Investment in Transferable Securities) and funds that are not UCITS. ETFs form part of the Irish and European regulatory frameworks that govern UCITS, with ETFs having been the subject of specific consideration at
European level (which is then repeated and/or interpreted by the Central Bank in its UCITS Notices and Guidance Notes).
One of our
subsidiaries, WisdomTree Management Limited, is an Ireland based management company providing investment and other management services to WisdomTree Issuer plc, or WTI, and WisdomTree UCITS ETFs. The WisdomTree UCITS ETFs are issued by WTI. WTI, a
non-consolidated
third party, is a public limited company organized in Ireland and is authorized as a UCITS by the Central Bank. All UCITS have their basis in EU legislation and once authorized in one European
Economic Area, or EEA, Member State, may be marketed throughout the EU, without further authorization. This is described as an EU passport.
WTI is established and operated as a public limited company with segregated liability between its
sub-funds.
The
sub-funds
are segregated portfolios, each with their own investment objective and policies and assets. Each
sub-fund
has a separate authorization from the Central Bank, and each is authorized as an ETF. Each
sub-fund
tracks a different index. The index must comply with
regulatory criteria that govern, among others, the eligibility and diversification of its constituents, and the availability of information on the index such as the frequency of calculation of the index, the index’s transparency, its
methodology and frequency of calculation. Each
sub-fund
is listed on the Irish Stock Exchange and has shares admitted to trading on the London Stock Exchange and, typically, on various European stock exchanges
and, accordingly, is subject to the listing requirements of those exchanges.
WTI is currently subject to the following legislation and
regulatory requirements:
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European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (as amended) (UCITS Regulations).
The UCITS Regulations, which transpose Council Directive
2009/65/EC, Commission Directive 2010/43/EC and Commission Directive 2010/44/EC into Irish law, are effective from July 1, 2011. UCITS established in Ireland are authorized under the UCITS Regulations.
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Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (Central Bank UCITS Regulations).
The Central Bank
UCITS Regulations were adopted in November 2015 and, together with the UCITS Regulations, any guidance notes produced by the Central Bank, and the Central Bank forms, they form the basis for all of the requirements that the Central Bank imposes on
UCITS, UCITS management companies and depositaries of UCITS.
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Central Bank Guidance Notes.
The Central Bank has also produced Guidance Notes which provide direction on issues relating to the funds industry, certain of which set down conditions not contained in the
Regulations with which UCITS must conform.
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The Companies Acts 2014 (Companies Acts).
WTI is incorporated as a public limited company under the Irish Companies Acts. Therefore, WTI is required to comply with various obligations under the Companies
Acts such as, but not limited to, convening general meetings and keeping proper books and records. The segregation of liability between
sub-funds
means there cannot be, as a matter of Irish law,
cross-contamination of liability as between
sub-funds
so that the insolvency of one
sub-fund
affects another
sub-fund.
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Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4
July 2012 on OTC derivatives, central counterparties and trade repositories, known as the European
Market Infrastructure Regulation (EMIR)
. EMIR, which became effective on August 16, 2012, provides for certain
over-the-counter,
or OTC, derivative
contracts to be submitted to central clearing and imposes,
inter alia
, margin posting and other risk mitigation techniques, reporting and record keeping requirements. WTI uses OTC derivatives instruments to hedge the currency risk of some of
its
sub-funds,
which are subject to EMIR. WTI has adhered to the 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol published by the International Swaps and Derivatives Association,
Inc. The Central Bank has been designated as the competent authority for EMIR.
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Boost ETPs
One of our subsidiaries, Boost Management Limited, is a Jersey based management company providing investment and other management services to
Boost Issuer PLC, or BI, and Boost ETPs. The Boost ETPs are issued by BI. BI, a
non-consolidated
third party, is a public limited company organized in Ireland. It was established as a special purpose vehicle
for the purposes of issuing collateralized exchange traded securities, or ETP Securities, under the Collateralized ETP Securities Programme described in its Base Prospectus. BI is not required to be licensed, registered or authorized under any
current securities, commodities or banking laws of Ireland and operates without supervision by any authority in any jurisdiction.
The
Central Bank, as competent authority under Directive 2003/71/EC (as amended by Directive 2010/73/EU), or the Prospectus Directive, has approved the Base Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus
Directive. Such approval relates only to ETP Securities which are to be admitted to trading on a regulated market for the purpose of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments (MiFID)
and/or which are to be offered to the public in any Member State of the European Economic Area.
The Central Bank has, at the request of
BI, notified the approval of the Base Prospectus in accordance with Article 18 of the Prospectus Directive to the U.K. Listing Authority (the United Kingdom financial supervisory authority), the Commissione Nazionale per la Societá e la Borsa
(the Italian financial supervisory authority), the Bundesanstalt für Finanzdienstleistungsaufsicht (the German Federal financial supervisory authority) and the Financial Market Authority of Austria, by providing them,
inter alia
, with
certificates of approval attesting that this Base Prospectus has been drawn up in accordance with the Prospectus Directive. BI may request the Central Bank to provide competent authorities in other EEA Member States with such certificates whether
for the purposes of making a public offer in such Member States or for admission to trading of all or any ETP Securities on a regulated market therein or both.
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BI is currently subject to the following legislation and regulatory requirements:
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The Companies Acts
. BI is incorporated as a public limited liability company under the Companies Acts. Therefore, BI is required to comply with various obligations under the Companies Acts such as, but not
limited to, convening general meetings and keep proper books and records.
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The Prospectus Directive
. The Base Prospectus has been drafted, and any offer of ETP Securities in any EEA Member State that has implemented the Prospectus Directive is made in compliance with the
Prospectus Directive and any relevant implementing measure in such Member States.
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EMIR
. BI hedges its payment obligations in respect of the ETP Securities by entering into swap transactions with swap providers, which are subject to EMIR. The Central Bank has been designated as the
competent authority for EMIR and, in order to assess compliance with EMIR, requests that BI submits annually an EMIR Regulatory Return.
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Japanese Regulation
In February
2016, our Tokyo, Japan-based subsidiary, WisdomTree Japan Inc., or WTJ, became registered as a Type 1 Financial Instruments Business with the Kanto Local Finance Bureau (a part of Japan’s Ministry of Finance under authority delegated by the
Financial Services Agency of Japan, or FSA). WTJ also is a member of the Japan Securities Dealers Association and the Japan Investor Protection Fund, and is required to comply with the various rules and regulations of each, as applicable. Although
WTJ does not currently sponsor any locally listed ETFs in the Japanese market, it assists in the marketing of our U.S. listed ETFs to investors in Japan and, as such, is subject to local regulation within the parameters of its Type 1 Financial
Instruments Business registration.
WTJ is currently subject to the following legislation and regulatory requirements:
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The Companies Act
. WTJ is incorporated as a “Kabushiki Kaisha”, or KK, under the Companies Act of Japan. KKs are similar to U.S. C corporations. WTJ is required to comply with various obligations
under the Companies Act such as, but not limited to, convening general meetings, appointing a statutory auditor and maintaining proper books and records.
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The Financial Instruments and Exchange Law
. WTJ is subject to the Financial Instruments and Exchange Law, or FIEL, which is administered and enforced by the FSA. The FSA establishes standards for
compliance, including capital adequacy and financial soundness requirements, customer protection requirements and conduct of business rules. The FSA is empowered to conduct administrative proceedings that can result in censure, fines, the issuance
of cease and desist orders or the suspension or revocation of registrations and licenses granted under the FIEL.
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Canadian Regulation
Our Toronto, Canada based subsidiary, WisdomTree Asset Management Canada, Inc., or WTAMC, is registered as an investment fund
manager and exempt market dealer (a restricted broker/dealer license for the exempt market) in certain Canadian jurisdictions where such registration is required. WTAMC’s registration as an investment fund manager enables it to act as fund
manager to investment funds, including our Canadian ETFs, in Canada. WTAMC is a corporation incorporated under the Business Corporations Act (Ontario) and must comply with various obligations under that Act including with respect to the appointment
of directors and officers, the conduct of meetings of directors and shareholders and the maintaining of books and records. As a registered investment fund manager and exempt market dealer, WTAMC is subject to the requirements of applicable
securities laws including National Instrument
31-103
–
Registration Requirements, Exemptions and Ongoing Registrant Obligations of the Canadian Securities Administrators
, which prescribes
registration requirements including proficiency requirements for certain individuals required to be registered on behalf of the firm, firm capital and reporting requirements, firm insurance coverage requirements and the requirement to establish and
maintain policies and procedures to ensure compliance by the firm and individuals acting on its behalf with applicable securities legislation.
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Our Canadian ETFs are public investment funds whose units are listed on the Toronto Stock
Exchange. Our Canadian ETFs are in continuous distribution of their units and have filed prospectuses with the Canadian Securities Administrators in order to offer their units, which are required to be renewed annually. Our Canadian ETFs are subject
to National Instrument
81-102
–
Investment Funds of the Canadian Securities Administrators
, which sets out requirements relating to the investments and limitations on certain investment strategies
that may be undertaken by public investment funds as well as requiring fund portfolio assets to be held by independent qualified financial institutions and prescribing that certain fundamental fund changes necessitate obtaining approval of
unitholders. Our Canadian ETFs are also subject to National Instrument
81-106
–
Investment Fund Continuous Disclosure
, which mandates the preparation and filing of annual audited and semi-annual
unaudited financial statements for each fund as well as management reports of fund performance for the same periods which are required to be sent to unitholders of the fund. In addition, each of our Canadian ETFs also must prepare quarterly
portfolio disclosure and annually prepare and make available its proxy voting disclosure, which is a record of how the fund voted the various portfolio securities held by it. Finally, National Instrument
81-107
–
Independent Review Committee for Investment Funds
, requires public investment funds to have an independent review committee, or IRC, consisting of at least three members, each of whom must
be independent of the fund manager, to review and approve or make a recommendation relating to conflict of interest matters referred to the IRC by the fund manager for consideration that may arise in the course of managing the operations of a fund.
Intellectual Property
We regard our
name, WisdomTree, as material to our business and have registered WisdomTree
®
as a service mark with the U.S. Patent and Trademark Office and in various foreign jurisdictions.
Our index-based equity ETFs are based on our own indexes and we do not license them from, nor do we pay licensing fees to, third parties for
these indexes. We do, however, license third party indexes for certain of our fixed income, currency and alternative ETFs.
On
March 6, 2012, the U.S. Patent and Trademark Office issued to us our patent on Financial Instrument Selection and Weighting System and Method, which is embodied in our dividend weighted equity indexes. We also have two patent applications
pending with the U.S. Patent and Trademark office that relate to the operation of our ETFs and our index methodology. There is no assurance that patents will be issued from these applications and we currently do not rely upon our recently issued or
future patents for a competitive advantage.
Employees
As of December 31, 2016 we had 209 full-time employees, of which 163 were in our U.S. Business segment and 46 were in our International
Business segment. None of our employees are covered by a collective bargaining agreement and we consider our relations with employees to be good.
Available Information
Company Website and Public
Filings
Our website is located at
www.wisdomtree.com
, and our investor relations website is located at
http://ir.wisdomtree.com
. We make available, free of charge through our investor relations website, our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
and amendments to those reports, filed or furnished pursuant to Sections 13(a) or Section 15(d) of the
Exchange Act as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website that contains reports, proxy and information statements, and other information
regarding the Company at
www.sec.gov
.
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We webcast our earnings calls and certain events we participate in or host with members of the
investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases as part of our investor
relations website. Further corporate governance information, including board committee charters and code of conduct, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites
are not incorporated by reference into this Annual Report on Form
10-K
or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references
only.
Any investment in our common stock involves a high degree of risk. You
should consider carefully the specific risk factors described below in addition to the other information contained in this Report before making a decision to invest in our common stock. If any of these risks actually occur, our business, operating
results, financial condition and prospects could be harmed. This could cause the trading price of our common stock to decline and a loss of all or part of your investment. Certain statements below are forward-looking statements. See the section
entitled “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to Our Business and Our Industry
Net outflows during 2016 in our two largest ETFs have had, and in the future could continue to have, a negative impact on our revenues.
At December 31, 2016, approximately 43% of our U.S. listed ETF AUM was concentrated in two of our WisdomTree ETFs, with 23% in WisdomTree
Europe Hedged Equity Fund (HEDJ) and 20% in WisdomTree Japan Hedged Equity Fund (DXJ). These two ETFs also accounted for approximately 50% of our revenues in 2016. As a result, our operating results are particularly exposed to the performance of
these ETFs and our ability to maintain the AUM of these ETFs, as well as investor sentiment toward investing in the ETFs’ strategies. We are also subject to political, economic and market risks in either of these markets and to a weakening of
the U.S. dollar relative to the Euro or Yen. During 2016, we experienced significant net outflows in HEDJ and DXJ, with HEDJ having $7.8 billion of net outflows and DXJ with $5.7 billion of net outflows, the majority of which were
experienced during the first three quarters of 2016. While flows associated with these ETFs have begun to stabilize, we cannot assure you that this will continue. If HEDJ and DXJ were to continue to experience net outflows, our revenues would be
adversely affected.
Declining prices of securities can adversely affect our business by reducing the market value of the assets we manage or
causing WisdomTree ETF shareholders to sell their fund shares and trigger redemptions.
We are subject to risks arising from
declining prices of securities, which may result in a decrease in demand for investment products, a higher redemption rate and/or a decline in AUM. The securities markets are highly volatile and securities prices may increase or decrease for many
reasons, including general economic conditions, political events, acts of terrorism and other matters beyond our control. Substantially all of our revenues are determined by AUM in equity securities, in both the international and U.S. markets. As a
result, our business can be expected to generate lower revenues in declining equity market environments or general economic downturns. A decline in the prices of securities held by the WisdomTree ETFs may cause our revenues to decline by either
causing the value of our AUM to decrease, which would result in lower advisory fees, or causing investors in the WisdomTree ETFs to sell their shares in favor of investments they perceive to offer greater opportunity or lower risk, thus triggering
redemptions that would also result in decreased AUM and lower fees.
Fluctuations in the amount and mix of our AUM may negatively impact revenues
and operating margins.
The level of our revenues depends on the amount and mix of our AUM. Our revenues are derived primarily
from advisory fees based on a percentage of the value of our AUM and vary with the nature of the ETFs, which
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have different fee levels. Fluctuations in the amount and mix of our AUM may be attributable in part to market conditions outside of our control that have had, and in the future could have, a
negative impact on our revenues and operating margins.
Withdrawals or broad changes in investments in our ETFs by investors with significant
positions may negatively impact revenues and operating margins.
We have had in the past, and may have in the future, investors
who maintain significant positions in one or more of our ETFs. If such an investor were to broadly change or withdraw its investments in our ETFs because of a change to its investment strategy, market conditions or any other reason, it may
significantly change the amount and mix of our AUM, which may negatively affect our revenues and operating margins.
We derive a substantial portion
of our revenues from a limited number of products and, as a result, our operating results are particularly exposed to the performance of these funds and our ability to maintain the AUM of these funds, as well as investor sentiment toward investing
in the funds’ strategies.
At December 31, 2016, approximately 75% of our U.S. listed ETF AUM was concentrated in ten of
our WisdomTree ETFs (with 23% in HEDJ and 20% in DXJ). As a result, our operating results are particularly exposed to the performance of these funds and our ability to maintain the AUM of these funds, as well as investor sentiment toward investing
in the funds’ strategies. If the AUM in these funds were to decline, either because of declining market values or net outflows from these funds, our revenues would be adversely affected.
Much of our AUM is held in ETFs that invest in foreign securities and we therefore have substantial exposure to foreign market conditions and are
subject to currency exchange rate risks.
Many of our ETFs invest in securities of companies, governments and other organizations
located outside the U.S. and at December 31, 2016, approximately 68% of our AUM was comprised of such investments. Therefore, the success of our business is closely tied to market conditions in foreign markets. Investments in
non-U.S.
issuers are affected by political, social and economic uncertainty affecting a country or region in which we are invested. In addition, fluctuations in foreign currency exchange rates could reduce the
revenues we earn from certain foreign invested ETFs. This occurs because an increase in the value of the U.S. dollar relative to
non-U.S.
currencies may result in a decrease in the dollar value of the AUM in
these ETFs, which, in turn, would result in lower revenues. Furthermore, investors are likely to believe certain foreign invested ETFs, as well as certain of our currency and fixed income ETFs, are a less attractive investment opportunity when the
value of the U.S. dollar rises relative to
non-U.S.
currencies, which could have the effect of reducing investments in these ETFs, thus reducing revenues. Conversely, a weakening U.S. dollar may make less
attractive our international hedged equity ETFs, as unhedged alternatives would benefit from the appreciation of the foreign currency or currencies while our hedged ETFs would not, which could result in redemptions in our funds. Since a substantial
portion of our AUM at December 31, 2016 was held in our international hedged equity ETFs, a weakening of the U.S. dollar relative to the Euro or Yen may adversely affect our AUM and revenues.
Many of our WisdomTree ETFs have a limited track record and poor investment performance could cause our revenues to decline.
Many of our ETFs have a limited track record upon which an evaluation of their investment performance can be made. At December 31, 2016,
of our total 94 U.S. listed ETFs, 56 had at least a three-year track record, 40 had at least a five-year track record and 19 had at least a
ten-year
track record. Furthermore, as part of our strategy, we
continuously evaluate our product offerings to ensure that all of our funds are useful, compelling and differentiated investment offerings, to more competitively align our overall product line in the current ETF landscape and to reallocate our
attention and resources to areas of greater client interest. As a result, we may further adjust our product offerings, which may result in the closing of some of our ETFs, changing their investment objective or offering of new funds. The investment
performance of our funds is important to our
22
success. While strong investment performance could stimulate sales of our ETFs, poor investment performance, on an absolute basis or as compared to third party benchmarks or competitive products,
could lead to a decrease in sales or stimulate redemptions, thereby lowering the AUM and reducing our revenues. Our fundamentally-weighted equity ETFs are designed to provide the potential for better risk-adjusted investment returns over full market
cycles and are best suited for investors with a longer-term investment horizon. However, the investment approach of our equity ETFs may not perform well during certain shorter periods of time during different points in the economic cycle.
We currently depend on State Street Bank and Trust Company to provide us with critical administrative services to operate our business and the
WisdomTree ETFs. The failure of State Street to adequately provide such services could materially affect our operating business and harm WisdomTree ETF shareholders.
We currently depend upon State Street Bank and Trust Company, or State Street, to provide the WisdomTree Trust with custody services, fund
accounting, administration, transfer agency and securities lending services. The failure of State Street to successfully provide us and the WisdomTree ETFs with these services could result in financial loss to us and WisdomTree ETF shareholders. In
addition, because State Street provides a multitude of important services to us, changing this vendor relationship would be challenging. It might require us to devote a significant portion of management’s time to negotiate a similar
relationship with another vendor or have these services provided by multiple vendors, which would require us to coordinate the transfer of these functions to another vendor or vendors.
We depend on BNY Mellon, Western Asset Management, Voya Investment Management and GreenHaven Advisors to provide portfolio management services and other
third parties to provide many critical services to operate our business and the WisdomTree ETFs. The failure of key vendors to adequately provide such services could materially affect our operating business and harm WisdomTree ETF shareholders.
We depend on third party vendors to provide us with many services that are critical to operating our business, including BNY
Mellon, Western Asset Management, Voya Investment Management and GreenHaven Advisors as
sub-advisers
that provide us with portfolio management services, third party providers of index calculation services for
our indexes, a distributor of the WisdomTree ETFs and a third party provider of indicative values of the portfolios of the WisdomTree ETFs. The failure of any of these key vendors to provide us and the WisdomTree ETFs with these services could lead
to operational issues and result in financial loss to us and WisdomTree ETF shareholders.
The asset management business is intensely competitive.
Many of our competitors have greater market share, offer a broader range of products, charge lower fees and have greater financial resources than we do. As a result, we may experience pressures on our pricing and market share.
Our business operates in intensely competitive industry segments. We compete directly with other ETF sponsors and mutual fund companies and
indirectly against other investment management firms, insurance companies, banks, brokerage firms and other financial institutions that offer products that have similar features and investment objectives to those offered by us. We compete based on a
number of factors, including name recognition, service, investment performance, product features, breadth of product choices and fees. Several ETF sponsors with whom we directly compete are seeking to obtain market share based on low fees. Many of
our competitors have greater market share, offer a broader range of products and have greater financial resources than we do. Some financial institutions operate in a more favorable regulatory environment and/or have proprietary products and
distribution channels, which may provide certain competitive advantages to them and their investment products. Our competitors may also adopt products, services or strategies similar to ours, including the use of fundamentally-weighted indexes. In
addition, over time certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms. This
convergence could result in our competitors gaining greater resources and we may experience pressures on our pricing and market share as a
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result of these factors and as some of our competitors seek to increase market share by reducing prices. We believe that competition within the ETF industry will continue to increase as more
traditional asset management companies become ETF sponsors.
Competitive pressures could reduce revenues and profit margins.
The ETF industry is becoming significantly more competitive as existing players broaden their suite of products to offer different strategies
that are, in some cases, similar to ours. Although the ETF industry currently has a higher barrier to entry as a result of the need for ETF sponsors to obtain exemptive relief from the SEC in order to operate ETFs, traditional asset managers, many
of whom are much larger than us, have either already entered or started to enter the ETF space, and some competitors have launched ETFs using either third party or proprietary fundamentally weighted or factor-based indexes or currency hedged ETFs
with fees that are generally equivalent to, and in some instances lower than, our ETFs. We expect that additional companies, both new and traditional asset managers, will continue to enter the ETF space.
There also has been increased price competition in not only commoditized product categories such as traditional, market capitalization
weighted index exposures, but also in fundamental or other
non-market
cap weighted or factor-based exposures. Vanguard, Schwab, iShares and State Street primarily compete in this space and have offered low fee
products for many years, but also have lowered prices across additional funds, or launched new funds at lower price points, along with other new market entrants noted above.
In addition, in 2008, the SEC proposed a rule that, if adopted, would eliminate the need to obtain exemptive relief, thereby lowering the
barrier to entry. This proposed rule was never adopted and it is unclear whether a new rule could be proposed in 2017. ETFs that do not meet generic exchange listing standards, which historically included actively managed ETFs, have had to undergo a
lengthy exchange listing process, which sometimes takes in excess of a year. However, in 2016, generic listing standards for active ETFs were approved, thereby reducing a barrier to entry for active ETFs that meet the new generic listing standards.
In addition, in December 2014, the SEC granted Eaton Vance and related parties an exemption from certain provisions of the Investment
Company Act to permit the offering of a form of
non-transparent
exchange traded managed funds, and other unaffiliated fund complexes have signed up to launch such funds, with the first funds launching in 2016.
In addition, the SEC rejected proposals from Precidian and BlackRock to also offer a form of
non-transparent
exchange traded product. Subsequently, Precidian refiled its application with changes intended to
address the SEC’s concerns and other fund managers also have filed with the SEC for approval of other types of
non-transparent
exchange traded products, which could obtain approval in 2017. The launch of
non-transparent
exchange traded products may allow traditional actively managed mutual fund sponsors to compete more effectively against ETFs, which could reduce our revenues and profit margins.
Our revenues could be adversely affected if the WisdomTree Trust determines that the advisory fees we receive from the WisdomTree ETFs should be
reduced.
Our advisory agreements with the WisdomTree Trust and the fees we collect from the WisdomTree ETFs are subject to review
and approval by the Independent Trustees of the WisdomTree Trust. The advisory agreements are subject to initial review and approval. After the initial
two-year
term of the agreement for each ETF, the
continuation of such agreement must be reviewed and approved at least annually by a majority of the Independent Trustees. In determining whether to approve the agreements, the Independent Trustees consider factors such as the nature and quality of
the services provided by us, the fees charged by us and the costs and profits realized by us in connection with such services, as well as any ancillary or
“fall-out”
benefits from such services, the
extent to which economies of scale are shared with the WisdomTree ETFs, and the level of fees paid by other similar funds. If the Independent Trustees determine that the advisory fees we charge to any particular fund are too high, we will need to
reduce our fees, which could adversely affect our revenues.
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Our risk management policies and procedures, and those of our third party vendors upon which we rely, may
not be fully effective in identifying or mitigating risk exposure, including employee misconduct. If our policies and procedures do not adequately protect us from exposure to these risks, we may incur losses that would adversely affect our financial
condition, reputation and market share.
We have developed risk management policies and procedures and we continue to refine them
as we conduct our business. Many of our procedures involve oversight of third party vendors that provide us with critical services such as portfolio management, custody and fund accounting and administration, and index calculation services. Our
policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure. Moreover, we are subject to the risks of errors and misconduct by our employees, including fraud and
non-compliance
with policies. These risks are difficult to detect in advance and deter, and could harm our business, results of operations or financial condition. Although we maintain insurance and use other
traditional risk-shifting tools, such as third party indemnification, in order to manage certain exposures, they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as risk of counterparty denial of coverage,
default or insolvency. If our policies and procedures do not adequately protect us from exposure and our exposure is not adequately covered by insurance or other risk-shifting tools, we may incur losses that would adversely affect our financial
condition and could cause a reduction in our revenues as WisdomTree ETF shareholders shift their investments to the products of our competitors.
Compliance with extensive, complex and changing regulation imposes significant financial and strategic costs on our business, and
non-compliance
could result in fines and penalties.
Our business is subject to extensive
regulation of our business and operations. Our U.S. subsidiary, WisdomTree Asset Management, Inc., or WTAM, is a registered investment adviser and is subject to oversight by the SEC pursuant to its regulatory authority under the Investment Advisers
Act. We also must comply with certain requirements under the Investment Company Act, with respect to the WisdomTree ETFs for which WTAM acts as investment adviser. WTAM is also a member of the NFA and registered as a commodity pool operator for
certain of our ETFs. In addition, one of our other subsidiaries, WisdomTree Commodity Services, LLC, is also a member of the NFA and registered as a commodity pool operator for a commodity ETF that is not registered under the Investment Company Act.
As a commodity pool operator, we are subject to oversight by the NFA and the CFTC pursuant to regulatory authority under the Commodity Exchange Act. In addition, the content and use of our marketing and sales materials and of our sales force in the
U.S. regarding our U.S. listed ETFs is subject to the regulatory authority of FINRA. We are also subject to foreign laws and regulatory authorities with respect to operational aspects of our ETFs that invest in securities of issuers in foreign
countries, in the offer and/or sales of our ETFs in foreign jurisdictions and in our offering of investment products domiciled outside of the U.S., such as our UCITS ETFs, Boost ETPs and Canadian ETFs. Each of the regulatory bodies with jurisdiction
over us has regulatory powers dealing with many aspects of our business, including the authority to grant, and, in specific circumstances to cancel, permissions to carry on particular businesses. Our failure to comply with applicable laws or
regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser. Even if a sanction imposed against us or our personnel is small in monetary amount, the
adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation and thus result in redemptions from our ETFs and impede our ability to retain WisdomTree ETF shareholders and develop new WisdomTree ETF
shareholders, all of which may reduce our revenues.
We face the risk of significant intervention by regulatory authorities, including
extended investigation activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or be prohibited from engaging in some of
our business activities. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect WisdomTree ETF shareholders and our advisory clients, and are not designed to protect our stockholders.
Consequently, these regulations often serve to limit our activities, including through WisdomTree ETF shareholder protection and market conduct requirements.
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The regulatory environment in which we operate also is subject to modifications and further
regulation. Recently, concerns have been raised about ETFs’ possible contribution to market volatility as well as the disclosure requirements applicable to certain types of more complex ETFs. In addition, the SEC recently approved a broad set
of reforms regarding data reporting and fund liquidity, and proposed a broad set of reforms regarding derivatives usage and business continuity that would apply to all registered funds, including ETFs, which may have a negative impact on our
existing ETFs (including their operations and/or their performance) and our ability to launch new and innovative ETFs. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us or investors in the ETFs
also may adversely affect our business, and our ability to function in this environment will depend on our ability to constantly monitor and react to these changes. Regulatory uncertainty continues to surround the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, which represented a comprehensive overhaul of the financial services regulatory environment and requires federal agencies to implement numerous new rules, which, if adopted, may impose additional regulatory burdens
and expenses on our business. Compliance with new laws and regulations may result in increased compliance costs and expenses.
Specific
regulatory changes also may have a direct impact on our revenues. In addition to regulatory scrutiny and potential fines and sanctions, regulators continue to examine different aspects of the asset management industry. New regulation, judicial
interpretations, revised viewpoints, outcomes of lawsuits against other fund complexes or growth in our ETF assets and/or profitability related to the annual approval process for investment advisory agreements may result in the reduction of fees
under these agreements, which would mean a reduction in our revenues.
Our operations outside the U.S. are subject to the laws and
regulations of various
non-U.S.
jurisdictions and
non-U.S.
regulatory agencies and bodies. As we have expanded our international presence, a number of our subsidiaries
and international operations have become subject to regulatory systems, in various jurisdictions, comparable to those covering our operations in the U.S. Regulators in these
non-U.S.
jurisdictions may have
broad authority with respect to the regulation of financial services including, among other things, the authority to grant or cancel required licenses or registrations.
Damage to our reputation could adversely affect our business.
We believe we have developed a strong brand and a reputation for innovative, thoughtful products, favorable long-term investment performance
and excellent client services. The WisdomTree name and brand is a valuable asset and any damage to it could hamper our ability to maintain and grow our AUM and attract and retain employees, thereby having a material adverse effect on our revenues.
Risks to our reputation may range from regulatory issues to unsubstantiated accusations. Managing such matters may be expensive, time-consuming and difficult.
Abnormally wide bid/ask spreads and market disruptions that halt or disrupt trading or create extreme volatility could undermine investor confidence in
the ETF investment structure and limit investor acceptance of ETFs.
The shares of the WisdomTree ETFs, like the shares of all
ETFs, trade on exchanges in market transactions that generally approximate the value of the underlying portfolio of securities held by the particular ETF. Trading involves risks including the potential lack of an active market for fund shares,
abnormally wide bid/ask spreads (the difference between the prices at which shares of an ETF can be bought and sold) that can exist for a variety of reasons and losses from trading. These risks can be exacerbated during periods when there is low
demand for an ETF, when the markets in the underlying investments are closed, when markets conditions are extremely volatile or when trading is disrupted. This could result in limited growth or a reduction in the overall ETF market and result in our
revenues not growing as rapidly as it has in the recent past or even in a reduction of revenues.
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We have experienced significant growth in recent years, and if we were unable to manage this growth it
could have a material adverse effect on our business.
We have experienced significant growth in recent years, which has placed
increased demands on our management and other resources and will continue to do so in the future. We may not be able to manage our expanding operations effectively or achieve planned growth on a timely or profitable basis. Managing our growth
effectively will involve, among other things:
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continuing to retain, motivate and manage our existing employees and attract and integrate new employees;
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developing, implementing and improving our operational, financial, accounting, reporting and other internal systems and controls on a timely basis; and
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maintaining and developing our various support functions including human resources, information technology, legal and corporate communications.
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If we are unable to manage our growth effectively, there could be a material adverse effect on our ability to maintain or increase revenues
and profitability.
Continued growth will require continued investment in personnel, information technology infrastructure and marketing
activities, as well as further development and implementation of financial, operational and compliance systems and controls. We may not be successful in implementing all of the processes that are necessary to support our growth. Unless our growth
results in an increase in our revenues that is at least proportionate to the increase in our costs associated with this growth, our future profitability will be adversely affected.
Our growth strategy also involves, among other things, launching innovative new products that diversify our product offerings and revenues.
This will require us to develop products in areas in which we do not have significant prior experience. We may not be successful in developing new products and if developed and launched, we may not be successful in marketing these new products.
We recently expanded our business into Europe, Japan and Canada, which increases our operational, regulatory, financial and other risks.
In 2014, we expanded into Europe through the acquisition of Boost, and in 2016, we commenced operations in Japan and Canada. As a result of
such expansion, we face increased operational, regulatory, financial, compliance, reputational and foreign exchange rate risks. The failure of our compliance and internal control systems to properly mitigate such additional risks, or of our
operating infrastructure to support such expansion, could result in operational failures and regulatory fines or sanctions. If our international products and operations experience any negative consequences or are perceived negatively in
non-U.S.
markets, it may also harm our reputation in other markets, including the U.S. market. Future international expansion could require us to incur additional
up-front
expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with leases, the employment of additional support staff and regulatory compliance. Operating our business in
non-U.S.
markets may be more expensive than in the U.S. To the extent that our revenues do not increase to the same degree our expenses increase in connection with our expansion outside the U.S., our
profitability could be adversely affected. Our International Business segment had
pre-tax
losses of $5.1 million, $9.2 million and $19.2 million for the years ended December 31, 2014, 2015
and 2016, respectively. We cannot provide any assurance that this segment will achieve profitability. Expanding our business into
non-U.S.
markets may also place significant demands on our existing
infrastructure and employees.
The uncertainty regarding the potential U.K. exit from the European Union could adversely affect our business.
The referendum held in the U.K. on June 23, 2016 resulted in a determination that the U.K. should exit the European Union,
referred to as the “Brexit.” Such an exit from the European Union would be unprecedented and
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it is unclear how the U.K.’s access to the EU Single Market (and vice versa), and the wider trading, legal and regulatory environment in which we operate, would be impacted and how this
would affect our business and the global macroeconomic environment. The uncertainty surrounding the terms of the Brexit and its consequences could adversely impact the manner in which we conduct our operations in Europe, investor confidence and
result in additional market volatility. It also could adversely affect our business, including our revenues, from either a decrease in the value of our AUM, which would result in lower advisory fees, or from investors in the WisdomTree ETFs selling
their shares in favor of investments they perceive as less exposed to the Brexit risks, thus triggering redemptions that would also result in decreased AUM and lower fees.
Future strategic transactions, including business combinations, mergers and acquisitions, may occur at any time, be significant in size relative to our
assets and operations, result in significant changes in our business and materially and adversely affect our stock price. Additionally, we may expend significant financial, management time and other resources without the consummation of such
transactions or the realization of the anticipated benefits.
We believe attractive opportunities for strategic transactions
exist, some of which may be material to our operations and financial condition if consummated. We have engaged in the past and expect to continue to engage in the future in strategic discussions that we believe may enable us to strengthen our
business, expand and diversify our product offering, increase our AUM or enter into new markets. Such transactions may result in our issuing a significant amount of our common stock or other security that could be dilutive to our stockholders,
result in substantial borrowings, result in changes in our board composition and/or management team, constitute a change of control of our Company, lead to significant changes in our product offering, business operations and earning and risk
profiles, and/or result in a decline in the price of our common stock.
Even if consummated, such transactions may involve numerous risks,
including, among others:
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diversion of the attention of management and other personnel;
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failure to obtain necessary regulatory, stockholder or other approvals;
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failure to retain personnel;
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failure to obtain any necessary financing on acceptable terms or at all;
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failure of counterparties to indemnify us against liabilities arising from such transactions;
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potential loss of, or harm to, our relationship with our and the counterparties’ employees, customers and suppliers as a result of integration of new businesses;
|
|
|
•
|
|
unfavorable market conditions that could negatively impact the acquired or combined businesses; and
|
|
|
•
|
|
legal proceedings, including lawsuits brought by stockholders of us or the counterparties which may result in expenses and/or have a material adverse effect on our business.
|
We could be prevented from, or significantly delayed in, achieving our strategic goals if we are unable to successfully integrate acquired
businesses. Our ability to complete future strategic transactions depends upon a number of factors that are not entirely within our control, including our ability to identify suitable merger or acquisition candidates, negotiate acceptable terms,
conclude satisfactory agreements and secure financing. Our failure to complete strategic transactions or to integrate and manage acquired or combined businesses successfully could materially and adversely affect our business, results of operations
and financial conditions.
28
Our ability to operate effectively could be impaired if we fail to retain or recruit key personnel.
The success of our business and the implementation of our growth strategy are highly dependent on our ability to attract, retain
and motivate highly skilled, and sometimes highly specialized, employees, including in particular, operations, product development, research and sales personnel. Our employees may voluntarily terminate their employment at any time. The market for
these individuals is extremely competitive and is likely to become more so as additional investment management firms enter the ETF industry. Our compensation methods may not enable us to recruit and retain required personnel. For example, price
volatility in our common stock may impact our ability to effectively use equity grants as an employee compensation incentive. Also, we may need to increase compensation levels, which would decrease our net income or increase our losses. If we are
unable to retain and attract key personnel, it could have an adverse effect on our business, results of operations and financial condition.
Changes
in U.S. federal income tax law could make some of our products less attractive to investors.
Many of the WisdomTree ETFs seek to
obtain the investment return achieved by our proprietary indexes that weigh index components based upon dividends. Even with the increase a few years ago in income tax rates applicable to dividends, corporate dividends continue to enjoy favorable
tax treatment under current U.S. federal income tax law. If the income tax rates imposed on dividends were increased further, it may make these WisdomTree ETFs less attractive to investors.
Our expenses are subject to fluctuations that could materially affect our operating results.
Our results of operations are dependent in part on the level of our expenses, which can vary from quarter to quarter. Our expenses may
fluctuate primarily as a result of discretionary spending, including additional headcount, accruals for incentive compensation, marketing, advertising and sales expenses we incur to support our growth initiatives. Accordingly, our results of
operation may vary from quarter to quarter.
Any significant limitation, or failure of our technology systems, or of our third party vendors’
technology systems, or any security breach of our information and cyber security infrastructure, software applications, technology or other systems that are critical to our operations could interrupt or damage our operations and result in material
financial loss, regulatory violations, reputational harm or legal liability.
We are dependent upon the effectiveness of our own,
and our vendors’, information security policies, procedures and capabilities to protect the technology systems used to operate our business and to protect the data that reside on or are transmitted through them. Although we and our third party
vendors take protective measures to secure information, our and our vendors’ technology systems may still be vulnerable to unauthorized access, computer viruses or other events that could result in inaccuracies in our information or system
disruptions or failures, which could materially interrupt or damage our operations. In addition, technology is subject to rapid change and we cannot guarantee that our competitors may not implement more advanced technology platforms for their
products, which could affect our business. Any inaccuracies, delays, system failures or breaches, or advancements in technology, and the cost necessary to address them, could subject us to client dissatisfaction and losses or result in material
financial loss, regulatory violations, reputational harm or legal liability, which, in turn, could cause a decline in our earnings or stock price.
We may from time to time in the future be involved in legal proceedings that could require significant management time and attention, possibly resulting
in significant expense or in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
From time to time, we may be subject to litigation. In connection with any litigation in which we are involved, we may be forced to incur
costs and expenses in connection with defending ourselves or in connection
29
with the payment of any settlement or judgment or compliance with any injunctions in connection therewith if there is an unfavorable outcome. The expense of defending litigation may be
significant. The amount of time to resolve lawsuits is unpredictable and defending ourselves may divert management’s attention from the
day-to-day
operations of our
business, which could adversely affect our business, results of operations, financial condition and cash flows. In addition, an unfavorable outcome in any such litigation could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
Catastrophic and unpredictable events could have a material adverse effect on our business.
A terrorist attack, war, power failure, cyber-attack, natural disaster or other catastrophic or unpredictable event could adversely affect our
revenues, expenses and operating results by: interrupting our normal business operations; inflicting employee casualties, including loss of our key employees; requiring substantial expenditures and expenses to repair, replace and restore normal
business operations; and reducing investor confidence. We have a disaster recovery plan to address certain contingencies, but this plan may not be sufficient in responding or ameliorating the effects of all disaster scenarios. Similarly, these types
of events could also affect the ability of the third party vendors that we rely upon to conduct our business, including parties that provide us with
sub-advisory
portfolio management services, custodial, fund
accounting and administration services or index calculation services, to continue to provide these necessary services to us, even though they may also have disaster recovery plans to address these contingencies. In addition, a failure of the stock
exchanges on which our ETFs trade to function properly could cause a material disruption to our business. If we or our third party vendors are unable to respond adequately or in a timely manner, these failures may result in a loss of revenues and/or
increased expenses, either of which would have a material adverse effect on our operating results.
A change of control of our Company would
automatically terminate our investment management agreements relating to the WisdomTree ETFs unless the Board of Trustees of the WisdomTree Trust and shareholders of the WisdomTree ETFs voted to continue the agreements. A change in control could
occur if a third party were to acquire a controlling interest in our Company.
Under the Investment Company Act, an investment
management agreement with a fund must provide for its automatic termination in the event of its assignment. The fund’s board must vote to continue such an agreement following any such assignment and the shareholders of the WisdomTree ETFs must
approve the assignment. The cost of obtaining such shareholder approval can be significant and ordinarily would be borne by us. Similarly, under the Investment Advisers Act, a client’s investment management agreement may not be
“assigned” by the investment adviser without the client’s consent.
An investment management agreement is considered under
both acts to be assigned to another party when a controlling block of the adviser’s securities is transferred. Under both acts, there is a presumption that a stockholder beneficially owning 25% or more of an adviser’s voting stock controls
the adviser and conversely a stockholder beneficially owning less than 25% is presumed not to control the adviser. In our case, an assignment of our investment management agreements may occur if a third party were to acquire a controlling interest
in our Company. We cannot be certain that the Trustees of the WisdomTree ETFs would consent to assignments of our investment management agreements or approve new agreements with us if a change of control occurs. And even if such approval were
obtained, approval from the shareholders of the WisdomTree ETFs would be required to be obtained; such approval could not be guaranteed and even if obtained, likely would result in significant expense. This restriction may discourage potential
purchasers from acquiring a controlling interest in our Company.
We may from time to time be subject to claims of infringement of third party
intellectual property rights, which could harm our business.
Third parties may assert against us alleged patent, copyright,
trademark or other intellectual property rights to intellectual property that is important to our business. Any claims that our products or processes infringe the
30
intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and
may divert the efforts and attention of our management from our business. As a result of such intellectual property infringement claims, we could be required or otherwise decide that it is appropriate to:
|
|
•
|
|
pay third party infringement claims;
|
|
|
•
|
|
discontinue selling the particular funds subject to infringement claims;
|
|
|
•
|
|
discontinue using the processes subject to infringement claims;
|
|
|
•
|
|
develop other intellectual property or products not subject to infringement claims, which could be time-consuming and costly or may not be possible; or
|
|
|
•
|
|
license the intellectual property from the third party claiming infringement, which license may not be available on commercially reasonable terms.
|
The occurrence of any of the foregoing could result in unexpected expenses, reduce our revenues and adversely affect our business and
financial results.
We have been issued a patent and have applied for other patents, but additional patents may not be issued to us and we may not
be able to enforce or protect our patents and other intellectual property rights, which may harm our ability to compete and harm our business.
Although we have a patent and have applied for other patents relating to our index methodology and the operation of our ETFs, these other
patents may not be issued to us. In addition, even if issued, our ability to enforce our patents and other intellectual property rights is subject to general litigation risks. While we have been competing without the benefit of these patents being
issued, if they are not issued or we cannot successfully enforce them, we may lose the benefit of a future competitive advantage that they would otherwise provide to us. If we seek to enforce our rights, we could be subject to claims that the
intellectual property right is invalid or is otherwise not enforceable. Furthermore, our assertion of intellectual property rights could result in the other party seeking to assert alleged intellectual property rights of its own or assert other
claims against us, which could harm our business. If we are not ultimately successful in defending ourselves against these claims in litigation, we may be subject to the risks described in the immediately preceding risk factor entitled “We may
from time to time be subject to claims of infringement of third party intellectual property rights, which could harm our business.”
Risks
Relating to our Common Stock
The market price of our common stock has been fluctuating significantly and may continue to do so, and you could
lose all or part of your investment.
The market price of our common stock has been fluctuating significantly and may continue to
do so, depending upon many factors, some of which may be beyond our control, including:
|
|
•
|
|
variations in our quarterly operating results;
|
|
|
•
|
|
differences between our actual financial operating results and those expected by investors and analysts;
|
|
|
•
|
|
publication of research reports about us or the investment management industry;
|
|
|
•
|
|
changes in expectations concerning our future financial performance and the future performance of the ETF industry and the asset management industry in general, including financial estimates and recommendations by
securities analysts;
|
|
|
•
|
|
our strategic moves and those of our competitors, such as acquisitions or consolidations;
|
31
|
|
•
|
|
changes in the regulatory framework of the ETF industry and the asset management industry in general and regulatory action, including action by the SEC to lessen the regulatory requirements or shortening the process to
obtain regulatory relief under the Investment Company Act that is necessary to become an ETF sponsor;
|
|
|
•
|
|
the level of demand for our stock, including the amount of short interest in our stock;
|
|
|
•
|
|
changes in general economic or market conditions; and
|
|
|
•
|
|
realization of any other of the risks described elsewhere in this section.
|
In addition, stock
markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock. Furthermore, in the past,
market fluctuations and price declines in a company’s stock have led to securities class action litigations or other derivative stockholder lawsuits. If such a suit were to arise, it could cause substantial costs to us and divert our resources
regardless of the outcome.
If equity research analysts issue unfavorable commentary or downgrade our common stock, the price of our common stock
could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts
publish about us and our business. We do not control the opinions of these analysts. The price and trading volume of our common stock could decline if one or more equity analysts downgrade our common stock or if analysts issue other unfavorable
commentary or cease publishing reports about us or our business.
Future issuances of our common stock could lower our stock price and dilute the
interests of existing stockholders.
We may issue additional shares of our common stock in the future, either in connection with
an acquisition or for other business reasons. The issuance of a substantial amount of common stock could have the effect of substantially diluting the interests of our current stockholders. In addition, the sale of a substantial amount of common
stock in the public market, either in the initial issuance or in a subsequent resale by the target company in an acquisition which received such common stock as consideration or by investors who acquired such common stock in a private placement,
could have a material adverse effect on the market price of our common stock.
The members of our Board of Directors, their affiliates and our
executive officers, as stockholders, can exert significant influence over our Company.
As of December 31, 2016, the members
of our Board of Directors and our executive officers, as stockholders, collectively beneficially owned approximately 16.6% of our outstanding common stock. As a result of this ownership, they have the ability to significantly influence all matters
requiring approval by stockholders of our Company, including the election of directors. This concentration of ownership also may have the effect of delaying or preventing a change in control of our Company that may be favored by other stockholders.
This could prevent transactions in which stockholders might otherwise receive a premium for their shares over current market prices.
Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we
enter into in which a director or officer has a conflict of interest are generally permissible so long as (i) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to
our Board of Directors and a majority of our disinterested directors, or a committee consisting solely of disinterested directors, approves the transaction, (ii) the material facts relating to the director’s or officer’s relationship
or interest as to the transaction are disclosed to our stockholders and a majority
32
of our disinterested stockholders approves the transaction, or (iii) the transaction is otherwise fair to us. Under our certificate of incorporation, representatives of our stockholders are
not required to offer to us any transaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is expressly offered to
them solely in their capacity as a director of ours. The listing requirements of the NASDAQ Global Select Market, upon which our common stock is listed, also require that certain transactions in which a director or officer has a conflict of interest
must be considered and approved by our Audit Committee, which consists solely of independent directors.
A provision in our certificate of
incorporation and
by-laws
may prevent or delay an acquisition of our Company, which could decrease the market value of our common stock.
Provisions of Delaware law, our certificate of incorporation and our
by-laws
may discourage, delay or
prevent a merger, acquisition or other change in control that stockholders may consider favorable. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our Board of Directors.
These provisions include:
|
|
•
|
|
a classified Board of Directors;
|
|
|
•
|
|
limitations on the removal of directors;
|
|
|
•
|
|
advance notice requirements for stockholder proposals and nominations;
|
|
|
•
|
|
the inability of stockholders to act by written consent or to call special meetings;
|
|
|
•
|
|
the ability of our Board of Directors to make, alter or repeal our
by-laws;
and
|
|
|
•
|
|
the authority of our Board of Directors to issue preferred stock with such terms as our Board of Directors may determine.
|
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination
transactions with stockholders of 15% or more of our outstanding voting stock that our Board of Directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us
without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
As a result,
these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or
tender offer is at a premium over the then current market price for our common stock.
The payment of dividends to our stockholders is subject to
the discretion of our Board of Directors and may be limited by our financial condition, and any applicable laws.
In November
2014, we commenced a quarterly cash dividend and intend to continue to pay regular dividends to our stockholders. Our Board of Directors may, in its discretion, increase or decrease the level of dividends. Further, our Board of Directors has the
discretion to discontinue the payment of dividends entirely. Any determination as to the payment of dividends, as well as the level of such dividends, will depend on, among other things, general economic and business conditions, our level of AUM,
our strategic plans, our financial results and condition, new credit facilities or other agreements that could limit the amount of dividends we are permitted to pay and any applicable laws. If, as a consequence of these various limitations and
restrictions, we are unable to generate sufficient income from our business, we may need to reduce or eliminate the payment of dividends on our common stock. Any change in the level of our dividends or the suspension of the payment thereof could
adversely affect our stock price.
33
In addition, our Board of Directors is authorized, without stockholder approval, to issue
preferred stock with such terms as our Board of Directors may, in its discretion, determine. Our Board of Directors could, therefore, issue preferred stock with dividend rights superior to that of the common stock, which could also limit the payment
of dividends on the common stock.
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
We have no unresolved comments from the SEC staff relating to
our periodic or current reports filed with the SEC pursuant to the Exchange Act.
Our principal executive office is located at 245 Park Avenue, New York, New
York 10167. We occupy approximately 38,000 square feet of office space under a lease that expires in July 2029. We believe that the space we lease is sufficient to meet our needs until the expiration of the lease.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
We may be subject to reviews, inspections and investigations by the
SEC, CFTC, NFA, state and foreign regulators, as well as legal proceedings arising in the ordinary course of business. We are not currently party to any litigation that is expected to have a material impact on our business, financial position,
results of operations or cash flows.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
34
PART II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market Information
Our common stock is
traded on the NASDAQ Global Select Market under the symbol “WETF.” The following table sets forth the
intra-day
high and low sale prices per share as reported by the NASDAQ Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
High
|
|
|
Low
|
|
|
Dividends
Declared
|
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2016
|
|
$
|
13.32
|
|
|
$
|
8.00
|
|
|
$
|
0.08
|
|
|
Quarter ended September 30, 2016
|
|
$
|
12.07
|
|
|
$
|
9.03
|
|
|
$
|
0.08
|
|
|
Quarter ended June 30, 2016
|
|
$
|
13.13
|
|
|
$
|
8.70
|
|
|
$
|
0.08
|
|
|
Quarter ended March 31, 2016
|
|
$
|
15.63
|
|
|
$
|
9.75
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2015
|
|
$
|
22.33
|
|
|
$
|
14.68
|
|
|
$
|
0.33
|
(1)
|
|
Quarter ended September 30, 2015
|
|
$
|
26.23
|
|
|
$
|
15.25
|
|
|
$
|
0.08
|
|
|
Quarter ended June 30, 2015
|
|
$
|
23.26
|
|
|
$
|
18.08
|
|
|
$
|
0.08
|
|
|
Quarter ended March 31, 2015
|
|
$
|
22.35
|
|
|
$
|
14.09
|
|
|
$
|
0.08
|
|
|
(1)
|
Represents special cash dividend of $0.25 per share and regular quarterly cash dividend of $0.08 per share.
|
As of December 31, 2016, there were 248 holders of record of shares of our common stock and we believe there were approximately 36,300
beneficial owners of our common stock.
Dividends
In November 2014, we commenced a quarterly cash dividend and intend to continue to pay regular dividends to our stockholders. In November 2015,
we paid a special cash dividend in addition to our regular quarterly cash dividend. Our Board of Directors may, in its discretion, increase or decrease the level of dividends. Further, our Board of Directors has the discretion to discontinue the
payment of dividends entirely. Any determination as to the payment of dividends, as well as the level of such dividends, will depend on, among other things, general economic and business conditions, our level of AUM, our strategic plans, our
financial results and condition, new credit facilities or other agreements that could limit the amount of dividends we are permitted to pay, and any applicable laws.
35
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser”
of shares of the Company’s common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
of Shares
Purchased
|
|
|
Average Price
Paid Per Share
|
|
|
Total Number of
Shares Purchased
as
Part of Publicly
Announced Plans
or Programs
(1)
|
|
|
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
October 1, 2016 to October 31, 2016
|
|
|
25,785
|
|
|
$
|
10.23
|
|
|
|
25,785
|
|
|
|
|
|
|
November 1, 2016 to November 30, 2016
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
|
December 1, 2016 to December 31, 2016
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,785
|
|
|
$
|
10.23
|
|
|
|
25,785
|
|
|
$
|
96,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On October 29, 2014, our Board of Directors authorized a three-year share repurchase program of up to $100 million. On April 27, 2016, the Board approved a $60.0 million increase to this program and
extended the term through April 27, 2019, increasing the total authorized repurchase amount to $100.3 million. During the three months ended December 31, 2016, we repurchased 25,785 shares of our common stock under this program for an
aggregate cost of approximately $0.3 million. As of December 31, 2016, $96.5 million remained under this program for future purchases.
|
36
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
You should read the selected consolidated financial data
presented below in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and our consolidated financial statements and the related notes included
elsewhere in this Report. The selected consolidated statements of operations data presented below under the heading “Consolidated Statements of Operations Data” for the years ended December 31, 2014, 2015 and 2016 and the selected
consolidated balance sheet data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this
Report. The selected consolidated financial data presented below under the headings “Consolidated Statements of Operations Data” for the years ended December 31, 2012 and 2013 and under “Consolidated Balance Sheet Data” as
of December 31, 2012, 2013 and 2014 have been derived from our consolidated financial statements not included in this Report. The historical results presented below are not necessarily indicative of the financial results to be expected for
future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
84,024
|
|
|
$
|
148,594
|
|
|
$
|
182,816
|
|
|
$
|
297,944
|
|
|
$
|
218,465
|
|
|
Other income
|
|
|
774
|
|
|
|
874
|
|
|
|
946
|
|
|
|
998
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
84,798
|
|
|
|
149,468
|
|
|
|
183,762
|
|
|
|
298,942
|
|
|
|
219,446
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
23,233
|
|
|
|
36,210
|
|
|
|
40,995
|
|
|
|
73,228
|
|
|
|
63,263
|
|
|
Fund management and administration
|
|
|
23,020
|
|
|
|
35,076
|
|
|
|
34,383
|
|
|
|
42,782
|
|
|
|
41,083
|
|
|
Marketing and advertising
|
|
|
5,363
|
|
|
|
8,309
|
|
|
|
11,514
|
|
|
|
13,371
|
|
|
|
15,643
|
|
|
Sales and business development
|
|
|
3,586
|
|
|
|
6,474
|
|
|
|
6,221
|
|
|
|
9,189
|
|
|
|
12,537
|
|
|
Professional and consulting fees
|
|
|
4,603
|
|
|
|
2,748
|
|
|
|
7,578
|
|
|
|
7,067
|
|
|
|
6,692
|
|
|
Occupancy, communications and equipment
|
|
|
1,419
|
|
|
|
2,784
|
|
|
|
3,578
|
|
|
|
4,299
|
|
|
|
5,211
|
|
|
Depreciation and amortization
|
|
|
307
|
|
|
|
439
|
|
|
|
821
|
|
|
|
1,006
|
|
|
|
1,305
|
|
|
Third party sharing arrangements
|
|
|
5,468
|
|
|
|
1,368
|
|
|
|
594
|
|
|
|
2,443
|
|
|
|
2,827
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,676
|
|
|
Acquisition payment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,185
|
|
|
|
6,738
|
|
|
Other
|
|
|
2,976
|
|
|
|
4,523
|
|
|
|
4,530
|
|
|
|
6,187
|
|
|
|
6,909
|
|
|
ETF shareholder proxy
|
|
|
3,264
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Litigation, net
|
|
|
176
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exchange listing and offering
|
|
|
353
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
73,768
|
|
|
|
97,931
|
|
|
|
110,214
|
|
|
|
161,757
|
|
|
|
163,884
|
|
|
Income before taxes
|
|
|
11,030
|
|
|
|
51,537
|
|
|
|
73,548
|
|
|
|
137,185
|
|
|
|
55,562
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
12,497
|
|
|
|
57,133
|
|
|
|
29,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,030
|
|
|
$
|
51,537
|
|
|
$
|
61,051
|
|
|
$
|
80,052
|
|
|
$
|
26,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share—basic
|
|
$
|
0.09
|
|
|
$
|
0.41
|
|
|
$
|
0.46
|
|
|
$
|
0.58
|
|
|
$
|
0.19
|
|
|
Net income per share—diluted
|
|
$
|
0.08
|
|
|
$
|
0.37
|
|
|
$
|
0.44
|
|
|
$
|
0.58
|
|
|
$
|
0.19
|
|
|
Weighted average common shares—basic
|
|
|
122,138
|
|
|
|
126,651
|
|
|
|
131,770
|
|
|
|
137,242
|
|
|
|
134,401
|
|
|
Weighted average common shares—diluted
|
|
|
137,968
|
|
|
|
139,797
|
|
|
|
138,551
|
|
|
|
138,825
|
|
|
|
135,539
|
|
|
Cash dividends declared per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.08
|
|
|
$
|
0.57
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,246
|
|
|
$
|
104,316
|
|
|
$
|
165,284
|
|
|
$
|
210,070
|
|
|
$
|
92,722
|
|
|
Total assets
|
|
$
|
63,425
|
|
|
$
|
141,791
|
|
|
$
|
220,751
|
|
|
$
|
292,693
|
|
|
$
|
249,767
|
|
|
Total liabilities
|
|
$
|
12,365
|
|
|
$
|
32,762
|
|
|
$
|
36,466
|
|
|
$
|
58,191
|
|
|
$
|
48,423
|
|
|
Stockholders’ equity
|
|
$
|
51,060
|
|
|
$
|
109,029
|
|
|
$
|
184,285
|
|
|
$
|
234,502
|
|
|
$
|
201,344
|
|
37
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read
together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Report. In addition to historical consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those
discussed below. For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Item 1A. “Risk Factors” of this Report. We
assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Introduction
We were the tenth largest
ETP sponsor in the world (based on AUM), with AUM of $41.3 billion globally as of December 31, 2016. An ETP is a pooled investment vehicle that holds a basket of financial instruments, securities or other assets and generally seeks to
track (index-based) or outperform (actively managed) the performance of a broad or specific equity, fixed income or alternatives market segment, commodity or currency (or an inverse or multiple thereof). ETPs are listed on an exchange with their
shares traded in the secondary market at market prices, generally at approximately the same price as the net asset value of their underlying components. ETP is an umbrella term that includes ETFs, exchange-traded notes and exchange-traded
commodities.
Through our operating subsidiaries, we provide investment advisory and other management services to the WisdomTree ETFs and
Boost ETPs collectively offering ETPs covering equity, fixed income, currency, alternatives and commodity asset classes. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETPs’ average daily
AUM. Our expenses are predominantly related to selling, operating and marketing our ETPs. We have contracted with third parties to provide certain operational services for the ETPs. We distribute our ETPs through all major channels within the asset
management industry, including brokerage firms, registered investment advisers, institutional investors, private wealth managers and discount brokers primarily through our sales force. Our sales efforts are not directed towards the retail segment
but rather are directed towards financial or investment advisers that act as intermediaries between the
end-client
and us.
Executive Summary
Our U.S. listed AUM,
which makes up the vast majority of our global AUM, has fluctuated over the last three fiscal years, from $39.3 billion at the end of 2014, to $51.6 billion at the end of 2015 and $40.2 billion at the end of 2016. We tend to
experience particularly strong inflows when our products align with market sentiment. For example, in 2015, our currency hedged European equity ETF (HEDJ) comprised the vast majority of our net inflows and offset the outflows we experienced in
emerging markets as the aggressive monetary policy of the European Central Bank weakened the Euro, stimulating the local equity markets. Similarly, we experienced strong inflows into our currency hedged Japanese equity ETF (DXJ) in 2013 as a result
of a weakening Yen due to political and economic policy changes in Japan. In 2016, we experienced significant outflows in these two products as those markets fell out of favor with investors.
Our financial results have fluctuated along with the changes in our AUM. Revenues were $183.8 million, $298.9 million and
$219.4 million in 2014, 2015 and 2016, respectively.
Our short term strategic focus remains diversifying and stabilizing our asset
base by offering innovative products, expanding our distribution capabilities, investing in technologies to offer differentiated services and expanding our global footprint.
38
Other business highlights for 2016 include the following:
|
|
•
|
|
We continued to invest in strategic growth initiatives in 2016 to better position us for longer term success. We launched 12 U.S. listed ETFs capitalizing on macro-investment themes and diversifying our product
offerings. These launches included dynamic currency hedged ETFs, such as the Dynamic Currency Hedged International Equity ETF (DDWM), which was the most successful ETF launched in the U.S. in 2016 based on total AUM, the industry’s first smart
beta corporate bond suite and a collateralized put write strategy ETF on the S&P 500 index. We also invested in marketing and sales related initiatives to support our existing ETFs as well as new ETF launches. Headcount increased by 32 globally,
predominantly in sales and functions supporting sales, including research and marketing.
|
|
|
•
|
|
We executed on our global growth plans by establishing an office in Toronto and distributing a select range of locally listed ETFs in Canada. During 2016, we launched six new Canadian ETFs, four new Boost ETPs and 4 new
WisdomTree UCITS ETFs. We also entered into a global product partnership with ICBC Credit Suisse Asset Management (International) Company Limited to launch, market and distribute ETFs that track the S&P China 500 Index. A Luxembourg UCITS ETF
listed in Europe marked the first product in this collaboration.
|
|
|
•
|
|
In November 2016, we made a $20.0 million strategic investment for a 36% fully diluted equity interest in AdvisorEngine, formerly known as Vanare, an
end-to-end
digital wealth management platform which enables individual customization of investment philosophies. We and AdvisorEngine also entered into a strategic
agreement whereby our asset allocation models are made available through AdvisorEngine’s open architecture platform and we actively introduce the platform to our distribution network. AdvisorEngine offers an array of distinct product offerings
that provide advisors with new client prospecting tools, online client onboarding, institutional grade analytics, trading, performance reporting and billing. Its technology is distinctive in that it provides these features from an advisor-centric
point of view, allowing advisors to deepen their engagement with clients and demonstrate the value of the advisory relationship.
|
|
|
•
|
|
In May 2016, we accelerated the buyout of the remaining minority interest in our European business and made management changes to drive continued growth.
|
|
|
•
|
|
We returned approximately $83.0 million to our stockholders through our ongoing quarterly cash dividend and stock buybacks.
|
Business Segments
We operate as an ETP
sponsor and asset manager providing investment advisory services in the U.S., Europe, Canada and Japan. These activities are reported in our U.S. Business and International Business segments, as follows:
|
|
•
|
|
U.S. Business segment
: Our U.S. business and Japan sales office, which primarily engages in selling our U.S. listed ETFs to Japanese institutions; and
|
|
|
•
|
|
International Business segment
: Our European business which commenced in April 2014 in connection with our acquisition of Boost and our Canadian business which launched its first six ETFs in July 2016.
|
39
The following charts reflect key operating and financial metrics for our businesses:
U.S. Business Segment
International Business Segment
Consolidated Operating Results
40
Background
Market Environment
The following
chart reflects the annual returns of the broad based equity indexes over the last three years. As the chart reflects, the broad based equity market indexes have been volatile since 2013.
Source: FactSet
The vast majority of our global AUM is in U.S. listed ETFs. The U.S. ETF industry also has been experiencing generally higher flows as the
charts below reflect. In 2016, domestic equities gathered the majority of net inflows for the year:
Source: Investment Company Institute.
41
Industry Developments
The ETF industry is becoming significantly more competitive. There has been increased price competition in not only commoditized product
categories such as traditional, market capitalization weighted index exposures, but also in fundamental or other
non-market
cap weighted or factor-based exposures. In addition, existing players have broadened
their suite of products to offer different strategies that are, in some cases, similar to ours. Lastly, large traditional asset managers are also launching ETFs, some with similar strategies to ours. We do not know what effect, if any, increased
price competition or the launch of these ETFs may have on our business. Within the ETF industry, being a first mover, or one of the first providers of ETFs in a particular asset class, can be a significant advantage, as the first ETF in a category
to attract scale in AUM and trading liquidity is generally viewed as the most attractive ETF. We believe that our early launch of ETFs in a number of asset classes or strategies, including fundamental weighting and currency hedging, positions us
well to maintain our position as one of the leaders of the ETF industry. Additionally, we believe our affiliated indexing or “self-indexing” model enables us to launch proprietary products which do not have exact competition.
In April 2016, the DOL published its final rule to address conflicts of interest in retirement advice, commonly referred to as the Fiduciary
Rule. The Fiduciary Rule is scheduled to become effective in April 2017. However, in February 2017, President Trump issued a presidential memorandum instructing the DOL to conduct an economic and legal analysis on the rule’s potential impact.
As a result, the DOL has formally proposed a
60-day
delay to the effective date. Also in February 2017, a Texas district court upheld the rule. In response to the Fiduciary Rule, industry experts predicted an
acceleration in the shift from commission-based to
fee-based
advisory models. Already, we have seen several large asset management firms announce changes to their platforms and policies in response to the
Fiduciary Rule which favor fee based account structures. Also in response to the Fiduciary Rule, several fund sponsors have implemented further fee reductions which have occurred primarily in commoditized exposures based upon third party indexes. If
the Fiduciary Rule is ultimately implemented, we believe that ETFs’ competitiveness generally will increase due to the inherent benefits of ETFs – transparency and liquidity; and while we are not immune to fee pressure, we believe our
proprietary approach and self-indexing differentiates us from the competition. Even if the Fiduciary Rule is not implemented, we believe certain large firms nevertheless will move forward with changes that were developed to comply with the rule.
Components of Revenue
Advisory fees
The majority of our revenues are comprised of advisory fees we earn from our U.S. listed ETFs. We earn this revenue based on a
percentage of the average daily value of AUM. Our average daily value of AUM is the average of the daily aggregate AUM of our ETFs as determined by the then current net asset value (as defined under Investment Company Act
Rule 2a-4)
of such ETFs as of the close of business each day. Our fee percentages for individual U.S. listed ETFs, net of fee waivers, range from 0.12% to 0.88%.
We determine the appropriate advisory fee to charge for our ETFs based on the cost of operating each particular ETF taking into account the
types of securities the ETFs will hold, fees third party service providers will charge us for operating the ETFs and our competitors’ fees for similar ETFs. Generally, our actively managed ETFs, along with our emerging markets ETFs, are priced
higher than our other index based ETFs.
Each of our ETFs has a fixed advisory fee. In order to increase the advisory fee, we would need
to obtain approval from a majority of the ETF shareholders, which may be difficult or not possible to achieve. There also may be a significant cost in obtaining such ETF shareholder approval. We do not need ETF shareholder approval to lower our
advisory fee. From time to time, we implement voluntary waivers of a portion of our advisory fee. These waivers may expire without shareholder approval needing to be obtained. In addition, we earn a fee based on daily aggregate AUM of our ETFs in
exchange for bearing certain fund expenses.
42
Our ETF advisory fee revenues may fluctuate based on general stock market trends, which include
market value appreciation or depreciation, currency fluctuations against the U.S. dollar and level of inflows or outflows from our ETFs. In addition, these revenues may fluctuate due to increased competition or a determination by the independent
trustees of the WisdomTree ETFs to terminate or significantly alter the funds’ investment management agreements with us.
Other income
Other income includes interest income from investing our corporate cash and fees from licensing our indexes to third parties.
These revenues are immaterial to our financial results and we do not expect them to be material in the near term.
Components of Expenses
Our operating expenses consist primarily of costs related to selling, operating and marketing our ETFs as well as the infrastructure needed to
run our business.
Compensation and benefits
Employee compensation and benefits expenses are expensed when incurred and include salaries, incentive compensation, and related benefit costs.
Virtually all our employees receive incentive compensation that is based on our operating results as well as their individual performance. Therefore, a portion of this expense will fluctuate with our business results. In order to attract and retain
qualified personnel, we must maintain competitive employee compensation and benefit plans. We would expect changes in employee compensation and benefits expense to be correlated with changes in our revenues and net inflows.
Also included in compensation and benefits are costs related to equity awards granted to our employees. Our executive management and Board of
Directors strongly believe that equity awards are an important part of our employees’ overall compensation package and that incentivizing our employees with equity in the Company aligns the interest of our employees with that of our
stockholders. We use the fair value method in recording compensation expense for equity based awards. Under the fair value method, compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized as
an expense over the vesting period.
We expect our compensation and benefits expense for our U.S. Business segment will be between 28% to
31% of U.S. Business segment revenues in 2017.
Fund management and administration
Fund management and administration expenses are expensed when incurred and are comprised of the following costs we pay third party service
providers to operate our ETFs:
|
|
•
|
|
portfolio management of our ETFs
(sub-advisory);
|
|
|
•
|
|
fund accounting and administration;
|
|
|
•
|
|
accounting and tax services;
|
|
|
•
|
|
printing and mailing of stockholder materials;
|
43
|
|
•
|
|
legal and compliance services;
|
|
|
•
|
|
trustee fees and expenses;
|
|
|
•
|
|
preparation of regulatory reports and filings;
|
|
|
•
|
|
certain local income taxes; and
|
|
|
•
|
|
other administrative services.
|
We are not responsible for extraordinary expenses, taxes and
certain other expenses.
BNY Mellon acts as
sub-adviser
for the majority of our ETFs and, prior to
April 2014, also provided fund administration, custody and accounting related services for all the WisdomTree ETFs. In April 2014, we transferred our fund administration, custody and accounting related services to State Street. The fees we pay BNY
Mellon and our other
sub-advisers
generally have minimums per fund which range from $25,000 to $80,000 per year with additional fees ranging between 0.015% and 0.20% of average daily AUM at various breakpoint
levels depending on the nature of the ETF. In addition, we pay certain costs based on transactions in our ETFs or based on inflow levels. The fees we pay for accounting, tax, transfer agency, index calculation, indicative values and exchange listing
are based on the number of ETFs we have. The remaining fees are based on a combination of both AUM and number of funds, or as incurred.
Marketing
and advertising
Marketing and advertising expenses are recorded when incurred and include the following:
|
|
•
|
|
advertising and product promotion campaigns that are initiated to promote our existing and new ETFs as well as brand awareness;
|
|
|
•
|
|
development and maintenance of our website; and
|
|
|
•
|
|
creation and preparation of marketing materials.
|
Our discretionary advertising comprises the
largest portion of this expense and we generally expect these costs to increase as we continue to execute our growth strategy and compete against other ETF sponsors. In addition, we may incur expenditures in certain periods to attract inflows, the
benefit of which may or may not be recognized from increases to our AUM in future periods. However, due to the discretionary nature of some of these costs, they can generally be reduced if there were a decline in the markets.
Sales and business development
Sales and business development expenses are recorded when incurred and include the following:
|
|
•
|
|
travel and entertainment or conference related expenses for our sales force;
|
|
|
•
|
|
market data services for our research team;
|
|
|
•
|
|
sales related software tools;
|
|
|
•
|
|
voluntary payment of certain costs associated with the creation or redemption of ETF shares, as we may elect from time to time; and
|
|
|
•
|
|
legal and other advisory fees associated with the development of new funds or business initiatives.
|
44
Professional and consulting fees
Professional fees are expensed when incurred and consist of fees we pay to corporate advisers including accountants, tax advisers, legal
counsel, investment bankers, human resources or other consultants. These expenses fluctuate based on our needs or requirements at the time. Certain of these costs are at our discretion and can fluctuate year to year.
Occupancy, communications and equipment
Occupancy, communications and equipment expense includes costs for our corporate headquarters in New York City as well as office related
costs in our other locations.
Depreciation and amortization
Depreciation and amortization expense results primarily from amortization of leasehold improvements to our office space as well as depreciation
on fixed assets we purchase, which is depreciated over five to fifteen years.
Third party sharing arrangements
Third party sharing arrangements expense includes payments to our third party marketing agents in Latin America, Australia, New Zealand and
Israel. In addition, this expense includes fees we pay to allow our ETFs to be listed on certain third party platforms.
Acquisition payment
Prior to May 2016, acquisition payment expense represented the change in the fair value of the buyout obligation of the remaining
minority interest in our European business, in which we acquired a majority stake in April 2014. In May 2016, we accelerated the buyout of this remaining minority interest.
Other
Other expenses consist
primarily of insurance premiums, general office related expenses, securities license fees for our sales force, public company related expenses, corporate related travel and entertainment and board of director fees, including stock-based compensation
related to equity awards we granted to our directors.
Income tax
Income tax expense consists of taxes due to federal, various state and certain foreign authorities on our income. Our U.S. rate may change in
the future if our share of income attributable to various states changes. In addition, income tax expense is impacted by a valuation allowance on foreign net operating losses. These losses may be recognized in the future if the foreign businesses
(Europe and Canada) become profitable.
Also, in the first quarter of 2017 we will be adopting Accounting Standards Update
(“ASU”)
2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU
2016-09),
which
requires income tax windfalls and shortfalls arising from stock-based compensation vesting and exercises to be recorded in income tax expense, rather than additional
paid-in
capital, when applicable. As a
result, the adoption of the standard will increase volatility reported in income tax expense. During the first quarter of 2017, we anticipate recognizing approximately $1.0 million of income tax expense for tax shortfalls related to stock-based
compensation vesting occurring during the period.
45
Factors that May Impact our Future Financial Results
Revenues
Our revenues are
highly correlated to the level and relative mix of our AUM, as well as the fee rate associated with our ETFs, and is impacted by market sentiment.
A significant portion of our AUM is invested in securities issued outside of the U.S. Therefore, our AUM and revenues are affected by
movements in global capital market levels and the strengthening or weakening of the U.S. dollar against other currencies. As the chart below reflects, as of December 31, 2016, 43% of our U.S. AUM was concentrated in two products with similar
strategies – HEDJ, our European equity ETF which hedges exposure to the Euro, and DXJ, our Japanese equity ETF which hedges exposure to the Yen. The strengthening of the Euro or Yen against the U.S. dollar, or the decline in European or
Japanese equity markets, may have an adverse effect on our results.
Another factor impacting our revenues is the fees associated with our ETFs. Our overall average fee rate is
affected by the mix of flows into our ETFs. With a significant portion of our AUM invested in securities issued outside of the U.S., favorable market sentiment toward international equities (particularly during a time when the U.S. dollar is
strengthening for our international currency hedged products) is likely to have a positive effect on our overall revenues and conversely unfavorable market sentiment is likely to have a negative impact.
We also currently compete within the ETF market against several large ETF sponsors, many smaller sponsors, as well as new entrants to the
marketplace, including large asset management companies who have launched or announced intentions to launch ETF products. Competitive pressures could reduce revenues and profit margins as certain existing players have launched ETFs with fees that
are generally equivalent to, and in some instances lower than, our ETFs. However, we believe that our ability to gather inflows into our ETFs, coupled with general stock market trends, will have the greatest impact on our business.
Expenses – Strategic Investments
We have made significant growth investments in our business over the last several years, which have elevated the recurring expense base for
future years. While we will continue to strategically invest in our business, we expect our investment in new strategic growth initiatives to decrease and range from $3.0 million to $4.0 million in 2017. These initiatives include:
|
|
•
|
|
Continue to expand our sales force, sales support staff and sales activities;
|
46
|
|
•
|
|
Continue to launch ETFs to expand and diversify our product set;
|
|
|
•
|
|
Increase marketing and sales activities to bring more awareness of our existing and new products, as well as our brand; and
|
|
|
•
|
|
Invest in technology and operational support to better scale for future growth.
|
The
components of our strategic growth initiatives may increase or decrease from our planned estimates depending on the nature of the growth initiatives and market conditions.
Income Taxes
The Trump
administration has expressed the desire to advance major tax reform through Congress, including a reduction in the corporate tax rate. Our U.S. statutory income tax rate is currently approximately 40%. A reduction in the corporate tax rate would
favorably impact our results to extent corporate tax reform is ultimately implemented.
Seasonality
We believe seasonal fluctuations in the asset management industry are common, however such trends are generally masked by global market events
and market volatility in general. Therefore, period to period comparisons of ours or the industry’s flows and operating results may not be meaningful or indicative of results in future periods.
47
Key Operating Statistics
The following table presents key operating statistics that serve as indicators for the performance of our business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
U.S. LISTED ETFs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ETFs (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
51,639
|
|
|
$
|
39,281
|
|
|
$
|
34,884
|
|
|
Assets acquired
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
Inflows/(outflows)
|
|
|
(12,557
|
)
|
|
|
16,856
|
|
|
|
5,075
|
|
|
Market appreciation/(depreciation)
|
|
|
857
|
|
|
|
(4,498
|
)
|
|
|
(678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
40,164
|
|
|
$
|
51,639
|
|
|
$
|
39,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period
|
|
$
|
41,012
|
|
|
$
|
55,930
|
|
|
$
|
35,308
|
|
|
Revenue days
|
|
|
366
|
|
|
|
365
|
|
|
|
365
|
|
|
Number of ETFs – end of the period
|
|
|
94
|
|
|
|
86
|
|
|
|
70
|
|
|
ETF Industry and Market Share (in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ETF industry net inflows
|
|
$
|
284
|
|
|
$
|
231
|
|
|
$
|
241
|
|
|
WisdomTree market share of industry inflows
|
|
|
n/a
|
|
|
|
7.3
|
%
|
|
|
2.1
|
%
|
|
Average ETF advisory fee during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative strategy ETFs
|
|
|
0.79
|
%
|
|
|
0.95
|
%
|
|
|
0.95
|
%
|
|
Emerging markets equity ETFs
|
|
|
0.71
|
%
|
|
|
0.71
|
%
|
|
|
0.68
|
%
|
|
International developed equity ETFs
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
International hedged equity ETFs
|
|
|
0.54
|
%
|
|
|
0.54
|
%
|
|
|
0.50
|
%
|
|
Currency ETFs
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.49
|
%
|
|
Fixed income ETFs
|
|
|
0.44
|
%
|
|
|
0.52
|
%
|
|
|
0.54
|
%
|
|
U.S. equity ETFs
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blended total
|
|
|
0.51
|
%
|
|
|
0.53
|
%
|
|
|
0.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUROPEAN LISTED ETPs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ETPs (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
437,934
|
|
|
$
|
165,018
|
|
|
$
|
96,817
|
*
|
|
Inflows/(outflows)
|
|
|
197,870
|
|
|
|
539,780
|
|
|
|
119,084
|
|
|
Market appreciation/(depreciation)
|
|
|
(9,524
|
)
|
|
|
(266,864
|
)
|
|
|
(50,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
626,280
|
|
|
$
|
437,934
|
|
|
$
|
165,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period
|
|
|
550,572
|
|
|
|
358,895
|
|
|
|
118,987
|
|
|
Average ETP advisory fee during the period
|
|
|
0.82
|
%
|
|
|
0.83
|
%
|
|
|
0.79
|
%
|
|
Number of ETPs—end of period
|
|
|
68
|
|
|
|
64
|
|
|
|
50
|
|
|
|
|
|
|
|
Total UCITS ETFs (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
335,938
|
|
|
$
|
16,179
|
|
|
$
|
—
|
|
|
Inflows/(outflows)
|
|
|
51,905
|
|
|
|
287,573
|
|
|
|
16,036
|
**
|
|
Market appreciation/(depreciation)
|
|
|
10,172
|
|
|
|
32,186
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
398,015
|
|
|
$
|
335,938
|
|
|
$
|
16,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period
|
|
|
402,191
|
|
|
|
241,573
|
|
|
|
14,775
|
|
|
Average UCITS ETF advisory fee during the period
|
|
|
0.45
|
%
|
|
|
0.46
|
%
|
|
|
0.38
|
%
|
|
Number of UCITS ETFs—end of period
|
|
|
16
|
|
|
|
12
|
|
|
|
6
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
CANADIAN LISTED ETFs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ETFs (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Inflows/(outflows)***
|
|
|
68,534
|
|
|
|
—
|
|
|
|
—
|
|
|
Market appreciation/(depreciation)
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
68,618
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period
|
|
|
67,640
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Average ETF advisory fee during the period
|
|
|
0.47
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Number of ETFs—end of period
|
|
|
6
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
Headcount: U.S. Business Segment
|
|
|
163
|
|
|
|
143
|
|
|
|
101
|
|
|
Headcount: International Business Segment
|
|
|
46
|
|
|
|
34
|
|
|
|
23
|
|
|
**
|
UCITS first launched October 24, 2014
|
|
***
|
ETF inception date July 14, 2016
|
Note: Previously issued statistics may be restated due to trade
adjustments
Source: Investment Company Institute, Bloomberg, WisdomTree
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year
Ended December 31,
|
|
|
Change
|
|
|
Percent
Change
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Global AUM (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
41,257
|
|
|
$
|
52,413
|
|
|
$
|
(11,156
|
)
|
|
|
(21.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. listed AUM (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
51,639
|
|
|
$
|
39,281
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
|
225
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net inflows/(outflows)
|
|
|
(12,557
|
)
|
|
|
16,856
|
|
|
$
|
n/a
|
|
|
|
n/a
|
|
|
Market appreciation/(depreciation)
|
|
|
857
|
|
|
|
(4,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
40,164
|
|
|
$
|
51,639
|
|
|
$
|
(11,475
|
)
|
|
|
(22.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Results (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
219,446
|
|
|
$
|
298,942
|
|
|
$
|
(79,496
|
)
|
|
|
(26.6
|
%)
|
|
Total expenses
|
|
|
163,884
|
|
|
|
161,757
|
|
|
|
2,127
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income
|
|
$
|
55,562
|
|
|
$
|
137,185
|
|
|
$
|
(81,623
|
)
|
|
|
(59.5
|
%)
|
|
Net income
|
|
$
|
26,155
|
|
|
$
|
80,052
|
|
|
$
|
(53,897
|
)
|
|
|
(67.3
|
%)
|
Our global AUM decreased 21.3% from $52.4 billion at the end of 2015 to $41.3 billion at the end of
2016. This change was primarily driven by changes in our U.S. listed AUM which decreased 22.2% from $51.6 billion at the end of 2015 to $40.2 billion at the end of 2016 due to $12.6 billion of net outflows partly offset by market
appreciation. We reported
pre-tax
income of $55.6 million in 2016, a decrease of 59.5% from 2015 primarily due to lower revenues, and we reported net income of $26.2 million in 2016 compared to
$80.1 million in 2015.
49
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Change
|
|
|
Percent
Change
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Global AUM (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global - Average AUM
|
|
$
|
42,032
|
|
|
$
|
56,531
|
|
|
$
|
(14,499
|
)
|
|
|
(25.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. listed AUM (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. listed - Average AUM
|
|
$
|
41,012
|
|
|
$
|
55,930
|
|
|
$
|
(14,918
|
)
|
|
|
(26.7
|
%)
|
|
U.S. listed - Average ETF advisory fee
|
|
|
0.51
|
%
|
|
|
0.53
|
%
|
|
|
(0.02
|
)
|
|
|
(3.8
|
%)
|
|
Revenues (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
218,465
|
|
|
$
|
297,944
|
|
|
$
|
(79,479
|
)
|
|
|
(26.7
|
%)
|
|
Other income
|
|
|
981
|
|
|
|
998
|
|
|
|
(17
|
)
|
|
|
(1.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
219,446
|
|
|
$
|
298,942
|
|
|
$
|
(79,496
|
)
|
|
|
(26.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
Advisory fee revenues decreased 26.7% from $297.9 million in 2015 to $218.5 million in 2016 due to lower average AUM primarily
resulting from net outflows from our two largest U.S. listed ETFs – our currency hedged European and Japan equity ETFs (HEDJ and DXJ, respectively). Our average U.S. advisory fee decreased to 0.51% from 0.53% during the year due to changes in
product mix.
Other income
Other income was essentially unchanged from 2015 to 2016.
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended
December 31,
|
|
|
Change
|
|
|
Percent
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Compensation and benefits
|
|
$
|
63,263
|
|
|
$
|
73,228
|
|
|
$
|
(9,965
|
)
|
|
|
(13.6
|
%)
|
|
Fund management and administration
|
|
|
41,083
|
|
|
|
42,782
|
|
|
|
(1,699
|
)
|
|
|
(4.0
|
%)
|
|
Marketing and advertising
|
|
|
15,643
|
|
|
|
13,371
|
|
|
|
2,272
|
|
|
|
17.0
|
%
|
|
Sales and business development
|
|
|
12,537
|
|
|
|
9,189
|
|
|
|
3,348
|
|
|
|
36.4
|
%
|
|
Professional and consulting fees
|
|
|
6,692
|
|
|
|
7,067
|
|
|
|
(375
|
)
|
|
|
(5.3
|
%)
|
|
Occupancy, communications and equipment
|
|
|
5,211
|
|
|
|
4,299
|
|
|
|
912
|
|
|
|
21.2
|
%
|
|
Depreciation and amortization
|
|
|
1,305
|
|
|
|
1,006
|
|
|
|
299
|
|
|
|
29.7
|
%
|
|
Third party sharing arrangements
|
|
|
2,827
|
|
|
|
2,443
|
|
|
|
384
|
|
|
|
15.7
|
%
|
|
Goodwill impairment
|
|
|
1,676
|
|
|
|
—
|
|
|
|
1,676
|
|
|
|
n/a
|
|
|
Acquisition payment
|
|
|
6,738
|
|
|
|
2,185
|
|
|
|
4,553
|
|
|
|
208.4
|
%
|
|
Other
|
|
|
6,909
|
|
|
|
6,187
|
|
|
|
722
|
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
163,884
|
|
|
$
|
161,757
|
|
|
$
|
2,127
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
As a Percent of Revenues:
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
Compensation and benefits
|
|
|
28.8
|
%
|
|
|
24.5
|
%
|
|
Fund management and administration
|
|
|
18.7
|
%
|
|
|
14.3
|
%
|
|
Marketing and advertising
|
|
|
7.1
|
%
|
|
|
4.5
|
%
|
|
Sales and business development
|
|
|
5.7
|
%
|
|
|
3.1
|
%
|
|
Professional and consulting fees
|
|
|
3.0
|
%
|
|
|
2.4
|
%
|
|
Occupancy, communications and equipment
|
|
|
2.5
|
%
|
|
|
1.4
|
%
|
|
Depreciation and amortization
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
|
Third party sharing arrangements
|
|
|
1.3
|
%
|
|
|
0.8
|
%
|
|
Goodwill impairment
|
|
|
0.8
|
%
|
|
|
—
|
|
|
Acquisition payment
|
|
|
3.1
|
%
|
|
|
0.7
|
%
|
|
Other
|
|
|
3.1
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
74.7
|
%
|
|
|
54.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
Compensation and benefits expense decreased 13.6% from $73.2 million in 2015 to $63.3 million in 2016 due to a significant decline in
accrued incentive compensation as a result of net outflows we experienced in 2016 partly offset by higher headcount related expenses and higher stock-based compensation due to equity awards we granted as part of 2015 incentive compensation.
Headcount of our U.S. Business segment was 143 and our International Business segment was 34 at the end of 2015 compared to 163 and 46, respectively, at the end of 2016.
Fund management and administration
Fund management and administration expense decreased 4.0% from $42.8 million in 2015 to $41.1 million in 2016. This decrease was
primarily due to lower fund costs for our U.S. listed ETFs as a result of lower average AUM partly offset by higher costs for additional fund launches by our U.S., European and Canadian businesses. We had 86 U.S. listed ETFs and 76 European
listed products at the end of 2015 compared to 94 U.S. listed ETFs, 84 European listed products and six Canadian listed ETFs at the end of 2016.
Marketing and advertising
Marketing and advertising expense increased 17.0% from $13.4 million in 2015 to $15.6 million in 2016 primarily due to higher levels
of advertising related activities.
Sales and business development
Sales and business development expense increased 36.4% from $9.2 million in 2015 to $12.5 million in 2016 primarily due to higher
spending on sales related activities.
Professional and consulting fees
Professional and consulting fees decreased 5.3% from $7.1 million in 2015 to $6.7 million in 2016. This decrease was primarily due to
lower fees for strategic consulting services and lower recruiting fees partly offset by fees associated with our office in Canada that we established in April 2016.
Occupancy, communications and equipment
Occupancy, communications and equipment expense increased 21.2% from $4.3 million in 2015 to $5.2 million in 2016 primarily due to
technology initiatives and higher costs for our office space in Japan which was opened in the second quarter of 2015.
51
Depreciation and amortization
Depreciation and amortization expense increased 29.7% from $1.0 million in 2015 to $1.3 million in 2016 primarily due to expenses of
our Japan office that we opened in the second quarter of 2015 and higher amortization for leasehold improvements to our New York office space.
Third party sharing arrangements
Third party sharing arrangements expense increased 15.7% from $2.4 million in 2015 to $2.8 million in 2016 primarily due to fees we
pay to list our ETFs on third party platforms and higher fees to our marketing agent in Latin America.
Goodwill impairment
A goodwill impairment charge of $1.7 million was recorded during the three months ended December 31, 2016, which was related to an
interim impairment test performed on the goodwill recognized in connection with the acquisition of a majority stake in our European business in April 2014. See Note 16 to our Consolidated Financial Statements.
Acquisition payment
Acquisition payment expense increased 208.4% from $2.2 million in 2015 to $6.7 million in 2016 as a result of the acceleration of the
buyout of the remaining minority interest in our European business.
Other
Other expenses increased 11.7% from $6.2 million in 2015 to $6.9 million in 2016 primarily due to expenses of our Japan office that
we opened in the second quarter of 2015 and increases other general and administrative expenses.
Income tax expense
Our effective income tax rate for the year ended December 31, 2016 was 52.9%, which resulted in income tax expense of $29.4 million.
Our tax rate differed from the federal statutory rate of 35% primarily due to a valuation allowance on our foreign net operating losses, the acquisition payment expense and goodwill impairment charge (both of which are
non-deductible)
and state and local income taxes.
Our effective income tax rate for the year
ended December 31, 2015 was 41.6%, which resulted in income tax expense of $57.1 million. Our tax rate differed from the federal statutory rate of 35% primarily due to state and local income taxes, foreign net operating losses and the
acquisition payment expense (which is
non-deductible).
52
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year
Ended December 31,
|
|
|
Change
|
|
|
Percent
Change
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Global AUM (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
52,413
|
|
|
$
|
39,462
|
|
|
$
|
12,951
|
|
|
|
32.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. listed AUM (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
39,281
|
|
|
$
|
34,884
|
|
|
|
|
|
|
|
|
|
|
Net inflows/(outflows)
|
|
|
16,856
|
|
|
|
5,075
|
|
|
$
|
11,781
|
|
|
|
232.1
|
%
|
|
Market appreciation/(depreciation)
|
|
|
(4,498
|
)
|
|
|
(678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
51,639
|
|
|
$
|
39,281
|
|
|
$
|
12,358
|
|
|
|
31.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Results (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
298,942
|
|
|
$
|
183,762
|
|
|
$
|
115,180
|
|
|
|
62.7
|
%
|
|
Total expenses
|
|
|
161,757
|
|
|
|
110,214
|
|
|
|
51,543
|
|
|
|
46.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income
|
|
$
|
137,185
|
|
|
$
|
73,548
|
|
|
$
|
63,637
|
|
|
|
86.5
|
%
|
|
Net income
|
|
$
|
80,052
|
|
|
$
|
61,051
|
|
|
$
|
19,001
|
|
|
|
31.1
|
%
|
Our global AUM increased 32.8% from $39.5 billion at the end of 2014 to $52.4 billion at the end of
2015. This change was primarily driven by changes in our U.S. listed AUM which increased 31.5% from $39.3 billion at the end of 2014 to $51.6 billion at the end of 2015 due to $16.9 billion of net inflows partly offset by market
depreciation. We reported
pre-tax
income of $137.2 million in 2015, an increase of 86.5% from 2014 primarily due to higher revenues, and we reported net income of $80.1 million in 2015 compared to
$61.1 million in 2014.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Change
|
|
|
Percent
Change
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Global AUM (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global - Average AUM
|
|
$
|
56,531
|
|
|
$
|
35,442
|
|
|
$
|
21,089
|
|
|
|
59.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. listed - Average AUM (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. listed - Average AUM
|
|
$
|
55,930
|
|
|
$
|
35,308
|
|
|
$
|
20,622
|
|
|
|
58.4
|
%
|
|
U.S. listed - Average ETF advisory fee
|
|
|
0.53
|
%
|
|
|
0.52
|
%
|
|
|
0.01
|
|
|
|
1.9
|
%
|
|
Revenues (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
297,944
|
|
|
$
|
182,816
|
|
|
$
|
115,128
|
|
|
|
63.0
|
%
|
|
Other income
|
|
|
998
|
|
|
|
946
|
|
|
|
52
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
298,942
|
|
|
$
|
183,762
|
|
|
$
|
115,180
|
|
|
|
62.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
Advisory fees revenues increased 63.0% from $182.8 million in 2014 to $297.9 million in 2015 due to higher average AUM primarily
resulting from net inflows to our currency hedged European equity ETF (HEDJ) partly offset by market depreciation. The average U.S. advisory fee earned increased from 0.52% in 2014 to 0.53% in 2015 due to inflows into our higher fee ETFs.
Other income
Other
income increased 5.5% from 2014 to 2015. This increase was primarily due to higher interest income from our growing cash balances and higher index licensing fees partly offset by losses on foreign currencies.
53
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended
December 31,
|
|
|
Change
|
|
|
Percent
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Compensation and benefits
|
|
$
|
73,228
|
|
|
$
|
40,995
|
|
|
$
|
32,233
|
|
|
|
78.6
|
%
|
|
Fund management and administration
|
|
|
42,782
|
|
|
|
34,383
|
|
|
|
8,399
|
|
|
|
24.4
|
%
|
|
Marketing and advertising
|
|
|
13,371
|
|
|
|
11,514
|
|
|
|
1,857
|
|
|
|
16.1
|
%
|
|
Sales and business development
|
|
|
9,189
|
|
|
|
6,221
|
|
|
|
2,968
|
|
|
|
47.7
|
%
|
|
Professional and consulting fees
|
|
|
7,067
|
|
|
|
7,578
|
|
|
|
(511
|
)
|
|
|
(6.7
|
%)
|
|
Occupancy, communications and equipment
|
|
|
4,299
|
|
|
|
3,578
|
|
|
|
721
|
|
|
|
20.2
|
%
|
|
Depreciation and amortization
|
|
|
1,006
|
|
|
|
821
|
|
|
|
185
|
|
|
|
22.5
|
%
|
|
Third party sharing arrangements
|
|
|
2,443
|
|
|
|
594
|
|
|
|
1,849
|
|
|
|
311.3
|
%
|
|
Acquisition payment
|
|
|
2,185
|
|
|
|
—
|
|
|
|
2,185
|
|
|
|
n/a
|
|
|
Other
|
|
|
6,187
|
|
|
|
4,530
|
|
|
|
1,657
|
|
|
|
36.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
161,757
|
|
|
$
|
110,214
|
|
|
$
|
51,543
|
|
|
|
46.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percent of Revenues:
|
|
Year Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
Compensation and benefits
|
|
|
24.5
|
%
|
|
|
22.3
|
%
|
|
Fund management and administration
|
|
|
14.3
|
%
|
|
|
18.7
|
%
|
|
Marketing and advertising
|
|
|
4.5
|
%
|
|
|
6.3
|
%
|
|
Sales and business development
|
|
|
3.1
|
%
|
|
|
3.4
|
%
|
|
Professional and consulting fees
|
|
|
2.4
|
%
|
|
|
4.1
|
%
|
|
Occupancy, communications and equipment
|
|
|
1.4
|
%
|
|
|
1.9
|
%
|
|
Depreciation and amortization
|
|
|
0.3
|
%
|
|
|
0.5
|
%
|
|
Third party sharing arrangements
|
|
|
0.8
|
%
|
|
|
0.3
|
%
|
|
Acquisition payment
|
|
|
0.7
|
%
|
|
|
0.0
|
%
|
|
Other
|
|
|
2.1
|
%
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
54.1
|
%
|
|
|
60.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
Compensation and benefits expense increased 78.6% from $41.0 million in 2014 to $73.2 million in 2015. This increase was primarily
due to higher accrued incentive compensation due to our record inflow levels, increased headcount related expenses to support our growth and higher stock-based compensation due to equity awards granted to our employees as part of 2014 compensation.
Headcount of our U.S. Business segment was 101 and our International Business segment was 23 at the end of 2014 compared to 143 and 34, respectively, at the end of 2015.
Fund management and administration
Fund management and administration expense increased 24.4% from $34.4 million in 2014 to $42.8 million in 2015. This increase
was primarily due to costs associated with higher average U.S. listed AUM; printing and mailing fees as a result of additional holders of our U.S. listed ETFs; and other costs associated with additional ETFs. Lastly, we incurred higher costs for our
non-U.S.
listed ETFs as a result of new ETFs launched or cross listed in Europe. We had 70 U.S. listed ETFs and 56 European listed products at the end of 2014 compared to 86 U.S. listed ETFs and 76 European
listed products at the end of 2015.
54
Marketing and advertising
Marketing and advertising expense increased 16.1% from $11.5 million in 2014 to $13.4 million in 2015 primarily due to higher levels
of advertising related activities to support our growth.
Sales and business development
Sales and business development expense increased 47.7% from $6.2 million in 2014 to $9.2 million in 2015 primarily due to higher
levels of spending for sales and product development related initiatives.
Professional and consulting fees
Professional and consulting fees decreased 6.7% from $7.6 million in 2014 to $7.1 million in 2015. This decrease was primarily due to
lower fees for strategic consulting services, and advisory costs associated with the acquisition of a majority stake in our European business in April 2014, partly offset by higher recruiting fees as part of our sales force expansion plan.
Occupancy, communications and equipment
Occupancy, communications and equipment expense increased 20.2% from $3.6 million in 2014 to $4.3 million in 2015 primarily due to
equipment purchases as part of our technology enhancements.
Depreciation and amortization
Depreciation and amortization expense increased 22.5% from $0.8 million in 2014 to $1.0 million in 2015 primarily due to amortization
of leasehold improvements to our office space.
Third party sharing arrangements
Third party sharing arrangements expense increased 311.3% from $0.6 million in 2014 to $2.4 million in 2015 primarily due to higher
fees to our third party marketing agent in Latin America as well as fees we pay to list our ETFs on a third party platform.
Acquisition payment
Acquisition payment expense was $2.2 million in 2015. This expense represents the change in the estimated fair value of the buyout
obligation of the remaining minority interest in our European business, the majority of which was acquired in April 2014. The buyout obligation is based on a formula that takes into account the AUM in the business, its profitability levels and
the trading multiple of WETF.
Other
Other expenses increased 36.6% from $4.5 million in 2014 to $6.2 million in 2015 due to higher general and administrative expenses.
Income tax expense
Our effective income tax rate for the year ended December 31, 2015 was 41.6%, which resulted in income tax expense of $57.1 million.
Our tax rate differed from the federal statutory rate of 35% primarily due to state and local income taxes, foreign net operating losses and the acquisition payment expense (which is
non-deductible).
55
Our effective income tax rate for the year ended December 31, 2014 was 17.0%, which resulted
in income tax expense of $12.5 million. Our tax rate differed from the federal statutory rate of 35% primarily due to the release of a valuation allowance on the Company’s U.S. deferred tax assets, which was partially offset by a charge
arising from applying a lower state tax rate to the Company’s deferred tax assets upon completion of a state income tax study.
Quarterly Results
The following tables set forth our unaudited consolidated quarterly statement of operations data, both in dollar amounts and as a
percentage of total revenues, and our unaudited consolidated quarterly operating data for the quarters in 2015 and 2016. In our opinion, this unaudited information has been prepared on substantially the same basis as the consolidated financial
statements appearing elsewhere in this Report and includes all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the unaudited consolidated quarterly data. The unaudited consolidated quarterly data should be
read together with the consolidated financial statements and related notes included elsewhere in this Report. The results for any quarter are not necessarily indicative of results for any future period, and you should not rely on them as such.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share
amounts)
|
|
Q1/15
|
|
|
Q2/15
|
|
|
Q3/15
|
|
|
Q4/15
|
|
|
Q1/16
|
|
|
Q2/16
|
|
|
Q3/16
|
|
|
Q4/16
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
59,869
|
|
|
$
|
81,320
|
|
|
$
|
80,520
|
|
|
$
|
76,235
|
|
|
$
|
60,615
|
|
|
$
|
55,931
|
|
|
$
|
51,553
|
|
|
$
|
50,366
|
|
|
Other income
|
|
|
272
|
|
|
|
239
|
|
|
|
233
|
|
|
|
254
|
|
|
|
263
|
|
|
|
50
|
|
|
|
236
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
60,141
|
|
|
|
81,559
|
|
|
|
80,753
|
|
|
|
76,489
|
|
|
|
60,878
|
|
|
|
55,981
|
|
|
|
51,789
|
|
|
|
50,798
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
19,601
|
|
|
|
18,669
|
|
|
|
19,407
|
|
|
|
15,551
|
|
|
|
15,226
|
|
|
|
14,343
|
|
|
|
15,328
|
|
|
|
18,366
|
|
|
Fund management and administration
|
|
|
10,168
|
|
|
|
11,208
|
|
|
|
10,519
|
|
|
|
10,887
|
|
|
|
10,044
|
|
|
|
10,621
|
|
|
|
10,372
|
|
|
|
10,046
|
|
|
Marketing and advertising
|
|
|
3,076
|
|
|
|
3,628
|
|
|
|
3,573
|
|
|
|
3,094
|
|
|
|
3,832
|
|
|
|
4,566
|
|
|
|
3,600
|
|
|
|
3,645
|
|
|
Sales and business development
|
|
|
1,900
|
|
|
|
2,076
|
|
|
|
2,438
|
|
|
|
2,775
|
|
|
|
2,447
|
|
|
|
3,834
|
|
|
|
3,075
|
|
|
|
3,181
|
|
|
Professional and consulting fees
|
|
|
1,463
|
|
|
|
1,604
|
|
|
|
1,570
|
|
|
|
2,430
|
|
|
|
2,835
|
|
|
|
1,365
|
|
|
|
1,035
|
|
|
|
1,457
|
|
|
Occupancy, communications and equipment
|
|
|
918
|
|
|
|
943
|
|
|
|
1,183
|
|
|
|
1,255
|
|
|
|
1,222
|
|
|
|
1,241
|
|
|
|
1,469
|
|
|
|
1,279
|
|
|
Depreciation and amortization
|
|
|
220
|
|
|
|
223
|
|
|
|
253
|
|
|
|
310
|
|
|
|
316
|
|
|
|
330
|
|
|
|
332
|
|
|
|
327
|
|
|
Third party sharing arrangements
|
|
|
283
|
|
|
|
497
|
|
|
|
485
|
|
|
|
1,178
|
|
|
|
907
|
|
|
|
709
|
|
|
|
622
|
|
|
|
589
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,676
|
|
|
Acquisition payment
|
|
|
257
|
|
|
|
264
|
|
|
|
172
|
|
|
|
1,492
|
|
|
|
745
|
|
|
|
5,993
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
1,235
|
|
|
|
1,509
|
|
|
|
1,620
|
|
|
|
1,823
|
|
|
|
1,632
|
|
|
|
1,823
|
|
|
|
1,731
|
|
|
|
1,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
39,121
|
|
|
|
40,621
|
|
|
|
41,220
|
|
|
|
40,795
|
|
|
|
39,206
|
|
|
|
44,825
|
|
|
|
37,564
|
|
|
|
42,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
21,020
|
|
|
|
40,938
|
|
|
|
39,533
|
|
|
|
35,694
|
|
|
|
21,672
|
|
|
|
11,156
|
|
|
|
14,225
|
|
|
|
8,509
|
|
|
Income tax expense
|
|
|
8,958
|
|
|
|
16,766
|
|
|
|
16,245
|
|
|
|
15,164
|
|
|
|
9,600
|
|
|
|
7,505
|
|
|
|
6,270
|
|
|
|
6,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,062
|
|
|
$
|
24,172
|
|
|
$
|
23,288
|
|
|
$
|
20,530
|
|
|
$
|
12,072
|
|
|
$
|
3,651
|
|
|
$
|
7,955
|
|
|
$
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.09
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - diluted
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.09
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.33
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1/15
|
|
|
Q2/15
|
|
|
Q3/15
|
|
|
Q4/15
|
|
|
Q1/16
|
|
|
Q2/16
|
|
|
Q3/16
|
|
|
Q4/16
|
|
|
Percent of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
|
99.5
|
%
|
|
|
99.7
|
%
|
|
|
99.7
|
%
|
|
|
99.7
|
%
|
|
|
99.6
|
%
|
|
|
99.9
|
%
|
|
|
99.5
|
%
|
|
|
99.1
|
%
|
|
Other income
|
|
|
0.5
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
32.6
|
%
|
|
|
22.9
|
%
|
|
|
24.0
|
%
|
|
|
20.3
|
%
|
|
|
25.0
|
%
|
|
|
25.6
|
%
|
|
|
29.6
|
%
|
|
|
36.2
|
%
|
|
Fund management and administration
|
|
|
16.8
|
%
|
|
|
13.7
|
%
|
|
|
13.0
|
%
|
|
|
14.2
|
%
|
|
|
16.5
|
%
|
|
|
19.0
|
%
|
|
|
20.0
|
%
|
|
|
19.8
|
%
|
|
Marketing and advertising
|
|
|
5.1
|
%
|
|
|
4.4
|
%
|
|
|
4.4
|
%
|
|
|
4.0
|
%
|
|
|
6.3
|
%
|
|
|
8.2
|
%
|
|
|
7.0
|
%
|
|
|
7.2
|
%
|
|
Sales and business development
|
|
|
3.2
|
%
|
|
|
2.5
|
%
|
|
|
3.0
|
%
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
|
|
6.8
|
%
|
|
|
5.9
|
%
|
|
|
6.2
|
%
|
|
Professional and consulting fees
|
|
|
2.4
|
%
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
3.2
|
%
|
|
|
4.7
|
%
|
|
|
2.4
|
%
|
|
|
2.0
|
%
|
|
|
2.9
|
%
|
|
Occupancy, communications and equipment
|
|
|
1.5
|
%
|
|
|
1.2
|
%
|
|
|
1.5
|
%
|
|
|
1.7
|
%
|
|
|
2.0
|
%
|
|
|
2.2
|
%
|
|
|
2.8
|
%
|
|
|
2.5
|
%
|
|
Depreciation and amortization
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
0.6
|
%
|
|
Third party sharing arrangements
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
|
|
1.1
|
%
|
|
Goodwill impairment
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
3.3
|
%
|
|
Acquisition payment
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
2.0
|
%
|
|
|
1.2
|
%
|
|
|
10.7
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Other
|
|
|
2.1
|
%
|
|
|
1.9
|
%
|
|
|
2.0
|
%
|
|
|
2.4
|
%
|
|
|
2.7
|
%
|
|
|
3.3
|
%
|
|
|
3.3
|
%
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
65.0
|
%
|
|
|
49.8
|
%
|
|
|
51.0
|
%
|
|
|
53.3
|
%
|
|
|
64.4
|
%
|
|
|
80.1
|
%
|
|
|
72.5
|
%
|
|
|
83.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
35.0
|
%
|
|
|
50.2
|
%
|
|
|
49.0
|
%
|
|
|
46.7
|
%
|
|
|
35.6
|
%
|
|
|
19.9
|
%
|
|
|
27.5
|
%
|
|
|
16.8
|
%
|
|
Income tax expense
|
|
|
14.9
|
%
|
|
|
20.6
|
%
|
|
|
20.1
|
%
|
|
|
19.8
|
%
|
|
|
15.8
|
%
|
|
|
13.4
|
%
|
|
|
12.1
|
%
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
20.1
|
%
|
|
|
29.6
|
%
|
|
|
28.9
|
%
|
|
|
26.9
|
%
|
|
|
19.8
|
%
|
|
|
6.5
|
%
|
|
|
15.4
|
%
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1/15
|
|
|
Q2/15
|
|
|
Q3/15
|
|
|
Q4/15
|
|
|
Q1/16
|
|
|
Q2/16
|
|
|
Q3/16
|
|
|
Q4/16
|
|
|
Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. LISTED ETFs (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
39,281
|
|
|
$
|
55,758
|
|
|
$
|
61,299
|
|
|
$
|
53,047
|
|
|
$
|
51,639
|
|
|
$
|
44,256
|
|
|
$
|
38,046
|
|
|
$
|
37,704
|
|
|
Assets acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
225
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Inflows/(outflows)
|
|
|
13,520
|
|
|
|
6,598
|
|
|
|
(661
|
)
|
|
|
(2,601
|
)
|
|
|
(5,359
|
)
|
|
|
(4,949
|
)
|
|
|
(2,381
|
)
|
|
|
132
|
|
|
Market appreciation/(depreciation)
|
|
|
2,957
|
|
|
|
(1,057
|
)
|
|
|
(7,591
|
)
|
|
|
1,193
|
|
|
|
(2,249
|
)
|
|
|
(1,261
|
)
|
|
|
2,039
|
|
|
|
2,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
55,758
|
|
|
$
|
61,299
|
|
|
$
|
53,047
|
|
|
$
|
51,639
|
|
|
$
|
44,256
|
|
|
$
|
38,046
|
|
|
$
|
37,704
|
|
|
$
|
40,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period
|
|
$
|
46,391
|
|
|
$
|
61,153
|
|
|
$
|
59,572
|
|
|
$
|
56,603
|
|
|
$
|
45,475
|
|
|
$
|
41,830
|
|
|
$
|
38,710
|
|
|
$
|
38,253
|
|
|
Number of ETFs – end of the period
|
|
|
70
|
|
|
|
75
|
|
|
|
79
|
|
|
|
86
|
|
|
|
93
|
|
|
|
99
|
|
|
|
93
|
|
|
|
94
|
|
|
ETF Industry and Market Share (in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ETF industry net inflows
|
|
$
|
55.6
|
|
|
$
|
41.9
|
|
|
$
|
43.2
|
|
|
$
|
90.8
|
|
|
$
|
34.6
|
|
|
$
|
30.8
|
|
|
$
|
91.3
|
|
|
$
|
127.2
|
|
|
WisdomTree market share of industry inflows
|
|
|
23.8
|
%
|
|
|
15.6
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Average ETF advisory fee during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative strategy ETFs
|
|
|
0.95
|
%
|
|
|
0.95
|
%
|
|
|
0.95
|
%
|
|
|
0.94
|
%
|
|
|
0.88
|
%
|
|
|
0.87
|
%
|
|
|
0.78
|
%
|
|
|
0.77
|
%
|
|
Emerging markets equity ETFs
|
|
|
0.71
|
%
|
|
|
0.71
|
%
|
|
|
0.72
|
%
|
|
|
0.71
|
%
|
|
|
0.71
|
%
|
|
|
0.71
|
%
|
|
|
0.71
|
%
|
|
|
0.70
|
%
|
|
International developed equity ETFs
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
|
0.56
|
%
|
|
International hedged equity ETFs
|
|
|
0.53
|
%
|
|
|
0.54
|
%
|
|
|
0.54
|
%
|
|
|
0.54
|
%
|
|
|
0.54
|
%
|
|
|
0.54
|
%
|
|
|
0.54
|
%
|
|
|
0.54
|
%
|
|
Currency ETFs
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
Fixed income ETFs
|
|
|
0.52
|
%
|
|
|
0.52
|
%
|
|
|
0.51
|
%
|
|
|
0.51
|
%
|
|
|
0.49
|
%
|
|
|
0.48
|
%
|
|
|
0.47
|
%
|
|
|
0.46
|
%
|
|
U.S. equity ETFs
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0.52
|
%
|
|
|
0.53
|
%
|
|
|
0.53
|
%
|
|
|
0.52
|
%
|
|
|
0.52
|
%
|
|
|
0.52
|
%
|
|
|
0.51
|
%
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUROPEAN LISTED ETPs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ETPs (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
165,018
|
|
|
$
|
288,801
|
|
|
$
|
384,089
|
|
|
$
|
431,259
|
|
|
$
|
437,934
|
|
|
$
|
488,069
|
|
|
$
|
560,063
|
|
|
$
|
647,497
|
|
|
Inflows/(outflows)
|
|
|
145,382
|
|
|
|
50,331
|
|
|
|
191,044
|
|
|
|
153,023
|
|
|
|
123,461
|
|
|
|
20,578
|
|
|
|
92,045
|
|
|
|
(38,214
|
)
|
|
Market appreciation/(depreciation)
|
|
|
(21,599
|
)
|
|
|
44,957
|
|
|
|
(143,874
|
)
|
|
|
(146,348
|
)
|
|
|
(73,326
|
)
|
|
|
51,416
|
|
|
|
(4,611
|
)
|
|
|
16,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
288,801
|
|
|
$
|
384,089
|
|
|
$
|
431,259
|
|
|
$
|
437,934
|
|
|
$
|
488,069
|
|
|
$
|
560,063
|
|
|
$
|
647,497
|
|
|
$
|
626,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period
|
|
|
220,479
|
|
|
|
336,588
|
|
|
|
419,112
|
|
|
|
445,011
|
|
|
|
428,857
|
|
|
|
544,676
|
|
|
|
575,248
|
|
|
|
640,101
|
|
|
Average ETP advisory fee during the period
|
|
|
0.81
|
%
|
|
|
0.82
|
%
|
|
|
0.83
|
%
|
|
|
0.85
|
%
|
|
|
0.84
|
%
|
|
|
0.84
|
%
|
|
|
0.82
|
%
|
|
|
0.80
|
%
|
|
Number of ETPs – end of the period
|
|
|
57
|
|
|
|
57
|
|
|
|
62
|
|
|
|
64
|
|
|
|
67
|
|
|
|
67
|
|
|
|
67
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
Total UCITS ETFs (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
16,179
|
|
|
$
|
45,846
|
|
|
$
|
228,588
|
|
|
$
|
264,452
|
|
|
$
|
335,938
|
|
|
$
|
396,901
|
|
|
$
|
391,900
|
|
|
$
|
371,307
|
|
|
Inflows/(outflows)
|
|
|
28,851
|
|
|
|
144,234
|
|
|
|
62,217
|
|
|
|
52,271
|
|
|
|
71,440
|
|
|
|
26,931
|
|
|
|
(58,908
|
)
|
|
|
12,442
|
|
|
Market appreciation/(depreciation)
|
|
|
816
|
|
|
|
38,508
|
|
|
|
(26,353
|
)
|
|
|
19,215
|
|
|
|
(10,477
|
)
|
|
|
(31,932
|
)
|
|
|
38,315
|
|
|
|
14,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
45,846
|
|
|
$
|
228,588
|
|
|
$
|
264,452
|
|
|
$
|
335,938
|
|
|
$
|
396,901
|
|
|
$
|
391,900
|
|
|
$
|
371,307
|
|
|
$
|
398,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period
|
|
|
29,708
|
|
|
|
204,568
|
|
|
|
246,558
|
|
|
|
286,816
|
|
|
|
356,814
|
|
|
|
400,047
|
|
|
|
437,767
|
|
|
|
375,286
|
|
|
Average UCITS ETF advisory fee during the period
|
|
|
0.40
|
%
|
|
|
0.44
|
%
|
|
|
0.45
|
%
|
|
|
0.45
|
%
|
|
|
0.47
|
%
|
|
|
0.46
|
%
|
|
|
0.44
|
%
|
|
|
0.42
|
%
|
|
Number of UCITS ETFs – end of the period
|
|
|
6
|
|
|
|
10
|
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1/15
|
|
|
Q2/15
|
|
|
Q3/15
|
|
|
Q4/15
|
|
|
Q1/16
|
|
|
Q2/16
|
|
|
Q3/16
|
|
|
Q4/16
|
|
|
CANADIAN LISTED ETFs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ETFs (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,427
|
|
|
Inflows/(outflows)*
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68,531
|
|
|
|
3
|
|
|
Market appreciation/(depreciation)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(104
|
)
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,427
|
|
|
$
|
68,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
68,177
|
|
|
|
67,168
|
|
|
Average ETF advisory fee during the period
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
0.47
|
%
|
|
|
0.46
|
%
|
|
Number of ETFs – end of the period
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount - U.S. Business segment
|
|
|
109
|
|
|
|
118
|
|
|
|
132
|
|
|
|
143
|
|
|
|
153
|
|
|
|
157
|
|
|
|
159
|
|
|
|
163
|
|
|
Headcount – International Business segment
|
|
|
27
|
|
|
|
28
|
|
|
|
29
|
|
|
|
34
|
|
|
|
38
|
|
|
|
47
|
|
|
|
43
|
|
|
|
46
|
|
|
*
|
ETF inception date July 14, 2016
|
Segment Results
We operate as an ETP sponsor and asset manager providing investment advisory services in the U.S., Europe, Canada and Japan. These activities
are reported in our U.S. Business and International Business reportable segments. The U.S. Business segment includes the results of our U.S. operations and Japan sales office. The results of our European and Canadian operations are reported as the
International Business segment. Revenues are primarily derived in the U.S. and the vast majority of our AUM is currently located in the U.S.
59
The table below presents the net revenues, operating expenses and income before taxes of these
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(in thousands)
|
|
|
U.S. Business segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
212,490
|
|
|
$
|
294,719
|
|
|
$
|
182,947
|
|
|
Operating expenses
|
|
|
(137,769
|
)
|
|
|
(148,384
|
)
|
|
|
(104,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
74,721
|
|
|
$
|
146,335
|
|
|
$
|
78,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets during the period (in millions)
|
|
$
|
41,012
|
|
|
$
|
55,930
|
|
|
$
|
35,308
|
|
|
Average advisory fee during the period
|
|
|
0.51
|
%
|
|
|
0.53
|
%
|
|
|
0.52
|
%
|
|
|
|
|
|
|
International Business segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,956
|
|
|
$
|
4,223
|
|
|
$
|
815
|
|
|
Operating expenses
|
|
|
(26,115
|
)
|
|
|
(13,373
|
)
|
|
|
(5,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
$
|
(19,159
|
)
|
|
$
|
(9,150
|
)
|
|
$
|
(5,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European ETPs – Average assets during the period (in thousands)
|
|
$
|
550,572
|
|
|
$
|
358,895
|
|
|
$
|
118,987
|
|
|
UCITS ETFs – Average asset during the period (in thousands)
|
|
$
|
402,191
|
|
|
$
|
241,573
|
|
|
$
|
14,775
|
|
|
Canadian ETFs – Average asset during the period (in thousands)
|
|
$
|
67,640
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
European ETPs – Average advisory fee during the period
|
|
|
0.82
|
%
|
|
|
0.83
|
%
|
|
|
0.79
|
%
|
|
UCITS ETFs – Average advisory fee during the period
|
|
|
0.45
|
%
|
|
|
0.46
|
%
|
|
|
0.38
|
%
|
|
Canadian ETFs – Average advisory fee during the period
|
|
|
0.47
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
219,446
|
|
|
$
|
298,942
|
|
|
$
|
183,762
|
|
|
Operating expenses
|
|
|
(163,884
|
)
|
|
|
(161,757
|
)
|
|
|
(110,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
55,562
|
|
|
$
|
137,185
|
|
|
$
|
73,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
U.S. Business segment
Revenues of the U.S. Business segment decreased 27.9% from $294.7 million in 2015 to $212.5 million in 2016. The decrease was
attributable to lower average AUM which decreased 26.7%, primarily resulting from net outflows from our two largest U.S. listed ETFs – our currency hedged European and Japan equity ETFs (HEDJ and DXJ, respectively). Our average U.S. advisory
fee decreased to 0.51% from 0.53% during the year due to changes in product mix.
Operating expenses of the U.S. Business segment
decreased 7.2% from $148.4 million in 2015 to $137.8 million in 2016. The decrease was primarily due to significantly lower accrued incentive compensation as a result of net outflows we experienced partly offset by higher headcount related
expenses and higher stock-based compensation due to equity awards granted to our employees as part of 2015 compensation. Operating expenses also decreased as a result of lower fund management and administration expenses primarily due to lower
average U.S. listed AUM. These decreases were partly offset by higher sales and business development and marketing expenses.
60
International Business segment
Revenues of the International Business segment increased 64.7% from $4.2 million in 2015 to $7.0 million in 2016. This increase was
attributable to higher average AUM which increased 69.9% from $600.5 million in 2015 to $1.0 billion in 2016 primarily due to net inflows. In addition, in July 2016 we began distributing six locally listed ETFs in Canada.
Operating expenses of the International Business segment increased 95.3% from $13.4 million in 2015 to $26.1 million in 2016.
Certain
non-recurring
charges were recognized in 2016 including an increase of $4.6 million in acquisition payment expense primarily associated with the acceleration of the buyout of the remaining
minority interest in our European business and a goodwill impairment charge of $1.7 million on the goodwill recognized in connection with the acquisition of a majority stake in our European business. In addition, compensation and benefits
expense was higher due to increased headcount, including a full year of compensation that was recognized in 2016 for European hires that occurred during the build out of our European business in 2015. Fund management and administration expense also
increased due to higher average AUM. Also, we incurred expenses in Canada as our office was established in April 2016.
Year Ended December 31,
2015 Compared to Year Ended December 31, 2014
U.S. Business segment
Revenues of the U.S. Business segment increased 61.1% from $182.9 million in 2014 to $294.7 million in 2015. The increase was
primarily attributable to higher average AUM which increased 58.4% due to net inflows of $16.9 million, partially offset by market depreciation. In 2015, our currency hedged European equity ETF (HEDJ) comprised the vast majority of our net
inflows and offset the net outflows we experienced in emerging markets as the aggressive monetary policy of the European Central Bank weakened the Euro, stimulating the local equity markets.
Operating expenses of the U.S. Business segment increased 42.2% from $104.3 million in 2014 to $148.4 million in 2015. The increase
was primarily due to higher accrued incentive compensation due to our record net inflow levels, increased headcount related expenses and higher stock-based compensation due to equity awards granted to our employees as part of 2014 compensation.
Operating expenses also increased as a result of higher fund management and administration expenses primarily due to higher average U.S. listed AUM.
International Business segment
Revenues of the International Business segment increased 418.2% from $0.8 million in 2014 to $4.2 million in 2015. The International
Business segment commenced operations on April 15, 2014 in connection with the acquisition of our European business. The increase in revenues was directly attributable to a full year of operations in 2015 as well as higher average AUM, which
increased 348.9% from $133.8 million in 2014 to $600.5 million in 2015 primarily due to net inflows and partially offset by market depreciation. The average advisory fee earned during the period also increased 4 and 8 basis points for our
European ETPs and UCITS, respectively, due to changes in product mix.
Operating expenses of the International Business segment increased
126.7% from $5.9 million in 2014 to $13.4 million in 2015. The higher expenses were incurred in connection with the build out of our European business as headcount increased from 23 at December 31, 2014 to 34 at December 31,
2015. Operating expenses also increased as a result of higher fund management and administration, primarily due to higher average International AUM. In addition, the International Business segment recognized a $2.2 million acquisition payment
expense which represented the change in the estimated fair value of the buyout obligation of the minority interest in our European business.
61
Liquidity and Capital Resources
The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
Balance Sheet Data (in thousands)
:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
92,722
|
|
|
$
|
210,070
|
|
|
Securities owned, at fair value
|
|
|
58,907
|
|
|
|
—
|
|
|
Securities
held-to-maturity
|
|
|
22,496
|
|
|
|
23,689
|
|
|
Accounts receivable
|
|
|
17,668
|
|
|
|
27,576
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: Liquid assets
|
|
|
191,793
|
|
|
|
261,335
|
|
|
Less: Total liabilities
|
|
|
(48,423
|
)
|
|
|
(58,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total: Available liquidity
|
|
$
|
143,370
|
|
|
$
|
203,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Cash Flow Data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
$
|
54,911
|
|
|
$
|
155,111
|
|
|
$
|
82,630
|
|
|
Investing cash flows
|
|
|
(89,265
|
)
|
|
|
(12,319
|
)
|
|
|
(5,831
|
)
|
|
Financing cash flows
|
|
|
(82,844
|
)
|
|
|
(98,136
|
)
|
|
|
(15,772
|
)
|
|
Foreign exchange rate effect
|
|
|
(150
|
)
|
|
|
130
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents
|
|
$
|
(117,348
|
)
|
|
$
|
44,786
|
|
|
$
|
60,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity
We consider our available liquidity to be our liquid assets less our liabilities. Liquid assets consist of cash and cash equivalents,
securities owned, at fair value, securities
held-to-maturity
and accounts receivable. Cash and cash equivalents include cash on hand with financial institutions and all
highly liquid investments with an original maturity of 90 days or less at the time of purchase. Our securities owned, at fair value are highly liquid investments. Certain securities are accounted for as
held-to-maturity
securities and we have the intention and ability to hold them to maturity. However, these securities are also readily traded and, if needed, could be sold for liquidity. Accounts receivable
are current assets and primarily represent receivables from advisory fees we earn from our ETPs. Our liabilities consist primarily of payments owed to vendors and third parties in the normal course of business as well as accrued year end
compensation for employees.
Cash and cash equivalents decreased $117.3 million in 2016 due to $63.6 million of cash and cash
equivalents invested in an
available-for-sale
portfolio of short-duration investment grade corporate bonds, $43.7 million used to pay dividends on our common stock,
$39.4 million used to repurchase our common stock, $20.0 million invested in AdvisorEngine, $15.5 million used to purchase
held-to-maturity
securities,
$11.8 million used in connection with the GreenHaven acquisition and $0.9 million of other activities. These decreases were partly offset by $54.9 million of cash generated by our operating activities, $16.7 million from
held-to-maturity
securities called or maturing during the year and $6.0 million from sales and maturities of securities
available-for-sale.
Cash and cash equivalents increased $44.8 million in 2015 due to
$155.1 million of cash flows generated by our operating activities, $4.8 million from
held-to-maturity
securities called or maturing during the year and
$4.5 million from the exercise of stock options. These increases were partially offset by $78.5 million used to pay dividends on our common stock, $24.1 million used to repurchase our common stock, $14.4 million used to
purchase securities
held-to-maturity
and $2.6 million for leasehold and other capital expenditures for our office space.
62
Cash and cash equivalents increased $61.0 million in 2014 primarily due to
$82.6 million of cash flows generated by our operating activities, $1.5 million received from the exercise of stock options, $1.4 million in cash acquired from the acquisition of our European business and $0.9 million received
from securities called or maturing during the year. These increases were partially offset by $10.8 million used to pay dividends on our common stock, $6.5 million used to repurchase our common stock, $4.9 million used for leasehold
and other capital expenditures for our new office space and $3.2 million used to purchase securities
held-to-maturity.
Capital Resources
Our principal
source of financing is our operating cash flow. We believe that current cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for at least the next 12 months.
Use of Capital
Our business does
not require us to maintain a significant cash position. We expect that our main uses of cash will be to fund the ongoing operations of our business, invest in strategic growth initiatives, expand our business through strategic acquisitions and fund
our capital return program. As part of our capital management, we maintain a capital return program which includes a $0.08 per share quarterly cash dividend and authority to purchase our common stock through April 27, 2019, including purchases
to offset future equity grants made under our equity plans. In 2016, we repurchased 3,778,932 shares of our common stock under the repurchase program for an aggregate cost of $39.4 million. Currently, $96.5 million remains under this
program for future purchases.
Contractual Obligations
The following table summarizes our future cash payments associated with contractual obligations as of December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Payments Due by Period
|
|
|
|
|
(in thousands)
|
|
|
|
|
Less than 1
year
|
|
|
1 to 3 years
|
|
|
3 to 5 years
|
|
|
More than 5
years
|
|
|
Operating leases
|
|
$
|
37,291
|
|
|
$
|
4,020
|
|
|
$
|
6,326
|
|
|
$
|
8,422
|
|
|
$
|
18,523
|
|
|
Acquisition payable
|
|
|
3,537
|
|
|
|
3,537
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,828
|
|
|
$
|
7,557
|
|
|
$
|
6,326
|
|
|
$
|
8,422
|
|
|
$
|
18,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Arrangements
Other than operating leases, which are included in the table above, we do not have any
off-balance
sheet financing or other arrangements. We have neither created nor are party to any special-purpose or
off-balance
sheet entities for the purpose of raising capital, incurring debt or operating our business.
Critical Accounting Policies
Goodwill and
Intangible Assets
Goodwill is the excess of the fair value of the purchase price over the fair values of the identifiable net
assets at the acquisition date. The Company tests its goodwill for impairment at least annually and at the time of a triggering event requiring
re-evaluation,
if one were to occur. Goodwill may be impaired
when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying value. If the estimated fair value of such reporting unit is less than its carrying value, goodwill impairment is recognized if the implied
fair
63
value of the reporting unit’s goodwill is less than the carrying amount of that goodwill. A reporting unit is an operating segment or a component of an operating segment provided that the
component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.
For impairment testing purposes, goodwill has been allocated to our U.S. Business reporting unit and the European Business reporting unit
(included within the International Business reportable segment) based upon the goodwill derived from each acquisition. When performing our goodwill impairment test, we consider a qualitative assessment, when appropriate, and the income approach,
market approach and our market capitalization when determining the fair value of our reporting units.
We have designated April 30
th
as our annual impairment testing date. Goodwill was tested for impairment during the three months ended June 30, 2016 and the fair value of the reporting unit exceeded its carrying value and
therefore no impairment was recognized. However, in the fourth quarter of 2016, we reorganized our reporting structure, which required interim goodwill impairment tests to be performed on the goodwill allocated to both the U.S. Business and European
Business reporting units. In connection with these interim impairment tests, we determined that all of the goodwill allocated to the European Business reporting unit ($1.7 million) was impaired based on the income approach and taking into
consideration the reporting unit’s historical operating losses. The goodwill allocated to the U.S. Business reporting unit was not impaired based upon a qualitative assessment.
Indefinite-lived intangible assets are tested for impairment at least annually and are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are impaired if their estimated fair value is less than their carrying value. We may rely on a qualitative assessment when
performing our intangible asset impairment test. Otherwise, the impairment evaluation is performed at the lowest level of identifiable cash flows independent of other assets. We have designated November
30
th
as our annual impairment testing date for indefinite-lived intangible assets related to the GreenHaven acquisition. Our intangible assets were assessed for impairment as of November 30,
2016 and the results of this analysis identified no impairment.
Revenue Recognition
We earn investment advisory fees from ETPs, as well as licensing fees from third parties. ETP advisory fees are based on a percentage of the
ETPs’ average daily net assets and recognized over the period the related service is provided. Licensing fees are based on a percentage of the average monthly net assets and recognized over the period the related service is provided.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU
2016-13,
Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments
(ASU
2016-13).
The main objective of the standard is to provide financial statement users
with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in the standard
replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is
applicable to loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, loan commitments and certain other
off-balance
sheet credit exposures, debt securities
(including those
held-to-maturity)
and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized
financial assets. Accordingly, the new methodology will be utilized when assessing our securities classified as
available-for-sale
(“AFS”) and
held-to-maturity
for impairment. ASU
2016-13
is effective for years beginning after December 15, 2019,
64
including interim periods within those fiscal years under a modified retrospective approach. Early adoption is permitted for periods beginning after December 15, 2018. We are currently
evaluating the impact that the standard will have on our consolidated financial statements.
In March 2016, the FASB issued ASU
2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU
2016-09).
The standard is intended to simplify
several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU
2016-09
is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We will be adopting this standard in the first quarter of 2017. The adoption of the standard will increase volatility reported in income
tax expense as income tax windfalls and shortfalls will be recorded in income tax expense, rather than additional
paid-in
capital, when applicable. In the first quarter of 2017, we anticipate recognizing
approximately $1.0 million of income tax expense for tax shortfalls related to stock-based compensation vesting occurring during this period.
In February 2016, the FASB issued ASU
2016-02,
Leases
(ASU
2016-02),
which requires lessees to include most leases on the balance sheet. ASU
2016-02
is effective for fiscal years (and interim reporting periods within those
years) beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements. See Note 8 to our Consolidated Financial Statements.
In November 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred Taxes
(ASU
2015-17),
which simplifies the presentation of deferred income taxes.
ASU 2015-17
provides presentation requirements to classify deferred tax assets and
liabilities as noncurrent in a classified statement of financial position. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. We early adopted ASU
2015-17
effective December 31, 2015, retrospectively. Adoption resulted in a reclassification of $9.3 million from current to noncurrent assets on our Consolidated Balance Sheet at December 31, 2015.
In February 2015, the FASB issued ASU
2015-02,
Amendments to the Consolidation Analysis
(ASU
2015-02),
which amends the consolidation guidance in Accounting Standards Codification (“ASC”) 810. The standard eliminates the deferral of FAS 167, per
ASC 810-10-65-2(a),
which has allowed certain investment funds to follow the previous consolidation guidance in FIN 46 (R). The standard changes whether
(1) fees paid to a decision maker or service provider represent a variable interest, (2) a limited partnership or similar entity has the characteristics of a variable interest entity (“VIE”) and (3) a reporting entity is the
primary beneficiary of a VIE. The effective date of the standard is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public companies, and early adoption was permitted. We adopted ASU
2015-02
effective January 1, 2016. Adoption had no impact on our consolidated financial statements.
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers
(ASU
2014-09),
which is a new comprehensive revenue recognition standard on the financial reporting requirements for revenue from contracts entered into with customers. In July 2015, the FASB deferred this ASU’s
effective date by one year, to interim and annual periods beginning after December 15, 2017. The deferral allows early adoption at the original effective date. During 2016, the FASB issued ASU
2016-08,
which clarifies principal versus agent considerations, ASU
2016-10,
which clarifies identifying performance obligations and the licensing implementation guidance, and ASU
2016-12,
which amends certain aspects of the new revenue recognition standard pursuant to ASU
2014-09.
ASU
2014-09
allows for the
use of either the retrospective or modified retrospective adoption method. We are currently reviewing our contracts in order to evaluate the impact that the standard will have on our consolidated financial statements.
65
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The following information,
together with information included in other parts of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, describes key aspects of our market risk.
Market Risk
Market risk to us
generally represents the risk of changes in the value of securities held in the portfolios of the WisdomTree ETPs that generally results from fluctuations in securities prices, foreign currency exchange rates against the U.S. dollar, and interest
rates. Nearly all of our revenues are derived from advisory agreements for the WisdomTree ETFs. Under these agreements, the advisory fee we receive is based on the average market value of the assets in the WisdomTree ETF portfolios we manage.
Fluctuations in the value of these securities are common and are generated by numerous factors such as market volatility, the overall economy,
inflation, changes in investor strategies and sentiment, availability of alternative investment vehicles, government regulations and others. Accordingly, changes in any one or a combination of these factors may reduce the value of investment
securities and, in turn, the underlying AUM on which our revenues are earned. These declines may cause investors to withdraw funds from our ETPs in favor of investments that they perceive as offering greater opportunity or lower risk, thereby
compounding the impact on our revenues. We believe challenging and volatile market conditions will continue to be present in the foreseeable future.
Interest Rate Risk
In order to
maximize yields, we invest our corporate cash in short-term interest earning assets, primarily money market instruments at a commercial bank, federal agency debt instruments and short-term investment grade corporate bonds which totaled
$161.2 million and $135.7 million as of December 31, 2015 and 2016, respectively. We do not anticipate that changes in interest rates will have a material impact on our financial condition, operating results or cash flows.
Exchange Rate Risk
As a result of
our operations in Europe, Japan and Canada, we now operate globally and are subject to currency translation exposure on the results of our
non-U.S.
operations. Foreign currency translation risk is the risk
that exchange rate gains or losses arise from translating foreign entities’ statements of earnings and balance sheets from functional currency to our reporting currency (the U.S. dollar) for consolidation purposes. We generate the vast majority
of our revenues and expenses in the U.S. dollar and expect to do so for some time. We do not anticipate that changes in exchange rates, predominantly the British pound or Euro, and to a lesser extent, the Japanese Yen and Canadian Dollar, as they
relate to translating functional currency to our reporting currency, will have a material impact on our financial condition, operating results or cash flows. Currently, we do not enter into derivative financial instruments aimed at offsetting
certain exposures in the statement of operations or the balance sheet but may look to do so in the future.
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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The report of the independent registered
public accounting firm and financial statements listed in the accompanying index are included in Item 15 of this Annual Report on Form
10-K.
See Index to the consolidated financial statements on page
F-1
of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A.
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CONTROLS AND PROCEDURES
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Evaluation of Disclosure Controls and Procedures
As of December 31, 2016, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15(b)
promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that, as of December 31, 2016, our disclosure controls and procedures were effective at a reasonable assurance level in ensuring that material information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules, regulations and forms of the SEC, including ensuring that such material information is accumulated by and communicated to our
management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2016, there were no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Management on Internal Control over
Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. In order to evaluate the effectiveness of internal control over financial reporting, management
has conducted an assessment, including testing, using the criteria in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Our system
of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of
its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the assessment,
management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
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ITEM 9B.
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OTHER INFORMATION
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None.
67
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
1. Organization and Description of Business
WisdomTree Investments, Inc., through its global subsidiaries (collectively, “WisdomTree” or the “Company”), is an exchange
traded product (“ETP”) sponsor and asset manager headquartered in New York. WisdomTree offers ETPs covering equity, fixed income, currency, alternative and commodity asset classes. The Company has the following wholly-owned operating
subsidiaries:
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WisdomTree Asset Management, Inc.
(“WTAM”) is a New York based investment adviser registered with the SEC providing investment advisory and other management services to the WisdomTree Trust
(“WTT”) and WisdomTree exchange traded funds (“ETFs”).
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•
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Boost Management Limited
(“BML”) is a Jersey based management company providing investment and other management services to Boost Issuer PLC (“BI”) and Boost ETPs.
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WisdomTree Europe Limited
(“WisdomTree Europe”) is a U.K. based company registered with the Financial Conduct Authority providing management and other services to BML and WisdomTree Management Limited.
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WisdomTree Management Limited
(“WTML”) is an Ireland based management company providing investment and other management services to WisdomTree Issuer plc (“WTI”) and WisdomTree UCITS ETFs.
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WisdomTree Japan Inc.
(“WTJ”) is a Japan based company that is registered with Japan’s Ministry of Finance and serves the institutional market selling U.S. listed WisdomTree ETFs in Japan.
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WisdomTree Commodity Services, LLC
(“WTCS”) is a New York based company that serves as the managing owner and commodity pool operator of the WisdomTree Continuous Commodity Index Fund. WTCS is
registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”).
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WisdomTree Asset Management Canada, Inc.
(“WTAMC”) is a Canada based investment fund manager registered with the Ontario Securities Commission providing fund management services to locally-listed
WisdomTree ETFs.
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The WisdomTree ETFs are issued in the U.S. by WTT. WTT, a
non-consolidated
third party, is a Delaware statutory trust registered with the SEC as an
open-end
management investment company. The Company has licensed to WTT the use
of certain of its own indexes on an exclusive basis for the WisdomTree ETFs in the U.S. The Boost ETPs are issued by BI. BI, a
non-consolidated
third party, is a public limited company organized in Ireland.
The WisdomTree UCITS ETFs are issued by WTI. WTI, a
non-consolidated
third party, is a public limited company organized in Ireland.
The Board of Trustees and Board of Directors of WTT, BI and WTI, respectively, are separate from the Board of Directors of the Company. The
respective Trustees and Directors of WTT, BI and WTI, as applicable, are primarily responsible for overseeing the management and affairs of the WisdomTree ETFs, Boost ETPs and the WisdomTree UCITS ETFs for the benefit of the WisdomTree ETF, Boost
ETP and the WisdomTree UCITS ETF shareholders, respectively, and have contracted with the Company to provide for general management and administration services. The Company, in turn, has contracted with third parties to provide the majority of these
administration services. In addition, certain officers of the Company provide general management services for WTT, BI and WTI.
F-9
2. Significant Accounting Policies
Basis of Presentation
These
consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and in the opinion of management reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of financial condition, results of operations, and cash flows for the periods presented. The consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation. Certain accounts in the prior years’ consolidated
financial statements have been reclassified to conform to the current year’s consolidated financial statements presentation. These reclassifications had no effect on the previously reported operating results.
Consolidation
The Company
consolidates entities in which it has a controlling financial interest. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity (“VOE”) or a
variable interest entity (“VIE”). The usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. If the Company has a majority voting interest in a VOE, the entity is consolidated. The Company
has a controlling financial interest in a VIE when the Company has a variable interest that provides it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the
obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company had no variable interests in any VIEs at December 31, 2016 and 2015.
Segment and Geographic Information
The Company operates as an ETP sponsor and asset manager providing investment advisory services in the U.S., Europe, Canada and Japan. These
activities are reported in the Company’s U.S. Business and International Business reportable segments. The U.S. Business segment includes the results of the Company’s U.S. operations and Japan sales office, which primarily engages in
selling U.S. listed ETFs to Japanese institutions. The results of the Company’s European and Canadian operations are reported as the International Business segment.
Revenues are primarily derived in the U.S. and the vast majority of the Company’s AUM is currently located in the U.S.
Foreign Currency Translation
Assets and liabilities of subsidiaries whose functional currency is not the U.S. dollar are translated based on the end of period exchange
rates from local currency to U.S. dollars. Results of operations are translated at the average exchange rates in effect during the period.
Use of
Estimates
The preparation of the Company’s 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 as of the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. Actual results could differ materially from those
estimates.
F-10
Revenue Recognition
The Company earns investment advisory fees from its ETPs, as well as licensing fees from third parties. ETP advisory fees are based on a
percentage of the ETPs’ average daily net assets and recognized over the period the related service is provided. Licensing fees are based on a percentage of the average monthly net assets and recognized over the period the related service is
provided.
Depreciation and Amortization
Depreciation is provided for using the straight-line method over the estimated useful lives of the related assets as follows:
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Equipment
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5 years
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Furniture and fixtures
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15 years
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Leasehold improvements are amortized over the term of their respective leases or service lives of the
improvements, whichever is shorter. Fixed assets are stated at cost less accumulated depreciation and amortization.
Occupancy
The Company accounts for its office lease facilities as operating leases, which may include free rent periods and escalation clauses. The
Company expenses the lease payments associated with operating leases on a straight-line basis over the lease term.
Marketing and Advertising
Advertising costs, including media advertising and production costs, are expensed when incurred.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be classified as cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer and other obligations due under normal trade terms. An allowance for doubtful accounts is not provided since,
in the opinion of management, all accounts receivable recorded are deemed collectible.
Impairment of Long-Lived Assets
The Company performs a review for the impairment of long-lived assets when events or changes in circumstances indicate that the estimated
undiscounted future cash flows expected to be generated by the assets are less than their carrying amounts or when other events occur which may indicate that the carrying amount of an asset may not be recoverable.
Earnings per Share
Basic earnings
per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Net income available to common stockholders represents net income of the
Company reduced by an allocation of earnings to participating
F-11
securities. Unvested share-based payment awards that contain
non-forfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and are included in the computation of EPS pursuant to the
two-class
method. Share-based payment awards that do not contain such rights are not deemed participating securities and are
included in diluted shares outstanding (if dilutive) under the treasury stock method. Diluted EPS reflects the reduction in earnings per share assuming dilutive options or other dilutive contracts to issue common stock were exercised or converted
into common stock. Diluted EPS is calculated under both the treasury stock method and
two-class
method. The calculation that results in the most dilutive EPS amount for the common stock is reported in the
Company’s consolidated financial statements.
Securities Owned and Securities Sold, but not yet Purchased (at fair value)
Securities owned and securities sold, but not yet purchased are securities classified as either trading or
available-for-sale
(“AFS”). These securities are recorded on their trade date and are measured at fair value. The Company classifies these financial instruments based primarily on the Company’s
intent to hold or sell the security. Changes in the fair value of securities classified as trading are reported in other income in the period the change occurs. Unrealized gains and losses of securities classified as AFS are included within other
comprehensive income. Once sold, amounts reclassified out of accumulated other comprehensive income and into earnings are determined using the specific identification method. AFS securities are assessed for impairment on a quarterly basis.
Securities
Held-to-Maturity
The Company accounts for certain of its investments as
held-to-maturity
on a trade date basis, which are recorded at amortized cost. For
held-to-maturity
investments, the Company has the intent and ability to hold investments to maturity and it is not
more-likely-than-not
that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. On a quarterly basis, the Company reviews its portfolio of
investments for impairment. If a decline in fair value is deemed to be other-than-temporary, the security is written down to its fair value through earnings.
Investment, Carried at Cost
The
Company accounts for equity securities that do not have a readily determinable fair value as cost method investments to the extent such investments are not subject to consolidation or the equity method. Income is recognized when dividends are
received only to the extent they are distributed from net accumulated earnings of the investee. Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment.
Cost method investments held by the Company are assessed for impairment on a quarterly basis.
Goodwill
Goodwill is the excess
of the fair value of the purchase price over the fair values of the identifiable net assets at the acquisition date. The Company tests its goodwill for impairment at least annually and at the time of a triggering event requiring
re-evaluation,
if one were to occur. Goodwill may be impaired when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying value. If the estimated fair value of such
reporting unit is less than its carrying value, goodwill impairment is recognized if the implied fair value of the reporting unit’s goodwill is less than the carrying amount of that goodwill. A reporting unit is an operating segment or a
component of an operating segment provided that the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.
For impairment testing purposes, goodwill has been allocated to the Company’s U.S. Business reporting unit and the European Business
reporting unit (included within the International Business reportable segment) based
F-12
upon the goodwill derived from each acquisition (See Note 16). The Company has designated April 30
th
as its annual goodwill impairment
testing date. When performing its goodwill impairment test, the Company considers a qualitative assessment, when appropriate, and the income approach, market approach and its market capitalization when determining the fair value of its reporting
units.
Intangible Assets
Indefinite-lived intangible assets are tested for impairment at least annually and are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are impaired if their estimated fair values are less than their carrying values.
Finite-lived intangible assets, if any, are amortized over their estimated useful life, which is the period over which the assets are expected
to contribute directly or indirectly to the future cash flows of the Company. These intangible assets are tested for impairment at the time of a triggering event, if one were to occur. Finite-lived intangible assets may be impaired when the
estimated undiscounted future cash flows generated from the assets are less than their carrying amounts.
The Company may rely on a
qualitative assessment when performing its intangible asset impairment test. Otherwise, the impairment evaluation is performed at the lowest level of identifiable cash flows independent of other assets. The Company has designated November 30
th
as its annual impairment testing date for the indefinite-lived intangible assets related to the GreenHaven acquisition.
Stock-Based Awards
Accounting for
stock-based compensation requires the measurement and recognition of compensation expense for all equity awards based on estimated fair values. Stock-based compensation is measured based on the grant-date fair value of the award and is amortized
over the relevant service period.
Income Taxes
The Company accounts for income taxes using the liability method, which requires the determination of deferred tax assets and liabilities based
on the differences between the financial and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which differences are expected to reverse. Deferred tax assets are adjusted by a valuation allowance if, based on
the weight of available evidence, it is
more-likely-than-not
that some portion or all of the deferred tax assets will not be realized.
In order to recognize and measure any unrecognized tax benefits, management evaluates and determines whether any of its tax positions are
more-likely-than-not
to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets
this recognition threshold, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. The Company records interest expense and penalties related to tax expenses as income tax expense.
Non-income
based taxes are recorded as part of other liabilities and other expenses.
Third Party Sharing Arrangements
The Company pays a percentage of its advisory fee revenues based on incremental growth in AUM, subject to caps or minimums, to marketing agents
to sell WisdomTree ETFs and for including WisdomTree ETFs on third party customer platforms.
F-13
Business Combinations and Acquisitions
The Company includes the results of operations of the businesses that it acquires from the respective dates of acquisition. The fair values of
the purchase price of the acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase price over the fair values of these identifiable assets and
liabilities is recorded as goodwill. The Company may allocate purchase price to identifiable intangible assets. The estimated fair value of identifiable intangible assets is based on critical estimates, judgments and assumptions derived from:
analysis of market conditions; revenue and revenue growth assumptions; profitability assumptions; discount rates; customer retention rates; and estimated useful lives.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-13,
Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments
(ASU
2016-13).
The main objective of the standard
is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this
objective, the amendments in the standard replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform
credit loss estimates. The standard is applicable to loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, loan commitments and certain other
off-balance
sheet credit exposures, debt securities (including those
held-to-maturity)
and other financial assets measured at fair value through other comprehensive income, and
beneficial interests in securitized financial assets. Accordingly, the new methodology will be utilized when assessing the Company’s securities classified as AFS and
held-to-maturity
for impairment. ASU
2016-13
is effective for years beginning after December 15, 2019, including interim
periods within those fiscal years under a modified retrospective approach. Early adoption is permitted for periods beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its
consolidated financial statements.
In March 2016, the FASB issued ASU
2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU
2016-09).
The standard is intended to simplify several areas of accounting for share-based
compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures.
ASU 2016-09
is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2016, and early adoption is permitted. The Company will be adopting this standard in the first quarter of 2017. The adoption of the standard will increase volatility reported in income tax expense as income
tax windfalls and shortfalls will be recorded in income tax expense, rather than additional
paid-in
capital, when applicable. In the first quarter of 2017, the Company anticipates recognizing approximately
$1.0 million of income tax expense for tax shortfalls related to stock-based compensation vesting occurring during this period.
In
February 2016, the FASB issued ASU
2016-02,
Leases
(ASU
2016-02),
which requires lessees to include most leases on the balance sheet. ASU
2016-02
is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact that
the standard will have on its consolidated financial statements (See Note 8).
In November 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred Taxes
(ASU
2015-17),
which simplifies the presentation of deferred income taxes.
ASU 2015-17
provides presentation requirements to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The standard is effective for fiscal years
beginning after December 15, 2016, including interim periods within that reporting period. The Company early adopted ASU
2015-17
effective December 31, 2015, retrospectively. Adoption resulted in a
reclassification of $9,279 from current to noncurrent assets on its Consolidated Balance Sheet at December 31, 2015.
F-14
In February 2015, the FASB issued ASU
2015-02,
Amendments to the Consolidation Analysis
(ASU
2015-02),
which amends the consolidation guidance in Accounting Standards Codification (“ASC”) 810. The standard eliminates the deferral of FAS
167, per
ASC 810-10-65-2(a),
which has allowed certain investment funds to follow the previous consolidation guidance
in FIN 46 (R). The standard changes whether (1) fees paid to a decision maker or service provider represent a variable interest, (2) a limited partnership or similar entity has the characteristics of a VIE and (3) a reporting
entity is the primary beneficiary of a VIE. The effective date of the standard is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public companies, and early adoption was permitted. The
Company adopted ASU
2015-02
effective January 1, 2016. Adoption had no impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers
(ASU
2014-09),
which is a new comprehensive revenue recognition standard on the financial reporting requirements for revenue from contracts entered into with customers. In July 2015, the FASB deferred this ASU’s
effective date by one year, to interim and annual periods beginning after December 15, 2017. The deferral allows early adoption at the original effective date. During 2016, the FASB issued ASU
2016-08,
which clarifies principal versus agent considerations, ASU
2016-10,
which clarifies identifying performance obligations and the licensing implementation guidance, and ASU
2016-12,
which amends certain aspects of the new revenue recognition standard pursuant to ASU
2014-09.
ASU
2014-09
allows for the
use of either the retrospective or modified retrospective adoption method. The Company is currently reviewing its contracts in order to evaluate the impact that the standard will have on its consolidated financial statements.
3. Cash and Cash Equivalents
Cash and
cash equivalents of approximately $56,484 and $152,103 at December 31, 2016 and December 31, 2015, respectively, were held at one financial institution. At December 31, 2016 and December 31, 2015, cash equivalents were
approximately $55,619 and $137,481, respectively.
4. Securities Owned and Securities Sold, but not yet Purchased (and Fair Value Measurement)
Securities owned and securities sold, but not yet purchased are measured at fair value. The fair value of securities is defined as the price
that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. ASC 820,
Fair Value Measurements
, establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect assumptions that market participants would use in pricing the asset or liability developed based
on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Instruments whose significant drivers are unobservable.
The availability of observable inputs can vary from product to product and is effected by a wide variety of factors, including, for example,
the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires
F-15
more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on
the lowest level input that is significant to the fair value measurement in its entirety.
Fair Valuation Methodology
Cash and Cash Equivalents
– These financial assets represent cash in banks or cash invested in highly liquid investments with
original maturities less than 90 days. These investments are valued at par, which approximates fair value, and are considered Level 1 (See Note 3).
Securities
(Held-to-Maturity)
– These securities
are Federal agency debt instruments which are instruments that are generally traded in active, quoted and highly liquid markets and are therefore classified as Level 1 within the fair value hierarchy (See Note 5).
Securities Owned/Sold But Not Yet Purchased
– These securities consist of securities classified as trading and AFS, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Securities Owned
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
1,556
|
|
|
$
|
—
|
|
|
Available-for-sale
securities
|
|
|
57,351
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,907
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Sold, but not yet Purchased
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
1,248
|
|
|
$
|
—
|
|
|
Available-for-sale
securities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,248
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities are investments in exchange traded funds. These instruments are generally traded in active,
quoted and highly liquid markets and are therefore classified as Level 1 within the fair value hierarchy. AFS securities are investments in short-term investment grade corporate bonds and are classified as Level 2. Fair value is generally
derived from observable bids for these Level 2 financial instruments.
AFS Securities
The following table summarizes unrealized gains, losses and fair value of the AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Cost
|
|
$
|
57,615
|
|
|
$
|
—
|
|
|
Gross unrealized gains in other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
Gross unrealized losses in other comprehensive income
|
|
|
(264
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
57,351
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
All of the Company’s AFS securities are due within one year. The Company assesses the AFS securities for
other-than-temporary impairment on a quarterly basis. No AFS securities were determined to be other-than-temporarily impaired for the year ending December 31, 2016.
F-16
Acquisition Payable (See Note 15)
– In April 2014, the Company acquired a 75%
majority stake in its European business. Under the terms of the agreement, the remaining 25% was to be acquired on or about March 31, 2018.
As of December 31, 2015, the Company estimated the fair value of the acquisition payable to be $9,900, of which $3,942 was recorded on
the Consolidated Balance Sheets. The fair value was categorized as Level 3 and was based on a predefined formula that included the following inputs, many of which were unobservable: the contractual minimum payment obligation, projected European
AUM (ranging from $1,000,000 to $6,000,000), the Company’s enterprise value over global AUM, and operating results of the European business. The fair value was determined using a discounted cash flows analysis using a discount rate of 27.5%.
Significant increases (decreases) to the projected AUM of the European listed ETPs or operating results of the European business in isolation would have resulted in a higher (lower) fair value measurement. Significant increases (decreases) to the
discount rate in isolation would have resulted in a lower (higher) fair value measurement.
In May 2016, the Company accelerated the
buyout of the remaining minority interest in its European business. Acquisition payment expense recognized during the year ended December 31, 2016 was $6,738, of which $5,993 was recorded during the three months ended June 30, 2016 in
connection with the acceleration of the buyout. The remaining acquisition payable recorded on the Consolidated Balance Sheets was $3,537 at December 31, 2016 (See Note 15).
5. Securities
Held-to-Maturity
The following table is a summary of the Company’s securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Federal agency debt instruments
|
|
$
|
22,496
|
|
|
$
|
23,689
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes unrealized gains, losses, and fair value of securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Cost/amortized cost
|
|
$
|
22,496
|
|
|
$
|
23,689
|
|
|
Gross unrealized gains
|
|
|
13
|
|
|
|
82
|
|
|
Gross unrealized losses
|
|
|
(1,353
|
)
|
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
21,156
|
|
|
$
|
23,162
|
|
|
|
|
|
|
|
|
|
|
|
The Company assesses these securities for other-than-temporary impairment on a quarterly basis. No securities
were determined to be other-than-temporarily impaired for the years ending December 31, 2016 and 2015. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the
securities before recovery of their amortized cost bases, which may be maturity.
The following table sets forth the maturity profile of
the securities
held-to-maturity;
however, these securities may be called prior to maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Due within one year
|
|
$
|
3,994
|
|
|
$
|
—
|
|
|
Due one year through five years
|
|
|
1,023
|
|
|
|
8,369
|
|
|
Due five years through ten years
|
|
|
4,031
|
|
|
|
3,127
|
|
|
Due over ten years
|
|
|
13,448
|
|
|
|
12,193
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,496
|
|
|
$
|
23,689
|
|
|
|
|
|
|
|
|
|
|
|
F-17
6. Investment, Carried at Cost
On November 18, 2016, the Company made a strategic investment in AdvisorEngine, Inc., formerly known as Vanare, an
end-to-end
wealth management platform which enables individual customization of investment philosophies. The Company and AdvisorEngine also entered into a strategic agreement
whereby the Company’s asset allocation models are made available through AdvisorEngine’s open architecture platform and the Company actively introduces the platform to its distribution network.
The Company invested $20,000 in AdvisorEngine for 11,811,856 convertible preferred shares (“Series A Preferred”), which is the
equivalent to a 36% fully diluted equity ownership interest.
The Series A Preferred contains various rights and protections including a
non-cumulative
6.0% dividend, payable if and when declared by the board of directors, and a liquidation preference that is senior to all other holders of capital stock of AdvisorEngine, which is convertible into
common stock at the option of the Company. The investment is accounted for under the cost method of accounting as it is not considered to be
in-substance
common stock.
This investment is assessed for impairment on a quarterly basis. No impairment existed at December 31, 2016.
7. Fixed Assets
The following table
summarizes fixed assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Equipment
|
|
$
|
1,739
|
|
|
$
|
1,258
|
|
|
Furniture and fixtures
|
|
|
2,393
|
|
|
|
2,382
|
|
|
Leasehold improvements
|
|
|
10,877
|
|
|
|
10,312
|
|
|
Less accumulated depreciation and amortization
|
|
|
(3,261
|
)
|
|
|
(1,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,748
|
|
|
$
|
11,974
|
|
|
|
|
|
|
|
|
|
|
|
8. Commitments and Contingencies
Contractual Obligations
The
Company has entered into obligations under operating leases with initial
non-cancelable
terms in excess of one year for office space, telephone, and data services. Expenses recorded under these agreements for
the years ended December 31, 2016, 2015, and 2014 were approximately $4,293, $3,447 and $3,157, respectively.
Future minimum lease
payments with respect to
non-cancelable
operating leases at December 31, 2016 are approximately as follows:
|
|
|
|
|
|
|
2017
|
|
$
|
4,020
|
|
|
2018
|
|
|
3,379
|
|
|
2019
|
|
|
2,947
|
|
|
2020
|
|
|
2,866
|
|
|
2021 and thereafter
|
|
|
24,079
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,291
|
|
|
|
|
|
|
|
F-18
Letter of Credit
The Company collateralized its U.S. office lease through a standby letter of credit totaling $1,384. The collateral is included in cash and
cash equivalents on the Company’s Consolidated Balance Sheets.
Contingencies
The Company is subject to various reviews, inspections and investigations by regulatory authorities as well as legal proceedings arising in the
ordinary course of business. The Company is not currently party to any litigation that is expected to have a material impact on its business, financial position, results of operations or cash flows.
9. Related Party Transactions
The
Company’s revenues are derived primarily from investment advisory agreements with related parties. Under these agreements, the Company has licensed to related parties the use of certain of its own indexes for the U.S. and Canadian WisdomTree
ETFs and WisdomTree UCITS ETFs. The Board of Trustees and Board of Directors of the related parties are primarily responsible for overseeing the management and affairs of the U.S. and Canadian WisdomTree ETFs, Boost ETPs and WisdomTree UCITS ETFs
for the benefit of their shareholders and have contracted with the Company to provide for general management and administration services. The Company is also responsible for certain expenses of the related parties, including the cost of transfer
agency, custody, fund administration and accounting, legal, audit, and other
non-distribution
services, excluding extraordinary expenses, taxes and certain other expenses, which is included in fund management
and administration on the Company’s Consolidated Statements of Operations. In exchange, the Company receives fees based on a percentage of the ETF average daily net assets. The advisory agreements may be terminated by the related parties upon
notice. Certain officers of the Company also provide general management oversight of the related parties; however, these officers have no material decision making responsibilities and primarily implement the decisions of the Board of Trustees and
Board of Directors of the related parties.
The following table summarizes accounts receivable from related parties which are included as
a component of Accounts receivable on the Company’s Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Receivable from WTT
|
|
$
|
16,506
|
|
|
$
|
24,560
|
|
|
Receivable from BI and WTI
|
|
|
645
|
|
|
|
487
|
|
|
Receivable from WTCS
|
|
|
158
|
|
|
|
—
|
|
|
Receivable from WTAMC
|
|
|
40
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,349
|
|
|
$
|
25,047
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes revenues from advisory services provided to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Advisory services provided to WTT
|
|
$
|
209,199
|
|
|
$
|
293,788
|
|
|
$
|
181,987
|
|
|
Advisory services provided to BI and WTI
|
|
|
7,251
|
|
|
|
4,156
|
|
|
|
829
|
|
|
Advisory services provided to WTCS
|
|
|
1,867
|
|
|
|
—
|
|
|
|
—
|
|
|
Advisory services provided to WTAMC
|
|
|
148
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
218,465
|
|
|
$
|
297,944
|
|
|
$
|
182,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
The Company also has an investment in a WisdomTree ETF of approximately $1,300 at
December 31, 2016. For the year ended December 31, 2016, the Company has recorded losses of approximately $12 within other income on the Consolidated Statements of Operations.
10. Stock-Based Awards
The Company
grants equity awards to employees and directors which include restricted stock awards and stock options. Options may be issued for terms of ten years and may vest after at least one year and have an exercise price equal to the Company’s stock
price on the grant date. Restricted stock awards are generally valued based on the Company’s stock price on the grant date. The Company estimates the fair value for options using the Black-Scholes option pricing model. All restricted stock and
option awards require future service as a condition of vesting with certain awards subject to acceleration under certain conditions.
On
June 20, 2016, the Company’s stockholders approved a new equity award plan under which the Company can issue up to 10,000,000 shares of common stock (less one share for every share granted under prior plans since March 31, 2016 and
inclusive of shares available under the prior plans as of March 31, 2016) in the form of stock options and other stock-based awards. The Company also has issued from time to time stock-based awards outside a plan.
For the years ended December 31, 2016, 2015 and 2014, total stock-based compensation expense was $14,892, $10,900 and $8,137,
respectively, and the related tax benefit recognized in the Consolidated Statements of Operations was $5,324, $4,149 and $2,973, respectively.
The actual tax benefit realized for the tax deductions for share-based compensation was $12,877, $67,532 and $23,309 for the years ended
December 31, 2016, 2015 and 2014, respectively.
A summary of unrecognized stock-based compensation expense and average remaining
vesting period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
Stock-Based
Compensation
|
|
|
Average
Remaining
Vesting Period
|
|
|
Employees and directors option awards
|
|
$
|
8
|
|
|
|
0.07
|
|
|
Employees and directors restricted stock awards
|
|
$
|
20,714
|
|
|
|
1.79
|
|
Stock Options
A summary of option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Outstanding January 1, 2014
|
|
|
7,844,691
|
|
|
$
|
1.29
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeitures/expirations
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(2,514,621
|
)
|
|
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
5,330,070
|
|
|
$
|
1.61
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeitures/expirations
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(3,785,473
|
)
|
|
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
1,544,597
|
|
|
$
|
2.62
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeitures/expirations
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(176,350
|
)
|
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2016
(1)
|
|
|
1,368,247
|
|
|
$
|
2.82
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Expire on dates ranging from March 4, 2017 to November 15, 2021.
|
F-20
The total intrinsic value of options exercised for the years ended December 31, 2016, 2015
and 2014 was $1,794, $76,329 and $36,226, respectively. Cash received from option exercise for the years ended December 31, 2016, 2015 and 2014 was $195, $4,520 and $1,544, respectively.
The following table summarizes information on stock options outstanding at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Weighted-
Average
Remaining
Life
(Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Remaining
Life
(Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
$0.70 – $0.70
|
|
|
435,000
|
|
|
|
2.1
|
|
|
$
|
0.70
|
|
|
|
435,000
|
|
|
|
2.1
|
|
|
$
|
0.70
|
|
|
$1.07 – $1.07
|
|
|
93,535
|
|
|
|
1.0
|
|
|
|
1.07
|
|
|
|
93,535
|
|
|
|
1.0
|
|
|
|
1.07
|
|
|
$2.09 – $2.26
|
|
|
390,176
|
|
|
|
2.4
|
|
|
|
2.20
|
|
|
|
390,176
|
|
|
|
2.4
|
|
|
|
2.20
|
|
|
$5.05 – $5.05
|
|
|
285,000
|
|
|
|
4.1
|
|
|
|
5.05
|
|
|
|
247,500
|
|
|
|
4.1
|
|
|
|
5.05
|
|
|
$6.36 – $6.82
|
|
|
74,536
|
|
|
|
4.4
|
|
|
|
6.46
|
|
|
|
74,536
|
|
|
|
4.4
|
|
|
|
6.46
|
|
|
$7.01 – $8.51
|
|
|
90,000
|
|
|
|
4.7
|
|
|
|
7.48
|
|
|
|
90,000
|
|
|
|
4.7
|
|
|
|
7.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,368,247
|
|
|
|
2.8
|
|
|
$
|
2.82
|
|
|
|
1,330,747
|
|
|
|
2.8
|
|
|
$
|
2.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, outstanding options for 1,368,247 shares had a remaining average contractual term
of 2.8 years and an intrinsic value of $11,386. Outstanding options for 1,330,747 were exercisable, had a remaining average contractual term of 2.8 years and an intrinsic value of $11,158.
Restricted stock
The Company
grants restricted stock to employees and directors. All restricted stock awards require future service as a condition of vesting with certain awards subject to acceleration under certain conditions. Restricted stock awards generally vest over three
years.
A summary of restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
Unvested Balance at January 1, 2014
|
|
|
1,896,877
|
|
|
$
|
7.27
|
|
|
Granted
|
|
|
623,088
|
|
|
|
16.08
|
|
|
Vested
|
|
|
(996,385
|
)
|
|
|
6.73
|
|
|
Forfeited
|
|
|
(9,641
|
)
|
|
|
10.81
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Balance at December 31, 2014
|
|
|
1,513,939
|
|
|
$
|
11.22
|
|
|
Granted
|
|
|
886,413
|
|
|
|
19.72
|
|
|
Vested
|
|
|
(753,917
|
)
|
|
|
10.05
|
|
|
Forfeited
|
|
|
(25,709
|
)
|
|
|
17.30
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Balance at December 31, 2015
|
|
|
1,620,726
|
|
|
$
|
16.32
|
|
|
Granted
|
|
|
1,687,553
|
|
|
|
11.19
|
|
|
Vested
|
|
|
(846,386
|
)
|
|
|
13.98
|
|
|
Forfeited
|
|
|
(25,439
|
)
|
|
|
16.17
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Balance at December 31, 2016
|
|
|
2,436,454
|
|
|
$
|
13.58
|
|
|
|
|
|
|
|
|
|
|
|
F-21
11. Employee Benefit Plans
The Company has a 401(k) savings plan covering all eligible employees in which the Company can make discretionary contributions from its
profits.
A summary of the Company made discretionary contributions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
$
|
934
|
|
|
$
|
763
|
|
|
$
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Earnings Per Share
The following is a reconciliation of the basic and diluted earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Net income
|
|
$
|
26,155
|
|
|
$
|
80,052
|
|
|
$
|
61,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in thousands)
|
|
|
Shares of common stock and common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in basic computation
|
|
|
134,401
|
|
|
|
137,242
|
|
|
|
131,770
|
|
|
Dilutive effect of common stock equivalents
|
|
|
1,138
|
|
|
|
1,583
|
|
|
|
6,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in dilutive computation
|
|
|
135,539
|
|
|
|
138,825
|
|
|
|
138,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.58
|
|
|
$
|
0.46
|
|
|
Diluted earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.58
|
|
|
$
|
0.44
|
|
In the table above, unvested share-based awards that have
non-forfeitable
rights to dividends or dividend equivalents are treated as a separate class of securities in calculating EPS.
Diluted earnings per share reflects the reduction in earnings per share assuming options or other contracts to issue common stock were
exercised or converted into common stock (if dilutive) under the treasury stock method. The Company excluded 996,000 and 1,247,000 common stock equivalents from its computation of diluted earnings per share for the years ended December 31, 2016
and 2014, respectively, as they were determined to be anti-dilutive. There were no anti-dilutive common stock equivalents included in the calculation of diluted earnings per share for the year ended December 31, 2015.
F-22
13. Income Taxes
The components of current and deferred income tax expense included in the Consolidated Statement of Operations for years ended
December 31, 2016, 2015 and 2014 as determined in accordance with ASC 740,
Income Taxes
(“ASC 740”), are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
14,515
|
|
|
$
|
1,598
|
|
|
$
|
—
|
|
|
State and local
|
|
|
1,425
|
|
|
|
2,431
|
|
|
|
94
|
|
|
Foreign
|
|
|
567
|
|
|
|
210
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,507
|
|
|
|
4,239
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10,629
|
|
|
|
46,784
|
|
|
|
10,739
|
|
|
State and local
|
|
|
2,296
|
|
|
|
6,233
|
|
|
|
1,664
|
|
|
Foreign
|
|
|
(25
|
)
|
|
|
(123
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,900
|
|
|
|
52,894
|
|
|
|
12,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense from operations
|
|
$
|
29,407
|
|
|
$
|
57,133
|
|
|
$
|
12,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate of 35% and the Company’s effective rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Federal statutory rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
|
Change in valuation allowance
|
|
|
8.16
|
%
|
|
|
0.90
|
%
|
|
|
(27.74
|
%)
|
|
State income tax rate, net of federal benefit
|
|
|
4.17
|
%
|
|
|
4.11
|
%
|
|
|
1.55
|
%
|
|
Acquisition expense
|
|
|
4.06
|
%
|
|
|
0.61
|
%
|
|
|
—
|
|
|
Goodwill impairment
|
|
|
1.16
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Foreign tax differential
|
|
|
0.68
|
%
|
|
|
0.82
|
%
|
|
|
0.82
|
%
|
|
Change in effective state rate
|
|
|
0.22
|
%
|
|
|
(0.06
|
%)
|
|
|
6.86
|
%
|
|
Other differences, net
|
|
|
(0.52
|
%)
|
|
|
0.27
|
%
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
52.93
|
%
|
|
|
41.65
|
%
|
|
|
16.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Losses – U.S
.
The Company’s
pre-tax
federal net operating losses for tax purposes (“NOLs”) at
December 31, 2016 was $4,195 which expire in 2024. The net operating loss carryforwards have been reduced by the impact of annual limitations described in the Internal Revenue Code Section 382 that arose as a result of an ownership change.
The Company no longer has any NOLs related to vested stock-based compensation awards that were previously unrecognized under GAAP. Such
NOLs were utilized during the year ended December 31, 2016 to reduce the Company’s tax liability with a corresponding credit to additional
paid-in
capital.
F-23
Net Operating Losses – International
The Company’s European and Canadian subsidiaries generated NOLs outside the U.S. The following table summarizes the activity for these
NOLs for the years ended December 31, 2016, 2015 and 2014, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Balance – Beginning of year
(pre-tax)
|
|
$
|
10,746
|
|
|
$
|
4,061
|
|
|
$
|
—
|
|
|
Foreign subsidiaries tax losses
|
|
|
12,960
|
|
|
|
6,685
|
|
|
|
4,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – End of year
(pre-tax)
|
|
$
|
23,706
|
|
|
$
|
10,746
|
|
|
$
|
4,061
|
|
|
|
|
|
|
|
Tax Rate – Blended
|
|
|
19.2
|
%
|
|
|
19.1
|
%
|
|
|
20.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – End of year (tax effected)
|
|
$
|
4,551
|
|
|
$
|
2,051
|
|
|
$
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, 2015, and 2014, the Company established a full valuation allowance related to these
NOLs as it is
more-likely-than-not
that some portion or all of the deferred tax assets will not be realized.
Deferred Tax Assets
A summary of
the components of the Company’s deferred tax assets at December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
5,382
|
|
|
$
|
4,868
|
|
|
Accrued expenses
|
|
|
4,552
|
|
|
|
10,197
|
|
|
NOLs – Foreign
|
|
|
4,551
|
|
|
|
2,051
|
|
|
Deferred rent liability
|
|
|
2,024
|
|
|
|
2,116
|
|
|
NOLs – U.S.
|
|
|
1,611
|
|
|
|
1,828
|
|
|
Unrealized losses
|
|
|
101
|
|
|
|
5
|
|
|
Other
|
|
|
227
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
18,448
|
|
|
|
21,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
2,405
|
|
|
|
2,272
|
|
|
Incentive compensation
|
|
|
1,365
|
|
|
|
2,753
|
|
|
Goodwill and intangible assets
|
|
|
301
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
4,071
|
|
|
|
5,025
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets less deferred tax liabilities
|
|
|
14,377
|
|
|
|
16,122
|
|
|
Less: valuation allowance
|
|
|
(4,551
|
)
|
|
|
(2,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
9,826
|
|
|
$
|
14,071
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions
The Company determined that it has no unrecognized tax benefits as of December 31, 2016 and 2015 as defined within
ASC 740-10.
Income Tax Examinations
The Company is subject to U.S. federal income tax as well as income tax of multiple state, local and certain foreign jurisdictions. The
Company’s 2013 federal income tax return is currently under audit.
F-24
Tax returns filed with each jurisdiction generally remain open to examination under the normal
three-year statute of limitation. As of December 31, 2016, with few exceptions, the Company was no longer subject to income tax examinations by any taxing authority for years before 2013.
Undistributed Earnings of Foreign Subsidiaries
The Company recognizes deferred tax liabilities associated with outside basis differences on investments in foreign subsidiaries unless the
difference is considered essentially permanent in duration. As of December 31, 2016, all of the Company’s undistributed earnings and profits, which are not currently significant, are considered essentially permanent in duration.
14. Shares Repurchased
On
October 29, 2014, the Company’s Board of Directors authorized a three-year share repurchase program of up to $100,000. On April 27, 2016, the Board of Directors approved a $60,000 increase to the Company’s share repurchase
program and extended the term through April 27, 2019. Included under this program are purchases to offset future equity grants made under the Company’s equity plans and are made in open market or privately negotiated transactions. This
authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual number of shares repurchased depends on a variety of factors including price, corporate
and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The repurchase program may be suspended or terminated at any time without prior notice. Shares repurchased under this program are returned to
the status of authorized and unissued on the Company’s books and records.
During the years ended December 31, 2016, 2015 and
2014, the Company repurchased 3,778,932 shares, 1,190,356 shares and 415,834 shares of its common stock, respectively, under this program for an aggregate cost of $39,379, $24,116 and $6,531, respectively.
As of December 31, 2016, $96,505 remains under this program for future purchases.
15. Business Combinations and Acquisitions
GreenHaven Acquisition (allocated to the Company’s U.S. Business reporting unit)
Effective January 1, 2016, the Company acquired the outstanding membership interest in each of GreenHaven Commodity Services, LLC, the
managing owner of the GreenHaven Continuous Commodity Index Fund (“Commodities ETF”), and GreenHaven Coal Services, LLC, the sponsor of the GreenHaven Coal Fund (“Coal ETF”), from GreenHaven, LLC and GreenHaven Group LLC,
respectively, for $11,825 in cash. As part of the acquisition, the Company recognized an intangible asset related to its customary advisory agreement with the Commodities ETF of $9,953 and goodwill of $1,799 (which primarily represents potential
future performance of the funds), both of which are deductible for tax purposes.
The following table summarizes the purchase price
allocation:
|
|
|
|
|
|
|
Fair value acquired:
|
|
|
|
|
|
Assets
|
|
$
|
205
|
|
|
Goodwill
|
|
|
1,799
|
|
|
Intangible asset
|
|
|
9,953
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
11,957
|
|
|
Less: Liabilities
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,825
|
|
|
|
|
|
|
|
F-25
The Company closed the Coal ETF on September 29, 2016.
Boost Acquisition (allocated to the Company’s “European Business” reporting unit)
In April 2014, the Company acquired a 75% majority stake in its European business (formerly Boost), with an obligation to buy out the remaining
minority interest on or about March 31, 2018. No consideration was transferred on the acquisition date. The acquisition of the remaining minority interest was to be calculated using a predefined formula based on the
180-day
average of European AUM at December 31, 2017 and was to be tied to the Company’s enterprise value over the
180-day
average of global AUM at December 31,
2017, and affected by the operating results of the European business. This obligation was measured at fair value each reporting period and any change in the carrying amount was recognized as an expense, included within acquisition payment expense on
the Company’s Consolidated Statement of Operations.
Because the Company was required to redeem the remaining 25% interest using a
predefined formula, under U.S. GAAP, the Company did not record this interest as a
non-controlling
interest.
The minority shareholders, who remained employed with the Company, were guaranteed a minimum payment of $1,757 for their interest if they
terminate their employment without good reason or they are terminated for cause prior to December 31, 2017. The Company determined that this minimum payment represented consideration transferred and was recognized and measured at
acquisition-date fair value. The acquisition gave rise to goodwill of $1,676 which represented the excess of the consideration transferred over the $81 fair value of the net assets acquired, consisting primarily of accounts receivable, accounts
payable and fixed assets (See Note 16). The goodwill is not tax deductible.
Any future payments made in connection with this acquisition
was accounted for separately from the business combination and represents compensation for post-acquisition services. For the year ended December 31, 2015, the Company recorded $997 of compensation expense and $1,188 of interest expense
reflected within acquisition payment expense on the Company’s Consolidated Statements of Operations.
In May 2016, the Company
accelerated the buyout and completed the purchase of the remaining minority interest. Acquisition payment expense recorded during the year ended December 31, 2016 was $6,738, of which $5,993 was recognized during the three months ended
June 30, 2016 as a result of the acceleration of the buyout.
Amounts payable in connection with this acquisition at
December 31, 2016 and 2015 were $3,537 and $3,942, respectively.
16. Goodwill and Intangible Assets
Goodwill
During the fourth quarter
of 2016, the Company reorganized its reporting structure which resulted in a change in the composition of its reporting units (See Note 17). Previously, the Company had a single reporting unit. This change resulted in the reassignment of the
Company’s goodwill to the reorganized reporting units as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Unit
|
|
|
|
|
|
|
|
U.S.
Business
|
|
|
European
Business
(1)
|
|
|
Total
|
|
|
Balance at January 1, 2016
|
|
$
|
—
|
|
|
$
|
1,676
|
|
|
$
|
1,676
|
|
|
Increases/(decreases)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GreenHaven acquisition
|
|
|
1,799
|
|
|
|
—
|
|
|
|
1,799
|
|
|
Goodwill impairment – Boost
|
|
|
—
|
|
|
|
(1,676
|
)
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
1,799
|
|
|
$
|
—
|
|
|
$
|
1,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Europe is included within the Company’s International Business reportable segment.
|
F-26
The Company has designated April 30
th
as its
annual goodwill impairment testing date. However, the reorganization of the reporting structure required the Company to perform interim goodwill impairment tests on its goodwill allocated to both the U.S. Business and European Business reporting
units. In connection with these interim impairment tests, the Company determined that all of the goodwill allocated to the European Business reporting unit ($1,676) was impaired based on the income approach and taking into consideration the
reporting unit’s historical operating losses. The goodwill allocated to the U.S. Business reporting unit was not impaired based on a qualitative assessment.
Intangible Asset (Indefinite-Lived)
As part of the GreenHaven acquisition, the Company identified an intangible asset related to its customary advisory agreement with the
GreenHaven Commodities ETF for $9,953. This intangible asset (which is deductible for tax purposes) was determined to have an indefinite useful life. The Company has designated November 30
th
as
its annual impairment testing date for this indefinite-lived intangible asset.
|
|
|
|
|
|
|
|
|
Total
|
|
|
Balance at January 1, 2016
|
|
$
|
—
|
|
|
Increases – Advisory agreement (Commodities)
|
|
|
9,953
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
9,953
|
|
|
|
|
|
|
|
During the fourth quarter of 2016, the Company performed its indefinite-lived intangible asset impairment
test. The results of this analysis identified no impairment.
17. Segment Reporting
The Company operates as an ETP sponsor and asset manager providing investment advisory services in the U.S., Europe, Canada and Japan. These
activities are reported in the Company’s U.S. Business and International Business reportable segments. The U.S. Business segment includes the results of the Company’s U.S. operations and Japan sales office. The results of the
Company’s European and Canadian operations are reported as the International Business segment.
Information concerning these
reportable segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Revenues (U.S. Business segment)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
211,066
|
|
|
$
|
293,788
|
|
|
$
|
181,987
|
|
|
Other income
|
|
|
1,424
|
|
|
|
931
|
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (U.S. Business segment)
|
|
$
|
212,490
|
|
|
$
|
294,719
|
|
|
$
|
182,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (International Business segment)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
7,399
|
|
|
$
|
4,156
|
|
|
$
|
829
|
|
|
Other income
|
|
|
(443
|
)
|
|
|
67
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (International Business segment)
|
|
$
|
6,956
|
|
|
$
|
4,223
|
|
|
$
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
219,446
|
|
|
$
|
298,942
|
|
|
$
|
183,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Business segment
|
|
$
|
74,721
|
|
|
$
|
146,335
|
|
|
$
|
78,631
|
|
|
International Business segment
|
|
|
(19,159
|
)
|
|
|
(9,150
|
)
|
|
|
(5,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before taxes
|
|
$
|
55,562
|
|
|
$
|
137,185
|
|
|
$
|
73,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
Assets are not reported by segment as such information is not utilized by the chief operating
decision maker. The vast majority of the Company’s assets are located in the U.S.
18. Subsequent Events
The Company has evaluated subsequent events through the date of issuance of the accompanying consolidated financial statements. There were no
events requiring disclosure.
F-28