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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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 Japans 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.
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 Companys 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 years 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
8
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 VIEs 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 March 31, 2017 and December 31, 2016.
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 Companys U.S. Business and International Business reportable segments. The U.S. Business segment includes the results of the Companys U.S. operations and Japan sales office, which primarily engages in
selling U.S. listed ETFs to Japanese institutions. The results of the Companys 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 Companys 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 Companys 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.
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.
9
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 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 Companys 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 Companys
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 units 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 Companys U.S. Business reporting unit (See Note 14). 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.
10
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 its indefinite-lived
intangible assets.
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
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.
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 Companys 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,
CompensationStock
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 adopted this standard prospectively on January 1, 2017. The adoption of the standard increased volatility
11
reported in income tax expense as income tax windfalls and shortfalls associated with the vesting of stock-based compensation is now recorded in income tax expense, rather than additional
paid-in
capital, when applicable. This new guidance resulted in the Company recognizing approximately $1.0 million of income tax expense for tax shortfalls related to stock-based compensation vesting occurring
during this period, which reduced basic and diluted EPS by $0.01 (See Notes 11 and 12).
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 January 2016, the FASB issued ASU
2016-01,
Financial Instruments
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU
2016-01).
The main objective of the standard is to enhance the reporting model for financial instruments to provide
users of financial statements with more decision-useful information. The amendments in the update make targeted improvements to generally accepted accounting principles. These include requiring equity investments (except those accounted for under
the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
Available-for-sale
classification for equity investments with readily determinable fair values will no longer be permissible. However, an entity may choose to measure
equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
The update also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an
entity is required to measure the investment at fair value. ASU
2016-01
is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption
is not permitted for the updates currently applicable to the Company. The Companys equity investments with readily determinable fair values are all currently measured at fair value with changes in fair value recognized in net income. The
Company will apply the amendments in this update when assessing the carrying value of its investment, held at cost.
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 ASUs 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 $39,743 and $56,484 at March 31, 2017 and December 31, 2016, respectively, were held at
one financial institution. At March 31, 2017 and December 31, 2016, cash equivalents were approximately $39,522 and $55,619, 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:
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Level 1
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Quoted prices for identical instruments in active markets.
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Level 2
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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.
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Level 3
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Instruments whose significant drivers are unobservable.
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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
12
market, the determination of fair value requires 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:
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March 31,
2017
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December 31,
2016
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|
Securities Owned
|
|
|
|
|
|
|
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Trading securities
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$
|
264
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$
|
1,556
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Available-for-sale
securities
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57,347
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|
|
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57,351
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|
|
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Total
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$
|
57,611
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|
|
$
|
58,907
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|
|
|
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|
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Securities Sold, but not yet Purchased
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|
|
|
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Trading securities
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|
$
|
27
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|
|
$
|
1,248
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|
Available-for-sale
securities
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|
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|
|
|
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|
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|
|
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Total
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$
|
27
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|
|
$
|
1,248
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|
|
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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:
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March 31,
2017
|
|
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December 31,
2016
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|
Cost
|
|
$
|
57,779
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|
|
$
|
57,615
|
|
Gross unrealized gains in other comprehensive income
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|
|
|
|
|
|
|
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Gross unrealized losses in other comprehensive income
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|
|
(432
|
)
|
|
|
(264
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)
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
57,347
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|
|
$
|
57,351
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|
|
|
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All the Companys 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 at March 31, 2017 or December 31, 2016.
During the three months ended March 31, 2017, the Company received $21.0 million of proceeds from the sale and maturity of
available-for-sale
securities and recognized gross realized losses of $0.2 million. These losses have been reclassified out of accumulated other comprehensive income and
into other income within the Consolidated Statements of Operations. Proceeds received were used to purchase additional AFS securities.
13
5. Securities
Held-to-Maturity
The following table is a summary of the Companys securities
held-to-maturity:
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|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Federal agency debt instruments (amortized cost)
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|
$
|
23,202
|
|
|
$
|
22,496
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes unrealized gains, losses, and fair value of securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Cost/amortized cost
|
|
$
|
23,202
|
|
|
$
|
22,496
|
|
Gross unrealized gains
|
|
|
12
|
|
|
|
13
|
|
Gross unrealized losses
|
|
|
(1,405
|
)
|
|
|
(1,353
|
)
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
21,809
|
|
|
$
|
21,156
|
|
|
|
|
|
|
|
|
|
|
The Company assesses these securities for other-than-temporary impairment on a quarterly basis. No securities
were determined to be other-than-temporarily impaired at March 31, 2017 or December 31, 2016. 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:
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|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Due within one year
|
|
$
|
3,997
|
|
|
$
|
3,994
|
|
Due one year through five years
|
|
|
1,020
|
|
|
|
1,023
|
|
Due five years through ten years
|
|
|
4,030
|
|
|
|
4,031
|
|
Due over ten years
|
|
|
14,155
|
|
|
|
13,448
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,202
|
|
|
$
|
22,496
|
|
|
|
|
|
|
|
|
|
|
6. Investment, Carried at Cost
On November 18, 2016, the Company made a $20,000 strategic investment in AdvisorEngine, Inc., an
end-to-end
wealth management platform which enables individual customization of investment philosophies. The Company and AdvisorEngine also entered into an agreement whereby the Companys asset
allocation models are made available through AdvisorEngines open architecture platform and the Company actively introduces the platform to its distribution network.
In consideration of its investment, the Company received 11,811,856 shares of Series A convertible preferred shares (Series A
Preferred), for an aggregate equity ownership interest of approximately 42% (or 36% on a fully-diluted basis).
The Series A
Preferred is convertible into common stock at the option of the Company and 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. 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 March 31, 2017 or December 31, 2016.
7.
Fixed Assets
The following table summarizes fixed assets:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Equipment
|
|
$
|
1,839
|
|
|
$
|
1,739
|
|
Furniture and fixtures
|
|
|
2,414
|
|
|
|
2,393
|
|
Leasehold improvements
|
|
|
11,006
|
|
|
|
10,877
|
|
Less accumulated depreciation and amortization
|
|
|
(3,617
|
)
|
|
|
(3,261
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,642
|
|
|
$
|
11,748
|
|
|
|
|
|
|
|
|
|
|
14
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 three months ended March 31, 2017 and 2016 were approximately $1,120 and $985, respectively.
Future minimum lease payments with
respect to
non-cancelable
operating leases at March 31, 2017 were approximately as follows:
|
|
|
|
|
Remainder of 2017
|
|
$
|
3,040
|
|
2018
|
|
|
3,437
|
|
2019
|
|
|
2,952
|
|
2020
|
|
|
2,867
|
|
2021 and thereafter
|
|
|
24,079
|
|
|
|
|
|
|
Total
|
|
$
|
36,375
|
|
|
|
|
|
|
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 Companys Consolidated Balance Sheets.
Contingencies
The Company may be subject to 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 adverse impact on its business, financial position, results of operations or cash flows.
9. Related Party Transactions
The
Companys 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 Companys 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 Companys Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Receivable from WTT
|
|
$
|
17,970
|
|
|
$
|
16,506
|
|
Receivable from BI and WTI
|
|
|
766
|
|
|
|
645
|
|
Receivable from WTCS
|
|
|
131
|
|
|
|
158
|
|
Receivable from WTAMC
|
|
|
31
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,898
|
|
|
$
|
17,349
|
|
|
|
|
|
|
|
|
|
|
15
The following table summarizes revenues from advisory services provided to related parties:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Advisory services provided to WTT
|
|
$
|
50,456
|
|
|
$
|
58,642
|
|
Advisory services provided to BI and WTI
|
|
|
2,155
|
|
|
|
1,523
|
|
Advisory services provided to WTCS
|
|
|
570
|
|
|
|
450
|
|
Advisory services provided to WTAMC
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,262
|
|
|
$
|
60,615
|
|
|
|
|
|
|
|
|
|
|
The Company also had an investment in a WisdomTree ETF of approximately $1,300 at December 31, 2016. The
investment was redeemed by the fund which was subsequently closed and liquidated during three months ended March 31, 2017.
10. Stock-Based Awards
The Company grants equity awards to employees and directors which include restricted stock awards, restricted stock units and stock
options. Stock 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 Companys stock price on the grant date. Restricted stock awards and restricted stock units are generally
valued based on the Companys stock price on the grant date. The Company estimates the fair value for stock options using the Black-Scholes option pricing model. All restricted stock awards, restricted stock units and stock option awards
require future service as a condition of vesting with certain awards subject to acceleration under certain conditions.
On June 20,
2016, the Companys 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.
The Company recorded stock-based compensation expense of $3,421 and $3,503 for the three months ended March 31, 2017 and 2016,
respectively.
A summary of unrecognized stock-based compensation expense and average remaining vesting period is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
Unrecognized Stock-
Based
Compensation
|
|
|
Average
Remaining
Vesting Period
|
|
Employees and directors restricted stock awards
|
|
$
|
22,613
|
|
|
|
1.93
|
|
A summary of stock options, restricted stock and restricted stock unit activity for the three months ended
March 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
Restricted
Stock
Awards
|
|
|
Restricted
Stock
Units
|
|
Balance at January 1, 2017
|
|
|
1,368,247
|
|
|
|
2,436,454
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
492,044
|
|
|
|
3,759
|
|
Exercised/vested
|
|
|
(5,000
|
)
|
|
|
(819,247
|
)
|
|
|
|
|
Forfeitures
|
|
|
|
|
|
|
(3,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
1,363,247
|
|
|
|
2,105,743
|
|
|
|
3,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
11. Earnings Per Share
The following is a reconciliation of the basic and diluted earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
6,880
|
|
|
$
|
12,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in thousands)
|
|
|
|
|
Shares of common stock and common stock equivalents
:
|
|
|
|
|
|
|
|
|
Weighted average common shares used in basic computation
|
|
|
134,385
|
|
|
|
135,467
|
|
Dilutive effect of common stock equivalents
|
|
|
1,124
|
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in dilutive computation
|
|
|
135,509
|
|
|
|
136,457
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
Diluted earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
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 1,549,440 and 2,017,005 common stock equivalents from its computation of diluted earnings per share for the three months ended
March 31, 2017 and 2016, respectively, as they were determined to be anti-dilutive.
As further discussed in Note 12, the Company
adopted ASU
2016-09
prospectively during the three-months ended March 31, 2017 which had the effect of reducing basic and diluted EPS by $0.01.
12. Income Taxes
Effective Income Tax Rate
Three Months Ended March 31, 2017 and March 31, 2016
The Companys effective income tax rate for the three months
ended March 31, 2017 of 53.6% resulted in income tax expense of $7.9 million. The Companys tax rate differs from the federal statutory tax rate of 35% primarily due to a valuation allowance on foreign net operating losses, tax
shortfalls associated with the vesting of stock-based compensation awards and state and local income taxes.
Effective January 1,
2017, US GAAP was amended with the intention to simplify the accounting for stock-based compensation. This includes the requirement to record the tax effects related to stock-based compensation within income tax expense, rather than additional
paid-in
capital, when applicable. Therefore, tax shortfalls (and tax windfalls) associated with the vesting of stock-based compensation awards are now included within income tax expense. This new guidance resulted
in the recognition of $1.0 million of income tax expense associated with tax shortfalls recognized upon vesting of stock-based compensation awards during the quarter.
The Companys effective income tax rate for the three months ended March 31, 2016 of 44.3% resulted in income tax expense of
$9,600. The Companys tax rate differs from the federal statutory tax rate of 35% primarily due to state and local income taxes, the acquisition payment expense (which is
non-deductible)
and a
valuation allowance on foreign net operating losses.
Net Operating Losses U.S
.
The Companys
pre-tax
federal net operating losses for tax purposes (NOLs) at
March 31, 2017 was $3,671 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.
Net Operating Losses International
The Companys European and Canadian subsidiaries generated NOLs outside the U.S. These tax effected NOLs were $2.4 million at
March 31, 2017. 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.
17
Deferred Tax Assets
A summary of the components of the Companys deferred tax asset at March 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOLs Foreign
|
|
$
|
2,414
|
|
|
$
|
4,551
|
|
Stock-based compensation
|
|
|
2,353
|
|
|
|
5,382
|
|
Deferred rent liability
|
|
|
2,005
|
|
|
|
2,024
|
|
NOLs U.S.
|
|
|
1,410
|
|
|
|
1,611
|
|
Accrued expenses
|
|
|
1,207
|
|
|
|
4,552
|
|
Unrealized losses
|
|
|
163
|
|
|
|
101
|
|
Other
|
|
|
262
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
9,814
|
|
|
|
18,448
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
2,405
|
|
|
|
2,405
|
|
Incentive compensation
|
|
|
1,023
|
|
|
|
1,365
|
|
Goodwill and intangible assets
|
|
|
376
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
3,804
|
|
|
|
4,071
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets less deferred tax liabilities
|
|
|
6,010
|
|
|
|
14,377
|
|
Less: valuation allowance
|
|
|
(2,414
|
)
|
|
|
(4,551
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
3,596
|
|
|
$
|
9,826
|
|
|
|
|
|
|
|
|
|
|
13. Shares Repurchased
On October 29, 2014, the Companys 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 Companys 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 Companys 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 Companys books and records.
During the three months ended March 31, 2017 and March 31, 2016, the Company repurchased 346,529 shares and 3,407,305 shares of its
common stock, respectively, under this program for an aggregate cost of $3,628 and $35,555, respectively.
As of March 31, 2017,
$92,877 remains under this program for future purchases.
14. Goodwill and Intangible Assets
Goodwill has been allocated to the Companys U.S. Business reporting unit. The Company has designated April 30
th
as its annual goodwill impairment testing date. The following table summarizes the goodwill activity during the period:
|
|
|
|
|
|
|
U.S. Business
Reporting Unit
|
|
Balance at January 1, 2017
|
|
$
|
1,799
|
|
Increases/(decreases)
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
1,799
|
|
|
|
|
|
|
18
Intangible Asset (Indefinite-Lived)
As part of the GreenHaven acquisition which occurred on January 1, 2016, 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, 2017
|
|
$
|
9,953
|
|
Increases/(decreases)
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
9,953
|
|
|
|
|
|
|
15. 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 Companys U.S. Business and International Business reportable segments. The U.S. Business segment includes the results of the Companys U.S. operations and Japan sales office. The results of the
Companys European and Canadian operations are reported as the International Business segment.
Information concerning these
reportable segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues (U.S. Business segment)
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
51,026
|
|
|
$
|
59,092
|
|
Other income
|
|
|
1,312
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
Total revenues (U.S. Business segment)
|
|
$
|
52,338
|
|
|
$
|
59,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (International Business segment)
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
2,236
|
|
|
$
|
1,523
|
|
Other income
|
|
|
25
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Total revenues (International Business segment)
|
|
$
|
2,261
|
|
|
$
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
54,599
|
|
|
$
|
60,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before taxes
|
|
|
|
|
|
|
|
|
U.S. Business segment
|
|
$
|
17,908
|
|
|
$
|
24,210
|
|
International Business segment
|
|
|
(3,086
|
)
|
|
|
(2,538
|
)
|
|
|
|
|
|
|
|
|
|
Total income before taxes
|
|
$
|
14,822
|
|
|
$
|
21,672
|
|
|
|
|
|
|
|
|
|
|
Assets are not reported by segment as such information is not utilized by the chief operating decision maker.
The vast majority of the Companys assets are located in the U.S.
16. Subsequent Events
On April 27, 2017, the Company and AdvisorEngine jointly announced their commitment to providing advisor growth solutions through
AdvisorEngines acquisition of Kredible Technologies, Inc., a technology enabled, research-driven practice management firm designed to help advisors acquire new clients. The Company invested an additional $5,000 in AdvisorEngine to help
facilitate the Kredible acquisition and continue to fuel AdvisorEngines growth, leadership and innovation in the advisor solutions space. The Company received 2,646,062 shares of Series
A-1
convertible
preferred stock (Series
A-1
Preferred) for an aggregate equity ownership interest of approximately 47% (or 41% on a fully-diluted basis). The Series
A-1
Preferred has substantially the same terms as the Series A Preferred that the Company received in November 2016 in connection with its initial investment in AdvisorEngine as described in Note 6.
19