Form 10-Q
false2020Q30000880631--12-31DE0.000.00Redemption price of $7.70: The Company may redeem for cash all or any portion of the notes, at its option, on or after June 20, 2021 and on or prior to the 55th scheduled trading day immediately preceding the maturity date, if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding the redemption date. No sinking fund is provided for the Convertible Notes.Redemption price of $7.70: The Company may redeem for cash all or any portion of the notes, at its option, on or after June 20, 2021 and on or prior to the 55th scheduled trading day immediately preceding the maturity date, if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding the redemption date. No sinking fund is provided for the Convertible Notes.Recorded as an income tax benefit of $5,981 during the nine months ended September 30, 2020, along with an equal and offsetting amount recorded in other gains and losses, net, to recognize a reduction in the indemnification asset. During the nine months ended September 30, 2019, an income tax benefit of $4,309 was recorded along with an equal and offsetting amount in other gains and losses, net.The gross unrecognized tax benefits were accrued in British pounds.Derecognized upon the sale of the Company’s Canadian ETF business (Note 25).WTJ also recognized an impairment expense of $572 in connection with the termination of its office lease on March 31, 2019.Excludes 15,307,153 and 14,997,269 participating securities and 4,669 and 5,437 potentially dilutive non-participating common stock equivalents for the three and nine months ended September 30, 2020 as the Company reported a net loss for the period.The debt discount arose from the bifurcation of the conversion option. The unamortized debt discount and issuance costs is reported net of the unamortized premium on the Additional Notes.Includes amortization of the discount arising from the bifurcation of the conversion option, amortization of the issuance costs allocated to the Convertible Notes and amortization of the premium associated with the Additional Notes. 0000880631 2020-09-30 0000880631 2019-12-31 0000880631 2020-07-01 2020-09-30 0000880631 2019-07-01 2019-09-30 0000880631 2020-01-01 2020-09-30 0000880631 2019-01-01 2019-09-30 0000880631 2019-01-01 2019-12-31 0000880631 2016-05-21 2016-06-20 0000880631 2020-01-01 2020-03-31 0000880631 2020-04-01 2020-06-30 0000880631 2018-04-11 0000880631 2019-09-30 0000880631 2023-08-21 2023-08-21 0000880631 2020-10-26 0000880631 2020-01-01 2020-06-30 0000880631 2023-04-21 2023-05-20 0000880631 2020-06-30 0000880631 2019-06-30 0000880631 2018-12-31 0000880631 2020-03-31 0000880631 wetf:FederalAgencyMember 2020-09-30 0000880631 wetf:WisdomtreeETFMember 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
    
    
to
    
    
    
    
.
Commission File Number
001-10932
 
 
WisdomTree Investments, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
13-3487784
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
245 Park Avenue, 35
th
Floor
New York, New York
 
10167
(Address of principal executive offices)
 
(Zip Code)
212-801-2080
(Registrant’s telephone number, including area code)
 
 
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, as amended (the “Exchange Act”) 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 every Interactive Data File required to be submitted 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 such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated
filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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  
Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on
which registered
Common Stock, $0.01 par value
  
WETF
  
The NASDAQ Stock Market LLC
As of
October
 26, 2020, there were
 
148,781,570
 
shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.
 
 
 

Table of Contents
WISDOMTREE INVESTMENTS, INC.
Form
10-Q
For the Quarterly Period Ended September 30, 2020
TABLE OF CONTENTS
 
    
Page
Number
 
PART I: FINANCIAL INFORMATION      4  
Item 1. Financial Statements      4  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations      33  
Item 3. Quantitative and Qualitative Disclosures about Market Risk      52  
Item 4. Controls and Procedures      53  
PART II: OTHER INFORMATION      53  
Item 1. Legal Proceedings      53  
Item 1A. Risk Factors      53  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds      53  
Item 3. Defaults Upon Senior Securities      54  
Item 4. Mine Safety Disclosures      54  
Item 5. Other Information      54  
Item 6. Exhibits      55  
Unless otherwise indicated, references to “the Company,” “we,” “us,” “our” and “WisdomTree” mean WisdomTree Investments, Inc. and its subsidiaries.
WisdomTree
®
and Modern Alpha
®
are trademarks of WisdomTree Investments, Inc. in the United States and in other countries. All other trademarks are the property of their respective owners.
 
2

Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q
contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
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” included in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2019 and Quarterly Reports on Form
10-Q
for the quarters ended March 31, 2020 and June 30, 2020. If one or more of these or other 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 may include statements about:
 
   
the ultimate duration of the
COVID-19
pandemic and its short-term and long-term impact on our business and the global economy;
 
   
anticipated trends, conditions and investor sentiment in the global markets and exchange traded products, or ETPs;
 
   
anticipated levels of inflows into and outflows out of our ETPs;
 
   
our ability to deliver favorable rates of return to investors;
 
   
competition in our business;
 
   
our ability to develop new products and services;
 
   
our ability to maintain current vendors or find new vendors to provide services to us at favorable costs;
 
   
our ability to successfully operate and expand our business in
non-U.S.
markets; and
 
   
the effect of laws and regulations that apply to our business.
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.
 
3

Table of Contents
PART I: FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
WisdomTree Investments, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
 
    
September 30,
2020
   
December 31,
2019
 
    
(Unaudited)
       
Assets
    
Current assets:
    
Cash and cash equivalents
   $ 63,561     $ 74,972  
Securities owned, at fair value (including $23,906 and $16,886 invested in WisdomTree ETFs at September 30, 2020 and December 31, 2019, respectively)
     32,574       17,319  
Accounts receivable (including $23,420 and $25,667 due from related parties at September 30, 2020 and December 31, 2019, respectively)
     26,163       26,838  
Income taxes receivable
     38       —    
Prepaid expenses
     4,971       3,724  
Other current assets
     704       207  
  
 
 
   
 
 
 
Total current assets
     128,011       123,060  
Fixed assets, net
     7,654       8,127  
Notes receivable, net
     —         28,172  
Indemnification receivable (Note 22)
     25,502       32,101  
Securities
held-to-maturity
     501       16,863  
Deferred tax assets, net
     7,115       7,398  
Investments (Note 9)
     8,112       11,192  
Right of use assets – operating leases (Note 15)
     16,788       18,161  
Goodwill (Note 24)
     85,856       85,856  
Intangible assets (Note 24)
     601,247       603,294  
Other noncurrent assets
     185       983  
  
 
 
   
 
 
 
Total assets
   $ 880,971     $ 935,207  
  
 
 
   
 
 
 
Liabilities and stockholders’ equity
    
Liabilities
    
Current liabilities:
    
Fund management and administration payable
   $ 22,427     $ 22,021  
Compensation and benefits payable
     13,881       26,501  
Deferred consideration – gold payments (Note 11)
     17,202       13,953  
Securities sold, but not yet purchased, at fair value
     —         582  
Operating lease liabilities (Note 15)
     3,124       3,682  
Income taxes payable
     —         3,372  
Accounts payable and other liabilities
     10,383       8,930  
  
 
 
   
 
 
 
Total current liabilities
     67,017       79,041  
Convertible notes (Note 13)
     165,819       —    
Debt (Note 12)
     —         175,956  
Deferred consideration – gold payments (Note 11)
     190,546       159,071  
Operating lease liabilities (Note 15)
     17,849       19,057  
Other noncurrent liabilities (Note 22)
     25,502       32,101  
  
 
 
   
 
 
 
Total liabilities
     466,733       465,226  
Preferred stock – Series A
Non-Voting
Convertible, par value $0.01; 14.750 shares authorized, issued and
outstanding; redemption value of $50,690 and $71,630 at September 30, 2020 and December 31, 2019,
respectively) (Note 14)
     132,569       132,569  
  
 
 
   
 
 
 
Contingencies (Note
16
)
  
Stockholders’ equity
    
Preferred stock, par value $0.01; 2,000 shares authorized:
    
 
 
 
     
Common stock, par value $0.01; 250,000 shares authorized; issued and outstanding: 148,782 and 155,264 at September 30, 2020 and December 31, 2019, respectively
     1,488       1,553  
Additional
paid-in
capital
     319,443       352,658  
Accumulated other comprehensive income
     640       945  
Accumulated deficit
     (39,902     (17,744
  
 
 
   
 
 
 
Total stockholders’ equity
     281,669       337,412  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 880,971     $ 935,207  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
4

Table of Contents
WisdomTree Investments, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
    
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
    
2020
   
2019
   
2020
   
2019
 
Operating Revenues:
        
Advisory fees
   $ 63,919     $ 67,006     $ 184,077     $ 197,473  
Other income
     721       712       2,563       2,023  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     64,640       67,718       186,640       199,496  
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating Expenses:
        
Compensation and benefits
     19,098       18,880       53,848       61,481  
Fund management and administration
     15,219       15,110       44,165       45,852  
Marketing and advertising
     2,996       3,022       7,413       8,612  
Sales and business development
     2,386       4,354       7,984       12,947  
Contractual gold payments (Note 11)
     4,539       3,502       12,362       9,710  
Professional and consulting fees
     950       1,259       3,580       4,037  
Occupancy, communications and equipment
     1,611       1,549       4,805       4,715  
Depreciation and amortization
     253       259       760       792  
Third-party distribution fees
     1,233       1,503       3,928       5,822  
Acquisition and disposition-related costs
     —         190       416       536  
Other
     1,611       1,959       5,204       6,267  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     49,896       51,587       144,465       160,771  
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
     14,744       16,131       42,175       38,725  
Other Income/(Expenses):
        
Interest expense
     (2,511     (2,832     (6,974     (8,634
Loss on revaluation of deferred consideration – gold payments (Note 11)
     (8,870     (6,306     (34,436     (5,939
Interest income
     111       799       393       2,396  
Impairments (Note 26)
     (3,080     —         (22,752     (572
Loss on extinguishment of debt (Note 12)
     —         —         (2,387     —    
Other gains and losses, net
     744       843       56       (3,500
  
 
 
   
 
 
   
 
 
   
 
 
 
Income/(loss) before income taxes
     1,138       8,635       (23,925     22,476  
Income tax expense/(benefit)
     1,408       4,483       (1,767     7,021  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net (loss)/income
   $ (270   $ 4,152     $ (22,158   $ 15,455  
  
 
 
   
 
 
   
 
 
   
 
 
 
(Loss)/earnings per share—basic
   $ (0.01   $ 0.02     $ (0.16   $ 0.09  
  
 
 
   
 
 
   
 
 
   
 
 
 
(Loss)/earnings per share—diluted
   $ (0.01   $ 0.02     $ (0.16   $ 0.09  
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average common shares—basic
     145,564       151,897       149,886       151,782  
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average common shares—diluted
     145,564       167,163       149,886       166,944  
  
 
 
   
 
 
   
 
 
   
 
 
 
Cash dividends declared per common share
   $ 0.03     $ 0.03     $ 0.09     $ 0.09  
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
5

Table of Contents
WisdomTree Investments, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income/(Loss)
(In Thousands)
(Unaudited)
 
    
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
    
2020
   
2019
   
2020
   
2019
 
Net (loss)/income
   $ (270   $ 4,152     $ (22,158   $ 15,455  
Other comprehensive income/(loss)
        
Reclassification of foreign currency translation adjustment to other gains and losses, net, upon the sale of WisdomTree Asset Management Canada Inc. (“WTAMC” or “Canadian ETF business”) (Note 25)
     —         —         (167     —    
Reclassification of foreign currency translation adjustment to other gains and losses, net, upon the liquidation of WisdomTree Japan Inc. (Note 25)
     —         (397     —         (397
Foreign currency translation adjustment
     380       (293     (138     (35
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income/(loss)
     380       (690     (305     (432
  
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income/(loss)
   $ 110     $ 3,462     $ (22,463   $ 15,023  
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
6

Table of Contents
WisdomTree Investments, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands)
(Unaudited)
 
    
For the Three Months Ended September 30, 2020
 
    
Common Stock
   
Additional
Paid-In

Capital
   
Accumulated
Other

Comprehensive
Income
    
Accumulated
Deficit
   
Total
 
    
Shares
Issued
   
Par
Value
 
Balance—July 1, 2020
     149,796     $ 1,498     $ 325,406     $ 260      $ (39,632   $ 287,532  
Restricted stock issued and vesting of restricted stock units, net
     52       1       (1     —          —         —    
Shares repurchased
     (1,066     (11     (4,524     —          —         (4,535
Stock-based compensation
    
  
      —         2,844       —          —         2,844  
Allocation of equity component related to convertible notes, net of issuance costs of $29 and deferred taxes of $222
    
  
      —         655       —          —         655  
Other comprehensive income
    
  
      —         —         380        —         380  
Dividends
    
  
      —         (4,937     —          —         (4,937
Net loss
    
  
      —         —        —          (270     (270
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance—September 30, 2020
     148,782     $ 1,488     $ 319,443     $ 640      $ (39,902   $ 281,669  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
 
    
For the Three Months Ended September 30, 2019
 
    
Common Stock
   
Additional
Paid-In

Capital
   
Accumulated
Other

Comprehensive
Income
   
Accumulated
Deficit
   
Total
 
    
Shares
Issued
   
Par
Value
 
Balance—July 1, 2019
     155,108     $ 1,551     $ 367,750     $ 725     $ (6,207   $ 363,819  
Restricted stock issued and vesting of restricted stock units, net
     (301     (3     3       —         —         —    
Shares repurchased
     (13     —         (80     —         —         (80
Exercise of stock options, net
     25       —         56       —         —         56  
Stock-based compensation
     —         —         2,374       —         —         2,374  
Other comprehensive loss
     —         —         —         (690     —         (690
Dividends
     —         —         —         —         (5,095     (5,095
Net income
     —         —         —         —         4,152       4,152  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—September 30, 2019
     154,819     $ 1,548     $ 370,103     $ 35     $ (7,150   $ 364,536  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
7

Table of Contents
WisdomTree Investments, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Continued)
(In Thousands)
(Unaudited)
 
    
For the Nine Months Ended September 30, 2020
 
    
Common Stock
   
Additional
Paid-In

Capital
   
Accumulated
Other

Comprehensive
Income
   
Accumulated
Deficit
   
Total
 
    
Shares
Issued
   
Par
Value
 
Balance—January 1, 2020
     155,264     $ 1,553     $ 352,658     $ 945     $ (17,744   $ 337,412  
Restricted stock issued and vesting of restricted stock units, net
     1,601       16       (16     —         —         —    
Shares repurchased
     (8,190     (81     (30,898     —         —         (30,979
Exercise of stock options, net
     107       —         240       —         —         240  
Stock-based compensation
    
  
      —         9,003       —         —         9,003  
Allocation of equity component related to convertible notes, net of issuance costs of $157 and deferred taxes of $1,239
    
  
      —         3,663       —         —         3,663  
Other comprehensive loss
    
  
      —         —         (305     —         (305
Dividends
    
  
      —         (15,207     —         —         (15,207
Net loss
    
  
      —         —         —         (22,158     (22,158
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—September 30, 2020
     148,782     $ 1,488     $ 319,443     $ 640     $ (39,902   $ 281,669  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
For the Nine Months Ended September 30, 2019
 
    
Common Stock
   
Additional
Paid-In

Capital
   
Accumulated
Other

Comprehensive
Income
   
Accumulated
Deficit
   
Total
 
    
Shares
Issued
   
Par
Value
 
Balance—January 1, 2019
     153,202     $ 1,532     $ 363,655     $ 467     $ (7,319   $ 358,335  
Restricted stock issued and vesting of restricted stock units, net
     1,910       18       (18     —         —         —    
Shares repurchased
     (338     (2     (2,185     —         —         (2,187
Exercise of stock options, net
     45       —         70       —         —         70  
Stock-based compensation
     —         —         8,581       —         —         8,581  
Other comprehensive loss
     —         —         —         (432     —         (432
Dividends
     —         —         —         —         (15,286     (15,286
Net income
     —         —         —         —         15,455       15,455  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—September 30, 2019
     154,819     $ 1,548     $ 370,103     $ 35     $ (7,150   $ 364,536  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
8

Table of Contents
WisdomTree Investments, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
    
Nine Months Ended

September 30,
 
    
2020
   
2019
 
Cash flows from operating activities:
    
Net (loss)/income
   $ (22,158   $ 15,455  
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
    
Advisory fees received in gold and other precious metals
     (46,077     (36,306
Loss on revaluation of deferred consideration – gold payments (Note 11)
     34,436       5,939  
Impairments
     22,752       572  
Contractual gold payments (Note 11)
     12,362       9,710  
Stock-based compensation
     9,003       8,581  
Gain on sale – Canadian ETF business
     (2,877     —    
Loss on extinguishment of debt
     2,387       —    
Amortization of right of use asset
     2,384       2,379  
Amortization of issuance costs – former credit facility
     1,328       2,159  
Deferred income taxes
     (961     1,383  
Amortization of issuance costs – convertible notes
     882       —    
Depreciation and amortization
     760       792  
Paid-in-kind
interest income
     —         (1,856
Other
     (1,173     (330
Changes in operating assets and liabilities:
    
Securities owned, at fair value
     (15,255     5,497  
Accounts receivable
     3,166       2,358  
Income taxes receivable/payable
     (3,399     4,350  
Prepaid expenses
     (1,325     (888
Gold and other precious metals
     32,969       25,751  
Other assets
     (341     (571
Fund management and administration payable
     735       (366
Compensation and benefits payable
     (12,349     1,476  
Securities sold, but not yet purchased, at fair value
     (582     (1,130
Operating lease liabilities
     (2,778     (2,662
Accounts payable and other liabilities
     1,679       788  
  
 
 
   
 
 
 
Net cash provided by operating activities
     15,568       43,081  
  
 
 
   
 
 
 
Cash flows from investing activities:
    
Purchase of fixed assets
     (292     (25
Funding of notes receivable
     —         (1,790
Proceeds from
held-to-maturity
securities maturing or called prior to maturity
     16,441       2,313  
Proceeds from the sale of the Company’s financial interests in AdvisorEngine Inc.
     9,592       —    
Proceeds from sale of Canadian ETF business, net
     2,774       —    
  
 
 
   
 
 
 
Net cash provided by investing activities
     28,515       498  
  
 
 
   
 
 
 
Cash flows from financing activities:
    
Repayment of long-term debt
     (179,000     (15,000
Shares repurchased
     (30,979     (2,187
Dividends paid
     (15,207     (15,286
Convertible notes issuance costs
     (5,411     —    
Proceeds from the issuance of convertible notes (Note 13)
     175,250       —    
Proceeds from exercise of stock options
     240       70  
  
 
 
   
 
 
 
Net cash used in financing activities
     (55,107     (32,403
  
 
 
   
 
 
 
Decrease in cash flow due to changes in foreign exchange rate
     (387     (385
  
 
 
   
 
 
 
(Decrease)/increase in cash and cash equivalents
     (11,411     10,791  
Cash and cash equivalents—beginning of period
     74,972       77,784  
  
 
 
   
 
 
 
Cash and cash equivalents—end of period
   $ 63,561     $ 88,575  
  
 
 
   
 
 
 
Supplemental disclosure of cash flow information:
    
Cash paid for taxes
   $ 7,650     $ 5,439  
  
 
 
   
 
 
 
Cash paid for interest
   $ 3,390     $ 6,997  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
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WisdomTree Investments, Inc. and Subsidiaries
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, commodity, fixed income,
leveraged-and-inverse,
currency and alternative strategies. The Company has the following wholly-owned operating subsidiaries:
 
   
WisdomTree Asset Management, Inc.
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”). 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.
 
   
WisdomTree Management Jersey Limited
(“ManJer”) is a Jersey based management company providing management services to
seven
issuers (the “ManJer Issuers”) in respect of the ETPs issued and listed by the ManJer Issuers covering commodity, currency, cryptocurrency and
leveraged-and-inverse
strategies.
 
   
WisdomTree Multi Asset Management Limited
(“WTMAML”) is a Jersey based management company providing management services to WisdomTree Multi Asset Issuer PLC (“WMAI”) in respect of the ETPs issued by WMAI. WMAI, a
non-consolidated
third party, is a public limited company domiciled in Ireland.
 
   
WisdomTree Management Limited
(“WML”)
is an Ireland based management company providing management services to WisdomTree Issuer ICAV (“WTI”) in respect of the WisdomTree UCITS ETFs issued by WTI. WTI, a
non-consolidated
third party, is a public limited company domiciled in Ireland.
 
   
WisdomTree UK Limited
(“WTUK”)
is a U.K. based company registered with the Financial Conduct Authority currently providing distribution and support services to ManJer, WTMAML and WML.
 
   
WisdomTree Europe Limited
is a U.K. based company which is the legacy distributor of the WMAI ETPs and WisdomTree UCITS ETFs. These services are now provided directly by WTUK. WisdomTree Europe Limited is no longer regulated and does not provide any regulated services.
 
   
WisdomTree Ireland Limited
is an Ireland based company authorized by the Central Bank of Ireland providing distribution services to ManJer, WTMAML and WML.
 
   
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 and is a member of the National Futures Association.
Sale of Canadian ETF Business
On February 19, 2020, the Company completed the sale of WTAMC to CI Financial Corp. (Note 25).
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.
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.
 
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The Company reassesses its evaluation of whether an entity is a VIE when certain reconsideration events occur.
Segment and Geographic Information
Effective January 1, 2020, the Company, through its subsidiaries in the U.S. and Europe, conducts business as a single operating segment as an ETP sponsor and asset manager which is based upon the Company’s current organizational and management structure, as well as information used by the chief operating decision maker to allocate resources and other factors. Previously, the Company’s financial results were reported in its U.S. Business and International Business reportable segments.
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. The impact of the foreign currency translation adjustment is included in the Consolidated Statements of Comprehensive Income/(Loss) as a component of other comprehensive income/(loss).
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.
Revenue Recognition
The Company earns substantially all of its revenue in the form of advisory fees from its ETPs and recognizes this revenue over time, as the performance obligation is satisfied. Advisory fees are based on a percentage of the ETPs’ average daily net assets. Progress is measured using the practical expedient under the output method resulting in the recognition of revenue in the amount for which the Company has a right to invoice.
Contractual Gold Payments
Contractual gold payments are measured and paid monthly based upon the average daily spot price of gold (Note 11).
Marketing and Advertising
Advertising costs, including media advertising and production costs, are expensed when incurred.
Depreciation and Amortization
Depreciation is provided for using the straight-line method over the estimated useful lives of the related assets as follows:
 
Equipment
     5 years
Furniture and fixtures
   15 years
Leasehold improvements are amortized over the term of their respective leases or service lives of the improvements, whichever is shorter. Fixed assets are recorded at cost less accumulated depreciation and amortization.
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. Forfeitures are recognized when they occur.
Third-Party Distribution Fees
The Company pays a percentage of its advisory fee revenues based on incremental growth in assets under management (“AUM”), subject to caps or minimums, to marketing agents to sell WisdomTree ETFs and for including WisdomTree ETFs on third-party customer platforms.
 
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Table of Contents
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. The Company maintains deposits with financial institutions in an amount that is in excess of federally insured limits.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer and other obligations due under normal trade terms. The Company measures credit losses by applying historical loss rates, adjusted for current conditions and reasonable and supportable forecasts to amounts outstanding using the aging method.
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.
Notes Receivable
Notes receivable are accounted for on an amortized cost basis, including accrued interest and net of original issue discount and impairments, if any. Interest income is accrued over the term of the notes using the effective interest method. Notes receivable are placed on
non-accrual
status when the Company is in receipt of information indicating collection of interest is doubtful. Cash received on notes receivable placed on
non-accrual
status is recognized on a cash basis as interest income if and when received.
Effective January 1, 2020, the Company performs a review for the impairment of the notes receivable and accrued interest on a quarterly basis using the current expected credit loss model and provides for an allowance for credit losses by applying an estimated loss rate to amounts outstanding at the balance sheet date. Previously, credit losses were measured using an incurred loss approach.
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. All equity securities are classified by the Company as trading. Debt securities are classified based primarily on the Company’s intent to hold or sell the security. Changes in the fair value of debt securities classified as trading and AFS are reported in other income and other comprehensive income, respectively, in the period the change occurs. Debt securities classified as AFS are assessed for impairment on a quarterly basis and an estimate for credit loss is provided when the fair value of the AFS debt security is below its amortized cost basis. Credit-related impairments are recognized as an allowance with a corresponding adjustment to earnings, while impairments resulting from noncredit-related factors are recognized in other comprehensive income. Amounts recorded in other comprehensive income are reclassified into earnings upon sale of the AFS debt security using the specific identification method.
Securities
Held-to-Maturity
The Company accounts for certain of its securities as
held-to-maturity
on a trade date basis, which are recorded at amortized cost. For
held-to-maturity
securities, the Company has the intent and ability to hold these securities to maturity and it is not
more-likely-than-not
that the Company will be required to sell these securities before recovery of their amortized cost bases, which may be maturity.
Held-to-maturity
securities are placed on
non-accrual
status when the Company is in receipt of information indicating collection of interest is doubtful. Cash received on
held-to-maturity
securities placed on
non-accrual
status is recognized on a cash basis as interest income if and when received.
Effective January 1, 2020, the Company reviews its portfolio of
held-to-maturity
securities for impairment on a quarterly basis by applying an estimated loss rate after consideration for the nature of collateral securing the financial asset as well as potential future changes in collateral values and historical loss information for financial assets secured with similar collateral. Previously, these securities were evaluated for impairment on a quarterly basis and if a decline in fair value was deemed to be other-than-temporary, the securities was written down to its fair value through earnings.
Investments in pass-through government-sponsored enterprises (“GSEs”) are determined to have an estimated loss rate of zero due to an implicit U.S. government guarantee.
Investments
The Company accounts for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed within Accounting Standards Update (“ASU”)
2016-01,
Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities
, to the extent such investments are not subject to consolidation or the equity method.
 
Under the measurement alternative, these financial instruments are carried at cost, less any impairment (assessed quarterly), plus or
 
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minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In addition, 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.
Goodwill
Goodwill is the excess of the purchase price over the fair values of the identifiable net assets at the acquisition date. The Company tests goodwill for impairment at least annually and at the time of a triggering event requiring
re-evaluation,
if one were to occur. Goodwill is considered 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 based on that difference, not to exceed the carrying amount of 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.
Goodwill is allocated to the Company’s U.S. Business and European Business components. Effective January 1, 2020, for impairment testing purposes, these components are aggregated as a single reporting unit as they fall under the same operating segment and have similar economic characteristics. Previously, these components were tested separately for impairment when Company was operating as more than one operating segment.
Goodwill is assessed for impairment annually on November 30
th
.
When performing its goodwill impairment test, the Company considers a qualitative assessment, when appropriate, and a quantitative assessment using the market approach and its market capitalization when determining the fair value of the reporting units, in the aggregate. 
Intangible Assets
Indefinite-lived intangible assets are tested for impairment at least annually and are also 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 reasonably identifiable cash flows independent of other assets. The annual impairment testing date for all of the Company’s intangible assets is November 30
th
.
Leases
Effective January 1, 2019, the Company accounts for its lease obligations in accordance with Accounting Standards Codification (“ASC”) Topic 842,
Leases
(ASC 842), which requires the recognition of both (i) a lease liability equal to the present value of the remaining lease payments and (ii) an offsetting
right-of-use
asset. The remaining lease payments are discounted using the rate implicit in the lease, if known, or otherwise the Company’s incremental borrowing rate. After lease commencement,
right-of-use
assets are assessed for impairment and otherwise are amortized over the remaining lease term on a straight-line basis. These recognition requirements are not applied to short-term leases which are those with a lease term of 12 months or less. Instead, lease payments associated with short-term leases are recognized as an expense on a straight-line basis over the lease term.
ASC 842 also provides a practical expedient which allows for consideration in a contract to be accounted for as a single lease component rather than allocated between lease and
non-lease
components. The Company has elected to apply this practical expedient to all lease contracts, where applicable.
Upon adoption of ASC 842 on January 1, 2019, the Company applied the transitional practical expedients to its outstanding leases and therefore the Company did not reassess (i) whether any expired or existing contracts are or contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company also elected to apply the new lease requirements at the effective date, rather than the beginning of the earliest comparative period presented.
Deferred Consideration – Gold Payments
Deferred consideration represents the present value of an obligation to pay gold to a third party into perpetuity and is measured using forward-looking gold prices and a selected discount rate (Note 11). Changes in the fair value of this obligation are reported as (loss)/gain on revaluation of deferred consideration – gold payments on the Company’s Consolidated Statements of Operations.
 
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Convertible Notes and Debt
Convertible notes and debt are carried at amortized cost, net of debt discounts and debt issuance costs. The convertible notes are required to be separated into their liability and equity components by allocating the issuance proceeds to each of these components. The liability component for convertible instruments that qualify for a derivative scope exception (applicable to the convertible notes) is allocated proceeds equal to the estimated fair value of similar debt instruments without the conversion option. The difference between the gross proceeds received from the issuance of the convertible notes and the proceeds allocated to the liability component represents the residual amount that is recorded in additional
paid-in
capital. Interest expense is recognized using the effective interest method and includes amortization of debt discounts and debt issuance costs over the life of the debt.
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. The Series A
non-voting
convertible preferred stock (Note 21) and 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).
Diluted EPS is calculated under the treasury stock method and the
two-class
method. The calculation that results in the lowest diluted EPS amount for the common stock is reported in the Company’s consolidated financial statements. The treasury stock method includes the dilutive effect of potential common shares including unvested stock-based awards, the Series A
non-voting
convertible preferred stock and the convertible notes, if any. Potential common shares associated with the Series A
non-voting
convertible preferred stock and the convertible notes are computed under the
if-converted
method. Potential common shares associated with the conversion option embedded in the convertible notes are dilutive when the Company’s average stock price exceeds the conversion price.
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 bases 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 reduced 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.
Tax positions are evaluated utilizing a
two-step
process. The Company first determines whether any of its tax positions are
more-likely-than-not
to be sustained upon examination, based solely on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. 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.
Recently Issued
Accounting
 
Pronouncements
In August 2020,
the Financial Accounting Standards Board (“FASB”) issued
 ASU
2020-06,
Debt – Debt with Conversion and Other Options
(ASU
2020-06).
Under the ASU, the accounting for convertible instruments will be simplified by removing major separation models required under current GAAP. Accordingly, more convertible instruments will be reported as a single liability or equity with no separate accounting for embedded conversion features. Certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception will be removed and, as a result, more equity contracts will qualify for the scope exception. The ASU will also simplify the diluted
earnings-per-share
calculation in certain areas. The ASU will be effective for years beginning after December 31, 2021, including interim periods within those fiscal years.
 Early adoption is permitted for fiscal periods 
 beginning after December 15, 2020 (including interim periods within the same fiscal year).
The adoption of this ASU will result in a reduction 
 of interest expense recognized on the Company’s recently issued convertible notes (Note 13) of approximately $420 per quarter. The Company expects to early adopt the ASU.
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes
(ASU
2019-12).
The main objective of the standard is to reduce complexity in the accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income); (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an
 
interim
period when a year-to-date loss exceeds the anticipated loss for the year. The standard also simplifies the accounting for income taxes by enacting the following: (a) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on
 
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Table of Contents
income as an income-based tax and account for any incremental amount as a
non-income-based
tax; (b) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered as a separate transaction; (c) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (d) requiring that an entity reflect the enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. ASU
2019-12
is effective for years beginning after December 15, 2020, including the interim periods within those reporting periods. Early adoption is permitted. The Company has determined that this standard will not have a material impact on its financial statements
 and has not early adopted this ASU
.
Recently Adopted Accounting Pronouncements
On January 1, 2020, the Company adopted 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. In issuing this standard, the FASB is responding to criticism that prior guidance delayed recognition of credit losses. The standard replaced the prior guidance’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain
off-balance
sheet credit exposures. 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. The CECL model does not apply to AFS debt securities. For AFS debt securities with unrealized losses, entities measure credit losses in a manner similar to prior guidance, except that the credit losses are recognized as allowances rather than reductions in the amortized cost of the securities. Accordingly, the new methodology is utilized when assessing the Company’s financial instruments for impairment. As a result, entities recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time. The ASU also simplified the accounting model for purchased credit-impaired debt securities and loans. ASU
2016-13
also expanded the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. The adoption of this standard, which is applicable to the Company’s trade receivables, notes receivable and
held-to-maturity
securities did not have a material impact on the Company’s consolidated financial statements.
On January 1, 2020, the Company adopted ASU
2018-13,
Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
(ASU
2018-13),
which modified the disclosure requirements on fair value measurements, including removing the requirement to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. ASU
2018-13
also added new disclosures including the requirement to disclose (a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This standard only impacted the disclosures pertaining to fair value measurements and were incorporated into the notes to the Company’s consolidated financial statements.
3. Cash and Cash Equivalents
Of the total cash and cash equivalents of
 
$
63,561 and $74,972 at September 30, 2020 and December 31, 2019, respectively, $59,038 and $72,120 were held at two financial institutions. At September 30, 2020 and December 31, 2019, cash equivalents were approximately $2,577 and $317, respectively.
Certain of the Company’s international subsidiaries are required to maintain a minimum level of regulatory capital, which was
 $
10,644 and $12,312 at September 30, 2020 and December 31, 2019, respectively. These requirements are generally satisfied by cash on hand.
In addition, the Company collateralized its U.S. office lease through a standby letter of credit totaling $1,384 which is restricted from further use.
4. Fair Value Measurements
The fair value of financial instruments 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.
 
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  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 affected 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 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.
The tables below summarize the categorization of the Company’s assets and liabilities measured at fair value. During the three and nine months ended September 30, 2020 and 2019 there were no transfers between Levels 2 and 3.
 
    
September 30, 2020
 
    
Total
    
Level 1
    
Level 2
    
Level 3
 
Assets:
           
Recurring fair value measurements:
           
Cash equivalents
   $ 2,577      $ 2,577      $ —      $ —  
Securities owned, at fair value
     32,574        24,101        8,473      —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 35,151      $ 26,678      $ 8,473    $ —  
  
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
           
Recurring fair value measurements:
           
Deferred consideration (Note 11)
   $ 207,748      $ —      $ —      $ 207,748  
  
 
 
    
 
 
    
 
 
    
 
 
 
Non-recurring
fair value measurements
           
Convertible notes
(1)
   $ 24,344      $ —      $ 24,344    $ —  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Fair value determined on August 13, 2020 (Note 13)
 
    
December 31, 2019
 
    
Total
    
Level 1
    
Level 2
    
Level 3
 
Assets:
           
Recurring fair value measurements:
           
Cash
 
equivalents
   $ 317      $ 317      $     —      $ —  
Securities owned, at fair value
       17,319        17,319        —          —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $   17,636      $ 17,636      $ —      $ —  
  
 
 
    
 
 
    
 
 
    
 
 
 
           
Non-recurring
fair value measurements:
           
AdvisorEngine Inc. – Financial interests
(1)
   $   28,172        —          —        $   28,172  
  
 
 
    
 
 
    
 
 
    
 
 
 
           
Liabilities:
           
Recurring fair value measurements:
           
Deferred consideration (Note 11)
   $ 173,024      $ —      $ —      $ 173,024  
Securities sold, but not yet purchased
     582        582        —          —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 173,606      $ 582      $ —      $ 173,024  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Fair value determined on December 31, 2019 (Note 7).
Recurring Fair Value Measurements—Methodology
Cash Equivalents (Note 3)
– These financial assets represent cash invested in highly liquid investments with original maturities of less than
90
days. These investments are valued at par, which approximates fair value, and are
c
onsidered Level 1.
 
16

Securities Owned/Sold but Not Yet Purchased (Note 5)
– Securities owned and sold, but not yet purchased are investments in ETFs, pass-through GSEs and corporate bonds. ETFs are generally traded in active, quoted and highly liquid markets and are therefore classified as Level 1 in the fair value hierarchy. Pricing of pass-through GSEs and corporate bonds include consideration given to collateral characteristics and market assumptions related to yields, credit risk and prepayments and are therefore classified as Level 2.
Deferred Consideration (Note 11)
– Deferred consideration represents the present value of an obligation to pay gold into perpetuity.
The following table presents a reconciliation of beginning and ending balances of recurring fair value measurements classified as Level 3:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2020
    
2019
    
2020
    
2019
 
Deferred consideration (Note 11)
           
Beginning balance
   $ 198,784      $ 161,273      $ 173,024      $ 161,540  
Net realized losses
(1)
     4,539        3,502        12,362        9,710  
Net unrealized losses/(gains)
(2)
     8,870        6,306        34,436        5,939  
Settlements
     (4,445      (3,441      (12,074      (9,549
  
 
 
    
 
 
    
 
 
    
 
 
 
Ending balance
   $ 207,748      $ 167,640      $ 207,748      $ 167,640  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Recorded as contractual gold payments expense on the Company’s Consolidated Statements of Operations.
(2)
Recorded as loss on revaluation of deferred consideration – gold payments on the Company’s Consolidated Statements of Operations.
5. Securities Owned/Sold, but Not Yet Purchased
These securities consist of the following:
 
    
September 30,
2020
    
December 31,
2019
 
Securities Owned
     
Trading securities
   $ 32,574      $ 17,319  
  
 
 
    
 
 
 
Securities Sold, but not yet Purchased
     
Trading securities
   $ —        $ 582  
  
 
 
    
 
 
 
The Company had no AFS debt securities at September 30, 2020 and December 31, 2019.
6. Securities
Held-to-Maturity
The following table is a summary of the Company’s securities
held-to-maturity:
 
    
September 30,
2020
    
December 31,
2019
 
Debt instruments: Pass-through GSEs (amortized cost)
   $ 501      $ 16,863  
  
 
 
    
 
 
 
During the nine months ended September 30, 2020 and 2019, the Company received proceeds of $16,441
 
and $2,313, respectively, from
held-to-maturity
securities maturing or being called prior to maturity.
The following table summarizes unrealized gains, losses, and fair value (classified as Level 2 within the fair value hierarchy) of securities
held-to-maturity:
 
    
September 30,
2020
    
December 31,
2019
 
Cost/amortized cost
   $ 501      $ 16,863  
Gross unrealized gains
     37        38  
Gross unrealized losses
     (17      (297
  
 
 
    
 
 
 
Fair value
   $ 521      $ 16,604  
  
 
 
    
 
 
 
 
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Table of Contents
An allowance for credit losses was not provided on the Company’s
held-to-maturity
securities as all securities are investments in pass-through GSEs which are determined to have an estimated loss rate of zero due to an implicit U.S. government guarantee. In addition, no securities were determined to be other-than-temporarily impaired at December 31, 2019.
The following table sets forth the maturity profile of the securities
held-to-maturity;
however, these securities may be called prior to maturity date:
 
    
September 30,
2020
    
December 31,
2019
 
Due within one year
   $ —        $ —    
Due one year through five years
     —          2,000  
Due five years through ten years
     —          7,494  
Due over ten years
     501        7,369  
  
 
 
    
 
 
 
Total
   $ 501      $ 16,863  
  
 
 
    
 
 
 
7. AdvisorEngine Inc. – Sale of Financial Interests
On May 4, 2020, the Company closed a transaction to exit its investment in AdvisorEngine Inc. (“AdvisorEngine”). The fair value of upfront consideration paid to the Company was $9,592.
Consideration also includes contingent payments totaling up to $10,408 which will be payable only upon AdvisorEngine achieving certain revenue milestones during the first through fourth anniversaries of such exit. The fair value of the contingent payments was determined to be insignificant at closing and was measured using a Monte-Carlo simulation whereby forecasted revenue assumed during the first, second, third and fourth years was simulated forward in a risk-neutral framework to determine whether the revenues would exceed the
pre-defined
revenue targets.
The table below presents the range and weighted averages of significant unobservable inputs utilized in the Monte-Carlo simulation (classified as Level 3 in the fair value hierarchy):
 
Unobservable Inputs (Initial Recognition
 – May 4, 2020
)
Forecasted revenue simulated forward as a percentage of the
pre-defined
revenue targets
  
34% - 71% (47% weighted average)
Revenue volatility
   25%
The weighted-average forecasted revenue simulated forward as a percentage of the
pre-defined
revenue targets represents the arithmetic average of the percentages for each of the four years. An increase in the forecasted revenue percentages and revenue volatility input would result in a higher fair value.
The contingent payments are subsequently remeasured when the contingency is resolved and the gain is realized.
Summarized below are the financial interests previously held:
 
    
September 30, 2020
    
December 31, 2019
 
    
Amortized
Cost, plus
Accrued
Interest
    
Net

Carrying
Value
    
Amortized
Cost, plus
Accrued
Interest
    
Net

Carrying
Value
 
Unsecured convertible note
   $ —        $ —        $ 2,126      $ 2,126  
Unsecured
non-convertible
note
     —          —          31,184        26,046