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 March 31, 2019

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, 35th 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 April 26, 2019, there were 155,053,303 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.

 

 

 

WISDOMTREE INVESTMENTS, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2019

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			49
Item 4. Controls and Procedures			50
PART II: OTHER INFORMATION			50
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3. Defaults Upon Senior Securities			51
Item 4. Mine Safety Disclosures			51
Item 5. Other Information			51
Item 6. Exhibits			52

 

2

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, 2018. 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:

 

•

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

PART I: FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

WisdomTree Investments, Inc. and Subsidiaries

Consolidated Balance Sheets

(In Thousands, Except Per Share Amounts)

 

		March 31, 2019				December 31, 2018
Assets		(unaudited)
Current assets:
Cash and cash equivalents		$	78,942			$	77,784
Securities owned, at fair value			6,419				8,873
Accounts receivable			28,136				25,834
Income taxes receivable			1,770				1,181
Prepaid expenses			4,037				4,441
Other current assets			164				163
Total current assets			119,468				118,276
Fixed assets, net			8,863				9,122
Note receivable, net (Note 8)			29,317				28,722
Indemnification receivable (Note 21)			31,593				34,876
Securities held-to-maturity			20,159				20,180
Deferred tax assets, net			3,998				7,042
Investments, carried at cost (Note 9)			28,080				28,080
Right of use assets – operating leases (Note 14)			19,446				—
Goodwill (Note 23)			85,856				85,856
Intangible assets (Note 23)			603,251				603,209
Other noncurrent assets			1,486				2,155
Total assets		$	951,517			$	937,518
Liabilities and stockholders’ equity
Liabilities
Current liabilities:
Fund management and administration payable		$	26,921			$	22,508
Compensation and benefits payable			9,214				18,453
Deferred consideration – gold payments (Note 11)			11,857				11,765
Securities sold, but not yet purchased, at fair value			1,338				1,698
Operating lease liabilities (Note 14)			3,651				—
Accounts payable and other liabilities			9,772				8,377
Total current liabilities			62,753				62,801
Long-term debt (Note 12)			195,174				194,592
Deferred consideration – gold payments (Note 11)			145,290				149,775
Operating lease liabilities (Note 14)			20,704				—
Deferred rent payable			—				4,570
Other noncurrent liabilities (Note 21)			31,593				34,876
Total liabilities			455,514				446,614
Preferred stock – Series A Non-Voting Convertible, par value $0.01; 14.750 shares authorized, issued and outstanding (Note 13)			132,569				132,569
Contingencies (Note 15)
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: 155,056 and 153,202 at March 31, 2019 and December 31, 2018, respectively			1,551				1,532
Additional paid-in capital			364,717				363,655
Accumulated other comprehensive income			758				467
Accumulated deficit			(3,592	)			(7,319	)
Total stockholders’ equity			363,434				358,335
Total liabilities and stockholders’ equity		$	951,517			$	937,518

The accompanying notes are an integral part of these consolidated financial statements

 

4

WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

		Three Months Ended March 31,
		2019				2018
Operating Revenues:
Advisory fees		$	64,840			$	58,456
Other income			645				448
Total revenues			65,485				58,904
Operating Expenses:
Compensation and benefits			21,301				18,832
Fund management and administration			15,166				10,912
Marketing and advertising			2,680				3,195
Sales and business development			4,422				3,813
Contractual gold payments (Note 11)			3,098				—
Professional and consulting fees			1,482				1,636
Occupancy, communications and equipment			1,618				1,363
Depreciation and amortization			269				355
Third-party distribution fees			2,400				1,725
Acquisition-related costs (Note 3)			313				2,062
Other			2,053				1,790
Total expenses			54,802				45,683
Operating income			10,683				13,221
Other Income/(Expenses):
Interest expense			(2,892	)			—
Gain on revaluation of deferred consideration – gold payments (Note 11)			4,404				—
Interest income			779				962
Impairment (Note 14)			(572	)			—
Other losses, net			(4,627	)			(261	)
Income before taxes			7,775				13,922
Income tax (benefit)/expense			(1,049	)			4,498
Net income		$	8,824			$	9,424
Earnings per share—basic		$	0.05			$	0.07
Earnings per share—diluted		$	0.05			$	0.07
Weighted-average common shares—basic			151,625				135,329
Weighted-average common shares—diluted			166,811				136,468
Cash dividends declared per common share		$	0.03			$	0.03

The accompanying notes are an integral part of these consolidated financial statements

 

5

WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2019				2018
Net income		$	8,824			$	9,424
Other comprehensive income
Change in unrealized gains on available-for-sale debt securities, net of tax			—				460
Foreign currency translation adjustment			291				412
Other comprehensive income			291				872
Comprehensive income		$	9,115			$	10,296

The accompanying notes are an integral part of these consolidated financial statements

 

6

WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands)

(Unaudited)

 

		For the Three Months Ended March 31, 2019
		Common Stock								Additional Paid-In Capital				Accumulated Other				Accumulated Deficit				Total
		Shares Issued				Par Value								Comprehensive Income
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			2,145				21				(21	)			—				—				—
Shares repurchased			(311	)			(2	)			(2,003	)			—				—				(2,005	)
Exercise of stock options, net			20				—				14				—				—				14
Stock-based compensation			—				—				3,072				—				—				3,072
Other comprehensive income			—				—				—				291				—				291
Dividends			—				—				—				—				(5,097	)			(5,097	)
Net income			—				—				—				—				8,824				8,824
Balance—March 31, 2019			155,056			$	1,551			$	364,717			$	758			$	(3,592	)		$	363,434

 

		For the Three Months Ended March 31, 2018
		Common Stock								Additional Paid-In Capital				Accumulated Other				Accumulated Deficit				Total
		Shares Issued				Par Value								Comprehensive Income
Balance—January 1, 2018			136,996			$	1,370			$	216,006			$	291			$	(24,716	)		$	192,951
Restricted stock issued and vesting of restricted stock units, net			667				7				(7	)			—				—				—
Shares repurchased			(60	)			—				(734	)			—				—				(734	)
Exercise of stock options, net			148				1				53				—				—				54
Stock-based compensation			—				—				3,309				—				—				3,309
Stock issuance costs			—				—				(139	)			—				—				(139	)
Other comprehensive income			—				—				—				872				—				872
Dividends			—				—				—				—				(4,132	)			(4,132	)
Net income			—				—				—				—				9,424				9,424
Balance—March 31, 2018			137,751			$	1,378			$	218,488			$	1,163			$	(19,424	)		$	201,605

The accompanying notes are an integral part of these consolidated financial statements

 

7

WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2019				2018
Cash flows from operating activities:
Net income		$	8,824			$	9,424
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Advisory fees received in gold and other precious metals			(11,389	)			—
Gain on revaluation of deferred consideration			(4,404	)			—
Contractual gold payments			3,098				—
Stock-based compensation			3,072				3,309
Deferred income taxes			3,048				(136	)
Amortization of right of use asset			798				—
Amortization of credit facility issuance costs			711				—
Paid-in-kind interest income (Note 8)			(595	)			(416	)
Impairment			572				—
Depreciation and amortization			269				355
Other			3				661
Changes in operating assets and liabilities:
Securities owned, at fair value			2,454				1,106
Accounts receivable			(1,939	)			606
Income taxes receivable/payable			(604	)			4,297
Prepaid expenses			419				(360	)
Gold and other precious metals			7,975				—
Other assets			182				160
Fund management and administration payable			4,274				(1,744	)
Compensation and benefits payable			(9,250	)			(22,003	)
Securities sold, but not yet purchased, at fair value			(360	)			(950	)
Operating lease liabilities			(881	)			—
Accounts payable and other liabilities			1,575				855
Net cash provided by/(used in) operating activities			7,852				(4,836	)
Cash flows from investing activities:
Purchase of fixed assets			(7	)			(17	)
Proceeds from held-to-maturity securities maturing or called prior to maturity			18				32
Proceeds from sales and maturities of debt securities available-for-sale			—				60,498
Net cash provided by investing activities			11				60,513
Cash flows from financing activities:
Dividends paid			(5,097	)			(4,132	)
Shares repurchased			(2,005	)			(734	)
Proceeds from exercise of stock options			14				54
Net cash used in financing activities			(7,088	)			(4,812	)
Increase in cash flow due to changes in foreign exchange rate			383				593
Net increase in cash and cash equivalents			1,158				51,458
Cash and cash equivalents—beginning of period			77,784				54,193
Cash and cash equivalents—end of period		$	78,942			$	105,651
Supplemental disclosure of cash flow information:
Cash paid for taxes		$	707			$	339
Cash paid for interest		$	2,224			$	—

NON-CASH ACTIVITIES

On January 1, 2019, the Company recognized a right-of-use asset and lease liability of $19,827 and $24,817, respectively, upon the implementation of Accounting Standards Update 2016-02 Leases. See Note 14 for additional information.

The accompanying notes are an integral part of these consolidated financial statements

 

8

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.

 

•

ETFS Management Company (Jersey) Limited (“ManJer”) is a Jersey based management company providing management services to nine issuers (the “ETFS Issuers”) in respect of the ETPs issued and listed by the ETFS Issuers covering commodity, currency and leveraged-and-inverse strategies.

 

•

Boost Management Limited (“BML”) is a Jersey based management company providing management services to Boost Issuer PLC (“BI”) in respect of the Boost ETPs issued by BI. BI, 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 plc (“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, BML and WML.

 

•

WisdomTree Europe Limited is a U.K. based company which is the legacy distributor of the Boost 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, BML and WML.

 

•

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 Canadian ETFs.

 

•

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.

Acquisition of ETFS

On April 11, 2018, the Company acquired the European exchange-traded commodity, currency and leveraged-and-inverse business (“ETFS”) of ETFS Capital Limited (“ETFS Capital”, formerly known as ETF Securities Limited). This acquisition is referred to throughout the consolidated financial statements as the ETFS Acquisition. See Note 3 for additional information.

Restructuring of Distribution Strategy in Japan

In July 2018, the Company determined to restructure its distribution strategy in Japan and has expanded its existing relationship with Premia Partners Company Limited to manage distribution of the Company’s ETFs in Japan. As a result, WisdomTree Japan Inc. (“WTJ”) has ceased operations and is in the process of being liquidated. During the three months ended March 31, 2019 and 2018, WTJ reported an operating loss of $430 and $1,232, respectively. WTJ also recognized an impairment expense of $572 in connection with the termination of its office lease on March 31, 2019.

 

9

2. Significant Accounting Policies

Basis of Presentation

These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and in the opinion of management reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of financial condition, results of operations, and cash flows for the periods presented. The consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The financial results of ETFS are included in the Company’s consolidated financial statements since the acquisition date, April 11, 2018 (See Note 3).

Certain accounts in the consolidated financial statements for the three months ended March 31, 2018 have been reclassified to conform to the current year’s consolidated financial statement presentation. The following table summarizes these reclassifications which had no effect on previously reported net income.

 

Operating Revenues:		Three Months Ended March 31, 2018
Advisory fees (previously reported)		$	58,756
Other ETP fees reclassified to Other income			(300	)
Advisory fees (currently reported)		$	58,456
Other income (previously reported)		$	849
Other ETP fees reclassified from Advisory fees			300
Interest income reclassified to Other Income/(Expenses)			(962	)
Realized and unrealized losses reclassified to Other losses, net			261
Other income (currently reported)		$	448
Total revenues (currently reported)		$	58,904
Other Income/(Expenses):
Interest income reclassified from operating revenues		$	962
Other losses, net (previously reported)		$	—
Realized and unrealized losses reclassified from operating revenues			(261	)
Other losses, net (currently reported)		$	(261	)

Consolidation

The Company consolidates entities in which it has a controlling financial interest. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). The usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. If the Company has a majority voting interest in a VOE, the entity is consolidated. The Company has a controlling financial interest in a VIE when the Company has a variable interest that provides it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company reassesses its evaluation of whether an entity is a VIE when certain reconsideration events occur.

Segment and Geographic Information

The Company operates as an ETP sponsor and asset manager providing investment advisory services globally. These activities are reported in the Company’s U.S. Business and International Business reportable segments. The International Business reportable segment includes the results of the Company’s European operations and Canadian operations.

The financial results of ETFS are included in the International Business reportable segment as of the acquisition date.

 

10

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 as a component of other comprehensive income.    

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. ETP 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 (See 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 AUM, subject to caps or minimums, to marketing agents to sell WisdomTree ETFs and for including WisdomTree ETFs on third-party customer platforms.

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. An allowance for doubtful accounts is not provided since, in the opinion of management, all accounts receivable recorded are deemed current and collectible.

 

11

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.

Note Receivable

Note receivable is accounted for on an amortized cost basis, net of original issue discount. Interest income is accrued over the term of the note using the effective interest method. The Company performs a review for the impairment of the note receivable on a quarterly basis and provides for an allowance for credit losses if all or a portion of the note is determined to be uncollectible.

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. 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 securities classified as trading are reported in other income in the period the change occurs. Unrealized gains and losses of securities classified as available-for-sale are included in other comprehensive income. Once sold, amounts reclassified out of accumulated other comprehensive income and into earnings are determined using the specific identification method. Available-for-sale 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.

Investments, Carried at Cost

The Company accounts for equity investments that do not have a readily determinable fair value as cost method investments 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 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 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, in accordance with ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The Company early adopted the revised guidance for the impairment tests performed after January 1, 2017. Under the revised guidance, 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.

For impairment testing purposes, goodwill has been allocated to the Company’s U.S. Business reporting unit which is assessed annually for impairment on April 30^th. In addition, goodwill arising from the ETFS Acquisition (See Note 3) has been allocated to the European Business reporting unit, included within the International Business reportable segment and is assessed annually for impairment on November 30^th. 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.

 

12

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 (See Note 14). 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 (See Note 11). Changes in the fair value of this obligation are reported as gain/(loss) on revaluation of deferred consideration – gold payments on the Company’s Consolidated Statements of Operations.

Long-Term Debt

Long-term debt is carried at amortized cost, net of debt issuance costs. Interest expense is recognized using the effective interest method and includes amortization of 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 preferred stock issued in connection with the ETFS Acquisition (see Note 13) 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) 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 the treasury stock and if-converted method and the two-class method. The calculation that results in the most dilutive EPS amount for the common stock is reported in the Company’s consolidated financial statements.

 

13

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 June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The main objective of the standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In issuing this standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply 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 available-for-sale debt securities. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the credit losses will be recognized as allowances rather than reductions in the amortized cost of the securities. Accordingly, the new methodology will be utilized when assessing the Company’s financial instruments for impairment. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. 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 the periods beginning after December 15, 2018. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements and plans to adopt this standard on January 1, 2020.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which modifies 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. ASU 2018-13 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2019 and early adoption is permitted. This standard will only impact the disclosures pertaining to fair value measurements. The Company plans to adopt this standard on January 1, 2020.

3. Business Combination

Summary

On April 11, 2018, the Company acquired from ETFS Capital its European exchange-traded commodity, currency and short-and-leveraged business for a purchase price consisting of $253,000 in cash, and a fixed number of shares of the Company’s capital stock, consisting of (i) 15,250,000 shares of common stock (the “Common Shares”) and (ii) 14,750 shares of Series A Non-Voting Convertible Preferred Stock (the “Preferred Shares”), which are convertible into an aggregate of 14,750,000 shares of common stock. ETFS Capital is subject to lock-up, standstill and voting restrictions and received registration rights with respect to the Common Shares and shares issuable upon conversion of the Preferred Shares.

Also on April 11, 2018 and in connection with the acquisition, the Company entered into a credit agreement, pursuant to which the lenders extended a $200,000 term loan (the “Term Loan”) and made available a $50,000 revolving credit facility (the “Revolver” and, together with the Term Loan, the “Credit Facility”) (See Note 12).

 

14

Purchase Price Allocation

The ETFS Acquisition has been accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, which requires an allocation of the consideration paid by the Company to the identifiable assets and liabilities of ETFS based on the estimated fair values as of the closing date of the acquisition. An allocation of the consideration transferred is presented below and includes the Company’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed.

The following table summarizes the allocation of the purchase price as of the acquisition date:

 

Purchase price
Preferred Shares issued			14,750
Conversion ratio			1,000
Common stock equivalents			14,750,000
Common Shares issued			15,250,000
Total shares issued			30,000,000
WisdomTree stock price(1)		$	9.00
Equity portion of purchase price		$	270,000
Cash portion of purchase price
Term Loan (See Note 12)			200,000
Cash on hand			53,000
Purchase price			523,000
Deferred consideration (See Note 11)			172,746
Total		$	695,746
Allocation of consideration
Cash and cash equivalents			13,687
Receivables and other current assets			14,069
Intangible assets(2)			601,247
Other current liabilities			(17,314	)
Fair value of net assets acquired			611,689
Goodwill resulting from the ETFS Acquisition (3)		$	84,057

 

(1)	The closing price of the Company’s common stock on April 10, 2018, the trading day prior to the closing date of the acquisition.

(2)

Represents purchase price allocated to customary advisory agreements. The fair value of the intangible assets was determined using an income approach (discounted cash flow analysis) which relied upon significant unobservable inputs including a revenue growth multiple of 3% to 4% and a weighted average cost of capital of 11.6%. These intangible assets were determined to have an indefinite useful life and are not deductible for tax purposes. A deferred tax liability associated with these intangible assets was not recognized as the intangibles arose in Jersey, a jurisdiction where the Company is subject to a zero percent tax rate.

(3)	Goodwill arising from the ETFS Acquisition represents the value of synergies created from combining the operations of ETFS and the Company. The goodwill is not deductible for tax purposes as the transaction was structured as a stock acquisition occurring in the United Kingdom.

Acquisition-Related Costs

During the three months ended March 31, 2019 and 2018, the Company incurred acquisition-related costs of $313 and $2,062, respectively.

 

15

Supplemental Unaudited Pro Forma Financial Information

The following table presents unaudited pro forma financial information of the Company as if the ETFS Acquisition had been consummated on January 1, 2017. The information was derived from the historical financial results of the Company and ETFS for all periods presented and was adjusted to give effect to pro forma events that are directly attributable to the acquisition, factually supportable and expected to have a continuing impact on the combined results following the acquisition.

 

		Three Months Ended March 31, 2018
Revenues		$	79,771
Net income		$	11,243			(including a loss on revaluation of deferred consideration of $2,555)

Significant adjustments to the unaudited pro forma financial information above include the recognition of interest expense associated with the Credit Facility for the periods presented, eliminating acquisition-related costs directly attributable to the acquisition and adjusting consolidated income tax expense based upon the Company’s anticipated normalized consolidated effective tax rate.

The unaudited pro forma financial information above is not necessarily indicative of what the combined results of the Company would have been had the acquisition been completed as of January 1, 2017 and does not purport to project the future results of the combined company. In addition, the unaudited pro forma financial information does not reflect any future planned cost savings initiatives following the completion of the acquisition.

4. Cash and Cash Equivalents

Cash and cash equivalents of approximately $34,029 and $34,398 at March 31, 2019 and December 31, 2018, respectively, were held at one financial institution. At March 31, 2019 and December 31, 2018, cash equivalents were approximately $566 and $24, respectively.

In addition, certain of our subsidiaries of our International Business segment are required to maintain a minimum level of net liquid assets, which was $12,164 and $11,005 at March 31, 2019 and December 31, 2018, respectively. These requirements are generally satisfied by cash on hand.

5. 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:

 

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 months ended March 31, 2019 and 2018, there were no transfers between Levels 1, 2 and 3.

 

16

		March 31, 2019
		Total				Level 1				Level 2				Level 3
Assets:
Recurring fair value measurements:
Cash equivalents		$	566			$	566			$	—			$	—
Securities owned, at fair value			6,419				6,419				—				—
Total		$	6,985			$	6,985			$	—			$	—
Liabilities:
Recurring fair value measurements:
Deferred consideration (Note 11)		$	157,147			$	—			$	—			$	157,147
Securities sold, but not yet purchased			1,338				1,338				—				—
Total		$	158,485			$	1,338			$	—			$	157,147

 

		December 31, 2018
		Total				Level 1				Level 2				Level 3
Assets:
Recurring fair value measurements:
Cash equivalents		$	24			$	24			$	—			$	—
Securities owned, at fair value			8,873				8,873				—				—
Total		$	8,897			$	8,897			$	—			$	—
Non-recurring fair value measurements:
Thesys – Series Y preferred stock(1)		$	3,080			$	—			$	—			$	3,080
Total		$	3,080			$	—			$	—			$	3,080
Liabilities:
Recurring fair value measurements:
Deferred consideration (Note 11)		$	161,540			$	—			$	—			$	161,540
Securities sold, but not yet purchased			1,698				1,698				—				—
Total		$	163,238			$	1,698			$	—			$	161,540

 

(1)	Fair value determined on December 31, 2018 (See Note 9).

Recurring Fair Value Measurements—Methodology

Cash Equivalents (Note 4) – 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 considered Level 1.

Securities Owned/Sold but Not Yet Purchased (Note 6) – Securities owned and sold, but not yet purchased are investments in ETFs. ETFs are generally traded in active, quoted and highly liquid markets and are therefore classified as Level 1 in the fair value hierarchy.

 

17

Deferred Consideration – Deferred consideration represents the present value of an obligation to pay gold into perpetuity and was measured at March 31, 2019 using forward-looking gold prices ranging from $1,303 per ounce to $2,394 per ounce ($1,294 per ounce to $2,621 per ounce at December 31, 2018) which are extrapolated from the last observable price (beyond 2024), discounted at a rate of 10% and includes a perpetual growth rate of 1.5%. This obligation is classified as Level 3 as the discount rate, perpetual growth rate and extrapolated forward-looking gold prices are significant unobservable inputs. An increase in forward-looking gold prices would result in an increase in deferred consideration, whereas an increase in the discount rate would reduce the fair value. See Note 11 for additional information.

The following table presents a reconciliation of beginning and ending balances of recurring fair value measurements classified as Level 3:

 

		Three Months Ended March 31,
		2019				2018
Deferred consideration (See Note 11)
Beginning balance		$	161,540			$	—
Net realized losses/(gains)(1)			3,098				—
Net unrealized losses/(gains)(2)			(4,404	)			—
Settlements			(3,087	)			—
Ending balance		$	157,147			$	—

 

(1)	Recorded as contractual gold payments expense on the Company’s Consolidated Statements of Operations.

(2)	Recorded as gain on revaluation of deferred consideration – gold payments on the Company’s Consolidated Statements of Operations.

6. Securities Owned/Sold but Not Yet Purchased

The following table is a summary of the Company’s securities owned and securities sold but not yet purchased:

 

		March 31, 2019				December 31, 2018
Securities Owned
Trading securities		$	6,419			$	8,873
Securities Sold, but not yet Purchased
Trading securities		$	1,338			$	1,698

The Company had no available-for-sale debt securities at March 31, 2019 and December 31, 2018. During the three months ended March 31, 2018, the Company received $60,498 of proceeds from the sale and maturity of available-for-sale debt securities and recognized gross realized losses of $716. Those losses were reclassified out of accumulated other comprehensive income and into the Consolidated Statements of Operations.

7. Securities Held-to-Maturity

The following table is a summary of the Company’s securities held-to-maturity:

 

		March 31, 2019				December 31, 2018
Federal agency debt instruments (amortized cost)		$	20,159			$	20,180

 

18

The following table summarizes unrealized gains, losses, and fair value (classified as Level 2 within the fair value hierarchy) of securities held-to-maturity:

 

		March 31, 2019				December 31, 2018
Cost/amortized cost		$	20,159			$	20,180
Gross unrealized gains			6				5
Gross unrealized losses			(1,083	)			(1,679	)
Fair value		$	19,082			$	18,506

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, 2019 or December 31, 2018. 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:

 

		March 31, 2019				December 31, 2018
Due within one year		$	—			$	—
Due one year through five years			—				—
Due five years through ten years			7,519				7,521
Due over ten years			12,640				12,659
Total		$	20,159			$	20,180

8. Note Receivable

The Company has an outstanding unsecured promissory note from AdvisorEngine Inc. (“AdvisorEngine”). All principal amounts under the note bear interest from the date such amounts are advanced until repaid at a rate of 5% per annum, provided that immediately upon the occurrence and during the continuance of an event of default (as defined), interest will be increased to 10% per annum. All accrued and unpaid interest is treated as paid-in-kind (“PIK”) by capitalizing such amount and adding it to the principal amount of the original note. AdvisorEngine has the option to prepay the note, in whole or in part, at any time without premium or penalty. All borrowings under the promissory note mature on December 29, 2021.

The following is a summary of the outstanding note receivable balance:

 

		March 31, 2019				December 31, 2018
Note receivable (face value)		$	30,000			$	30,000
Less: Original issue discount (“OID”), unamortized			(2,378	)			(2,582	)
Plus: PIK interest			1,695				1,304
Total note receivable, net		$	29,317			$	28,722

During the three months ended March 31, 2019 and March 31, 2018, the Company recognized interest income of $595 and $416, respectively, which included OID amortization and accrued PIK interest. The Company determined that an allowance for credit loss was not necessary at March 31, 2019 and December 31, 2018 as there have been no adverse events or circumstances since the note was issued which may indicate that its carrying amount may not be recoverable. The fair value of the note receivable (classified as Level 2 within the fair value hierarchy and determined using high yield credit spreads) was $28,802 and $27,618 at March 31, 2019 and December 31, 2018, respectively.

 

19

9. Investments, Carried at Cost

The following table sets forth the Company’s investments, carried at cost:

 

		March 31, 2019				December 31, 2018
AdvisorEngine – Preferred stock		$	25,000			$	25,000
Thesys Group, Inc. (“Thesys”)			3,080				3,080
Total		$	28,080			$	28,080

AdvisorEngine

Preferred Stock

The Company owns approximately 46% (or 41% on a fully-diluted basis) of AdvisorEngine, a digital wealth management platform, through strategic investments totaling $25,000. In consideration of its investment, the Company received 11,811,856 shares and 2,646,062 shares of Series A and Series A-1 convertible preferred stock, respectively. The Series A and Series A-1 preferred shares have substantially the same terms, are convertible into common stock at the option of the Company and contain 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 Company and AdvisorEngine also entered into an agreement whereby the Company’s asset allocation models are made available through AdvisorEngine’s open architecture platform and the Company actively introduces the platform to its distribution network.

The investment is accounted for under the cost method of accounting as it is not considered to be in-substance common stock. The Company quantitatively assessed its investment for impairment at December 31, 2018. The table below presents the ranges and weighted averages of significant unobservable inputs used in this assessment:

 

		Range (Weighted Average)
Market Approach
Revenue multiple			4.7x - 5.4x (5.0x)
Income Approach
Weighted average cost of capital (“WACC”)			26.0%

An increase in the revenue multiple would result in a higher enterprise value, whereas an increase in the WACC would reduce fair value. The results of the quantitative assessment noted no impairment at December 31, 2018. In addition, no impairment existed at March 31, 2019 based upon a qualitative assessment. There were also no observable price changes during the applicable reporting periods.

Thesys

On June 20, 2017, the Company was issued 7,797,533 newly authorized shares of Series Y preferred stock (“Series Y Preferred”) of Thesys in connection with the resolution of a dispute related to the Company’s ownership stake in Thesys. The Series Y Preferred represents current ownership of approximately 19% of Thesys on a fully diluted basis (excluding certain reserved shares). In addition, the Company was issued a warrant to purchase 3,898,766 shares of Series Y Preferred.

The Series Y Preferred ranks pari passu in priority with Thesys’s current preferred stockholders, has a liquidation preference of $0.231 per share, contains various rights and protections and is convertible into common stock at the option of the Company. The warrant is exercisable for five years after closing, at varying exercise prices that increase over time and set at multiples of a pre-determined Thesys valuation (or new valuation if Thesys completes a qualified financing, as defined, within two years). If a claim is brought against Thesys or the Company relating to the settlement, the warrant will be exercisable for 100% of the number of shares of Series Y Preferred issued to the Company at closing.

The Series Y Preferred is accounted for under the cost method of accounting as it is not considered to be in-substance common stock. The Company quantitatively assessed its investment for impairment at December 31, 2018. The table below presents the ranges and weighted averages of significant unobservable inputs used in this assessment:

 

20

		Range (Weighted Average)
Income Approach(1)
Weighted average cost of capital (“WACC”)			3.8% - 15.5% (14.1%)

 

(1)	The inputs selected varied, based upon the Thesys business line being valued. An increase in the WACC would result in a lower enterprise value.

The quantitative assessment performed resulted in the recognition of an impairment in the fourth quarter of 2018. No additional impairment was recognized at March 31, 2019 based upon a qualitative assessment. There were also no observable price changes during the applicable reporting periods.

The carrying value of the Series Y Preferred was $3,080 at March 31, 2019 and December 31, 2018. The fair value of the warrant was determined to be insignificant. The warrant is not accounted for as a derivative as it cannot be net settled and is not readily convertible to cash.

10. Fixed Assets, net

The following table summarizes fixed assets:

 

		March 31, 2019				December 31, 2018
Equipment		$	2,284			$	2,244
Furniture and fixtures			2,218				2,218
Leasehold improvements			10,982				10,964
Less: accumulated depreciation and amortization			(6,621	)			(6,304	)
Total		$	8,863			$	9,122

11. Deferred Consideration

Deferred consideration represents an obligation the Company assumed in connection with the ETFS Acquisition. The obligation is for fixed payments to ETFS Capital of physical gold bullion equating to 9,500 ounces of gold per year through March 31, 2058 and then subsequently reduced to 6,333 ounces of gold continuing into perpetuity (“Contractual Gold Payments”).

The Contractual Gold Payments are paid from advisory fee income generated by any Company-sponsored financial product backed by physical gold and are subject to adjustment and reduction for declines in advisory fee income generated by such products, with any reduction remaining due and payable until paid in full. ETFS Capital’s recourse is limited to such advisory fee income and it has no recourse back to the Company for any unpaid amounts that exceed advisory fees earned. ETFS Capital ultimately has the right to claw back Gold Bullion Securities Ltd. (a physically backed gold ETP issuer) if the Company fails to remit any amounts due.

The Company determined the present value of the deferred consideration of $157,147 and $161,540 at March 31, 2019 and December 31, 2018, respectively, using forward-looking gold prices which were extrapolated from the last observable price (beyond 2024), discounted at a rate of 10.0%. Current and long-term amounts payable at March 31, 2019 were $11,857 and $145,290, respectively.

During the three months ended March 31, 2019, the Company recognized Contractual Gold Payments expense of $3,098, arising from the fixed payments of physical gold bullion of 2,375 ounces and the unwinding of the discount (representing the increase in the carrying amount of the deferred consideration for the passage of time). A gain on the revaluation of deferred consideration of $4,404 was recognized during the three months ended March 31, 2019 due to flattening of the forward-looking gold curve as compared to the forward-looking gold curve on December 31, 2018, the date on which the deferred consideration was last measured.

See Note 5 for a reconciliation of changes in the deferred consideration balances.

12. Long-Term Debt

On April 11, 2018 and in connection with the ETFS Acquisition, the Company entered into the Credit Facility pursuant to which the lenders extended a $200,000 Term Loan and made available a $50,000 Revolver. Interest on the Term Loan accrues at an annual rate equal to LIBOR, plus up to 2.00% (commencing at LIBOR, plus 1.75%), and interest on the Revolver accrues at an annual rate equal to LIBOR, plus up to 1.50% (commencing at LIBOR, plus 1.25%), in each case, with the exact interest rate margin determined based on the Total Leverage Ratio (as defined below). The Revolver is also subject to a facility fee equal to an annual rate of up to 0.50% of the actual daily amount of the aggregate commitments (whether used or unused) under the Revolver, with the exact facility fee rate determined based on the Total Leverage Ratio. The Credit Facility matures on April 11, 2021. The Term Loan does not amortize and the entire principal balance is due in a single payment on the maturity date.

 

21

The following table provides a summary of the Company’s outstanding borrowings under the Credit Facility:

 

		March 31, 2019								December 31, 2018
		Term Loan				Revolver				Term Loan				Revolver
Amount borrowed		$	200,000			$	—			$	200,000			$	—
Unamortized issuance costs			(4,826	)			1,066				(5,408	)			1,195
Carrying amount		$	195,174			$	1,066			$	194,592			$	1,195
Effective interest rate(1)			5.47	%			n/a				5.09	%			n/a

 

(1)	Includes amortization of issuance costs.

During the three months ended March 31, 2019, the Company recognized $2,892 of interest expense on the Credit Facility. Unamortized issuance costs related to the Revolver of $1,066 and $1,195 at March 31, 2019 and December 31, 2018, respectively, are included within other noncurrent assets on the Consolidated Balance Sheet. The fair value of the Company’s long-term debt (classified as Level 2 within the fair value hierarchy) was $194,876 and $196,126 at March 31, 2019 and December 31, 2018, respectively.

The credit agreement includes a financial covenant that requires that the Company maintain a Total Leverage Ratio (as defined below), calculated as of the last day of each fiscal quarter, equal to or less than the ratio set forth opposite such fiscal quarter:

 

Fiscal Quarter Ending		Total Leverage Ratio
March 31, 2019			2.75:1.00
June 30, 2019			2.50:1.00
September 30, 2019			2.50:1.00
December 31, 2019			2.50:1.00
March 31, 2020			2.25:1.00
June 30, 2020			2.25:1.00
September 30, 2020 and each subsequent fiscal quarter ending on or before the maturity date			2.00:1.00

Total Leverage Ratio means, as of the last day of any fiscal quarter, the ratio of Consolidated Total Debt of the Company and its restricted subsidiaries (as defined in the credit agreement) as of such date to Consolidated EBITDA of the Company and its restricted subsidiaries (as defined in the credit agreement) for the four consecutive fiscal quarters ended on such date.

The Company’s obligations under the Term Loan and Revolver are unconditionally guaranteed by the Company and certain of its subsidiaries and secured by substantially all of the present and future property and assets of the Company and such subsidiaries, in each case, subject to customary exceptions and exclusions.

The credit agreement contains customary affirmative covenants for transactions of this type and other affirmative covenants agreed to by the parties, including, among others, the provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters. The credit agreement contains customary negative covenants, including among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchasing equity interests of the Company, entering into affiliate transactions and asset sales. The credit agreement also provides for a number of customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control and judgment defaults.

The Company is in compliance with its covenants under the credit agreement.

13. Preferred Shares

On April 10, 2018, the Company filed a Certificate of Designations of Series A Non-Voting Convertible Preferred Stock with the Secretary of State of the State of Delaware establishing the rights, preferences, privileges, qualifications, restrictions, and limitations relating to the Preferred Shares. The Preferred Shares are intended to provide ETFS Capital with economic rights equivalent to the Company’s common stock on an as-converted basis. The Preferred Shares have no voting rights, are not transferable and have the same priority with regard to dividends, distributions and payments as the common stock.

As described in the Certificate of Designations, the Company will not issue, and ETFS Capital does not have the right to require the Company to issue, any shares of common stock upon conversion of the Preferred Shares, if, as a result of such conversion, ETFS Capital (together with certain attribution parties) would beneficially own more than 9.99% of the Company’s outstanding common stock immediately after giving effect to such conversion.

 

22

In connection with the completion of the ETFS Acquisition, the Company issued 14,750 Preferred Shares, which are convertible into an aggregate of 14,750,000 shares of common stock. The fair value of this consideration was $132,750, based on the closing price of the Company’s common stock on April 10, 2018 of $9.00 per share, the trading day prior to the closing of the acquisition.

The following is a summary of the Preferred Share balance:

 

		March 31, 2019				December 31, 2018
Issuance of Preferred Shares		$	132,750			$	132,750
Less: Issuance costs			(181	)			(181	)
Preferred Shares – carrying value		$	132,569			$	132,569

Temporary equity classification is required for redeemable instruments for which redemption triggers are outside of the issuer’s control. ETFS Capital has the right to redeem all the Preferred Shares specified to be converted during the period of time specified in the Certificate of Designations in the event that: (a) the number of shares of the Company’s common stock authorized by its certificate of incorporation is insufficient to permit the Company to convert all of the Preferred Shares requested by ETFS Capital to be converted; or (b) ETFS Capital does not, upon completion of a change of control of the Company, receive the same amount per Preferred Share as it would have received had each outstanding Preferred Share been converted into common stock immediately prior to the change of control. However, the Company will not be obligated to make any such redemption payments to the extent such payments would be a breach of any covenant or obligation the Company owes to any of its secured creditors or is otherwise prohibited by applicable law.

Any such redemption will be at a price per Preferred Share equal to the dollar volume-weighted average price for a share of common stock for the 30-trading day period ending on the date of such attempted conversion or change of control, as applicable, multiplied by 1,000. Such redemption payment will be made in one payment no later than 10 business days following the last day of the Company’s first fiscal quarter that begins on a date following the date ETFS Capital exercises such redemption right.

The carrying amount of the Preferred Shares was not adjusted as it was not probable that the Preferred Shares would become redeemable.

14. Leases

The Company has entered into operating leases for its corporate headquarters and other office facilities, financial data terminals and equipment. The Company has no finance leases.

Upon the adoption of ASC 842 on January 1, 2019, the Company recognized a right-of-use asset and lease liability of $19,827 and $24,817, respectively. The right-of-use asset was equal to the lease liability, less accrued lease payments and remaining unamortized lease incentives.

The following table provides additional information regarding the Company’s leases:

 

		Three Months Ended March 31,
		2019				2018
Lease cost:
Operating lease cost		$	798			$	743
Short-term lease cost			389				284
Total lease cost		$	1,187			$	1,027
Other information:
Cash paid for amounts included in the measurement of operating liabilities (operating leases)		$	881				n/a
Right-of-use assets obtained in exchange for new operating lease liabilities			n/a				n/a
Weighted-average remaining lease term (in years) – operating leases			10.0				n/a
Weighted-average discount rate – operating leases			6.3	%			n/a

None of the Company’s leases include variable payments, residual value guarantees or any restrictions or covenants relating to the Company’s ability to pay dividends or incur additional financing obligations.

The Company’s lease of its headquarters, which expires on August 20, 2029, includes an option to extend for an additional five years. Rent payable under the option is equal to the fair market rent of the premise as determined by the landlord approximately six

 

23

months prior to the commencement of the extension term. The lease also includes a cancellation option which is effective on August 21, 2024 and requires notice to be provided to the landlord at least 12 months prior. Triggering this option requires a cancellation payment of $4,236. The cancellation and extension options were not reasonably certain of being exercised and were therefore not recognized as part of the right-of-use asset and lease liability.

Other leases also include extension, automatic renewal and termination provisions. These provisions were also not reasonably certain of being exercised and were therefore not recognized as part of the right-of-use asset and lease liability.

The following table discloses future minimum lease payments at March 31, 2019 with respect to the Company’s operating lease liabilities:

 

Remainder of 2019		$	2,723
2020			3,695
2021			2,958
2022			2,958
2023			2,958
2024 and thereafter			17,641
Total future minimum lease payments (undiscounted)		$	32,933

The following table reconciles the future minimum lease payments (disclosed above) at March 31, 2019 to the operating lease liabilities recognized in the Company’s Consolidated Balance Sheet:

 

Amounts recognized in the Company’s Consolidated Balance Sheet
Lease liability – short term		$	3,651
Lease liability – long term			20,704
Subtotal			24,355
Difference between undiscounted and discounted cash flows			8,578
Total future minimum lease payments (undiscounted)		$	32,933

The following table discloses the future minimum lease payments at March 31, 2018 (prior period), which is required as the Company elected to apply the new lease requirements at the effective date, rather than the beginning of the earliest comparative period presented:

 

Remainder of 2018		$	3,072
2019			3,764
2020			3,516
2021			3,146
2022			2,958
2023 and thereafter			20,599
Total future minimum lease payments (undiscounted)		$	37,055

Lease Termination – Japan Office

The Company recognized an impairment expense of $572 in connection with the termination of its Japan office lease.

Letter of Credit

The Company collateralized its U.S. office lease through a standby letter of credit totaling $1,384. The collateral is included in cash and cash equivalents on the Company’s Consolidated Balance Sheets.

 

24

15. 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.

16. Variable Interest Entity

VIEs are entities with any of the following characteristics: (i) the entity does not have enough equity to finance its activities without additional financial support; (ii) the equity holders, as a group, lack the characteristics of a controlling financial interest; or (iii) the entity is structured with non-substantive voting rights. The Company determined that AdvisorEngine has the characteristics of a VIE.

Consolidation of a VIE is required for the party deemed to be the primary beneficiary, if any. The primary beneficiary is the party who has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. The Company is not the primary beneficiary of AdvisorEngine as it does not have the power to direct the activities that most significantly impact AdvisorEngine’s economic performance. Such power is conveyed through AdvisorEngine’s board of directors and the Company does not have control over the board.

The following table presents information about the Company’s variable interests in AdvisorEngine (a non-consolidated VIE):

 

		March 31, 2019				December 31, 2018
Carrying Amount - Assets
Preferred stock		$	25,000			$	25,000
Note receivable - unsecured			29,317				28,722
Total carrying amount - Assets		$	54,317			$	53,722
Maximum exposure to loss		$	54,317			$	53,722

17. Revenues from Contracts with Customers

The following table presents the Company’s total revenues categorized as revenues from contracts with customers and other sources of revenues:

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Revenues from contracts with customers:
Advisory fees		$	64,840			$	58,456
Other			645				448
Total operating revenues		$	65,485			$	58,904

The Company recognizes revenues from contracts with customers when the performance obligation is satisfied, which is when the promised goods or services are transferred to the customer. A good or service is considered to be transferred when the customer obtains control, which is represented by the transfer of rights with regard to the good or service. Transfer of control happens either over time or at a point in time. When a performance obligation is satisfied over time, an entity is required to select a single method of measuring progress for each performance obligation that depicts the entity’s performance in transferring control of goods or services to the customer.

 

25

Substantially all the Company’s revenues from contracts with customers are derived primarily from investment advisory agreements with related parties (See Note 18). These advisory fees are recognized over time, are earned from the Company’s ETPs and are calculated based on a percentage of the ETPs’ average daily net assets. There is no significant judgment in calculating amounts due which are invoiced monthly in arrears and are not subject to any potential reversal. 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.

There are no contract assets or liabilities that arise in connection with the recognition of advisory fee revenue. In addition, there are no costs incurred to obtain or fulfill the contracts with customers, all of which are investment advisory agreements with related parties.

See Note 18 for further information including disaggregation of advisory fee revenue and amounts due from customers, all of which are derived from related parties. Advisory fee revenues are also reported by segment as disclosed in Note 24.

18. Related Party Transactions

The Company’s revenues are derived primarily from investment advisory agreements with related parties. Under these agreements, the Company has licensed to related parties the use of certain of its own indexes for the U.S. and Canadian WisdomTree ETFs and WisdomTree UCITS ETFs. The Board of Trustees and Board of Directors (including certain officers of the Company) of the related parties are primarily responsible for overseeing the management and affairs of the entities for the benefit of their stakeholders and have contracted with the Company to provide for general management and administration services. The Company is also responsible for certain expenses of the related parties, including the cost of transfer agency, custody, fund administration and accounting, legal, audit, and other non-distribution services, excluding extraordinary expenses, taxes and certain other expenses, which is included in fund management and administration on the Company’s Consolidated Statements of Operations. In exchange, the Company receives fees based on a percentage of the ETFs’ average daily net assets. The advisory agreements may be terminated by the related parties upon notice.

The following table summarizes accounts receivable from related parties which are included as a component of accounts receivable on the Company’s Consolidated Balance Sheets:

 

		March 31, 2019				December 31, 2018
Receivable from WTT		$	15,036			$	14,678
Receivable from ETFS Issuers			8,786				8,779
Receivable from BI and WTI			1,004				951
Receivable from WTAMC			189				167
Receivable from WTCS			97				95
Total		$	25,112			$	24,670

The following table summarizes revenues from advisory services provided to related parties:

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Advisory services provided to WTT		$	42,223			$	55,202
Advisory services provided to ETFS Issuers			19,273				—
Advisory services provided to BI and WTI			2,504				2,626
Advisory services provided to WTAMC			546				311
Advisory services provided to WTCS			294				317
Total		$	64,840			$	58,456

The Company also has investments in certain WisdomTree ETFs of approximately $4,940 and $7,117 at March 31, 2019 and December 31, 2018, respectively. Gains related to these ETFs for the three months ended March 31, 2019 and 2018 were $353 and $9, respectively.

 

26

19. Stock-Based Awards

On June 20, 2016, the Company’s stockholders approved a new equity award plan under which the Company can issue up to 10,000,000 shares of common stock (less one share for every share granted under prior plans since March 31, 2016 and inclusive of shares available under the prior plans as of March 31, 2016) in the form of stock options and other stock-based awards. The Company also has issued from time to time stock-based awards outside a plan.

The Company grants equity awards to employees and directors which include restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance-based restricted stock units (“PRSUs”) and stock options. Certain awards described below are subject to acceleration under certain conditions.

 

Stock options:		Generally issued for terms of ten years and may vest after at least one year of service and have an exercise price equal to the Company’s stock price on the grant date. The Company estimates the fair value of stock options (when granted) using the Black-Scholes option pricing model.
RSAs/RSUs:		Awards are valued based on the Company’s stock price on grant date and generally vest ratably over three years.
PRSUs:		These awards cliff vest three years from grant date and contain a market condition whereby the number of PRSUs ultimately vesting is tied to how the Company’s total shareholder return (“TSR”) compares to a peer group of other publicly traded asset managers over the three-year period. A Monte Carlo simulation is used to value these awards.
		The number of PRSUs vesting ranges from 0% to 200% of the target number of PRSUs granted, as follows:
		•  If the relative TSR is below the 25th percentile, then 0% of the target number of PRSUs granted will vest;   •  If the relative TSR is at the 25th percentile, then 50% of the target number of PRSUs granted will vest; and   •  If the relative TSR is above the 25th percentile, then linear scaling is applied such that the percent of the target number of PRSUs vesting is 100% at the 50th percentile and capped at 200% of the target number of PRSUs granted for performance at the 100th percentile.

For the three months ended March 31, 2019 and 2018, total stock-based compensation expense was $3,072 and $3,309, respectively.

A summary of unrecognized stock-based compensation expense and average remaining vesting period is as follows:

 

		March 31, 2019
		Unrecognized Stock- Based Compensation				Average Remaining Vesting Period
Employees and directors restricted stock awards		$	24,012				2.48

A summary of stock options, restricted stock and restricted stock unit activity for the three months ended March 31, 2019 is as follows:

 

		Stock Options				RSAs				RSUs				PRSUs
Balance at January 1, 2019			570,537				1,957,102				9,494				—
Granted			—				2,233,878				35,283				270,872	(1)
Exercised/vested			(20,000	)			(827,721	)			(4,341	)			—
Forfeitures			—				(93,194	)			—				—
Balance at March 31, 2019			550,537				3,270,065				40,436				270,872	(1)

 

(1)

Represents the target number of PRSUs granted and outstanding. The number of PRSUs that ultimately vest ranges from 0% to 200% of this amount. A Monte Carlo simulation was used to value these awards using the following assumptions for the Company and the peer group: (i) beginning 90-day average stock prices; (ii) valuation date stock prices; (iii) historical stock price volatilities ranging from 22% to 42% (average 28%); (iv) correlation coefficients based upon the price data used to calculate the historical volatilities; (v) a risk free interest rate of 2.56%; and (vi) an expected dividend yield of 0%.

 

27

20. Earnings Per Share

The following tables set forth reconciliations of the basic and diluted earnings per share computations for the periods presented:

 

		Three Months Ended March 31,
Basic Earnings per Share		2019				2018
Net income		$	8,824			$	9,424
Less: Income distributed to participating securities			(544	)			(71	)
Less: Undistributed income allocable to participating securities			(391	)			(85	)
Net income available to common stockholders		$	7,889			$	9,268
Weighted average common shares (in thousands)			151,625				135,329
Basic earnings per share		$	0.05			$	0.07
		Three Months Ended March 31,
Diluted Earnings per Share		2019				2018
Net income		$	8,824			$	9,424
Weighted Average Diluted Shares (in thousands):
Weighted average common shares			151,625				135,329
Dilutive effect of common stock equivalents			15,186				1,139
Weighted average diluted shares			166,811				136,468
Diluted earnings per share		$	0.05			$	0.07

Diluted earnings per share is calculated under both the treasury stock and if-converted method and the two-class method and 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). The calculation that results in the most dilutive earnings per share amount for common stock is reported in the Company’s consolidated financial statements. The Company excluded 3,495,080 and 1,101,513 common stock equivalents from its computation of diluted earnings per share for the three months ended March 31, 2019 and 2018, respectively, as they were determined to be anti-dilutive.

21. Income Taxes

Effective Income Tax Rate – Three Months Ended March 31, 2019 and March 31, 2018

The Company’s effective income tax rate for the three months ended March 31, 2019 of negative 13.5% resulted in an income tax benefit of $1,049. The Company’s effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a $4,309 reduction in unrecognized tax benefits, a non-taxable gain on revaluation of deferred consideration and a lower tax rate on foreign earnings, partly offset by a valuation allowance on foreign net operating losses, tax shortfalls associated with the vesting and exercise of stock-based compensation awards and state and local income taxes.

The Company’s effective income tax rate for the three months ended March 31, 2018 of 32.3% resulted in income tax expense of $4,498. The Company’s effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a valuation allowance on foreign net operating losses and state and local income taxes, partly offset by tax windfalls associated with the vesting and exercise of stock-based compensation awards.

 

28