Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

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 June 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

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

☐

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.

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

☐

☒

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 July

, 2020, there were 145,875,749 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.

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 this Report and in our Annual Report on Form

10-K

for the fiscal year ended December 31, 2019 and Quarterly Report on Form

10-Q

for the quarter ended March 31, 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.

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PART I: FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

WisdomTree Investments, Inc. and Subsidiaries

Consolidated Balance Sheets

(In Thousands, Except Per Share Amounts)


	June 30, 2020			December 31, 2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	50,255		$	74,972
Securities owned, at fair value (including $12,929 and $16,886 invested in WisdomTree ETFs at June 30, 2020 and December 31, 2019, respectively)		13,110			17,319
Accounts receivable (including $22,026 and $25,667 due from related parties at June 30, 2020 and December 31, 2019, respectively)		24,372			26,838
Prepaid expenses		5,621			3,724
Other current assets		1,414			207

Total current assets		94,772			123,060
Fixed assets, net		7,835			8,127
Notes receivable, net (Note 8)		—			28,172
Indemnification receivable (Note 22)		24,364			32,101
Securities held-to-maturity		581			16,863
Deferred tax assets, net		5,540			7,398
Investments (Note 9)		11,192			11,192
Right of use assets – operating leases (Note 15)		17,230			18,161
Goodwill (Note 24)		85,856			85,856
Intangible assets (Note 24)		601,247			603,294
Other noncurrent assets		184			983

Total assets	$	848,801		$	935,207

Liabilities and stockholders’ equity
Liabilities
Current liabilities:
Fund management and administration payable	$	23,240		$	22,021
Compensation and benefits payable		7,629			26,501
Deferred consideration – gold payments (Note 11)		16,364			13,953
Securities sold, but not yet purchased, at fair value		—			582
Operating lease liabilities (Note 15)		3,293			3,682
Income taxes payable		2,277			3,372
Accounts payable and other liabilities		9,376			8,930

Total current liabilities		62,179			79,041
Convertible notes (Note 13)		141,479			—
Debt (Note 12)		—			175,956
Deferred consideration – gold payments (Note 11)		182,420			159,071
Operating lease liabilities (Note 15)		18,258			19,057
Other noncurrent liabilities (Note 22)		24,364			32,101

Total liabilities		428,700			465,226

Preferred stock – Series A Non-Voting Convertible, par value $0.01; 14.750 shares authorized, issued and outstanding; redemption value of $50,244 and $71,630 at June 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: 149,796 and 155,264 at June 30, 2020 and December 31, 2019, respectively		1,498			1,553
Additional paid-in capital		325,406			352,658
Accumulated other comprehensive income		260			945
Accumulated deficit		(39,632	)		(17,744	)

Total stockholders’ equity		287,532			337,412

Total liabilities and stockholders’ equity	$	848,801		$	935,207

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

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WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Operating Revenues:
Advisory fees	$	57,208		$	65,627		$	120,158		$	130,467
Other income		918			666			1,842			1,311

Total revenues		58,126			66,293			122,000			131,778

Operating Expenses:
Compensation and benefits		17,455			21,300			34,750			42,601
Fund management and administration		14,461			15,576			28,946			30,742
Marketing and advertising		1,949			2,910			4,417			5,590
Sales and business development		2,181			4,171			5,598			8,593
Contractual gold payments (Note 11)		4,063			3,110			7,823			6,208
Professional and consulting fees		1,357			1,296			2,630			2,778
Occupancy, communications and equipment		1,643			1,548			3,194			3,166
Depreciation and amortization		251			264			507			533
Third-party distribution fees		1,340			1,919			2,695			4,319
Acquisition and disposition-related costs		33			33			416			346
Other		1,596			2,255			3,593			4,308

Total operating expenses		46,329			54,382			94,569			109,184

Operating income		11,797			11,911			27,431			22,594
Other Income/(Expenses):
Interest expense		(2,044	)		(2,910	)		(4,463	)		(5,802	)
(Loss)/gain on revaluation of deferred consideration – gold payments (Note 11)		(23,358	)		(4,037	)		(25,566	)		367
Interest income		119			818			282			1,597
Impairments (Note 7 and 25)		—			—			(19,672	)		(572	)
Loss on extinguishment of debt (Note 12)		(2,387	)		—			(2,387	)		—
Other gains and losses, net		1,819			284			(688	)		(4,343	)

(Loss)/income before income taxes		(14,054	)		6,066			(25,063	)		13,841

Income tax (benefit)/expense		(804	)		3,587			(3,175	)		2,538

Net (loss)/income	$	(13,250	)	$	2,479		$	(21,888	)	$	11,303

(Loss)/earnings per share – basic	$	(0.09	)	$	0.01		$	(0.15	)	$	0.07

(Loss)/earnings per share – diluted	$	(0.09	)	$	0.01		$	(0.15	)	$	0.07

Weighted-average common shares – basic		151,623			151,818			152,071			151,722

Weighted-average common shares – diluted		151,623			167,249			152,071			166,855

Cash dividends declared per common share	$	0.03		$	0.03		$	0.06		$	0.06

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

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WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands)

(Unaudited)


	For the Three Months Ended June 30, 2020
	Common Stock						Additional Paid-In Capital			Accumulated Other		Accumulated Deficit			Total
	Shares Issued			Par Value			Additional Paid-In Capital			Comprehensive Income		Accumulated Deficit			Total
Balance – April 1, 2020		156,424		$	1,564		$	349,495		$	92	$	(26,382)		$	324,769
Restricted stock issued and vesting of restricted stock units, net		110			1			(1	)		—		—			—
Shares repurchased		(6,738	)		(67	)		(24,882	)		—		—			(24,949)
Stock-based compensation		—			—			2,920			—		—			2,920
Allocation of equity component related to convertible notes, net of issuance costs of $128 and deferred taxes of $1,017		—			—			3,008			—		—			3,008
Other comprehensive income		—			—			—			168		—			168
Dividends		—			—			(5,134	)		—		—			(5,134	)
Net loss		—			—			—			—		(13,250	)		(13,250	)

Balance – June 30, 2020		149,796		$	1,498		$	325,406		$	260	$	(39,632	)	$	287,532


	For the Three Months Ended June 30, 2019
	Common Stock					Additional Paid-In Capital			Accumulated Other			Accumulated Deficit			Total
	Shares Issued			Par Value		Additional Paid-In Capital			Comprehensive Income			Accumulated Deficit			Total
Balance – April 1, 2019		155,056		$	1,551	$	364,717		$	758		$	(3,592	)	$	363,434
Restricted stock issued and vesting of restricted stock units, net		66			—		—			—			—			—
Shares repurchased		(14	)		—		(102	)		—			—			(102	)
Stock-based compensation		—			—		3,135			—			—			3,135
Other comprehensive loss		—			—		—			(33	)		—			(33	)
Dividends		—			—		—			—			(5,094	)		(5,094	)
Net income		—			—		—			—			2,479			2,479

Balance – June 30, 2019		155,108		$	1,551	$	367,750		$	725		$	(6,207	)	$	363,819

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

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WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Continued)

(In Thousands)

(Unaudited)


	For the Six Months Ended June 30, 2020
	Common Stock						Additional Paid-In Capital			Accumulated Other			Accumulated Deficit			Total
	Shares Issued			Par Value			Additional Paid-In Capital			Comprehensive Income			Accumulated Deficit			Total
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		1,549			15			(15	)		—			—			—
Shares repurchased		(7,124	)		(70	)		(26,374	)		—			—			(26,444	)
Exercise of stock options, net		107			—			240			—			—			240
Stock-based compensation		—			—			6,159			—			—			6,159
Allocation of equity component related to convertible notes, net of issuance costs of $128 and deferred taxes of $1,017		—			—			3,008			—			—			3,008
Other comprehensive loss		—			—			—			(685	)		—			(685	)
Dividends		—			—			(10,270	)		—			—			(10,270	)
Net loss		—			—			—			—			(21,888	)		(21,888	)

Balance – June 30, 2020		149,796		$	1,498		$	325,406		$	260		$	(39,632	)	$	287,532


	For the Six Months Ended June 30, 2019
	Common Stock						Additional Paid-In Capital			Accumulated Other		Accumulated Deficit			Total
	Shares Issued			Par Value			Additional Paid-In Capital			Comprehensive Income		Accumulated Deficit			Total
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		2,211			21			(21	)		—		—			—
Shares repurchased		(325	)		(2	)		(2,105	)		—		—			(2,107	)
Exercise of stock options, net		20			—			14			—		—			14
Stock-based compensation		—			—			6,207			—		—			6,207
Other comprehensive income		—			—			—			258		—			258
Dividends		—			—			—			—		(10,191	)		(10,191	)
Net income		—			—			—			—		11,303			11,303

Balance – June 30, 2019		155,108		$	1,551		$	367,750		$	725	$	(6,207	)	$	363,819

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

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WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)


	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net (loss)/income	$	(21,888	)	$	11,303
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Advisory fees received in gold and other precious metals		(29,135	)		(22,872	)
Loss/(gain) on revaluation of deferred consideration – gold payments		25,566			(367	)
Impairments		19,672			572
Contractual gold payments		7,823			6,208
Stock-based compensation		6,159			6,207
Gain on sale – Canadian ETF business		(2,877	)		—
Loss on extinguishment of debt		2,387			—
Amortization of right of use asset		1,588			1,590
Amortization of issuance costs – former credit facility		1,328			1,430
Deferred income taxes		832			2,443
Depreciation and amortization		507			533
Amortization of issuance costs – convertible notes		115			—
Paid-in-kind interest income		—			(1,223	)
Other		(83	)		5
Changes in operating assets and liabilities:
Securities owned, at fair value		4,209			(222	)
Accounts receivable		4,461			1,833
Income taxes payable		(1,046	)		(44	)
Prepaid expenses		(2,016	)		(1,746	)
Gold and other precious metals		20,882			16,318
Other assets		(702	)		(552	)
Fund management and administration payable		1,677			1,231
Compensation and benefits payable		(18,431	)		(3,938	)
Securities sold, but not yet purchased, at fair value		(582	)		(1,155	)
Operating lease liabilities		(1,845	)		(1,760	)
Accounts payable and other liabilities		781			(435	)

Net cash provided by operating activities		19,382			15,359

Cash flows from investing activities:
Purchase of fixed assets		(224	)		(15	)
Funding of notes receivable		—			(1,540	)
Proceeds from held-to-maturity securities maturing or called prior to maturity		16,365			39
Proceeds from the sale of the Company’s financial interests in AdvisorEngine Inc.		8,155			—
Proceeds from sale of Canadian ETF business, net		2,774			—

Net cash provided by/(used in) investing activities		27,070			(1,516	)

Cash flows from financing activities:
Repayment of debt		(179,000	)		—
Shares repurchased		(26,444	)		(2,107	)
Dividends paid		(10,270	)		(10,191	)
Convertible notes issuance costs		(4,611	)		—
Proceeds from the issuance of convertible notes (Note 13)		150,000			—
Proceeds from exercise of stock options		240			14

Net cash used in financing activities		(70,085	)		(12,284	)

(Decrease)/increase in cash flow due to changes in foreign exchange rate		(1,084	)		268

(Decrease)/increase in cash and cash equivalents		(24,717	)		1,827
Cash and cash equivalents – beginning of period		74,972			77,784

Cash and cash equivalents – end of period	$	50,255		$	79,611

Supplemental disclosure of cash flow information:
Cash paid for taxes	$	2,200		$	4,403

Cash paid for interest	$	3,390		$	4,559

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 eight 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.

Table of Contents

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 (Loss)/Income 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.

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.

Table of Contents

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 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.


	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		54

Item 3. Defaults Upon Senior Securities		54

Item 4. Mine Safety Disclosures		54

Item 5. Other Information		54

Item 6. Exhibits		55