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,
leveraged-and-inverse,
currency and alternative strategies. The Company has the following wholly-owned operating subsidiaries:WisdomTree Asset Management, Inc.
non-consolidated
third party, is a Delaware statutory trust registered with the SEC as anopen-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
leveraged-and-inverse
strategies.WisdomTree Multi Asset Management Limited
non-consolidated
third party, is a public limited company domiciled in Ireland.WisdomTree Management Limited
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
is a U.K. based company registered with the Financial Conduct Authority currently providing distribution and support services to ManJer,
WisdomTree Europe Limited
WisdomTree Ireland Limited
WisdomTree Asset Management Canada, Inc.
WisdomTree Commodity Services, LLC
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 operationsoperations. During the three months ended September 30, 2019, WTJ was liquidated and isthe foreign currency translation adjustment of $397 previously recorded in accumulated other comprehensive income was recognized in other gains and losses, net in the processConsolidated Statements of being liquidated. Operations.
WTJ reported operating losses during the three months ended JuneSeptember 30, 2019 and 2018 of $35$85 and $1,125,$1,342, respectively, and during the sixnine months ended JuneSeptember 30, 2019 and 2018 of $465$550 and $2,357,$3,698, respectively. WTJ also recognized an impairment expense of $572 in connection with the termination of its office lease during the sixnine months ended JuneSeptember 30, 2019.
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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-ownedwholly 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(Note 3).
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.
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 (loss)/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(Note 11).
Marketing and Advertising
Advertising costs, including media advertising and production costs, are expensed when incurred.
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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.
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, net of original issue discount. Interest income is accrued over the term of the notes using the effective interest method. The Company performs a review for the impairment of the notes receivable on a quarterly basis and provides for an allowance for credit losses if all or a portion of the notes are 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 asavailable-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. Forheld-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.1
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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”), 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.
2016-01,
Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities
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. 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.
re-evaluation,
if one were to occur, in accordance with ASU2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
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(See Note(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 30income approach, market approach and its market capitalization when determining the fair value of its reporting units.
th
. In addition, goodwill arising from the ETFS Acquisition th
. When performing its goodwill impairment test, the Company considers a qualitative assessment, when appropriate, and the 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,(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(See Note(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,
Leases
right-of-use
asset 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.
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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(Note 11). Changes in the fair value of this obligation are reported as (loss)
/gainon 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(Note 13) and unvested share-based payment awards that contain 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.
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 thetwo-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 is calculated under the treasury stock andmost dilutivelowest diluted EPS amount for the common stock is reported in the Company’s consolidated financial statements.
if-converted
method and thetwo-class
method. The calculation that results in the 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(ASU
2016-13,
Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments
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) certainoff-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 otheroff-balance
sheet credit exposures, debt securities (including thoseheld-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 toavailable-for-sale
debt securities. Foravailable-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. ASU2016-13
also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU2016-13
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(ASU
2018-13,
Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
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 1
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2 of the fair value hierarchy,,(2),2019,2020. 2020.
the policy for timing of transfers between levels and
(3) the valuation processes for Level
3fair 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
3fair 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
3fair value measurements. ASU
2018-13
is effective for fiscal years (and interim reporting periods within those years) beginning after December
15,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
1,3. Business Combination
Summary
On April 11, 2018, the Company acquired from ETFS Capital its European exchange-traded commodity, currency andshort-and-leveragedleveraged-and-inversebusiness 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 Capitalis subject tolock-up, a standstill restriction and voting restrictions and received has
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(Note 12).
Purchase Price Allocation
The ETFS Acquisition has been accounted for under the acquisition method of accounting in accordance with ASC Topic 805,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.
Business Combinations,
The following table summarizes the allocation of the purchase price as of the acquisition date:
Purchase price | Purchase price | Purchase price | ||||||
Preferred Shares issued | 14,750 | 14,750 | ||||||
Conversion ratio | 1,000 | 1,000 | ||||||
Common stock equivalents | 14,750,000 | 14,750,000 | ||||||
Common Shares issued | 15,250,000 | 15,250,000 | ||||||
Total shares issued | 30,000,000 | 30,000,000 | ||||||
WisdomTree stock price (1) | $ | 9.00 | $ | 9.00 | ||||
Equity portion of purchase price | $ | 270,000 | $ | 270,000 | ||||
Cash portion of purchase price | ||||||||
Term Loan (See Note 12) | 200,000 | |||||||
Term Loan (Note 12) | 200,000 | |||||||
Cash on hand | 53,000 | 53,000 | ||||||
Purchase price | 523,000 | 523,000 | ||||||
Deferred consideration (See Note 11) | 172,746 | |||||||
Deferred consideration (Note 11) | 172,746 | |||||||
Total | $ | 695,746 | $ | 695,746 | ||||
Allocation of consideration | ||||||||
Cash and cash equivalents | 13,687 | 13,687 | ||||||
Receivables and other current assets | 14,069 | 14,069 | ||||||
Intangible assets (2) | 601,247 | 601,247 | ||||||
Other current liabilities | (17,314 | ) | (17,314 | ) | ||||
Fair value of net assets acquired | 611,689 | 611,689 | ||||||
Goodwill resulting from the ETFS Acquisition (3) | $ | 84,057 | $ | 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. |
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| (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 and sixnine months ended JuneSeptember 30, 2019, the Company incurred acquisition-related costs of $33$190 and $346,$536, respectively, which were predominantly associated with the integration of ETFS.ETFS and costs incurred in connection with the rationalization of
the Company’s
product offering in Europe followingthe
ETFS Acquisition
.During the three and sixnine months ended JuneSeptember 30, 2018, the Company incurred acquisition-related costs of $7,928$456 and $9,990,$10,446, respectively, which included professional advisor fees, severance and other compensation costs, a
write-off
of the Company’s office lease and other integration costs.Operating Results of ETFS
The Company’s Consolidated Statements of Operations include the following operating results of ETFS since the acquisition date of April 11, 2018 through JuneSeptember 30, 2018:
Revenues: | $37,137 | |
Income before income taxes: | $ (including a gain on revaluation of deferred consideration of $ 17,630) |
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, 2018. 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.
Nine Months Ended September 30, 2018 | ||||
Revenues: | $ | 229,674 | ||
Net income: | $ | 48,088 | ||
Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||
Revenues: | $ | 78,025 | $ | 157,796 | ||||
Net income: | $ | 23,274 | $ | 34,517 | ||||
Included within the proforma financial information above is a gain on revaluation of deferred consideration of $8,326 and $5,771$4,670 during the three and sixnine months ended JuneSeptember 30, 2018, respectively.2018. 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, 2018 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.acquisition
.
4. Cash and Cash Equivalents
Of the total cash and cash
equivalents of approximately $71,564
$88,575
and $60,779$77,784 at JuneSeptember 30, 2019 and
December 31, 2018, respectively, $72,967 and $60,779 were held at two financial institutions.
At JuneSeptember 30, 2019 and December 31, 2018, cash equivalents were approximately $1,811$10,216 and $24, respectively.respectively
.
In addition, certain of the Company’s subsidiaries of its International Business segment are required to maintain a minimum level of net liquid assets, which was $12,255$12,106 and $11,005 at JuneSeptember 30, 2019 and December 31, 2018, respectively. These requirements are generally satisfied by cash on hand.hand
.
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5. Fair Value Measurements
The fair value of financial instruments is defined as the price that wouldwould 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,, 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:
Fair Value Measurements
Level 1 – | Quoted prices for identical instruments in active markets. | |||
Level 2 – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | |||
Level 3 – | Instruments whose significant drivers are unobservable. |
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The tables below summarize the categorization of the Company’s assets and liabilities measured at fair value. During the three and sixnine months ended JuneSeptember 30, 2019 and 2018 there were no transfers between Levels 1, 2 and 3.
June 30, 2019 | September 30, 2019 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Recurring fair value measurements: | ||||||||||||||||||||||||||||||||
Cash equivalents | $ | 1,811 | $ | 1,811 | $ | — | $ | — | $ | 10,216 | $ | 10,216 | $ | — | $ | — | ||||||||||||||||
Securities owned, at fair value | 9,095 | 9,095 | — | — | 3,376 | 3,376 | — | — | ||||||||||||||||||||||||
Total | $ | 10,906 | $ | 10,906 | — | $ | — | $ | 13,592 | $ | 13,592 | — | $ | — | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Recurring fair value measurements: | ||||||||||||||||||||||||||||||||
Deferred consideration (Note 11) | $ | 161,273 | $ | — | $ | — | $ | 161,273 | $ | 167,640 | $ | — | $ | — | $ | 167,640 | ||||||||||||||||
Securities sold, but not yet purchased | 543 | 543 | — | — | 568 | 568 | — | — | ||||||||||||||||||||||||
Total | $ | 161,816 | $ | 543 | $ | — | $ | 161,273 | $ | 168,208 | $ | 568 | $ | — | $ | 167,640 | ||||||||||||||||
December 31, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Recurring fair value measurements: | ||||||||||||||||
Cash and cash equivalents | $ | 24 | $ | 24 | $ | — | $ | — | ||||||||
Securities owned, at fair value | 8,873 | 8,873 | — | — | ||||||||||||
Total | $ | 8,897 | $ | 8,897 | $ | — | $ | — | ||||||||
Non-recurring fair value measurements: | ||||||||||||||||
Thesys Group, Inc. – 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 | ||||||||
December 31, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Recurring fair value measurements: | ||||||||||||||||
Cash and cash equivalents | $ | 24 | $ | 24 | $ | — | $ | — | ||||||||
Securities owned, at fair value | 8,873 | 8,873 | — | — | ||||||||||||
Total | $ | 8,897 | $ | 8,897 | $ | — | $ | — | ||||||||
Non-recurring fair value measurements: | ||||||||||||||||
Thesys Group, Inc. – 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 |
Recurring Fair Value Measurements - Measurements—Methodology
Cash Equivalents (Note 4)
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
1in the fair value hierarchy.
Deferred Consideration
–
Deferred consideration represents the present value of an obligation to pay gold into perpetuity and was measured at
using forward-looking gold prices ranging from $
$1,467 per ounce to $
$2,277 per ounce ($
1,294per ounce to $
$2,621 per ounce at December
31,which are extrapolated from the last observable price (beyond
2025), discounted at a rate of
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
11for 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Deferred consideration (See Note 11) | ||||||||||||||||
Beginning balance | $ | 157,147 | $ | 172,746 | $ | 161,540 | $ | 172,746 | ||||||||
Net realized losses/(gains) (1) | 3,110 | 2,715 | 6,208 | 2,715 | ||||||||||||
Net unrealized losses/(gains) (2) | 4,037 | (9,898 | ) | (367 | ) | (9,898 | ) | |||||||||
Settlements | (3,021 | ) | (2,715 | ) | (6,108 | ) | (2,715 | ) | ||||||||
Ending balance | $ | 161,273 | $ | 162,848 | $ | 161,273 | $ | 162,848 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Deferred consideration (Note 11) | ||||||||||||||||
Beginning balance | $ | 161,273 | $ | 162,848 | $ | 161,540 | $ | 172,746 | ||||||||
Net realized losses (1) | 3,502 | 2,880 | 9,710 | 5,595 | ||||||||||||
Net unrealized losses/(gains) (2) | 6,306 | (7,732 | ) | 5,939 | (17,630 | ) | ||||||||||
Settlements | (3,441 | ) | (1,941 | ) | (9,549 | ) | (4,656 | ) | ||||||||
Ending balance | $ | 167,640 | $ | 156,055 | $ | 167,640 | $ | 156,055 | ||||||||
| (1) | Recorded as contractual gold payments expense on the Company’s Consolidated Statements of Operations. |
| (2) | Recorded as (loss)/gain on revaluation of deferred consideration – gold payments on the Company’s Consolidated Statements of Operations. |
6. Securities Owned/Sold, but Not Yet Purchased
These securities consist of the following:
June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
Securities Owned | ||||||||||||||||
Trading securities | $ | 9,095 | $ | 8,873 | $ | 3,376 | $ | 8,873 | ||||||||
Securities Sold, but not yet Purchased | ||||||||||||||||
Trading securities | $ | 543 | $ | 1,698 | $ | 568 | $ | 1,698 | ||||||||
The Company had noJuneSeptember 30, 2019 and December 31, 2018. During the three and sixnine months ended JuneSeptember 30, 2018, the Company received $4,000$0 and $64,498, respectively, of proceeds from the sale and maturity of$23$0 and $739, respectively. Those losses were reclassified out of accumulated other comprehensive income and into the Consolidated Statements of Operations.
available-for-sale
debt securities at available-for-sale
securities and recognized gross realized losses of 7. Securities
Held-to-Maturity
The following table is a summary of the Company’s securities
held-to-maturity:
June 30, 2019 | December 31, 2018 | |||||||
Federal agency debt instruments (amortized cost) | $ | 20,136 | $ | 20,180 | ||||
September 30, 2019 | December 31, 2018 | |||||||
Federal agency debt instruments (amortized cost) | $ | 17,796 | $ | 20,180 | ||||
The following table summarizes unrealized gains, losses, and fair value (classified as Level 2 within the fair value hierarchy) of securities
held-to-maturity:
June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
Cost/amortized cost | $ | 20,136 | $ | 20,180 | $ | 17,796 | $ | 20,180 | ||||||||
Gross unrealized gains | 8 | 5 | 74 | 5 | ||||||||||||
Gross unrealized losses | (505 | ) | (1,679 | ) | (77 | ) | (1,679 | ) | ||||||||
Fair value | $ | 19,639 | $ | 18,506 | $ | 17,793 | $ | 18,506 | ||||||||
The Company assesses these securities for other-than-temporary impairment on a quarterly basis. No JuneSeptember 30, 2019 or December 31, 2018. The Company does not intend to sell these securities and it is not
NaN
securities were determined to be other-than-temporarily impaired at 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:June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
Due within one year | $ | — | $ | — | $ | — | $ | — | ||||||||
Due one year through five years | — | — | 2,000 | — | ||||||||||||
Due five years through ten years | 7,517 | 7,521 | 7,494 | 7,521 | ||||||||||||
Due over ten years | 12,619 | 12,659 | 8,302 | 12,659 | ||||||||||||
Total | $ | 20,136 | $ | 20,180 | $ | 17,796 | $ | 20,180 | ||||||||
8. Notes Receivable
The following table sets forth the Company’s notes receivable:
June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| AdvisorEngine Inc. – Unsecured non-convertible note | $ | 29,935 | $ | 28,722 | $ | 30,556 | $ | 28,722 | ||||||||
| AdvisorEngine Inc. – Unsecured convertible note | 1,550 | — | 1,812 | — | ||||||||||||
Total | $ | 31,485 | $ | 28,722 | $ | 32,368 | $ | 28,722 | ||||||||
20
During the three months ended JuneSeptember 30, 2019 and 2018, the Company recognized interest income of $628$633 and $421,$533, respectively. During the sixnine months ended JuneSeptember 30, 2019 and 2018, the Company recognized interest income of $1,223$1,856 and $840,$1,373, respectively. Interest income included original issue discount
(“OID”)amortization and accruedpaid-in-kind (“PIK”)
paid-in-kind
interest. The Company determined that an allowance for credit loss was not necessary at JuneSeptember 30, 2019 and December 31, 2018 as there have been no adverse events or circumstances since the notes were issued which may indicate that their carrying amounts may not be recoverable.
Unsecured
Non-Convertible
NoteThe 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 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 unsecured
non-convertible
note receivable balance:June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
Note receivable (face value) | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | ||||||||
Less: OID, unamortized | (2,167 | ) | (2,582 | ) | (1,956 | ) | (2,582 | ) | ||||||||
Plus: PIK interest | 2,102 | 1,304 | 2,512 | 1,304 | ||||||||||||
Total note receivable, net | $ | 29,935 | $ | 28,722 | $ | 30,556 | $ | 28,722 | ||||||||
The fair value of the note receivable (classified as Level 2 within the fair value hierarchy and determined using high yield credit spreads) was $29,703 $$27,618 $JuneSeptember 30, 2019 and December 31, 2018, respectively.
30,288
and 27,618
at Unsecured Convertible Note
In April and September 2019, the Company participated in a private convertible note financing round of AdvisorEngine by advancing $1,540$1,790 in consideration for a convertible note, which was issued as part of a series of convertible notes pursuant to a Convertible Note Purchase Agreement entered into among AdvisorEngine, the Company and the other purchasers thereto. The convertible note bears interest at a rate of 3% per annum, with all or any unpaid portion being treated as PIK by capitalizing such amount and adding it to the principal amount outstanding, is unsecured, and matures on April 11, 2021. All principal (and, at the option of AdvisorEngine if not paid in cash, accrued interest) under the convertible note will automatically convert into a class or series of preferred stock substantially identical to that issued in a qualified financing (as defined), but at a price per share equal to 80% of the price per share sold in such transaction. In the event of a corporate transaction (as defined), the.interest. If neither a qualified financing nor a corporate transaction occurs prior to the maturity date, the.interest. The convertible note may not be prepaid by AdvisorEngine without the prior consent of the requisite holders (which includes the Company).
convertible note would be repaid in cash from the proceeds of such transaction in the amount of 1.5 times the outstanding principal amount, plus any accrued and unpaid interest
convertible note is repaid at a rate of 1.25 times the outstanding principal amount, plus accrued and unpaid interest
The following is a summary of the outstanding unsecured convertible note receivable balance:
June 30, 2019 | ||||
Note receivable (face value) | $ | 1,540 | ||
Plus: PIK interest | 10 | |||
Total note receivable, net | $ | 1,550 | ||
September 30, 2019 | ||||
Note receivable (face value) | $ | 1,790 | ||
Plus: PIK interest | 22 | |||
Total note receivable, net | $ | 1,812 | ||
The carryingfair value of the note receivable approximates fair value at JuneSeptember 30, 2019 due to its short-term nature.
9. Investments, Carried at Cost
The following table sets forth the Company’s investments, carried at cost:
June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| AdvisorEngine – Preferred stock | $ | 25,000 | $ | 25,000 | $ | 25,000 | $ | 25,000 | ||||||||
Thesys Group, Inc. (“Thesys”) | 3,080 | 3,080 | 3,080 | 3,080 | ||||||||||||
Total | $ | 28,080 | $ | 28,080 | $ | 28,080 | $ | 28,080 | ||||||||
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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 SeriesA-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 anon-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 | 4.7 x - 5.4 x (5.0 x) | |||
Income Approach | ||||
Weighted average cost of capital (“WACC”) | ||||
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 JuneSeptember 30, 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 ranksin 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
pari passu
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:Range (Weighted Average) | ||||
Income Approach (1) | ||||
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 JuneSeptember 30, 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 June September 30, 2019 and December 31, 2018, respectively. 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 settledsettled and is not readily convertible to cash.
22
10. Fixed Assets, net
The following table summarizes fixed assets:
June 30, 2019 | December 31, 2018 | |||||||
Equipment | $ | 2,259 | $ | 2,244 | ||||
Furniture and fixtures | 2,218 | 2,218 | ||||||
Leasehold improvements | 10,964 | 10,964 | ||||||
Less: accumulated depreciation and amortization | (6,837 | ) | (6,304 | ) | ||||
Total | $ | 8,604 | $ | 9,122 | ||||
September 30, 2019 | December 31, 2018 | |||||||
Equipment | $ | 2,224 | $ | 2,244 | ||||
Furniture and fixtures | 2,218 | 2,218 | ||||||
Leasehold improvements | 10,947 | 10,964 | ||||||
Less: accumulated depreciation and amortization | (7,035 | ) | (6,304 | ) | ||||
Total | $ | 8,354 | $ | 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 to6,333
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 hasno 0 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 $161,273$167,640 and $161,540 at JuneSeptember 30, 2019 and December 31, 2018, respectively, using forward-looking gold prices which were extrapolated from the last observable price (beyond 2025), discounted at a rate of 10.0% and a perpetual growth rate of 1.5%. Current amounts payable were $12,857$13,403 and $11,765 and long-term amounts payable were $148,416$154,237 and $149,775, respectively, at JuneSeptember 30, 2019 and December 31, 2018, respectively.
During the three and sixnine months ended JuneSeptember 30, 2019 and 2018, the Company recognized the following in respect of deferred consideration:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Contractual Gold Payments | $ | 3,110 | $ | 2,715 | $ | 6,208 | $ | 2,715 | ||||||||
| Contractual Gold Payments – gold ounces paid | 2,375 | 2,085 | (1) | 4,750 | 2,085 | (1) | ||||||||||
(Loss)/gain on revaluation of deferred consideration – gold payments (2) | $ | (4,037 | ) | $ | 9,898 | $ | 367 | $ | 9,898 | |||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Contractual Gold Payments | $ | 3,502 | $ | 2,880 | $ | 9,710 | $ | 5,595 | ||||||||
Contractual Gold Payments – gold ounces paid | 2,375 | 2,375 | 7,125 | 4,460 | (1) | |||||||||||
(Loss)/gain on revaluation of deferred consideration – gold payments (2) | $ | (6,306 | ) | $ | 7,732 | $ | (5,939 | ) | $ | 17,630 | ||||||
| (1) | Represents payments during the period April 11, 2018 through |
| (2) | Gains/(losses) arise due to (decreases)/increases in the forward-looking price of gold and the magnitude of any gain or loss is highly correlated to the magnitude of the change in the forward-looking price of gold. 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 to2.00% 2.00% (commencing at LIBOR, plus 1.75%)
Revolver accrues at an annual
rate equal to LIBOR, plus up to% 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.
date.
In connection with the Company’s capital management strategy, $15,000 of available capital was used during the three months ended September 30, 2019 to begin to pay down the Company’s long-term debt.
23
The following table provides a summary of the Company’s outstanding borrowings under the Credit Facility:
June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||
Term Loan | Revolver (1) | Term Loan | Revolver (1) | Term Loan | Revolver (1) | Term Loan | Revolver (1) | |||||||||||||||||||||||||
Amount borrowed | $ | 200,000 | $ | — | $ | 200,000 | $ | — | $ | 200,000 | $ | — | $ | 200,000 | $ | — | ||||||||||||||||
Amount repaid | (15,000 | ) | — | — | — | |||||||||||||||||||||||||||
Unamortized issuance costs | (4,238 | ) | 935 | (5,408 | ) | 1,195 | (3,641 | ) | 803 | (5,408 | ) | 1,195 | ||||||||||||||||||||
Carrying amount | $ | 195,762 | $ | 935 | $ | 194,592 | $ | 1,195 | $ | 181,359 | $ | 803 | $ | 194,592 | $ | 1,195 | ||||||||||||||||
Effective interest rate (2) | 5.46 | % | n/a | 5.09 | % | n/a | 5.24 | % | n/a | 5.09 | % | n/a | ||||||||||||||||||||
| (1) | The available capacity under the Revolver is subject to compliance with the Total Leverage Ratio. |
| (2) | Includes amortization of issuance costs. |
Interest expense recognized on the Credit Facility during the three months ended JuneSeptember 30, 2019 and 2018 was $2,910$2,832 and $2,356,$2,747, respectively, and during the sixnine months ended JuneSeptember 30, 2019 and 2018 was $5,802$8,634 and $2,356,$5,103, respectively. Unamortized issuance costs related to the Revolver of $935$803 and $1,195 at JuneSeptember 30, 2019 and December 31, 2018, respectively, are included in 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 $197,500$182,919 and $196,126 at JuneSeptember 30, 2019 and December 31, 2018, respectively.
The credit agreement includes a financial covenant that requires that the Company to 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 | |||
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 anas-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 than9.99% 9.99% of the Company’s outstanding common stock immediately after giving effect to such conversion.
24
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:
June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
Issuance of Preferred Shares | $ | 132,750 | $ | 132,750 | $ | 132,750 | $ | 132,750 | ||||||||
Less: Issuance costs | (181 | ) | (181 | ) | (181 | ) | (181 | ) | ||||||||
| Preferred Shares – carrying value | $ | 132,569 | $ | 132,569 | $ | 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. Theright-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 June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine September 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Lease cost: | ||||||||||||||||||||||||||||||||
Operating lease cost | $ | 795 | $ | 857 | $ | 1,590 | $ | 1,600 | $ | 789 | $ | 874 | $ | 2,379 | $ | 2,474 | ||||||||||||||||
Short-term lease cost | 383 | 432 | 772 | 716 | 322 | 561 | 1,094 | 1,277 | ||||||||||||||||||||||||
Total lease cost | $ | 1,178 | $ | 1,289 | $ | 2,362 | $ | 2,316 | $ | 1,111 | $ | 1,435 | $ | 3,473 | $ | 3,751 | ||||||||||||||||
Other information: | ||||||||||||||||||||||||||||||||
Cash paid for amounts included in the measurement of operating liabilities (operating leases) | $ | 875 | n/a | $ | 1,760 | n/a | $ | 902 | n/a | $ | 2,662 | n/a | ||||||||||||||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||
| Weighted-average remaining lease term (in years) – operating leases | 9.8 | n/a | 9.8 | n/a | 9.6 | n/a | 9.6 | n/a | ||||||||||||||||||||||||
| Weighted-average discount rate – operating leases | 6.3 | % | n/a | 6.3 | % | n/a | 6.3 | % | n/a | 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.
25
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
months prior to the commencement of the extension term. The lease also includes a cancellation option which is effective on August
21,
2024and requires notice to be provided to the landlord at least
12months prior. Triggering this option requires a cancellation payment of $4,236.$
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 JuneSeptember 30, 2019 with respect to the Company’s operating lease liabilities:
Remainder of 2019 | $ | 1,832 | $ | 918 | ||||
2020 | 3,676 | 3,653 | ||||||
2021 | 2,958 | 2,958 | ||||||
2022 | 2,958 | 2,958 | ||||||
2023 | 2,958 | 2,958 | ||||||
2024 and thereafter | 17,641 | 17,641 | ||||||
Total future minimum lease payments (undiscounted) | $ | 32,023 | $ | 31,086 | ||||
The following table reconciles the future minimum lease payments (disclosed above) at JuneSeptember 30, 2019 to the operating lease liabilities recognized in the Company’s Consolidated Balance Sheet:
Amounts recognized in the Company’s Consolidated Balance Sheet | ||||||||
Amounts recognized in the Company’s Consolidated | ||||||||
Balance Sheet | ||||||||
| Lease liability – short term | $ | 3,632 | $ | 3,671 | ||||
| Lease liability – long term | 20,190 | 19,581 | ||||||
Subtotal | 23,822 | 23,252 | ||||||
Difference between undiscounted and discounted cash flows | 8,201 | 7,834 | ||||||
Total future minimum lease payments (undiscounted) | $ | 32,023 | $ | 31,086 | ||||
The following table discloses the future minimum lease payments at JuneSeptember 30, 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 | $ | 1,948 | $ | 921 | ||||
2019 | 3,764 | 3,764 | ||||||
2020 | 3,516 | 3,516 | ||||||
2021 | 3,146 | 3,146 | ||||||
2022 | 2,958 | 2,958 | ||||||
2023 and thereafter | 20,599 | 20,599 | ||||||
Total future minimum lease payments (undiscounted) | $ | 35,931 | $ | 34,904 | ||||
Lease Termination – Japan Office
During the sixnine months ended JuneSeptember 30, 2019, 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.
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.
26
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):June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
Carrying Amount—Assets | ||||||||||||||||
Carrying Amount — Assets | ||||||||||||||||
Preferred stock | $ | 25,000 | $ | 25,000 | $ | 25,000 | $ | 25,000 | ||||||||
| Unsecured non-convertible note receivable | 29,935 | 28,722 | 30,556 | 28,722 | ||||||||||||
| Unsecured convertible note receivable | 1,550 | — | 1,812 | — | ||||||||||||
Total carrying amount—Assets | $ | 56,485 | $ | 53,722 | ||||||||||||
Total carrying amount — Assets | $ | 57,368 | $ | 53,722 | ||||||||||||
Maximum exposure to loss | $ | 56,485 | $ | 53,722 | $ | 57,368 | $ | 53,722 | ||||||||
17. Revenues from Contracts with Customers
The following table presents the Company’s total revenues from contracts with customers:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Revenues from contracts with customers: | ||||||||||||||||||||||||||||||||
Advisory fees | $ | 65,627 | $ | 73,778 | $ | 130,467 | $ | 132,234 | $ | 67,006 | $ | 71,679 | $ | 197,473 | $ | 203,913 | ||||||||||||||||
Other | 666 | 997 | 1,311 | 1,445 | 712 | 891 | 2,023 | 2,336 | ||||||||||||||||||||||||
Total operating revenues | $ | 66,293 | $ | 74,775 | $ | 131,778 | $ | 133,679 | $ | 67,718 | $ | 72,570 | $ | 199,496 | $ | 206,249 | ||||||||||||||||
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.
Substantially all the Company’s revenues from contracts with customers are derived primarily from investment advisory agreements with related parties (See Note(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.
27
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 otherETFs’ETPs’ average daily net assets. The advisory agreements may be terminated by the related parties upon notice.
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 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:
June 30, 2019 | December 31, 2018 | |||||||
Receivable from WTT | $ | 13,920 | $ | 14,678 | ||||
Receivable from ETFS Issuers | 8,573 | 8,779 | ||||||
Receivable from BI and WTI | 853 | 951 | ||||||
Receivable from WTAMC | 196 | 167 | ||||||
Receivable from WTCS | 80 | 95 | ||||||
Total | $ | 23,622 | $ | 24,670 | ||||
September 30, 2019 | December 31, 2018 | |||||||
Receivable from WTT | $ | 13,514 | $ | 14,678 | ||||
| Receivable from ManJer Issuers | 8,308 | 8,779 | ||||||
| Receivable from WMAI and WTI | 1,340 | 951 | ||||||
Receivable from WTAMC | 201 | 167 | ||||||
Receivable from WTCS | 71 | 95 | ||||||
Total | $ | 23,434 | $ | 24,670 | ||||
The following table summarizes revenues from advisory services provided to related parties:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Advisory services provided to WTT | $ | 42,817 | $ | 52,591 | $ | 85,040 | $ | 107,792 | ||||||||
Advisory services provided to ETFS Issuers | 19,367 | 17,720 | 38,640 | 17,720 | ||||||||||||
Advisory services provided to BI and WTI | 2,583 | 2,724 | 5,087 | 5,351 | ||||||||||||
Advisory services provided to WTAMC | 607 | 403 | 1,153 | 715 | ||||||||||||
Advisory services provided to WTCS | 253 | 340 | 547 | 656 | ||||||||||||
Total | $ | 65,627 | $ | 73,778 | $ | 130,467 | $ | 132,234 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Advisory services provided to WTT | $ | 41,721 | $ | 49,900 | $ | 126,761 | $ | 157,693 | ||||||||
| Advisory services provided to ManJer Issuers | 21,758 | 18,442 | 60,398 | 36,161 | ||||||||||||
| Advisory services provided to WMAI and WTI | 2,670 | 2,532 | 7,757 | 7,883 | ||||||||||||
Advisory services provided to WTAMC | 628 | 489 | 1,781 | 1,204 | ||||||||||||
Advisory services provided to WTCS | 229 | 316 | 776 | 972 | ||||||||||||
Total | $ | 67,006 | $ | 71,679 | $ | 197,473 | $ | 203,913 | ||||||||
The Company also has investments in certain WisdomTree ETFs of approximately $3,193$2,927 and $7,117 at JuneSeptember 30, 2019 and December 31, 2018, respectively. Gains and losses related to these ETFs during the three months ended JuneSeptember 30, 2019 and 2018 were ($205)$64 and ($67),$76, respectively, and during the sixnine months ended JuneSeptember 30, 2019 and 2018 were $148$212 and ($58),$17, respectively.
2
8
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 25 th percentile, then 0% of the target number of PRSUs granted will vest; | |
| • | If the relative TSR is at the 25 th percentile, then 50% of the target number of PRSUs granted will vest; and | |
| • | If the relative TSR is above the 25 th 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. |
Stock-based compensation during the three months ended JuneSeptember 30, 2019 and 2018 was $3,135$2,374 and $3,529,$3,240, respectively, and during the sixnine months ended JuneSeptember 30, 2019 and 2018 was $6,207$8,581 and $6,838,$10,078, respectively.
A summary of unrecognized stock-based compensation expense and average remaining vesting period is as follows:
June 30, 2019 | ||||||||
Unrecognized Stock- Based Compensation | Average Remaining Vesting Period (Years) | |||||||
Employees and directors | $ | 21,078 | 2.16 | |||||
September 30, 2019 | ||||||||
Unrecognized Stock- Based Compensation | Average Remaining Vesting Period (Years) | |||||||
Employees and directors | $ | 16,134 | 1.89 | |||||
A summary of stock-based compensation award activity during the three months ended JuneSeptember 30, 2019 is as follows:
Stock Options | RSAs | RSUs | PRSUs | |||||||||||||
Balance at April 1, 2019 | 550,537 | 3,270,065 | 40,436 | 270,872 | (1) | |||||||||||
Granted | — | 97,649 | — | — | ||||||||||||
Exercised/vested | — | (105,319 | ) | — | — | |||||||||||
Forfeitures | — | (31,142 | ) | — | — | |||||||||||
Balance at June 30, 2019 | 550,537 | 3,231,253 | 40,436 | 270,872 | (1) | |||||||||||
Stock | ||||||||||||||||
Options | RSAs | RSUs | PRSUs | |||||||||||||
Balance at July 1, 2019 | 550,537 | 3,231,253 | 40,436 | 270,872 | (1) | |||||||||||
Granted | — | — | — | — | ||||||||||||
Exercised/vested | (25,000 | ) | (37,607 | ) | (1,158 | ) | — | |||||||||
Forfeitures | (1 | ) | (301,826 | ) | — | (38,262 | ) | |||||||||
Balance at September 30, 2019 | 525,536 | 2,891,820 | 39,278 | 232,610 | (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%. |
2
9
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 June 30, | Six Months Ended June 30, | |||||||||||||||
Basic Earnings per Share | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income | $ | 2,479 | $ | 16,724 | $ | 11,303 | $ | 26,148 | ||||||||
Less: Income distributed to participating securities | (539 | ) | (513 | ) | (1,083 | ) | (584 | ) | ||||||||
Less: Undistributed income allocable to participating securities | — | (1,101 | ) | (117 | ) | (999 | ) | |||||||||
Net income available to common stockholders | $ | 1,940 | $ | 15,110 | $ | 10,103 | $ | 24,565 | ||||||||
Weighted average common shares (in thousands) | 151,818 | 149,056 | 151,722 | 142,230 | ||||||||||||
Basic earnings per share | $ | 0.01 | $ | 0.10 | $ | 0.07 | $ | 0.17 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Basic Earnings per Share | ||||||||||||||||
Net income | $ | 4,152 | $ | 22,049 | $ | 15,455 | $ | 48,197 | ||||||||
Less: Income distributed to participating securities | (539 | ) | (507 | ) | (1,622 | ) | (1,091 | ) | ||||||||
Less: Undistributed income allocable to participating securities | — | (1,719 | ) | (18 | ) | (2,518 | ) | |||||||||
Net income available to common stockholders | $ | 3,613 | $ | 19,823 | $ | 13,815 | $ | 44,588 | ||||||||
Weighted average common shares (in thousands) | 151,897 | 150,892 | 151,782 | 145,149 | ||||||||||||
Basic earnings per share | $ | 0.02 | $ | 0.13 | $ | 0.09 | $ | 0.31 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Diluted Earnings per Share | ||||||||||||||||
Net income | $ | 4,152 | $ | 22,049 | $ | 15,455 | $ | 48,197 | ||||||||
Weighted Average Diluted Shares (in thousands) | ||||||||||||||||
Weighted average common shares | 151,897 | 150,892 | 151,782 | 145,149 | ||||||||||||
Dilutive effect of common stock equivalents | 15,266 | 15,730 | 15,162 | 10,435 | ||||||||||||
Weighted average diluted shares (in thousands) | 167,163 | 166,622 | 166,944 | 155,584 | ||||||||||||
Diluted earnings per share | $ | 0.02 | $ | 0.13 | $ | 0.09 | $ | 0.31 | ||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Diluted Earnings per Share | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income | $ | 2,479 | $ | 16,724 | $ | 11,303 | $ | 26,148 | ||||||||
Weighted Average Diluted Shares (in thousands) | ||||||||||||||||
Weighted average common shares | 151,818 | 149,056 | 151,722 | 142,230 | ||||||||||||
Dilutive effect of common stock equivalents | 15,431 | 14,290 | 15,133 | 7,749 | ||||||||||||
Weighted average diluted shares | 167,249 | 163,346 | 166,855 | 149,979 | ||||||||||||
Diluted earnings per share | $ | 0.01 | $ | 0.10 | $ | 0.07 | $ | 0.17 | ||||||||
Diluted earnings per share presented above is calculated underusing the treasury stock andthetwo-classmethod 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 mostsame dilutive earnings per share amount for common stock is reported inwhen calculated under the Company’s consolidated financial statements. The
if-converted
method and two-class
method.T
heand 869,288
1,243,549common stock equivalents from its computation of diluted earnings per share duringfor the three months ended June September
30,
2019and
2018, respectively, and 1,239,431
1,417,375and 1,140,659
1,406,844common stock equivalents from its computation of diluted earnings per share duringfor the sixnine months ended June September
30,
2019and
2018, respectively, as they were determined to be anti-dilutive.
21. Income Taxes
Effective Income Tax Rate – Three and SixNine Months Ended JuneSeptember 30, 2019
The Company’s effective income tax rate during the three months ended JuneSeptember 30, 2019 of 59.1%51.9% resulted in income tax expense of $3,587.$4,483. 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,non-deductibleexecutive compensation, a
non-deductible
loss on revaluation of deferred consideration,non-deductible
executive compensation and state and local income taxes, partly offset by a lower tax rate on foreign earnings.The Company’s effective income tax rate during the sixnine months ended JuneSeptember 30, 2019 of 18.3%31.2% resulted in income tax expense of $2,538.$7,021. 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 lower tax rate on foreign earnings and anon-taxablegain on revaluation of deferred consideration, partly offset by a valuation allowance on foreign net operating losses, anon-deductibleexecutive compensation partly offset by a $4,309 reduction in unrecognized tax benefits and state and local income taxes.a lower tax rate on foreign earnings.
non-deductible
loss on revaluation of deferred consideration, state and local income taxes and tax shortfalls associated with the vesting and exercise of stock-based compensation awards,Effective Income Tax Rate – Three and SixNine Months Ended JuneSeptember 30, 2018
The Company’s effective income tax rate duringfor the three and six months ended JuneSeptember 30, 2018 of 24.6% and 27.6%, respectively,19.9% resulted in income tax expense of $5,460 and $9,958, respectively.$5,481. The Company’s effective income tax rate differs from the federal statutory tax rate of 21% primarily due to thenon-deductiblenon-taxableacquisition-related costs,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 and state and local income taxes.
The Company’s effective income tax rate for the nine months ended September 30, 2018 of 24.3% resulted in income tax expense of $15,439. The Company’s tax rate differs from the federal statutory tax rate of 21% primarily due to a valuation allowance on foreign net operating losses, state and local income taxes andanon-taxablethe gain on revaluation of deferred consideration and a lower tax rate on foreign earnings.
non-deductible
acquisition-related costs, partly offset by 30
Deferred Tax Assets
A summary of the components of the Company’s deferred tax assets at JuneSeptember 30, 2019 and December 31, 2018 are as follows:
June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | ||||||||||||||
Deferred tax assets: | Deferred tax assets: | Deferred tax assets: | |||||||||||||||
NOLs – International | $ | 8,992 | $ | 6,605 | $ | 8,776 | $ | 6,605 | |||||||||
Accrued expenses | 1,837 | 2,699 | 2,729 | 2,699 | |||||||||||||
Goodwill and intangible assets | 1,746 | 1,841 | 1,718 | 1,841 | |||||||||||||
Stock-based compensation | 1,189 | 2,673 | 1,399 | 2,673 | |||||||||||||
Net lease liability | 1,160 | 1,184 | 1,153 | 1,184 | |||||||||||||
Capital losses | 794 | 794 | 803 | 794 | |||||||||||||
NOLs – U.S. | 635 | 762 | 642 | 762 | |||||||||||||
Other | 272 | 40 | 242 | 40 | |||||||||||||
Deferred tax assets | 16,625 | 16,598 | 17,462 | 16,598 | |||||||||||||
Deferred tax liabilities: | Deferred tax liabilities: | Deferred tax liabilities: | |||||||||||||||
Fixed assets and prepaid assets | 1,480 | 1,433 | 1,451 | 1,433 | |||||||||||||
Unrealized gains | 760 | 724 | 777 | 724 | |||||||||||||
Deferred tax liabilities | 2,240 | 2,157 | 2,228 | 2,157 | |||||||||||||
Total deferred tax assets less deferred tax liabilities | 14,385 | 14,441 | 15,234 | 14,441 | |||||||||||||
Less: valuation allowance | (9,786 | ) | (7,399 | ) | (9,579 | ) | (7,399 | ) | |||||||||
Deferred tax assets, net | $ | 4,599 | $ | 7,042 | $ | 5,655 | $ | 7,042 | |||||||||
Net Operating Losses – U.S
The Company’s tax effected federal net operating losses (“NOLs”) at JuneSeptember 30, 2019 were $635$642, which expire in 2024. The net operating loss carryforwards have been reduced by the impact of annual limitations described in the Internal Revenue Code Section 382 that arose as a result of an ownership change.
The Company’s tax effected capital losses at JuneSeptember 30, 2019 was $794.w
ere
$803. A full valuation allowance was established as it ismore-likely-than-not
that the deferred tax assets will not be realized.Net Operating Losses – International
Certain of the Company’s European subsidiaries and its Canadian subsidiary generated NOLs outside the U.S. These tax effected NOLs were $8,992$8,776 and $6,605 at JuneSeptember 30, 2019 and December 31, 2018, respectively. The Company established a full valuation allowance related to these NOLs as it is$4,315$4,575 of these NOLs at JuneSeptember 30, 2019 expire between 2036 and 2039. The remainder is carried forward indefinitely.
more-likely-than-not
that the deferred tax assets will not be realized. Approximately Uncertain Tax Positions
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.31
In connection with the ETFS Acquisition, the Company accrued a liability for uncertain tax positions and interest and penalties at the acquisition date. The table below sets forth the aggregate changes in the balance of these gross unrecognized tax benefits during the three and sixnine months ended JuneSeptember 30, 2019:
Total | Unrecognized Tax Benefits | Interest and Penalties | ||||||||||
Balance on January 1, 2019 | $ | 34,876 | $ | 28,101 | $ | 6,775 | ||||||
| Decrease—Lapse of statute of limitations | (4,309 | ) | (2,999 | ) | (1,310 | ) | ||||||
Increases | 101 | — | 101 | |||||||||
Foreign currency translation (1) | 925 | 745 | 180 | |||||||||
Balance at March 31, 2019 | $ | 31,593 | $ | 25,847 | $ | 5,746 | ||||||
Increases | 101 | — | 101 | |||||||||
Foreign currency translation (1) | (817 | ) | (668 | ) | (149 | ) | ||||||
Balance at June 30, 2019 | $ | 30,877 | $ | 25,179 | $ | 5,698 | ||||||
Increases | 102 | — | 102 | |||||||||
Foreign currency translation (1) | (994 | ) | (810 | ) | (184 | ) | ||||||
Balance at September 30, 2019 | $ | 29,985 | $ | 24,369 | $ | 5,616 | ||||||
Total | Unrecognized Tax Benefits | Interest and Penalties | ||||||||||
Balance on January 1, 2019 | $ | 34,876 | $ | 28,101 | $ | 6,775 | ||||||
Decrease—Lapse of statute of limitations | (4,309 | ) | (2,999 | ) | (1,310 | ) | ||||||
Increases | 101 | — | 101 | |||||||||
Foreign currency translation (1) | 925 | 745 | 180 | |||||||||
Balance at March 31, 2019 | $ | 31,593 | $ | 25,847 | $ | 5,746 | ||||||
Increases | 101 | — | 101 | |||||||||
Foreign currency translation (1) | (817 | ) | (668 | ) | (149 | ) | ||||||
Balance at June 30, 2019 | $ | 30,877 | $ | 25,179 | $ | 5,698 | ||||||
| (1) | The gross unrecognized tax benefits were accrued in British |
The Company also recorded an offsetting indemnification asset provided by ETFS Capital as part of its agreement to indemnify the Company for any potential claims, for which an amount is being held in escrow. ETFS Capital has also agreed to provide additional collateral by maintaining a minimum working capital balance up to a stipulated amount. The decrease resulting from the lapsing of the statute of limitations of $4,309, was recorded as an income tax benefit and an equal and offsetting amount to reduce the indemnification asset was recorded in othersixnine months ended JuneSeptember 30, 2019.
gains and
losses, net, during the The gross unrecognized tax benefits and interest and penalties totaling $30,877$29,985 and $34,876 at JuneSeptember 30, 2019 and December 31, 2018, respectively, are included in other
non-current
liabilities on the Consolidated Balance Sheet. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, the Company does not expect the change to have a material impact on its consolidated financial statements.At JuneSeptember 30, 2019, there were $25,179$24,369 of unrecognized tax benefits that, if recognized, would impact the effective tax rate. The recognition of any unrecognized tax benefits would result in an equal and offsetting adjustment to the indemnification asset which would be recorded in income before taxes due to the indemnity for any potential claims.
Income Tax Examinations
The Company is subject to U.S. federal income tax as well as income tax of multiple state, local and certain foreign jurisdictions. The Company’s federal tax return and ManJer’s tax return (a Jersey-based subsidiary) for the year ended December 31, 2016 are currently under review by the relevant tax authorities. The Company is indemnified by ETFS Capital for any potential exposure associated with ManJer’s tax return under audit.
The Company is not currently under audit in any other income tax jurisdictions. As of JuneSeptember 30, 2019, with few exceptions, the Company was no longer subject to income tax examinations by any taxing authority for years before 2015.
Undistributed Earnings of Foreign Subsidiaries
The Company recognizes deferred tax liabilities for withholding taxes that may become payable, where applicable, upon the distribution of earnings and profits from foreign subsidiaries unless considered permanent in duration. As of June
September
30, 2019, the Company considers all undistributed foreign earnings and profits to be permanent in duration.22. Shares Repurchased
On April 24, 2019, the Company’s Board of Directors extended the term of the Company’s share repurchase program for three years through April 27, 2022. Included under this program are purchases to offset future equity grants made under the Company’s equity plans and purchases made in open market or privately negotiated transactions. This authority may be exercised from time to time, subject to the terms of the credit agreement described below and regulatory considerations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The repurchase program may be suspended or terminated at any time without prior notice. Shares repurchased under this program are returned to the status of authorized and unissued on the Company’s books and records.
As more fully disclosed in Note 3, the Company completed the ETFS Acquisition on April 11, 2018. To partially finance the acquisition, the Company entered into a credit agreement which contains customary negative covenants, including, among others, a covenant which may restrict the Company’s ability to repurchase equity interests. Share repurchases only are permitted to the extent the Total Leverage Ratio (as defined in the credit agreement) does not exceedtoand no event of default (as defined in the credit agreement) has occurred and is continuing at the time the share repurchase is made. However, the Company’s ability to purchase shares of its common stock withheld pursuant to the terms of equity awards granted to employees to satisfy tax withholding obligations is not restricted.
1.75
1.00
32
During the three and sixnine months ended JuneSeptember 30, 2019, the Company repurchased 14,06513,300 shares and 325,278338,578 shares of its common stock, respectively, under this program for an aggregate cost of $102$80 and $2,107,$2,187, respectively.
During the three and sixnine months ended JuneSeptember 30, 2018, the Company repurchased 26,71747,816 shares and 87,225135,041 shares of its common stock, respectively, under this program for an aggregate cost of $272$424 and $1,006,$1,430, respectively.
As of JuneSeptember 30, 2019, $83,622$83,542 remained under this program for future purchases.
23. Goodwill and Intangible Assets
Goodwill
The table below sets forth goodwill by reporting unit. Goodwill allocated to the U.S. Business reporting unit is tested annually for impairment on April 30
th
. Goodwill allocated to the European Business reporting unit is tested annually for impairment on November 30th
.Reporting Unit | Reporting Unit | ||||||||||||||||||||||||
European Business (1) | U.S. Business | Total | European Business (1) | U.S. Business | Total | ||||||||||||||||||||
Balance at January 1, 2019 | $ | 84,057 | $ | 1,799 | $ | 85,856 | $ | 84,057 | $ | 1,799 | $ | 85,856 | |||||||||||||
Changes | — | — | — | — | — | — | |||||||||||||||||||
Balance at June 30, 2019 | $ | 84,057 | $ | 1,799 | $ | 85,856 | |||||||||||||||||||
Balance at September 30, 2019 | $ | 84,057 | $ | 1,799 | $ | 85,856 | |||||||||||||||||||
| (1) | The European Business is included in the Company’s International Business reportable segment. |
The goodwill allocated to the European Business reporting unit is not deductible for tax purposes as the transaction
ETFS Acquisition
was structured as a stock acquisition occurring in the United Kingdom. The goodwill allocated to the U.S. Business reporting unit is deductible for tax purposes.Intangible Assets (Indefinite-Lived)
Advisory Agreements (ETFS) | Advisory Agreements (Questrade AUM) | Total | ||||||||||
Balance at January 1, 2019 | $ | 601,247 | $ | 1,962 | $ | 603,209 | ||||||
Foreign currency translation | — | 82 | 82 | |||||||||
Balance at June 30, 2019 | $ | 601,247 | $ | 2,044 | $ | 603,291 | ||||||
Advisory Agreements (ETFS) | Advisory Agreements (Questrade AUM) | Total | ||||||||||
Balance at January 1, 2019 | $ | 601,247 | $ | 1,962 | $ | 603,209 | ||||||
Foreign currency translation | — | 59 | 59 | |||||||||
Balance at September 30, 2019 | $ | 601,247 | $ | 2,021 | $ | 603,268 | ||||||
ETFS
In connection with the ETFS Acquisition which was completed on April 11, 2018 (see Note(Note 3), the Company identified intangible assets valued at $601,247 related to the right to manage AUM through 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%. The intangible assets were determined to have indefinite useful lives and are not deductible for tax purposes. The Company has designated November 30
th
as its annual impairment testing date for these intangible assets.Questrade ETFs
During the fourth quarter of
2017, 8 Canadian-listed ETFs from Questrade, Inc. (the “Questrade ETFs”). The entire purchase price was allocated to the Company’s right to manage AUM in the form of advisory contracts. These intangible assets are translated based on the end of period exchange rates from local currency to U.S. dollars.
Most of the Questrade ETFs were merged into the Company’s existing Canadian-listed ETFs. The intangible assets (which are deductible for tax purposes) were determined to have an indefinite useful life. The Company has designated November 30
th
as its annual impairment testing date for these intangible assets.3
3
24. Segment Reporting
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 U.S. Business segment includes the results of the Company’s U.S. operations and wind down costs associated with the Japan sales office. The results of the Company’s European and Canadian operations are reported as the International Business segment.
Information concerning these reportable segments are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
U.S. Business Segment | ||||||||||||||||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||||||||||
Advisory fees | $ | 43,070 | $ | 52,931 | $ | 85,587 | $ | 108,449 | $ | 41,950 | $ | 50,216 | $ | 127,537 | $ | 158,665 | ||||||||||||||||
Other income | 76 | 162 | 182 | 309 | 81 | 173 | 263 | 482 | ||||||||||||||||||||||||
Total operating revenues | $ | 43,146 | $ | 53,093 | $ | 85,769 | $ | 108,758 | $ | 42,031 | $ | 50,389 | $ | 127,800 | $ | 159,147 | ||||||||||||||||
Total operating expenses | $ | (36,407 | ) | $ | (42,638 | ) | $ | (73,583 | ) | $ | (81,668 | ) | $ | (33,477 | ) | $ | (33,774 | ) | $ | (107,060 | ) | $ | (115,442 | ) | ||||||||
Other income/(expenses) | ||||||||||||||||||||||||||||||||
Interest expense | $ | (194 | ) | $ | (173 | ) | $ | (386 | ) | $ | (173 | ) | $ | (197 | ) | $ | (196 | ) | $ | (583 | ) | $ | (369 | ) | ||||||||
Interest income | 818 | 612 | 1,597 | 1,574 | 793 | 719 | 2,390 | 2,293 | ||||||||||||||||||||||||
Impairment | — | — | (572 | ) | — | — | — | (572 | ) | — | ||||||||||||||||||||||
Other gains and losses, net | (54 | ) | (66 | ) | 91 | (292 | ) | |||||||||||||||||||||||||
Other gains, net | 235 | 318 | 326 | 26 | ||||||||||||||||||||||||||||
Total other income | $ | 570 | $ | 373 | $ | 730 | $ | 1,109 | ||||||||||||||||||||||||
Total other income/(expenses) | $ | 831 | $ | 841 | $ | 1,561 | $ | 1,950 | ||||||||||||||||||||||||
Total income before income taxes (U.S. Business Segment) | $ | 7,309 | $ | 10,828 | $ | 12,916 | $ | 28,199 | ||||||||||||||||||||||||
Total income before taxes (U.S. Business Segment) | $ | 9,385 | $ | 17,456 | $ | 22,301 | $ | 45,655 | ||||||||||||||||||||||||
International Business Segment (1) | ||||||||||||||||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||||||||||
Advisory fees | $ | 22,557 | $ | 20,847 | $ | 44,880 | $ | 23,785 | $ | 25,056 | $ | 21,463 | $ | 69,936 | $ | 45,248 | ||||||||||||||||
Other income | 590 | 835 | 1,129 | 1,136 | 631 | 718 | 1,760 | 1,854 | ||||||||||||||||||||||||
Total operating revenues | $ | 23,147 | $ | 21,682 | $ | 46,009 | $ | 24,921 | $ | 25,687 | $ | 22,181 | $ | 71,696 | $ | 47,102 | ||||||||||||||||
Total operating expenses | $ | (17,975 | ) | $ | (17,606 | ) | $ | (35,601 | ) | $ | (24,259 | ) | $ | (18,110 | ) | $ | (17,088 | ) | $ | (53,711 | ) | $ | (41,347 | ) | ||||||||
Other income/(expenses) | ||||||||||||||||||||||||||||||||
Interest expense | $ | (2,716 | ) | $ | (2,183 | ) | $ | (5,416 | ) | $ | (2,183 | ) | $ | (2,635 | ) | $ | (2,551 | ) | $ | (8,051 | ) | $ | (4,734 | ) | ||||||||
(Loss)/gain on revaluation of deferred consideration | (4,037 | ) | 9,898 | 367 | 9,898 | |||||||||||||||||||||||||||
Other gains and losses, net | 338 | (435 | ) | (4,434 | ) | (470 | ) | |||||||||||||||||||||||||
(Loss)/gain on revaluation of deferred consideration – gold payments | (6,306 | ) | 7,732 | (5,939 | ) | 17,630 | ||||||||||||||||||||||||||
Interest income | 6 | — | 6 | — | ||||||||||||||||||||||||||||
Other gains/(losses), net | 608 | (200 | ) | (3,826 | ) | (670 | ) | |||||||||||||||||||||||||
Total other income/(expenses) | $ | (6,415 | ) | $ | 7,280 | $ | (9,483 | ) | $ | 7,245 | $ | (8,327 | ) | $ | 4,981 | $ | (17,810 | ) | $ | 12,226 | ||||||||||||
Total (loss)/income before income taxes (International Business Segment) | $ | (1,243 | ) | $ | 11,356 | $ | 925 | $ | 7,907 | |||||||||||||||||||||||
Total (loss)/income before taxes (International Business Segment) | $ | (750 | ) | $ | 10,074 | $ | 175 | $ | 17,981 | |||||||||||||||||||||||
Income/(loss) before income taxes | ||||||||||||||||||||||||||||||||
U.S. Business segment | $ | 7,309 | $ | 10,828 | $ | 12,916 | $ | 28,199 | $ | 9,385 | $ | 17,456 | $ | 22,301 | $ | 45,655 | ||||||||||||||||
International Business segment | (1,243 | ) | 11,356 | 925 | 7,907 | (750 | ) | 10,074 | 175 | 17,981 | ||||||||||||||||||||||
Total income before income taxes | $ | 6,066 | $ | 22,184 | $ | 13,841 | $ | 36,106 | $ | 8,635 | $ | 27,530 | $ | 22,476 | $ | 63,636 | ||||||||||||||||
Assets are not reported by segment as such information is not utilized by the chief operating decision maker.
| (1) | The financial results of ETFS are included in the International Business reportable segment as of April 11, 2018. |
3
4
25. Subsequent Events
The Company evaluated subsequent events through the date of issuance of the accompanying consolidated financial statements. There were no events requiring disclosure.
35
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below. For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Item 1A “Risk Factors” in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2018. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.Executive Summary
Introduction
We are the only publicly-traded asset management company that focuses exclusively on exchange-traded products, or ETPs, and are one of the leading ETP sponsors in the world based on assets under management, or AUM, with AUM of $60.4$60.0 billion globally as of JuneSeptember 30, 2019. An ETP is a pooled investment vehicle that holds a basket of securities, financial instruments or other assets and generally seeks to track (index-based) or outperform (actively managed) the performance of a broad or specific equity, fixed income or alternatives market segment, commodity or currency (or an inverse or multiple thereof). ETPs are listed on an exchange with their shares traded in the secondary market at market prices, generally at approximately the same price as the net asset value of their underlying components. ETP is an umbrella term that includes exchange-traded funds, or ETFs, exchange-traded notes and exchange-traded commodities.
We focus on creating ETFs for investors that offer thoughtful innovation, smart engineering and redefined investing. We have launched many
first-to-market
ETFs in the United States and pioneered alternative weighting and performance methods commonly referred to as “smart beta.” However, our U.S. listed ETFs are not beta, but rather an investment innovation we call “Modern Alpha.” Our Modern Alpha approach combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective ETFs that are built to perform.Through our operating subsidiaries, we provide investment advisory and other management services to our ETPs collectively offering ETPs covering equity, commodity, fixed income, leveraged and inverse,
leveraged-and-inverse,
currency and alternative strategies. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETPs’ average daily AUM. Our expenses are predominantly related to selling, operating and marketing our ETPs. We have contracted with third parties to provide certain operational services for the ETPs. We distribute our ETPs through all major channels within the asset management industry, including brokerage firms, registered investment advisers, institutional investors, private wealth managers and discount brokers primarily through our sales force. Our sales efforts are not directed towards the retail segment but rather are directed towards financial or investment advisers that act as intermediaries between theend-client
and us.We strive to deliver a better investing experience through innovative solutions. Continued investments in technology-enabled services and the launch of our Advisor Solutions program in October 2017, which includes portfolio construction, asset allocation, practice management services and wealth management technology, have been made to differentiate us in the market, expand our distribution and further enhance our relationships with financial advisors.
We were incorporated under the laws of the state of Delaware on September 19, 1985 as Financial Data Systems, Inc.
Acquisition of ETFS
In April 2018, we acquired the European exchange-traded commodity, currency andshort-and-leveragedleveraged-and-inversebusiness of ETFS Capital Limited, or ETFS Capital. Throughout this Report, we refer to the acquired business as ETFS and the acquisition as the ETFS Acquisition. Following the ETFS Acquisition we became the largest global independent ETP provider based on AUM, with significant scale and presence in the U.S. and Europe, the two largest ETP markets.
Our operating results for the prior periods reported in this Report are not directly comparable to the current periods as the ETFS Acquisition was completed on April 11, 2018.
36
Industry Developments
Custodial Platforms
Recently, several of the largest custodial platforms and online brokerage firms announced their decision to eliminate trading commissions for ETFs. Our arrangements with these platforms had offered us preferred or exclusive access for our products, enabling investors to purchase our ETFs without paying commissions. While exclusivity is no longer available, the elimination of commissions removes a component of trading costs previously affecting ETFs and is therefore a positive development for the ETF industry. ETF sponsors are also now better positioned to target access to all platforms, thereby creating additional opportunities. We expect cost savings going forward from the elimination of these arrangements.
ETF Rule Approved
On June 5,September 26, 2019, the SEC adopted Regulation Best Interest,approved Rulebroker-dealersissuers to actdisclose a number of items in a standardized format on daily basis, including portfolio holdings and median
6c-11,
commonly referred to as the “ETF Rule,” which is designed to simplify the rules governing ETFs. The ETF Rule includes several items that will level the playing field for ETF issuers, including removing the need to file for exemptive relief in order to issue ETFs, removing the regulatory distinction between actively managed and index-based ETFs (including removing specific requirements associated with self-indexed ETFs) and making custom baskets available to all issuers subject to policy and procedure requirements. The rule also requires bid-ask
spread over the prior30-day
period. The rule will go into effect in December 2019 and issuers have one year to implement all necessary changes.While the ETF Rule will further lower barriers to entry, we view the passage of the rule positively. The ETF Rule will allow for enhancements in indexes that we create and for broader product development opportunities associated with ETFs tracking such indexes. Wider use of custom baskets will promote efficiency in the best interest of their retail customers when making a recommendation. The SEC also adopted the Form CRS relationship summary,creation and redemption process, which requires registered investment advisers and broker-dealerscould lead to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services. Regulation Best Interest, Form CRS and the related rule will become effective 60 days after their publication in the Federal Register. The compliance date for both rules is June 30, 2020. Congress and individual state legislatures have continued to debate, and in some instances taken further action, in seeking to ensure heightened standards. We believe that the increased focus on fiduciary and best interest standards will continue to raise investor awareness of the benefits that ETFs provide – transparency,greater tax efficiency and liquidity – which we believeand tighterexpand ETFs’ competitiveness generally.
increase transparency and help investors understand the costs and benefits of investing in ETFs.bid-ask
spreads. Enhanced and uniform data disclosures also will Assets Under Management
WisdomTree ETPs
The chart below sets forth the asset mix of our ETPs at September 30, 2018, June 30, 2018, March 31, 2019 and JuneSeptember 30, 2019:
Over the last few years, concentrations in HEDJ, our European equity ETF which hedges exposure to the euro, and DXJ, our Japanese equity ETF which hedges exposure to the yen, have declined dramatically as negative investor sentiment toward these products has led to considerable net outflows. Recently, these outflows have largely been offset by strong inflows into our commodity, fixed income, U.S. equity and emerging markets products. In addition,During the ETFS Acquisition has further diversified our investment theme concentrations by adding commodity exposures, predominantly gold.nine months ended September 30, 2019 net inflows were $0.2 billion, or $2.7 billion excluding outflows from HEDJ and DXJ.
37
Market Environment
U.S. listed ETF Industry Flows
As the charts below reflect, U.S. listed ETF net flows for the three months ended JuneSeptember 30, 2019 were $79.8$84.6 billion. FixedU.S. equity, fixed income U.S equity and international equitycommodities gathered the majority of those flows.
Source: Bloomberg, Investment Company Institute, WisdomTree
International ETP Industry Flows
As the charts below reflect, international ETP net flows were $17.1$30.0 billion for the three months ended JuneSeptember 30, 2019. Fixed income and commoditiesequities gathered the majority of those flows.
Source: Morningstar
38
Business Segments
We operate as an ETP sponsor and asset manager providing investment advisory services globally. These activities are reported in our U.S. Business and International Business segments.
U.S. Business Segment
Our U.S. Business segment included our Japan sales office, WTJ, which engaged in selling our U.S. listed ETFs to Japanese institutions. In July 2018, we determined to restructure our distribution strategy in Japan and expanded our existing relationship with Premia Partners Company Limited to manage distribution of our ETFs in Japan. As a result, WTJ has ceased operations and is inwas liquidated during the process of being liquidated. three months ended September 30, 2019.
WTJ reported operating losses for the three months ended JuneSeptember 30, 2019 and 2018 of $0.04$0.1 million and $1.1$1.3 million, respectively, and for the sixnine months ended JuneSeptember 30, 2019 and 2018 of $0.5$0.6 million and $2.4$3.7 million, respectively. WTJ also recognized an impairment expense of $0.6 million in connection with the termination of its office lease during the sixnine months ended JuneSeptember 30, 2019.
International Business Segment
The International Business segment includes our European business and our Canadian business.
Our Operating and Financial Results
U.S. Business Segment
Our U.S. listed ETFs’ AUM wasdecreased from $39.2 billion at June 30, 2019 essentially unchanged from March 31, 2019.to $37.6 billion at September 30, 2019 primarily due to net outflows and market depreciation.
39
International Business Segment
Our international ETPs’ AUM increased from $19.7 billion at March 31, 2019 to $21.2 billion at June 30, 2019 to $22.4 billion at September 30, 2019 due to market appreciation and net inflows.
Consolidated Operating Results
The following table sets forth our revenues and net income for the most recent five quarters.
Revenues
Expenses
Other Income/(Expenses)
Net income
40
Key Operating Statistics
The following table presents key operating statistics that serve as indicators for the performance of our business:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
June 30, 2019 | March 31, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | September 30, 2019 | June 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||||||||||||||||||||||||||
GLOBAL ETPs (in millions) | ||||||||||||||||||||||||||||||||||||||||
Beginning of period assets | $ | 59,112 | $ | 54,094 | $ | 44,962 | $ | 54,094 | $ | 48,937 | $ | 60,389 | $ | 59,111 | $ | 59,970 | $ | 54,094 | $ | 48,936 | ||||||||||||||||||||
Assets acquired | — | — | 17,641 | — | 17,641 | — | — | — | — | 17,641 | ||||||||||||||||||||||||||||||
Inflows/(outflows) | 337 | 561 | (1,223 | ) | 898 | (3,442 | ) | (670 | ) | 337 | (1,233 | ) | 227 | (4,676 | ) | |||||||||||||||||||||||||
Market appreciation/(depreciation) | 938 | 4,544 | (1,402 | ) | 5,482 | (3,104 | ) | 474 | 941 | 403 | 5,959 | (2,713 | ) | |||||||||||||||||||||||||||
Fund closures | — | (87 | ) | (9 | ) | (87 | ) | (63 | ) | (181 | ) | — | — | (268 | ) | (48 | ) | |||||||||||||||||||||||
End of period assets | $ | 60,387 | $ | 59,112 | $ | 59,969 | $ | 60,387 | $ | 59,969 | $ | 60,012 | $ | 60,389 | $ | 59,140 | $ | 60,012 | $ | 59,140 | ||||||||||||||||||||
Average assets during the period | $ | 58,569 | $ | 57,683 | $ | 61,301 | $ | 58,126 | $ | 54,512 | $ | 60,314 | $ | 58,569 | $ | 59,460 | $ | 58,856 | $ | 56,162 | ||||||||||||||||||||
Average ETP advisory fee during the period | 0.45 | % | 0.46 | % | 0.48 | % | 0.45 | % | 0.49 | % | ||||||||||||||||||||||||||||||
Revenue days | 91 | 90 | 91 | 181 | 181 | |||||||||||||||||||||||||||||||||||
Number of ETPs—end of period | 536 | 534 | 526 | 457 | 526 | |||||||||||||||||||||||||||||||||||
Average ETF advisory fee during the period | 0.44 | % | 0.45 | % | 0.48 | % | 0.45 | % | 0.49 | % | ||||||||||||||||||||||||||||||
Number of ETFs – end of the period | 366 | 536 | 535 | 366 | 535 | |||||||||||||||||||||||||||||||||||
U.S. LISTED ETFs (in millions) | ||||||||||||||||||||||||||||||||||||||||
Beginning of period assets | $ | 39,366 | $ | 35,486 | $ | 42,886 | $ | 35,486 | $ | 46,827 | $ | 39,220 | $ | 39,366 | $ | 41,340 | $ | 35,486 | $ | 46,827 | ||||||||||||||||||||
Inflows/(outflows) | (166 | ) | 147 | (1,231 | ) | (19 | ) | (3,397 | ) | (1,197 | ) | (166 | ) | (878 | ) | (1,217 | ) | (4,276 | ) | |||||||||||||||||||||
Market appreciation/(depreciation) | 20 | 3,820 | (306 | ) | 3,840 | (2,027 | ) | (431 | ) | 20 | 1,094 | 3,410 | (947 | ) | ||||||||||||||||||||||||||
Fund closures | — | (87 | ) | (9 | ) | (87 | ) | (63 | ) | — | — | — | (87 | ) | (48 | ) | ||||||||||||||||||||||||
End of period assets | $ | 39,220 | $ | 39,366 | $ | 41,340 | $ | 39,220 | $ | 41,340 | $ | 37,592 | $ | 39,220 | $ | 41,556 | $ | 37,592 | $ | 41,556 | ||||||||||||||||||||
Average assets during the period | $ | 38,945 | $ | 38,061 | $ | 43,464 | $ | 38,503 | $ | 44,541 | $ | 37,857 | $ | 38,945 | $ | 41,555 | $ | 38,288 | $ | 43,546 | ||||||||||||||||||||
Average ETF advisory fee during the period | 0.44 | % | 0.45 | % | 0.49 | % | 0.45 | % | 0.49 | % | 0.44 | % | 0.44 | % | 0.48 | % | 0.45 | % | 0.49 | % | ||||||||||||||||||||
Number of ETFs – end of the period | 79 | 77 | 81 | 79 | 81 | 80 | 79 | 84 | 80 | 84 | ||||||||||||||||||||||||||||||
INTERNATIONAL LISTED ETPs (in millions) | ||||||||||||||||||||||||||||||||||||||||
Beginning of period assets | $ | 19,746 | $ | 18,608 | $ | 2,076 | $ | 18,608 | $ | 2,110 | $ | 21,169 | $ | 19,745 | $ | 18,630 | $ | 18,608 | $ | 2,109 | ||||||||||||||||||||
Assets acquired | — | — | 17,641 | — | 17,641 | — | — | — | — | 17,641 | ||||||||||||||||||||||||||||||
Inflows/(outflows) | 503 | 414 | 8 | 917 | (45 | ) | 527 | 503 | (355 | ) | 1,444 | (400 | ) | |||||||||||||||||||||||||||
Market appreciation/(depreciation) | 918 | 724 | (1,096 | ) | 1,642 | (1,077 | ) | 905 | 921 | (691 | ) | 2,549 | (1,766 | ) | ||||||||||||||||||||||||||
Fund closures | (181 | ) | — | — | (181 | ) | — | |||||||||||||||||||||||||||||||||
End of period assets | $ | 21,167 | $ | 19,746 | $ | 18,629 | $ | 21,167 | $ | 18,629 | $ | 22,420 | $ | 21,169 | $ | 17,584 | $ | 22,420 | $ | 17,584 | ||||||||||||||||||||
Average assets during the period | $ | 19,624 | $ | 19,622 | $ | 17,837 | $ | 19,623 | $ | 9,971 | $ | 22,457 | $ | 19,624 | $ | 17,905 | $ | 20,568 | $ | 12,616 | ||||||||||||||||||||
Average ETP advisory fee during the period | 0.46 | % | 0.47 | % | 0.47 | % | 0.47 | % | 0.48 | % | 0.44 | % | 0.46 | % | 0.48 | % | 0.46 | % | 0.48 | % | ||||||||||||||||||||
Number of ETPs—end of period | 457 | 457 | 445 | 457 | 445 | 286 | 457 | 451 | 286 | 451 | ||||||||||||||||||||||||||||||
PRODUCT CATEGORIES (in millions) | ||||||||||||||||||||||||||||||||||||||||
Commodity & Currency | ||||||||||||||||||||||||||||||||||||||||
Beginning of period assets | $ | 17,015 | $ | 16,251 | $ | 399 | $ | 16,251 | $ | 427 | $ | 18,446 | $ | 16,978 | $ | 16,115 | $ | 16,214 | $ | 426 | ||||||||||||||||||||
Assets acquired | — | — | 16,778 | — | 16,778 | — | — | — | — | 16,778 | ||||||||||||||||||||||||||||||
Inflows/(outflows) | 558 | 227 | (77 | ) | 785 | (103 | ) | 558 | 563 | (418 | ) | 1,347 | (510 | ) | ||||||||||||||||||||||||||
Market appreciation/(depreciation) | 905 | 537 | (945 | ) | 1,442 | (947 | ) | 973 | 905 | (699 | ) | 2,416 | (1,696 | ) | ||||||||||||||||||||||||||
End of period assets | $ | 18,478 | $ | 17,015 | $ | 16,155 | $ | 18,478 | $ | 16,155 | $ | 19,977 | $ | 18,446 | $ | 14,998 | $ | 19,977 | $ | 14,998 | ||||||||||||||||||||
Average assets during the period | $ | 16,940 | $ | 17,033 | $ | 15,301 | $ | 16,987 | $ | 7,855 | $ | 19,804 | $ | 16,906 | $ | 15,330 | $ | 17,902 | $ | 10,334 | ||||||||||||||||||||
U.S. Equity | ||||||||||||||||||||||||||||||||||||||||
Beginning of period assets | $ | 15,880 | $ | 13,334 | $ | 13,359 | $ | 13,334 | $ | 14,234 | $ | 16,021 | $ | 15,880 | $ | 14,301 | $ | 13,334 | $ | 14,234 | ||||||||||||||||||||
Inflows/(outflows) | 103 | 632 | 114 | 735 | 160 | 242 | 103 | 347 | 977 | 507 | ||||||||||||||||||||||||||||||
Market appreciation/(depreciation) | 38 | 1,914 | 828 | 1,952 | (93 | ) | 153 | 38 | 538 | 2,105 | 445 | |||||||||||||||||||||||||||||
End of period assets | $ | 16,021 | $ | 15,880 | $ | 14,301 | $ | 16,021 | $ | 14,301 | $ | 16,416 | $ | 16,021 | $ | 15,186 | $ | 16,416 | $ | 15,186 | ||||||||||||||||||||
Average assets during the period | $ | 15,807 | $ | 14,947 | $ | 14,021 | $ | 15,377 | $ | 14,071 | $ | 16,004 | $ | 15,808 | $ | 14,950 | $ | 15,586 | $ | 14,364 | ||||||||||||||||||||
International Developed Market Equity | ||||||||||||||||||||||||||||||||||||||||
Beginning of period assets | $ | 14,417 | $ | 14,532 | $ | 22,287 | $ | 14,532 | $ | 25,836 | $ | 13,690 | $ | 14,416 | $ | 20,218 | $ | 14,532 | $ | 25,836 | ||||||||||||||||||||
Inflows/(outflows) | (729 | ) | (1,553 | ) | (1,466 | ) | (2,282 | ) | (4,215 | ) | (1,001 | ) | (729 | ) | (1,277 | ) | (3,283 | ) | (5,492 | ) | ||||||||||||||||||||
Market appreciation/(depreciation) | 1 | 1,438 | (604 | ) | 1,439 | (1,404 | ) | (145 | ) | 3 | 647 | 1,295 | (756 | ) | ||||||||||||||||||||||||||
End of period assets | $ | 13,689 | $ | 14,417 | $ | 20,217 | $ | 13,689 | $ | 20,217 | $ | 12,544 | $ | 13,690 | $ | 19,588 | $ | 12,544 | $ | 19,588 | ||||||||||||||||||||
Average assets during the period | $ | 13,960 | $ | 14,521 | $ | 22,319 | $ | 14,241 | $ | 23,307 | $ | 12,750 | $ | 13,960 | $ | 19,796 | $ | 13,744 | $ | 22,137 | ||||||||||||||||||||
41
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, 2019 | June 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||||||
Emerging Market Equity | ||||||||||||||||||||
Beginning of period assets | $ | 6,090 | $ | 5,730 | $ | 5,643 | $ | 5,278 | $ | 5,887 | ||||||||||
Inflows/(outflows) | 173 | 367 | (216 | ) | 456 | 88 | ||||||||||||||
Market appreciation/(depreciation) | (449 | ) | (7 | ) | (81 | ) | 80 | (629 | ) | |||||||||||
End of period assets | $ | 5,814 | $ | 6,090 | $ | 5,346 | $ | 5,814 | $ | 5,346 | ||||||||||
Average assets during the period | $ | 5,851 | $ | 5,785 | $ | 5,548 | $ | 5,712 | $ | 5,974 | ||||||||||
Fixed Income | ||||||||||||||||||||
Beginning of period assets | $ | 4,258 | $ | 4,023 | $ | 1,400 | $ | 2,570 | $ | 844 | ||||||||||
Inflows/(outflows) | (582 | ) | 208 | 329 | 1,044 | 930 | ||||||||||||||
Market appreciation/(depreciation) | (21 | ) | 27 | (9 | ) | 41 | (54 | ) | ||||||||||||
End of period assets | $ | 3,655 | $ | 4,258 | $ | 1,720 | $ | 3,655 | $ | 1,720 | ||||||||||
Average assets during the period | $ | 4,050 | $ | 4,119 | $ | 1,536 | $ | 3,893 | $ | 1,249 | ||||||||||
Leveraged & Inverse | ||||||||||||||||||||
Beginning of period assets | $ | 1,149 | $ | 1,226 | $ | 1,340 | $ | 1,083 | $ | 930 | ||||||||||
Assets acquired | — | — | — | — | 863 | |||||||||||||||
Inflows/(outflows) | (5 | ) | (63 | ) | (70 | ) | 14 | (245 | ) | |||||||||||
Market appreciation/(depreciation) | (6 | ) | (14 | ) | (20 | ) | 41 | (298 | ) | |||||||||||
End of period assets | $ | 1,138 | $ | 1,149 | $ | 1,250 | $ | 1,138 | $ | 1,250 | ||||||||||
Average assets during the period | $ | 1,170 | $ | 1,199 | $ | 1,294 | $ | 1,194 | $ | 1,193 | ||||||||||
Alternatives | ||||||||||||||||||||
Beginning of period assets | $ | 514 | $ | 628 | $ | 578 | $ | 755 | $ | 582 | ||||||||||
Inflows/(outflows) | (48 | ) | (108 | ) | 72 | (296 | ) | 68 | ||||||||||||
Market appreciation/(depreciation) | 2 | (6 | ) | 24 | 9 | 24 | ||||||||||||||
End of period assets | $ | 468 | $ | 514 | $ | 674 | $ | 468 | $ | 674 | ||||||||||
Average assets during the period | $ | 490 | $ | 574 | $ | 628 | $ | 577 | $ | 579 | ||||||||||
Closed ETPs | ||||||||||||||||||||
Beginning of period assets | $ | 221 | $ | 230 | $ | 375 | $ | 328 | $ | 197 | ||||||||||
Inflows/(outflows) | (7 | ) | (4 | ) | — | (32 | ) | (22 | ) | |||||||||||
Market appreciation/(depreciation) | (33 | ) | (5 | ) | 3 | (28 | ) | 251 | ||||||||||||
Fund closures | (181 | ) | — | — | (268 | ) | (48 | ) | ||||||||||||
End of period assets | $ | — | $ | 221 | $ | 378 | $ | — | $ | 378 | ||||||||||
Average assets during the period | $ | 195 | $ | 218 | $ | 378 | $ | 247 | $ | 332 | ||||||||||
Headcount: U.S. Business Segment | 142 | 143 | 151 | 142 | 151 | |||||||||||||||
Headcount: International Business Segment | 70 | 71 | 76 | 70 | 76 | |||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, 2019 | March 31, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | ||||||||||||||||
Emerging Market Equity | ||||||||||||||||||||
Beginning of period assets | $ | 5,730 | $ | 5,278 | $ | 6,289 | $ | 5,278 | $ | 5,887 | ||||||||||
Inflows/(outflows) | 367 | (84 | ) | (119 | ) | 283 | 304 | |||||||||||||
Market appreciation/(depreciation) | (7 | ) | 536 | (527 | ) | 529 | (548 | ) | ||||||||||||
End of period assets | $ | 6,090 | $ | 5,730 | $ | 5,643 | $ | 6,090 | $ | 5,643 | ||||||||||
Average assets during the period | $ | 5,785 | $ | 5,502 | $ | 6,116 | $ | 5,643 | $ | 6,187 | ||||||||||
Fixed Income | ||||||||||||||||||||
Beginning of period assets | $ | 4,023 | $ | 2,570 | $ | 1,083 | $ | 2,570 | $ | 844 | ||||||||||
Inflows/(outflows) | 208 | 1,418 | 349 | 1,626 | 601 | |||||||||||||||
Market appreciation/(depreciation) | 26 | 35 | (32 | ) | 61 | (45 | ) | |||||||||||||
End of period assets | $ | 4,257 | $ | 4,023 | $ | 1,400 | $ | 4,257 | $ | 1,400 | ||||||||||
Average assets during the period | $ | 4,119 | $ | 3,511 | $ | 1,219 | $ | 3,815 | $ | 1,106 | ||||||||||
Leveraged & Inverse | ||||||||||||||||||||
Beginning of period assets | $ | 1,419 | $ | 1,282 | $ | 872 | $ | 1,282 | $ | 930 | ||||||||||
Assets acquired | — | — | 863 | — | 863 | |||||||||||||||
Inflows/(outflows) | (62 | ) | 67 | (62 | ) | 5 | (195 | ) | ||||||||||||
Market appreciation/(depreciation) | (19 | ) | 70 | (142 | ) | 51 | (67 | ) | ||||||||||||
End of period assets | $ | 1,338 | $ | 1,419 | $ | 1,531 | $ | 1,338 | $ | 1,531 | ||||||||||
Average assets during the period | $ | 1,384 | $ | 1,408 | $ | 1,593 | $ | 1,396 | $ | 1,235 | ||||||||||
Alternatives | ||||||||||||||||||||
Beginning of period assets | $ | 628 | $ | 755 | $ | 492 | $ | 755 | $ | 582 | ||||||||||
Inflows/(outflows) | (108 | ) | (141 | ) | 66 | (249 | ) | (4 | ) | |||||||||||
Market appreciation/(depreciation) | (6 | ) | 14 | 20 | 8 | — | ||||||||||||||
End of period assets | $ | 514 | $ | 628 | $ | 578 | $ | 514 | $ | 578 | ||||||||||
Average assets during the period | $ | 574 | $ | 666 | $ | 564 | $ | 620 | $ | 555 | ||||||||||
Closed ETPs | ||||||||||||||||||||
Beginning of period assets | $ | — | $ | 92 | $ | 181 | $ | 92 | $ | 197 | ||||||||||
Inflows/(outflows) | — | (5 | ) | (28 | ) | (5 | ) | 10 | ||||||||||||
Market appreciation/(depreciation) | — | — | — | — | — | |||||||||||||||
Fund closures | — | (87 | ) | (9 | ) | (87 | ) | (63 | ) | |||||||||||
End of period assets | $ | — | $ | — | $ | 144 | $ | — | $ | 144 | ||||||||||
Average assets during the period | $ | — | $ | 95 | $ | 168 | $ | 47 | $ | 196 | ||||||||||
Headcount: U.S. Business Segment | 143 | 141 | 155 | 143 | 155 | |||||||||||||||
Headcount: International Business Segment | 71 | 75 | 76 | 71 | 76 | |||||||||||||||
Note: Previously issued statistics may be restated due to fund closures and trade adjustments
Source: WisdomTree
42
Three Months Ended JuneSeptember 30, 2019 Compared to Three Months Ended JuneSeptember 30, 2018
Selected Operating and Financial Information
Three Months Ended September 30, | Change | Percent Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
Global AUM (in millions) | ||||||||||||||||
Average global AUM | $ | 60,314 | $ | 59,460 | $ | 854 | 1.4 | % | ||||||||
Operating Revenues (in thousands) | ||||||||||||||||
Advisory fees | $ | 67,006 | $ | 71,679 | $ | (4,673 | ) | (6.5 | %) | |||||||
Other income | 712 | 891 | (179 | ) | (20.1 | %) | ||||||||||
Total revenues | $ | 67,718 | $ | 72,570 | $ | (4,852 | ) | (6.7 | %) | |||||||
Three Months Ended June 30, | Change | Percent Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
Global AUM (in millions) | ||||||||||||||||
Average global AUM | $ | 58,569 | $ | 61,301 | $ | (2,732 | ) | (4.4 | %) | |||||||
Operating Revenues (in thousands) | ||||||||||||||||
Advisory fees | $ | 65,627 | $ | 73,778 | $ | (8,151 | ) | (11.0 | %) | |||||||
Other income | 666 | 997 | (331 | ) | (33.2 | %) | ||||||||||
Total revenues | $ | 66,293 | $ | 74,775 | $ | (8,482 | ) | (11.3 | %) | |||||||
Average Global AUM
Our average global AUM decreased 4.4%increased 1.4% from $61.3$59.5 billion at JuneSeptember 30, 2018 to $58.6$60.3 billion at JuneSeptember 30, 2019 due to market appreciation and net inflows. Over the trailing twelve months net inflows were $0.5 million, primarily due to outflows from HEDJ and DXJ, largely offset by net inflows into our commodity, fixed income, U.S. equity and commodityemerging market ETPs, largely offset by $4.3 billion of outflows from HEDJ and market appreciation.DXJ.
Operating Revenues
Advisory fees
Advisory fee revenues decreased 11.0%6.5% from $73.8$71.7 million during the three months ended JuneSeptember 30, 2018 to $65.6$67.0 million in the comparable period in 2019 due to lower average AUM of our U.S. Business segment, partly offset by higher average AUM of our International Business segment as well as the recognition of a full quarter of revenues from ETFS.segment. Our average global ETP advisory fee declined 34 basis points, from 0.48% during the three months ended JuneSeptember 30, 2018 to 0.45%0.44% during the three months ended JuneSeptember 30, 2019 primarily due to a change in product mix in our U.S. Business segment.
Other income
Other income decreased 33.2%20.1% from $1.0$0.9 million during the three months ended JuneSeptember 30, 2018 to $0.7 million in the comparable period in 2019 primarily due to lower creation/redemption fees of our International Business segment.
Operating Expenses
Three Months Ended September 30, | Change | Percent Change | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Compensation and benefits | $ | 18,880 | $ | 17,544 | $ | 1,336 | 7.6 | % | ||||||||
Fund management and administration | 15,110 | 15,292 | (182 | ) | (1.2 | %) | ||||||||||
Marketing and advertising | 3,022 | 3,239 | (217 | ) | (6.7 | %) | ||||||||||
Sales and business development | 4,354 | 3,801 | 553 | 14.5 | % | |||||||||||
Contractual gold payments | 3,502 | 2,880 | 622 | 21.6 | % | |||||||||||
Professional and consulting fees | 1,259 | 1,934 | (675 | ) | (34.9 | %) | ||||||||||
Occupancy, communications and equipment | 1,549 | 1,722 | (173 | ) | (10.0 | %) | ||||||||||
Depreciation and amortization | 259 | 306 | (47 | ) | (15.4 | %) | ||||||||||
Third-party distribution fees | 1,503 | 1,407 | 96 | 6.8 | % | |||||||||||
Acquisition-related costs | 190 | 456 | (266 | ) | (58.3 | %) | ||||||||||
Other | 1,959 | 2,281 | (322 | ) | (14.1 | %) | ||||||||||
Total expenses | $ | 51,587 | $ | 50,862 | $ | 725 | 1.4 | % | ||||||||
Three Months Ended June 30, | Change | Percent Change | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Compensation and benefits | $ | 21,300 | $ | 19,301 | $ | 1,999 | 10.4 | % | ||||||||
Fund management and administration | 15,576 | 14,621 | 955 | 6.5 | % | |||||||||||
Marketing and advertising | 2,910 | 3,778 | (868 | ) | (23.0 | %) | ||||||||||
Sales and business development | 4,171 | 4,503 | (332 | ) | (7.4 | %) | ||||||||||
Contractual gold payments | 3,110 | 2,715 | 395 | 14.5 | % | |||||||||||
Professional and consulting fees | 1,296 | 1,560 | (264 | ) | (16.9 | %) | ||||||||||
Occupancy, communications and equipment | 1,548 | 1,574 | (26 | ) | (1.7 | %) | ||||||||||
Depreciation and amortization | 264 | 337 | (73 | ) | (21.7 | %) | ||||||||||
Third-party distribution fees | 1,919 | 1,666 | 253 | 15.2 | % | |||||||||||
Acquisition-related costs | 33 | 7,928 | (7,895 | ) | (99.6 | %) | ||||||||||
Other | 2,255 | 2,261 | (6 | ) | (0.3 | %) | ||||||||||
Total expenses | $ | 54,382 | $ | 60,244 | $ | (5,862 | ) | (9.7 | %) | |||||||
Three Months Ended June 30, | Three Months Ended September 30, | |||||||||||||||
As a Percent of Revenues: | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Compensation and benefits | 32.1 | % | 25.8 | % | 27.9 | % | 24.2 | % | ||||||||
Fund management and administration | 23.5 | % | 19.6 | % | 22.3 | % | 21.1 | % | ||||||||
Marketing and advertising | 4.4 | % | 5.1 | % | 4.5 | % | 4.4 | % | ||||||||
Sales and business development | 6.3 | % | 6.0 | % | 6.5 | % | 5.2 | % | ||||||||
43
Three Months Ended September 30, | ||||||||
As a Percent of Revenues: | 2019 | 2018 | ||||||
Contractual gold payments | 5.2 | % | 4.0 | % | ||||
Professional and consulting fees | 1.9 | % | 2.7 | % | ||||
Occupancy, communications and equipment | 2.2 | % | 2.4 | % | ||||
Depreciation and amortization | 0.4 | % | 0.4 | % | ||||
Third-party distribution fees | 2.2 | % | 2.0 | % | ||||
Acquisition-related costs | 0.2 | % | 0.6 | % | ||||
Other | 2.9 | % | 3.1 | % | ||||
Total expenses | 76.2 | % | 70.1 | % | ||||
Three Months Ended June 30, | ||||||||
As a Percent of Revenues: | 2019 | 2018 | ||||||
Contractual gold payments | 4.7 | % | 3.6 | % | ||||
Professional and consulting fees | 1.9 | % | 2.1 | % | ||||
Occupancy, communications and equipment | 2.3 | % | 2.1 | % | ||||
Depreciation and amortization | 0.4 | % | 0.5 | % | ||||
Third-party distribution fees | 2.9 | % | 2.2 | % | ||||
Acquisition-related costs | 0.1 | % | 10.6 | % | ||||
Other | 3.4 | % | 3.0 | % | ||||
Total expenses | 82.0 | % | 80.6 | % | ||||
Compensation and benefits
Compensation and benefits expense increased 10.4%7.6% from $19.3$17.5 million during the three months ended JuneSeptember 30, 2018 to $21.3$18.9 million in the comparable period in 2019 due to severance expense of $1.5 million and higher incentive compensation. Headcount of our U.S. Business segment was 155151 and our International Business segment was 76 at JuneSeptember 30, 2018 compared to 143142 and 71,70, respectively, at JuneSeptember 30, 2019.
Fund management and administration
Fund management and administration expense increased 6.5%decreased 1.2% from $14.6$15.3 million during the three months ended JuneSeptember 30, 2018 to $15.6$15.1 million in the comparable period in 2019 primarily due to the recognition of a full quarter of expense from ETFS, partly offset bylower variable fees associated with lower average AUM of our U.S. Business segment, partly offset by higher average AUM of our International Business segment. We had 8184 U.S. listed ETFs and 445451 International listed ETPs at JuneSeptember 30, 2018 compared to 7980 U.S. listed ETFs and 457286 International listed ETPs at JuneSeptember 30, 2019.
Marketing and advertising
Marketing and advertising expense decreased 23.0%6.7% from $3.8$3.2 million during the three months ended JuneSeptember 30, 2018 to $2.9$3.0 million in the comparable period in 2019 due to lower global spending.spending in our International Business segment.
Sales and business development
Sales and business development expense decreased 7.4%increased 14.5% from $4.5$3.8 million during the three months ended JuneSeptember 30, 2018 to $4.2$4.4 million in the comparable period in 2019 primarily due to lowerhigher spending on sales related activities ofin our U.S. Business segment.
Contractual gold payments
Contractual gold payments expense increased 14.5%21.6% from $2.7$2.9 million during the three months ended JuneSeptember 30, 2018 to $3.1$3.5 million in the comparable period in 2019. This expense was associated with the payment of 2,375 ounces of gold (2,085 ounces for the period April 11 through June 30, 2018) and was calculated using the average daily spot price of $1,302$1,213 and $1,310$1,474 per ounce during the three months ended ofSeptember 2018 and 2019, respectively.
Professional and consulting fees
Professional and consulting fees decreased 16.9%34.9% from $1.6$1.9 million during the three months ended JuneSeptember 30, 2018 to $1.3 million in the comparable period in 2019 due to lower spending on corporate consulting-related expenses.
Occupancy, communications and equipment
Occupancy, communications and equipment expense decreased 1.7%10.0% from $1.6$1.7 million during the three months ended JuneSeptember 30, 2018 to $1.5 million in the comparable period in 2019 due to the closure of our office in Japan partly offset by additional office space associated with the ETFS Acquisition.Japan.
Depreciation and amortization
Depreciation and amortization expense decreased 21.7%15.4% from the three months ended JuneSeptember 30, 2018 to $0.3 million primarily due to the closure of our office in Japan.
Third-party distribution fees
Third-party distribution fees were essentially unchanged from the three months ended September 30, 2018.
44
Acquisition-related costs
Acquisition-related costs decreased 58.3% from $0.5 million during the three months ended September 30, 2018 to $0.2 million in the comparable period in 2019 as the integration of ETFS is essentially complete. Costs incurred during the current period were associated with the rationalization of our product offering in Europe following our acquisition of ETFS.
Other
Other expenses decreased 14.1% from the three months ended September 30, 2018 to $2.0 million primarily due to lower levels of administrative spending.
Other Income/(Expenses)
Three Months Ended September 30, | Change | Percent Change | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Interest expense | $ | (2,832 | ) | $ | (2,747 | ) | $ | (85 | ) | 3.1 | % | |||||
(Loss)/gain on revaluation of deferred consideration | (6,306 | ) | 7,732 | (14,038 | ) | n/a | ||||||||||
Interest income | 799 | 719 | 80 | 11.1 | % | |||||||||||
Other gains, net | 843 | 118 | 725 | 614.4 | % | |||||||||||
Total other income/(expenses) | $ | (7,496 | ) | $ | 5,822 | $ | (13,318 | ) | n/a | |||||||
Three Months Ended September 30, | ||||||||
As a Percent of Revenues: | 2019 | 2018 | ||||||
Interest expense | (4.2 | %) | (3.8 | %) | ||||
(Loss)/gain on revaluation of deferred consideration | (9.3 | %) | 10.7 | % | ||||
Interest income | 1.1 | % | 1.0 | % | ||||
Other gains, net | 1.2 | % | 0.1 | % | ||||
Total other income/(expenses) | (11.2 | %) | 8.0 | % | ||||
Interest expense
Interest expense increased 3.1% from $2.7 million during the three months ended September 30, 2018 to $2.8 million in the comparable period in 2019 due to higher interest rates. Our effective interest rate during the three months ended September 30, 2018 and September 30, 2019 was 5.1% and 5.2%, respectively, and includes our cost of borrowing and amortization of issuance costs.
(Loss)/gain on revaluation of deferred consideration – gold payments
We recognized a gain on revaluation of deferred consideration of $7.7 million during the three months ended September 30, 2018 as compared to a loss of ($6.3) million during the three months ended September 30, 2019. The loss in the current quarter was due to an increase in the price of gold and the steepening of the forward-looking gold curve when compared to the forward-looking gold curve on June 30, 2019, the date on which the deferred consideration was last measured. The magnitude of any gain or loss is highly correlated to the magnitude of the change in the forward-looking price of gold.
Interest income
Interest income increased 11.1% from $0.7 million during the three months ended September 30, 2018 to $0.8 million in the comparable period in 2019 primarily due to higher
paid-in-kind
interest, or PIK, on notes receivable from AdvisorEngine.Other gains, net
Other gains, net were $0.1 million and $0.8 million during the three months ended September 30, 2018 and 2019, respectively. Included in the three months ended September 30, 2019 is a gain of $0.4 million from the recognition of the foreign currency translation adjustment upon the liquidation of our Japan business. In addition, gains and losses generally arise from the sale of gold earned from management fees paid by our physically-backed gold ETPs, foreign exchange fluctuations, securities owned and other miscellaneous items.
Income taxes
Our effective income tax rate for the three months ended September 30, 2019 of 51.9% resulted in income tax expense of $4.5 million. Our effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a valuation allowance on foreign net operating losses, a
non-deductible
loss on revaluation of deferred consideration,non-deductible
executive compensation and state and local taxes, partly offset by a lower tax rate on foreign earnings.45
Our effective income tax rate for the three months ended September 30, 2018 of 19.9% resulted in income tax expense of $5.5 million. Our tax rate differs from the federal statutory tax rate of 21% primarily due to the
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 and state and local income taxes.Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
Selected Operating and Financial Information
Nine Months Ended September 30, | Change | Percent Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
Global AUM (in millions) | ||||||||||||||||
Average global AUM | $ | 58,856 | $ | 56,162 | $ | 2,694 | 4.8 | % | ||||||||
Operating Revenues (in thousands) | ||||||||||||||||
Advisory fees | $ | 197,473 | $ | 203,913 | $ | (6,440 | ) | (3.2 | %) | |||||||
Other income | 2,023 | 2,336 | (313 | ) | (13.4 | %) | ||||||||||
Total revenues | $ | 199,496 | $ | 206,249 | $ | (6,753 | ) | (3.3 | %) | |||||||
Average Global AUM
Our average global AUM increased 4.8% from $56.2 billion during the nine months ended September 30, 2018 to $58.9 billion in the comparable period in 2019 primarily due to the inclusion of AUM from ETFS for the entire nine months of 2019, market appreciation and net inflows into our commodity, fixed income, U.S. equity and emerging market ETPs, largely offset by outflows from HEDJ and DXJ.
Operating Revenues
Advisory fees
Advisory fee revenues decreased 3.2% from $203.9 million during the nine months ended September 30, 2018 to $197.5 million in the comparable period in 2019 due to a 4 basis point decline in our average global ETP advisory fee and lower average AUM of our U.S. Business segment, partly offset by higher revenues earned from the ETFS acquired business, which were recognized for the entire nine months of 2019.
Other income
Other income decreased 13.4% from $2.3 million during the nine months ended September 30, 2018 to $2.0 million in the comparable period in 2019 primarily due lower licensing fee revenues of our U.S. Business segment.
Operating Expenses
Nine Months Ended September 30, | Change | Percent Change | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Compensation and benefits | $ | 61,481 | $ | 55,677 | $ | 5,804 | 10.4 | % | ||||||||
Fund management and administration | 45,852 | 40,825 | 5,027 | 12.3 | % | |||||||||||
Marketing and advertising | 8,612 | 10,212 | (1,600 | ) | (15.7 | %) | ||||||||||
Sales and business development | 12,947 | 12,117 | 830 | 6.8 | % | |||||||||||
Contractual gold payments | 9,710 | 5,595 | 4,115 | 73.5 | % | |||||||||||
Professional and consulting fees | 4,037 | 5,130 | (1,093 | ) | (21.3 | %) | ||||||||||
Occupancy, communications and equipment | 4,715 | 4,659 | 56 | 1.2 | % | |||||||||||
Depreciation and amortization | 792 | 998 | (206 | ) | (20.6 | %) | ||||||||||
Third-party distribution fees | 5,822 | 4,798 | 1,024 | 21.3 | % | |||||||||||
Acquisition-related costs | 536 | 10,446 | (9,910 | ) | (94.9 | %) | ||||||||||
Other | 6,267 | 6,332 | (65 | ) | (1.0 | %) | ||||||||||
Total expenses | $ | 160,771 | $ | 156,789 | $ | 3,982 | 2.5 | % | ||||||||
46
As a Percent of Revenues: | Nine Months Ended September 30, | |||||||
2019 | 2018 | |||||||
Compensation and benefits | 30.8 | % | 27.0 | % | ||||
Fund management and administration | 23.0 | % | 19.8 | % | ||||
Marketing and advertising | 4.3 | % | 5.0 | % | ||||
Sales and business development | 6.5 | % | 5.9 | % | ||||
Contractual gold payments | 4.9 | % | 2.7 | % | ||||
Professional and consulting fees | 2.0 | % | 2.4 | % | ||||
Occupancy, communications and equipment | 2.4 | % | 2.3 | % | ||||
Depreciation and amortization | 0.4 | % | 0.4 | % | ||||
Third-party distribution fees | 2.9 | % | 2.3 | % | ||||
Acquisition-related costs | 0.3 | % | 5.1 | % | ||||
Other | 3.1 | % | 3.1 | % | ||||
Total expenses | 80.6 | % | 76.0 | % | ||||
Compensation and benefits
Compensation and benefits expense increased 10.4% from $55.7 million during the nine months ended September 30, 2018 to $61.5 million in the comparable period in 2019 primarily due severance expense of $3.5 million, the effect of the ETFS Acquisition for the entire nine months of 2019, and higher incentive compensation, partly offset by lower headcount related expenses.
Fund management and administration
Fund management and administration expense increased 12.3% from $40.8 million during the nine months ended September 30, 2018 to $45.9 million in the comparable period in 2019 primarily due to the effect of the ETFS Acquisition for the entire nine months of 2019, partly offset by lower average AUM of our U.S. Business segment.
Marketing and advertising
Marketing and advertising expense decreased 15.7% from $10.2 million during the nine months ended September 30, 2018 to $8.6 million in the comparable period in 2019 primarily due to lower spending in our U.S. Business segment.
Sales and business development
Sales and business development expense increased 6.8% from $12.1 million during the nine months ended September 30, 2018 to $12.9 million in the comparable period in 2019 primarily due to the effect of the ETFS Acquisition for the entire nine months of 2019.
Contractual gold payments
Contractual gold payments expense increased 73.5% from $5.6 million during the period April 11, 2018 through September 30, 2018 to $9.7 million during the nine months ended September 30, 2019. This expense was associated with the payment of 7,125 ounces of gold (4,460 ounces for the period April 11 through September 30, 2018) and was calculated using the average daily spot price of $1,255 and $1,363 per ounce during the year to date periods of 2018 and 2019, respectively.
Professional and consulting fees
Professional and consulting fees decreased 21.3% from $5.1 million during the nine months ended September 30, 2018 to $4.0 million in the comparable period in 2019 due to lower spending on corporate consulting-related expenses of our U.S. Business segment.
Occupancy, communications and equipment
Occupancy, communications and equipment expense was essentially unchanged from the nine months ended September 30, 2018.
Depreciation and amortization
Depreciation and amortization expense decreased 20.6% from $1.0 million during the nine months ended September 30, 2018 to $0.8 million in the comparable period in 2019 primarily due to the closure of our office in Japan.
47
Third-party distribution fees
Third-party distribution fees increased 15.2%21.3% from $1.7$4.8 million during the threenine months ended JuneSeptember 30, 2018 to $1.9$5.8 million in the comparable period in 2019 primarily due to higher fees paid for platform relationships partly offset by lower fees paid to our third-party marketing agent in Latin America.
Acquisition-related costs
Acquisition-related costs decreased 99.6%94.9% from $7.9$10.4 million during the threenine months ended JuneSeptember 30, 2018 to $0.03$0.5 million in the comparable period in 2019 as the integration of ETFS is essentially complete. We expect to have additional acquisition-related expenses in the third quarter as we rationalize our product offering in Europe following the ETFS Acquisition.
Other
Other expenses were essentially unchanged from the threenine months ended JuneSeptember 30, 2018.
Other Income/(Expenses)
Nine Months Ended September 30, | Change | Percent Change | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Interest expense | $ | (8,634 | ) | $ | (5,103 | ) | $ | (3,531 | ) | 69.2 | % | |||||
(Loss)/gain on revaluation of deferred consideration | (5,939 | ) | 17,630 | (23,569 | ) | n/a | ||||||||||
Interest income | 2,396 | 2,293 | 103 | 4.5 | % | |||||||||||
Impairments | (572 | ) | — | (572 | ) | n/a | ||||||||||
Other losses, net | (3,500 | ) | (644 | ) | (2,856 | ) | 443.5 | % | ||||||||
Total other income/(expenses) | $ | (16,249 | ) | $ | 14,176 | $ | (30,425 | ) | n/a | |||||||
Three Months Ended June 30, | Change | Percent Change | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Interest expense | $ | (2,910 | ) | $ | (2,356 | ) | $ | (554 | ) | 23.5 | % | |||||
(Loss)/gain on revaluation of deferred consideration – gold payments | (4,037 | ) | 9,898 | (13,935 | ) | n/a | ||||||||||
Interest income | 818 | 612 | 206 | 33.7 | % | |||||||||||
Other gains and losses, net | 284 | (501 | ) | 785 | n/a | |||||||||||
Total other income/(expenses) | $ | (5,845 | ) | $ | 7,653 | $ | (13,498 | ) | n/a | |||||||
Three Months Ended June 30, | ||||||||||||||||
As a Percent of Revenues: | 2019 | 2018 | Nine Months Ended September 30, | |||||||||||||
As a Percent of Revenues: | 2019 | 2018 | ||||||||||||||
(4.4 | %) | (3.1 | %) | (4.3 | %) | (2.5 | %) | |||||||||
(Loss)/gain on revaluation of deferred consideration – gold payments | (6.1 | %) | 13.2 | % | ||||||||||||
(Loss)/gain on revaluation of deferred consideration | (3.0 | %) | 8.5 | % | ||||||||||||
Interest income | 1.2 | % | 0.8 | % | 1.2 | % | 1.1 | % | ||||||||
Other gains and losses, net | 0.4 | % | (0.7 | %) | ||||||||||||
Impairment | (0.3 | %) | n/a | |||||||||||||
Other losses, net | (1.7 | %) | (0.3 | %) | ||||||||||||
Total other income/(expenses) | (8.8 | %) | 10.2 | % | (8.1 | %) | 6.8 | % | ||||||||
Interest expense
Interest expense increased 23.5%69.2% from $2.4$5.1 million during the threenine months ended JuneSeptember 30, 2018 to $2.9 million in the comparable period in 2019 due to higher interest rates as well as the recognition of a full quarter of expense as the borrowing under our term loan commenced on April 11, 2018. Our effective interest rate during April 11, 2018 through June 30, 2018 and during the three months ended June 30, 2019 was 4.9% and 5.5%, respectively, and includes our cost of borrowing and amortization of issuance costs.
Six Months Ended June 30, | Change | Percent Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
Global AUM (in millions) | ||||||||||||||||
Average global AUM | $ | 58,126 | $ | 54,512 | $ | 3,614 | 6.6 | % | ||||||||
Revenues (in thousands) | ||||||||||||||||
Advisory fees | $ | 130,467 | $ | 132,234 | $ | (1,767 | ) | (1.3 | %) | |||||||
Other income | 1,311 | 1,445 | (134 | ) | (9.3 | %) | ||||||||||
Total revenues | $ | 131,778 | $ | 133,679 | $ | (1,901 | ) | (1.4 | %) | |||||||
Six Months Ended June 30, | Change | Percent Change | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Compensation and benefits | $ | 42,601 | $ | 38,133 | $ | 4,468 | 11.7 | % | ||||||||
Fund management and administration | 30,742 | 25,533 | 5,209 | 20.4 | % | |||||||||||
Marketing and advertising | 5,590 | 6,973 | (1,383 | ) | (19.8 | %) | ||||||||||
Sales and business development | 8,593 | 8,316 | 277 | 3.3 | % | |||||||||||
Contractual gold payments | 6,208 | 2,715 | 3,493 | 128.7 | % | |||||||||||
Professional and consulting fees | 2,778 | 3,196 | (418 | ) | (13.1 | %) | ||||||||||
Occupancy, communications and equipment | 3,166 | 2,937 | 229 | 7.8 | % | |||||||||||
Depreciation and amortization | 533 | 692 | (159 | ) | (23.0 | %) | ||||||||||
Third-party distribution fees | 4,319 | 3,391 | 928 | 27.4 | % | |||||||||||
Acquisition-related costs | 346 | 9,990 | (9,644 | ) | (96.5 | %) | ||||||||||
Other | 4,308 | 4,051 | 257 | 6.3 | % | |||||||||||
Total expenses | $ | 109,184 | $ | 105,927 | $ | 3,257 | 3.1 | % | ||||||||
Six Months Ended June 30, | ||||||||
As a Percent of Revenues: | 2019 | 2018 | ||||||
Compensation and benefits | 32.3 | % | 28.5 | % | ||||
Fund management and administration | 23.3 | % | 19.1 | % | ||||
Marketing and advertising | 4.3 | % | 5.2 | % | ||||
Sales and business development | 6.5 | % | 6.2 | % | ||||
Contractual gold payments | 4.7 | % | 2.0 | % | ||||
Professional and consulting fees | 2.1 | % | 2.4 | % | ||||
Occupancy, communications and equipment | 2.4 | % | 2.2 | % | ||||
Depreciation and amortization | 0.4 | % | 0.5 | % | ||||
Third-party distribution fees | 3.3 | % | 2.6 | % | ||||
Acquisition-related costs | 0.3 | % | 7.5 | % | ||||
Other | 3.3 | % | 3.0 | % | ||||
Total expenses | 82.9 | % | 79.2 | % | ||||
Six Months Ended June 30, | Change | Percent Change | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Interest expense | $ | (5,802 | ) | $ | (2,356 | ) | $ | (3,446 | ) | 146.3 | % | |||||
Gain on revaluation of deferred consideration – gold payments | 367 | 9,898 | (9,531 | ) | (96.3 | %) | ||||||||||
Interest income | 1,597 | 1,574 | 23 | 1.5 | % | |||||||||||
Impairment | (572 | ) | — | (572 | ) | n/a | ||||||||||
Other losses, net | (4,343 | ) | (762 | ) | (3,581 | ) | 469.9 | % | ||||||||
Total other income/(expenses) | $ | (8,753 | ) | $ | 8,354 | $ | (17,107 | ) | n/a | |||||||
Six Months Ended June 30, | ||||||||
As a Percent of Revenues: | 2019 | 2018 | ||||||
Interest expense | (4.4 | %) | (1.8 | %) | ||||
Gain on revaluation of deferred consideration – gold payments | 0.3 | % | 7.4 | % | ||||
Interest income | 1.2 | % | 1.2 | % | ||||
Impairment | (0.4 | %) | n/a | |||||
Other losses, net | (3.3 | %) | (0.6 | %) | ||||
Total other income/(expenses) | (6.6 | %) | 6.2 | % | ||||
We recognized a gain on revaluation of deferred consideration of $9.9$17.6 million during the sixnine months ended JuneSeptember 30, 2018 as compared to a gainloss of $0.4($5.9) million during the sixnine months ended JuneSeptember 30, 2019. The gain aroseloss in the current year aswas due to an increase in the price of gold, partly offset by the flattening of the forward-looking curve flattened when compared to the forward-looking curve on December 31, 2018. The magnitude of any gain or loss is highly correlated to the magnitude of the change in the forward-looking price of gold.
Interest income
Interest income was essentially unchanged from the sixnine months ended JuneSeptember 30, 2018 as PIK interest received on notes receivable from AdvisorEngine was offset by the maturity of our short-term investment grade portfolio which occurred in the prior year.
48
Impairment
We recognized an impairment ofa $0.6 million impairment during the sixnine months ended JuneSeptember 30, 2019 in connection with the termination of our Japan office lease.
Other losses, net
Other losses, net were $0.8$0.6 million and $4.3$3.5 million during the sixnine months ended JuneSeptember 30, 2018 and 2019, respectively. Included in the loss recognized during the sixnine months ended JuneSeptember 30, 2019 is a charge of $4.3 million arising from the release of alimitations. The indemnification arose fromlimitations in connection with the ETFS Acquisition. An equal and offsetting benefit has been recognized in income tax expense. Also included in the nine months ended September 30, 2019 is a gain of $0.4 million from the recognition of the foreign currency translation adjustment upon the liquidation of our Japan business. In addition, gains and losses generally arise from the sale of gold earned from management fees paid by our physically-backed gold ETPs, foreign exchange fluctuations, securities owned and other miscellaneous items.
tax-related
indemnification asset upon the expiration of the statute of Income taxes
Our effective income tax rate forduring the sixnine months ended JuneSeptember 30, 2019 of 18.3%31.2% resulted in an income tax expense of $2.5$7.0 million. Our effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a $4.3 million reduction in unrecognized tax benefits, a lower tax rate on foreign earnings and anon-taxablegain on revaluation of deferred consideration, partly offset by a valuation allowance on foreign net operating losses, anon-deductibleexecutive compensation partly offset by a $4.3 million reduction in unrecognized tax benefits and state and local income taxes.a lower tax rate on foreign earnings.
non-deductible
loss on revaluation of deferred consideration, state and local income taxes and tax shortfalls associated with the vesting and exercise of stock-based compensation awards,Our effective income tax rate for the sixnine months ended JuneSeptember 30, 2018 of 27.6%24.3% resulted in income tax expense of $10.0$15.4 million. Our effective tax rate differs from the federal statutory tax rate of 21% primarily due tonon-deductibleacquisition-related costs, a valuation allowance on foreign net operating losses, and state and local income taxes and
non-deductible
acquisition-related costs, partly offset by thenon-taxable
gain on revaluation of deferred consideration and a lower tax rate on foreign earnings.49
Segment Results
The table below presents the results of our U.S. Business and International Business reportable segments (in thousands, except for average assets during the period, which are in millions).
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
U.S. Business Segment | ||||||||||||||||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||||||||||
Advisory fees | $ | 43,070 | $ | 52,931 | $ | 85,587 | $ | 108,449 | $ | 41,950 | $ | 50,216 | $ | 127,537 | $ | 158,665 | ||||||||||||||||
Other income | 76 | 162 | 182 | 309 | 81 | 173 | 263 | 482 | ||||||||||||||||||||||||
Total operating revenues | $ | 43,146 | $ | 53,093 | $ | 85,769 | $ | 108,758 | $ | 42,031 | $ | 50,389 | $ | 127,800 | $ | 159,147 | ||||||||||||||||
Total operating expenses | $ | (36,407 | ) | $ | (42,638 | ) | $ | (73,583 | ) | $ | (81,668 | ) | $ | (33,477 | ) | $ | (33,774 | ) | $ | (107,060 | ) | $ | (115,442 | ) | ||||||||
Other income/(expenses) | ||||||||||||||||||||||||||||||||
Interest expense | $ | (194) | $ | (173) | $ | (386) | $ | (173 | ) | $ | (197 | ) | $ | (196 | ) | $ | (583 | ) | $ | (369 | ) | |||||||||||
Interest income | 818 | 612 | 1,597 | 1,574 | 793 | 719 | 2,390 | 2,293 | ||||||||||||||||||||||||
Impairment | — | — | (572 | ) | — | — | — | (572 | ) | — | ||||||||||||||||||||||
Other gains and losses, net | (54 | ) | (66 | ) | 91 | (292 | ) | |||||||||||||||||||||||||
Other gains, net | 235 | 318 | 326 | 26 | ||||||||||||||||||||||||||||
Total other income | $ | 570 | $ | 373 | $ | 730 | $ | 1,109 | $ | 831 | $ | 841 | $ | 1,561 | $ | 1,950 | ||||||||||||||||
Total income before income taxes (U.S. Business Segment) | $ | 7,309 | $ | 10,828 | $ | 12,916 | $ | 28,199 | $ | 9,385 | $ | 17,456 | $ | 22,301 | $ | 45,655 | ||||||||||||||||
Average assets during the period (in millions) | $ | 38,945 | $ | 43,464 | $ | 38,503 | $ | 44,541 | $ | 37,857 | $ | 41,555 | $ | 38,288 | $ | 43,546 | ||||||||||||||||
Average ETF advisory fee during the period | 0.44 | % | 0.49 | % | 0.45 | % | 0.49 | % | 0.44 | % | 0.48 | % | 0.45 | % | 0.49 | % | ||||||||||||||||
International Business Segment | ||||||||||||||||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||||||||||
Advisory fees | $ | 22,557 | $ | 20,847 | $ | 44,880 | $ | 23,785 | $ | 25,056 | $ | 21,463 | $ | 69,936 | $ | 45,248 | ||||||||||||||||
Other income | 590 | 835 | 1,129 | 1,136 | 631 | 718 | 1,760 | 1,854 | ||||||||||||||||||||||||
Total operating revenues | $ | 23,147 | $ | 21,682 | $ | 46,009 | $ | 24,921 | $ | 25,687 | $ | 22,181 | $ | 71,696 | $ | 47,102 | ||||||||||||||||
Total operating expenses | $ | (17,975 | ) | $ | (17,606 | ) | $ | (35,601 | ) | $ | (24,259 | ) | $ | (18,110 | ) | $ | (17,088 | ) | $ | (53,711 | ) | $ | (41,347 | ) | ||||||||
Other income/(expenses) | ||||||||||||||||||||||||||||||||
Interest expense | $ | (2,716 | ) | $ | (2,183 | ) | $ | (5,416 | ) | $ | (2,183 | ) | $ | (2,635 | ) | $ | (2,551 | ) | $ | (8,051 | ) | $ | (4,734 | ) | ||||||||
(Loss)/gain on revaluation of deferred consideration | (4,037 | ) | 9,898 | 367 | 9,898 | |||||||||||||||||||||||||||
(Loss)/gain on revaluation of deferred consideration – gold payments | (6,306 | ) | 7,732 | (5,939 | ) | 17,630 | ||||||||||||||||||||||||||
Interest income | 6 | — | 6 | — | ||||||||||||||||||||||||||||
Other gains and losses, net | 338 | (435 | ) | (4,434 | ) | (470 | ) | 608 | (200 | ) | (3,826 | ) | (670 | ) | ||||||||||||||||||
Total other income/(expenses) | $ | (6,415 | ) | $ | 7,280 | $ | (9,483 | ) | $ | 7,245 | $ | (8,327 | ) | $ | 4,981 | $ | (17,810 | ) | $ | 12,226 | ||||||||||||
Total (loss)/income before income taxes (International Business Segment) | $ | (1,243 | ) | $ | 11,356 | $ | 925 | $ | 7,907 | $ | (750 | ) | $ | 10,074 | $ | 175 | $ | 17,981 | ||||||||||||||
Average assets during the period (in millions) | $ | 19,624 | $ | 17,837 | $ | 19,623 | $ | 9,971 | $ | 22,457 | $ | 17,905 | $ | 20,568 | $ | 12,616 | ||||||||||||||||
Average ETP advisory fee during the period | 0.46 | % | 0.47 | % | 0.47 | % | 0.48 | % | 0.44 | % | 0.48 | % | 0.46 | % | 0.48 | % | ||||||||||||||||
Income/(loss) before income taxes | ||||||||||||||||||||||||||||||||
U.S. Business segment | $ | 7,309 | $ | 10,828 | $ | 12,916 | $ | 28,199 | $ | 9,385 | $ | 17,456 | $ | 22,301 | $ | 45,655 | ||||||||||||||||
International Business segment | (1,243 | ) | 11,356 | 925 | 7,907 | (750 | ) | 10,074 | 175 | 17,981 | ||||||||||||||||||||||
Total income before income taxes | $ | 6,066 | $ | 22,184 | $ | 13,841 | $ | 36,106 | $ | 8,635 | $ | 27,530 | $ | 22,476 | $ | 63,636 | ||||||||||||||||
50
Three Months Ended JuneSeptember 30, 2019 Compared to Three Months Ended JuneSeptember 30, 20192018
U.S. Business segment
Operating revenues decreased 18.7%16.6% from $53.1$50.4 million induring the three months ended JuneSeptember 30, 2018 to $43.1$42.0 million in the comparable period in 2019. The decrease was attributable to lower average AUM due to net outflows from HEDJ and DXJ, market depreciation and lower average U.S. listed ETF advisory fees due to a change in product mix. These decreases were partly offset by net inflows into our fixed income, and U.S. equity and emerging markets ETFs. Our average U.S. ETF advisory fee was 0.49%0.48% and 0.44% during the three months ended JuneSeptember 30, 2018 and 2019, respectively.
Operating expenses decreased 14.6% from $42.6of $33.5 million during the three months ended JuneSeptember 30, 2019 were essentially unchanged from the three months ended September 30, 2018 to $36.4 million in the comparable period in 2019 primarily due toas lower acquisition-related costs, lower marketingfund management and advertising expenseadministration expenses and lower sales and business development expense. These decreasesprofessional fees were partlylargely offset by higher incentive compensation and severance expense of $1.4 million.higher sales and business development expenses. Headcount of our U.S. Business segment was 155151 and 143142 at JuneSeptember 30, 2018 and 2019, respectively.
Other income/(expenses) were $0.6$0.8 million during the three months ended JuneSeptember 30, 2019, which were comprised of interest income of $0.8 million and other net gains of $0.2 million which were partly offset by interest expense of ($0.2) million. Other income/(expenses) for the three months ended JuneSeptember 30, 2018 were $0.4$0.8 million, which were comprised of interest income of $0.6$0.7 million and other net gains of $0.3 million, partly offset by interest expense of ($0.2) million.
International Business segment
Operating revenues increased 6.8%15.8% from $21.7$22.2 million during the three months ended JuneSeptember 30, 2018 to $23.1$25.7 million in the comparable period in 2019. The increase was attributable to higher average AUM due to net inflows into our commodity ETPs and market appreciation as well as the recognition of a full quarter of revenues from ETFS.appreciation. These increases were partly offset by lower average International listed ETP advisory fees due to a change in product mix. Our average International listed ETP advisory fee was 0.47%0.48% and 0.46%0.44% during the three months ended JuneSeptember 30, 2018 and 2019, respectively.
Operating expenses increased 2.1%6.0% from $17.6$17.1 million during the three months ended JuneSeptember 30, 2018 to $18.0$18.1 million in the comparable period in 2019 primarily due to the recognition of a full quarter ofhigher fund management and administration expense from ETFS, partly offset by lower acquisition-related costs.expenses and higher contractual gold payments. Headcount of our International Business segment was 76 and 7170 at JuneSeptember 30, 2018 and 2019, respectively.
Other income/(expenses) were ($6.4)8.3) million during the three months ended JuneSeptember 30, 2019, which were comprised of a loss on revaluation of deferred consideration of ($4.0)6.3) million and interest expense of ($2.7)2.6) million, partly offset by and other net gains of $0.3$0.6 million. Other income/(expenses) for the three months ended JuneSeptember 30, 2018 were $7.3$5.0 million and were comprised of a gain on revaluation of deferred consideration of $9.9$7.7 million, partly offset by interest expense of ($2.2)2.5) million and other net losses of ($0.4)0.2) million.
U.S. Business segment
Operating revenues decreased 21.1%19.7% from $108.8$159.1 million induring the sixnine months ended JuneSeptember 30, 2018 to $85.8$127.8 million in the comparable period in 2019. The decrease was attributable due to lower average AUM and lowera 4 basis point decrease in our average U.S. listed ETF advisory fees due to a change in product mix. See “Three Months Ended JuneSeptember 30, 2019 Compared to Three Months Ended JuneSeptember 30, 2018” above for additional information. Our average U.S. ETF advisory fee was 0.49% and 0.45% during the sixnine months ended JuneSeptember 30, 2018 and 2019, respectively.
Operating expenses decreased 9.9%7.3% from $81.7$115.4 million during the sixnine months ended JuneSeptember 30, 2018 to $73.6$107.1 million in the comparable period in 2019 primarily due to lower acquisition-related costs, lower fund management and administration expense, and lower marketing and advertising expense and lower sales and business development expense. These decreases were partly offset by severance expensesexpense of $3.4 million, higher incentive compensation and higher third-party distribution fees.
Other income/(expenses) were $0.7$1.6 million during the sixnine months ended JuneSeptember 30, 2019, which were comprised of interest income of $1.6$2.4 million and other net gains of $0.1$0.3 million, partly offset by an impairment of ($0.6) million recognized in connection with the termination of our Japan office lease and interest expense of ($0.4)0.6) million. Other income/(expenses) for the sixnine months ended JuneSeptember 30, 2018 were $1.1$1.9 million and were comprised of interest income of $1.6$2.3 million, partly offset by interest expense of ($0.2) million and other net losses of ($0.3)0.4) million.
51
International Business segment
Operating revenues increased 84.6%52.2% from $24.9$47.1 million during the sixnine months ended JuneSeptember 30, 2018 to $46.0$71.7 million in the comparable period in 2019 primarily due higher revenues earned from ETFS, which were recognized for the acquisitionentire nine months of which2019. This increase was completed on April 11, 2018.partly offset by a 2 basis point decrease in our average International listed ETP advisory fee due to a change in product mix. Our average International listed ETP advisory fee was 0.48% and 0.46% during the nine months ended September 30, 2018 and 2019, respectively.
Operating expenses increased 46.8%29.9% from $24.3$41.3 million during the sixnine months ended JuneSeptember 30, 2018 to $35.6$53.7 million in the comparable period in 2019 primarily due to higher expenses from ETFS, which were recognized for the entire sixnine months of 2019. These increases were partly offset by lower acquisition-related costs.
Other income/(expenses) were ($9.5)17.8) million during the sixnine months ended JuneSeptember 30, 2019, which were comprised of interest expense of ($5.4)8.1) million, a loss on revaluation of deferred consideration of ($5.9) million and other net losses of ($4.4)3.8) million. Other net losses primarily arose from the reduction of aThese losses were partly offset by a gain on revaluation of deferred consideration of $0.4 million. Other income/(expenses) for the sixnine months ended JuneSeptember 30, 2018 were $7.2$12.2 million and were comprised of a gain on revaluation of deferred consideration of $9.9$17.6 million, partly offset by interest expense of ($2.2)4.7) million and other net losses of ($0.5)0.7) million.
tax-related
indemnification asset upon the expiration of the statute of limitations. Liquidity and Capital Resources
The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations:
June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
Balance Sheet Data (in thousands) | ||||||||||||||||
Cash and cash equivalents | $ | 79,611 | $ | 77,784 | $ | 88,575 | $ | 77,784 | ||||||||
Accounts receivable | 24,442 | 25,834 | 24,381 | 25,834 | ||||||||||||
Securities held-to-maturity | 20,136 | 20,180 | 17,796 | 20,180 | ||||||||||||
Securities owned, at fair value | 9,095 | 8,873 | 3,376 | 8,873 | ||||||||||||
Total: Liquid assets | 133,284 | 132,671 | 134,128 | 132,671 | ||||||||||||
Less: Total current liabilities | (63,142 | ) | (62,801 | ) | (71,477 | ) | (62,801 | ) | ||||||||
Less: Net liquid asset requirement – certain subsidiaries (International Business segment) | (12,255 | ) | (11,005 | ) | (12,106 | ) | (11,005 | ) | ||||||||
Subtotal | 57,887 | 58,865 | 50,545 | 58,865 | ||||||||||||
Plus: Revolving credit facility – available capacity | 25,140 | 50,000 | 15,810 | 50,000 | ||||||||||||
Total: Available liquidity | $ | 83,027 | $ | 108,865 | $ | 66,355 | $ | 108,865 | ||||||||
Six Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cash Flow Data (in thousands) | ||||||||||||||||
Operating cash flows | $ | 15,359 | $ | 9,014 | $ | 43,081 | $ | 30,200 | ||||||||
Investing cash flows | (1,516 | ) | (172,645 | ) | 498 | (181,764 | ) | |||||||||
Financing cash flows | (12,284 | ) | 181,095 | (32,403 | ) | 175,654 | ||||||||||
Foreign exchange rate effect | 268 | (913 | ) | (385 | ) | (1,158 | ) | |||||||||
Increase in cash and cash equivalents | $ | 1,827 | $ | 16,551 | $ | 10,791 | $ | 22,932 | ||||||||
Liquidity
We consider our available liquidity to be our liquid assets and available borrowings under our revolving credit facility, less our current liabilities and net liquid asset requirements of certain subsidiaries of our International Business segment. Liquid assets consist of cash and cash equivalents, accounts receivable, securities
held-to-maturity
and securities owned, at fair value. Our securities owned, at fair value are highly liquid investments. Certain securities are accounted for asheld-to-maturity
securities and we have the intention and ability to hold them to maturity. However, these securities are also readily traded and, if needed, could be sold for liquidity. Accounts receivable are current assets and primarily represent receivables from advisory fees we earn from our ETPs. Our current liabilities consist primarily of payments owed to vendors and third parties in the normal course of business, deferred consideration and accrued incentive compensation for employees.See the section below titled “Credit Facility” for a discussion of our revolving credit facility.
52
Cash and cash equivalents increased $1.8$10.8 million during the sixnine months ended JuneSeptember 30, 2019 due to net cash provided by operating activities of $15.4$43.1 million and $0.3$2.3 million from changes in foreign exchange rates.$10.2$15.3 million used to pay dividends on our common stock, $2.1$15.0 million used to partially repay our long-term debt, $2.2 million used to repurchase our common stock and $1.5$1.8 million used to fund the AdvisorEngine unsecured convertible notenotes receivable and $0.1$0.3 million used for other activities.
held-to-maturity
securities called or maturing during the period. These increases were partly offset by Cash and cash equivalents increased $16.6$22.9 million duringin the sixnine months ended JuneSeptember 30, 2018 due to $200.0 of million proceeds from the issuance of long-term debt, $64.5 million from sales and maturities of debt securities9.030.2 million of cash generated by our operating activities and $1.1 million from$233.2$239.3 million of cash paid upon closing of the ETFS Acquisition, net of cash acquired, $9.2$14.2 million used to pay dividends on our common stock, $8.7 million used to pay credit facility issuance costs, $5.0$8.0 million used to fund the AdvisorEngine unsecured$1.0$1.4 million used to repurchase our common stock and $0.9$1.3 million used for other activities.
available-for-sale,
$held-to-maturity
securities called or maturing during the period. These increases were partly offset by non-convertible
note receivable, Credit Facility
On April 11, 2018 and in connection with the ETFS Acquisition, we entered into a credit agreement with Credit Suisse AG and certain other lenders. Under the credit agreement, the lenders extended us a $200.0 million Term Loan, the net cash proceeds of which were used, together with other cash on hand, to complete the acquisition and pay certain related fees, costs and expenses, and made a $50.0 million revolving credit facility, or the Revolver, available to us for revolving borrowings from time to time for working capital, capital expenditures and general corporate purposes. The Term Loan, together with the Revolver, are referred to in this Report as the Credit Facility. The available capacity under the Revolver is subject to compliance with the Total Leverage Ratio as further described below.
In connection with our capital management strategy, we used $15.0 million of our available capital during the three months ended September 30, 2019 to begin to pay down our long-term debt.
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.
The credit agreement governing the terms of the Credit Facility includes a financial covenant that requires that we maintain a Total Leverage Ratio, 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 | |||
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 ours and our restricted subsidiaries (as defined in the credit agreement) as of such date to Consolidated EBITDA of ours and our restricted subsidiaries (as defined in the credit agreement) for the four consecutive fiscal quarters ended on such date.
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 ours, 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.
We are in compliance with our covenants under the credit agreement.
53
Capital Resources
Our principal source of financing is our operating cash flow. We believe that current cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for at least the next 12 months. In addition, we have access to the Revolver for working capital, capital expenditures and general corporate purposes. No amounts are currently outstanding under the Revolver.
Use of Capital
Our business does not require us to maintain a significant cash position. However, certain of our subsidiaries of our International Business segment are required to maintain a minimum level of net liquid assets, which at JuneSeptember 30, 2019 was approximately $12.3$12.1 million in the aggregate. Notwithstanding these net liquid asset requirements, we expect that our main uses of cash will be to fund the ongoing operations of our business. Also, asAs part of our capital management, we use available capital to pay down our long-term debt. We also maintain a capital return program which includes a $0.03 per share quarterly cash dividend and authority to purchase our common stock through April 27, 2022, including purchases to offset future equity grants made under our equity plans. As previously mentioned, under the terms of the credit agreement, we are subject to various covenants including compliance with the Total Leverage Ratio. A quarterly dividend payment in excess of $0.03 per share and repurchases of our common stock (excluding purchases of our common stock withheld pursuant to the terms of equity awards granted to employees to satisfy tax withholding obligations) are permitted only to the extent the Total Leverage Ratio does not exceed 1.75 to 1.00 and no event of default (as defined in the credit agreement) has occurred and is continuing at the time the cash dividend payment or stock repurchase is made.
During the three months ended JuneSeptember 30, 2019, we repurchased 14,06513,300 shares of our common stock under the repurchase program for an aggregate cost of $0.1 million. At JuneSeptember 30, 2019, $83.6$83.5 million remained under this program for future purchases.
Contractual Obligations
The following table summarizes our future cash payments associated with contractual obligations as of JuneSeptember 30, 2019:
Total | Payments Due by Period | Total | Payments Due by Period | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | |||||||||||||||||||||||||||||||||
Term Loan | $ | 200,000 | $ | — | $ | 200,000 | $ | — | $ | — | $ | 185,000 | $ | — | $ | 185,000 | $ | — | $ | — | ||||||||||||||||||||
Operating leases | 32,023 | 3,632 | 6,313 | 5,916 | 16,162 | 31,086 | 3,671 | 6,076 | 5,948 | 15,391 | ||||||||||||||||||||||||||||||
Total | $ | 232,023 | $ | 3,632 | $ | 206,313 | $ | 5,916 | $ | 16,162 | $ | 216,086 | $ | 3,671 | $ | 191,076 | $ | 5,948 | $ | 15,391 | ||||||||||||||||||||
Off-Balance
Sheet ArrangementsWe do not have any
off-balance
sheet financing or other arrangements and have neither created nor are party to any special-purpose oroff-balance
sheet entities for the purpose of raising capital, incurring debt or operating our business.Critical Accounting Policies
Business Combinations
We account for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805,which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and liabilities based on the estimated fair values as of the closing date of the acquisition. The excess of the fair value of purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill.
Business Combinations,
Goodwill and Intangible Assets
Goodwill is the excess of the fair value of the purchase price over the fair values of the identifiable net assets at the acquisition date. We test our goodwill for impairment at least annually and at the time of a triggering event requiring. We early adopted the revised guidance for 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.
re-evaluation,
if one were to occur, in accordance with Accounting Standards Update, or ASU,2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment
54
For impairment testing purposes, goodwill has been allocated to our U.S. Business reporting unit which is assessed annually for impairment on April 30(See Note(Note 3 to our Consolidated Financial Statements) has been allocated to the European Business reporting unit included in the International Business reportable segment and assessed annually for impairment on November 30 income approach, market approach and our market capitalization when determining the fair value of our reporting units. Goodwill allocated to our U.S. Business reporting unit was assessed for impairment as of April 30, 2019. The results of this analysis indicated no impairment.
th
. In addition, goodwill arising from the ETFS Acquisition th
. When performing our goodwill impairment test, we consider a qualitative assessment, when appropriate, and theIndefinite-lived intangible assets are tested for impairment at least annually and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are impaired if their estimated fair value is less than their carrying value. We may rely on a qualitative assessment when performing our intangible asset impairment test. Otherwise, the impairment evaluation is performed at the lowest level of reasonably identifiable cash flows independent of other assets. The annual impairment testing date for all our intangible assets is November 30
th
.Investments, Carried at Cost
We account for equity investments that do not have a readily determinable fair value as cost method investments under the measurement alternative prescribed within ASU, 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.
2016-01,
Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities
Revenue Recognition
We earn substantially all of our revenue in the form of advisory fees from our ETPs and recognize 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 we have a right to invoice.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU(ASU
2016-13,
Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments
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, or CECL, model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certainoff-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 otheroff-balance
sheet credit exposures, debt securities (including thoseheld-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 toavailable-for-sale
debt securities. Foravailable-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 our 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. ASU2016-13
also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU2016-13
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. We are currently evaluating the impact that this standard will have on our consolidated financial statements and plan to adopt this standard on January 1, 2020.In August 2018, the FASB issued ASU(ASU
2018-13,
Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
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 valuemeasurements. 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. ASU2018-13
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. We plan to adopt this standard on January 1, 2020.55
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The following information, together with information included in other parts of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, describes key aspects of our market risk.
Market Risk
Market risk to us generally represents the risk of changes in the value of our ETPs that results from fluctuations in securities or commodity prices, foreign currency exchange rates against the U.S. dollar, and interest rates. Nearly all our revenues are derived from advisory agreements for the WisdomTree ETPs. Under these agreements, the advisory fee we receive is based on the average market value of the assets in the WisdomTree ETP portfolios we manage.
Fluctuations in the value of the ETPs are common and are generated by numerous factors such as market volatility, the overall economy, inflation, changes in investor strategies and sentiment, availability of alternative investment vehicles, government regulations and others. Accordingly, changes in any one or a combination of these factors may reduce the value of investment securities and, in turn, the underlying AUM on which our revenues are earned. These declines may cause investors to withdraw funds from our ETPs in favor of investments that they perceive as offering greater opportunity or lower risk, thereby compounding the impact on our revenues. We believe challenging and volatile market conditions will continue to be present in the foreseeable future.
Interest Rate Risk
We invest our corporate cash in short-term interest earning assets, primarily money market instruments at a commercial bank, federal agency debt instruments and other securities which totaled $27.4 million and $30.5$30.8 million as of December 31, 2018 and JuneSeptember 30, 2019, respectively. We do not anticipate that changes in interest rates will have a material impact on our financial condition, operating results or cash flows.
In addition, in connection with the ETFS Acquisition, we obtained a $250.0 million Credit Facility consisting of a $200.0 million Term Loan and $50.0 million Revolver.Facility. Interest rate risk is not significant as borrowings under these facilities accrue interest at variable rates (See Note(Note 12 to our Consolidated Financial Statements).
Exchange Rate Risk
Over the last few years, we have expanded our business globally and are subject to currency translation exposure on the results of our
non-U.S.
operations, primarily in Europe and Canada. Foreign currency translation risk is the risk that exchange rate gains or losses arise from translating foreign entities’ statements of earnings and balance sheets from functional currency to our reporting currency (the U.S. dollar) for consolidation purposes. Historically we generated the vast majority of our revenues and expenses in the U.S. dollar. However, upon completion of the ETFS Acquisition our exposure to exchange rate risk has increased. While the advisory fees earned by ETFS are predominantly in U.S. dollars (and also paid in gold ounces, as described below), expenses for corporate overhead are generally incurred in British pounds. Currently, we do not enter into derivative financial instruments aimed at offsetting certain exposures in the statement of operations or the balance sheet but may seek to do so in the future.Exchange rate risk associated with the euro and Canadian dollar is not considered to be significant.
Commodity Price Risk
The completion of the ETFS Acquisition has provided us with an industry leading position in European-listed gold and commodity products. Fluctuations in the prices of commodities that are linked to certain of these ETPs could have a material adverse effect on ETFS’s AUM and revenues. In addition, a portion of the advisory fee revenues we receive on our ETPs backed by gold are paid in gold ounces. In addition, we pay gold ounces to satisfy our deferred consideration obligation that we assumed in connection with the ETFS Acquisition (See Note(Note 11 to our Consolidated Financial Statements). While we may readily sell the gold that we earn under these advisory contracts, we still may maintain a position. We currently do not enter into arrangements to hedge against fluctuations in the price of gold and any hedging we may undertake in the future may not be cost-effective or sufficient to hedge against this gold exposure.
56
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of JuneSeptember 30, 2019, our management, with the participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to RuleJuneSeptember 30, 2019, our disclosure controls and procedures were effective at a reasonable assurance level in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules, regulations and forms of the SEC, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
13a-15(b)
promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that, as of Changes in Internal Control over Financial Reporting
During the quarter ended JuneSeptember 30, 2019, we completed the integration of ETFS into our overall internal control over financial reporting. Therethere were no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
None.
| ITEM 1A. | RISK FACTORS |
You should carefully consider the information set forth in this Report, as well as the information in Part 1, Item 1A. “Risk Factors” in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2018.| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Recent sales of Unregistered Securities
None.
Use of Proceeds
Not applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” of shares of our common stock.
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||
Period | (in thousands) | |||||||||||||||
April 1, 2019 to April 30, 2019 | 5,060 | $ | 7.59 | 5,060 | ||||||||||||
May 1, 2019 to May 31, 2019 | 9,005 | $ | 7.03 | 9,005 | ||||||||||||
June 1, 2019 to June 30, 2019 | — | $ | — | — | ||||||||||||
Total | 14,065 | $ | 7.23 | 14,065 | $ | 83,622 | ||||||||||
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||
Period | (in thousands) | |||||||||||||||
July 1, 2019 to July 31, 2019 | 9,789 | $ | 6.31 | 9,789 | ||||||||||||
August 1, 2019 to August 31, 2019 | — | $ | — | — | ||||||||||||
September 1, 2019 to September 30, 2019 | 3,511 | $ | 5.13 | 3,511 | ||||||||||||
Total | 13,300 | $ | 6.00 | 13,300 | $ | 83,542 | ||||||||||
57
| (1) | On April 24, 2019, our Board of Directors extended the term of our share repurchase program for three years through April 27, 2022. During the three months ended |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
None.
58
| ITEM 6. | EXHIBITS |
Exhibit No. | Description | |||
3.1 | ||||
3.2 | ||||
3.3 | ||||
4.1 | ||||
4.2 | ||||
4.3 | ||||
4.4 | ||||
4.5 | ||||
4.6 | ||||
31.1 (1) | ||||
31.2 (1) | ||||
31.3 (1) | ||||
32 (1) | ||||
101 (1) | Financial Statements from the Quarterly Report on Form 10-Q of the Company for the three months ended | |||
101.SCH (1) | Inline XBRL Taxonomy Extension Schema Document | |||
101.CAL (1) | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF (1) | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB (1) | Inline XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE (1) | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
104 (1) | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*) | |||
| (1) | Filed herewith. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized on this 311JulyNovember 2019.
st
day of WISDOMTREE INVESTMENTS, INC. | ||
By: | /s/ Jonathan Steinberg | |
Jonathan Steinberg | ||
(Principal Executive Officer) | ||
WISDOMTREE INVESTMENTS, INC. | ||
By: | /s/ Amit Muni | |
Amit Muni | ||
Chief Financial Officer (Principal Financial Officer) | ||
WISDOMTREE INVESTMENTS, INC. | ||
By: | /s/ Bryan Edmiston | |
Bryan Edmiston | ||
Chief Accounting Officer | ||
(Principal Accounting Officer) | ||
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