Quarterly Report


Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2016

or

 

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

For the transition period from                         to                         .

Commission File Number 001-10932

 

 

WisdomTree Investments, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3487784

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

245 Park Avenue, 35 th Floor

New York, New York

  10167
(Address of principal executive officers)   (Zip Code)

212-801-2080

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of October 31, 2016, there were 136,392,912 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.

 

 

 


Table of Contents

WISDOMTREE INVESTMENTS, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2016

TABLE OF CONTENTS

 

     Page
Number
 

PART I: FINANCIAL INFORMATION

     4   

Item 1. Financial Statements

     4   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     31   

Item 4. Controls and Procedures

     31   

PART II: OTHER INFORMATION

     32   

Item 1. Legal Proceedings

     32   

Item 1A. Risk Factors

     32   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 3. Defaults Upon Senior Securities

     32   

Item 4. Mine Safety Disclosures

     32   

Item 5. Other Information

     32   

Item 6. Exhibits

     33   

 

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Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. If one or more of these or other risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission (“SEC”) as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

In particular, forward-looking statements in this Report may include statements about:

 

    anticipated trends, conditions and investor sentiment in the global markets and exchange traded products, or ETPs, which include exchange traded funds, or ETFs;

 

    anticipated levels of inflows into and outflows out of our ETPs;

 

    our ability to deliver favorable rates of return to investors;

 

    our ability to develop new products and services;

 

    our ability to maintain current vendors or find new vendors to provide services to us at favorable costs;

 

    our ability to successfully expand our business into non-U.S. markets;

 

    timing of payment of our cash income taxes;

 

    competition in our business; and

 

    the effect of laws and regulations that apply to our business.

The forward-looking statements in this Report represent our views as of the date of this Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this Report.

 

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WisdomTree Investments, Inc. and Subsidiaries

Consolidated Balance Sheets

(In Thousands, Except Per Share Amounts)

 

     September 30,
2016
    December 31,
2015
 
     (Unaudited)        

Assets:

    

Current assets:

    

Cash and cash equivalents

   $ 178,132      $ 210,070   

Investments

     1,991        —    

Accounts receivable

     17,282        27,576   

Other current assets

     4,142        2,899   
  

 

 

   

 

 

 

Total current assets

     201,547        240,545   

Fixed assets, net

     11,790        11,974   

Investments

     14,238        23,689   

Deferred tax asset, net

     6,662        14,071   

Goodwill

     3,475        1,676   

Intangible asset

     9,953        —    

Other noncurrent assets

     787        738   
  

 

 

   

 

 

 

Total assets

   $ 248,452      $ 292,693   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Liabilities:

    

Current liabilities:

    

Fund management and administration payable

   $ 13,375      $ 12,971   

Compensation and benefits payable

     9,065        28,060   

Income taxes payable

     5,342        3,024   

Acquisition payable

     3,697        —    

Accounts payable and other liabilities

     6,160        5,039   
  

 

 

   

 

 

 

Total current liabilities

     37,639        49,094   

Acquisition payable

     —         3,942   

Deferred rent payable

     4,957        5,155   
  

 

 

   

 

 

 

Total liabilities

     42,596        58,191   
  

 

 

   

 

 

 

Commitments and Contingencies (See Note 7)

    

Stockholders’ equity:

    

Preferred stock, par value $0.01; 2,000 shares authorized

     —         —    

Common stock, par value $0.01; 250,000 shares authorized; issued and outstanding: 136,424 and 138,415 at September 30, 2016 and December 31, 2015, respectively

     1,364        1,384   

Additional paid-in capital

     237,378        257,960   

Accumulated other comprehensive income/(loss)

     900        (126

Accumulated deficit

     (33,786     (24,716
  

 

 

   

 

 

 

Total stockholders’ equity

     205,856        234,502   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 248,452      $ 292,693   
  

 

 

   

 

 

 

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

 

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WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

     Three Months Ended,
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Revenues:

           

Advisory fees

   $ 51,553       $ 80,520       $ 168,099       $ 221,709   

Other income

     236         233         549         744   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     51,789         80,753         168,648         222,453   

Expenses:

           

Compensation and benefits

     15,328         19,407         44,897         57,677   

Fund management and administration

     10,372         10,519         31,037         31,895   

Marketing and advertising

     3,600         3,573         11,998         10,277   

Sales and business development

     3,075         2,438         9,356         6,414   

Professional and consulting fees

     1,035         1,570         5,235         4,637   

Occupancy, communications and equipment

     1,469         1,183         3,932         3,044   

Depreciation and amortization

     332         253         978         696   

Third-party sharing arrangements

     622         485         2,238         1,265   

Acquisition payment

     —           172         6,738         693   

Other

     1,731         1,620         5,186         4,364   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     37,564         41,220         121,595         120,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     14,225         39,533         47,053         101,491   

Income tax expense

     6,270         16,245         23,375         41,969   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 7,955       $ 23,288       $ 23,678       $ 59,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share—basic

   $ 0.06       $ 0.17       $ 0.17       $ 0.44   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share—diluted

   $ 0.06       $ 0.17       $ 0.17       $ 0.43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares—basic

     134,046         136,582         134,541         135,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares—diluted

     135,190         138,181         135,583         137,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends declared per common share

   $ 0.08       $ 0.08       $ 0.24       $ 0.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Comprehensive income

           

Net income

   $ 7,955       $ 23,288       $ 23,678       $ 59,522   

Other comprehensive income

           

Foreign currency translation adjustment

     106         168         1,026         46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 8,061       $ 23,456       $ 24,704       $ 59,568   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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WisdomTree Investments, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 23,678      $ 59,522   

Non-cash items included in net income:

    

Income tax expense

     14,761        40,573   

Depreciation and amortization

     978        696   

Stock-based compensation

     11,092        7,878   

Deferred rent

     (173     (26

Accretion to interest income and other

     (75     9   

Changes in operating assets and liabilities:

    

Accounts receivable

     10,207        (7,253

Other assets

     (1,371     (1,892

Acquisition payable

     (218     693   

Fund management and administration payable

     414        1,216   

Compensation and benefits payable

     (18,944     7,402   

Income taxes payable

     2,260        840   

Accounts payable and other liabilities

     1,336        490   
  

 

 

   

 

 

 

Net cash provided by operating activities

     43,945        110,148   

Cash flows from investing activities:

    

Purchase of fixed assets

     (654     (1,606

Purchase of investments

     (6,048     (11,353

Acquisition less cash acquired

     (11,818     —    

Proceeds from investments called prior to maturity

     13,579        1,681   
  

 

 

   

 

 

 

Net cash used in investing activities

     (4,941     (11,278

Cash flows from financing activities:

    

Dividends paid

     (32,748     (32,867

Shares repurchased

     (39,116     (23,689

Proceeds from exercise of stock options

     107        4,471   
  

 

 

   

 

 

 

Net cash used in financing activities

     (71,757     (52,085
  

 

 

   

 

 

 

Increase/(decrease) in cash flows due to changes in foreign exchange rate

     815        (77
  

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents

     (31,938     46,708   

Cash and cash equivalents—beginning of period

     210,070        165,284   
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 178,132      $ 211,992   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for taxes

   $ 6,664      $ 551   
  

 

 

   

 

 

 

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

 

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WisdomTree Investments, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In Thousands, Except Share and Per Share Amounts)

1. Organization and Description of Business

WisdomTree Investments, Inc., through its global subsidiaries (collectively, “WisdomTree” or the “Company”), is an exchange traded product (“ETP”) sponsor and asset manager headquartered in New York. WisdomTree offers ETPs covering equity, fixed income, currency, alternative and commodity asset classes. The Company has the following operating subsidiaries:

 

    WisdomTree Asset Management, Inc. (“WTAM”) is a New York based investment adviser registered with the SEC providing investment advisory and other management services to the WisdomTree Trust (“WTT”) and WisdomTree exchange traded funds (“ETFs”).

 

    Boost Management Limited (“BML” or “Boost”) is a Jersey based investment manager providing investment and other management services to Boost Issuer PLC (“BI”) and Boost ETPs.

 

    WisdomTree Europe Limited (“WisdomTree Europe”) is a U.K. based company registered with the Financial Conduct Authority providing management and other services to BML and WisdomTree Management Limited.

 

    WisdomTree Management Limited (“WTML”) is an Ireland based investment manager providing investment and other management services to WisdomTree Issuer plc (“WTI”) and WisdomTree UCITS ETFs.

 

    WisdomTree Japan Inc . (“WTJ”) is a Japan based company that is registered with Japan’s Ministry of Finance and serves the institutional market selling U.S. listed WisdomTree ETFs in Japan.

 

    WisdomTree Commodity Services, LLC (“WTCS”) is a New York based company that serves as the managing owner and commodity pool operator of the WisdomTree Continuous Commodity Index Fund. WTCS is registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”).

 

    WisdomTree Coal Services, LLC (“WTC”) is a New York based company that serves as the sponsor and commodity pool operator of the WisdomTree Coal Fund. WTC is registered with the CFTC and is a member of the NFA. On September 29, 2016, the Company closed the WisdomTree Coal Fund. In connection with this closure, the Company plans to dissolve WTC.

 

    WisdomTree Asset Management Canada, Inc. (“WTAMC”) is a Canada based investment fund manager registered with the Ontario Securities Commission providing fund management services to locally-listed WisdomTree ETFs.

The WisdomTree ETFs are issued in the U.S. by WTT. WTT, a non-consolidated third party, is a Delaware statutory trust registered with the SEC as an open-end management investment company. The Company has licensed to WTT the use of certain of its own indexes on an exclusive basis for the WisdomTree ETFs in the U.S. The Boost ETPs are issued by BI. BI, a non-consolidated third party, is a public limited company organized in Ireland. The WisdomTree UCITS ETFs are issued by WTI. WTI, a non-consolidated third party, is a public limited company organized in Ireland.

The Board of Trustees and Board of Directors of WTT, BI and WTI, respectively, are separate from the Board of Directors of the Company. The respective Trustees and Directors of WTT, BI and WTI, as applicable, are primarily responsible for overseeing the management and affairs of the WisdomTree ETFs, Boost ETPs and the WisdomTree UCITS ETFs for the benefit of the WisdomTree ETF, Boost ETP and the WisdomTree UCITS ETF shareholders, respectively, and have contracted with the Company to provide for general management and administration services. The Company, in turn, has contracted with third parties to provide the majority of these administration services. In addition, certain officers of the Company provide general management services for WTT, BI and WTI.

2. Significant Accounting Policies

Basis of Presentation

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

All intercompany accounts and transactions have been eliminated in consolidation. Certain accounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year’s consolidated financial statements presentation. These reclassifications had no effect on the previously reported operating results.

 

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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 has no variable interests in any VIEs.

Foreign Currency Translation

Assets and liabilities of subsidiaries whose functional currency is not the U.S. dollar are translated based on the end of period exchange rates from local currency to U.S. dollars. Results of operations are translated at the average exchange rates in effect during the period.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. Actual results could differ materially from those estimates.

Revenue Recognition

The Company earns investment advisory fees from its ETPs, as well as licensing fees from third parties. ETP advisory fees are based on a percentage of the ETPs’ average daily net assets and recognized over the period the related service is provided. Licensing fees are based on a percentage of the average monthly net assets and recognized over the period the related service is provided.

Depreciation and Amortization

Depreciation is provided for using the straight-line method over the estimated useful lives of the related assets as follows:

 

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 stated at cost less accumulated depreciation and amortization.

Marketing and Advertising

Advertising costs, including media advertising and production costs, are expensed when incurred.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be classified as cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are customer and other obligations due under normal trade terms. An allowance for doubtful accounts is not provided since, in the opinion of management, all accounts receivable recorded are deemed collectible.

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.

 

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Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Net income available to common stockholders represents net income of the Company reduced by an allocation of earnings to participating securities. Unvested share-based payment awards that contain non- forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of EPS pursuant to the two-class method. Share-based payment awards that do not contain such rights are not deemed participating securities and are included in diluted shares outstanding (if dilutive) under the treasury stock method. Diluted EPS reflects the reduction in earnings per share assuming dilutive options or other dilutive contracts to issue common stock were exercised or converted into common stock. Diluted EPS is calculated under both the treasury stock method and two-class method. The calculation that results in the most dilutive EPS amount for the common stock is reported in the Company’s consolidated financial statements.

Investments (Held-to-Maturity)

The Company accounts for all of its investments as held-to-maturity on a settlement date basis, which are recorded at amortized cost. For held-to-maturity investments, the Company has the intent and ability to hold investments to maturity and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. On a quarterly basis, the Company reviews its portfolio of investments for impairment. If a decline in fair value is deemed to be other-than-temporary, the security is written down to its fair value through earnings.

Financial Instruments (Trading Securities)

Financial instruments owned and financial instruments sold, but not yet purchased are recorded on their settlement date and are measured at fair value.

Goodwill

Goodwill is the excess of the fair value of the purchase price over the fair values of the identifiable net assets at the acquisition date. The Company tests its goodwill for impairment at least annually and at the time of a triggering event requiring re-evaluation, if one were to occur. Goodwill is impaired if its estimated fair value is less than its carrying value. The Company has designated April 30 th as its annual goodwill impairment testing date.

Intangible Assets

Indefinite-lived intangible assets are tested for impairment at least annually and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are impaired if their estimated fair values are less than their carrying values.

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 impairment evaluation is performed at the lowest level of identifiable cash flows independent of other assets. The Company has designated November 30 th as its annual impairment testing date for the indefinite-lived intangible assets related to the GreenHaven acquisition.

Stock-Based Awards

Accounting for stock-based compensation requires the measurement and recognition of compensation expense for all equity awards based on estimated fair values. Stock-based compensation is measured based on the grant-date fair value of the award and is amortized over the relevant service period.

Income Taxes

The Company accounts for income taxes using the liability method, which requires the determination of deferred tax assets and liabilities based on the differences between the financial and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which differences are expected to reverse. Deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

In order to recognize and measure any unrecognized tax benefits, management evaluates and determines whether any of its tax positions are more-likely-than-not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. The Company records interest expense and penalties related to tax expenses as income tax expense.

 

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Third-Party Sharing Arrangements

The Company pays a percentage of its advisory fee revenues based on incremental growth in AUM, subject to caps or minimums, to marketing agents to sell WisdomTree ETFs and for including WisdomTree ETFs on third party customer platforms.

Segment, Geographic and Customer Information

The Company operates as a single business segment as an ETP sponsor and asset manager providing investment advisory services. Substantially all of the Company’s revenues, pretax income and assets are derived or located in the U.S. The Company maintains operations in Europe, Japan and Canada.

Business Combinations and Acquisitions

The Company includes the results of operations of the businesses that it acquires from the respective dates of acquisition. The fair values of the purchase price of the acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. The Company may allocate purchase price to identifiable intangible assets. The estimated fair value of identifiable intangible assets is based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; customer retention rates; and estimated useful lives.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The main objective of the standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in the standard replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is applicable to loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, loan commitments and certain other off-balance sheet credit exposures, debt securities (including those held-to-maturity) and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. Accordingly, the new methodology will be utilized when assessing the Company’s investments classified as held-to-maturity for impairment. ASU 2016-13 is effective for years beginning after December 15, 2019, including interim periods within those fiscal years under a modified retrospective approach. Early adoption is permitted for periods beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02), which requires lessees to include most leases on the balance sheet. ASU 2016-02 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes. ASU 2015-17 provides presentation requirements to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company early adopted ASU 2015-17 effective December 31, 2015, retrospectively. Adoption resulted in a reclassification of $9,279 from current to noncurrent assets on its Consolidated Balance Sheet at December 31, 2015.

In February 2015, the FASB issued Accounting Standards Update 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02), which amends the consolidation guidance in ASC 810. The standard eliminates the deferral of FAS 167, per ASC 810-10-65-2(a), which has allowed certain investment funds to follow the previous consolidation guidance in FIN 46 (R). The standard changes whether (1) fees paid to a decision maker or service provider represent a variable interest, (2) a limited partnership or similar entity has the characteristics of a variable interest entity (“VIE”) and (3) a reporting entity is the primary beneficiary of a VIE. The effective date of the standard is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public companies, and early adoption was permitted. The Company adopted ASU 2015-02 effective January 1, 2016. Adoption had no impact on the Company’s consolidated financial statements.

 

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In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which is a new comprehensive revenue recognition standard on the financial reporting requirements for revenue from contracts entered into with customers. In July 2015, the FASB deferred this ASU’s effective date by one year, to interim and annual periods beginning after December 15, 2017. The deferral allows early adoption at the original effective date. During 2016, the FASB issued ASU 2016-08, which clarifies principal versus agent considerations, ASU 2016-10, which clarifies identifying performance obligations and the licensing implementation guidance, and ASU 2016-12, which amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. ASU 2014-09 allows for the use of either the retrospective or modified retrospective adoption method. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

3. Cash and Cash Equivalents

At September 30, 2016 and December 31, 2015, cash equivalents were approximately $137,314 and $137,481, respectively. Cash and cash equivalents of approximately $144,270 and $152,103 at September 30, 2016 and December 31, 2015, respectively, were held at one financial institution.

4. Investments (“Held-to-Maturity”)

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

 

     September 30, 2016      December 31, 2015  
     Held-to-
Maturity
     Held-to-
Maturity
 

Federal agency debt instruments

   $ 16,229       $ 23,689   
  

 

 

    

 

 

 

The following table summarizes unrealized gains, losses and fair value of investments:

 

     September 30, 2016      December 31, 2015  
     Held-to-
Maturity
     Held-to-
Maturity
 

Cost/amortized cost

   $ 16,229       $ 23,689   

Gross unrealized gains

     27         82   

Gross unrealized losses

     (133      (609
  

 

 

    

 

 

 

Fair value

   $ 16,123       $ 23,162   
  

 

 

    

 

 

 

The following table sets forth the maturity profile of investments; however, these investments may be called prior to the maturity date:

 

     September 30, 2016      December 31, 2015  
     Held-to-
Maturity
     Held-to-
Maturity
 

Due within one year

   $ 1,991       $ —    

Due one year through five years

     3,026         8,369   

Due five years through ten years

     6,041         3,127   

Due over ten years

     5,171         12,193   
  

 

 

    

 

 

 

Total

   $ 16,229       $ 23,689   
  

 

 

    

 

 

 

5. Financial Instruments and Fair Value Measurement

Financial instruments are measured at fair value. The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:

Level 1 – Quoted prices for identical instruments in active markets.

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.

 

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The availability of observable inputs can vary from product to product and is effected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair Valuation Methodology

Cash and Cash Equivalents – These financial assets represent cash in banks or cash invested in highly liquid investments with original maturities less than 90 days. These investments are valued at par, which represent fair value, and are considered Level 1 (See Note 3).

Investments (Held-to-Maturity) – These financial instruments are Federal agency debt instruments which are instruments that are generally traded in active, quoted and highly liquid markets and are therefore classified as Level 1 within the fair value hierarchy (See Note 4).

Financial Instruments Owned/Sold But Not Yet Purchased (Trading Securities) – These financial instruments consist of exchange traded funds which are instruments that are generally traded in active, quoted and highly liquid markets and are therefore classified as Level 1 within the fair value hierarchy. The Company’s financial instruments owned and financial instruments sold, but not yet purchased were $125 and $114, respectively at September 30, 2016 and are reported within Other assets and Other liabilities on its Consolidated Balance Sheets. There were no financial instruments owned and financial instruments sold, but not yet purchased at December 31, 2015.

Acquisition Payable (See Note 13) – As of December 31, 2015, the Company estimated the fair value of the acquisition payable related to the acquisition of U.K. based ETP sponsor, Boost, to be $9,900. The fair value measurement of the acquisition payable was categorized as Level 3 and was based on a predefined formula that included the following inputs: the contractual minimum payment obligation, European AUM, the Company’s enterprise value over global AUM, and operating results of the European business. In May 2016, the Company accelerated the buyout of the remaining minority interest in Boost. At each reporting period through May 2016, the fair value of the acquisition payable was determined using a discounted cash flows analysis. The significant unobservable inputs used in the fair value measurement were the projected AUM of the European listed ETPs (ranging from $1,000,000 to $6,000,000), the projected operating results of the European business, and the discount rate (27.5%). Significant increases (decreases) to the projected AUM of the European listed ETPs or operating results of the European business in isolation would have resulted in a higher (lower) fair value measurement. Significant increases (decreases) to the discount rate in isolation would have resulted in a lower (higher) fair value measurement.

6. Fixed Assets

The following table summarizes fixed assets:

 

     September 30, 2016      December 31, 2015  

Equipment

   $ 1,727       $ 1,258   

Furniture and fixtures

     2,416         2,382   

Leasehold improvements

     10,628         10,312   

Less accumulated depreciation and amortization

     (2,981      (1,978
  

 

 

    

 

 

 

Total

   $ 11,790       $ 11,974   
  

 

 

    

 

 

 

7. Commitments and Contingencies

Contractual Obligations

The Company has entered into obligations under operating leases with initial non-cancelable terms in excess of one year for office space, telephone and data services. Expenses recorded under these agreements for the three months ended September 30, 2016 and 2015 were approximately $1,203 and $906, respectively, and for the nine months ended September 30, 2016 and 2015 were approximately $3,221 and $2,529, respectively.

 

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Future minimum lease payments with respect to non-cancelable operating leases at September 30, 2016 were approximately as follows:

 

Remainder of 2016

   $ 1,057   

2017

     3,880   

2018

     3,308   

2019

     2,956   

2020 and thereafter

     26,950   
  

 

 

 

Total

   $ 38,151   
  

 

 

 

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.

Contingencies

The Company is subject to various routine reviews and inspections by regulatory authorities as well as legal proceedings arising in the ordinary course of business. The Company is not currently party to any litigation or other legal proceedings that are expected to have a material impact on its business, financial position or results of operations.

8. 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 on an exclusive basis for the U.S. and Canadian WisdomTree ETFs, Boost ETPs and WisdomTree UCITS ETFs. The Board of Trustees and Board of Directors of the related parties are primarily responsible for overseeing the management and affairs of the U.S. and Canadian WisdomTree ETFs, Boost ETPs and WisdomTree UCITS ETFs for the benefit of their shareholders and have contracted with the Company to provide for general management and administration services. The Company is also responsible for certain expenses of the related parties, including the cost of transfer agency, custody, fund administration and accounting, legal, audit, and other non-distribution services, excluding extraordinary expenses, taxes and certain other expenses, which is included in fund management and administration on the Company’s Consolidated Statements of Operations. In exchange, the Company receives fees based on a percentage of the ETF average daily net assets. The advisory agreements may be terminated by the related parties upon notice. Certain officers of the Company also provide general management oversight of the related parties; however, these officers have no material decision making responsibilities and primarily implement the decisions of the Board of Trustees and Board of Directors of the related parties.

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

 

     September 30, 2016      December 31, 2015  

Receivable from WTT

   $ 15,980       $ 24,560   

Receivable from BI and WTI

     666         487   

Receivable from WTCS and WTC

     154         —     

Receivable from WTAMC

     30         —     
  

 

 

    

 

 

 

Total

   $ 16,830       $ 25,047   
  

 

 

    

 

 

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Advisory services provided to WTT

   $ 49,087       $ 79,242       $ 161,316       $ 218,997   

Advisory services provided to BI and WTI

     1,915         1,278         5,308         2,712   

Advisory services provided to WTCS and WTC

     482         —           1,406         —     

Advisory services provided to WTAMC

     69         —           69         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,553       $ 80,520       $ 168,099       $ 221,709   
  

 

 

    

 

 

    

 

 

    

 

 

 

9. Stock-Based Awards

The Company grants equity awards to employees and directors. Options may be issued for a term of ten years, may vest after at least one year and have an exercise price equal to the fair value of the Company on the date of grant. The Company estimates the fair value for options using the Black-Scholes option pricing model. All stock and option awards require future service as a condition of vesting with certain awards subject to acceleration under certain conditions.

 

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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. Options outstanding at September 30, 2016 expire on dates ranging from January 1, 2017 to November 15, 2021.

A summary of options and restricted stock activity for the three months ended September 30, 2016 is as follows:

 

     Options      Weighted
Average
Exercise Price
of Options
     Restricted
Stock
Awards
 

Balance at June 30, 2016

     1,447,747       $ 2.73         2,432,066   

Granted

     —        $ —          197,459   

Exercised/vested

     (3,500    $ 1.07         (126,092

Forfeitures

     —        $ —          (17,155
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2016

     1,444,247       $ 2.73         2,486,278   
  

 

 

    

 

 

    

 

 

 

A summary of stock-based compensation expense is as follows:

 

Three Months Ended September 30,      Nine Months Ended September 30,  
2016      2015      2016      2015  
$ 3,822       $ 2,926       $ 11,092       $ 7,878   

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     September 30, 2016  
     Unrecognized Stock-Based
Compensation
     Average
Remaining
Vesting Period
 

Employees and directors option awards

   $ 36         0.32   

Employees and directors restricted stock awards

   $ 24,507         2.0   

10. Earnings Per Share

The following is a reconciliation of the basic and diluted earnings per share computation:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  
     (shares in thousands)  

Net income

   $ 7,955       $ 23,288       $ 23,678       $ 59,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares of common stock and common stock equivalents :

           

Weighted average common shares used in basic computation

     134,046         136,582         134,541         135,527   

Dilutive effect of common stock equivalents

     1,144         1,599         1,042         2,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used in dilutive computation

     135,190         138,181         135,583         137,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.06       $ 0.17       $ 0.17       $ 0.44   

Diluted earnings per share

   $ 0.06       $ 0.17       $ 0.17       $ 0.43   

In the table above, unvested share-based awards that have non-forfeitable rights to dividends or dividend equivalents are treated as a separate class of securities in calculating EPS. The impact of applying this methodology was a reduction in basic EPS of $0.01 for the nine months ended September 30, 2016.

Diluted earnings per share reflects the reduction in earnings per share assuming options or other contracts to issue common stock were exercised or converted into common stock (if dilutive) under the treasury stock method. The Company excluded 516,630 and 243,427 common stock equivalents from its computation of diluted earnings per share for the three months ended September 30, 2016 and 2015, respectively, and 909,118 and 836,427 common stock equivalents from its computation of diluted earnings per share for the nine months ended September 30, 2016 and 2015, respectively, as they were determined to be anti-dilutive.

 

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11. Income Taxes

Effective Income Tax Rate – Three and Nine Months Ended September 30, 2016

The Company’s effective income tax rate for the three months ended September 30, 2016 of 44.1% resulted in income tax expense of $6,270. The Company’s tax rate differs from the federal statutory tax rate of 35% primarily due to 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, 2016 of 49.7% resulted in income tax expense of $23,375. The Company’s tax rate differs from the federal statutory tax rate of 35% primarily to due to a valuation allowance on foreign net operating losses, the non-deductibility of the expense associated with the acceleration of the buyout of the remaining minority interest in our European business in May 2016 and state and local taxes.

Effective Income Tax Rate – Three and Nine Months Ended September 30, 2015

The Company’s effective income tax rate for the three and nine months ended September 30, 2015 of 41.1% and 41.4%, respectively, resulted in income tax expense of $16,245 and $41,969, respectively. The Company’s tax rate differs from the federal statutory tax rate of 35% primarily due to state and local income taxes and a valuation allowance on the Company’s foreign net operating losses.

Net Operating Losses – U.S.

The Company’s pre-tax federal net operating losses for tax purposes (“NOLs”) at September 30, 2016 was $4,195. The Company is limited as to the amount of NOLs it may use in any given year due to a change in ownership that occurred in a prior year, as defined by Section 382 under the Internal Revenue Code. As of July 1, 2016, the Company no longer has any NOLs related to vested stock-based compensation awards that were previously unrecognized under GAAP. Such NOLs were utilized during the quarter ended June 30, 2016 to reduce the Company’s tax liability with a corresponding credit to additional paid-in capital.

Net Operating Losses – Foreign

The Company’s foreign subsidiaries generated NOLs outside the U.S. The following table summarizes the activity for these NOLs for the nine months ended September 30, 2016:

 

NOL - December 31, 2015 (pre-tax)

   $ (10,746

Foreign subsidiaries loss

     (7,800
  

 

 

 

NOL - September 30, 2016 (pre-tax)

     (18,546

Tax Rate - Blended

     19.0
  

 

 

 

NOL (tax effected) - September 30, 2016

   $ (3,524
  

 

 

 

At September 30, 2016 and December 31, 2015, the Company established a valuation allowance related to these NOLs of $3,524 and $2,051, respectively.

Deferred Tax Assets

A summary of the components of the gross and tax effected deferred tax asset as of September 30, 2016 is as follows:

 

Stock-based compensation

   $ 11,793   

Deferred rent liability

     5,318   

NOL – U.S.

     4,195   

Accrued expenses

     6,040   

Incentive compensation

     (4,442

Fixed assets

     (5,865

Other

     (539
  

 

 

 

Total U.S. deferred components

     16,500   

U.S. income tax rate

     38.4
  

 

 

 

U.S. tax effected

     6,336   
  

 

 

 

Japan tax effected

     326   
  

 

 

 

Total tax effected

   $ 6,662   
  

 

 

 

 

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12. Shares Repurchased

On October 29, 2014, the Company’s Board of Directors authorized a three-year share repurchase program of up to $100,000. On April 27, 2016, the Board of Directors approved a $60,000 increase to the Company’s share repurchase program and extended the term through April 27, 2019. Purchases under this program will include purchases to offset future equity grants made under the Company’s equity plans and will be made in open market or privately negotiated transactions. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual number of shares repurchased 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 will be returned to the status of authorized and unissued on the Company’s books and records.

During the three and nine months ended September 30, 2016, the Company repurchased 337,824 shares and 3,753,147 shares of its common stock, respectively, under this program for an aggregate cost of $3,462 and $39,116, respectively.

During the three and nine months ended September 30, 2015, the Company repurchased 329,635 and 1,164,741 shares of its common stock, respectively, under this program for an aggregate cost of $8,424 and $23,689, respectively.

As of September 30, 2016, $96,768 remains under this program for future purchases.

13. Business Combinations and Acquisitions

GreenHaven Acquisition

Effective January 1, 2016, the Company completed the acquisition of 100% of the issued and outstanding membership interest in each of GreenHaven Commodity Services, LLC, the managing owner of the GreenHaven Continuous Commodity Index Fund, and GreenHaven Coal Services, LLC, the sponsor of the GreenHaven Coal Fund, from GreenHaven, LLC and GreenHaven Group LLC, respectively, for approximately $11,800 in cash. As part of the acquisition, the Company recognized an intangible asset of approximately $10,000 and goodwill of approximately $1,800 (which primarily represents potential future performance of the funds), which is deductible for tax purposes.

The following table summarizes the purchase price allocation:

 

Fair value acquired:

  

Assets

   $ 205   

Goodwill

     1,799   

Intangible asset

     9,953   
  

 

 

 

Total assets acquired

   $ 11,957   

Less: Liabilities

     (132
  

 

 

 

Total

   $ 11,825   
  

 

 

 

Boost Acquisition

In April 2014, the Company expanded into Europe through a 75% majority investment in U.K. based ETP sponsor Boost, with an obligation to buy out the remaining minority investment in four years. In May 2016, the Company accelerated the buyout and completed the purchase of the remaining minority interest. As a result, the Company recognized $5,993 of expense for the three months ended June 30, 2016 as an acquisition payment on the Company’s Consolidated Statements of Operations to reflect the purchase price and other related expenses.

14. Goodwill and Intangible Assets

Goodwill

The Company has designated April 30 th as its annual goodwill impairment testing date. The following table summarizes the goodwill activity during the period:

 

    
Total
 

Balance at January 1, 2016

   $ 1,676   

Goodwill acquired during the period

     1,799   
  

 

 

 

Balance at September 30, 2016

   $ 3,475   
  

 

 

 

Goodwill was tested for impairment during the three months ended June 30, 2016. The fair value of the reporting unit exceeded its carrying value and therefore no impairment was recognized.

 

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Intangible Asset (Indefinite-Lived)

As part of the GreenHaven acquisition, the Company identified an intangible asset related to its customary advisory agreement with the GreenHaven Commodities ETF for $9,953. This intangible asset (which is deductible for tax purposes) was determined to have an indefinite useful life. The Company has designated November 30 th as its annual impairment testing date for this indefinite-lived intangible asset.

 

     Total  

Balance at January 1, 2016

   $ —     

Increases – Advisory agreement (Commodities)

     9,953   
  

 

 

 

Balance at September 30, 2016

   $ 9,953   
  

 

 

 

15. Subsequent Events

The Company has evaluated subsequent events through the date of issuance of the accompanying consolidated financial statements. There were no events requiring disclosure.

 

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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, 2015 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. 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 were the tenth largest ETP sponsor in the world based on assets under management (“AUM”), with AUM of $38.8 billion globally as of September 30, 2016. 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 ETFs, exchange-traded notes and exchange-traded commodities.

Through our operating subsidiaries in the U.S., Europe, Japan and Canada, we provide investment advisory and other management services, collectively offering ETPs covering equity, fixed income, currency, alternatives and commodity asset classes. 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 the end-client and us.

$37.7 billion of our AUM are from our U.S. listed WisdomTree ETFs. As of September 30, 2016, we were the seventh largest sponsor of ETFs in the U.S. based on AUM. As the pie chart below reflects, 42% of our U.S. AUM is concentrated in European and Japanese equity exposures which hedge the Euro (trading under the symbol HEDJ) or Yen (trading under the symbol DXJ) against the U.S. dollar. Negative sentiment towards these two equity market or the weakening of the U.S. dollar against the Euro or Yen is likely to have an adverse effect on our results.

 

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Market Environment

The global economy held up well after the U.K. vote to leave the European Union, with equity markets experiencing a modest recovery. Emerging markets also rebounded on improving fundamentals while bond yields rose as a result of expectations of greater monetary easing by global central banks going largely unfulfilled. U.S. interest rates were held steady in September and the low interest rate environment continued to contribute to a global search for yield. However, the Federal Reserve has indicated that a case for a rate increase is becoming more compelling on the backdrop of improvements in the U.S. job market and stabilization in the global markets.

The S&P 500 rose 3.3%, the MSCI EAFE (local currency) rose 6.0% and the MSCI Emerging Markets Index (U.S. dollar) rose 8.3% in the third quarter. In addition, Europe and Japan equity markets rebounded with the MSCI EMU Index rising 6.6% and the MSCI Japan Index rising 7.2% in local currency terms. The U.S. dollar weakened 1.3% versus the Yen and 1.1% versus the Euro during the third quarter.

The ETF industry experienced significant inflows during the third quarter. The following charts reflect the U.S. ETF industry net flows in total and net inflows/(outflows) by broad category:

 

LOGO

Source: Investment Company Institute, WisdomTree

As the charts above reflect, industry flows for the third quarter of 2016 were $90.1 billion. U.S. equities, fixed income, emerging markets equities and commodities gathered the majority of the flows in the quarter in line with market sentiment.

Our Operating and Financial Results

The following charts reflect the net flows into and from our U.S. listed ETFs:

 

LOGO

We had net outflows of $2.4 billion in the third quarter of 2016 primarily due to the negative sentiment toward Europe and Japan, our two largest exposures. This negative sentiment led to outflows in Europe and Japan focused ETFs. However, we generated $759.0 million of net inflows into our U.S. equity ETFs. Our dividend focused U.S. equity ETFs recently achieved a ten-year track record which we believe could provide momentum for us for further flows into these ETFs. Our U.S. listed AUM declined from $38.0 billion as of June 30, 2016 to $37.7 billion as of September 30, 2016 primarily due to the net outflows largely offset by $2.0 billion of market appreciation.

 

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Our financial results have been primarily effected by the negative sentiment to our two largest ETFs, which has resulted in net outflows. Our revenues, expenses and net income are as follows:

 

LOGO

 

    Revenues – We recorded revenues of $51.8 million in the third quarter of 2016, down 35.9% from the third quarter of last year primarily due to outflows in our two largest ETFs and negative market movement.

 

    Expenses – Total expenses declined 8.9% from the third quarter of 2015 to $37.6 million primarily due to lower compensation.

Industry Developments

On April 6, 2016, the Department of Labor published its final rule to address conflicts of interest in retirement advice, commonly referred to as the Fiduciary Rule. In response to this rule, industry experts predict an acceleration in the shift from commission-based to fee-based advisory models. Already, we have seen several large asset management firms announce changes to their platforms and policies in response to the Fiduciary Rule which favor fee based account structures. Also in response to the Fiduciary Rule, several fund sponsors have implemented further fee reductions which have occurred primarily in commoditized exposures based upon third party indexes. With the passage of the Fiduciary Rule, we believe that ETFs’ competitiveness generally will increase due to the inherent benefits of ETFs – transparency and liquidity; and while we are not immune to fee pressure, we believe our proprietary approach and self-indexing differentiates us from the competition.

 

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Key Operating Statistics

The following table presents key operating statistics that serve as indicators for the performance of our business:

 

     Three Months Ended     Nine Months Ended  
     September 30,     June 30,     September 30,     September 30,  
     2016     2016     2015     2016     2015  

U.S. LISTED ETFs

        

Total ETFs (in millions)

        

Beginning of period assets

   $ 38,046      $ 44,256      $ 61,299      $ 51,639      $ 39,281   

Assets acquired

     —         —          —          225        —     

Inflows/(outflows)

     (2,380     (4,949     (661     (12,689     19,457   

Market appreciation/(depreciation)

     2,038        (1,261     (7,591     (1,471     (5,691
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period assets

   $ 37,704      $ 38,046      $ 53,047      $ 37,704      $ 53,047   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average assets during the period

   $ 38,710      $ 41,830      $ 59,572      $ 42,005      $ 55,705   

Revenue days

     92        91        92        274        273   

Number of ETFs – end of the period

     93        99        79        93        79   

ETF Industry and Market Share (in billions)

          

ETF industry net inflows

   $ 90.1      $ 30.8      $ 43.2      $ 155.5      $ 140.1   

WisdomTree market share of industry inflows

     n/a        n/a        n/a        n/a        13.9

Average ETF advisory fee during the period

          

Alternative strategy ETFs

     0.78     0.87     0.95     0.84     0.95

Emerging markets equity ETFs

     0.71     0.71     0.72     0.71     0.71

International developed equity ETFs

     0.56     0.56     0.56     0.56     0.56

International hedged equity ETFs

     0.54     0.54     0.54     0.54     0.54

Currency ETFs

     0.50     0.50     0.50     0.50     0.50

Fixed income ETFs

     0.47     0.48     0.51     0.48     0.52

U.S. equity ETFs

     0.35     0.35     0.35     0.35     0.35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Blended total

     0.51     0.52     0.53     0.52     0.53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EUROPEAN LISTED ETPs

          

Total ETPs (in thousands)

          

Beginning of period assets

   $ 560,063      $ 488,069      $ 384,089      $ 437,934      $ 165,018   

Inflows/(outflows)

     92,045        20,578        191,044        236,084        386,757   

Market appreciation/(depreciation)

     (4,611     51,416        (143,874     (26,521     (120,516
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period assets

   $ 647,497      $ 560,063      $ 431,259      $ 647,497      $ 431,259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average assets during the period

   $ 575,248      $ 544,677      $ 419,112      $ 516,052      $ 325,393   

Average ETP advisory fee during the period

     0.82     0.84     0.83     0.83     0.83

Number of ETPs – end of the period

     67        67        62        67        62   

Total UCITS ETFs (in thousands)

          

Beginning of period assets

   $ 391,900      $ 396,901      $ 228,588      $ 335,938      $ 16,179   

Inflows/(outflows)

     (58,908     26,931        62,217        39,463        235,302   

Market appreciation/(depreciation)

     38,315        (31,932     (26,353     (4,094     12,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period assets

   $ 371,307      $ 391,900      $ 264,452      $ 371,307      $ 264,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average assets during the period

   $ 437,767      $ 400,047      $ 246,558      $ 400,423      $ 160,278   

Average UCITS ETF advisory fee during the period

     0.44     0.46     0.45     0.46     0.44

Number of UCITS ETFs – end of the period

     27        27        12        27        12   

 

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     Three Months Ended      Nine Months Ended  
     September 30,     June 30,      September 30,      September 30,  
     2016     2016      2015      2016     2015  

CANADIAN LISTED ETFs

            

Total Canadian Listed ETFs (in thousands)

            

Beginning of period assets

     —          —           —           —          —     

Inflows/(outflows)*

   $ 68,531        —           —         $ 68,531        —     

Market appreciation/(depreciation)

     (104     —           —           (104     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

End of period assets

   $ 68,427        —           —         $ 68,427        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Average assets during the period

   $ 68,177        n/a         n/a         n/a        n/a   

Average ETF advisory fee during the period

     0.51     n/a         n/a         n/a        n/a   

Number of ETFs – end of the period

     6        n/a         n/a         6        n/a   

U.S. headcount

     151        149         128         151        128   

Non-U.S. headcount

     52        55         34         52        34   

 

* ETFs inception date: July 14, 2016.

Note: Previously issued statistics may be restated due to trade adjustments.

Source: Investment Company Institute, Bloomberg, WisdomTree

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Revenues

 

     Three Months Ended
September 30,
    Change      Percent
Change
 
     2016     2015       

U.S. listed-Average AUM (in millions)

   $ 38,710      $ 59,572      $ (20,862      (35.0 %) 

U.S. listed-Average ETF advisory fee

     0.51     0.53     (0.02   

Advisory fees (in thousands)

   $ 51,553      $ 80,520      $ (28,967      (36.0 %) 

Other income (in thousands)

     236        233        3         1.3
  

 

 

   

 

 

   

 

 

    

Total revenues (in thousands)

   $ 51,789      $ 80,753      $ (28,964      (35.9 %) 
  

 

 

   

 

 

   

 

 

    

Advisory fees

Advisory fees revenues declined 36.0% from $80.5 million in the three months ended September 30, 2015 to $51.6 million in the comparable period in 2016 primarily due to declines in our AUM primarily in our two largest ETFs. Our average advisory fee for our U.S. listed ETFs declined from 0.53% in the three months ended September 30, 2015 to 0.51% in the comparable period in 2016 due to the change in AUM mix.

Other income

Other income was essentially unchanged from the three months ended September 30, 2015.

 

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Expenses

 

     Three Months Ended
September 30,
     Change      Percent
Change
 
(in thousands)    2016      2015        

Compensation and benefits

   $ 15,328       $ 19,407       $ (4,079      (21.0 %) 

Fund management and administration

     10,372         10,519         (147      (1.4 %) 

Marketing and advertising

     3,600         3,573         27         0.8

Sales and business development

     3,075         2,438         637         26.1

Professional and consulting fees

     1,035         1,570         (535      (34.1 %) 

Occupancy, communications and equipment

     1,469         1,183         286         24.2

Depreciation and amortization

     332         253         79         31.2

Third-party sharing arrangements

     622         485         137         28.2

Acquisition payment

     —           172         (172      n/a   

Other

     1,731         1,620         111         6.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

   $ 37,564       $ 41,220       $ (3,656      (8.9 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended
September 30,
 

As a Percent of Revenues:

   2016     2015  

Compensation and benefits

     29.6     24.0

Fund management and administration

     20.0     13.0

Marketing and advertising

     7.0     4.4

Sales and business development

     5.9     3.0

Professional and consulting fees

     2.0     2.0

Occupancy, communications and equipment

     2.8     1.5

Depreciation and amortization

     0.7     0.3

Third-party sharing arrangements

     1.2     0.6

Acquisition payment

     n/a        0.2

Other

     3.3     2.0
  

 

 

   

 

 

 

Total expenses

     72.5     51.0
  

 

 

   

 

 

 

Compensation and benefits

Compensation and benefits expense declined 21.0% from $19.4 million in the three months ended September 30, 2015 to $15.3 million due to lower accrued incentive compensation relating to year-to-date outflows we experienced partly offset by higher headcount related expenses to support our growth and higher stock-based compensation due to equity awards we granted as of part 2015 incentive compensation. Our global headcount was 162 at September 30, 2015 compared to a global headcount of 203 at September 30, 2016.

Fund management and administration

Fund management and administration expense declined 1.4% from $10.5 million in the three months ended September 30, 2015 to $10.4 million in the comparable period in 2016 primarily due to lower fund costs for our U.S. listed ETF business as a result of lower average AUM partly offset by higher costs for additional fund launches by our European and Canadian businesses. We had 79 U.S. listed ETFs and 74 European listed products at September 30, 2015 compared to 93 U.S. listed ETFs, 94 European listed products and 6 Canadian listed ETFs at September 30, 2016.

Marketing and advertising

Marketing and advertising expense was essentially unchanged from the three months ended September 30, 2015.

Sales and business development

Sales and business development expense increased 26.1% from $2.4 million in the three months ended September 30, 2015 to $3.1 million in the comparable period in 2016 due to higher spending for sales data related initiatives.

 

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Professional and consulting fees

Professional and consulting fees declined 34.1% from $1.6 million in the three months ended September 30, 2015 to $1.0 million in the comparable period in 2016 primarily due to fees incurred in the prior year associated with our acquisition of the GreenHaven family of commodity ETFs, which was completed in January 2016.

Occupancy, communications and equipment

Occupancy, communications and equipment expense increased 24.2% from $1.2 million in the three months ended September 30, 2015 to $1.5 million in the comparable period in 2016 primarily due to technology initiatives and higher costs for our office space in London.

Depreciation and amortization

Depreciation and amortization expense was essentially unchanged from the three months ended September 30, 2015.

Third-party sharing arrangements

Third-party sharing arrangements expense increased 28.2% from $0.5 million in the three months ended September 30, 2015 to $0.6 million for the comparable period in 2016 due to higher fees to our third party marketing agent in Latin America.

Other

Other expense was essentially unchanged from the three months ended September 30, 2015.

Income tax

Our effective income tax rate for the three months ended September 30, 2016 was 44.1%, which resulted in income tax expense of $6.3 million. Our tax rate differs from the federal statutory tax rate of 35% primarily due to a valuation allowance on our foreign net operating losses and state and local income taxes.

Our effective income tax rate for the three months ended September 30, 2015 was 41.1%, which resulted in income tax expense of $16.2 million. Our tax rate differs from the federal statutory tax rate of 35% primarily due to state and local income taxes and a valuation allowance on our foreign net operating losses.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Revenues

 

     Nine Months Ended
September 30,
    Change      Percent
Change
 
     2016     2015       

U.S. listed-Average AUM (in millions)

   $ 42,005      $ 55,705      $ (13,700      (24.6 %) 

U.S. listed-Average ETF advisory fee

     0.52     0.53     (0.01 )      —    

Advisory fees (in thousands)

   $ 168,099      $ 221,709      $ (53,610      (24.2 %) 

Other income (in thousands)

     549        744        (195      (26.2 %) 
  

 

 

   

 

 

   

 

 

    

Total revenues (in thousands)

   $ 168,648      $ 222,453      $ (53,805      (24.2 %) 
  

 

 

   

 

 

   

 

 

    

Advisory fees

Advisory fees revenues declined 24.2% from $221.7 million in the nine months ended September 30, 2015 to $168.1 million in the comparable period in 2016 primarily due to declines in our AUM primarily in our two largest ETFs partly offset by higher revenues from our European listed products. Our average advisory fee for our U.S. listed ETFs declined from 0.53% in the nine months ended September 30, 2015 to 0.52% in the comparable period in 2016 due to the change in AUM mix.

Other income

Other income declined 26.2% from $0.7 million in the nine months ended September 30, 2015 to $0.5 million in the comparable period in 2016 due to unrealized currency losses on our cash balances for our European business.

 

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Expenses

 

     Nine Months Ended
September 30,
     Change      Percent
Change
 
(in thousands)    2016      2015        

Compensation and benefits

   $ 44,897       $ 57,677       $ (12,780      (22.2 %) 

Fund management and administration

     31,037         31,895         (858      (2.7 %) 

Marketing and advertising

     11,998         10,277         1,721         16.7

Sales and business development

     9,356         6,414         2,942         45.9

Professional and consulting fees

     5,235         4,637         598         12.9

Occupancy, communications and equipment

     3,932         3,044         888         29.2

Depreciation and amortization

     978         696         282         40.5

Third-party sharing arrangements

     2,238         1,265         973         76.9

Acquisition payment

     6,738         693         6,045         n/a   

Other

     5,186         4,364         822         18.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

   $ 121,595       $ 120,962       $ 633         0.5
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
 

As a Percent of Revenues:

   2016     2015  

Compensation and benefits

     26.6     25.9

Fund management and administration

     18.4     14.3

Marketing and advertising

     7.1     4.6

Sales and business development

     5.6     2.9

Professional and consulting fees

     3.1     2.1

Occupancy, communications and equipment

     2.3     1.4

Depreciation and amortization

     0.6     0.3

Third-party sharing arrangements

     1.3     0.6

Acquisition payment

     4.0     0.3

Other

     3.1     2.0
  

 

 

   

 

 

 

Total expenses

     72.1     54.4
  

 

 

   

 

 

 

Compensation and benefits

Compensation and benefits expense declined 22.2% from $57.7 million in the nine months ended September 30, 2015 to $44.9 million due to lower accrued incentive compensation relating to year-to-date outflows we experienced partly offset by higher headcount related expenses to support our growth and higher stock-based compensation due to equity awards we granted as part of 2015 incentive compensation.

Fund management and administration

Fund management and administration expense declined 2.7% from $31.9 million in the nine months ended September 30, 2015 to $31.0 million in the comparable period in 2016 primarily due to lower fund costs for our U.S. listed ETF business as a result of lower average AUM partly offset by higher costs for additional fund launches by our European and Canadian businesses.

Marketing and advertising

Marketing and advertising expense increased 16.7% from $10.3 million in the nine months ended September 30, 2015 to $12.0 million in the comparable period in 2016 primarily due to website development and planned higher levels of marketing related activities.

Sales and business development

Sales and business development expense increased 45.9% from $6.4 million in the nine months ended September 30, 2015 to $9.4 million in the comparable period in 2016 primarily due to higher spending for sales related activities and costs associated with our Canadian office which opened in the current year.

 

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Professional and consulting fees

Professional and consulting fees increased 12.9% from $4.6 million in the nine months ended September 30, 2015 to $5.2 million in the comparable period in 2016 primarily due to higher corporate services and technology related expenses in our non-U.S. offices.

Occupancy, communications and equipment

Occupancy, communications and equipment expense increased 29.2% from $3.0 million in the nine months ended September 30, 2015 to $3.9 million in the comparable period in 2016 primarily due to technology related spending initiatives.

Depreciation and amortization

Depreciation and amortization expense increased 40.5% from $0.7 million in the nine months ended September 30, 2015 to $1.0 million in the comparable period in 2016 primarily due to expenses associated with purchases of fixed assets and leasehold improvements.

Third-party sharing arrangements

Third-party sharing arrangements expense increased 76.9% from $1.3 million in the nine months ended September 30, 2015 to $2.2 million for the comparable period in 2016 primarily due to higher fees to our third party marketing agent in Latin America.

Acquisition Payment

The nine months ended September 30, 2016 includes an acquisition payment expense of $6.0 million recognized in the second quarter of 2016, which was incurred in connection with the acceleration of the buyout of the remaining minority interest in our European business in May 2016.

Other

Other expense increased 18.8% from $4.4 million in the nine months ended September 30, 2015 to $5.2 million in the comparable period in 2016 primarily due to higher general and administrative expenses as well as fees for our independent directors.

Income tax

Our effective income tax rate for the nine months ended September 30, 2016 was 49.7%, which resulted in income tax expense of $23.4 million. Our tax rate differs from the federal statutory tax rate of 35% primarily due to a valuation allowance on our foreign net operating losses, the non-deductibility of the expense associated with the acceleration of the buyout of the remaining minority interest in our European business in May 2016 and state and local income taxes.

Our effective income tax rate for the nine months ended September 30, 2015 was 41.4%, which resulted in income tax expense of $42.0 million. Our tax rate differs from the federal statutory tax rate of 35% primarily due to state and local income taxes and a valuation allowance on the Company’s foreign net operating losses.

Non-GAAP Financial Measurements

In an effort to provide additional information regarding our results as determined by GAAP, we also disclose certain non-GAAP information which we believe provides useful and meaningful information. Our management reviews these non-GAAP financial measurements when evaluating our financial performance and results of operations; therefore, we believe it is useful to provide information with respect to these non-GAAP measurements so as to share this perspective of management. Non-GAAP measurements do not have any standardized meaning, do not replace nor are superior to GAAP financial measurements and are unlikely to be comparable to similar measures presented by other companies. These non-GAAP financial measurements should be considered in the context with our GAAP results. The non-GAAP financial measurements contained in this Report are gross margin and gross margin percentage. We disclose gross margin, which we define as total revenues less fund management and administration expenses and third-party sharing arrangements, and gross margin percentage as non-GAAP financial measurements because we believe they provide investors with a consistent way to analyze the amount we retain after paying third party service providers to operate our ETPs and third party marketing agents whose fees are associated with our AUM level. Management tracks gross margin and gross margin percentage to analyze the profitability of operating our products.

 

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The following table reflects the calculation of our gross margin and gross margin percentage:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
(in thousands)    2016     2015     2016     2015  

GAAP total revenue

   $ 51,789      $ 80,753      $ 168,648      $ 222,453   

Fund management and administration

     (10,372     (10,519     (31,037     (31,895

Third-party sharing arrangements

     (622     (485     (2,238     (1,265
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

   $ 40,795      $ 69,749      $ 135,373      $ 189,293   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin percentage

     78.8     86.4     80.3     85.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations:

 

     September 30,
2016
     December 31,
2015
 

Balance Sheet Data (in thousands):

     

Cash and cash equivalents

   $ 178,132       $ 210,070   

Investments

     16,229         23,689   

Accounts receivable

     17,282         27,576   
  

 

 

    

 

 

 

Total: Liquid assets

     211,643         261,335   

Less: Total liabilities

     (42,596      (58,191
  

 

 

    

 

 

 

Total: Available liquidity

   $ 169,047       $ 203,144   
  

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
 
     2016      2015  

Cash Flow Data (in thousands):

     

Operating cash flows

   $ 43,945       $ 110,148   

Investing cash flows

     (4,941      (11,278

Financing cash flows

     (71,757      (52,085

Foreign exchange rate effect

     815         (77
  

 

 

    

 

 

 

(Decrease)/Increase in cash and cash equivalents

   $ (31,938    $ 46,708   
  

 

 

    

 

 

 

Liquidity

We consider our available liquidity to be our liquid assets less our liabilities. Liquid assets consist of cash and cash equivalents, accounts receivable and investments. We account for investments as held-to-maturity securities and have the intention and ability to hold to maturity. However, if needed, such investments could be sold for liquidity. Cash and cash equivalents include cash on hand with financial institutions and all highly liquid investments with an original maturity of 90 days or less at the time of purchase. Accounts receivable primarily represents receivables from advisory fees we earn from our ETPs. Investments represent federal agency debt instruments. Our liabilities consist primarily of payments owed to vendors and third parties in the normal course of business as well as accrued year end incentive compensation for employees.

Cash and cash equivalents declined by $31.9 million in the first nine months of 2016 to $178.1 million at September 30, 2016 primarily due to $39.1 million used to repurchase shares of our common stock, $32.7 million used for our quarterly dividends, $11.8 million for our acquisition of GreenHaven and $6.0 million used to purchase investments, partly offset by $43.9 million of cash generated by our operations and $13.6 million of proceeds from investments called during the period.

Cash and cash equivalents increased by $46.7 million in the first nine months of 2015 to $212.0 million at September 30, 2015 primarily due to $110.1 million of cash flow from operations and proceeds of $1.7 million from investments called during the period, partly offset by $32.9 million used for our quarterly dividend payments, $23.7 million used to repurchase shares of our common stock and $11.4 million used to purchase investments.

Capital Resources

Our principal source of financing is our operating cash flows. We believe that current cash flows generated by our operating activities should be sufficient for us to fund our operations for at least the next 12 months.

 

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Use of Capital

Our business does not require us to maintain a significant cash position. As a result, we expect that our main uses of cash will be to fund the ongoing operations of our business, invest in strategic growth initiatives, expand our business through strategic acquisitions and fund our capital return program. As part of our capital management, we maintain a capital return program which includes a $0.08 per share quarterly cash dividend and authority to purchase up to $100.3 million of our common stock over three years, including purchases to offset future equity grants made under our equity plans. During the first nine months of 2016, we repurchased 3.7 million shares of our common stock under the repurchase program for an aggregate cost of $39.1 million. These shares were returned to the status of authorized and unissued on our books and records.

Contractual Obligations

The following table summarizes our future cash payments associated with contractual obligations as of September 30, 2016:

 

            Less than 1
year
     1 to 3 years      3 to 5 years      More than 5
years
 

Operating leases

   $ 38,151       $ 1,057       $ 7,188       $ 8,605       $ 21,301   

Acquisition payable

     3,697         3,697         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 41,848       $ 4,754       $ 7,188       $ 8,605       $ 21,301   

Off-Balance Sheet Arrangements

Other than operating leases, which are included in the table above, we do not have any off-balance sheet financing or other arrangements. We have neither created nor are party to any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business.

Critical Accounting Policies

Stock-Based Compensation

Stock-based compensation expense reflects the fair value of stock-based awards measured at grant date and is recognized over the relevant service period. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model includes the input of certain variables that are dependent on future expectations, including the expected lives of our options from grant date to exercise date, the volatility of our underlying common shares in the market over that time period, the rate of dividends that we may pay during that time and an appropriate risk-free interest rate. Many of these assumptions require management’s judgment. If actual experience differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.

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. The Company tests its goodwill for impairment at least annually and at the time of a triggering event requiring re-evaluation, if one were to occur. Goodwill is impaired if its estimated fair value is less than its carrying value. We have designated April 30 th as our annual impairment testing date. Goodwill was tested for impairment during the three months ended June 30, 2016. The fair value of the reporting unit exceeded its carrying value and therefore no impairment was recognized.

Indefinite-lived intangible assets are tested for impairment at least annually and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are impaired if their estimated fair value is less than their carrying value. The impairment evaluation is performed at the lowest level of identifiable cash flows independent of other assets. We have designated November 30 th as our annual impairment testing date for indefinite-lived intangible assets related to the GreenHaven acquisition.

Revenue Recognition

We earn investment advisory fees from ETPs, as well as licensing fees from third parties. ETP advisory fees are based on a percentage of the ETPs’ average daily net assets and recognized over the period the related service is provided. Licensing fees are based on a percentage of the average monthly net assets and recognized over the period the related service is provided.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The main objective of the standard is to provide financial statement users with more decision-useful information about the expected credit

 

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losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in the standard replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is applicable to loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, loan commitments and certain other off-balance sheet credit exposures, debt securities (including those held-to-maturity) and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. Accordingly, the new methodology will be utilized when assessing our investments classified as held-to-maturity for impairment. ASU 2016-13 is effective for years beginning after December 15, 2019, including interim periods within those fiscal years under a modified retrospective approach. Early adoption is permitted for periods beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02), which requires lessees to include most leases on the balance sheet. ASU 2016-02 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes. ASU 2015-17 provides presentation requirements to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company early adopted ASU 2015-17 effective December 31, 2015, retrospectively. Adoption resulted in a reclassification of $9.3 million from current to noncurrent assets on our Consolidated Balance Sheet at December 31, 2015.

In February 2015, the FASB issued Accounting Standards Update 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02), which amends the consolidation guidance in ASC 810. The standard eliminates the deferral of FAS 167, per ASC 810-10-65-2(a), which has allowed certain investment funds to follow the previous consolidation guidance in FIN 46 (R). The standard changes whether (1) fees paid to a decision maker or service provider represent a variable interest, (2) a limited partnership or similar entity has the characteristics of a variable interest entity (“VIE”) and (3) a reporting entity is the primary beneficiary of a VIE. The effective date of the standard is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public companies, and early adoption was permitted. The Company adopted ASU 2015-02 effective January 1, 2016. Adoption had no impact on our consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which is a new comprehensive revenue recognition standard on the financial reporting requirements for revenue from contracts entered into with customers. In July 2015, the FASB deferred this ASU’s effective date by one year, to interim and annual periods beginning after December 15, 2017. The deferral allows early adoption at the original effective date. During 2016, the FASB issued ASU 2016-08, which clarifies principal versus agent considerations, ASU 2016-10, which clarifies identifying performance obligations and the licensing implementation guidance, and ASU 2016-12, which amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. ASU 2014-09 allows for the use of either the retrospective or modified retrospective adoption method. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

 

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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 the market risk to the Company.

Market Risk

Market risk to us generally represents the risk of changes in the value of financial instruments held in the portfolios of the WisdomTree ETPs that generally result from fluctuations in securities prices, foreign currency exchange rates against the U.S. dollar, and interest rates. Nearly all of our revenues are derived from advisory agreements for the WisdomTree ETFs. Under these agreements, the advisory fee we receive is based on the average market value of the assets in the WisdomTree ETF portfolios we manage.

Fluctuations in the value of these securities 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

In order to maximize yields, we invest our corporate cash in short-term interest earning assets, primarily money market instruments at a commercial bank and federal agency debt instruments which totaled $153.5 million and $161.2 million as of September 30, 2016 and December 31, 2015, respectively. We do not anticipate that changes in interest rates will have a material impact on our financial condition, operating results or cash flows.

Exchange Rate Risk

As a result of our operations in Europe, Japan and Canada, we now operate globally and are subject to currency translation exposure on the results of our non-U.S. operations. 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. We generate the vast majority of our revenues and expenses in the U.S. dollar and expect to do so for some time. We do not anticipate that changes in exchange rates, predominantly the British pound or Euro, as they relate to translating functional currency to our reporting currency, will have a material impact on our financial condition, operating results or cash flows. 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 look to do so in the future.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2016, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 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 and our Chief Financial Officer concluded that, as of September 30, 2016, 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 and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2016, there were no 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.

 

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

In addition to the risk factors and other information set forth below and elsewhere in this Report, you should carefully consider the information set forth in Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.

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 the Company’s 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)  

July 1, 2016 to July 31, 2016

     42,364       $ 10.65         42,364      

August 1, 2016 to August 31, 2016

     266,253       $ 10.15         266,253      

September 1, 2016 to September 30, 2016

     29,207       $ 10.50         29,207      
  

 

 

       

 

 

    

Total

     337,824       $ 10.25         337,824       $ 96,768   
  

 

 

       

 

 

    

 

 

 

 

 

(1) On October 29, 2014, our Board of Directors authorized a three-year share repurchase program of up to $100.0 million. On April 27, 2016, the Board approved a $60.0 million increase to this program and extended the term through April 27, 2019, increasing the total authorized repurchase amount to $100.3 million. During the three months ended September 30, 2016, we repurchased 337,824 shares of our common stock under this program for an aggregate cost of $3.5 million. As of September  30, 2016, $96.8 million remained under this program for future purchases.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

Exhibit No.  

Description

   Reference
Exhibit No.
 
3.1 (1)   Amended and Restated Certificate of Incorporation      3.1   
3.2 (1)   Amended and Restated Bylaws      3.2   
4.1 (1)   Specimen Common Stock Certificate      4.1   
4.2 (1)   Amended and Restated Stockholders Agreement among Registrant and certain investors dated December 21, 2006      4.2   
4.3 (1)   Securities Purchase Agreement among Registrant and certain investors dated December 21, 2006      4.3   
4.4 (1)   Securities Purchase Agreement among Registrant and certain investors dated October 15, 2009      4.4   
4.5 (1)   Third Amended and Restated Registration Rights Agreement dated October 15, 2009      4.5   
31.1 (2)   Certification of Chief Executive Officer and Principal Executive Officer pursuant to Rule 13a-14 of the Exchange Act   
31.2 (2)   Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14 of the Exchange Act   
32 (2)   Section 1350 Certification   
101 (2)   Financial Statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2016, formatted in XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive Income (Unaudited); (iii) Consolidated Statements of Cash Flows (Unaudited); and (iv) Notes to Consolidated Financial Statements, as blocks of text and in detail.   
101.INS (2)   XBRL Instance Document   
101.SCH (2)   XBRL Taxonomy Extension Schema Document   
101.CAL (2)   XBRL Taxonomy Extension Calculation Linkbase Document   
101.DEF (2)   XBRL Taxonomy Extension Definition Linkbase Document   
101.LAB (2)   XBRL Taxonomy Extension Label Linkbase Document   
101.PRE (2)   XBRL Taxonomy Extension Presentation Linkbase Document   

 

 

(1) Incorporated by reference from the Registrant’s Registration Statement on Form 10, filed with the SEC on March 31, 2011.
(2) 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 9 th day of November 2016.

 

WISDOMTREE INVESTMENTS, INC.
By:  

/s/ Jonathan Steinberg

  Jonathan Steinberg
  Chief Executive Officer and President (Authorized Officer and Principal Executive Officer)
WISDOMTREE INVESTMENTS, INC.
By:  

/s/ Amit Muni

  Amit Muni
  Executive Vice President—Finance and Chief Financial Officer (Authorized Officer and Principal Financial and Accounting Officer)

 

34

Exhibit 31.1

CERTIFICATION

I, Jonathan Steinberg, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of WisdomTree Investments, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

By:  

/s/ Jonathan Steinberg

  Jonathan Steinberg
  Chief Executive Officer
  (Principal Executive Officer)

Date: November 9, 2016

 

Exhibit 31.2

CERTIFICATION

I, Amit Muni, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of WisdomTree Investments, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

By:  

/s/ Amit Muni

  Amit Muni
  Chief Financial Officer (Principal Financial Officer)

Date: November 9, 2016

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of WisdomTree Investments, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2016 as filed with the Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), we, Jonathan Steinberg, Chief Executive Officer of the Company, and Amit Muni, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to our knowledge, that:

 

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification is being furnished and not filed, and shall not be incorporated into any documents for any purpose, under the Exchange Act of 1934, as amended. A signed original of this written statement require by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

 

By:

 

/s/ Jonathan Steinberg

 

Jonathan Steinberg

 

Chief Executive Officer

(Principal Executive Officer)

By:

 

/s/ Amit Muni

 

Amit Muni

 

Chief Financial Officer

(Principal Financial Officer)

Date: November 9, 2016