WisdomTree(WT) - 2020 Q2 - Quarterly Report

Report Overview SEC Filing Information This is a Quarterly Report on Form 10-Q for WisdomTree Investments, Inc. for Q2 2020, a large accelerated filer listed on NASDAQ - The report is a Quarterly Report on Form 10-Q for the period ended June 30, 2020[2] - WisdomTree Investments, Inc. is a large accelerated filer[4] - Common Stock, $0.01 par value, is traded on The NASDAQ Stock Market LLC under the symbol WETF[5] Cautionary Note Regarding Forward-Looking Statements This section warns that forward-looking statements involve risks and uncertainties, potentially causing actual results to differ materially - Forward-looking statements are based on management's beliefs and assumptions and involve known and unknown risks and uncertainties[10] - Actual results may differ materially due to factors listed in the 'Risk Factors' section of this report and previous filings[11] - Ultimate duration and impact of the COVID-19 pandemic on business and global economy[13] - Anticipated trends, conditions, and investor sentiment in global markets and ETPs[13] - Anticipated levels of inflows into and outflows out of ETPs[13] - Ability to deliver favorable rates of return to investors[13] - Competition in the business[13] - Ability to develop new products and services[13] - Ability to maintain current vendors or find new vendors at favorable costs[13] - Ability to successfully operate and expand business in non-U.S. markets[13] - Effect of laws and regulations that apply to the business[13] PART I: FINANCIAL INFORMATION Item 1. Financial Statements This section presents WisdomTree's unaudited consolidated financial statements and detailed notes for the periods ended June 30, 2020 Consolidated Balance Sheets Total assets decreased from $935.2 million to $848.8 million by June 30, 2020, with liabilities and equity also declining | Metric | June 30, 2020 (Unaudited) (in thousands) | December 31, 2019 (in thousands) | | :-------------------------------- | :------------------------ | :------------------ | | Total Assets | $848,801 | $935,207 | | Total Liabilities | $428,700 | $465,226 | | Total Stockholders' Equity | $287,532 | $337,412 | - Cash and cash equivalents decreased from $74,972 thousand to $50,255 thousand[16] - Notes receivable, net, decreased from $28,172 thousand to $0[16] - Securities held-to-maturity decreased from $16,863 thousand to $581 thousand[16] - Convertible notes increased from $0 to $141,479 thousand, while Debt decreased from $175,956 thousand to $0[16] Consolidated Statements of Operations The company reported a $13.25 million net loss for Q2 2020, a significant decline from prior year, driven by revaluation losses and debt extinguishment | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Total Revenues | $58,126 | $66,293 | $122,000 | $131,778 | | Total Operating Expenses | $46,329 | $54,382 | $94,569 | $109,184 | | Operating Income | $11,797 | $11,911 | $27,431 | $22,594 | | (Loss)/gain on revaluation of deferred consideration – gold payments | $(23,358) | $(4,037) | $(25,566) | $367 | | Loss on extinguishment of debt | $(2,387) | — | $(2,387) | — | | Net (loss)/income | $(13,250) | $2,479 | $(21,888) | $11,303 | | (Loss)/earnings per share – basic | $(0.09) | $0.01 | $(0.15) | $0.07 | | Cash dividends declared per common share | $0.03 | $0.03 | $0.06 | $0.06 | - Advisory fees decreased by 12.8% for the three months ended June 30, 2020, compared to the same period in 2019[18] - Compensation and benefits decreased by 18.1% for the three months ended June 30, 2020, compared to the same period in 2019[18] - Contractual gold payments increased by 30.6% for the three months ended June 30, 2020, compared to the same period in 2019[18] Consolidated Statements of Comprehensive (Loss)/Income The company reported a $13.08 million comprehensive loss for Q2 2020, a significant shift from prior-year income, driven by net loss | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net (loss)/income | $(13,250) | $2,479 | $(21,888) | $11,303 | | Other comprehensive income/(loss) | $168 | $(33) | $(685) | $258 | | Comprehensive (loss)/income | $(13,082) | $2,446 | $(22,573) | $11,561 | - A reclassification of foreign currency translation adjustment to other gains and losses, net, upon the sale of WisdomTree Asset Management Canada, Inc. resulted in a $(167) thousand impact for the six months ended June 30, 2020[20] Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased from $337.4 million to $287.5 million by June 30, 2020, due to repurchases, dividends, and net loss | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | | Balance – January 1 | $337,412 | $358,335 | | Shares repurchased | $(26,444) | $(2,107) | | Dividends | $(10,270) | $(10,191) | | Net loss/(income) | $(21,888) | $11,303 | | Balance – June 30 | $287,532 | $363,819 | - Common stock shares issued decreased from 155,264 thousand at January 1, 2020, to 149,796 thousand at June 30, 2020[24] - Additional paid-in capital decreased by $27.25 million during the six months ended June 30, 2020[24] - Accumulated deficit increased by $21.89 million due to net loss during the six months ended June 30, 2020[24] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $24.7 million in H1 2020, driven by financing outflows, partially offset by convertible notes and operating cash | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $19,382 | $15,359 | | Net cash provided by/(used in) investing activities | $27,070 | $(1,516) | | Net cash used in financing activities | $(70,085) | $(12,284) | | (Decrease)/increase in cash and cash equivalents | $(24,717) | $1,827 | | Cash and cash equivalents – end of period | $50,255 | $79,611 | - Repayment of debt totaled $179,000 thousand in H1 2020[26] - Proceeds from the issuance of convertible notes were $150,000 thousand in H1 2020[26] - Shares repurchased amounted to $26,444 thousand in H1 2020[26] Notes to Consolidated Financial Statements These notes detail the company's financial statements, covering organization, accounting policies, assets, liabilities, debt, equity, and recent transactions 1. Organization and Description of Business WisdomTree is a New York-based ETP sponsor and asset manager, which sold its Canadian ETF business on February 19, 2020 - WisdomTree is an ETP sponsor and asset manager offering ETPs covering equity, commodity, fixed income, leveraged and inverse, currency and alternative strategies[27] - The Company completed the sale of WisdomTree Asset Management Canada, Inc. (WTAMC) to CI Financial Corp. on February 19, 2020[28] 2. Significant Accounting Policies This section details key accounting policies, including segment reporting, revenue recognition, and accounting for financial instruments and assets - Effective January 1, 2020, the Company operates as a single operating segment (ETP sponsor and asset manager) in the U.S. and Europe, a change from previous U.S. and International Business segments[32] - Substantially all revenue is from advisory fees based on a percentage of ETPs' average daily net assets, recognized over time[35] - Convertible notes are separated into liability and equity components, with interest expense recognized using the effective interest method[61] - The Company expects to early adopt ASU 2020-06, which simplifies accounting for convertible instruments, resulting in an approximate $350 thousand per quarter reduction in interest expense on convertible notes[68] 3. Cash and Cash Equivalents Cash and cash equivalents decreased from $74.97 million to $50.26 million by June 30, 2020, with regulatory capital requirements for international subsidiaries | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------ | :------------ | :---------------- | | Cash and cash equivalents | $50,255 | $74,972 | | Regulatory capital (international subsidiaries) | $10,561 | $12,312 | - The Company collateralized its U.S. office lease with a $1,384 thousand standby letter of credit, which is restricted from further use[75] 4. Fair Value Measurements Financial instruments are categorized into a three-level fair value hierarchy, with deferred gold consideration at Level 3 and convertible notes at Level 2 | Asset/Liability (June 30, 2020) (in thousands) | Total | Level 1 | Level 2 | Level 3 | | :------------------------------ | :---- | :------ | :------ | :------ | | Cash equivalents | $67 | $67 | — | — | | Securities owned, at fair value | $13,110 | $13,110 | — | — | | Deferred consideration | $198,784 | — | — | $198,784 | | Convertible notes (non-recurring) | $145,847 | — | $145,847 | — | | Deferred Consideration (Level 3) (in thousands) | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :------------------------------- | :------------------------------- | :------------------------------- | | Beginning balance | $175,300 | $173,024 | | Net realized losses/(gains) | $4,063 | $7,823 | | Net unrealized losses/(gains) | $23,358 | $25,556 | | Ending balance | $198,784 | $198,784 | 5. Securities Owned/Sold, but Not Yet Purchased Securities owned decreased from $17.32 million to $13.11 million by June 30, 2020, with no securities sold but not yet purchased | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Securities Owned (Trading securities) | $13,110 | $17,319 | | Securities Sold, but not yet Purchased (Trading securities) | $0 | $582 | 6. Securities Held-to-Maturity Securities held-to-maturity decreased from $16.86 million to $0.58 million by June 30, 2020, with no credit loss allowance due to U.S. government guarantees | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Debt instruments: Pass-through GSEs (amortized cost) | $581 | $16,863 | | Proceeds from held-to-maturity securities maturing or called | $16,365 (6 months) | $39 (6 months) | - No allowance for credit losses was provided on held-to-maturity securities due to an estimated loss rate of zero for pass-through GSEs with implicit U.S. government guarantees[89] 7. AdvisorEngine Inc. – Sale of Financial Interests The company exited its AdvisorEngine Inc. investment on May 4, 2020, receiving $8.16 million cash and recognizing a $19.67 million impairment - The Company exited its investment in AdvisorEngine Inc. on May 4, 2020[91] - Upfront consideration: $9,367 thousand (of which $8,155 thousand has been paid)[91] - Contingent payments: Up to $10,633 thousand, payable upon AdvisorEngine achieving certain revenue milestones over four years[92] - Impairment recognized on notes receivable (six months ended June 30, 2020): $19,672 thousand[95] - Gain recognized from fair value adjustment of consideration (three months ended June 30, 2020): $868 thousand[95] 8. Notes Receivable Notes receivable were placed on non-accrual status after the AdvisorEngine exit, resulting in no interest income for Q2 and H1 2020 - Notes receivable were placed on non-accrual status effective January 1, 2020, following the exit of the AdvisorEngine investment[97] | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Interest income | $0 | $628 | $0 | $1,223 | 9. Investments The company holds strategic investments in Securrency, Inc. ($8.11 million) and Thesys Group, Inc. ($3.08 million), with no impairment recognized | Investment (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------------- | :------------ | :---------------- | | Securrency, Inc. – Preferred stock | $8,112 | $8,112 | | Thesys Group, Inc. – Preferred stock | $3,080 | $3,080 | | Total | $11,192 | $11,192 | - The investment in Securrency, Inc. represents approximately 25% ownership (20% fully diluted) and includes a non-cumulative 6.0% dividend and liquidation preference[99] - The investment in Thesys Group, Inc. represents approximately 19% ownership on a fully diluted basis and includes a warrant to purchase additional shares[101][102] 10. Fixed Assets, net Net fixed assets decreased slightly from $8.13 million to $7.84 million by June 30, 2020, primarily due to depreciation | Fixed Asset Category (in thousands) | June 30, 2020 | December 31, 2019 | | :---------------------------------- | :------------ | :---------------- | | Equipment | $2,452 | $2,330 | | Furniture and fixtures | $2,225 | $2,218 | | Leasehold improvements | $10,947 | $10,989 | | Less: accumulated depreciation and amortization | $(7,789) | $(7,410) | | Total | $7,835 | $8,127 | 11. Deferred Consideration Deferred consideration for gold payments increased from $173.02 million to $198.78 million by June 30, 2020, due to higher gold prices - Deferred consideration is an obligation to pay 9,500 ounces of gold per year through March 31, 2058, then 6,333 ounces into perpetuity, assumed from the ETFS Acquisition[107] | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Deferred consideration | $198,784 | $173,024 | | Forward-looking gold price (weighted average) – per ounce | $2,015 | $1,757 | | Discount rate | 10.0% | 10.0% | | Perpetual growth rate | 1.0% | 1.5% | | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | | Contractual gold payments | $4,063 | $3,110 | | (Loss)/gain on revaluation of deferred consideration – gold payments | $(23,358) | $(4,037) | 12. Credit Facility The company terminated its credit facility on June 16, 2020, repaying $174.0 million debt and incurring a $2.39 million loss on extinguishment - The Company terminated its credit facility on June 16, 2020, by repaying $174,000 thousand outstanding under its term loan[114] - A loss on extinguishment of debt of $2,387 thousand was recognized due to the write-off of unamortized issuance costs[114] | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Term Loan outstanding | $0 | $179,000 | | Revolver outstanding | $0 | $0 | | Carrying amount | $0 | $175,956 | | Effective interest rate | 4.15% | 5.32% | 13. Convertible Notes The company issued $150.0 million in 4.25% Convertible Senior Notes due 2023, with an initial conversion price of $5.92 per share - The Company issued $150,000 thousand in 4.25% Convertible Senior Notes due 2023 on June 16, 2020[116] - Maturity date: June 15, 2023[117] - Interest rate: 4.25%, payable semiannually[118] - Initial conversion price: $5.92 per share (168.9189 shares per $1,000 principal amount)[125] - Redemption price: $7.70 per share (if redeemed by company)[125] - Seniority: Senior unsecured obligations, subordinated to Series A Non-Voting Convertible Preferred Stock redemption payments[125] - Approximately $23,850 thousand of the net proceeds were used to repurchase 6,445,949 shares of common stock[116] 14. Preferred Shares The company has 14,750 Series A Non-Voting Convertible Preferred Shares outstanding, with economic rights equivalent to common stock but no voting rights - 14,750 shares of Series A Non-Voting Convertible Preferred Stock were issued, convertible into 14,750,000 shares of common stock[127] - The Preferred Shares have no voting rights and are not transferable, but have economic rights equivalent to common stock[125] | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Preferred Shares – carrying value | $132,569 | $132,569 | | Redemption value | $50,244 | $71,630 | 15. Leases The company accounts for operating leases under ASC 842, with a total lease cost of $2.23 million for H1 2020 and a 9.0-year weighted-average lease term | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | | Operating lease cost | $1,588 | $1,590 | | Short-term lease cost | $642 | $772 | | Total lease cost | $2,230 | $2,362 | | Cash paid for operating liabilities | $1,845 | $1,760 | - Weighted-average remaining lease term: 9.0 years[132] - Weighted-average discount rate: 6.3%[136] - Future minimum lease payments (undiscounted) at June 30, 2020: $28,333 thousand[136] 16. Contingencies The company faces regulatory reviews and legal proceedings but no current litigation is expected to materially impact its financials - The Company is not currently party to any litigation expected to have a material adverse impact on its business, financial position, results of operations or cash flows[137] 17. Variable Interest Entities The company's maximum exposure to loss from VIEs decreased from $36.28 million to $8.11 million by June 30, 2020, due to the AdvisorEngine exit - The Company is not the primary beneficiary of any entities in which it has a variable interest, as it does not have the power to direct the activities that most significantly impact their economic performance[139] | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Carrying Amount – Assets (Securrency) | $8,112 | $8,112 | | Carrying Amount – Assets (AdvisorEngine) | $0 | $28,172 | | Total carrying amount – Assets | $8,112 | $36,284 | | Maximum exposure to loss | $8,112 | $36,284 | 18. Revenues from Contracts with Customers Total operating revenues decreased by 12.3% to $58.13 million in Q2 2020, primarily from advisory fees with related parties | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Advisory fees | $57,208 | $65,627 | $120,158 | $130,467 | | Other income | $918 | $666 | $1,842 | $1,311 | | Total operating revenues | $58,126 | $66,293 | $122,000 | $131,778 | - Revenues are primarily derived from investment advisory agreements with related parties, based on a percentage of ETPs' average daily net assets[143] | Geographic Revenue (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | United States | $31,629 | $43,146 | $71,499 | $85,769 | | Jersey | $25,641 | $21,368 | $48,166 | $42,529 | | Ireland | $856 | $1,172 | $1,970 | $2,327 | | Canada | $0 | $607 | $365 | $1,153 | 19. Related Party Transactions Revenues are primarily from investment advisory agreements with related parties, with accounts receivable totaling $22.03 million by June 30, 2020 - Revenues are primarily from investment advisory agreements with related parties, where the Company licenses its indexes and provides management/administration services[146] | Receivable from Related Parties (in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------------------------------- | :------------ | :---------------- | | Receivable from WTT | $10,974 | $14,765 | | Receivable from ManJer Issuers | $10,159 | $9,036 | | Total | $22,026 | $25,667 | | Advisory Services from Related Parties (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :---------------------------------------------------- | :------------------------------- | :------------------------------- | | Advisory services provided to WTT | $31,389 | $42,817 | | Advisory services provided to ManJer Issuers | $23,670 | $19,367 | | Total | $57,208 | $65,627 | 20. Stock-Based Awards Stock-based compensation expense was $2.92 million in Q2 2020, with $15.34 million unrecognized at June 30, 2020, over a 1.72-year vesting period - The Company grants equity awards (RSAs, RSUs, PRSUs, and stock options) to employees and directors[151] | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Stock-based compensation | $2,920 | $3,135 | $6,159 | $6,207 | - Unrecognized stock-based compensation: $15,337 thousand at June 30, 2020[153] - Average remaining vesting period: 1.72 years at June 30, 2020[153] 21. Earnings Per Share Basic and diluted EPS was $(0.09) for Q2 2020 and $(0.15) for H1 2020, with convertible note shares excluded from diluted EPS | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Basic (loss)/earnings per share | $(0.09) | $0.01 | $(0.15) | $0.07 | | Diluted (loss)/earnings per share | $(0.09) | $0.01 | $(0.15) | $0.07 | | Weighted average common shares – basic (in thousands) | 151,623 | 151,818 | 152,071 | 151,722 | - Potential common shares from convertible notes were excluded from diluted EPS for Q2 and H1 2020 because the average stock price was lower than the conversion price of $5.92 per share[156] 22. Income Taxes The effective income tax rate was 5.7% for Q2 2020 ($0.8 million benefit) and 12.7% for H1 2020 ($3.18 million benefit), impacted by revaluation losses and valuation allowances - Effective income tax rate for Q2 2020: 5.7% (benefit of $804 thousand)[158] - Effective income tax rate for H1 2020: 12.7% (benefit of $3,175 thousand)[159] - Key factors for H1 2020 tax benefit: $5,981 thousand reduction in unrecognized tax benefits, $2,877 thousand non-taxable gain from Canadian ETF business sale, and $2,842 thousand tax benefit from deferred tax asset valuation allowance release on UK interest carryforwards[159] | Deferred Tax Assets (in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------------------- | :------------ | :---------------- | | Total deferred tax assets | $31,596 | $31,553 | | Total deferred tax liabilities | $7,264 | $6,470 | | Less: valuation allowance | $(18,792) | $(17,685) | | Deferred tax assets, net | $5,540 | $7,398 | - Unrecognized tax benefits (including interest and penalties) totaled $24,364 thousand at June 30, 2020, with a potential decrease of $4,527 thousand in the next 12 months due to lapsing statutes of limitations[173] 23. Shares Repurchased The company repurchased 6.74 million shares for $24.95 million in Q2 2020, with $56.95 million remaining under the program - The Board of Directors extended the share repurchase program through April 27, 2022[178] | Metric | Three Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :------------------------------------ | :------------------------------- | :------------------------------- | | Shares repurchased | 6,738,313 | 7,123,712 | | Aggregate cost | $24,949 | $26,444 | | Remaining under program (June 30, 2020) | — | $56,945 | 24. Goodwill and Intangible Assets Goodwill remained at $85.86 million, while indefinite-lived intangible assets totaled $601.25 million, decreasing due to the Canadian ETF business sale | Metric (in thousands) | June 30, 2020 | January 1, 2020 | | :-------------------- | :------------ | :-------------- | | Goodwill | $85,856 | $85,856 | | Intangible Assets (Advisory Agreements (ETFS)) | $601,247 | $601,247 | | Intangible Assets (Advisory Agreements (Questrade AUM)) | $0 | $2,047 | | Total Intangible Assets | $601,247 | $603,294 | - Goodwill and indefinite-lived intangible assets are tested annually for impairment on November 30th[181][183] - The decrease in intangible assets is due to the derecognition of Advisory Agreements (Questrade AUM) upon the sale of the Canadian ETF business[182] 25. Exit Activities The company sold its Canadian ETF business on February 19, 2020, recognizing a $2.88 million gain, and liquidated WisdomTree Japan Inc. in September 2019 - Sale of Canadian ETF Business (WTAMC) completed on February 19, 2020, for CDN $3,720 thousand (USD $2,774 thousand) cash at closing, with potential additional contingent consideration[185] - A $2,877 thousand gain on sale was recognized for the Canadian ETF business[186] | Operating Losses (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------ | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | WTAMC | $0 | $607 | $428 | $1,384 | | WisdomTree Japan Inc. (WTJ) | $0 | $35 | $0 | $465 | 26. Subsequent Events No events requiring disclosure were identified after the reporting period through the financial statements' issuance date - No events requiring disclosure were identified after the reporting period through the issuance date of the financial statements[188] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operating results, AUM trends, non-GAAP measures, liquidity, and critical accounting policies, focusing on ETPs Executive Summary WisdomTree, a global ETP sponsor, saw AUM rebound to $57.6 billion by June 30, 2020, after Q2 declines, and enhanced capital management - WisdomTree is the only publicly-traded asset management company focused exclusively on ETPs, with $57.6 billion in AUM globally as of June 30, 2020[190] - Average AUM and revenues declined 6.9% and 9.0% respectively from the prior quarter due to COVID-19 market declines[195] - Ending AUM increased 14.6% from $50.3 billion at March 31, 2020, to $57.6 billion at June 30, 2020, due to market rebound[197] - Issued $150.0 million in 4.25% Convertible Senior Notes due 2023 and repaid previously outstanding debt, terminating the former credit facility[197] - Used $23.9 million of proceeds to repurchase approximately 6.4 million shares of common stock[197] - Temporarily halted creations into certain European listed oil-related products due to unprecedented volatility in oil prices, with the halt on WisdomTree WTI Crude Oil ETC (CRUD) lifted on July 1, 2020, after implementing risk mitigation steps[199] Assets Under Management Global ETP AUM increased 14.6% to $57.6 billion by June 30, 2020, driven by market appreciation and international net inflows - Global ETP AUM increased 14.6% to $57.6 billion at June 30, 2020, primarily due to market appreciation[200] - U.S. listed ETFs AUM increased from $28.9 billion at March 31, 2020, to $31.3 billion at June 30, 2020 (market appreciation, partly offset by net outflows)[209] - International listed ETPs AUM increased from $21.4 billion at March 31, 2020, to $26.3 billion at June 30, 2020 (market appreciation and net inflows)[210] - Global financial markets rebounded in Q2 2020, with the S&P 500 advancing 20.6%, MSCI EAFE 12.8%, MSCI Emerging Markets Index 18.2%, and gold prices rising 10.0%[201][202] Our Operating and Financial Results Operating results show decreased revenues and a net loss for Q2 and H1 2020, driven by lower AUM, advisory fees, and significant non-operating losses Consolidated Operating Results (Five Quarters) Operating revenues decreased 12.3% to $58.1 million in Q2 2020, resulting in a $13.3 million net loss due to revaluation and debt extinguishment costs | Metric (in millions) | Q2 2020 | Q1 2020 | Q4 2019 | Q3 2019 | Q2 2019 | | :------------------- | :------ | :------ | :------ | :------ | :------ | | Operating Revenues | $58.1 | $63.9 | $66.3 | $65.5 | $66.3 | | Operating Expenses | $46.3 | $48.2 | $50.0 | $50.0 | $54.4 | | Operating Income | $11.8 | $15.7 | $16.3 | $15.5 | $11.9 | | Net (loss)/income | $(13.3) | $(8.6) | $10.0 | $10.0 | $2.5 | - Revenues decreased 12.3% YoY due to lower average AUM of U.S. listed products and a 4 basis point decline in average global advisory fee[212] - Total operating expenses decreased 14.8% YoY to $46.3 million, mainly due to lower compensation accruals, fund management, sales, marketing, and third-party distribution costs[212] - Loss on revaluation of deferred consideration – gold payments was $(23.4) million in Q2 2020, compared to $(4.0) million in Q2 2019[212] Key Operating Statistics Global ETP AUM ended Q2 2020 at $57.6 billion, with international ETPs seeing $1.6 billion net inflows and U.S. ETFs $1.47 billion net outflows | Metric (in millions) | Q2 2020 | Q1 2020 | Q2 2019 | | :------------------------------------ | :------ | :------ | :------ | | Global ETPs - End of period assets | $57,647 | $50,323 | $60,389 | | Global ETPs - Average assets during the period | $55,689 | $59,819 | $58,575 | | Global ETPs - Average ETP advisory fee during the period | 0.41% | 0.42% | 0.45% | | U.S. LISTED ETFs - Inflows/(outflows) | $(1,474) | $(1,273) | $(166) | | INTERNATIONAL LISTED ETPs - Inflows/(outflows) | $1,600 | $737 | $509 | | Commodity & Currency - Inflows/(outflows) | $1,316 | $592 | $611 | - Headcount remained stable at 214 at June 30, 2020[214] Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 Total revenues decreased 12.3% to $58.1 million in Q2 2020, leading to a net loss despite a 14.8% operating expense reduction | Metric (in thousands) | June 30, 2020 | June 30, 2019 | Change | Percent Change | | :------------------------------------ | :------------ | :------------ | :----- | :------------- | | Average global AUM | $55,689 | $58,575 | $(2,886) | (4.9%) | | Total revenues | $58,126 | $66,293 | $(8,167) | (12.3%) | | Total operating expenses | $46,329 | $54,382 | $(8,053) | (14.8%) | | Net (loss)/income | $(13,250) | $2,479 | $(15,729) | (634.5%) | - Advisory fee revenues decreased 12.8% to $57.2 million, with average global advisory fee declining from 0.45% to 0.41%[217] - Compensation and benefits decreased 18.1% due to lower incentive compensation and severance in prior year[221] - Marketing and advertising decreased 33.0%, and sales and business development decreased 47.7% due to lower discretionary spending from COVID-19[223][224] - Contractual gold payments increased 30.6% to $4.1 million due to higher average daily spot price of gold[225] - Loss on revaluation of deferred consideration – gold payments was $(23.4) million, a significant increase from $(4.0) million in prior year[234] - Loss on extinguishment of debt was $(2.4) million in Q2 2020[236] Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Total revenues decreased 7.4% to $122.0 million in H1 2020, resulting in a $21.89 million net loss due to revaluation losses and AdvisorEngine impairment | Metric (in thousands) | June 30, 2020 | June 30, 2019 | Change | Percent Change | | :------------------------------------ | :------------ | :------------ | :----- | :------------- | | Average global AUM | $57,754 | $58,129 | $(375) | (0.6%) | | Total revenues | $122,000 | $131,778 | $(9,778) | (7.4%) | | Total operating expenses | $94,569 | $109,184 | $(14,615) | (13.4%) | | Net (loss)/income | $(21,888) | $11,303 | $(33,191) | (293.6%) | - Advisory fee revenues decreased 7.9% to $120.2 million, with average global ETP advisory fee declining from 0.45% to 0.42%[242] - Compensation and benefits decreased 18.4% due to lower incentive compensation and severance[246] - Marketing and advertising decreased 21.0%, and sales and business development decreased 34.9% due to lower discretionary spending[248][249] - Contractual gold payments increased 26.0% to $7.8 million due to higher average daily spot price of gold[250] - Loss on revaluation of deferred consideration – gold payments was $(25.6) million, compared to a gain of $0.4 million in prior year[259] - Impairment charge of $19.7 million on AdvisorEngine investment in H1 2020[261] - Loss on extinguishment of debt of $2.4 million in H1 2020[262] Non-GAAP Financial Measurements Non-GAAP measures like adjusted net income and EPS are provided to exclude non-recurring items, offering a clearer view of operating performance - Non-GAAP financial measurements (Adjusted net income and adjusted diluted earnings per share) are used to report results exclusive of non-recurring or non-core operating business items[266][267] - Exclusions include: unrealized gains or losses on revaluation of deferred consideration, tax shortfalls and windfalls upon vesting and exercise of stock-based compensation awards, interest expense from the amortization of discount arising from the bifurcation of the conversion option embedded in convertible notes, loss on extinguishment of debt, release of deferred tax asset valuation allowance, gain/loss from AdvisorEngine investment exit, impairment charges, gain from Canadian ETF business sale, severance expense, and acquisition/disposition-related costs[267][270] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net (loss)/income, as reported | $(13,250) | $2,479 | $(21,888) | $11,303 | | Adjusted net income | $8,494 | $7,813 | $19,718 | $15,550 | | Adjusted earnings per share – diluted | $0.05 | $0.05 | $0.12 | $0.09 | Liquidity and Capital Resources Available liquidity decreased from $72.55 million to $15.58 million by June 30, 2020, due to debt repayment and share repurchases, despite convertible note issuance | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Total: Liquid assets | $88,318 | $135,992 | | Less: Total current liabilities | $(62,179) | $(79,041) | | Less: Regulatory capital requirement | $(10,561) | $(12,312) | | Total: Available liquidity | $15,578 | $72,547 | - Cash and cash equivalents decreased by $24.7 million in H1 2020 due to $179.0 million debt repayment, $26.4 million share repurchases, and $10.3 million dividends, partially offset by $150.0 million convertible note proceeds[274] - Issued $150.0 million in 4.25% Convertible Senior Notes due 2023 on June 16, 2020[276] - Terminated former credit facility on June 16, 2020, removing financial covenants and limitations on stock repurchases and dividends[278] - Maintains a capital return program with a $0.03 per share quarterly cash dividend and authority to purchase common stock through April 27, 2022 ($56.9 million remaining)[280][281] | Contractual Obligations (in thousands) | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | | :------------------------------------- | :---- | :--------------- | :----------- | :----------- | :---------------- | | Convertible Notes | $150,000 | $0 | $0 | $150,000 | $0 | | Deferred consideration – gold payments | $198,784 | $16,364 | $29,246 | $24,274 | $128,900 | | Operating leases | $28,333 | $3,293 | $5,916 | $6,090 | $13,034 | | Total | $377,117 | $19,657 | $35,162 | $180,364 | $141,934 | Critical Accounting Policies Critical accounting policies cover business combinations, goodwill and intangible asset impairment, equity investments, and revenue recognition from advisory fees - Business Combinations: Accounted for under the acquisition method, allocating consideration to identifiable assets, intangible assets, and liabilities based on fair values[285] - Goodwill and Intangible Assets: Goodwill is tested for impairment at least annually (November 30th) by comparing reporting unit fair value to carrying value. Indefinite-lived intangible assets are also tested annually for impairment[286][289] - Investments: Equity investments without readily determinable fair value are carried at cost less impairment, adjusted for observable price changes[290] - Revenue Recognition: Substantially all revenue from advisory fees is recognized over time, based on a percentage of ETPs' average daily net assets[291] Recently Issued and Pending Accounting Pronouncements FASB amendments to ASC 470-20 simplify convertible instrument accounting, effective after December 31, 2021, with early adoption permitted - FASB approved amendments to ASC 470-20 (Debt with Conversion and Other Options) in June 2020, simplifying convertible instrument accounting by removing major separation models[292] - The upcoming ASU will be effective for years beginning after December 31, 2021, with early adoption permitted for fiscal periods beginning after December 15, 2020, and is expected to reduce interest expense on convertible notes by approximately $0.3 million per quarter[292] - ASU 2019-12 (Income Taxes) was issued in December 2019 to reduce complexity in income tax accounting, effective for years beginning after December 15, 2020, and is not expected to have a material impact on the company's financial statements[293] Recently Adopted Accounting Pronouncements The company adopted ASU 2016-13 (CECL model) and ASU 2018-13 (Fair Value Measurement) on January 1, 2020, with no material financial impact - Adopted ASU 2016-13 (Financial Instruments-Credit Losses) on January 1, 2020, replacing the 'incurred loss' approach with the 'expected loss' (CECL) model[295] - The adoption of ASU 2016-13, applicable to trade receivables, notes receivable, and held-to-maturity securities, did not have a material impact on the consolidated financial statements[295] - Adopted ASU 2018-13 (Fair Value Measurement) on January 1, 2020, which modified fair value disclosure requirements and only impacted disclosures[296] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces market risk from ETP values, foreign currency, and commodity prices, impacting AUM and revenues, but has minimal interest rate risk - Market risk arises from changes in the value of ETPs due to fluctuations in securities or commodity prices, foreign currency exchange rates, and interest rates, directly impacting AUM and revenues[298][299] - Interest Rate Risk: Minimal impact anticipated due to short-term interest-earning assets and fixed-rate Convertible Notes (4.25%)[300] - Exchange Rate Risk: Subject to currency translation exposure from non-U.S. operations (primarily UK and Europe), with expenses incurred in British pounds. No derivative financial instruments are currently used for hedging[301][302] - Commodity Price Risk: Fluctuations in commodity prices linked to ETPs can adversely affect AUM and revenues. A portion of gold ETP advisory fees are paid in gold ounces, and the company pays gold ounces for deferred consideration. No hedging arrangements are currently in place for gold exposure[304] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of June 30, 2020[305] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended June 30, 2020[306] PART II: OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings - No legal proceedings were reported[308] Item 1A. Risk Factors Risks include the company's ability to settle or repurchase Convertible Notes upon conversion or fundamental change, impacting liquidity - The company may not have the ability to raise funds necessary to settle conversions of Convertible Notes or repurchase them upon a fundamental change, potentially leading to default[310] - The conditional conversion feature of the Convertible Notes, if triggered, could adversely affect the company's financial condition and liquidity by requiring cash payments for converted principal[312] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued $150.0 million in Convertible Senior Notes and repurchased 6.74 million shares for $24.9 million in Q2 2020 - Issued $150.0 million in 4.25% Convertible Senior Notes due 2023 on June 16, 2020, in a private offering[313] | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------- | :------------------------------- | :--------------------------- | | April 1, 2020 to April 30, 2020 | 5,103 | $2.94 | | May 1, 2020 to May 31, 2020 | 9,025 | $3.05 | | June 1, 2020 to June 30, 2020 | 6,724,185 | $3.70 | | Total (Q2 2020) | 6,738,313 | $3.70 | - As of June 30, 2020, $56.9 million remained under the share repurchase program for future repurchases[316] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities were reported[317] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[318] Item 5. Other Information The company reported no other information - No other information was reported[319] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, stock agreements, and certifications - Exhibits include Amended and Restated Certificate of Incorporation, Certificate of Designations of Series A Non-Voting Convertible Preferred Stock, Second Amended and Restated Bylaws, Specimen Common Stock Certificate, various Stockholders and Securities Purchase Agreements, Investor Rights Agreement, and certifications (31.1, 31.2, 31.3, 32)[320] - Financial Statements from the Quarterly Report on Form 10-Q are formatted in XBRL (Exhibit 101 and related taxonomy extension documents)[320] Signatures The report was signed on August 7, 2020, by the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer - The report was signed on August 7, 2020, by Jonathan Steinberg (CEO), Amit Muni (CFO), and Bryan Edmiston (Chief Accounting Officer)[323][325]