WisdomTree, Inc. - Quarter Report: 2016 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2016

or

For the transition period from                      to                     .

Commission File Number 001-10932

WisdomTree Investments, Inc.

(Exact name of registrant as specified in its charter)

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.

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.

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WISDOMTREE INVESTMENTS, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2016

TABLE OF CONTENTS

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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:

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)

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)

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)

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)

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:

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:

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:

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

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

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:

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:

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:

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

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:

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

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

10. Earnings Per Share

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

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:

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:

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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:

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:

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.

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:

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:

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:

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:

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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

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

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

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

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: