WISDOMTREE, INC. 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 endedDecember 31, 2020 and our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2021 . We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. Executive Summary Introduction We are the only publicly-traded asset management company that focuses exclusively on exchange-traded products, or ETPs, and are a leading global ETP sponsor based on assets under management, or AUM, with AUM of$72.8 billion globally as ofSeptember 30, 2021 . An ETP is a pooled investment vehicle that holds a basket of securities, financial instruments or other assets and generally seeks to track (index-based) or outperform (actively managed) the performance of a broad or specific equity, fixed income or alternatives market segment, commodity or currency (or an inverse or multiple thereof). ETPs are listed on an exchange with their shares traded in the secondary market at market prices, generally at approximately the same price as the net asset value of their underlying components. ETP is an umbrella term that includes exchange-traded funds, or ETFs, exchange-traded notes and exchange-traded commodities. Our family of ETPs includes products that track our own indexes, third-party indexes and market prices of commodities. We also offer actively managed products. Most of our equity-based funds employ a fundamentally weighted investment methodology, which weights securities based on factors such as dividends, earnings or investment factors, whereas most other industry indexes use a capitalization weighted methodology. We distribute our products through all major channels in the asset management industry, including banks, brokerage firms, registered investment advisers, institutional investors, private wealth managers and online brokers primarily through our sales force. Our sales efforts are not primarily directed towards the retail segment but rather are directed towards financial advisers that act as intermediaries between the end-client and us or institutional investors. We focus on creating products for investors that offer thoughtful innovation, smart engineering and redefined investing. We have launched many first-to-market products and pioneered alternative weighting we call "Modern Alpha," which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective funds that are built to perform. Through our operating subsidiaries, we provide investment advisory and other management services to our ETPs collectively offering products covering equity, commodity, fixed income, leveraged and inverse, currency, cryptocurrency and alternative strategies. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETPs' average daily AUM. Our expenses are predominantly related to selling, operating and marketing our products. We have contracted with third parties to provide certain operational services for the ETPs. We strive to deliver a better investing experience through innovative solutions. Continued investments in technology-enabled and research-driven solutions and our Advisor Solutions program, which includes portfolio construction, asset allocation, practice management services and digital tools for financial advisors, are meant to differentiate us in the market, expand our distribution and further enhance our relationships with financial advisors. We were incorporated under the laws of the state ofDelaware onSeptember 19, 1985 asFinancial Data Systems, Inc. and ultimately renamedWisdomTree Investments, Inc. onSeptember 6, 2005 . Digital Assets - Developments We are executing on our digital assets initiative and have made meaningful advancements. We filed registration statements for theWisdomTree Bitcoin Trust , theWisdomTree Ethereum Trust and theWisdomTree Digital Short-Term Treasury Fund with theSEC , among other regulatory and product related digital asset advancements which we expect to communicate in the future.The WisdomTree Enhanced Commodity Strategy Fund (GCC) became the first ETF to add bitcoin futures exposure. We cross-listed our European-domiciled WisdomTree Bitcoin ETP, or BTCW, inGermany , appointed Coinbase Custody as a custodian and received approval to passport BTCW in theEuropean Union , or EU, allowing for a wider audience to access and invest in the product. We launched a physically backed Ethereum ETP inEurope , which is also passported across the EU. We also invested inSecurrency, Inc.'s Series B funding round, as we believe their team is uniquely suited to lead in blockchain-based financial and regulatory technology going forward. We also recently invested in Onramp Invest, a technology firm that provides access to digital assets for registered investment advisers. Collaborations withOnramp Invest andFederal Life Insurance Company were also announced with respect to making available WisdomTree model portfolios that include digital assets in different channels. These initiatives were undertaken in our pursuit to establish ourselves as a leader in this space. 34 -------------------------------------------------------------------------------- Table of Contents Industry Developments InSeptember 2021 , SenatorRon Wyden , Senate Finance Committee Chair, released draft tax legislation that would directly impact the tax treatment of ETFs. The proposed legislation would eliminate ETFs' chief tax advantage by repealing Section 852(b)(6) of the Internal Revenue Code, which allows ETFs to redeem shares in-kind without exposing long-term investors to capital gains on any individual security in the underlying ETF structure. We believe that ETFs are an important tool used by retail investors striving to build financial security, as well as younger investors who are participating in the financial markets for the first time. The ETF creation and redemption process ensures accurate index tracking for the benefit of all shareholders and it is the most cost-effective and tax-efficient way to achieve this, directly benefiting the end investor. We believe that ETFs have proven to be a successful investment structure that should be protected. If eliminated, ETFs would lose a valuable benefit associated with the structure; however, overall industry growth should not be materially affected due to the other inherent benefits of ETFs - transparency and liquidity. Termination ofNew York Office Lease OnSeptember 9, 2021 , we entered into a Surrender Agreement to terminate the lease for our principal executive office at245 Park Avenue ,New York , effective immediately. In consideration for the landlord's agreement to enter into the Surrender Agreement and accelerate the expiration date of the term of the lease fromAugust 31, 2029 , we paid a termination fee of$12.7 million . As a result, we recognized a loss on the termination of a lease of$15.9 million during the three months endedSeptember 30, 2021 which is included in impairments and was inclusive of the right-of-use asset, leasehold improvements and fixed assets broker fees and a reduction in operating lease liabilities. Cost savings were$0.2 million during the third quarter of 2021 and are estimated to be approximately$0.6 million during the fourth quarter of 2021 when compared to actual occupancy and depreciation expense recognized during the second quarter of 2021. Cost savings for the year endingDecember 31, 2022 resulting from the reduction in theNew York andLondon office footprints are estimated to be approximately$3.5 million when compared to actual occupancy and depreciation expense recognized during the year endedDecember 31, 2020 . Anticipated rent for new office space inNew York andLondon with a smaller footprint is included in these estimates. Assets Under Management WisdomTree ETPs We offer ETPs covering equity, commodity, fixed income, leveraged and inverse, currency, cryptocurrency and alternative strategies. The chart below sets forth the asset mix of our ETPs atSeptember 30, 2020 ,June 30, 2021 andSeptember 30, 2021 : [[Image Removed]] Market Environment During the third quarter of 2021, theU.S andEurozone markets were flat as growth and inflation concerns arising in September erased prior gains. Emerging markets underperformed amid a sell-off inChina and concerns over continued supply chain disruptions. Gold prices also decreased modestly during the quarter. 35 -------------------------------------------------------------------------------- Table of Contents The S&P 500 and MSCI EAFE (local currency) rose 0.6% and 1.4%, respectively, while MSCI Emerging Markets Index (U.S. dollar) weakened 8.0%, and gold prices declined 1.1% during the third quarter of 2021. In addition, the European and Japanese equities markets both appreciated with the MSCI EMU Index and MSCI Japan Index increasing 0.5% and 5.3%, respectively, in local currency terms for the quarter. Also, theU.S. dollar rose 2.3% and 2.7% versus the euro and British pound, respectively, and weakened 1.0% versus the Japanese yen during the quarter.U.S. listed ETF Industry FlowsU.S. listed ETF industry net flows for the three months endedSeptember 30, 2021 were$170.4 billion .U.S. equity and fixed income gathered the majority of those flows. [[Image Removed]] Source: Morningstar European ETP Industry Flows European ETP industry net flows were$38.0 billion for the three months endedSeptember 30, 2021 . Equities and fixed income gathered the majority of those flows. [[Image Removed]] Source: Morningstar Our Operating and Financial Results We operate as an ETP sponsor and asset manager providing investment advisory services globally through our subsidiaries inthe United States andEurope .U.S. Listed ETFs OurU.S. listed ETFs' AUM decreased from$45.1 billion atJune 30, 2021 to$44.7 billion atSeptember 30, 2021 due to market depreciation, partly offset by net inflows. 36
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[[Image Removed]]
European Listed ETPs
Our European listed ETPs' AUM decreased from $28.8 billion at June 30, 2021 to
$28.0 billion at September 30, 2021 primarily due to market depreciation.
[[Image Removed]]
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Consolidated Operating Results
The following table sets forth our revenues and net income/(loss) for the most
recent five quarters. Prior period amounts previously disclosed have been
revised to conform with our current presentation. These revisions had no effect
on previously reported net income. See Note 2 to our Consolidated Financial
Statements for additional information.
[[Image Removed]]• Revenues
- We recorded operating revenues of
ended September 30, 2021 , up 22.5% from the three months ended
September 30, 2020 due to higher average global AUM.
• Operating Expenses- Total operating expenses increased 10.0% from the three months ended
compensation and headcount, fund management and administration costs,
third-party distribution fees, professional fees and sales and business
development expenses, partly offset by lower occupancy expense and
contractual gold payments.
• Other Income/(Expenses)- Other income/(expenses) includes interest income and interest expense,
gains/(losses) on revaluation of deferred consideration - gold payments,
impairments and other gains and losses. We recognized a loss of
$15.9 million upon the termination of our New York office lease during
the three months ended September 30, 2021 , which is included in
impairments. For the three months ended
gains/(losses) on revaluation of deferred consideration - gold payments
were $1.7 million and ($8.9) million , respectively.
• Net income
- We reported net income of $5.8 million during the three months ended
September 30, 2021 , compared to a net loss of $0.3 million during the
three months ended September 30, 2020 . The change was impacted by the
described above and a favorable change related to the revaluation of
deferred consideration - gold payments of $10.6 million .
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Key Operating Statistics
The following table presents key operating statistics that serve as indicators
for the performance of our business:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2021 2021 2020 2021 2020
GLOBAL ETPs (in millions)
Beginning of period assets $ 73,944 $ 69,534 $ 57,618 $ 67,385 $ 63,532
Assets sold - - - - (778 )
Inflows/(outflows) 548 931 (485 ) 2,758 (900 )
Market appreciation/(depreciation) (1,709 ) 3,483 3,622 2,644 (783 )
Fund closures - (4 ) (46 ) (4 ) (362 )
End of period assets $ 72,783 $ 73,944 $ 60,709 $ 72,783 $ 60,709
Average assets during the period $ 74,563 $
73,652
0.41 % 0.40 % 0.41 % 0.41 % 0.41 %
Revenue days 92 91 92 273 274
Number of ETPs-end of period 322 318 305 322 305
U.S. LISTED ETFs (in millions)
Beginning of period assets $ 45,129 $
42,163
612 1,130 575 3,085 (2,172 )
Market appreciation/(depreciation) (999 ) 1,836 1,373 3,140 (4,994 )
Fund closures - - - - (124 )
End of period assets $ 44,742 $ 45,129 $ 33,310 $ 44,742 $ 33,310
Average assets during the period $ 44,508 $
44,184
73 73 67 73 67
EUROPEAN LISTED ETPs (in millions)
Beginning of period assets $ 28,815 $ 27,371 $ 26,256 $ 28,868 $ 22,932
Assets sold - - - - (778 )
Inflows/(outflows) (64 ) (199 ) (1,060 ) (327 ) 1,272
Market appreciation/(depreciation) (710 ) 1,647 2,249 (496 ) 4,211
Fund closures - (4 ) (46 ) (4 ) (238 )
End of period assets $ 28,041 $ 28,815 $ 27,399 $ 28,041 $ 27,399
Average assets during the period $ 29,055 $
29,468
249 245 238 249 238
PRODUCT CATEGORIES (in millions)
Commodity & Currency
Beginning of period assets $ 24,772 $ 23,657 $ 24,246 $ 25,880 $ 20,073
Inflows/(outflows) (249 ) (318 ) (1,112 ) (1,227 ) 767
Market appreciation/(depreciation) (697 ) 1,433 2,042 (827 ) 4,336
End of period assets $ 23,826 $ 24,772 $ 25,176 $ 23,826 $ 25,176
Average assets during the period $ 24,859 $ 25,577 $ 25,949 $ 25,244 $ 23,132
U.S. Equity
Beginning of period assets $ 21,285 $ 20,018 $ 13,997 $ 18,367 $ 17,732
Inflows/(outflows) 351 190 897 759 370
Market appreciation/(depreciation) (253 ) 1,077 718 2,257 (2,490 )
End of period assets $ 21,383 $ 21,285 $ 15,612 $ 21,383 $ 15,612
Average assets during the period $ 21,793 $
20,983
$ 10,792 $
9,989 $ 8,843 $ 9,408
404 399 (586 ) 820 (2,649 )
Market appreciation/(depreciation) (16 ) 404 363 952 (1,749 )
End of period assets $ 11,180 $ 10,792 $ 8,620 $ 11,180 $ 8,620
Average assets during the period $ 11,146 $ 10,526 $ 8,834 $ 10,488 $ 9,693
Emerging Market Equity
Beginning of period assets $ 11,519 $ 10,477 $ 5,413 $ 8,539 $ 6,400
Inflows/(outflows) (149 ) 531 257 2,044 301
Market appreciation/(depreciation) (704 ) 511 309 83 (722 )
End of period assets $ 10,666 $ 11,519 $ 5,979 $ 10,666 $ 5,979
Average assets during the period $ 11,038 $ 11,012 $ 5,917 $ 10,642 $ 5,656
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Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2021 2021 2020 2021 2020
Fixed Income
Beginning of period assets $ 3,441 $ 3,246 $ 3,507 $ 3,308 $ 3,565
Inflows/(outflows) 115 168 76 293 39
Market appreciation/(depreciation) (26 ) 27 23 (71 ) 2
End of period assets $ 3,530 $ 3,441 $ 3,606 $ 3,530 $ 3,606
Average assets during the period $ 3,502 $ 3,337 $ 3,581 $ 3,358 $ 3,571
Leveraged & Inverse
Beginning of period assets $ 1,693 $ 1,521 $ 1,344 $ 1,477 $ 1,133
Inflows/(outflows) 42 (2 ) (10 ) 35 374
Market appreciation/(depreciation) (69 ) 174 89 154 (84 )
End of period assets $ 1,666 $ 1,693 $ 1,423 $ 1,666 $ 1,423
Average assets during the period $ 1,717 $ 1,666 $ 1,476 $ 1,646 $ 1,260
Cryptocurrency
Beginning of period assets $ 229 $ 377 $ 15 $ 167 $ 1
Inflows/(outflows) 12 8 15 56 28
Market appreciation/(depreciation) 54 (156 ) 3 72 4
End of period assets $ 295 $ 229 $ 33 $ 295 $ 33
Average assets during the period $ 277 $ 300 $ 27 $ 280 $ 13
Alternatives
Beginning of period assets $ 198 $ 227 $ 225 $ 215 $ 358
Inflows/(outflows) 22 (39 ) (4 ) (17 ) (99 )
Market appreciation/(depreciation) 2 10 8 24 (30 )
End of period assets $ 222 $ 198 $ 229 $ 222 $ 229
Average assets during the period $ 214 $ 231 $ 226 $ 223 $ 260
Closed ETPs
Beginning of period assets $ 15 $ 22 $ 28 $ 24 $ 1,252
Assets sold - - - - (778 )
Inflows/(outflows) - (6 ) (18 ) (5 ) (31 )
Market appreciation/(depreciation) - 3 67 - (50 )
Fund closures - (4 ) (46 ) (4 ) (362 )
End of period assets $ 15 $ 15 $ 31 $ 15 $ 31
Average assets during the period $ 17 $ 20 $ 30 $ 20 $ 602
Headcount: 235 227 211 235 211
Note: Previously issued statistics may be restated due to fund closures and trade adjustments Source: WisdomTree
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Three Months Ended September 30, 2021 Compared to Three Months Ended
September 30, 2020
Selected Operating and Financial Information
Three Months Ended
Percent
September 30,
Global AUM (in millions) 2021 2020 Change Change
Average global AUM $ 74,563 $ 61,200 $ 13,363 21.8 %
Operating Revenues (in thousands)
Advisory fees
(1) $ 76,400 $ 63,028 $ 13,372 21.2 %
Other income 1,712 721 991 137.4 %
Total revenues $ 78,112 $ 63,749 $ 14,363 22.5 %
(1) Advisory fees previously reported have been revised due to an immaterial
error correction. These revisions had no effect on previously reported net
income. See Note 2 to our Consolidated Financial Statements for additional
information.
Average Global AUM
Our average global AUM increased 21.8% from $61.2 billion at September 30, 2020
to $74.6 billion at September 30, 2021 due to market appreciation and net
inflows.
Operating Revenues
Advisory fees
Advisory fee revenues increased 21.2% from $63.0 million during the three months
ended September 30, 2020 to $76.4 million in the comparable period in 2021 due
to higher average global AUM. Our average global advisory fee was 0.41% during
both the three months ended September 30, 2020 and September 30, 2021 .
Other income
Other income increased 137.4% from $0.7 million during the three months ended
September 30, 2020 to $1.7 million in the comparable period in 2021 primarily
due to higher fees associated with our European listed products.
Operating Expenses
Three Months Ended
Percent
September 30,
(in thousands) 2021 2020 Change Change
Compensation and benefits $ 22,027 $ 19,098 $ 2,929 15.3 %
Fund management and administration
(1) 15,181 14,328 853 6.0 %
Marketing and advertising 2,925 2,996 (71 ) (2.4 %)
Sales and business development 2,935 2,386 549 23.0 %
Contractual gold payments 4,250 4,539 (289 ) (6.4 %)
Professional fees 1,583 950 633 66.6 %
Occupancy, communications and equipment 1,163 1,611 (448 ) (27.8 %)
Depreciation and amortization 185 253 (68 ) (26.9 %)
Third-party distribution fees 1,873 1,233 640 51.9 %
Other 1,787 1,611 176 10.9 %
Total operating expenses $ 53,909 $ 49,005 $ 4,904 10.0 %
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Three Months Ended
September 30,
As a Percent of Revenues: 2021 2020
Compensation and benefits 28.3 % 30.0 %
Fund management and administration
(1) 19.4 % 22.5 %
Marketing and advertising 3.7 % 4.7 %
Sales and business development 3.8 % 3.8 %
Contractual gold payments 5.4 % 7.1 %
Professional fees 2.0 % 1.5 %
Occupancy, communications and equipment 1.5 % 2.5 % Depreciation and amortization
0.2 % 0.4 %
Third-party distribution fees 2.4 % 1.9 %
Other 2.3 % 2.5 %
Total operating expenses 69.0 % 76.9 %
(1) Fund management and administration expenses previously reported have been
revised due to an immaterial error correction. These revisions had no effect
on previously reported net income. See Note 2 to our Consolidated Financial
Statements for additional information.
Compensation and benefits Compensation and benefits expense increased 15.3% from$19.1 million during the three months endedSeptember 30, 2020 to$22.0 million in the comparable period in 2021 due to higher incentive compensation and headcount. Headcount was 211 and 235 atSeptember 30, 2020 andSeptember 30, 2021 , respectively. Fund management and administration Fund management and administration expense increased 6.0% from$14.3 million during the three months endedSeptember 30, 2020 to$15.2 million in the comparable period in 2021 due to higher average global AUM. Marketing and advertising Marketing and advertising expense was essentially unchanged from the three months endedSeptember 30, 2020 . Sales and business development Sales and business development expense increased 23% from$2.4 million during the three months endedSeptember 30, 2020 to$2.9 million in the comparable period in 2021 primarily due to higher spending on conferences and sales tools. Contractual gold payments Contractual gold payments expense decreased 6.4% from$4.5 million during the three months endedSeptember 30, 2020 to$4.3 million in the comparable period in 2021. This expense was associated with the payment of 2,375 ounces of gold and was calculated using the average daily spot price of$1,911 and$1,789 per ounce during the three months endedSeptember 30, 2020 and 2021, respectively. Professional fees Professional fees increased 66.6% from$1.0 million during the three months endedSeptember 30, 2020 to$1.6 million in the comparable period in 2021 due to spending related to our digital assets initiative. Occupancy, communications and equipment Occupancy, communications and equipment expense decreased 27.8% from$1.6 million during the three months endedSeptember 30, 2020 to$1.2 million in the comparable period in 2021 as we exited ourNew York office and reduced our office footprint inEurope . Depreciation and amortization Depreciation and amortization expense decreased 26.9% from 0.3 million during the three months endedSeptember 30, 2020 to 0.2 million in the comparable period in 2021 due to write-off of fixed assets related to the exit of ourNew York office. 42 -------------------------------------------------------------------------------- Table of Contents Third-party distribution fees Third-party distribution fees increased 51.9% from$1.2 million during the three months endedSeptember 30, 2020 to$1.9 million in the comparable period in 2021 primarily due to higher AUM inLatin America resulting in higher fees paid to our third-party marketing agent. Other Other expenses were essentially unchanged from the three months endedSeptember 30, 2020 . Other Income/(Expenses) Three Months Ended Percent September 30, (in thousands) 2021 2020 Change Change Interest expense$ (3,729) $ (2,511) $ (1,218) 48.5 % Gain/(loss) on revaluation of deferred consideration - gold payments 1,737 (8,870 ) 10,607 n/a Interest income 689 111 578 520.7 % Impairments (15,853 ) (3,080 ) (12,773 ) 414.7 % Other losses and gains, net (714 ) 744
(1,458 ) n/a
Total other expenses, net$ (17,870) $ (13,606) $ (4,264) 31.3 % Three Months Ended September 30, As a Percent of Revenues: 2021
2020
Interest expense (4.8 %) (4.0 %) Gain/(loss) on revaluation of deferred consideration - gold payments 2.2 % (13.9 %) Interest income 0.9 % 0.2 % Impairments (20.3 %) (4.8 %) Other losses and gains, net (0.9 %) 1.2 % Total other expenses, net 22.9 % (21.3 %) Interest expense Interest expense increased 48.5% from$2.5 million during the three months endedSeptember 30, 2020 to$3.7 million in the comparable period in 2021 due to a higher level of debt outstanding, partly offset by a lower effective interest rate. Our effective interest rate during the three months endedSeptember 30, 2020 and 2021 was 6.3% and 4.6%, respectively. Gain/(loss) on revaluation of deferred consideration We recognized a loss on revaluation of deferred consideration of($8.9) million during the three months endedSeptember 30, 2020 as compared to a gain of$1.7 million gain during the three months endedSeptember 30, 2021 . The gain in the current quarter was due to lower forward-looking gold prices. The magnitude of any gain or loss is highly correlated to the magnitude of the change in the forward-looking price of gold. Interest income Interest income increased 520.7% from$0.1 million during the three months endedSeptember 30, 2020 to$0.7 million in the comparable period in 2021 due to an increase in our securities owned. Impairment During the three months endedSeptember 30, 2021 , we recognized a loss of$15.9 million upon the termination of ourNew York office lease, which is included in impairments. The impairment was inclusive of the write-off of the right-of-use asset, leasehold improvements and fixed assets, broker fees and a reduction in operating lease liabilities. During the three months endedSeptember 30, 2020 , we recognized a non-cash impairment charge of$3.1 million related to our investment inThesys Group, Inc. 43 -------------------------------------------------------------------------------- Table of Contents Other losses and gains, net Other losses and gains, net were$0.7 million and($0.7) million during the three months endedSeptember 30, 2020 and 2021, respectively. The three months endedSeptember 30, 2021 includes losses on our securities owned of$1.3 million and a gain of$0.8 million related to the remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business. Included in the three months endedSeptember 30, 2020 , is a gain of$0.2 million arising from an adjustment to the estimated fair value of consideration received from the exit of our investment inAdvisorEngine . Gains and losses also generally arise from the sale of gold earned from management fees paid by our physically-backed gold ETPs, foreign exchange fluctuations and other miscellaneous items. Income taxes Our effective income tax rate for the three months endedSeptember 30, 2021 of 7.9% resulted in income tax expense of$0.5 million . Our effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a lower tax rate on foreign earnings and a non-taxable gain on revaluation of deferred consideration, partly offset by higher non-deductible compensation. Our effective income tax rate for the three months endedSeptember 30, 2020 of 123.7% resulted in an income tax expense of$1.4 million . Our effective income tax rate differs from the federal statutory tax rate of 21% due to a non-deductible loss on revaluation of deferred consideration. This loss was partly offset by a lower tax rate on foreign earnings. Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Selected Operating and Financial Information Nine Months Ended Percent September 30, Global AUM (in millions) 2021 2020 Change Change Average global AUM$ 72,599 $ 59,020 $ 13,579 23.0 % Operating Revenues (in thousands) Advisory fees (1)$ 220,611 $ 181,697 $ 38,914 21.4 % Other income 4,532 2,563 1,969 76.8 % Total revenues$ 225,143 $ 184,260 $ 40,833 22.2 %
(1) Advisory fees previously reported have been revised due to an immaterial
error correction. These revisions had no effect on previously reported net
income. See Note 2 to our Consolidated Financial Statements for additional
information.
Average Global AUM
Our average global AUM increased 23.0% from $59.0 billion at September 30, 2020
to $72.6 billion at September 30, 2021 arising from market appreciation and net
inflows.
Operating Revenues
Advisory fees
Advisory fee revenues increased 21.4% from $181.7 million during the nine months
ended September 30, 2020 to $220.6 million in the comparable period in 2021 due
to higher average global AUM. Our average global advisory fee was 0.41% during
both the nine months ended September 30, 2020 and September 30, 2021 .
Other income
Other income increased 76.8% from $2.6 million during the nine months ended
September 30, 2020 to $4.5 million in the comparable period in 2021 primarily
due to higher fees associated with our European listed products.
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Operating Expenses
Nine Months Ended
Percent
September 30,
(in thousands) 2021 2020 Change Change
Compensation and benefits $ 64,985 $ 53,848 $ 11,137 20.7 %
Fund management and administration
(1) 43,495 41,785 1,710 4.1 %
Marketing and advertising 9,525 7,413 2,112 28.5 %
Sales and business development 7,239 7,984 (745 ) (9.3 %)
Contractual gold payments 12,834 12,362 472 3.8 %
Professional fees 5,517 3,580 1,937 54.1 %
Occupancy, communications and equipment 3,904 4,805 (901 ) (18.8 %)
Depreciation and amortization 693 760 (67 ) (8.8 %)
Third-party distribution fees 5,346 3,928 1,418 36.1 %
Acquisition and disposition-related costs - 416 (416 ) (100.0 %)
Other 5,110 5,204 (94 ) (1.8 %)
Total operating expenses $ 158,648 $ 142,085 $ 16,563 11.7 %
Nine Months Ended
September 30,
As a Percent of Revenues: 2021 2020
Compensation and benefits 28.9 % 29.2 %
Fund management and administration
(1) 19.3 % 22.7 %
Marketing and advertising 4.2 % 4.0 %
Sales and business development 3.2 % 4.4 %
Contractual gold payments 5.7 % 6.7 %
Professional fees 2.5 % 2.0 %
Occupancy, communications and equipment 1.7 % 2.6 %
Depreciation and amortization 0.3 % 0.4 %
Third-party distribution fees 2.4 % 2.1 %
Acquisition and disposition-related costs 0.0 % 0.2 %
Other 2.3 % 2.8 %
Total operating expenses 70.5 % 77.1 %
(1) Fund management and administration expenses previously reported have been
revised due to an immaterial error correction. These revisions had no effect
on previously reported net income. See Note 2 to our Consolidated Financial
Statements for additional information.
Compensation and benefits Compensation and benefits expense increased 20.7% from$53.8 million during the nine months endedSeptember 30, 2020 to$65.0 million in the comparable period in 2021 due to higher incentive compensation and headcount. Fund management and administration Fund management and administration expense increased 4.1% from$41.8 million during the nine months endedSeptember 30, 2020 to$43.5 million in the comparable period in 2021 primarily due to higher average global AUM. Marketing and advertising Marketing and advertising expense increased 28.5% from$7.4 million during the nine months endedSeptember 30, 2020 to$9.5 million in the comparable period in 2021 as our spending in the prior year was reduced at the onset of the COVID-19 pandemic. Sales and business development Sales and business development expense decreased 9.3% from$8.0 million during the nine months endedSeptember 30, 2020 to$7.2 million in the comparable period in 2021 primarily due to lower travel and discretionary spending resulting from the persistence of the COVID-19 pandemic. 45 -------------------------------------------------------------------------------- Table of Contents Contractual gold payments Contractual gold payments expense increased 3.8% from$12.4 million during the nine months endedSeptember 30, 2020 to$12.8 million in the comparable period in 2021. This expense was associated with the payment of 7,125 ounces of gold and was calculated using the average daily spot price of$1,735 and$1,801 per ounce during the nine months endedSeptember 30, 2020 and 2021, respectively. Professional fees Professional fees increased 54.1% from$3.6 million during the nine months endedSeptember 30, 2020 to$5.5 million in the comparable period in 2021 due to spending related to our digital assets initiative. Occupancy, communications and equipment Occupancy, communications and equipment expense decreased 18.8% from$4.8 million during the nine months endedSeptember 30, 2020 to$3.9 million in the comparable period in 2021 as we exited ourNew York office and reduced our office footprint inEurope . Depreciation and amortization Depreciation and amortization expense decreased 8.8% from$0.8 million during the nine months endedSeptember 30, 2020 to$0.7 million in the comparable period in 2021 due to the write-off of fixed assets related to the exit of ourNew York office. Third-party distribution fees Third-party distribution fees increased 36.1% from$3.9 million during the nine months endedSeptember 30, 2020 to$5.3 million in the comparable period in 2021 due to higher AUM inLatin America resulting in higher fees paid to our third-party marketing agent, as well as additional platform relationships. Acquisition and disposition-related costs Acquisition and disposition-related costs of$0.4 million during the nine months endedSeptember 30, 2020 arose due to the sale of our Canadian ETF business which was completed inFebruary 2020 . Other Other expenses were essentially unchanged from the nine months endedSeptember 30, 2020 . Other Income/(Expenses) Nine Months Ended Percent September 30, (in thousands) 2021 2020 Change Change Interest expense$ (8,592) $ (6,974) $ (1,618) 23.2 % Gain/(loss) on revaluation of deferred consideration - gold payments 5,066 (34,436 ) 39,502 n/a Interest income 1,145 393 752 191.3 % Impairments (16,156 ) (22,752 ) 6,596 (29.0 %) Loss on extinguishment of debt - (2,387 ) 2,387 (100.0 %) Other losses and gains, net (6,558 ) 56
(6,614 ) n/a
Total other expenses, net$ (25,095) $ (66,100) $ 41,005 (62.0 %) Nine Months Ended September 30, As a Percent of Revenues: 2021
2020
Interest expense (3.8 %) (3.8 %)
Gain/(loss) on revaluation of deferred consideration -
gold payments 2.3 % (18.7 %)
Interest income 0.5 % 0.2 %
Impairments (7.2 %) (12.3 %)
Loss on extinguishment of debt - (1.3 %)
Other losses and gains, net (2.9 %) 0.0 %
Total other expenses, net (11.1 %) (35.9 %)
46-------------------------------------------------------------------------------- Table of Contents Interest expense Interest expense increased 23.2% from$7.0 million during the nine months endedSeptember 30, 2020 to$8.6 million in the comparable period in 2021 due to a higher level of debt outstanding in the current period. Our effective interest rate during the nine months endedSeptember 30, 2020 and 2021 was 5.3% and 5.0%, respectively. Gain/(loss) on revaluation of deferred consideration We recognized a loss on revaluation of deferred consideration of($34.4) million during the nine months endedSeptember 30, 2020 as compared to a gain of$5.1 million during the nine months endedSeptember 30, 2021 . The gain in the current period was due to a decline in spot gold prices, partly offset by a steepening of the forward-looking gold curve. The magnitude of any gain or loss is highly correlated to the magnitude of the change in the forward-looking price of gold. Interest income Interest income increased 191.3% from$0.4 million during the nine months endedSeptember 30, 2020 to$1.1 million in the comparable period in 2021 due to an increase in our securities owned. Impairments During the nine months endedSeptember 30, 2021 , we recognized a loss of approximately$16.2 million upon exiting ourNew York andLondon offices, which is included in impairments. During the nine months endedSeptember 30, 2020 , we recognized a non-cash impairment charge of$22.8 million , including$3.1 million related to our investment in Thesys and$19.7 million related to our investment inAdvisorEngine . Loss on extinguishment of debt During the nine months endedSeptember 30, 2020 , we recognized a non-cash loss on extinguishment of debt of$2.4 million arising from the acceleration of debt issuance cost amortization in connection with the termination of our former credit facility onJune 16, 2020 . Other losses and gains, net Other losses and gains, net were$0.1 million and($6.6) million during the nine months endedSeptember 30, 2020 and 2021, respectively. This includes a charge of$6.0 million and$5.2 million during the nine months endedSeptember 30, 2020 and 2021, respectively, arising from the release of a tax-related indemnification asset upon the expiration of the statute of limitations. An equal and offsetting benefit has been recognized in income tax expense. During the nine months endedSeptember 30, 2021 , we also recognized losses on our securities owned of$2.2 million , a gain of$0.8 million related to the remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business and an unrealized gain of$0.4 million on our investment in Securrency. In addition, during the nine months endedSeptember 30, 2020 , we recognized a gain of$2.9 million associated with the sale of our Canadian ETF business and a gain of$1.1 million arising from an adjustment to the estimated fair value of consideration received from the exit of our investment inAdvisorEngine . Gains and losses also generally arise from the sale of gold earned from management fees paid by our physically-backed gold ETPs, foreign exchange fluctuations and other miscellaneous items. Income taxes Our effective income tax rate for the nine months endedSeptember 30, 2021 of 6.7% resulted in income tax expense of$2.8 million . Our effective income tax rate differs from the federal statutory rate of 21% primarily due to a$5.2 million reduction in unrecognized tax benefits, a lower tax rate on foreign earnings and a non-taxable gain on revaluation of deferred consideration. These items were partly offset by tax shortfalls associated with the vesting and exercise of stock-based compensation and non-deductible executive compensation. Our effective income tax rate for the nine months endedSeptember 30, 2020 of 7.4% resulted in an income tax benefit of$1.8 million . Our effective income tax rate differs from the federal statutory rate of 21% primarily due to a valuation allowance on capital losses, a non-deductible loss on revaluation of deferred consideration and tax shortfalls associated with the vesting and exercise of stock-based compensation awards. These items were partly offset by a$6.0 million reduction in unrecognized tax benefits, a$2.9 million non-taxable gain recognized upon sale of our Canadian ETF business in the first quarter of 2020, a tax benefit of$2.8 million recognized in connection with the release of a deferred tax asset valuation allowance on interest carryforwards arising from our debt previously held in theUnited Kingdom and a lower tax rate on foreign earnings. 47 -------------------------------------------------------------------------------- Table of Contents 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 include:
• Adjusted
net income and adjusted diluted earnings per share.
We disclose adjusted net income and adjusted diluted earnings per share
as
non-GAAPfinancial measurements in order to report our results exclusive of items
that are
non-recurring
or not core to our operating business. We believe presenting these
non-GAAPfinancial measures provides investors with a consistent way to analyze
our performance. These
non-GAAP
financial measures exclude the following:
• Unrealized gains or losses on the revaluation of deferred
consideration
: Deferred consideration is an obligation we assumed inconnection
with the ETFS acquisition that is carried at fair value. This item
represents the present value of an obligation to pay fixed ounces of
gold into perpetuity and is measured using forward-looking gold
prices. Changes in the forward-looking price of gold and changes in
the discount rate used to compute the present value of the annual
payment obligations may have a material impact on the carrying value
of the deferred consideration and our reported financial results. We
exclude this item when arriving at adjusted net income and adjusted
diluted earnings per share as it is not core to our operating
business. The item is not adjusted for income taxes as the obligation
was assumed by a wholly-owned subsidiary of ours that is based in
Jersey, a jurisdiction where we are subject to a zero percent tax
rate.
• Gains or losses on securities owned
: We account for our securities owned as trading securities, which
requires these instruments to be measured at fair value with gains and
losses reported in net income. In the third quarter of 2021, we began
excluding these items when calculating our
non-GAAP
financial measurements as these securities have become a more
meaningful percentage of total assets and the gains and losses
introduce volatility in earnings and are not core to our operating
business.
• Tax shortfalls and windfalls upon vesting and exercise of stock-based
compensation awards
: GAAP requires the recognition of tax windfalls and shortfalls within
income tax expense. These items arise upon the vesting and exercise of
stock-based compensation awards and the magnitude is directly
correlated to the number of awards vesting/exercised as well as the
difference between the price of our stock on the date the award was
granted and the date the award vested or was exercised. We exclude
these items when determining adjusted net income and adjusted diluted
earnings per share as they introduce volatility in earnings and are
not core to our operating business.
• Other items
: Remeasurement of contingent consideration payable to us from the
sale of our former Canadian ETF business, unrealized gains recognized
on our investment in Securrency, impairment charges, interest expense
from the amortization of discount arising from the bifurcation of the
conversion option embedded in the Convertible Notes (prior to
January 1, 2021 , the effective date of Accounting Standards Update
2020-06,
Debt - Debt with Conversion and Other Options, CashConversion)
, a loss on extinguishment of debt, the release of a deferred tax
asset valuation allowance recognized on interest carryforwards arising
from our debt previously outstanding in the United Kingdom , a gain
arising from an adjustment to the estimated fair value of
consideration received from the exit of our investment in
AdvisorEngine , a gain recognized upon the sale of our Canadian ETF
business and acquisition and disposition-related costs are excluded
when calculating our
non-GAAP
financial measurements.
48--------------------------------------------------------------------------------
Table of Contents
Three Months Ended Nine Months Ended
September 30 ,
2021 2020 2021 2020
Net income/(loss), as reported $ 5,833 $ (270) $38,610 $(22,158)
Add back: Impairments, net of income taxes (where
applicable) 12,002 2,326 12,247 21,998
Deduct/Add back: (Gain)/loss on revaluation of
deferred consideration (1,737) 8,870 (5,066) 34,436
Deduct: Gain recognized upon sale of Canadian ETF
business (787) - (787) (2,877)
Add back: Unrealized loss on securities owned, a
fair value, net of income taxes 1,006 - 1,006 -
Deduct: Unrealized gain recognized on our
investment in Securrency, net of income taxes - - (284) -
Deduct/Add back: Tax (windfalls)/shortfalls upon
vesting and exercise of stock-based compensation
awards - 50 (110) 670
Add back: Loss on extinguishment of debt, net of
income taxes - - - 1,910
Deduct: Release of a deferred tax asset valuation
allowance recognized on interest carryforwards
arising from debt previously outstanding in the
United Kingdom - - - (2,842)
Add back: Interest expense from the amortization of
discount arising from the bifurcation of the
conversion option embedded in the convertible
notes, net of income taxes - 286 - 328
Deduct: Gain arising from an adjustment to the
estimated fair value of consideration received from
the exit of investment in
- (225) - (1,093)
Add back: Acquisition and disposition-related
costs, net of income taxes - - - 383
Adjusted net income $16,317 $11,037 $45,616 $ 30,755
Deduct: Income distributed to participating
securities (538) (556) (1,634) (1,663)
Deduct: Undistributed income allocable to
participating securities (1,275) (687) (3,422) (1,701)
Adjusted net income available to common
stockholders $14,504 $ 9,794 $40,560 $ 27,391
Weighted average diluted shares, excluding
participating securities (in thousands) (See Note
19 to our Consolidated Financial Statements) 143,142 145,569 145,604 149,891
Adjusted earnings per share - diluted $ 0.10 $ 0.07 $ 0.28 $ 0.18
49
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Table of Contents
Liquidity and Capital Resources
The following table summarizes key data regarding our liquidity, capital
resources and use of capital to fund our operations:
September 30, December 31,
2021 2020
Balance Sheet Data (in thousands)
:
Cash and cash equivalents $ 127,924 $ 73,425
Securities owned, at fair value 119,390 34,895
Accounts receivable 32,092 29,455
Securities
held-to-maturity 331 451
Total: Liquid assets 279,737 138,226
Less: Total current liabilities (75,743 ) (73,999 )
Less: Regulatory capital requirement - certain
international subsidiaries (12,384 ) (10,745 )
Total: Available liquidity $ 191,610 $ 53,482
Nine Months Ended September 30,
2021 2020
Cash Flow Data (in thousands)
:
Operating cash flows
(1) $ 50,109 $ 32,129
Investing cash flows
(1) (92,467) 11,954
Financing cash flows 97,350 (55,107)
Foreign exchange rate effect (493) (387)
Increase/(decrease) in cash and cash equivalents $ 54,499
$ (11,411)
(1) Cash flows from purchasing securities owned, at fair value of
selling securities owned, at fair value of
ended
associated with the Company's business activities have been reclassified from
operating activities to investing activities to conform to the current year's
presentation in the Consolidated Statements of Cash Flows. See Note 2 for
additional information.
Liquidity
We consider our available liquidity to be our liquid assets, less our current liabilities and regulatory capital requirements of certain international subsidiaries. Liquid assets consist of cash and cash equivalents, securities owned, at fair value, accounts receivable and securities held-to-maturity. Our securities owned, at fair value are highly liquid investments. Accounts receivable are current assets and primarily represent receivables from advisory fees we earn from our ETPs. Our current liabilities consist primarily of payments owed to vendors and third parties in the normal course of business, deferred consideration and accrued incentive compensation for employees. Cash and cash equivalents increased$54.5 million during the nine months endedSeptember 30, 2021 due to$150.0 million of proceeds received from the issuance of the 2021 Notes,$50.1 million of net cash provided by operating activities,$11.0 million of proceeds from the sale of securities owned and$0.3 million provided by other activities. These increases were partly offset by$97.6 million used to purchase securities owned,$34.5 million used to repurchase our common stock,$14.7 million used to pay dividends on our common stock,$5.8 million used to purchase investments and$4.3 million used to pay the 2021 Note issuance costs. Cash and cash equivalents decreased$11.4 million during the nine months endedSeptember 30, 2020 due to$179.0 million used to repay our debt,$34.7 million used to purchase securities owned,$31.0 million used to repurchase our common stock,$15.2 million used to pay dividends on our common stock,$5.4 million used to pay theJune 2020 Notes issuance costs and$0.4 million used in other activities. These decreases were partly offset by$175.3 million of proceeds from the issuance of theJune 2020 Notes,$32.1 million of net cash provided by operating activities,$18.1 million of proceeds from the sale of securities owned,$16.4 million of proceeds from held-to-maturity securities maturing or called prior to maturity,$9.6 million of proceeds from the sale of our financial interests inAdvisorEngine and$2.8 million of net proceeds from the sale of our Canadian ETF business. Issuance of Convertible Notes OnJune 14, 2021 , we issued and sold$150.0 million in aggregate principal amount of 3.25% Convertible Senior Notes due 2026 (the "2021 Notes") pursuant to an indenture datedJune 14, 2021 , between us andU.S. Bank National Association , as trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended ("Rule 144A"). OnJune 16, 2020 , we issued and sold$150.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 50 -------------------------------------------------------------------------------- Table of Contents 2023 (the "June 2020 Notes") pursuant to an indenture datedJune 16, 2020 , between us and the trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A. OnAugust 13, 2020 , we issued and sold$25.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 at a price equal to 101% of the principal amount thereof, plus interest deemed to have accrued sinceJune 16, 2020 , and constitute a further issuance of, and form a single series with, ourJune 2020 Notes (the "August 2020 Notes" and together with theJune 2020 Notes, the "2020 Notes"). After the issuance of the 2021 Notes (and together with the 2020 Notes, the "Convertible Notes"), we had$325.0 million aggregate principal amount of Convertible Notes outstanding. Key terms of the Convertible Notes are as follows: 2021 Notes 2020 Notes Maturity date (unless earlier converted, repurchased or redeemed) June 15, 2026 June 15, 2023 Interest rate 3.25 % 4.25 % Conversion price $ 11.04 $ 5.92 Conversion rate 90.5797 168.9189 Redemption price $ 14.35 $ 7.70 • Interest rate : Payable semiannually in arrears onJune 15 andDecember 15 of each year. • Conversion price : Convertible at an initial conversion rate of our common stock, per
price as disclosed in the table above).
• Conversion
:
Holders may convert at their option at any time prior to the close of
business on the business day immediately preceding March 15, 2026 andonly under the following circumstances: (i) if the last reported sale
price of our common stock for at least 20 trading days during a period of
30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130%
of the conversion price on each applicable trading day; (ii) during the
five business day period after any ten consecutive trading day period
(the "measurement period") in which the trading price per
principal amount of the Convertible Notes for each trading day of the
measurement period was less than 98% of the product of the last reported
sales price of our common stock and the conversion rate on each such
trading day; (iii) upon a notice of redemption delivered by us in
accordance with the terms of the indentures but only with respect to theConvertible Notes called (or deemed called) for redemption; or (iv) upon
the occurrence of specified corporate events. On or after
and
respectively, until the close of business on the second scheduled trading
day immediately preceding the maturity date, holders may convert their
Convertible Notes at any time, regardless of the foregoing circumstances.
• Cash settlement of principal amount
: Upon conversion, we will pay cash up to the aggregate principal amount
of the Convertible Notes to be converted. At our election, we will alsosettle our conversion obligation in excess of the aggregate principal
amount of the Convertible Notes being converted in either cash, shares of
our common stock or a combination of cash and shares of its common stock.
• Redemption price
: We may redeem for cash all or any portion of the notes, at our option,
on or after June 20, 2026 and June 20, 2023 in respect of the 2021 Notes
and 2020 Notes, respectively, and on or prior to the 55
th
scheduled trading day immediately preceding the maturity date, if the
last reported sale price of our common stock has been at least 130% of
the conversion price then in effect for at least 20 trading days,
including the trading day immediately preceding the date on which we
provide notice of redemption, during any 30 consecutive trading dayperiod ending on, and including, the trading day immediately preceding
the date on which we provide notice of redemption, at a redemption price
equal to 100% of the principal amount of the notes to be redeemed, plus
accrued and unpaid interest to, but excluding the redemption date. No
sinking fund is provided for the Convertible Notes.
• Limited investor put rights
: Holders of the Convertible Notes have the right to require us to
repurchase for cash all or a portion of their notes at 100% of their
principal amount, plus any accrued and unpaid interest, upon theoccurrence of certain change of control transactions or liquidation,
dissolution or common stock delisting events.
• Conversion rate increase in certain customary circumstances: In certain circumstances, conversions in connection with a "make-whole
fundamental change" (as defined in the indentures) or conversions of
Convertible Notes called (or deemed called) for redemption may result in
an increase to the conversion rate, provided that the conversion rate
will not exceed 144.9275 shares and 270.2702 shares of our common stock
per $1,000 principal amount of the 2021 Notes and 2020 Notes,
respectively (the equivalent of 69,036,410 shares of our common stock),
subject to adjustment.
• Seniority and Security
: The 2021 Notes and 2020 Notes rank equal in right of payment, and are
our senior unsecured obligations, but are subordinated in right of
payment to our obligations to make certain redemption payments (if and
when due) in respect of its Series A
Non-VotingConvertible Preferred Stock (See Note 12 to our Consolidated Financial
Statements).
51-------------------------------------------------------------------------------- Table of Contents The indentures contain customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes outstanding may declare the entire principal amount of all the Convertible Notes to be repurchased, plus any accrued special interest, if any, to be immediately due and payable. Capital Resources Our principal source of financing is our operating cash flow. We believe that cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for the foreseeable future. Our ability to satisfy our contractual obligations as they arise are discussed in the section titled "Contractual Obligations" below. Use of Capital Our business does not require us to maintain a significant cash position. However, certain of our international subsidiaries are required to maintain a minimum level of regulatory capital, which atSeptember 30, 2021 was approximately$12.4 million in the aggregate. Notwithstanding these regulatory capital requirements, we expect that our main uses of cash will be to fund the ongoing operations of our business. We also maintain a capital return program which includes a$0.03 per share quarterly cash dividend and authority to purchase our common stock throughApril 27, 2022 , including purchases to offset future equity grants made under our equity plans. There were no shares repurchased during the three months endedSeptember 30, 2021 . AtSeptember 30, 2021 ,$17.7 million remained under this program for future purchases. Contractual Obligations Convertible Notes AtSeptember 30, 2021 , we had$325.0 million aggregate principal amount of Convertible Notes outstanding, of which$175.0 million are scheduled to mature onJune 15, 2023 and$150.0 million are scheduled to mature onJune 15, 2026 , unless earlier converted, repurchased or redeemed. Conditional conversions or a requirement to repurchase the Convertible Notes upon the occurrence of a fundamental change may accelerate payment. The Convertible Notes require cash settlement of the principal amount, while settlement of the conversion obligation in excess of the aggregate principal amount may be satisfied in either cash, shares of our common stock or a combination of cash and shares of its common stock. We currently anticipate refinancing these obligations when due. See the section titled "Issuance of Convertible Notes" above for additional information. Deferred Consideration - Gold Payments Deferred consideration represents an obligation we assumed inApril 2018 in connection with our acquisition of the European exchange-traded commodity, currency and leveraged and inverse business ofETFS Capital Limited . The obligation is for fixed payments toETFS Capital Limited of physical gold bullion equating to 9,500 ounces of gold per year throughMarch 31, 2058 and then subsequently reduced to 6,333 ounces of gold continuing into perpetuity ("Contractual Gold Payments"). The present value of the deferred consideration was$225.0 million atSeptember 30, 2021 . The Contractual Gold Payments are paid from advisory fee income generated by any of our sponsored financial products backed by physical gold with no recourse back to us for any unpaid amounts that exceed advisory fees earned. See Note 9 to our Consolidated Financial Statements for additional information. Operating Leases Total future minimum lease payments with respect to our office space was$0.7 million atSeptember 30, 2021 . Cash flows generated by our operating activities and existing cash balances should be sufficient to satisfy the future minimum lease payments. See Note 13 to our Consolidated Financial Statements for additional information. Off-Balance Sheet Arrangements We do not have any off-balance sheet financing or other arrangements and have neither created nor are party to any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. 52 -------------------------------------------------------------------------------- Table of Contents Critical Accounting PoliciesGoodwill and Intangible AssetsGoodwill is the excess of the purchase price over the fair values of the identifiable net assets at the acquisition date. We test goodwill for impairment at least annually and at the time of a triggering event requiring re-evaluation, if one were to occur.Goodwill is considered impaired when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying value. If the estimated fair value of such reporting unit is less than its carrying value, goodwill impairment is recognized based on that difference, not to exceed the carrying amount of goodwill. A reporting unit is an operating segment or a component of an operating segment provided that the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.Goodwill is allocated to ourU.S. Business and European Business components. For impairment testing purposes, these components are aggregated as a single reporting unit as they fall under the same operating segment and have similar economic characteristics.Goodwill is assessed for impairment annually onNovember 30 th . When performing our goodwill impairment test, we consider a qualitative assessment, when appropriate, and a quantitative assessment using the market approach and our market capitalization when determining the fair value of the reporting unit. Indefinite-lived intangible assets are tested for impairment at least annually and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are impaired if their estimated fair value is less than their carrying value. We may rely on a qualitative assessment when performing our intangible asset impairment test. Otherwise, the impairment evaluation is performed at the lowest level of reasonably identifiable cash flows independent of other assets. The annual impairment testing date for our intangible assets isNovember 30 th . Investments We account for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed in ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities , to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment (assessed quarterly), plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In addition, income is recognized when dividends are received only to the extent they are distributed from net accumulated earnings of the investee. Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment. See Note 7 to our Consolidated Financial Statements for information regarding a gain of$0.4 million recognized on our investment in Securrency during the nine months endedSeptember 30, 2021 . Deferred Consideration - Gold Payments Deferred consideration represents the present value of an obligation to pay gold to a third party into perpetuity and is measured using forward-looking gold prices observed on the CMX exchange, a selected discount rate and perpetual growth rate. The weighted average forward-looking gold price per ounce, discount rate and perpetual growth rate were$2,093 , 9.0% and 1.4%, respectively, atSeptember 30, 2021 . Changes in the fair value of this obligation are reported as gain/(loss) on revaluation of deferred consideration - gold payments on our Consolidated Statements of Operations. During the three months endedSeptember 30, 2021 , we reported a gain on deferred consideration - gold payments of$1.7 million . A 1.0% increase in the weighted average forward-looking gold price per ounce would have reduced this reported gain by$1.6 million , a 1 percentage point increase in the discount rate would have increased this reported gain by$23.7 million and a 1 percentage point increase in the perpetual growth rate would have reduced this reported gain by$20.7 million . See Note 9 to our Consolidated Financial Statements for additional information. Revenue Recognition We earn substantially all of our revenue in the form of advisory fees from our ETPs and recognize this revenue over time, as the performance obligation is satisfied. Advisory fees are based on a percentage of the ETPs' average daily net assets. Progress is measured using the practical expedient under the output method resulting in the recognition of revenue in the amount for which we have a right to invoice. Recently Adopted Accounting Pronouncements OnJanuary 1, 2021 , we early adopted ASU 2020-06, Debt - Debt with Conversion and Other Options (ASU 2020-06) under the modified retrospective approach. Under the ASU, the accounting for convertible instruments was simplified by removing major separation models required under current GAAP. Accordingly, more convertible instruments are reported as a single liability or equity with no separate accounting for embedded conversion features. Certain settlement conditions that are required for equity contracts to 53
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Table of Contents qualify for the derivative scope exception are removed and, as a result, more equity contracts will qualify for the scope exception. The ASU also simplifies the diluted earnings-per-share calculation in certain areas. Upon the adoption of this ASU, we reclassified the equity component related to the convertible notes, net of deferred taxes, reducing accumulated deficit by$0.6 million , increasing the carrying value of the convertible notes by$4.1 million , reducing additional paid-in capital by$3.7 million and reducing deferred tax liabilities by$1.0 million . These updates also reduced interest expense recognized on our convertible notes by approximately$0.4 million per quarter. See Note 11 to our Consolidated Financial Statements for additional information. OnJanuary 1, 2021 , we adopted ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (ASU 2019-12). The main objective of the standard is to reduce complexity in the accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income); (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The standard also simplifies the accounting for income taxes by enacting the following: (a) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount as a non-income-based tax; (b) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered as a separate transaction; (c) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (d) requiring that an entity reflect the enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. We have determined that the adoption of this standard did not have a material impact on our financial statements.
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