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 Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year endedDecember 31, 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 an asset management company in the business of offering transparent financial exposures to our clients and are a leading global ETP sponsor based on assets under management, or AUM, with AUM of$79.4 billion as ofMarch 31, 2022 . More recently, we have been positioning ourselves to expand beyond our existing ETP business by leveraging blockchain technology, digital assets and principles of decentralized finance, or DeFi, to deliver transparency, choice and inclusivity to customers and consumers around the world. Our family of ETPs includes providing exposure to equities, commodities, fixed income, leveraged and inverse, currency, cryptocurrency and alternative strategies. 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. 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. These products are distributed 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. We are at the forefront of innovation and have differentiated ourselves through continued investments in technology-enabled and research-driven solutions such as our Advisor Solutions program, which includes portfolio construction, asset allocation, practice management services and digital tools for financial advisors. We seek to usher in the next chapter of financial services by introducing new revenue streams and expanding our offerings to include a new financial services mobile application, branded WisdomTree Prime ™ , a digital wallet that is native to the blockchain and being developed for saving, spending and investing in both native crypto assets and tokenized versions of mainstream financial assets (e.g., blockchain enabled investment funds). We also are planning to launch asset- and fund-tokenization products beginning with a dollar token, gold token and digital short term treasury fund which will be available on multiple public and permissioned blockchains, leveraging federal and state regulated entities. As we pursue our digital assets strategy, we are embracing a concept we refer to as "responsible DeFi," which we believe upholds the foundational principles of regulation in this innovative and quickly evolving space.
We were incorporated under the laws of the state of
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Table of Contents 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 atMarch 31, 2021 ,December 31, 2021 andMarch 31, 2022 : [[Image Removed]] Market Environment During the first quarter of 2022, theU.S. andEurozone markets declined and inflationary pressures rose. Commodity prices surged following the Russian invasion of the sovereign territory ofUkraine and this contributed to a further increase in inflation as well as supply chain disruption. Emerging markets were negatively affected by renewed COVID-19 outbreaks. Gold prices increased during the quarter. The S&P 500, MSCI EAFE (local currency) and MSCI Emerging Markets Index (U.S. dollar) decreased by 4.6%, 3.6% and 6.9%, respectively, while gold prices increased 6.7% during the quarter. In addition, the European and Japanese equities markets both depreciated with the MSCI EMU Index and MSCI Japan Index decreasing 9.1% and 1.4%, respectively, in local currency terms for the quarter. Also, theU.S. dollar rose 1.7% and 2.7% versus the euro and British pound, respectively, and weakened 5.9% versus the Japanese yen during the quarter.
[[Image Removed]]
Source: Morningstar
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International ETP Industry Flows
International ETP industry net flows were
[[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 in
Our
[[Image Removed]]
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European Listed ETPs
Our European listed ETPs' AUM increased from$29.3 billion atDecember 31, 2021 to$30.8 billion atMarch 31, 2022 primarily due to market appreciation, partly offset by net outflows. [[Image Removed]]
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]]
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• Revenues
- We recorded operating revenues of
ended
due to higher average AUM, partly offset by a lower average advisory fee.
• Operating Expenses
- Total operating expenses increased 15.3% from the three months ended
responding to the activist campaign by
their Schedule 13D initially filed on
amended (the "activist campaign"), higher compensation arising from
increased headcount, higher fund management and administration costs, as
well as higher marketing expenses, third-party distribution fees and
sales and business development expenses. These increases were partly
offset by lower occupancy expenses.
• Other Income/(Expenses)- Other income/(expenses) includes interest income and interest expense,
gains/(losses) on revaluation of deferred consideration - gold payments,
impairments and other net losses. For the three months ended
2022 and 2021, the (losses)/gains on revaluation of deferred
consideration - gold payments were
respectively. We recognized charges arising from the release of a
tax-related
indemnification asset of
months ended
offsetting benefit has been recognized in income taxes. In addition,
during the three months ended March 31, 2022 we recognized losses on our
securities owned of $5.1 million .
• Net (loss)/income
- We reported net loss of
months ended
change related to the revaluation of deferred consideration - gold
payments of $19.8 million , losses on our securities owned and the change
in revenues and expenses described above.
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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
March 31,
March 31, December 31,
2022 2021 2021
GLOBAL ETPs (in millions)
Beginning of period assets $ 77,471 $ 72,774 $ 67,383
Inflows/(outflows) 1,314 1,908 1,268
Market appreciation/(depreciation) 618 2,804 876
Fund closures - (15 ) -
End of period assets $ 79,403 $ 77,471 $ 69,527
Average assets during the period $ 77,813 $ 75,986 $ 69,570
Average ETP advisory fee during the period 0.40 % 0.40 % 0.41 %
Revenue days 90 92 90
Number of ETPs-end of period 341 329 313
U.S. LISTED ETFs (in millions)
Beginning of period assets $ 48,210 $ 44,742 $ 38,517
Inflows/(outflows) 2,250 1,865 1,343
Market appreciation/(depreciation) (1,838 ) 1,618 2,303
Fund closures - (15 ) -
End of period assets $ 48,622 $ 48,210 $ 42,163
Average assets during the period $ 47,506 $ 46,944 $ 40,706
Number of ETFs - end of the period 77 75 68
EUROPEAN LISTED ETPs (in millions)
Beginning of period assets $ 29,261 $ 28,032 $ 28,866
Inflows/(outflows) (936 ) 43 (75 )
Market appreciation/(depreciation) 2,456 1,186 (1,427 )
Fund closures - - -
End of period assets $ 30,781 $ 29,261 $ 27,364
Average assets during the period $ 30,307 $ 29,042 $ 28,864
Number of ETPs-end of period 264 254 245
PRODUCT CATEGORIES (in millions)
Commodity & Currency Beginning of period assets$ 24,598 $ 23,825 $ 25,880 Inflows/(outflows) (1,058 ) (246 ) (672 ) Market appreciation/(depreciation) 2,761 1,019 (1,552 ) End of period assets$ 26,301 $ 24,598 $ 23,656 Average assets during the period$ 25,893 $ 24,423 $ 25,290 U.S. Equity Beginning of period assets$ 23,860 $ 21,383 $ 18,367 Inflows/(outflows) 779 784 218 Market appreciation/(depreciation) (901 ) 1,693 1,434 End of period assets$ 23,738 $ 23,860 $ 20,019 Average assets during the period$ 23,141 $
22,964
International Developed Market Equity Beginning of period assets$ 11,888 $ 11,174 $ 9,406 Inflows/(outflows) 97 440 17 Market appreciation/(depreciation) (566 ) 274 561 End of period assets$ 11,419 $ 11,888 $ 9,984 Average assets during the period$ 11,539 $ 11,518 $ 9,786 Emerging Market Equity Beginning of period assets$ 10,375 $ 10,666 $ 8,539 Inflows/(outflows) 189 (3 ) 1,663 Market appreciation/(depreciation) (573 ) (288 ) 275 End of period assets$ 9,991 $ 10,375 $ 10,477 Average assets during the period$ 10,116 $ 10,550 $ 9,875 37
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Three Months Ended
March 31,
March 31, December 31,
2022 2021 2021
Fixed Income
Beginning of period assets $ 4,354 $ 3,528 $ 3,308
Inflows/(outflows) 1,242 837 10
Market appreciation/(depreciation) (178 ) (11 ) (74 )
End of period assets $ 5,418 $ 4,354 $ 3,244 Average assets during the period
3,234 Leveraged & Inverse Beginning of period assets$ 1,775 $ 1,663 $ 1,477 Inflows/(outflows) (2 ) 11 (4 ) Market appreciation/(depreciation) 83 101 46 End of period assets$ 1,856 $ 1,775 $ 1,519
Average assets during the period
1,554 Cryptocurrency Beginning of period assets$ 357 $ 295$ 167 Inflows/(outflows) 37 28 36 Market appreciation/(depreciation) (11 ) 34 174 End of period assets$ 383 $ 357$ 377
Average assets during the period
264
Alternatives
Beginning of period assets $ 261 $ 222 $ 215
Inflows/(outflows) 29 56 -
Market appreciation/(depreciation) 3 (17 ) 12
End of period assets $ 293 $ 261 $ 227 Average assets during the period
223
Closed ETPs
Beginning of period assets $ 3 $ 18 $ 24
Inflows/(outflows) 1 1 -
Market appreciation/(depreciation) - (1 ) -
Fund closures - (15 ) -
End of period assets $ 4 $ 3 $ 24 Average assets during the period $ 5 $ 18 $
24
Headcount: 253 241 227
Note: Previously issued statistics may be restated due to fund closures and trade adjustments Source: WisdomTree
Three Months Ended
Selected Operating and Financial Information
Three Months Ended
March 31, Percent
AUM (in millions) 2022 2021 Change Change
Average AUM $ 77,813 $ 69,570 $ 8,243 11.8 %
Operating Revenues (in thousands)
Advisory fees
(1) $ 76,517 $ 70,042 $ 6,475 9.2 %
Other income 1,851 1,214 637 52.5 %
Total revenues $ 78,368 $ 71,256 $ 7,112 10.0 %
(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 AUM
Our average AUM increased 11.8% from
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Table of Contents Operating Revenues Advisory fees Advisory fee revenues increased 9.2% from$70.0 million during the three months endedMarch 31, 2021 to$76.5 million in the comparable period in 2022 due to higher average AUM, partly offset by a lower average advisory fee. Our average advisory fee was 0.40% during the three months endedMarch 31, 2022 and 0.41% during the same period in 2021.
Other income
Other income increased 52.5% from$1.2 million during the three months endedMarch 31, 2021 to$1.9 million in the comparable period in 2022 primarily due to higher fees associated with our European listed products. Operating Expenses Three Months Ended March 31, Percent (in thousands) 2022 2021 Change Change Compensation and benefits$ 24,787 $ 22,627 $ 2,160 9.5 % Fund management and administration (1) 15,494 13,947 1,547 11.1 % Marketing and advertising 4,023 3,006 1,017 33.8 % Sales and business development 2,609 2,145 464 21.6 % Contractual gold payments 4,450 4,270 180 4.2 % Professional fees 4,459 2,013 2,446 121.5 % Occupancy, communications and equipment 753 1,475 (722 ) (48.9 %) Depreciation and amortization 47 252 (205 ) (81.3 %) Third-party distribution fees 2,212 1,343 869 64.7 % Other 1,845 1,571 274 17.4 % Total operating expenses$ 60,679 $ 52,649 $ 8,030 15.3 % Three Months Ended March 31, As a Percent of Revenues: 2022 2021 Compensation and benefits 31.5 % 31.7 % Fund management and administration (1) 19.8 % 19.6 % Marketing and advertising 5.1 % 4.2 % Sales and business development 3.3 % 3.0 % Contractual gold payments 5.7 % 6.0 % Professional fees 5.7 % 2.8 %
Occupancy, communications and equipment 1.0 % 2.1 % Depreciation and amortization
0.1 % 0.4 %
Third-party distribution fees 2.8 % 1.9 %
Other 2.4 % 2.2 %
Total operating expenses 77.4 % 73.9 %
(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 9.5% from$22.6 million during the three months endedMarch 31, 2021 to$24.8 million in the comparable period in 2022 due to increased headcount. Headcount was 227 and 253 atMarch 31, 2021 and 2022, respectively.
Fund management and administration
Fund management and administration expense increased 11.1% from$13.9 million during the three months endedMarch 31, 2021 to$15.5 million in the comparable period in 2022 due to higher average AUM. 39
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Marketing and advertising
Marketing and advertising expense increased 33.8% from$3.0 million during the three months endedMarch 31, 2021 to$4.0 million in the comparable period in 2022 primarily due to higher spending on online marketing campaigns.
Sales and business development
Sales and business development expense increased 21.6% from$2.1 million during the three months endedMarch 31, 2021 to$2.6 million in the comparable period in 2022 primarily due to higher spending on conferences and market data.
Contractual gold payments
Contractual gold payments expense increased 4.2% from$4.3 million during the three months endedMarch 31, 2021 to$4.5 million in the comparable period in 2022. This expense was associated with the payment of 2,375 ounces of gold and was calculated using the average daily spot price of$1,798 and$1,874 per ounce during the three months endedMarch 31, 2021 and 2022, respectively.
Professional fees
Professional fees increased 121.5% from$2.0 million during the three months endedMarch 31, 2021 to$4.5 million in the comparable period in 2022 due to expenses incurred in response to the activist campaign by theInvestor Group .
Occupancy, communications and equipment
Occupancy, communications and equipment expense decreased 48.9% from$1.5 million during the three months endedMarch 31, 2021 to$0.8 million in the comparable period in 2022 due to the termination of ourNew York office lease inSeptember 2021 .
Depreciation and amortization
Depreciation and amortization expense decreased 81.3% from$0.3 million during the three months endedMarch 31, 2021 to$0.05 million in the comparable period in 2022 due to write-off of fixed assets related to the exit of ourNew York office.
Third-party distribution fees
Third-party distribution fees increased 64.7% from$1.3 million during the three months endedMarch 31, 2021 to$2.2 million in the comparable period in 2022 primarily due to higher AUM inLatin America resulting in higher fees paid to our third-party marketing agent, as well as new platform relationships inEurope .
Other
Other expenses were essentially unchanged from the three months endedMarch 31, 2021 . Other Income/(Expenses) Three Months Ended March 31, Percent (in thousands) 2022 2021 Change Change Interest expense$ (3,732 ) $ (2,296 ) $ (1,436 ) 62.5 % (Loss)/gain on revaluation of deferred consideration - gold payments (17,018 ) 2,832 (19,850 ) n/a Interest income 794 231 563 243.7 % Impairments - (303 ) 303 n/a Other losses, net (24,707 ) (5,893 ) (18,814 ) 319.3 % Total other expenses, net$ (44,663 ) $ (5,429 ) $ (39,234 ) 722.7 % 40
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Three Months Ended
March 31,
As a Percent of Revenues: 2022 2021
Interest expense (4.8 %) (3.2 %)
(Loss)/gain on revaluation of deferred consideration -
gold payments (21.7 %) 4.0 %
Interest income 1.0 % 0.3 %
Impairments 0.0 % (0.4 %)
Other losses, net (31.5 %) (8.3 %)
Total other expenses, net (57.0 %) (7.6 %)
Interest expense
Interest expense increased 62.5% from $2.3 million during the three months ended
March 31, 2021 to $3.7 million in the comparable period in 2022 due to a higher
level of debt outstanding, partly offset by a lower effective interest rate. Our
effective interest rate during the three months ended March 31, 2021 and 2022
was 5.3% and 4.6%, respectively.
(Loss)/gain on revaluation of deferred consideration
We recognized a gain on revaluation of deferred consideration of$2.8 million during the three months endedMarch 31, 2021 as compared to a loss of($17.0) million during the three months endedMarch 31, 2022 . The loss in the current quarter was due to higher 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 243.7% from
Impairment
During the three months endedMarch 31, 2021 , we recognized an impairment charge of$0.3 million upon exiting ourLondon office. There were no impairment charges recognized in the comparable period in 2022.
Other losses, net
Other losses, net were$5.9 million and$24.7 million during the three months endedMarch 31, 2021 and 2022, respectively. The three months endedMarch 31, 2022 includes a non-cash charge of$19.9 million arising from the release of a tax-related indemnification asset due to a favorable resolution to certain tax audits as well as the expiration of the statute of limitations (an equal and offsetting benefit was recognized in income tax expense) and losses on securities owned of$5.1 million . Included in the loss recognized during the three months endedMarch 31, 2021 is a charge of$5.2 million , arising from the release of a tax-related indemnification asset upon the expiration of the statute of limitations (an equal and offsetting benefit was recognized in income tax expense). During the three months endedMarch 31, 2021 , we also recognized an unrealized gain of$0.2 million on our investment in Securrency.
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 endedMarch 31, 2022 of 62.0% resulted in an income tax benefit of$16.7 million . Our tax rate differs from the federal statutory rate of 21% primarily due to a$19.9 million reduction in unrecognized tax benefits (including interest and penalties), a lower tax rate on foreign earnings and tax windfalls associated with the vesting of stock-based compensation awards. These items were partly offset by a non-taxable loss on revaluation of deferred consideration and an increase in the deferred tax asset valuation allowance on losses recognized on securities owned. Our effective income tax rate for the three months endedMarch 31, 2021 of negative 14.9% resulted in an income tax benefit of$2.0 million . Our effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a$5.2 million reduction in unrecognized tax benefits (including interest and penalties), a non-taxable gain on revaluation of deferred consideration and a lower tax rate on foreign earnings, partly offset tax shortfalls associated with the vesting and exercise of stock-based compensation awards. 41
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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 Operating Income, Operating Expenses, Income Before Income Taxes, Income Tax Expense, Net Income and Diluted Earnings per Share
We disclose adjusted operating income, operating expenses, income before income taxes, income tax expense, net income and diluted earnings per share as non-GAAP financial 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-GAAP financial measurements provides investors with a consistent way to analyze our performance. These non-GAAP financial measurements exclude the following: Unrealized gains or losses on the revaluation of deferred consideration: Deferred consideration is an obligation we assumed in connection 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 calculating our non-GAAP financial measurements 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 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 calculating our non-GAAP financial measurements as they introduce volatility in earnings and are not core to our operating business. Other items: Unrealized gains and losses recognized on our investments, changes in the deferred tax asset valuation allowance on securities owned, expenses incurred in response to the activist campaign by theInvestor Group , impairment charges and the remeasurement of contingent consideration payable to us from the sale of our Canadian ETF business. Three Months EndedMarch 31 ,March 31 , Adjusted Net Income and Diluted Earnings per Share: 2022
2021
Net (loss)/income, as reported$ (10,261 )
17,018 (2,832 ) Add back: Increase in deferred tax asset valuation allowance on securities owned
2,010 -
Add back: Losses on securities owned, net of income taxes 3,893
-
Add back: Expenses incurred in response to the activist
campaign by the
1,844 -
Deduct/Add back: Tax (windfalls)/shortfalls upon vesting and exercise of stock-based compensation awards
(565 ) 123
Add back/Deduct: Unrealized loss/(gain) recognized on our investments, net of income taxes
124 (179 )
Add back: Impairments, net of income taxes - 245
Adjusted net income$ 14,063 $ 12,504 Weighted average common shares - diluted 158,335
161,831
Adjusted earnings per share - diluted$ 0.09 $ 0.08 42
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Liquidity and Capital Resources
The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations:
March 31 ,
2022 2021
Balance Sheet Data (in thousands): Cash and cash equivalents$ 110,395 $ 140,709 Securities owned, at fair value 133,846 127,166 Accounts receivable 35,191 31,864 Securities held-to-maturity 290 308 Total: Liquid assets 279,722 300,047 Less: Total current liabilities (66,886 ) (83,667 ) Less: Regulatory capital requirement - certain international subsidiaries (12,602 ) (12,320 ) Total: Available liquidity$ 200,234 $ 204,060 Three Months Ended March 31, 2022 2021 Cash Flow Data (in thousands): Operating cash flows (1)$ (2,692 ) $ 2,290 Investing cash flows (1) (18,721 ) (5,990 ) Financing cash flows (8,236 ) (7,188 ) Foreign exchange rate effect (665 ) (235 )
Decrease in cash and cash equivalents
(1) Cash flows from purchasing securities owned, at fair value of (
and selling securities owned, at fair value of $1,232 during the three
months ended March 31, 2021 that were not acquired specifically for
resale or 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 decreased$30.3 million during the three months endedMarch 31, 2022 due to$25.5 million used to purchase securities owned,$6.9 million used to purchase investments,$4.8 million used to pay dividends on our common stock,$3.4 million used to repurchase our common stock,$2.7 million of net cash used in operating activities and$0.6 million used in other activities. These decreases were partly offset by$13.6 million of proceeds from the sale of securities owned. Cash and cash equivalents decreased$11.1 million during the three months endedMarch 31, 2021 due to$5.5 million used to purchase investments,$4.9 million used to pay dividends on our common stock,$2.6 million used to repurchase our common stock and$1.7 million used to purchase investments. These decreases were partly offset by$2.3 million provided by operating activities,$1.2 million of proceeds from the sale of securities owned and$0.1 provided by other activities.
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 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 , which 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"). 43
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After the issuance of the 2021 Notes (and together with the 2020 Notes, the
"Convertible Notes"), we had
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 on June 15 and December 15 of each year.
• Conversion price
: Convertible at an initial conversion rate (as disclosed in the table
above) of shares of our common stock per $1,000 principal amount of notes
(equivalent to an initial conversion 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 also
settle 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 our common stock.
• Redemption price
: We may redeem for cash all or any portion of the notes, at our option,
on or after
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
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 our Series A
Non-Voting
Convertible Preferred Stock (See Note 12 to our Consolidated Financial
Statements).
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.
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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 atMarch 31, 2022 was approximately$12.6 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, 2025 , including purchases to offset future equity grants made under our equity plans. During the three months endedMarch 31, 2022 , we repurchased 588,694 shares of our common stock under the repurchase program for an aggregate cost of$3.4 million . Currently,$100.0 million remains under this program for future purchases. Contractual Obligations Convertible Notes AtMarch 31, 2022 , 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 our 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$245.2 million atMarch 31, 2022 . 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$0.5 million atMarch 31, 2022 . Cash flows generated by our operating activities and existing cash balances should be sufficient to satisfy the future minimum lease payments. See Note 12 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. 45
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Critical Accounting Policies
Goodwill 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, the market approach and its market capitalization when determining the fair value of the reporting unit. The results of our analysis indicated no impairment based upon a quantitative assessment. 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.
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$2,263 , 9.0% and 0.9%, respectively, atMarch 31, 2022 . Changes in the fair value of this obligation are reported as (loss)/gain on revaluation of deferred consideration - gold payments in our Consolidated Statements of Operations. During the three months endedMarch 31, 2022 , we reported a loss on deferred consideration - gold payments of$17.0 million . A 1.0% increase in the weighted average forward-looking gold price per ounce would have increased this reported loss by$1.9 million , a 1 percentage point increase in the discount rate would have reduced this reported loss by$24.7 million and a 1 percentage point increase in the perpetual growth rate would have increased this reported loss by$21.7 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.
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