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, 2019 and Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2020 andJune 30, 2020 . 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$60.7 billion globally as ofSeptember 30, 2020 . 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 ETFs includes funds that track our own indexes, funds that track third-party indexes and actively managed funds. 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 ETF industry indexes use a capitalization weighted methodology. We distribute our ETFs through all major channels within the asset management industry, including brokerage firms, registered investment advisers, institutional investors, private wealth managers and discount brokers primarily through our sales force. Our sales efforts are not directed towards the retail segment but rather are directed towards financial or investment advisers that act as intermediaries between the end-client and us. We focus on creating ETFs for investors that offer thoughtful innovation, smart engineering and redefined investing. We have launched many first-to-market ETFs and pioneered alternative weighting methods commonly referred to as "smart beta." However, ourU.S. listed ETFs are not beta, but rather an investment approach 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. We strive to deliver a better investing experience through innovative solutions. Continued investments in technology-enabled services 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 . COVID-19 Impact on our Business Our operating revenues are directly correlated with the AUM that we manage. Our average AUM and revenues increased 9.9% and 11.2%, respectively, from the prior quarter principally from market appreciation. While our operating expenses increased 7.7% from the prior quarter, they are 10.1% lower on year to date basis as we continue to manage discretionary spending due to the uncertain market conditions arising from the COVID-19 pandemic. The pandemic has not adversely impacted our capital management strategy. InAugust 2020 , we issued and sold$25.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 on the same terms as those issued in the prior quarter. We also repurchased$4.5 million of our common stock during the current quarter ($31.0 million year-to-date). Additional share repurchases will depend upon our future operating results, available cash on hand and strategic priorities. We are precluded from prepaying principal due on our convertible notes. The CARES Act was enacted onMarch 27, 2020 in response to the COVID-19 pandemic, which provided financial assistance under various programs to help companies cope with economic hardships. We did not apply for any financial assistance afforded by the CARES Act. 33 -------------------------------------------------------------------------------- Table of Contents Planned Reduction in Office Footprint Throughout the COVID-19 pandemic, we have been operating our business remotely without disruption. The virtual work environment has led to efficiencies, increased transparency and further collaboration throughout our business. We have therefore decided to adopt a "remote first" philosophy with plans to significantly reduce our office footprints inNew York andLondon . We are planning to market ourNew York office space for sublease, allow ourLondon office lease to expire and seek reduced space in both locations. In connection with these actions, we anticipate recording an impairment charge of$9.0 million to$12.0 million . We also anticipate that our reduced office footprint will achieve$3.0 million to$4.0 million of annual cost savings. The timing of the impairment charge and realization of cost savings is highly dependent on our ability to secure a subtenant which we are estimating may occur by late 2021 or early 2022. The ultimate magnitude of these estimates is subject to market rent received and the duration of the sublease, market rents paid for new space, the actual amount of direct costs incurred and the discount rate used remeasure the carrying value of assets associated with our current office space, amongst other factors. Assets Under Management WisdomTree ETPs We offer ETPs covering equity, commodity, fixed income, leveraged-and-inverse, currency and alternative strategies. The chart below sets forth the asset mix of our ETPs atSeptember 30, 2019 ,June 30, 2020 andSeptember 30, 2020 : [[Image Removed]] Market Environment During the third quarter of 2020,the United States and Asian financial markets performed favorably while theEurozone market was largely unchanged. Economic stimulus measures and loose monetary policies continue to counterbalance the adverse effect of the COVID-19 pandemic on the global economy. Equity securities across all developed and emerging markets advanced, while government bonds were largely unchanged. Gold prices also appreciated during the quarter. During the third quarter of 2020, the S&P 500 advanced 8.9%, MSCI EAFE (local currency) advanced 1.3%, MSCI Emerging Markets Index (U.S. dollar) advanced 9.7% and gold prices rose 6.7%. In addition, the European and Japanese equities markets both appreciated with the MSCI EMU Index and MSCI Japan Index increasing 0.2% and 4.7%, respectively, in local currency terms for the quarter. Also, theU.S. dollar weakened 4.3%, 4.1% and 1.7% versus the British pound, Euro and Japanese yen, respectively. 34 -------------------------------------------------------------------------------- Table of ContentsU.S. listed ETF Industry FlowsU.S. listed ETF net flows for the three months endedSeptember 30, 2020 were$112.5 billion . Fixed income,U.S. equity, international equity and commodities gathered the majority of those flows. [[Image Removed]] Source: Bloomberg,Investment Company Institute , WisdomTree European ETP Industry Flows European ETP net flows were$34.2 billion for the three months endedSeptember 30, 2020 . 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 . OnFebruary 19, 2020 , we completed the sale of all of the outstanding shares of our wholly-owned Canadian subsidiary,WisdomTree Asset Management Canada, Inc. , or Canadian ETF business, to CI Financial Corp. We received CDN$3.7 million (USD$2.8 million ) in cash at closing and will receive additional cash consideration of CDN$2.0 million to$8.0 million , depending on the achievement of certain AUM growth targets over the next three years. Our Canadian ETF business reported operating losses during the nine months endedSeptember 30, 2020 of$0.4 million and during the three and nine months endedSeptember 30, 2019 of$0.5 million and$1.9 million , respectively. 35 -------------------------------------------------------------------------------- Table of ContentsU.S. Listed ETFs OurU.S. listed ETFs' AUM increased from$31.3 billion atJune 30, 2020 to$33.3 billion atSeptember 30, 2020 due to market appreciation and net inflows. [[Image Removed]] International Listed ETPs Our international ETPs' AUM increased from$26.3 billion atJune 30, 2020 to$27.4 billion atSeptember 30, 2020 due to market appreciation, partly offset by net outflows. [[Image Removed]] 36
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Consolidated Operating Results
The following table sets forth our revenues and net (loss)/income for the most
recent five quarters:
[[Image Removed]]
• Revenues
- We recorded operating revenues of
ended
advisory fee arising from AUM mix shift, notwithstanding the increase in
our average AUM.
• Operating Expenses- Total operating expenses decreased 3.3% from the three months ended
development costs, partly offset by higher contractual gold payments due
to higher average gold prices.
• Other Income/(Expenses)- Other income/(expenses) includes interest income and interest expense,
losses on revaluation of deferred consideration - gold payments,
impairments, loss on extinguishment of debt and other gains and losses.
For the three months ended
revaluation of deferred consideration - gold payments were
and $6.3 million , respectively.
• Net (loss)/income
- We reported a net loss of
three months ended
was impacted by the change in revenue and expenses described above, an
impairment charge of $3.1 million recorded in the current period and an
increase in the loss on revaluation of deferred consideration - gold
payments of $2.6 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,
2020 2020 2019 2020 2019
GLOBAL ETPs (in millions)
Beginning of period assets $ 57,647 $ 50,323 $ 60,389 $ 63,615 $ 54,094
Assets sold - - - (778 ) -
Inflows/(outflows) (468 ) 126 (698 ) (878 ) 206
Market appreciation/(depreciation) 3,560 7,494 471 (904 ) 5,949
Fund closures (46 ) (296 ) (181 ) (362 ) (268 )
End of period assets $ 60,693 $ 57,647 $ 59,981 $ 60,693 $ 59,981
Average assets during the period $ 61,194 $
55,689
0.42 % 0.41 % 0.44 % 0.42 % 0.45 %
Number of ETFs - end of the period 305 311 348 305 348
U.S. LISTED ETFs (in millions)
Beginning of period assets $ 31,344 $
28,893
575 (1,474 ) (1,198 ) (2,172 ) (1,217 )
Market appreciation/(depreciation) 1,373 4,039 (430 ) (5,012 ) 3,410
Fund closures - (114 ) - (124 ) (87 )
End of period assets $ 33,292 $
31,344
Average assets during the period$ 32,962 $
30,607
0.41 % 0.41 % 0.44 % 0.42 % 0.45 %
Number of ETFs - end of the period 67 67 80 67 80
INTERNATIONAL LISTED ETPs (in millions)
Beginning of period assets $ 26,303 $ 21,430 $ 21,169 $ 23,015 $ 18,608
Assets sold - - - (778 ) -
Inflows/(outflows) (1,043 ) 1,600 500 1,294 1,423
Market appreciation/(depreciation) 2,187 3,455 901 4,108 2,539
Fund closures (46 ) (182 ) (181 ) (238 ) (181 )
End of period assets $ 27,401 $ 26,303 $ 22,389 $ 27,401 $ 22,389
Average assets during the period $ 28,232 $
25,082
0.42 % 0.41 % 0.44 % 0.41 % 0.45 %
Number of ETPs-end of period 238 244 268 238 268
PRODUCT CATEGORIES (in millions)
Commodity & Currency
Beginning of period assets $ 24,260 $ 19,823 $ 18,204 $ 20,074 $ 15,976
Inflows/(outflows) (1,087 ) 1,316 511 821 1,354
Market appreciation/(depreciation) 2,036 3,121 998 4,314 2,383
End of period assets $ 25,209 $ 24,260 $ 19,713 $ 25,209 $ 19,713
Average assets during the period $ 25,959 $ 23,037 $ 19,558 $ 23,134 $ 17,643
U.S. Equity
Beginning of period assets $ 13,997 $ 12,151 $ 15,889 $ 17,732 $ 13,211
Inflows/(outflows) 897 (241 ) 239 371 986
Market appreciation/(depreciation) 718 2,087 153 (2,491 ) 2,084
End of period assets $ 15,612 $ 13,997 $ 16,281 $ 15,612 $ 16,281
Average assets during the period $ 15,139 $
13,302
$ 8,821 $
8,632
(587 ) (965 ) (1,009 ) (2,649 ) (3,318 )
Market appreciation/(depreciation) 369 1,154 (135 ) (1,759 ) 1,255
End of period assets $ 8,603 $
8,821
Average assets during the period $ 8,819$ 8,760 $ 12,379 $ 9,675$ 13,390 38
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Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2020 2020 2019 2020 2019
Emerging Market Equity
Beginning of period assets $ 5,413 $ 4,600 $ 5,966 $ 6,400 $ 5,201
Inflows/(outflows) 257 (25 ) 176 301 423
Market appreciation/(depreciation) 309 838 (443 ) (722 ) 75
End of period assets $ 5,979 $ 5,413 $ 5,699 $ 5,979 $ 5,699
Average assets during the period $ 5,913 $ 5,129 $ 5,729 $ 5,654 $ 5,604
Fixed Income
Beginning of period assets $ 3,530 $ 3,527 $ 3,946 $ 3,585 $ 2,244
Inflows/(outflows) 76 (53 ) (594 ) 44 1,062
Market appreciation/(depreciation) 24 56 (15 ) 1 31
End of period assets $ 3,630 $ 3,530 $ 3,337 $ 3,630 $ 3,337
Average assets during the period $ 3,605 $ 3,523 $ 3,731 $ 3,594 $ 3,570
Leveraged & Inverse
Beginning of period assets $ 1,349 $ 882 $ 989 $ 995 $ 964
Inflows/(outflows) (10 ) 312 12 314 78
Market appreciation/(depreciation) 92 155 1 122 (40 )
End of period assets $ 1,431 $ 1,349 $ 1,002 $ 1,431 $ 1,002
Average assets during the period $ 1,481 $ 1,163 $ 1,019 $ 1,218 $ 1,039
Alternatives
Beginning of period assets $ 225 $ 244 $ 434 $ 358 $ 508
Inflows/(outflows) (4 ) (29 ) (17 ) (99 ) (101 )
Market appreciation/(depreciation) 8 10 1 (30 ) 11
End of period assets $ 229 $ 225 $ 418 $ 229 $ 418
Average assets during the period $ 226 $ 226 $ 428 $ 260 $ 455
Closed ETPs
Beginning of period assets $ 52 $ 464 $ 1,648 $ 1,460 $ 1,758
Assets sold - - - (778 ) -
Inflows/(outflows) (10 ) (189 ) (16 ) 19 (278 )
Market appreciation/(depreciation) 4 73 (89 ) (339 ) 150
Fund closures (46 ) (296 ) (181 ) (362 ) (268 )
End of period assets $ - $ 52 $ 1,362 $ - $ 1,362
Average assets during the period $ 52 $ 549 $ 1,590 $ 549 $ 1,701
Headcount: 211 214 212 211 212
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, 2020 Compared to Three Months Ended
September 30, 2019
Selected Operating and Financial Information
Three Months Ended
September 30, Percent
2020 2019 Change Change
Global AUM (in millions)
Average global AUM $ 61,194 $ 60,306 $ 888 1.5 %
Operating Revenues (in thousands)
Advisory fees $ 63,919 $ 67,006 $ (3,087 ) (4.6 %)
Other income 721 712 9 1.3 %
Total revenues $ 64,640 $ 67,718 $ (3,078 ) (4.5 %)
Average Global AUM
Our average global AUM increased 1.5% from $60.3 billion at September 30, 2019
to $61.2 billion at September 30, 2020 principally due to the magnitude of
market appreciation recognized in the current quarter in relation to the prior
quarter.
Operating Revenues
Advisory fees
Advisory fee revenues decreased 4.6% from $67.0 million during the three months
ended September 30, 2019 to $63.9 million in the comparable period in 2020 due
to a 2 basis point decline in our average global advisory fee arising from AUM
mix shift, notwithstanding the increase in our average AUM. Our average global
advisory fee was 0.44% and 0.42% during the three months ended September 30,
2019 and 2020, respectively.
Other income
Other income was essentially unchanged from the three months ended September 30,
2019 .
Operating Expenses
Three Months Ended
September 30, Percent
(in thousands) 2020 2019 Change Change
Compensation and benefits $ 19,098 $ 18,880 $ 218 1.2 %
Fund management and administration 15,219 15,110 109 0.7 %
Marketing and advertising 2,996 3,022 (26 ) (0.9 %)
Sales and business development 2,386 4,354 (1,968 ) (45.2 %)
Contractual gold payments 4,539 3,502 1,037 29.6 %
Professional and consulting fees 950 1,259 (309 ) (24.5 %)
Occupancy, communications and equipment 1,611 1,549 62 4.0 %
Depreciation and amortization 253 259 (6 ) (2.3 %)
Third-party distribution fees 1,233 1,503 (270 ) (18.0 %)
Acquisition and disposition-related costs - 190 (190 ) n/a
Other 1,611 1,959 (348 ) (17.8 %)
Total operating expenses $ 49,896 $ 51,587 $ (1,691 ) (3.3 %)
Three Months Ended
September 30,
As a Percent of Revenues: 2020 2019
Compensation and benefits 29.6 % 27.9 %
Fund management and administration 23.5 % 22.3 %
Marketing and advertising 4.6 % 4.5 %
Sales and business development 3.7 % 6.5 %
Contractual gold payments 7.0 % 5.2 %
Professional and consulting fees 1.5 % 1.9 %
Occupancy, communications and equipment 2.5 % 2.2 %
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Three Months Ended
September 30,
As a Percent of Revenues: 2020 2019
Depreciation and amortization 0.4 % 0.4 %
Third-party distribution fees 1.9 % 2.2 %
Acquisition and disposition-related costs - 0.2 %
Other 2.5 % 2.9 %
Total expenses 77.2 % 76.2 %
Compensation and benefits
Compensation and benefits expense was essentially unchanged from the three
months ended September 30, 2019 . Headcount was 212 and 211 at September 30, 2019
and September 30, 2020 , respectively.
Fund management and administration
Fund management and administration expense was essentially unchanged from the
three months ended September 30,2019 as higher variable fees associated with
higher average global AUM was offset by lower expenses due to the sale of our
Canadian ETF business which was completed in February 2020 . We had 80 U.S.
listed ETFs and 268 international listed ETPs at September 30, 2019 compared to
67 U.S. listed ETFs and 238 international listed ETPs at September 30, 2020 .
Marketing and advertising
Marketing and advertising expense was essentially unchanged from the three
months ended September 30, 2019 .
Sales and business development
Sales and business development expense decreased 45.2% from $4.4 million during
the three months ended September 30, 2019 to $2.4 million in the comparable
period in 2020 primarily due to lower discretionary spending resulting from the
COVID-19
pandemic.
Contractual gold payments
Contractual gold payments expense increased 29.6% from $3.5 million during the
three months ended September 30, 2019 to $4.5 million in the comparable period
in 2020. This expense was associated with the payment of 2,375 ounces of gold
and was calculated using the average daily spot price of $1,474 and $1,911 per
ounce during the three months ended September 30, 2019 and 2020, respectively.
Professional and consulting fees
Professional and consulting fees decreased 24.5% from $1.3 million during the
three months ended September 30, 2019 to $1.0 million in the comparable period
in 2020 due to lower corporate consulting-related expenses.
Occupancy, communications and equipment
Occupancy, communications and equipment expense was essentially unchanged from
the three months ended September 30, 2019 .
Depreciation and amortization
Depreciation and amortization expense was essentially unchanged from the three
months ended September 30, 2019 .
Third-party distribution fees
Third-party distribution fees decreased 18.0% from $1.5 million during the three
months ended September 30, 2019 to $1.2 million in the comparable period in 2020
primarily due to lower fees for platform relationships.
Other
Other expenses decreased 17.8% from $2.0 million during the three months ended
September 30, 2019 to $1.6 million in the comparable period in 2020 primarily
due to lower office-related and travel expenses as a result of our employees
working remotely.
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Other Income/(Expenses)
Three Months Ended
September 30, Percent
(in thousands) 2020 2019 Change Change
Interest expense $ (2,511 ) $ (2,832 ) $ 321 (11.3 %)
Loss on revaluation of deferred
consideration - gold payments (8,870 ) (6,306 ) (2,564 ) 40.7 %
Interest income 111 799 (688 ) (86.1 %)
Impairments (3,080 ) - (3,080 ) n/a
Other gains, net 744 843 (99 ) (11.7 %)
Total other income/(expenses) $ (13,606 ) $ (7,496 ) $ (6,110 ) 81.5 %
Three Months Ended
September 30,
As a Percent of Revenues: 2020 2019
Interest expense (3.9 %) (4.2 %)
Loss on revaluation of deferred consideration - gold payments (13.7 %) (9.3 %)
Interest income 0.2 % 1.1 %
Impairments (4.8 %) n/a
Other gains, net 1.2 % 1.2 %
Total other income/(expenses) (21.0 %) (11.2 %)
Interest expense
Interest expense decreased 11.3% from $2.8 million during the three months ended
September 30, 2019 to $2.5 million in the comparable period in 2020 primarily
due to a lower level of debt outstanding. Our effective interest rate during the
three months ended September 30, 2019 and 2020 was 5.2% and 6.2%, respectively,
and includes our cost of borrowing and amortization of debt discount and
issuance costs.
Loss on revaluation of deferred consideration - gold payments
We recognized a loss on revaluation of deferred consideration of $6.3 million
and $8.9 million during the three months ended September 30, 2019 and 2020,
respectively. The loss in the each quarter was due to an increase in the
forward-looking price of gold when compared to the forward-looking gold curve at
the end of the prior quarter. 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 decreased 86.1% from $0.8 million during the three months ended
September 30, 2019 to $0.1 million in the comparable period in 2020 as
paid-in-kind
interest income was accrued in the prior period on our former AdvisorEngine Inc.
("AdvisorEngine") notes receivable.
Impairments
During the three months ended September 30, 2020 , we recognized a
non-cash
impairment charge of $3.1 million related to our investment in Thesys Group,
Inc. (See Note 9 to our Consolidated Financial Statements).
Other gains, net
Other gains, net were $0.8 million and $0.7 million during the three months
ended September 30, 2019 and 2020, respectively. Included in the three months
ended September 30, 2020 is a gain of $0.2 million arising from an adjustment to
the fair value of consideration received from the exit of our investment in
AdvisorEngine. During the three months ended September 30, 2019 , we recorded a
gain of $0.4 million resulting from the recognition of the foreign currency
translation adjustment upon the liquidation of our Japan business. In addition,
gains and losses generally arise from the sale of gold earned from management
fees paid by our physically-backed gold ETPs, foreign exchange fluctuations,
securities owned and other miscellaneous items.
Income taxes
Our effective income tax rate for the three months ended September 30, 2020 of
123.7% resulted in income tax expense of $1.4 million . Our tax rate differs from
the federal statutory tax rate of 21% primarily due to a
non-deductible
loss on revaluation of deferred consideration. This loss was partly offset by a
lower tax rate on foreign earnings.
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Our effective income tax rate for the three months ended September 30, 2019 of
51.9% resulted in income tax expense of $4.5 million . Our tax rate differs from
the federal statutory tax rate of 21% primarily due to a valuation allowance on
foreign net operating losses, a
non-deductible
loss on revaluation of deferred consideration,
non-deductible
executive compensation and state and local taxes, partly offset by a lower tax
rate on foreign earnings.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30,
2019
Selected Operating and Financial Information
Nine Months Ended
September 30, Percent
2020 2019 Change Change
Global AUM (in millions)
Average global AUM $ 58,901 $ 58,855 $ 46 0.0 %
Operating Revenues (in thousands)
Advisory fees $ 184,077 $ 197,473 $ (13,396 ) (6.8 %)
Other income 2,563 2,023 540 26.7 %
Total revenues $ 186,640 $ 199,496 $ (12,856 ) (6.4 %)
Average Global AUM
Our average global AUM was essentially unchanged from the nine months ended
September 30, 2019 .
Operating Revenues
Advisory fees
Advisory fee revenues decreased 6.8% from $197.5 million during the nine months
ended September 30, 2019 to $184.1 million in the comparable period in 2020 due
to a 3 basis point decline in our average global advisory fee arising from AUM
mix. Our average global ETP advisory fee declined from 0.45% during the nine
months ended September 30, 2019 to 0.42% during the nine months ended
September 30, 2020 .
Other income
Other income increased 26.7% from $2.0 million during the nine months ended
September 30, 2019 to $2.6 million in the comparable period in 2020 primarily
due to higher creation/redemption fees associated with our international listed
products.
Operating Expenses
Nine Months Ended
September 30, Percent
(in thousands) 2020 2019 Change Change
Compensation and benefits $ 53,848 $ 61,481 $ (7,633 ) (12.4 %)
Fund management and administration 44,165 45,852 (1,687 ) (3.7 %)
Marketing and advertising 7,413 8,612 (1,199 ) (13.9 %)
Sales and business development 7,984 12,947 (4,963 ) (38.3 %)
Contractual gold payments 12,362 9,710 2,652 27.3 %
Professional and consulting fees 3,580 4,037 (457 ) (11.3 %)
Occupancy, communications and equipment 4,805 4,715 90 1.9 %
Depreciation and amortization 760 792 (32 ) (4.0 %)
Third-party distribution fees 3,928 5,822 (1,894 ) (32.5 %)
Acquisition and disposition-related costs 416 536 (120 ) (22.4 %)
Other 5,204 6,267 (1,063 ) (17.0 %)
Total expenses $ 144,465 $ 160,771 $ (16,306 ) (10.1 %)
Nine Months Ended
September 30,
As a Percent of Revenues: 2020 2019
Compensation and benefits 28.8 % 30.8 %
Fund management and administration 23.7 % 23.0 %
Marketing and advertising 4.0 % 4.3 %
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Nine Months Ended
September 30,
As a Percent of Revenues: 2020 2019
Sales and business development 4.3 % 6.5 %
Contractual gold payments 6.6 % 4.9 %
Professional and consulting fees 1.9 % 2.0 %
Occupancy, communications and equipment 2.6 % 2.4 %
Depreciation and amortization 0.4 % 0.4 %
Third-party distribution fees 2.1 % 2.9 %
Acquisition and disposition-related costs 0.2 % 0.3 %
Other 2.8 % 3.1 %
Total expenses 77.4 % 80.6 %
Compensation and benefits
Compensation and benefits expense decreased 12.4% from $61.5 million during the
nine months ended September 30, 2019 to $53.8 million in the comparable period
in 2020 due to lower incentive compensation accruals as well as $3.5 million of
severance expense included in the prior period.
Fund management and administration
Fund management and administration expense decreased 3.7% from $45.9 million
during the nine months ended September 30, 2019 to $44.2 million in the
comparable period in 2020 primarily due to lower variable fees associated with
lower average AUM of our U.S. listed products, partly offset by higher average
AUM of our international listed products. These expenses were also lower as a
result of the sale of our Canadian ETF business in February 2020 .
Marketing and advertising
Marketing and advertising expense decreased 13.9% from $8.6 million during the
nine months ended September 30, 2019 to $7.4 million in the comparable period in
2020 primarily due to lower discretionary spending resulting from the
COVID-19
pandemic.
Sales and business development
Sales and business development expense decreased 38.3% from $12.9 million during
the nine months ended September 30, 2019 to $8.0 million in the comparable
period in 2020 primarily due to lower discretionary spending resulting from the
COVID-19
pandemic.
Contractual gold payments
Contractual gold payments expense increased 27.3% from $9.7 million during the
nine months ended September 30, 2019 to $12.4 million in the comparable period
in 2020. This expense was associated with the payment of 7,125 ounces of gold
and was calculated using the average daily spot price of $1,363 and $1,735 per
ounce during the nine months ended September 30, 2019 and 2020, respectively.
Professional and consulting fees
Professional and consulting fees decreased 11.3% from $4.0 million during the
nine months ended September 30, 2019 to $3.6 million in the comparable period in
2020 due to lower corporate consulting-related expenses.
Occupancy, communications and equipment
Occupancy, communications and equipment expense was essentially unchanged from
the nine months ended September 30, 2019 .
Depreciation and amortization
Depreciation and amortization expense was essentially unchanged from the nine
months ended September 30, 2019 .
Third-party distribution fees
Third-party distribution fees decreased 32.5% from $5.8 million during the nine
months ended September 30, 2019 to $3.9 million in the comparable period in 2020
primarily due to lower fees for platform relationships.
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Acquisition and disposition-related costs
Acquisition and disposition-related costs were essentially unchanged from the
nine months ended September 30, 2019 .
Other
Other expenses decreased 17.0% from $6.3 million during the nine months ended
September 30, 2019 to $5.2 million in the comparable period in 2020 primarily
due to lower office-related and travel expenses as a result of our employees
working remotely.
Other Income/(Expenses)
Nine Months Ended
September 30, Percent
(in thousands) 2020 2019 Change Change
Interest expense $ (6,974 ) $ (8,634 ) $ 1,660 (19.2 %)
Loss on revaluation of deferred
consideration - gold payments (34,436 ) (5,939 ) (28,497 ) 479.8 %
Interest income 393 2,396 (2,003 ) (83.6 %)
Impairments (22,752 ) (572 ) (22,180 ) 3,877.6 %
Loss on extinguishment of debt (2,387 ) - (2,387 ) n/a
Other gains and losses, net 56 (3,500 ) 3,556 n/a
Total other income/(expenses) $ (66,100 ) $ (16,249 ) $ (49,851 ) 306.8 %
Nine Months Ended
September 30,
As a Percent of Revenues: 2020 2019
Interest expense (3.7 %) (4.3 %)
Loss on revaluation of deferred consideration - gold payments (18.4 %) (3.0 %)
Interest income 0.2 % 1.2 %
Impairments (12.2 %) (0.3 %)
Loss on extinguishment of debt (1.3 %) n/a
Other gains and losses, net 0.0 % (1.7 %)
Total other income/(expenses) (35.4 %) (8.1 %) Interest expense Interest expense decreased 19.2% from$8.6 million during the nine months endedSeptember 30, 2019 to$7.0 million in the comparable period in 2020 due to a lower level of debt outstanding. Our effective interest rate during the nine months endedSeptember 30, 2019 and 2020 was 5.4% and 5.3%, respectively, and includes our cost of borrowing and amortization of debt discount and issuance costs. Loss on revaluation of deferred consideration We recognized a loss on revaluation of deferred consideration of$5.9 million and$34.4 million during the nine months endedSeptember 30, 2019 and 2020, respectively. The loss in each period was due to an increase in the forward-looking price of gold when compared to the forward-looking gold curve at the beginning of each respective year. 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 decreased 83.6% from$2.4 million during the nine months endedSeptember 30, 2019 to$0.4 million in the comparable period in 2020 as paid-in-kind interest income was accrued in the prior period on our former AdvisorEngine notes receivable. Impairments During the nine months endedSeptember 30, 2020 , we recognized non-cash impairment charges totaling$22.8 million , including$3.1 million related to our investment in Thesys and$19.7 million related to our investment in AdvisorEngine (See Notes 9 and 7 to our Consolidated Financial Statements). During the nine months endedSeptember 30, 2019 , we recognized a non-cash impairment charge of$0.6 million in connection with the termination of ourJapan office lease. 45 -------------------------------------------------------------------------------- Table of Contents 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 . See Note 12 to our Consolidated Financial Statements. Other gains and losses, net Other gains and losses, net were($3.5) million and$0.1 million during the nine months endedSeptember 30, 2019 and 2020, respectively. This includes a charge recorded during the nine months endedSeptember 30, 2019 and 2020 of$4.3 million and$6.0 million , 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. 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 (See Note 25 to our Consolidated Financial Statements) 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 in AdvisorEngine. 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, securities owned and other miscellaneous items. Income taxes 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 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, 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. Our effective income tax rate during the nine months endedSeptember 30, 2019 of 31.2% resulted in income tax expense of$7.0 million . Our effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a valuation allowance on foreign net operating losses, a non-deductible loss on revaluation of deferred consideration, state and local income taxes and tax shortfalls associated with the vesting and exercise of stock-based compensation awards, partly offset by a$4.3 million reduction in unrecognized tax benefits and a lower tax rate on foreign earnings. 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 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 may have a
material impact on the carrying value of the deferredconsideration
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.
? 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.
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? Interest expense from the amortization of discount arising from the
bifurcation of the conversion option embedded in the convertible notes
: GAAP requires convertible instruments to be separated into their
liability and equity components by allocating the issuance proceeds to
each of those components. The liability component for convertible
instruments that qualify for a derivative scope exception(applicable
to our convertible notes) is allocated proceeds equal to the estimated
fair value of similar debt without the conversion option. The
difference between the gross proceeds received from theissuance of
the convertible instrument and the proceeds allocated to the liability
component represents the residual amount that is classified in equity.
The discount arising from the recognition of the residual amount
classified in equity is amortized as interest expense over the life of
the instrument. We exclude this item when calculating our
non-GAAP
financial measurements as it is
non-cash
and distorts our actual cost of borrowing. In addition, in August
2020 , the FASB issued Accounting Standards Update
2020-06,
Debt - Debt with Conversion and Other Options, Cash Conversion
which includes the elimination of the requirement to bifurcate
conversion options qualifying for a derivative scope exception. Once
effective, this interest expense will no longer be recognized.
? Other items
: Loss on extinguishment of debt, the release of a deferred tax asset
valuation allowance recognized on interest carryforwardsarising 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, impairment
charges, a gain recognized upon the sale of our Canadian ETF business,
severance expense and acquisition and disposition-related costs are
excluded when determining adjusted net income and adjusted earnings
per share.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Adjusted Net Income and Diluted Earnings per Share: 2020 2019 2020 2019
Net (loss)/income, as reported $ (270 ) $ 4,152 $ (22,158 ) $ 15,455
Add back: Loss on revaluation of deferred
consideration 8,870 6,306 34,436 5,939
Add back: Impairments, net of income taxes 2,326 - 21,998 572
Deduct: Gain recognized upon sale of Canadian ETF
business - - (2,877 ) -
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: Loss on extinguishment of debt, net of
income taxes - - 1,910 -
Deduct: Gain arising from an adjustment to the estimated fair value of consideration received from the exit of investment in AdvisorEngine
(225 ) - (1,093 ) -
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 -
Add back: Tax shortfalls upon vesting and exercise of stock-based compensation awards
50 30 670 1,077
Add back: Acquisition and disposition-related costs, net of income taxes
- 154 383 434
Add back: Severance expense, net of income taxes - - - 2,715
Adjusted net income $ 11,037 $ 10,642 $ 30,755 $ 26,192
Deduct: Income distributed to participating
securities (556 ) (539 ) (1,663 ) (1,622 )
Deduct: Undistributed income allocable to
participating securities (687 ) (584 ) (1,701 ) (1,149 )
Adjusted net income available to common stockholders$ 9,794 $ 9,519 $ 27,391 $ 23,421 Weighted average diluted shares, excluding participating securities (in thousands) (See Note 21 to our Consolidated Financial Statements) 145,569
152,032 149,891 151,954
Adjusted earnings per share-diluted$ 0.07 $ 0.06 $ 0.18 $ 0.15 47
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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:
September 30 ,
2020 2019
Balance Sheet Data (in thousands) : Cash and cash equivalents$ 63,561 $ 74,972 Securities owned, at fair value 32,574 17,319 Accounts receivable 26,163 26,838 Securities held-to-maturity 501 16,863 Total: Liquid assets 122,799 135,992 Less: Total current liabilities (67,017 ) (79,041 ) Less: Regulatory capital requirement - certain international subsidiaries (10,644 ) (12,312 ) Subtotal 45,138 44,639 Plus: Revolving credit facility - available (1) capacity - 27,908 Total: Available liquidity$ 45,138 $ 72,547 (1) Terminated onJune 16, 2020 . Nine Months Ended September 30, 2020 2019 Cash Flow Data (in thousands) : Operating cash flows$ 15,568 $ 43,081 Investing cash flows 28,515 498 Financing cash flows (55,107 ) (32,403 ) Foreign exchange rate effect (387 ) (385 )
(Decrease)/increase in cash and cash equivalents
$ 10,791 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. Certain securities are accounted for as held-to-maturity securities and we have the intention and ability to hold them to maturity. However, these securities are also readily traded and, if needed, could be sold for liquidity. 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$11.4 million during the nine months endedSeptember 30, 2020 due to$179.0 million used to repay our debt,$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 convertible notes issuance costs and$0.5 million used in other activities. These decreases were partly offset by$175.3 million of proceeds from the issuance of convertible notes,$16.4 million of proceeds from held-to-maturity securities maturing or called prior to maturity,$15.6 million of net cash provided by operating activities,$9.6 million of proceeds from the sale of our financial interests in AdvisorEngine and$2.8 million of net proceeds from the sale of our Canadian ETF business. Cash and cash equivalents increased$10.8 million during the nine months endedSeptember 30, 2019 due to$43.1 million of net cash provided by operating activities and$2.3 million of proceeds from held-to-maturity securities called or maturing or called prior to maturity. These increases were partly offset by$15.3 million used to pay dividends on our common stock,$15.0 million used to partially repay our long-term debt,$2.2 million used to repurchase our common stock,$1.8 million used to fund AdvisorEngine notes receivable and$0.3 million used for other activities. Issuance of Convertible Notes OnAugust 13, 2020 the Company issued and sold$25.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 (the "Additional Notes") pursuant to an Indenture (the "Indenture"), datedJune 16, 2020 , between us andU.S. Bank National Association , as trustee (the "Trustee"), in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Additional Notes were issued 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, the 48 -------------------------------------------------------------------------------- Table of Contents Company's outstanding 4.25% Convertible Senior Notes due 2023 issued onJune 16, 2020 in the aggregate principal amount of$150.0 million (the "Existing Notes" and together with the Additional Notes, the "Convertible Notes"). Immediately after giving effect to the issuance of the Additional Notes, the Company had$175.0 million aggregate principal amount of Convertible Notes outstanding. Key terms of the Convertible Notes are as follows: • Maturity date :June 15, 2023 , unless earlier converted, repurchased or redeemed. • Interest rate of 4.25% : Payable semiannually in arrears onJune 15 andDecember 15 of each year, beginning onDecember 15, 2020 . • Conversion price of$5.92 : Convertible at an initial conversion rate of 168.9189 shares of our common stock, per$1,000 principal amount of notes (equivalent to an initial conversion price of approximately$5.92 per share. • Conversion : Holders may convert at their option at any time prior to the close of business on the business day immediately precedingMarch 15, 2023 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending onSeptember 30, 2020 , 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
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 eachsuch trading day; (iii) upon a notice of redemption that we deliver in
accordance with the terms in the Indenture but only with respect to the
Convertible Notes called (or deemed called) for redemption; or (iv) upon
the occurrence of specified corporate events. On or after
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 to 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 of $7
.
70: We may redeem for cash all or any portion of the notes, at our option,
on or after June 20, 2021 and on or prior to the 55
th
scheduled trading day immediately preceding the maturity date, if thelast 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 provides 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 Indenture) 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 270.2702 shares of our common stock per
amount of the Convertible Notes (the equivalent of 47,297,285 shares of
our common stock), subject to adjustment.
• Seniority and Security: The Convertible Notes are the Company's senior unsecured obligations,
but are subordinated in right of payment to the Company's obligations to
make certain redemption payments (if and when due) in respect of its
Series A
Non-VotingConvertible Preferred Stock (See Note 14 to our Consolidated Financial
Statements).
The Indenture contains 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. Termination of Former Credit Facility OnJune 16, 2020 and in connection with the issuance of the Existing Notes, we repaid our debt previously outstanding and terminated our former credit facility. We are therefore no longer subject to compliance with financial covenants under our former credit facility or limitations on stock repurchases and dividend payments. 49 -------------------------------------------------------------------------------- Table of Contents Capital Resources Our principal source of financing is our operating cash flow. We believe that current cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for at least the next 12 months. 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, 2020 was approximately$10.6 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, 2022 , including purchases to offset future equity grants made under our equity plans. During the three months endedSeptember 30, 2020 , we repurchased 1,066,261 shares of our common stock under the repurchase program for an aggregate cost of$4.5 million . AtSeptember 30, 2020 ,$52.4 million remained under this program for future purchases. Contractual Obligations The following table summarizes our future payments associated with contractual obligations as ofSeptember 30, 2020 : Payments Due by Period (in thousands) Less than 1 More than 5 Total year 1 to 3 years 3 to 5 years years Convertible Notes (1)$ 175,000 $ -$ 175,000 $ - $ - Deferred consideration - gold payments (2) 207,748 17,202 30,658 25,815 134,073 Operating leases 27,422 3,124 5,916 6,137 12,245 Total$ 410,170 $ 20,326 $ 211,574 $ 31,952 $ 146,318
(1) Conditional conversions or a requirement to repurchase the convertible notes
upon the occurrence of a fundamental change may accelerate payment (See Note
13 to our Consolidated Financial Statements).
(2) Paid from advisory fee income generated by any Company-sponsored financial
product backed by physical gold with no recourse back to us for any unpaid
amounts that exceed advisory fees earned (See Note 11 to our Consolidated
Financial Statements).
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.
Critical Accounting Policies
Business Combinations
We account for business combinations under the acquisition method of accounting
in accordance with Accounting Standards Codification Topic 805,
Business Combinations,
which requires an allocation of the consideration we paid to the identifiable
assets, intangible assets and liabilities based on the estimated fair values as
of the closing date of the acquisition. The excess of the fair value of purchase
price over the fair values of these identifiable assets, intangible assets and
liabilities is recorded as goodwill.
Goodwill and Intangible Assets
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 our U.S. Business and European Business components.
Effective January 1, 2020 , 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. Previously, these components
were tested separately for impairment when we were operating as more than one
operating segment.
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Goodwill is assessed for impairment annually on November 30
th
. When performing our goodwill impairment test, we consider a qualitative
assessment, when appropriate, and the market approach and its market
capitalization when determining the fair value of the reporting units, in the
aggregate.
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 all of
our intangible assets is November 30
th
.
Investments
We account for equity investments that do not have a readily determinable fair
value under the measurement alternative prescribed within 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 and a selected discount rate (See Note 11 to our Consolidated Financial
Statements). Changes in the fair value of this obligation are reported as
(loss)/gain on revaluation of deferred consideration - gold payments on the
Company's Consolidated Statements of Operations.
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 Issued Accounting Pronouncements
In August 2020 , the Financial Accounting Standards Board ("FASB") issued ASU
2020-06,
Debt - Debt with Conversion and Other Options
(ASU
2020-06).
Under the ASU, the accounting for convertible instruments will be simplified by
removing major separation models required under current GAAP. Accordingly, more
convertible instruments will be 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 qualify for the derivative
scope exception will be removed and, as a result, more equity contracts will
qualify for the scope exception. The ASU will also simplify the diluted
earnings-per-share
calculation in certain areas. The ASU will be effective for years beginning
after December 31, 2021 , including interim periods within those fiscal years.
Early adoption is permitted for fiscal periods beginning after December 15, 2020
(including interim periods within the same fiscal year). The adoption of this
ASU will result in a reduction of interest expense recognized on our recently
issued convertible notes (See Note 13 to our Consolidated Financial Statements)
of approximately $0.4 million per quarter. We expect to early adopt the ASU.
In December 2019 , the FASB issued 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
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in the interim period that includes the enactment date. ASU
2019-12
is effective for years beginning after December 15, 2020 , including the interim
periods within those reporting periods. Early adoption is permitted. We have
determined that this standard will not have a material impact on our financial
statements and are not early adopting this ASU.
Recently Adopted Accounting Pronouncements
On January 1, 2020 , we adopted ASU
2016-13,
Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses
on Financial Instruments
(ASU
2016-13).
The main objective of the standard is to provide financial statement users with
more decision-useful information about the expected credit losses on financial
instruments and other commitments to extend credit held by a reporting entity at
each reporting date. In issuing this standard, the FASB is responding to
criticism that prior guidance delayed recognition of credit losses. The standard
replaced the prior guidance's "incurred loss" approach with an "expected loss"
model. The new model, referred to as the current expected credit loss ("CECL")
model, applies to: (1) financial assets subject to credit losses and measured at
amortized cost, and (2) certain
off-balance
sheet credit exposures. The standard is applicable to loans, accounts
receivable, trade receivables, and other financial assets measured at amortized
cost, loan commitments and certain other
off-balance
sheet credit exposures, debt securities (including those
held-to-maturity)
and other financial assets measured at fair value through other comprehensive
income, and beneficial interests in securitized financial assets. The CECL model
does not apply to
available-for-sale
debt securities. For
available-for-sale
debt securities with unrealized losses, entities measure credit losses in a
manner similar to prior guidance, except that the credit losses are recognized
as allowances rather than reductions in the amortized cost of the securities.
Accordingly, the new methodology is utilized when assessing our financial
instruments for impairment. As a result, entities recognize improvements to
estimated credit losses immediately in earnings rather than as interest income
over time. The ASU also simplified the accounting model for purchased
credit-impaired debt securities and loans. ASU
2016-13
also expanded the disclosure requirements regarding an entity's assumptions,
models, and methods for estimating the allowance for loan and lease losses. The
adoption of this standard, which is applicable to our trade receivables, notes
receivable and
held-to-maturity
securities did not have a material impact on our consolidated financial
statements.
On January 1, 2020 , we adopted ASU
2018-13,
Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement
(ASU
2018-13),
which modified the disclosure requirements on fair value measurements, including
removing the requirement to disclose (1) the amount of and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for
timing of transfers between levels and (3) the valuation processes for Level 3
fair value measurements. ASU
2018-13
also added new disclosures including the requirement to disclose (a) the changes
in unrealized gains and losses for the period included in other comprehensive
income for recurring Level 3 fair value measurements held at the end of the
reporting period and (b) the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements. This
standard only impacted the disclosures pertaining to fair value measurements and
were incorporated into the notes to our consolidated financial statements.
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