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Item 7. Management’s Discussion and Analysis

2021-02-19 compared with 2020-02-28 · 342 added, 437 removed, 600 unchanged (56% of the section changed)

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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.

We are the only publicly-traded asset management company that focuses exclusively on ETPs and are a leading global ETP sponsor based on AUM, with AUM of $63.6 billion globally as of December 31, 2019.

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 $67.4 billion globally as of December 31, 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 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

We focus on creating ETFs for investors that offer thoughtful innovation, smart engineering and redefined investing.

ETP is an umbrella term that includes exchange-traded funds, or ETFs, exchange-traded notes and exchange-traded commodities.

Our family of ETPs includes products that track our own indexes, third-party indexes and market prices of commodities.

We also offer actively managed products.

Most of our equity-based funds employ a fundamentally weighted investment methodology, which weights securities based on factors such as dividends, earnings or investment factors, whereas most other industry indexes use a capitalization weighted methodology.

We distribute our products through all major channels within the asset management industry, including banks, brokerage firms, registered investment advisers, institutional investors, private wealth managers and online brokers primarily through our sales force.

Our sales efforts are not primarily directed towards the retail segment but rather are directed towards financial advisers that act as intermediaries between the end-client

and us or institutional investors.

We focus on creating products for investors that offer thoughtful innovation, smart engineering and redefined investing.

We have launched many first-to-market

ETFs and pioneered alternative weighting methods commonly referred to as “smart beta.” However, our U.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.

Through our operating subsidiaries, we provide investment advisory and other management services to our ETPs collectively offering ETPs covering equity, commodity, fixed income, leveraged and inverse, currency and alternative strategies.

products and pioneered alternative weighting we call “Modern Alpha,” which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective funds that are built to perform.

Through our operating subsidiaries, we provide investment advisory and other management services to our ETPs collectively offering products covering equity, commodity, fixed income, leveraged-and-inverse,

currency and alternative strategies.

In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETPs’ average daily AUM.

Our expenses are predominantly related to selling, operating and marketing our ETPs.

Our expenses are predominantly related to selling, operating and marketing our products.

We have contracted with third parties to provide certain operational services for the ETPs.

We strive to deliver a better investing experience through innovative solutions.

Continued investments in technology-enabled 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.

Continued investments in technology-enabled and research-driven solutions and our Advisor Solutions program, which includes portfolio construction, asset allocation, practice management services and digital tools for financial advisors, are meant to differentiate us in the market, expand our distribution and further enhance our relationships with financial advisors.

Executive Summary

We are focused on diversifying and growing our AUM and several important strategic initiatives that have been prioritized have contributed to modest organic growth.

Our organic growth has benefited from the expansion and diversification of our product line-up,

investments in technology-enabled services and our award-winning Advisor Solutions program, the transformation of our distribution reach and approach through an industry leading data intelligence function, prioritization of the development and distribution of our fully open architecture model portfolios and the integration of our recently acquired European business.

Negative investor sentiment toward HEDJ and DXJ has overshadowed the steps we have taken.

Over the last three years, we have experienced $13.0 billion of net outflows from two these products, which have masked strong inflows into our fixed income, U.S.

equity, commodity and emerging markets products.

During the years ended December 31, 2017, 2018 and 2019, global net inflows were $3.7 billion, $3.2 billion and $3.3 billion, excluding outflows from HEDJ and DXJ.

The ETFS Acquisition, which we completed in April 2018, provided us with immediate scale in Europe, an industry leading position in European listed gold and commodity products, greater AUM diversification globally, and profitability within our International Business segment.

Organic growth in Europe has been compelling with $1.6 billion of net inflows and 14.7% of AUM growth experienced since the completion of the acquisition.

Organic growth remains our focus and the execution of our strategic priorities have us better situated to capitalize on significant opportunities in the growing global ETP market.

Our mission is to be a profitable, growing and enduring financial services company with diversified revenue streams and global coverage as well as to deliver a smarter investment and financial experience through the quality of our exposures, products, solutions and the way we engage with our clients.

We have prioritized several important strategic initiatives, resulting in diversification of our AUM and compelling organic growth.

We have benefited from the expansion and diversification of our product line-up,

investments in technology-enabled and research-driven solutions and our award-winning Advisor Solutions program, the transformation of our distribution reach and approach through an industry leading data intelligence function, prioritization of the development and distribution of our fully open architecture model portfolios and the full integration of our European business.

We are also aggressively pursuing our digital assets initiatives and have been designing workflows and engaging productively with regulators with a goal of launching products later this year.

The ETFS Acquisition, which we completed in April 2018, provided us with immediate scale in Europe, an industry leading position in European listed gold and commodity products and greater AUM diversification globally.

Our European business has contributed $2.9 billion of net inflows and has experienced AUM growth of 49% since the completion of the acquisition.

Our diverse product lineup has us well positioned globally for growth and our focus and execution of our strategic priorities have us better situated to capitalize on significant opportunities in the growing global ETP market.

Business highlights include the following:

In January 2020, we entered into an agreement to collaborate with Professor Jeremy Siegel to design and launch two model portfolios—The Siegel-WisdomTree Global Equity Model and the Siegel-WisdomTree Longevity Model.

In December 2019, we made an $8.1 million strategic investment in Securrency, Inc., a leading developer of institutional-grade blockchain-based financial and regulatory technology, with plans to pursue the integration of blockchain technology into the ETF ecosystem.

In December 2019, our full range of U.S.

listed ETFs were made available commission-free on LPL Financial’s online trading platform.

In December 2019, we launched our first cryptocurrency product, the WisdomTree Bitcoin ETP, a physically-backed Bitcoin ETP which provides investors with a simple, secure and cost-efficient way to gain exposure to Bitcoin while utilizing the best of traditional financial infrastructure and product structuring.

In November 2019, we entered into a definitive agreement to sell all of the outstanding shares of our wholly-owned Canadian subsidiary to CI Financial, allowing us to benefit from the scale and resources of CI Financial and participate more cost effectively in the continued growth of the Canadian ETF market by providing index licenses for each of the WisdomTree Canada ETFs that currently track WisdomTree proprietary indexes.

The transaction was completed on February 19, 2020.

In October 2019, we completed the final stage of integration of the ETFS acquired business, which included the unification of 224 products under one WisdomTree brand and closure of 192 duplicative or extraneous products across our full product set.

In March and June 2019, we expanded our offerings of our ETPs on Swissquote’s and BNY Mellon’s Pershing Fundvest ®

In April 2019, we won two 2019 ETF.com Awards:

Index of the Year

—The WisdomTree U.S.

Multifactor Index and Best New Asset Allocation ETF

—The WisdomTree 90/60 U.S.

Balanced Fund

We also won two 2019 Mutual Fund Industry & ETF Awards:

ETF of the Year

—The WisdomTree Floating Rate Treasury Fund (USFR) and ESG/Impact ETF of the Year

—The WisdomTree Emerging Markets ex-State-Owned

Enterprises Fund (XSOE).

In March 2019, we launched our Investor Solutions program and Digital Portfolio Developer (DPD) in Europe.

Building on the success of the Advisor Solutions program in the U.S., the program aims to help investment managers to engage more effectively with clients and prospects and modernize portfolios to meet evolving investor needs.

In March 2019, we launched USFR on the London Stock Exchange, making U.S.

floating rate notes available to European investors in an ETF for the first time.

We launched 5 new U.S.

listed ETFs and 4 new International listed ETPs.

In connection with our capital management strategy, we used $21.0 million of our available capital to begin to pay down our debt and we returned approximately $22.7 million to our stockholders largely through our ongoing quarterly cash dividend and to a lesser extent, through stock repurchases.

With the integration of ESG criteria in our ex-state-owned

family of products, we are now the third largest ESG U.S.

listed ETF issuer.

In December 2020, we announced the reorganization of the WisdomTree Enhanced Commodity Strategy Fund – previously the WisdomTree Continuing Commodity Index Fund (GCC) – with an updated approach to broad-based commodity investing.

In October 2020, we were named “Best International Equity ETF Issuer ($1BN+)” by the ETF Express U.S.

Awards 2020, which recognizes excellence among ETF issuers and service providers across a wide range of categories.

In October 2020, we announced a collaboration with 55ip, a financial technology company, to deliver WisdomTree model portfolios utilizing 55ip’s automated tax-smart

In September 2020, we won two awards at the AJ Bell Fund & Investment Trust Awards 2020 for WisdomTree Physical Gold (PHAU) and WisdomTree Cloud Computing UCITS ETF (WCLD).

In July 2020, we secured additional third-party relationships for our model portfolios, including Carson Group, Riskalzye, Kwanti, ETF Logic and Orion.

In June 2020, we entered into a new distribution agreement in Italy for our model portfolios with The Intermonte Eye, a digital service providing products to its network of private banks.

In March 2020, we were awarded “Best European Commodity ETF Provider” at the ETF Express 2020 European Awards.

In February 2020, we completed sale of our Canadian ETF business to CI Financial Corp.

In February 2020, in collaboration with Professor Jeremy Siegel, we launched two Siegel-WisdomTree model portfolios – The Siegel-WisdomTree Global Equity Model and the Siegel-WisdomTree Longevity Model.

We launched 4 new International listed ETPs.

In connection with our capital management strategy, we issued $175.0 million of convertible senior notes due 2023, repaid our debt previously outstanding and returned approximately $51.3 million to our stockholders through stock repurchases and our ongoing quarterly cash dividend.

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 new operating and cost efficiencies throughout our business.

We have therefore decided to adopt a “remote first” philosophy with plans to significantly reduce our office footprints in New York and London.

We are marketing our New York office space for sublease and have allowed our London office lease to expire.

In connection with these actions, we anticipate recording an impairment charge of $9.0 million to $12.0 million when our New York office space is sub-leased.

We 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, among other factors.

Market Environment

The following chart reflects the annual returns of the broad-based equity indexes and gold prices over the last three years.

As shown below, while volatile, the broad-based equity market indexes and gold prices have all appreciated during this timeframe.

listed ETF Industry Flows

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equity gathered the majority of those flows.

Bloomberg, Investment Company Institute, WisdomTree.

International ETP Industry Flows

International ETP net flows were $140 billion for the year ended December 31, 2019.

Fixed income and equities gathered the majority of those flows.

European ETP Industry Flows

European ETP net flows were $121 billion for the year ended December 31, 2020.

Equities and fixed income gathered the majority of those flows.

Industry Developments

Asset Management – Consolidation

Over the last several months, a number of acquisitions in the asset management industry have either been announced or completed, including the acquisitions of Legg Mason, Eaton Vance and Waddell & Reed, among others.

It has also become public that a well-known activist investor has taken stakes in Invesco and Janus Henderson with an eye toward creating a large-scale firm to compete with the largest asset management players.

These trends have accelerated, as fee compression, cost pressures and increased regulations have weighed on the industry, highlighting the importance of scale and operating efficiency to compete in today’s market.

Our growth strategies, which include launching innovative new products, investments in technology-enabled and research-driven solutions and our Advisor Solutions program, increasing penetration in existing distribution channels, leveraging data intelligence and our Modern Alpha investment approach, have been effective in creating momentum in our core business.

We believe these strategies, differentiated and innovative product set and performance track records position us well for success to grow in this competitive landscape.

Competition and Fee Pressures

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Factors affecting our business include fees for our products, investment performance, brand recognition, business reputation, quality of service and the continuity of our financial advisor and platform relationships.

We compete directly with other ETF sponsors and mutual fund companies and indirectly against other investment management firms, insurance companies, banks, brokerage firms and other financial institutions.

The vast majority of the firms we compete with are subsidiaries of large diversified financial companies and many others are much larger in terms of AUM, years in operations and revenues and, accordingly, have much larger sales organizations and budgets.

In addition, these larger competitors may attract business through means that are not currently available to us, including retail bank offices, investment banking, insurance agencies and broker-dealers.

The ETF industry is becoming significantly more competitive.

Existing players have broadened their suite of products offering strategies that are, in some cases, similar to ours and large traditional asset managers are also launching ETFs, some with similar strategies as well.

There also has been increased price competition in not only commoditized product categories such as traditional, market capitalization weighted index exposures, but also in fundamental or other non-market

capitalization weighted or factor-based exposures.

Fee reduction by certain of our competitors has been a trend over the last few years and continues to persist and many of our competitors are well positioned to benefit from this trend.

We compete directly with other ETP sponsors and mutual fund companies and indirectly against other investment management firms, insurance companies, banks, brokerage firms and other financial institutions.

Many of the firms we compete with are subsidiaries of large diversified financial companies and many others are much larger in terms of AUM, years in operations and revenues and, accordingly, have much larger sales organizations and budgets.

In addition, these larger competitors may attract business through means that are not available to us, including retail bank offices, investment banking, insurance agencies and broker-dealers.

The ETP industry is becoming significantly more competitive.

Existing players have broadened their suite of products offering strategies that are, in some cases, similar to ours and large traditional asset managers are also launching ETPs, some with similar strategies as well.

Price competition exists in not only commoditized product categories such as traditional, market capitalization weighted index exposures and commodities, but also in non-market

capitalization weighted or factor-based exposures and commodities.

Fee reductions by certain of our competitors has been a trend over the last few years and continues to persist and many of our competitors are well positioned to benefit from this trend.

Certain larger competitors are able to offer products at lower price points or otherwise as loss leaders due to other revenue sources available within such competitors that are currently unavailable to us.

Funds are being offered with fees of 20 bps or less, which have attracted approximately 76% of the net flows globally during the last three years.

However, while the low-cost

ETFs have accumulated a significant amount of AUM recently, we estimate these same funds represent only approximately 32% of global revenues.

In the ETF industry, being a first mover, or one of the first providers of ETFs in a particular asset class, can be a significant advantage, as the first ETF in a category to attract scale in AUM and trading liquidity is generally viewed as the most attractive ETF.

We believe that our early launch of ETFs in a number of asset classes or strategies, including fundamental weighting and currency hedging along with gold and commodities and certain fixed income categories, positions us well to maintain our position as one of the leaders of the ETF industry.

Additionally, we believe our affiliated indexing or “self-indexing” model, as well as our more recent active ETFs, enable us to launch proprietary products that do not have exact competition and are positioned to generate alpha versus benchmarks.

As investors increasingly become more comfortable with the ETF structure, we believe there will be greater focus on after-fee

performance rather than using ETFs primarily as low-cost

Newer players have also been entering the ETP industry and frequently seek to differentiate by offering ETPs at a lower price point.

Funds are being offered with fees of 20 basis points or less, which have attracted approximately 84% of the net flows globally during the last three years.

However, while these low-cost

products have accumulated a significant amount of AUM recently, we estimate that these same funds represent only approximately 30% of global revenues.

Being a first mover, or one of the first providers of ETPs in a particular asset class, can be a significant advantage, as the first ETP in a category to attract scale in AUM and trading liquidity is generally viewed as the most attractive product.

We believe that our early launch of products in a number of asset classes or strategies, including fundamental weighting and currency hedging along with commodities including gold, certain fixed income, alternative and thematic categories, positions us well to maintain our standing as one of the leaders of the ETP industry.

Additionally, we believe our affiliated indexing or “self-indexing” model, as well as our more recent active ETFs, enable us to launch proprietary products that do not have direct competition and are positioned to generate alpha versus benchmarks.

As investors increasingly become more comfortable with the product structure, we believe there will be a greater focus on after-fee

performance rather than using ETPs primarily as low-cost

market access vehicles.

While we have selectively lowered fee rates on certain products that have yet to attain scale, and there is no assurance that we will not lower fee rates on certain ETFs in the future, our strategy continues to include launching new funds in the same category with a differentiated exposure at a lower fee rate, rather than reducing fees on existing ETFs with a significant amount of AUM, long performance track records, and secondary market liquidity.

While we have selectively lowered fee rates on certain products that have yet to attain scale, and there is no assurance that we will not lower fee rates on certain products in the future, our strategy continues to include launching new funds in the same category with a differentiated exposure at a lower fee rate, rather than reducing fees on existing products with a significant amount of AUM, long performance track records, and secondary market liquidity, which continue to remain competitively priced for the value provided, among other factors.

We generally believe we are well positioned from a product pricing perspective.

While we are not immune to fee pressure, we believe our ability to successfully compete will depend largely on our competitive product offerings and our ability to offer exposure to compelling investment strategies with strong after-fee

While we are not immune to fee pressure and have selectively lowered prices on a limited number of products and launched recent products at lower fees, we believe our ability to successfully compete will depend largely on our competitive product offerings and our ability to offer exposure to compelling investment strategies with strong after-fee

performance, develop distribution relationships, create new investment products, build trading volume, AUM and outperforming track records in existing funds, offer a diverse platform of investment choices, promote thought leadership and a differentiated solutions program, build upon our brand and attract and retain talented sales professionals and other employees.

Custodial Platforms

Recently, several of the largest custodial platforms and online brokerage firms eliminated trading commissions for ETFs.

Our arrangements with these platforms had offered us preferred or exclusive access for our products, enabling investors to purchase our ETFs without paying commissions.

While exclusivity is no longer available, the elimination of commissions removes a component of trading costs previously affecting ETFs and is therefore a positive development for the ETF industry.

ETF sponsors are also now better positioned to target access to all platforms, thereby creating additional opportunities.

We expect cost savings going forward from the elimination of these arrangements.

Regulatory Developments

The ETF industry continues to evolve with the introduction of new rules and regulations, such as the following:

In September 2019, the SEC approved Rule 6c-11,

commonly referred to as the “ETF Rule,” which became effective in December 2019 and ETF issuers have one year to implement.

designed to simplify the rules governing ETFs.

The rule includes several items that will level the playing field for ETF issuers, including removing the need to file for exemptive relief in order to issue most types of ETFs, which historically has been a costly and time consuming process, removing the regulatory distinction between actively managed and index-based ETFs (including removing specific requirements associated with self-indexed ETFs) and making custom baskets available to all issuers subject to policy and procedure requirements.

The rule also requires issuers to disclose a number of items in a standardized format on daily basis, including portfolio holdings and median bid-ask

spread over the prior 30-day

Regulation Best Interest.

In June 2019, the SEC adopted Regulation Best Interest, which requires broker-dealers to act in the best interest of their retail customers when making a recommendation.

The SEC also adopted the Form CRS relationship summary, which requires registered investment advisers and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services.

Regulation Best Interest, Form CRS and the related rule became effective in September 2019 and compliance is required by June 30, 2020.

Congress and individual state legislatures have continued to debate, and in some instances taken further action, in seeking to ensure heightened standards.

Non-Transparent Active ETFs.

During 2019, the SEC approved multiple proposals for non-transparent

active ETFs which are products that are not required to disclose their holdings daily, as most ETFs currently are required to do.

It is anticipated that the first non-transparent

active ETFs will launch by the summer of 2020.

While the ETF Rule will further lower barriers to entry, we view the passage of the rule positively.

The ETF Rule will allow for enhancements in indexes that we create and for broader product development opportunities associated with ETFs tracking such indexes.

Wider use of custom baskets will promote efficiency in the creation and redemption process, which could lead to greater tax efficiency and liquidity and tighter bid-ask

Enhanced and uniform data disclosures also will increase transparency and help investors understand the costs and benefits of investing in ETFs.

In addition, we believe that the heightened focus on fiduciary and best interest standards will continue to raise investor awareness of the inherent benefits that ETFs provide—transparency, tax efficiency and liquidity—which we believe will expand ETFs’ competitiveness generally.

We are also of the view that transparency in holdings is one of the hallmarks and benefits of the ETF structure.

While market commentators believe that non-transparent

active ETFs may lead to increased competition in the ETF industry as some of the largest asset managers who previously did not want to disclose holdings on a daily basis may now enter the ETF space, these non-transparent

ETFs may fact distribution challenges from gatekeepers and platforms that have been accustomed to greater transparency.

It is also unclear how the decreased transparency will impact the liquidity of these non-transparent

Additionally, we believe the shift toward fee-based

models will benefit the ETF industry and overall usage of ETFs likely will increase, as ETFs generally charge lower fees than mutual funds.

Regulations that discourage a commission model and mandate transparency of fees should be conducive for ETF growth.

Components of Operating Revenue

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Employee compensation and benefits expenses are expensed when incurred and include salaries, incentive compensation, and related benefit costs.

Virtually all our employees receive incentive compensation that is based on our operating results as well as their individual performance.

Virtually all of our employees receive incentive compensation that is based on our operating results as well as their individual performance.

Therefore, a portion of this expense will fluctuate with our business results.

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Also included in compensation and benefits are costs related to equity awards granted to our employees.

Our executive management and Board of Directors strongly believe that equity awards are an important part of our employees’ overall compensation package and that incentivizing our employees with equity in the Company aligns the interest of our employees with that of our stockholders.

We use the fair value method in recording compensation expense for equity-based awards.

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The fees we pay our sub-advisers

generally have minimums per fund which range from $25,000 to $112,000 per year with additional fees ranging between 0.015% and 0.20% of average daily AUM at various breakpoint levels depending on the nature of the ETP.

generally are the higher of the fixed minimums per fund, which range from $25,000 to $614,000 per year, or the percentage fee, which ranges between 0.015% and 0.20% per annum of average daily AUM at various breakpoint levels depending on the nature of the ETP.

In addition, we pay certain costs based on transactions in our ETPs or based on inflow levels.

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Contractual gold payments

Contractual gold payments expense represents an ongoing obligation of ETFS Capital that we assumed in connection with the ETFS Acquisition.

This ongoing obligation requires us to pay 9,500 ounces of gold annually from the advisory fee income we earn for managing physically backed gold ETPs.

Contractual gold payments expense represents an ongoing obligation requiring us to pay 9,500 ounces of gold annually from the advisory fee income we earn for managing physically backed gold ETPs.

See Note 12 to our Consolidated Financial Statements for additional information.

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Third-party distribution fees

Third-party distribution fees include payments made to enable our ETFs to be included on certain third-party platforms in exchange for commission-free trading or other preferential access and data.

Third-party distribution fees, which are expensed as incurred, include payments made to enable our products to be included on certain third-party platforms in exchange for commission-free trading or other preferential access.

These expenses also include payments to our third-party marketing agents in Latin America and Israel.

For the year ending December 31, 2020, we estimate that third-party distribution fees will be approximately $7.0 million, which is unchanged from 2019 as savings from platforms that recently eliminated trading commissions for ETFs are expected to be reinvested in existing and new global platform relationships.

For the year ending December 31, 2021, we estimate that third-party distribution fees will be approximately $6.0 million.

Acquisition and disposition-related costs

Acquisition and disposition-related costs are principally associated with costs incurred in connection with the ETFS Acquisition, including integration costs recognized following its completion.

Also included are costs associated with the sale our Canadian business, which was completed on February 19, 2020.

Acquisition and disposition-related costs are principally associated with costs incurred in connection with the ETFS Acquisition, which was completed in April 2018.

Also included are costs associated with the sale of our Canadian ETF business, which was completed in February 2020.

Other expenses consist primarily of insurance premiums, general office related expenses, securities license fees for our sales force, public company related expenses, corporate related travel and entertainment and board of director fees, including stock-based compensation related to equity awards we granted to our directors.

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Interest expense

Interest expense is associated with our debt and revolving Credit Facility.

We recognize interest expense using the effective interest method which includes the amortization of issuance costs.

Interest expense is associated with our convertible notes and former credit facility.

We recognize interest expense using the effective interest method which includes the amortization of discounts, premiums and issuance costs.

Revaluation of deferred consideration – gold payments

Deferred consideration arose in connection with the ETFS Acquisition and is remeasured each reporting period using forward-looking gold prices and a selected discount rate.

Deferred consideration arose in connection with the ETFS Acquisition and is remeasured each reporting period using forward-looking gold prices observed on the CMX exchange, a selected discount rate and perpetual growth rate.

See Note 12 to our Consolidated Financial Statements for additional information.

Interest income

Interest income, which is recognized on an accrual basis, arises on our note receivable and from investing our corporate cash.

Interest income, which is recognized on an accrual basis, arises from investing our corporate cash and on notes receivable previously outstanding.

Other gains and losses, net

Included herein are gains and losses arising from foreign exchange, the sale of gold earned from advisory fees paid by physically-backed gold ETPs, and other miscellaneous items.

Also included are losses arising from the release of tax-related

indemnification assets upon the expiration of the statute of limitations, for which an equal and offsetting benefit is recognized in income tax expense.

Our income tax expense consists of taxes due to federal, various state and local and certain foreign authorities.

The effective tax rate was not meaningful as our income before income taxes was $0.1 million.

The effective tax rate differs from the federal statutory rate of 21% primarily due to a valuation allowance on capital losses and foreign net operating losses, a non-deductible

loss on revaluation of deferred consideration, non-deductible

executive compensation, 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.

We currently anticipate that our consolidated normalized effective tax rate will be approximately 27% for the year ending December 31, 2020.

We currently anticipate that our consolidated normalized effective tax rate will be approximately 19% to 20% for the year ending December 31, 2021.

This estimated rate may change and is dependent upon our actual taxable income earned in relation to our forecasts as well as any other items which may arise that are not currently forecasted.

Such items may include, but are not limited to, any revaluation on deferred consideration and any stock-based compensation windfalls or shortfalls.

Such items may include, but are not limited to, any revaluation on deferred consideration – gold payments, reductions in unrecognized tax benefits and any stock-based compensation windfalls or shortfalls.

Corporate tax legislation could also impact our normalized effective tax rate.

Factors that May Impact our Future Financial Results

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As a result, our operating results are particularly exposed to investor sentiment toward investing in these products’ strategies and our ability to maintain AUM of these products, as well as the performance of these products.

Our concentrations in HEDJ and DXJ have declined dramatically over the last three years from 35% at December 31, 2017 to 10% at December 31, 2019, as negative investor sentiment toward these strategies led to net outflows of $13.0 billion during this timeframe.

These outflows largely have been offset by strong inflows into our U.S.

equity, fixed income, commodity and emerging markets products.

During the years ended December 31, 2017, 2018 and 2019 net inflows were $3.7 billion, $3.2 billion and $3.3 billion, excluding outflows from HEDJ and DXJ.

While HEDJ and DXJ outflows have been mitigated by inflows into our other products, our revenues are highly correlated to the level and relative mix of our AUM, as well as the fee rate associated with our ETPs.

Our revenues are also highly correlated to the level and relative mix of our AUM, as well as the fee rate associated with our ETPs.

Changes in product mix have led to a decline in our average global advisory fee, which, for the years ended December 31, 2018, 2019 and 2020 were 0.48%, 0.45% and 0.41%, respectively.

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Beginning of period assets

Assets acquired

Assets acquired/(sold)

Inflows/(outflows)

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Number of ETPs – end of the period

Years Ended December 31,

U.S LISTED ETFs (in millions)

LISTED ETFs (in millions)

Beginning of period assets

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Assets acquired

Assets acquired/(sold)

Inflows/(outflows)

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Beginning of period assets

Assets acquired

Inflows/(outflows)

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Beginning of period assets

Assets acquired

Inflows/(outflows)

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Average assets during the period

Years Ended December 31,

Emerging Market Equity

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Beginning of period assets

Assets acquired

Inflows/(outflows)

2 unchanged sentences

Average assets during the period

Years Ended December 31,

Leveraged & Inverse

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Average assets during the period

Headcount—U.S.

Business Segment

Headcount—International Segment

Previously issued statistics may be restated due to fund closures and trade adjustments

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Average Global AUM

Our average global AUM increased 5.9% from $56.4 billion during the year ended December 31, 2018 to $59.7 billion in the comparable period in 2019 primarily due to the inclusion of AUM from the ETFS acquired business for the entire year of 2019, market appreciation and net inflows into our U.S.

equity, fixed income, commodity and emerging market ETPs, largely offset by outflows from HEDJ and DXJ.

Our average global AUM increased 2.4% from $59.7 billion at December 31, 2019 to $61.2 billion at December 31, 2020 arising from market appreciation.

Operating Revenues

Advisory fees

Advisory fee revenues decreased 2.0% from $271.1 million during the year ended December 31, 2018 to $265.7 million in the comparable period in 2019 due to a 3 basis point decline in our average global advisory fee

and lower average AUM of our U.S.

listed products, partly offset by higher revenues earned from the ETFS acquired business, which were recognized for the entire year of 2019.

Our average global advisory fee declined from 0.48% to 0.45% during the years ended December 31, 2018 and 2019, respectively, due to the ETFS Acquisition and AUM mix shift.

Other income decreased 8.7% from $3.0 million during the year ended December 31, 2018 to $2.8 million in the comparable period in 2019 primarily due to lower licensing fee revenues.

Advisory fee revenues decreased 5.8% from $265.7 million during the year ended December 31, 2019 to $250.2 million in the comparable period in 2020 due to a 4 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 declined from 0.45% during the year ended December 31, 2019 to 0.41% during the year ended December 31, 2020.

Other income increased 27.8% from $2.8 million during the year ended December 31, 2019 to $3.5 million in the comparable period in 2020 primarily due to higher creation/redemption fees associated with our international listed products.

Operating Expenses

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Acquisition and disposition-related costs

Total expenses

Total operating expenses

As a Percent of Revenues:

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Sales and business development

As a Percent of Revenues:

Contractual gold payments

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Acquisition and disposition-related costs

Total expenses

Total operating expenses

Compensation and benefits

Compensation and benefits expense increased 8.4% from $74.5 million during the year ended December 31, 2018 to $80.8 million in the comparable period in 2019 primarily due to higher incentive compensation, partly offset by lower headcount related expenses.

Headcount of our U.S.

Business segment was 153 and our International Business segment was 75 at December 31, 2018 compared to 137 and 71, respectively, at December 31, 2019.

Compensation and benefits expense decreased 7.5% from $80.8 million during the year ended December 31, 2019 to $74.7 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 year period.

Headcount was 208 and 217 at December 31, 2019 and 2020, respectively.

Fund management and administration

Fund management and administration expense increased 8.5% from $56.7 million during the year ended December 31, 2018 to $61.5 million in the comparable period in 2019 due to expenses associated with the ETFS acquired business, which were recognized for the entire year of 2019, partly offset by lower average AUM of our U.S.

listed products.

Fund management and administration expense decreased 1.6% from $61.5 million during the year ended December 31, 2019 to $60.5 million in the comparable period in 2020 due to the sale of our Canadian ETF business in February 2020, partly offset by higher average AUM.

We had 80 U.S.

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Marketing and advertising

Marketing and advertising expense decreased 12.4% from $13.9 million during the year ended December 31, 2018 to $12.2 million in the comparable period in 2019 primarily due to lower domestic spending.

Marketing and advertising expense decreased 8.5% from $12.2 million during the year ended December 31, 2019 to $11.1 million in the comparable period in 2020 primarily due to lower discretionary spending resulting from the COVID-19

Sales and business development

Sales and business development expense increased 6.5% from $17.2 million during the year ended December 31, 2018 to $18.3 million in the comparable period in 2019 due to expenses associated with the ETFS acquired business, which were recognized for the entire year of 2019, as well as costs associated with the launch of our Bitcoin ETP.

Sales and business development expense decreased 42.1% from $18.3 million during the year ended December 31, 2019 to $10.6 million in the comparable period in 2020 primarily due to lower discretionary spending resulting from the COVID-19

Contractual gold payments

Contractual gold payments expense increased 55.4% from $8.5 million during the period April 11, 2018 through December 31, 2018 to $13.2 million during the year ended December 31, 2019.

This expense was associated with the payment of 9,500 ounces of gold (6,835 ounces for the period April 11 through December 31, 2018) and was calculated using the average daily spot price of $1,246 and $1,481 per ounce during the year to date periods of 2018 and 2019, respectively.

Contractual gold payments expense increased 27.1% from $13.2 million during the year ended December 31, 2019 to $16.8 million in the comparable period in 2020.

This expense was associated with the payment of 9,500 ounces of gold and was calculated using the average daily spot price of $1,393 and $1,770 per ounce during the years ended December 31, 2019 and 2020, respectively.

Professional and consulting fees

Professional and consulting fees decreased 29.3% from $8.0 million during the year ended December 31, 2018 to $5.6 million in the comparable period in 2019 due to lower domestic spending on corporate consulting-related expenses.

Professional and consulting fees decreased 13.1% from $5.6 million during the year ended December 31, 2019 to $4.9 million in the comparable period in 2020 due to lower corporate consulting-related expenses.

Occupancy, communications and equipment

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Depreciation and amortization

Depreciation and amortization expense decreased 19.7% from $1.3 million during the year ended December 31, 2018 to $1.0 million in the comparable period in 2019 primarily due to the closure of our office in Japan.

Depreciation and amortization expense was essentially unchanged from the year ended December 31, 2019.

Third-party distribution fees

Third-party distribution fees were essentially unchanged from the year ended December 31, 2018.

Third-party distribution fees decreased 25.1% from $7.0 million during the year ended December 31, 2019 to $5.2 million in the comparable period in 2020 primarily due to lower fees for platform relationships.

Acquisition and disposition-related costs

Acquisition and disposition-related costs decreased 92.1% from $11.5 million during the year ended December 31, 2018 to $0.9 million in the comparable period in 2019 as the integration of ETFS is essentially complete.

Expenses incurred during the year ended December 31, 2019 also include costs associated with the sale of our Canadian business, which was completed on February 19, 2020.

Other expenses were essentially unchanged from the year ended December 31, 2018.

Acquisition and disposition-related costs were $0.9 million and $0.4 million during the year ended December 31, 2019 and 2020.

These were incurred in connection with the integration of ETFS during the year ended December 31, 2019 and costs associated with the sale of our Canadian ETF business, which was completed in February 2020.

Other expenses decreased 14.3% from $8.1 million during the year ended December 31, 2019 to $6.9 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)

Year Ended December 31,

(in thousands)

Interest expense

(Loss)/gain on revaluation of deferred consideration

Loss on revaluation of deferred consideration

Interest income

Other losses, net

Loss on extinguishment of debt

Other gains and losses, net

Total other expenses, net

Year Ended December 31,

As a Percent of Revenues:

Interest expense

(Loss)/gain on revaluation of deferred consideration

Loss on revaluation of deferred consideration

Interest income

Other losses, net

Loss on extinguishment of debt

Other gains and losses, net

Total other expenses, net

Interest expense

Interest expense increased 41.2% from $8.0 million during the year ended December 31, 2018 to $11.2 million in the comparable period in 2019 as borrowing under our Credit Facility commenced on April 11, 2018.

In addition, the increase was attributable to higher interest rates, partly offset by a reduced borrowing as we partially repaid $21.0 million of our Term Loan during the year ended December 31, 2019.

Our effective interest rate during April 11, 2018 through December 31, 2018 and during the year ended December 31, 2019 was 5.1% and 5.3%, respectively, and includes our cost of borrowing and amortization of issuance costs.

(Loss)/gain on revaluation of deferred consideration

We recognized a gain on revaluation of deferred consideration of $12.2 million during the year ended December 31, 2018 as compared to a loss of ($11.3) million during the year ended December 31, 2019.

The loss arose in the current year due to an increase in the price of gold, partly offset by the flattening of the forward-looking curve when compared to the forward-looking curve on December 31, 2018.

Interest expense decreased 14.0% from $11.2 million during the year ended December 31, 2019 to $9.7 million in the comparable period in 2020 due to a lower level of debt outstanding.

Our effective interest rate during the years ended December 31, 2019 and 2020 were 5.3% and 5.5%, respectively, and includes our cost of borrowing and amortization of discounts, premiums and issuance costs.

Loss on revaluation of deferred consideration

We recognized a loss on revaluation of deferred consideration of $11.3 million and $56.8 million during the years ended December 31, 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.

In addition, the loss in the current year also resulted from a reduction in the discount rate used to compute the present value of the annual payment obligations.

Interest income

Interest income increased 7.7% from $3.1 million during the year ended December 31, 2018 to $3.3 million in the comparable period in 2019 due to paid-in-kind,

or PIK, interest accrued on notes receivable, partly offset by the maturity of our short-term investment grade portfolio which occurred in the prior year.

During the year ended December 31, 2019, impairment charges of $30.7 million were recognized on the following items:

(i) $30.1 million on our financial interests in AdvisorEngine (See Note 8 to our Consolidated Financial Statements) and (ii) $0.6 million in connection with the termination of our Japan office lease.

During the year ended December 31, 2018, impairment charges of $17.4 million were recognized on the following items:

(i) $10.0 million on the intangible asset associated with the WisdomTree Continuous Commodity Index Fund, or GCC;

(ii) $3.8 million related to our ownership stake in Thesys Group, Inc., or Thesys;

(iii) $3.3 million upon the expiration of our option to acquire the remaining equity interests in AdvisorEngine;

and (iv) $0.3 million associated with the disposal of the fixed assets of our Japan office.

Other losses, net

Other losses, net were $0.2 million and $3.5 million during the year ended December 31, 2018 and 2019, respectively.

Included in the loss recognized in the current year is a charge of $4.3 million arising from the release of a tax-related

Interest income decreased 77.7% from $3.3 million during the year ended December 31, 2019 to $0.7 million in the comparable period in 2020 as paid-in-kind

interest income was accrued in the prior period on our former AdvisorEngine Inc., or AdvisorEngine, notes receivable.

During the year ended December 31, 2020, we recognized non-cash

impairment charges totaling $22.8 million, including $19.7 million related to our former investment in AdvisorEngine, and $3.1 million related to our investment in Thesys Group, Inc., or Thesys (See Notes 8 and 10 to our Consolidated Financial Statements).

During the year ended December 31, 2019, we recognized non-cash

impairment charges totaling $30.7 million, including $30.1 million to our former investment in AdvisorEngine and $0.6 million in connection with the termination of our Japan office lease.

Loss on extinguishment of debt

During the year ended December 31, 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.

Other gains and losses, net

Other gains and losses, net were ($3.5) million and $0.6 million during the year ended December 31, 2019 and 2020, respectively.

This includes a charge recorded during the years ended December 31, 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.

The indemnification asset arose from the ETFS Acquisition.

An equal and offsetting benefit has been recognized in income tax expense.

Also included in the year ended December 31, 2019 is a gain of $0.4 million 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 advisory fees paid by our physically-backed gold ETPs, foreign exchange fluctuations, securities owned and other miscellaneous items.

In addition, during the year ended December 31, 2020, we recognized a gain of $2.9 million associated with the sale of our Canadian ETF business (See Note 3 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.

The year ended December 31, 2019 also includes a gain of $0.4 million from the recognition of the foreign currency translation adjustment upon the liquidation of our Japan business.

Gains and losses also generally arise from the sale of gold earned from advisory fees paid by our physically-backed gold ETPs, foreign exchange fluctuations, securities owned and other miscellaneous items.

Our effective income tax rate for the year ended December 31, 2020 of negative 1.2% resulted in income tax expense of $0.4 million.

Our tax rate differs from the federal statutory rate of 21% primarily due to a non-deductible

loss on revaluation of deferred consideration, a valuation allowance on capital losses and tax shortfalls associated with the vesting and exercise of stock-based compensation awards.

These items were partly offset by a tax benefit of $6.0 million recognized in connection with the release of the tax-related

indemnification asset described above, a $2.9 million non-taxable

gain recognized upon sale of our Canadian ETF business in the first quarter, a tax benefit of $2.6 million recognized in connection with the release of a deferred tax asset valuation allowance on interest carryforwards arising from our debt previously held in the UK and a lower tax rate on foreign earnings.

Our effective income tax rate during the year ended December 31, 2019 was not meaningful as our income before income taxes was $0.1 million.

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Our effective income tax rate for the year ended December 31, 2018 of 28.2% resulted in income tax expense of $14.4 million.

Our tax rate differs from the federal statutory tax rate of 21% primarily due to a valuation allowance on foreign net operating losses, non-deductible

acquisition and disposition-related costs, state and local income taxes and a valuation allowance on capital losses, partly offset by a non-taxable

gain on revaluation of deferred consideration, a lower tax rate on foreign earnings and stock-based compensation windfall tax benefits.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

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Total revenues

Acquisition of ETFS

In April 2018, we completed the ETFS Acquisition and therefore our results for the year ended December 2018 may not be directly comparable to our results from the year ended December 31, 2019.

Average Global AUM

Our average global AUM increased 24.8% from $45.2 billion during the year ended December 31, 2017 to $56.4 billion in the comparable period in 2018 primarily due to the $17.6 billion of AUM acquired in connection with the ETFS Acquisition and net inflows into our fixed income, U.S.

equity, commodity, emerging markets and alternative strategy ETPs.

These increases were partly offset by outflows from HEDJ/DXJ and market depreciation.

equity, fixed income, commodity and emerging market ETPs, largely offset by outflows from HEDJ and DXJ.

Operating Revenues

Advisory fees

Advisory fee revenues increased 19.6% from $226.7 million during the year ended December 31, 2017 to $271.1 million in the comparable period in 2018 primarily due the ETFS Acquisition, partly offset by lower average AUM of our U.S.

listed products.

Our average global advisory fee has declined 0.02%, from 0.50% to 0.48% during the years ended December 31, 2017 and 2018, respectively, due to the ETFS Acquisition and change in product mix.

Other income increased 87.9% from $1.6 million during the year ended December 31, 2017 to $3.0 million in the comparable period in 2018 primarily due to creation/redemption fees earned from the ETFS exchange-traded products.

listed products, partly offset by higher revenues earned from the ETFS acquired business, which were recognized for the entire year of 2019.

Our average global advisory fee declined from 0.48% to 0.45% during the years ended December 31, 2018 and 2019, respectively, due to the ETFS Acquisition and AUM mix shift.

Other income decreased 8.7% from $3.0 million during the year ended December 31, 2018 to $2.8 million in the comparable period in 2019 primarily due to lower licensing fee revenues.

Operating Expenses

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Acquisition and disposition-related costs

Total expenses

Total operating expenses

As a Percent of Revenues:

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Acquisition and disposition-related costs

Total expenses

Total operating expenses

Compensation and benefits

Compensation and benefits expense decreased 8.6% from $81.5 million during the year ended December 31, 2017 to $74.5 million in the comparable period in 2018 due to lower incentive compensation, partly offset by higher compensation associated with the ETFS Acquisition.

Headcount of our U.S.

Business segment was 162 and our International Business segment was 42 at December 31, 2017 compared to 153 and 75, respectively, at December 31, 2018.

Headcount was 228 and 208 at December 31, 2018 and 2019, respectively.

Fund management and administration

Fund management and administration expense increased 34.5% from $42.1 million during the year ended December 31, 2017 to $56.7 million in the comparable period in 2018 due to higher average AUM of our International listed products primarily associated with the ETFS Acquisition.

listed products.

We had 85 U.S.

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Marketing and advertising

Marketing and advertising expense decreased 3.6% from $14.4 million during the year ended December 31, 2017 to $13.9 million in the comparable period in 2018 primarily due to lower levels of domestic spending, partly offset by higher spending in Europe.

Sales and business development

Sales and business development expense increased 24.2% from $13.8 million during the year ended December 31, 2018 to $17.2 million in the comparable period in 2018 due to higher spending on sales related activities globally.

Contractual gold payments

Contractual gold payments expense represents an ongoing obligation of ETFS Capital that we assumed in connection with the ETFS Acquisition.

This obligation requires us to pay 9,500 ounces of gold annually from advisory fee income we earn from managing physically backed gold ETPs.

During the year ended December 31, 2018, we recognized $8.5 million of contractual gold payments expense associated with the payment of 6,835 ounces of gold at an average daily spot price of $1,246 per ounce.

Contractual gold payments expense increased 55.4% from $8.5 million during the period April 11, 2018 through December 31, 2018 to $13.2 million during the year ended December 31, 2019.

This expense was associated with the payment of 9,500 ounces of gold (6,835 ounces for the period from April 11, 2018 through December 31, 2018) and was calculated using the average daily spot price of $1,246 and $1,393 per ounce during the year to date periods of 2018 and 2019, respectively.

Professional and consulting fees

Professional and consulting fees increased 52.0% from $5.3 million during the year ended December 31, 2017 to $8.0 million in the comparable period in 2018 largely due to higher spending on corporate consulting-related expenses.

Professional and consulting fees decreased 29.3% from $8.0 million during the year ended December 31, 2018 to $5.6 million in the comparable period in 2019 due to lower spending on corporate consulting-related expenses.

Occupancy, communications and equipment

Occupancy, communications and equipment expense increased 14.6% from $5.4 million during the year ended December 31, 2017 to $6.2 million in the comparable period in 2018 primarily due to higher headcount associated with the ETFS Acquisition.

Occupancy, communications and equipment expense was essentially unchanged from the year ended December 31, 2018.

Depreciation and amortization

Depreciation and amortization expense decreased 6.7% from $1.4 million during the year ended December 31, 2017 to $1.3 million in the comparable period in 2018 and is primarily due to the closure of our office in Japan.

Third-party distribution fees

Third-party distribution fees increased 94.8% from $3.4 million during the year ended December 31, 2017 to $6.6 million in the comparable period in 2018 primarily due to higher fees paid for platform relationships and to our third-party marketing agent in Latin America.

Third-party distribution fees were essentially unchanged from the year ended December 31, 2018.

Acquisition and disposition-related costs

During the year ended December 31, 2018 we incurred acquisition and disposition-related costs associated with the ETFS Acquisition of $11.5 million which included professional advisor fees, severance and other compensation costs, a write-off

of our office lease and other integration costs.

During the year ended December 31, 2017, we incurred acquisition and disposition-related costs of $4.8 million, which were primarily professional fees associated with the ETFS Acquisition, as well as professional fees incurred in connection with securing an option to purchase the remaining equity interests in AdvisorEngine.

This option has since expired.

Other expenses increased 20.7% from $7.1 million during the year ended December 31, 2017 to $8.5 million in the comparable period in 2018 primarily due to higher office expenses associated with an increase in headcount from the ETFS Acquisition.

Acquisition and disposition-related costs decreased 92.1% from $11.5 million during the year ended December 31, 2018 to $0.9 million in the comparable period in 2019 reflecting the substantial completion of the integration of ETFS.

Expenses incurred during the year ended December 31, 2019 also include costs associated with the sale of our Canadian ETF business, which was completed in February 2020.

Other expenses were essentially unchanged from the year ended December 31, 2018.

Other Income/(Expenses)

Year Ended December 31,

(in thousands)

Interest expense

Gain on revaluation of deferred consideration

(Loss)/gain on revaluation of deferred consideration

Interest income

Settlement gain

Other losses, net

Total other income/(expenses)

Total other expenses, net

Year Ended December 31,

As a Percent of Revenues:

Interest expense

Gain on revaluation of deferred consideration

(Loss)/gain on revaluation of deferred consideration

Interest income

Settlement gain

Other losses, net

Total other income/(expenses)

Total other expenses, net

Interest expense

Interest expense for the year ended December 31, 2018 of $8.0 million was incurred on our borrowing under the Credit Facility that we entered on April 11, 2018 to facilitate the ETFS Acquisition.

Our effective interest rate during the period was 5.1% and includes our cost of borrowing and amortization of issuance costs.

Gain on revaluation of deferred consideration

We recognized a gain on revaluation of deferred consideration of $12.2 million during the year ended December 31, 2018.

A gain was recognized as the price of gold has declined when compared to April 11, 2018, the date in which the deferred consideration was originally measured.

The magnitude of the any gain or loss recognized is highly correlated to the magnitude of the change in the forward-looking price of gold.

Interest expense increased 41.2% from $8.0 million during the year ended December 31, 2018 to $11.2 million in the comparable period in 2019 as borrowing under our former credit facility commenced on April 11, 2018.

In addition, the increase was attributable to higher interest rates, partly offset by a reduced borrowing as we partially repaid $21.0 million of our outstanding debt during the year ended December 31, 2019.

(Loss)/gain on revaluation of deferred consideration

We recognized a gain on revaluation of deferred consideration of $12.2 million during the year ended December 31, 2018 as the price of gold had declined when compared to April 11, 2018, the date in which the deferred consideration was originally measured.

During the year ended December 31, 2019 we recognized a loss of ($11.3) million due to an increase in the price of gold, partly offset by the flattening of the forward-looking curve when compared to the forward-looking curve on December 31, 2018.

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 8.1% from $2.9 million during the year ended 2017 to $3.1 million in the comparable period in 2018 primarily due to PIK interest on notes receivable, partly offset by lower interest income on our short-term investment grade bond portfolio which has matured.

Interest income increased 7.7% from $3.1 million during the year ended December 31, 2018 to $3.3 million in the comparable period in 2019 due to paid-in-kind

interest accrued on our former AdvisorEngine notes receivable, partly offset by the maturity of our short-term investment grade portfolio which occurred in the prior year.

During the year ended December 31, 2019, we recognized non-cash

impairment charges totaling $30.7 million, including $30.1 million to our former investment in AdvisorEngine and $0.6 million in connection with the termination of our Japan office lease.

During the year ended December 31, 2018, impairment charges of $17.4 million were recognized on the following items:

(i) $10.0 million on the intangible asset associated with GCC;

(i) $10.0 million on the intangible asset associated with the WisdomTree Continuous Commodity Index Fund, or GCC;

(ii) $3.8 million related to our ownership stake in Thesys;

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and (iv) $0.3 million associated with the disposal of the fixed assets of our Japan office.

Settlement gain

A settlement gain of $6.9 million was recorded during the year ended December 31, 2017 representing the fair value of the preferred stock of Thesys that we received in connection with the resolution of a dispute regarding our ownership stake in Thesys, which occurred in June 2017 (See Note 10 to our Consolidated Financial Statements).

Other losses, net

Other losses, net were $0.2 million and $3.5 million during the year ended December 31, 2018 and 2019, respectively.

Gains and losses generally arise from the sale of gold earned from advisory fees paid by our physically-backed gold ETPs, foreign exchange fluctuations, securities owned and other miscellaneous items.

Included in the loss recognized in the current year is a charge of $4.3 million arising from the release of a tax-related

indemnification asset upon the expiration of the statute of limitations.

The indemnification asset arose from the ETFS Acquisition.

An equal and offsetting benefit has been recognized in income tax expense.

Also included in the year ended December 31, 2019 is a gain of $0.4 million from the recognition of the foreign currency translation adjustment upon the liquidation of our Japan business.

Our effective income tax rate during the year ended December 31, 2019 was not meaningful as our income before income taxes was $0.1 million.

Our effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a valuation allowance on capital losses and foreign net operating losses, a non-deductible

loss on revaluation of deferred consideration, non-deductible

Our effective income tax rate for the year ended December 31, 2018 of 28.2% resulted in income tax expense of $14.4 million.

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gain on revaluation of deferred consideration, a lower tax rate on foreign earnings and stock-based compensation windfall tax benefits.

The gain on revaluation of deferred consideration 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.

Our effective income tax rate for the year ended December 31, 2017 of 53.3% resulted in income tax expense of $31.0 million.

Our tax rate differed from the federal statutory tax rate of 35% primarily due to a valuation allowance on foreign net operating losses, state and local income tax expense, non-deductible

acquisition and disposition-related costs and tax shortfalls recognized upon vesting of stock-based compensation awards during the year ended December 31, 2017.

In addition, included within our effective income tax rate is a charge of $0.5 million to remeasure our net deferred tax assets, or DTAs, in connection with U.S.

We were required to remeasure our DTAs using the newly enacted federal corporate income tax rate of 21% at date of enactment.

This reduced the carrying value of our DTAs and increased tax expense.

Quarterly Results

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Acquisition and disposition-related costs

Total expenses

Total operating expenses

Operating income

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Interest income

Loss on extinguishment of debt

Other gains and losses, net

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Acquisition and disposition-related costs

Total expenses

Total operating expenses

Operating income

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Interest income

Loss on extinguishment of debt

Other gains and losses, net

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Beginning of period assets

Assets acquired

Inflows/(outflows)

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Beginning of period assets

Assets acquired

Inflows/(outflows)

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Beginning of period assets

Assets acquired

Inflows/(outflows)

3 unchanged sentences

Beginning of period assets

Assets acquired

Inflows/(outflows)

4 unchanged sentences

Beginning of period assets

Assets acquired

Inflows/(outflows)

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Beginning of period assets

Assets acquired

Inflows/(outflows)

4 unchanged sentences

Beginning of period assets

Assets acquired

Inflows/(outflows)

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Average assets during the period

Headcount—U.S.

Business segment

Headcount—International segment

Previously issued statistics may be restated due to fund closures and trade adjustments

Financial Measures

Financial Measurements

In an effort to provide additional information regarding our results as determined by GAAP, we also disclose certain non-GAAP

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financial measurements contained in this Report include:

Adjusted net income and adjusted diluted earnings per share.

net income and adjusted diluted earnings per share.

We disclose adjusted net income and adjusted diluted earnings per share as non-GAAP

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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 deferred consideration and our reported financial results.

Changes in the forward-looking price of gold and changes in the discount rate used to compute the present value of the annual payment obligations may have a material impact on the carrying value of the deferred consideration and our reported financial results.

We exclude this item when arriving at adjusted net income and adjusted diluted earnings per share as it is not core to our operating business.

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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.

Impairment charges, severance expense, acquisition and disposition-related costs, a re-measurement

of net deferred tax assets in connection with tax reform and a settlement gain are excluded when determining adjusted net income and adjusted earnings per share.

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.

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 these 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 the issuance 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.

Loss on extinguishment of debt, the release of a deferred tax asset valuation allowance recognized on interest carryforwards arising from our debt previously outstanding in the UK, 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 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.

Adjusted Net Income and Diluted Earnings per Share:

Net (loss)/income, as reported

Impairments, net of income taxes

Add back/(deduct):

Unrealized loss/(gain) on revaluation of deferred consideration

Severance expense, net of income taxes

Loss/(gain) on revaluation of deferred consideration

Impairments, net of income taxes

Gain recognized upon sale of Canadian ETF business

Release of a deferred tax asset valuation allowance recognized on interest carryforwards arising from debt previously outstanding in the United Kingdom

Loss on extinguishment of debt, net of income taxes

Gain arising from an adjustment to the estimated fair value of consideration received from the exit of investment in AdvisorEngine

Interest expense from the amortization of discount arising from the bifurcation of the conversion option embedded in the convertible notes, net of income taxes

Add back/(deduct):

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Acquisition and disposition-related costs, net of income taxes

Re-measurement

of net deferred tax assets (tax reform)

Settlement gain, net of income taxes

Severance expense, net of income taxes

Adjusted net income

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Adjusted earnings per share - diluted

Segment Results

The table below presents the results of our U.S.

Business and International Business reportable segments (in thousands, except for average assets during the period, which are in millions).

Years Ended December 31,

Business Segment

Operating revenues

Advisory fees

Total operating revenues

Total operating expenses

Other income/(expenses)

Interest expense

Interest income

Settlement gain

Other gains and losses, net

Total other income/(expenses)

Total income before taxes (U.S.

Business Segment)

Average assets during the period (in millions)

Average advisory fee during the period

International Business Segment

Operating revenues

Advisory fees

Total operating revenues

Total operating expenses

Other income/(expenses)

Interest expense

Interest income

(Loss)/gain on revaluation of deferred consideration

Other losses, net

Total other income/(expenses)

Total (loss)/income before taxes (International Business Segment)

Average assets during the period (in millions)

Average advisory fee during the period

Income/(loss) before taxes

Business segment

International Business segment

Total income before taxes

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Business segment

Operating revenues decreased 16.6% from $204.9 million during the year ended December 31, 2018 to $170.8 million in the comparable period in 2019.

The decrease was attributable to lower average AUM due to net outflows from HEDJ and DXJ, market depreciation and a 4 basis point decrease in our average advisory fee due to AUM mix shift.

These decreases were partly offset by net inflows into our U.S.

equity, fixed income and emerging markets ETFs.

Our average U.S.

listed advisory fee was 0.48% and 0.44% during the years ended December 31, 2018 and 2019, respectively.

Operating expenses decreased 7.5% from $152.4 million during the year ended December 31, 2018 to $141.1 million in the comparable period in 2019 primarily due to lower acquisition and disposition-related costs, lower fund management and administration expense, lower professional fees and lower marketing and advertising expense.

These decreases were partly offset by higher incentive compensation.

Other income/(expenses) of the U.S.

Business segment were ($27.9) million during the year ended December 31, 2019, which included impairments of ($30.7) million and interest expense of ($0.8) million.

These expenses were partly offset by interest income of $3.3 million and other net gains of $0.3 million.

Other income/(expenses) of the U.S.

Business segment were ($14.6) million during the year ended December 31, 2018, which included impairments of ($17.4) million and interest expense of ($0.6) million.

These expenses were partly offset by interest income of $3.1 million and other gains, net of $0.3 million.

International Business segment

Operating revenues increased 41.0% from $69.2 million during the year ended December 31, 2018 to $97.6 million in the comparable period in 2019 primarily due to higher revenues earned from the ETFS acquired business, which were recognized for the entire year of 2019.

This increase was partly offset by a 3 basis point decrease in our average advisory fee due to AUM mix shift.

Our average International listed advisory fee was 0.48% and 0.45% during the years ended December 31, 2018 and 2019, respectively.

Operating expenses increased 22.2% from $60.4 million during the year ended December 31, 2018 to $73.8 million in the comparable period in 2019, primarily due higher expenses from ETFS, which were recognized for the entire year of 2019.

These increases were partly offset by lower acquisition and disposition-related costs.

Other income/(expenses) were ($25.5) million during the year ended December 31, 2019, which were comprised of interest expense of ($10.5) million, a loss on revaluation of deferred consideration of ($11.3) million and other net losses of ($3.7) million.

Other net losses primarily arose from the reduction of a tax-related

indemnification asset upon the expiration of the statute of limitations.

Other income/(expenses) of the International Business segment was $4.3 million during the year ended December 31, 2018, which was comprised of a gain on revaluation of deferred consideration of $12.2 million, partly offset by interest expense of ($7.4) million and other losses of ($0.5) million.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Business segment

Operating revenues decreased 5.8% from $217.5 million during the year ended December 31, 2017 to $204.9 million in the comparable period in 2018.

The decrease was attributable to net outflows from HEDJ and DXJ, market depreciation and a 2 basis point decline in our average advisory fee due to AUM mix shift.

These decreases were partly offset by net inflows into fixed income, U.S.

equity, emerging markets and alternative strategy ETFs.

Our average U.S.

listed advisory fee was 0.50% and 0.48% during the years ended December 31, 2017 and 2018, respectively.

Operating expenses decreased 2.5% from $156.3 million during the year ended December 31, 2017 to $152.4 million in the comparable period in 2018 due primarily to lower incentive compensation, partly offset by higher acquisition and disposition-related costs, higher third-party distribution fees and higher professional fees.

Other income/(expenses) were ($14.6) million during the year ended December 31, 2018, which included impairments of ($17.4) million and interest expense of ($0.6) million.

These expenses were partly offset by interest income of $3.1 million and other net gains of $0.3 million.

Other income/(expenses) were $9.3 million during the year ended December 31, 2017 which included a settlement gain of $6.9 million and interest income of $2.8 million.

These items were partly offset by other net losses of ($0.4) million.

International Business segment

Operating revenues increased 543.6% from $10.8 million during the year ended December 31, 2017 to $69.2 million in the comparable period in 2018.

This increase was attributable to higher average AUM associated with the ETFS Acquisition.

Operating expenses increased 164.2% from $22.9 million during the year ended December 31, 2017 to $60.4 million in the comparable period in 2018, primarily due to the ETFS Acquisition.

Fund management and administration expense and compensation expense increased due to higher average AUM and higher headcount, respectively.

In addition, during the year ended December 31, 2018 we recognized contractual gold payments expense of $8.5 million and acquisition and disposition-related costs of $3.2 million associated with the integration of ETFS.

Other income/(expenses) was $4.3 million during the year ended December 31, 2018, which was comprised of a gain on revaluation of deferred consideration of $12.2 million, partly offset by interest expense of ($7.4) million and other losses of ($0.5) million.

Liquidity and Capital Resources

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Cash and cash equivalents

Accounts receivable

Securities owned, at fair value

Accounts receivable

Securities held-to-maturity

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Total current liabilities

Regulatory capital requirement—certain subsidiaries (International subsidiaries)

Regulatory capital requirement – certain international subsidiaries

Revolving credit facility – available capacity

Available liquidity

Terminated on June 16, 2020.

Year Ended December 31,

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(Decrease)/increase in cash and cash equivalents

We consider our available liquidity to be our liquid assets and available borrowings under our revolving credit facility, less our current liabilities and regulatory capital requirements of certain international subsidiaries.

Liquid assets consist of cash and cash equivalents, accounts receivable, securities held-to-maturity

and securities owned, at fair value.

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.

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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.

See the section below titled “Credit Facility” for a discussion of our revolving credit facility.

Cash and cash equivalents decreased $1.5 million during the year ended December 31, 2020 due to $179.0 million used to repay our debt, $31.2 million used to repurchase our common stock, $20.1 million used to pay dividends on our common stock and $5.4 million used to pay convertible notes issuance costs.

These decreases were partly offset by $175.3 million of proceeds from the issuance of convertible notes, $29.4 million of net cash provided by operating activities, $16.5 million of proceeds from held-to-maturity

securities maturing or called prior to maturity, $9.6 million of proceeds from the sale of our financial interests in AdvisorEngine, $2.8 million of net proceeds from the sale of our Canadian ETF business and $0.6 million from other activities.

Cash and cash equivalents decreased $2.8 million during the year ended December 31, 2019 due to $21.0 million used to partially repay our debt, $20.4 million used to pay dividends on our common stock, $8.1 million used to purchase investments, $2.3 million used to repurchase our common stock and $2.1 million used to fund notes receivable.

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These increases were partly offset by $239.3 million of cash paid upon closing of the ETFS Acquisition, net of cash acquired, $19.2 million used to pay dividends on our common stock, $8.7 million used to pay credit facility issuance costs, $8.0 million used to fund notes receivable, $2.9 million used to repurchase our common stock and $1.4 million used for other activities.

Cash and cash equivalents decreased $38.5 million during the year ended December 31, 2017 due to $99.8 million used to purchase securities available-for-sale,

$43.8 million used to pay dividends on our common stock, $18.7 million used to fund notes receivable, net of original issue discount, $8.3 million used to purchase investments, $7.9 million used to repurchase our common stock, $3.0 million used to purchase securities held-to-maturity

and $2.1 million used to acquire the Questrade ETFs.

These decreases were partly offset by $91.1 million from sales and maturities of securities available-for-sale,

$48.5 million of cash generated by our operating activities, $4.2 million from held-to-maturity

securities called or maturing during the period and $1.3 million for other activities.

Credit Facility

On April 11, 2018 and in connection with the ETFS Acquisition, we entered into a credit agreement with Credit Suisse AG and certain other lenders.

Under the credit agreement, the lenders extended to us a Term Loan,

of which $179.0 million is currently outstanding, and made a $50.0 million Revolver available to us for revolving borrowings from time to time for working capital, capital expenditures and general corporate purposes.

The available capacity under the Revolver is subject to compliance with the Total Leverage Ratio as further described below.

Interest on the Term Loan accrues at a rate per annum equal to LIBOR, plus up to 2.00% (commencing at LIBOR, plus 1.75%), and interest on the Revolver accrues at a rate per annum equal to LIBOR, plus up to 1.50% (commencing at LIBOR, plus 1.25%), in each case, with the exact interest rate margin determined based on the Total Leverage Ratio (as defined below).

The Revolver is also subject to a facility fee equal to a rate per annum of up to 0.50% of the actual daily amount of the aggregate commitments (whether used or unused) under the Revolver, with the exact facility fee rate determined based on the Total Leverage Ratio.

The Credit Facility matures on April 11, 2021.

The Term Loan does not amortize and the entire principal balance is due in a single payment on the maturity date.

The credit agreement governing the terms of the Credit Facility includes a financial covenant that requires that we maintain a Total Leverage Ratio, calculated as of the last day of each fiscal quarter, equal to or less than the ratio set forth opposite such fiscal quarter:

Fiscal Quarter Ending

Total Leverage Ratio

December 31, 2019

March 31, 2020

June 30, 2020

September 30, 2020 and each subsequent fiscal quarter ending on or before the Maturity Date

Total Leverage Ratio means, as of the last day of any fiscal quarter, the ratio of Consolidated Total Debt of ours and our restricted subsidiaries (as defined in the credit agreement) as of such date to Consolidated EBITDA of ours and our restricted subsidiaries (as defined in the credit agreement) for the four consecutive fiscal quarters ended on such date.

The credit agreement contains customary affirmative covenants for transactions of this type and other affirmative covenants agreed to by the parties, including, among others, the provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters.

The credit agreement contains customary negative covenants, including among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchasing equity interests of ours, entering into affiliate transactions and asset sales.

The credit agreement also provides for a number of customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control and judgment defaults.

We are in compliance with our covenants under the credit agreement.

Issuance of Convertible Notes

On August 13, 2020, we issued and sold $25.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023, or the Additional Notes, pursuant to an indenture, or the Indenture, dated June 16, 2020, between us and U.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.

The Additional Notes were issued at a price equal to 101% of the principal amount thereof, plus interest deemed to have accrued since June 16, 2020, and constitute a further issuance of, and form a single series with, our outstanding 4.25% Convertible Senior Notes due 2023 issued on June 16, 2020 in the aggregate principal amount of $150.0 million (the “Existing Notes” and together with the Additional Notes, the “Convertible Notes”).

After the issuance of the Additional Notes, we 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 on June 15 and December 15 of each year, beginning on December 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.

Holders may convert at their option at any time prior to the close of business on the business day immediately preceding March 15, 2023 only under the following circumstances:

(i) during any calendar quarter commencing after the calendar quarter ending on September 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 $1,000 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 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 March 15, 2023 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

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 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 day period 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 the occurrence 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 $1,000 principal 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 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 15 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

On June 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.

Capital Resources

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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.

In addition, we have access to the Revolver for working capital, capital expenditures and general corporate purposes.

No amounts are currently outstanding under the Revolver.

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 at December 31,

2019 was approximately $12.3 million in the aggregate.

However, certain of our international subsidiaries are required to maintain a minimum level of regulatory capital, which at December 31, 2020 was approximately $10.7 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.

As part of our capital management, we use available capital to pay down our Term Loan.

We also maintain a capital return program which includes a $0.03 per share quarterly cash dividend and authority to purchase our common stock through April 27, 2022, including purchases to offset future equity grants made under our equity plans.

As previously mentioned, under the terms of the credit agreement, we are subject to various covenants including compliance with the Total Leverage Ratio.

A quarterly dividend payment in excess of $0.03 per share and repurchases of our common stock (excluding purchases of our common stock withheld pursuant to the terms of equity awards granted to employees to satisfy tax withholding obligations) are permitted only to the extent the Total Leverage Ratio does not exceed 1.75 to 1.00 and no event of default (as defined in the credit agreement) has occurred and is continuing at the time the cash dividend payment or stock repurchase is made.

During the year ended December 31, 2020, we repurchased 8,234,324 shares of our common stock under the repurchase program for an aggregate cost of $31.2 million.

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Contractual Obligations

The following table summarizes our future cash payments associated with contractual obligations as of December 31, 2019.

The following table summarizes our future payments associated with contractual obligations as of December 31, 2020.

Payments Due by Period

(in thousands)

Convertible Notes (1)

Deferred consideration – gold payments (2)

Operating leases

Conditional conversions or a requirement to repurchase the Convertible Notes upon the occurrence of a fundamental change may accelerate payment (See Note 14 to our Consolidated Financial Statements).

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 12 to our Consolidated Financial Statements).

Sheet Arrangements

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sheet entities for the purpose of raising capital, incurring debt or operating our business.

Critical Accounting Policies

Critical Accounting Policies and Estimates

Business Combinations

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Goodwill and Intangible Assets

Goodwill is the excess of the fair value of the purchase price over the fair values of the identifiable net assets at the acquisition date.

We test our goodwill for impairment at least annually and at the time of a triggering event requiring re-evaluation,

if one were to occur, in accordance with Accounting Standards Update, or ASU, 2017-04

Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment.

We early adopted the revised guidance for impairment tests performed after January 1, 2017.

Under the revised guidance,

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.

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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.

For impairment testing purposes, goodwill has been allocated to our U.S.

Business reporting unit which is assessed annually for impairment on April 30 th

In addition, goodwill arising from the ETFS Acquisition (See Note 3 to our Consolidated Financial Statements) has been allocated to the European Business reporting unit included in the International Business reportable segment and assessed annually for impairment on November 30 th

When performing our goodwill impairment test, we consider a qualitative assessment, when appropriate, and the market approach and our market capitalization when determining the fair value of our reporting units.

Our goodwill was assessed for impairment as of the previously mentioned impairment testing dates.

The results of these analyses indicated no impairment.

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.

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 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.

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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

Our intangible assets were assessed for impairment as of November 30, 2019.

The results of these analyses indicated no impairment based upon quantitative assessments.

The annual impairment testing date for our intangible assets is November 30 th

The results of our analysis identified no indicators of impairment to be recognized based upon a quantitative assessment (discounted cash flow analysis) which relied upon significant unobservable inputs including projected revenue growth rates ranging from 3% to 11% (3.5% weighted average) and a weighted average cost of capital of 9.0%.

We account for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed within ASU 2016-01,

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Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment.

See Note 8 to our Consolidated Financial Statements for information regarding an impairment recognized on our financial interests in AdvisorEngine during the year ended December 31, 2019.

See Notes 8 and 10 to our Consolidated Financial Statements for information regarding impairments recognized on our financial interests in AdvisorEngine and our investment in Thesys during the year ended December 31, 2020.

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, a selected discount rate and perpetual growth rate.

The weighted average forward-looking gold price per ounce and discount rate was $2,117 and 9.0%, respectively, at December 31, 2020.

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.

During the year ended December 31, 2020, we reported a loss on deferred consideration – gold payments of $56.8 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 and a 1.0% increase in the discount rate would have decreased this reported loss by $23.0 million.

A 1.0% change in the perpetual growth rate is not meaningful.

See Note 12 to our Consolidated Financial Statements for additional information.

Revenue Recognition

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Recently Issued Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board, or 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 Convertible Notes (See Note 14 to our Consolidated Financial Statements) of approximately $0.4 million per quarter.

We expect to early adopt this ASU.

In December 2019, the FASB issued ASU 2019-12,

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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

(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.

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(a) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount as a non-income-based

tax, (b) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered as a separate transaction, (c) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements and (d) requiring that an entity reflect the enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

(b) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered as a separate transaction;

(c) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements;

and (d) requiring that an entity reflect the enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

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 currently evaluating whether to early adopt this standard.

In June 2016, the FASB issued ASU 2016-13,

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

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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 today’s guidance delays recognition of credit losses.

The standard will replace today’s “incurred loss” approach with an “expected loss” model.

The new model, referred to as the current expected credit loss, or CECL, model, will apply to:

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, or CECL, model, applies to:

(1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance

2 unchanged sentences

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

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 will measure credit losses in a manner similar to what they do today, except that the credit losses will be recognized as allowances rather than reductions in the amortized cost of the securities.

Accordingly, the new methodology will be utilized when assessing our financial instruments for impairment.

As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today.

The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans.

also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses.

is effective for years beginning after December 15, 2019, including interim periods within those fiscal years under a modified retrospective approach.

We have evaluated the impact of this standard which is applicable to our trade receivables and held-to-maturity

securities and have determined that it will not have a material impact to our consolidated financial statements.

This standard was adopted on January 1, 2020.

In August 2018, the FASB issued ASU 2018-13,

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.

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 modifies 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.

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.

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.

is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2019 and early adoption is

This standard will only impact the disclosures pertaining to fair value measurements and was adopted on January 1, 2020.

This standard only impacted the disclosures pertaining to fair value measurements and were incorporated into the Notes to our Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis