What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-06 · 190 added, 374 removed, 299 unchanged (65% of the section changed)

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For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Item 1A “Risk Factors” in our Annual Report on Form 10-K

for the fiscal year ended December 31, 2019 and Quarterly Reports on Form 10-Q

for the quarters ended March 31, 2020 and June 30, 2020.

for the fiscal year ended December 31, 2020.

We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Executive Summary

We are the only publicly-traded asset management company that focuses exclusively on exchange-traded products, or ETPs, and are a leading global ETP sponsor based on assets under management, or AUM, with AUM of $60.7 billion globally as of September 30, 2020.

An ETP is a pooled investment vehicle that holds a basket of securities, financial instruments or other assets and generally seeks to track (index-based) or outperform (actively managed) the performance of a broad or specific equity, fixed income or alternatives market segment, commodity or currency (or an inverse or multiple thereof).

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

Our family of ETFs includes funds that track our own indexes, funds that track third-party indexes and actively managed funds.

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

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

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

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

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.

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

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

currency, cryptocurrency and alternative strategies.

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

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

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

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

Continued investments in technology-enabled 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.

We were incorporated under the laws of the state of Delaware on September 19, 1985 as Financial Data Systems, Inc.

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on September 6, 2005.

Impact on our Business

Our operating revenues are directly correlated with the AUM that we manage.

Our average AUM and revenues increased 9.9% and 11.2%, respectively, from the prior quarter principally from market appreciation.

While our operating expenses increased 7.7% from the prior quarter, they are 10.1% lower on year to date basis as we continue to manage discretionary spending due to the uncertain market conditions arising from the COVID-19

The pandemic has not adversely impacted our capital management strategy.

In August 2020, we issued and sold $25.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 on the same terms as those issued in the prior quarter.

We also repurchased $4.5 million of our common stock during the current quarter ($31.0 million year-to-date).

Additional share repurchases will depend upon our future operating results, available cash on hand and strategic priorities.

We are precluded from prepaying principal due on our convertible notes.

The CARES Act was enacted on March 27, 2020 in response to the COVID-19

pandemic, which provided financial assistance under various programs to help companies cope with economic hardships.

We did not apply for any financial assistance afforded by the CARES Act.

Planned Reduction in Office Footprint

Throughout the COVID-19

pandemic, we have been operating our business remotely without disruption.

The virtual work environment has led to efficiencies, increased transparency and further collaboration throughout our business.

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

We are planning to market our New York office space for sublease, allow our London office lease to expire and seek reduced space in both locations.

In connection with these actions, we anticipate recording an impairment charge of $9.0 million to $12.0 million.

We also anticipate that our reduced office footprint will achieve $3.0 million to $4.0 million of annual cost savings.

The timing of the impairment charge and realization of cost savings is highly dependent on our ability to secure a subtenant which we are estimating may occur by late 2021 or early 2022.

The ultimate magnitude of these estimates is subject to market rent received and the duration of the sublease, market rents paid for new space, the actual amount of direct costs incurred and the discount rate used remeasure the carrying value of assets associated with our current office space, amongst other factors.

Recent Developments

We are executing on our digital assets initiative and have made meaningful advancements.

We recently filed for the WisdomTree Bitcoin Trust and the WisdomTree Digital Short-Term Treasury Fund with the SEC.

We cross-listed our European-domiciled WisdomTree Bitcoin ETP, or BTCW, in Germany, appointed Coinbase Custody as a custodian and received approval to passport BTCW in the European Union, or EU, allowing for a wider audience to access and invest in the product.

We launched a physically backed Ethereum ETP in Europe, which is also passported across the EU.

We also recently invested in Securrency, Inc.’s Series B funding round, as we believe their team is uniquely suited to lead in blockchain-based financial and regulatory technology going forward.

These initiatives were undertaken in our pursuit to establish ourselves as a leader in this space.

Assets Under Management

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We offer ETPs covering equity, commodity, fixed income, leveraged-and-inverse,

currency and alternative strategies.

The chart below sets forth the asset mix of our ETPs at September 30, 2019, June 30, 2020 and September 30, 2020:

currency, cryptocurrency and alternative strategies.

The chart below sets forth the asset mix of our ETPs at March 31, 2020, December 31, 2020 and March 31, 2021:

Market Environment

During the third quarter of 2020, the United States and Asian financial markets performed favorably while the Eurozone market was largely unchanged.

Economic stimulus measures and loose monetary policies continue to counterbalance the adverse effect of the COVID-19

pandemic on the global economy.

Equity securities across all developed and emerging markets advanced, while government bonds were largely unchanged.

Gold prices also appreciated during the quarter.

During the third quarter of 2020, the S&P 500 advanced 8.9%, MSCI EAFE (local currency) advanced 1.3%, MSCI Emerging Markets Index (U.S.

dollar) advanced 9.7% and gold prices rose 6.7%.

During the first quarter of 2021, global equity markets performed favorably upon the rollout of COVID-19

vaccines and further economic stimulus.

These developments contributed to a sharp rise in government bond yields and a decline in gold prices during the quarter.

The S&P 500 rose 6.2%, MSCI EAFE (local currency) rose 7.7%, MSCI Emerging Markets Index (U.S.

dollar) rose 2.3%, while gold prices declined 10.6% during the first quarter of 2021.

In addition, the European and Japanese equities markets both appreciated with the MSCI EMU Index and MSCI Japan Index increasing 9.1% and 8.9%, respectively, in local currency terms for the quarter.

Also, the U.S.

dollar weakened 4.3%, 4.1% and 1.7% versus the British pound, Euro and Japanese yen, respectively.

dollar strengthened 7.3% and 1.3% versus the Japanese yen and British pound, while weakening 4.4% versus the euro during the quarter.

Listed ETF Industry Flows

listed ETF net flows for the three months ended September 30, 2020 were $112.5 billion.

Fixed income, U.S.

equity, international equity and commodities gathered the majority of those flows.

Bloomberg, Investment Company Institute, WisdomTree

listed ETF net flows for the three months ended March 31, 2021 were $248.6 billion.

equity gathered the majority of those flows.

European ETP Industry Flows

European ETP net flows were $34.2 billion for the three months ended September 30, 2020.

Equities and fixed income gathered the majority of those flows.

Our Operating and Financial Results

European ETP net flows were $58.0 billion for the three months ended March 31, 2021.

Equities gathered the majority of those flows.

Operating and Financial Results

We operate as an ETP sponsor and asset manager providing investment advisory services globally through our subsidiaries in the United States and Europe.

On February 19, 2020, we completed the sale of all of the outstanding shares of our wholly-owned Canadian subsidiary, WisdomTree Asset Management Canada, Inc., or Canadian ETF business, to CI Financial Corp.

We received CDN $3.7 million (USD $2.8 million) in cash at closing and will receive additional cash consideration of CDN $2.0 million to $8.0 million, depending on the achievement of certain AUM growth targets over the next three years.

Our Canadian ETF business reported operating losses during the nine months ended September 30, 2020 of $0.4 million and during the three and nine months ended September 30, 2019 of $0.5 million and $1.9 million, respectively.

listed ETFs’ AUM increased from $31.3 billion at June 30, 2020 to $33.3 billion at September 30, 2020 due to market appreciation and net inflows.

listed ETFs’ AUM increased from $38.5 billion at December 31, 2020 to $42.2 billion at March 31, 2021 due to market appreciation and net inflows.

International Listed ETPs

Our international ETPs’ AUM increased from $26.3 billion at June 30, 2020 to $27.4 billion at September 30, 2020 due to market appreciation, partly offset by net outflows.

Our international ETPs’ AUM decreased from $28.9 billion at December 31, 2020 to $27.4 billion at March 31, 2021 due to market depreciation, primarily in our gold products.

Consolidated Operating Results

The following table sets forth our revenues and net (loss)/income for the most recent five quarters:

– We recorded operating revenues of $64.6 million during the three months ended September 30, 2020, down 4.5% from the three months ended September 30, 2019 due to a 2 basis point decline in our average global advisory fee arising from AUM mix shift, notwithstanding the increase in our average AUM.

Operating Expenses

– Total operating expenses decreased 3.3% from the three months ended September 30, 2019 to $49.9 million due to lower sales and business development costs, partly offset by higher contractual gold payments due to higher average gold prices.

The following table sets forth our revenues and net income/(loss) for the most recent five quarters:

– We recorded operating revenues of $72.8 million during the three months ended March 31, 2021, up 14.0% from the three months ended March 31, 2020 due to higher average AUM arising from market appreciation and net inflows.

– Total operating expenses increased 12.4% from the three months ended March 31, 2020 to $54.2 million due to higher incentive compensation, fund management and administration costs, professional fees, contractual gold payments and marketing expenses, partly offset by lower sales and business development and other expenses.

Other Income/(Expenses)

– Other income/(expenses) includes interest income and interest expense, losses on revaluation of deferred consideration – gold payments, impairments, loss on extinguishment of debt and other gains and losses.

For the three months ended September 30, 2020 and 2019, the losses on revaluation of deferred consideration – gold payments were $8.9 million and $6.3 million, respectively.

Net (loss)/income

– We reported a net loss of ($0.3) million during the three months ended September 30, 2020, compared to net income of $4.2 million during the three months ended September 30, 2019.

The change in net (loss)/income was impacted by the change in revenue and expenses described above, an impairment charge of $3.1 million recorded in the current period and an increase in the loss on revaluation of deferred consideration – gold payments of $2.6 million.

– Other income/(expenses) includes interest income and interest expense, gains/(losses) on revaluation of deferred consideration – gold payments, impairments and other net losses.

For the three months ended March 31, 2021 and 2020, the gains/(losses) on revaluation of deferred consideration – gold payments were $2.8 million and ($2.2) million, respectively.

We recognized charges arising from a release of a tax-related

indemnification asset upon the expiration of the statute of limitations of $5.2 million and $6.0 million during the three months ended March 31, 2021 and 2020, respectively.

An equal and offsetting benefit has been recognized in income taxes.

In addition, during the three months ended March 31, 2021, we recorded an unrealized gain on our investment in Securrency of $0.2 million and recognized an impairment charge of $0.3 million arising from exiting our London office.

During the three months ended March 31, 2020, we recognized a non-cash

impairment charge of $19.7 million on our investment in AdvisorEngine, Inc., or AdvisorEngine, and recorded a gain of $2.9 million associated with the sale of our Canadian ETF business.

Net income/(loss)

– We reported net income of $15.1 million during the three months ended March 31, 2021, compared to a net loss of ($8.6) million during the three months ended March 31, 2020.

The change in net income/(loss) was impacted by the change in revenue and expenses described above, a favorable change related to the revaluation of deferred consideration – gold payments of $5.0 million, as well as the previously mentioned $19.7 million impairment charge and $2.9 million gain that were recorded in the prior year period.

Key Operating Statistics

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Three Months Ended

Nine Months Ended

September 30,

GLOBAL ETPs ($ in millions)

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Average assets during the period

Average ETF advisory fee during the period

Number of ETFs – end of the period

Average ETP advisory fee during the period

Number of ETPs – end of the period

LISTED ETFs ($ in millions)

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Average assets during the period

International Developed Market Equity

Emerging Market Equity

Beginning of period assets

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Three Months Ended

Nine Months Ended

September 30,

Emerging Market Equity

International Developed Market Equity

Beginning of period assets

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Average assets during the period

Cryptocurrency

Beginning of period assets

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Market appreciation/(depreciation)

End of period assets

Average assets during the period

Beginning of period assets

Inflows/(outflows)

Market appreciation/(depreciation)

Fund closures

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

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Selected Operating and Financial Information

Three Months Ended

September 30,

Global AUM (in millions)

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Average Global AUM

Our average global AUM increased 1.5% from $60.3 billion at September 30, 2019 to $61.2 billion at September 30, 2020 principally due to the magnitude of market appreciation recognized in the current quarter in relation to the prior quarter.

Our average global AUM increased 15.6% from $60.2 billion at March 31, 2020 to $69.6 billion at March 31, 2021 due to market appreciation and net inflows.

Operating Revenues

Advisory fees

Advisory fee revenues decreased 4.6% from $67.0 million during the three months ended September 30, 2019 to $63.9 million in the comparable period in 2020 due to a 2 basis point decline in our average global advisory fee arising from AUM mix shift, notwithstanding the increase in our average AUM.

Our average global advisory fee was 0.44% and 0.42% during the three months ended September 30, 2019 and 2020, respectively.

Other income was essentially unchanged from the three months ended September 30, 2019.

Advisory fee revenues increased 13.8% from $63.0 million during the three months ended March 31, 2020 to $71.6 million in the comparable period in 2021 due to higher average global AUM.

Our average global advisory fee was 0.42% during the three months ended March 31, 2020 and March 31, 2021.

Other income increased 31.4% from $0.9 million during the three months ended March 31, 2020 to $1.2 million in the comparable period in 2021 primarily due to higher fees associated with our international listed products.

Operating Expenses

Three Months Ended

September 30,

(in thousands)

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Contractual gold payments

Professional and consulting fees

Professional fees

Occupancy, communications and equipment

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Three Months Ended

September 30,

As a Percent of Revenues:

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Contractual gold payments

Professional and consulting fees

Occupancy, communications and equipment

Three Months Ended

September 30,

As a Percent of Revenues:

Depreciation and amortization

Third-party distribution fees

Acquisition and disposition-related costs

Total expenses

Compensation and benefits

Compensation and benefits expense was essentially unchanged from the three months ended September 30, 2019.

Headcount was 212 and 211 at September 30, 2019 and September 30, 2020, respectively.

Fund management and administration

Fund management and administration expense was essentially unchanged from the three months ended September 30,2019 as higher variable fees associated with higher average global AUM was offset by lower expenses due to the sale of our Canadian ETF business which was completed in February 2020.

We had 80 U.S.

listed ETFs and 268 international listed ETPs at September 30, 2019 compared to 67 U.S.

listed ETFs and 238 international listed ETPs at September 30, 2020.

Marketing and advertising

Marketing and advertising expense was essentially unchanged from the three months ended September 30, 2019.

Sales and business development

Sales and business development expense decreased 45.2% from $4.4 million during the three months ended September 30, 2019 to $2.4 million in the comparable period in 2020 primarily due to lower discretionary spending resulting from the COVID-19

Contractual gold payments

Contractual gold payments expense increased 29.6% from $3.5 million during the three months ended September 30, 2019 to $4.5 million in the comparable period in 2020.

This expense was associated with the payment of 2,375 ounces of gold and was calculated using the average daily spot price of $1,474 and $1,911 per ounce during the three months ended September 30, 2019 and 2020, respectively.

Professional and consulting fees

Professional and consulting fees decreased 24.5% from $1.3 million during the three months ended September 30, 2019 to $1.0 million in the comparable period in 2020 due to lower corporate consulting-related expenses.

Professional fees

Occupancy, communications and equipment

Occupancy, communications and equipment expense was essentially unchanged from the three months ended September 30, 2019.

Depreciation and amortization

Depreciation and amortization expense was essentially unchanged from the three months ended September 30, 2019.

Third-party distribution fees

Third-party distribution fees decreased 18.0% from $1.5 million during the three months ended September 30, 2019 to $1.2 million in the comparable period in 2020 primarily due to lower fees for platform relationships.

Other expenses decreased 17.8% from $2.0 million during the three months ended September 30, 2019 to $1.6 million in the comparable period in 2020 primarily due to lower office-related and travel expenses as a result of our employees working remotely.

Other Income/(Expenses)

Three Months Ended

September 30,

(in thousands)

Interest expense

Loss on revaluation of deferred consideration – gold payments

Interest income

Other gains, net

Total other income/(expenses)

Three Months Ended

September 30,

As a Percent of Revenues:

Interest expense

Loss on revaluation of deferred consideration – gold payments

Interest income

Other gains, net

Total other income/(expenses)

Interest expense

Interest expense decreased 11.3% from $2.8 million during the three months ended September 30, 2019 to $2.5 million in the comparable period in 2020 primarily due to a lower level of debt outstanding.

Our effective interest rate during the three months ended September 30, 2019 and 2020 was 5.2% and 6.2%, respectively, and includes our cost of borrowing and amortization of debt discount and issuance costs.

Loss on revaluation of deferred consideration – gold payments

We recognized a loss on revaluation of deferred consideration of $6.3 million and $8.9 million during the three months ended September 30, 2019 and 2020, respectively.

The loss in the each quarter was due to an increase in the forward-looking price of gold when compared to the forward-looking gold curve at the end of the prior quarter.

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

Interest income

Interest income decreased 86.1% from $0.8 million during the three months ended September 30, 2019 to $0.1 million in the comparable period in 2020 as paid-in-kind

interest income was accrued in the prior period on our former AdvisorEngine Inc.

(“AdvisorEngine”) notes receivable.

During the three months ended September 30, 2020, we recognized a non-cash

impairment charge of $3.1 million related to our investment in Thesys Group, Inc.

(See Note 9 to our Consolidated Financial Statements).

Other gains, net

Other gains, net were $0.8 million and $0.7 million during the three months ended September 30, 2019 and 2020, respectively.

Included in the three months ended September 30, 2020 is a gain of $0.2 million arising from an adjustment to the fair value of consideration received from the exit of our investment in AdvisorEngine.

During the three months ended September 30, 2019, we recorded a gain of $0.4 million resulting from the recognition of the foreign currency translation adjustment upon the liquidation of our Japan business.

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

Our effective income tax rate for the three months ended September 30, 2020 of 123.7% resulted in income tax expense of $1.4 million.

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

loss on revaluation of deferred consideration.

This loss was partly offset by a lower tax rate on foreign earnings.

Our effective income tax rate for the three months ended September 30, 2019 of 51.9% resulted in income tax expense of $4.5 million.

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

loss on revaluation of deferred consideration, non-deductible

executive compensation and state and local taxes, partly offset by a lower tax rate on foreign earnings.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Selected Operating and Financial Information

Nine Months Ended

September 30,

Global AUM (in millions)

Average global AUM

Operating Revenues (in thousands)

Advisory fees

Total revenues

Average Global AUM

Our average global AUM was essentially unchanged from the nine months ended September 30, 2019.

Operating Revenues

Advisory fees

Advisory fee revenues decreased 6.8% from $197.5 million during the nine months ended September 30, 2019 to $184.1 million in the comparable period in 2020 due to a 3 basis point decline in our average global advisory fee arising from AUM mix.

Our average global ETP advisory fee declined from 0.45% during the nine months ended September 30, 2019 to 0.42% during the nine months ended September 30, 2020.

Other income increased 26.7% from $2.0 million during the nine months ended September 30, 2019 to $2.6 million in the comparable period in 2020 primarily due to higher creation/redemption fees associated with our international listed products.

Operating Expenses

Nine Months Ended

September 30,

(in thousands)

Compensation and benefits

Fund management and administration

Marketing and advertising

Sales and business development

Contractual gold payments

Professional and consulting fees

Occupancy, communications and equipment

Depreciation and amortization

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Acquisition and disposition-related costs

Total expenses

Nine Months Ended

September 30,

As a Percent of Revenues:

Compensation and benefits

Fund management and administration

Marketing and advertising

Nine Months Ended

September 30,

As a Percent of Revenues:

Sales and business development

Contractual gold payments

Professional and consulting fees

Occupancy, communications and equipment

Depreciation and amortization

Third-party distribution fees

Acquisition and disposition-related costs

Total expenses

Total operating expenses

Compensation and benefits

Compensation and benefits expense decreased 12.4% from $61.5 million during the nine months ended September 30, 2019 to $53.8 million in the comparable period in 2020 due to lower incentive compensation accruals as well as $3.5 million of severance expense included in the prior period.

Compensation and benefits expense increased 30.8% from $17.3 million during the three months ended March 31, 2020 to $22.6 million in the comparable period in 2021 due to higher incentive compensation accruals.

Headcount was 210 and 227 at March 31, 2020 and March 31, 2021, respectively.

Fund management and administration

Fund management and administration expense decreased 3.7% from $45.9 million during the nine months ended September 30, 2019 to $44.2 million in the comparable period in 2020 primarily due to lower variable fees associated with lower average AUM of our U.S.

listed products, partly offset by higher average AUM of our international listed products.

These expenses were also lower as a result of the sale of our Canadian ETF business in February 2020.

Fund management and administration expense increased 7.2% from $14.5 million during the three months ended March 31, 2020 to $15.5 million in the comparable period in 2021 due to higher average global AUM.

Marketing and advertising

Marketing and advertising expense decreased 13.9% from $8.6 million during the nine months ended September 30, 2019 to $7.4 million in the comparable period in 2020 primarily due to lower discretionary spending resulting from the COVID-19

Marketing and advertising expense increased 21.8% from $2.5 million during the three months ended March 31, 2020 to $3.0 million in the comparable period in 2021 as our spending in the prior year period was reduced at the onset of the COVID-19

Sales and business development

Sales and business development expense decreased 38.3% from $12.9 million during the nine months ended September 30, 2019 to $8.0 million in the comparable period in 2020 primarily due to lower discretionary spending resulting from the COVID-19

Sales and business development expense decreased 37.2% from $3.4 million during the three months ended March 31, 2020 to $2.1 million in the comparable period in 2021 primarily due to lower discretionary spending resulting from the COVID-19

Contractual gold payments

Contractual gold payments expense increased 27.3% from $9.7 million during the nine months ended September 30, 2019 to $12.4 million in the comparable period in 2020.

This expense was associated with the payment of 7,125 ounces of gold and was calculated using the average daily spot price of $1,363 and $1,735 per ounce during the nine months ended September 30, 2019 and 2020, respectively.

Professional and consulting fees

Professional and consulting fees decreased 11.3% from $4.0 million during the nine months ended September 30, 2019 to $3.6 million in the comparable period in 2020 due to lower corporate consulting-related expenses.

Contractual gold payments expense increased 13.6% from $3.8 million during the three months ended March 31, 2020 to $4.3 million in the comparable period in 2021.

This expense was associated with the payment of 2,375 ounces of gold and was calculated using the average daily spot price of $1,583 and $1,798 per ounce during the three months ended March 31, 2020 and 2021, respectively.

Professional fees

Professional fees increased 58.1% from $1.3 million during the three months ended March 31, 2020 to $2.0 million in the comparable period in 2021 due to spending related to our digital assets initiative.

Occupancy, communications and equipment

Occupancy, communications and equipment expense was essentially unchanged from the nine months ended September 30, 2019.

Occupancy, communications and equipment expense decreased 4.9% from $1.6 million during the three months ended March 31, 2020 to $1.5 million in the comparable period in 2021 as we exited our London office.

Depreciation and amortization

Depreciation and amortization expense was essentially unchanged from the nine months ended September 30, 2019.

Depreciation and amortization expense was essentially unchanged from the three months ended March 31, 2020.

Third-party distribution fees

Third-party distribution fees decreased 32.5% from $5.8 million during the nine months ended September 30, 2019 to $3.9 million in the comparable period in 2020 primarily due to lower fees for platform relationships.

Third-party distribution fees were essentially unchanged from the three months ended March 31, 2020.

Acquisition and disposition-related costs

Acquisition and disposition-related costs were essentially unchanged from the nine months ended September 30, 2019.

Other expenses decreased 17.0% from $6.3 million during the nine months ended September 30, 2019 to $5.2 million in the comparable period in 2020 primarily due to lower office-related and travel expenses as a result of our employees working remotely.

Acquisition and disposition-related costs of $0.4 million during the three months ended March 31, 2020 were recognized in connection with the sale of our Canadian ETF business.

Other expenses decreased 21.3% from $2.0 million during the three months ended March 31, 2020 to $1.6 million in the comparable period in 2021 primarily due to lower office-related and travel expenses as our employees are working remotely.

Other Income/(Expenses)

Nine Months Ended

September 30,

Three Months Ended

(in thousands)

Interest expense

Loss on revaluation of deferred consideration – gold payments

Gain/(loss) on revaluation of deferred consideration

Interest income

Loss on extinguishment of debt

Other gains and losses, net

Other losses, net

Total other income/(expenses)

Nine Months Ended

September 30,

Three Months Ended March 31,

As a Percent of Revenues:

Interest expense

Loss on revaluation of deferred consideration – gold payments

Gain/(loss) on revaluation of deferred consideration

Interest income

Loss on extinguishment of debt

Other gains and losses, net

Other losses, net

Total other income/(expenses)

Interest expense

Interest expense decreased 19.2% from $8.6 million during the nine months ended September 30, 2019 to $7.0 million in the comparable period in 2020 due to a lower level of debt outstanding.

Our effective interest rate during the nine months ended September 30, 2019 and 2020 was 5.4% and 5.3%, respectively, and includes our cost of borrowing and amortization of debt discount and issuance costs.

Loss on revaluation of deferred consideration

We recognized a loss on revaluation of deferred consideration of $5.9 million and $34.4 million during the nine months ended September 30, 2019 and 2020, respectively.

The loss in each period was due to an increase in the forward-looking price of gold when compared to the forward-looking gold curve at the beginning of each respective year.

Interest expense decreased 5.1% from $2.4 million during the three months ended March 31, 2020 to $2.3 million in the comparable period in 2020 due to a lower level of debt outstanding.

In addition, we early adopted Accounting Standards Update 2020-06,

Debt – Debt with Conversion and Other Options, Cash Conversion

on January 1, 2021 that eliminated the requirement to bifurcate certain conversion options embedded in convertible instruments (applicable to our convertible notes).

Previously, the discount arising from bifurcation was amortized as interest expense over the life of the instrument.

Our effective interest rate during the three months ended March 31, 2020 and 2021 was 5.0% and 5.3%, respectively.

Gain/(loss) on revaluation of deferred consideration – Gold payments

We recognized a loss on revaluation of deferred consideration of ($2.2) million during the three months ended March 31, 2020 as compared to a gain of $2.8 million during the three months ended March 31, 2021.

The gain in the current quarter arose due to a decline in spot gold prices, partly offset by a steepening of the forward-looking gold curve.

The loss in the prior period arose due to an increase in forward-looking gold prices.

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

Interest income

Interest income decreased 83.6% from $2.4 million during the nine months ended September 30, 2019 to $0.4 million in the comparable period in 2020 as paid-in-kind

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

During the nine months ended September 30, 2020, we recognized non-cash

impairment charges totaling $22.8 million, including $3.1 million related to our investment in Thesys and $19.7 million related to our investment in AdvisorEngine (See Notes 9 and 7 to our Consolidated Financial Statements).

During the nine months ended September 30, 2019, we recognized a non-cash

impairment charge of $0.6 million in connection with the termination of our Japan office lease.

Loss on extinguishment of debt

During the nine months ended September 30, 2020, we recognized a non-cash

loss on extinguishment of debt of $2.4 million arising from the acceleration of debt issuance cost amortization in connection with the termination of our former credit facility on June 16, 2020.

See Note 12 to our Consolidated Financial Statements.

Other gains and losses, net

Other gains and losses, net were ($3.5) million and $0.1 million during the nine months ended September 30, 2019 and 2020, respectively.

This includes a charge recorded during the nine months ended September 30, 2019 and 2020 of $4.3 million and $6.0 million, respectively, arising from the release of a tax-related

Interest income was essentially unchanged from the three months ended March 31, 2020.

During the three months ended March 31, 2021, we recognized an impairment charge of $0.3 million upon exiting our London office.

During the three months ended March 31, 2020, we recognized a non-cash

impairment charge of $19.7 million on our investment in AdvisorEngine.

Other losses, net

Other losses, net were $2.5 million and $5.9 million during the three months ended March 31, 2020 and 2021, respectively.

Included in the loss recognized during the three months ended March 31, 2020 and 2021 is a charge of $6.0 million and $5.2 million, respectively, arising from the release of a tax-related

indemnification asset upon the expiration of the statute of limitations.

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

In addition, during the nine months ended September 30, 2020, we recognized a gain of $2.9 million associated with the sale of our Canadian ETF business (See Note 25 to our Consolidated Financial Statements) and a gain of $1.1 million arising from an adjustment to the estimated fair value of consideration received from the exit of our investment in AdvisorEngine.

During the three months ended March 31, 2021, we also recognized an unrealized gain of $0.2 million on our investment in Securrency.

In addition, we recognized a gain of $2.9 million associated with the sale of our Canadian ETF business during the three months ended March 31, 2020.

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

Our effective income tax rate for the nine months ended September 30, 2020 of 7.4% resulted in an income tax benefit of $1.8 million.

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

loss on revaluation of deferred consideration and tax shortfalls associated with the vesting and exercise of stock-based compensation awards.

These items were partly offset by a $6.0 million reduction in unrecognized tax benefits, a $2.9 million non-taxable

gain recognized upon sale of our Canadian ETF business in the first quarter, a tax benefit of $2.8 million recognized in connection with the release of a deferred tax asset valuation allowance on interest carryforwards arising from our debt previously held in the United Kingdom and a lower tax rate on foreign earnings.

Our effective income tax rate during the nine months ended September 30, 2019 of 31.2% resulted in income tax expense of $7.0 million.

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

loss on revaluation of deferred consideration, state and local income taxes and tax shortfalls associated with the vesting and exercise of stock-based compensation awards, partly offset by a $4.3 million reduction in unrecognized tax benefits and a lower tax rate on foreign earnings.

Financial Measurements

Our effective income tax rate for the three months ended March 31, 2021 of negative 14.9% resulted in an income tax benefit of $2.0 million.

Our effective income tax rate differs from the federal statutory rate of 21% primarily due to a $5.2 million reduction in unrecognized tax benefits, a non-taxable

gain on revaluation of deferred consideration and a lower tax rate on foreign earnings, partly offset tax shortfalls associated with the vesting and exercise of stock-based compensation awards.

Our effective income tax rate for the three months ended March 31, 2020 of 21.5% resulted in an income tax benefit of $2.4 million.

Our effective income tax rate differs from the federal statutory rate of 21% primarily due a $6.0 million reduction in unrecognized tax benefits, a $2.9 million non-taxable

gain upon the sale of our Canadian ETF business and a lower tax rate on foreign earnings, partly offset by a valuation allowance on capital losses, tax shortfalls associated with the vesting and exercise of stock-based compensation awards and a non-deductible

loss on revaluation of deferred consideration.

Financial Measures

In an effort to provide additional information regarding our results as determined by GAAP, we also disclose certain 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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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 those components.

The liability component for convertible instruments that qualify for a derivative scope exception (applicable to our convertible notes) is allocated proceeds equal to the estimated fair value of similar debt without the conversion option.

The difference between the gross proceeds received from 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 United Kingdom, a gain arising from an adjustment to the estimated fair value of consideration received from the exit of our investment in AdvisorEngine, impairment charges, a gain recognized upon the sale of our Canadian ETF business, severance expense and acquisition and disposition-related costs are excluded when determining adjusted net income and adjusted earnings per share.

Three Months Ended

Nine Months Ended

Impairment charges, an unrealized gain recognized on our investment in Securrency, a gain recognized upon the sale of our Canadian ETF business and acquisition and disposition-related costs are excluded when determining adjusted net income and adjusted earnings per share.

Three Months Ended March 31,

Adjusted Net Income and Diluted Earnings per Share:

Net (loss)/income, as reported

Loss 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

Net income/(loss), as reported

Deduct/Add back:

(Gain)/loss on revaluation of deferred consideration

Unrealized gain recognized on our investment in Securrency, net of income taxes

Impairments, net of income taxes (where applicable)

Tax shortfalls upon vesting and exercise of stock-based compensation awards

Acquisition and disposition-related costs, net of income taxes

Severance expense, net of income taxes

Gain recognized upon the sale of our Canadian ETF business

Adjusted net income

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Adjusted net income available to common stockholders

Weighted average diluted shares, excluding participating securities (in thousands) (See Note 21 to our Consolidated Financial Statements)

Weighted average diluted shares, excluding participating securities

(See Note 18 to our Consolidated Financial Statements)

Adjusted earnings per share - diluted

Liquidity and Capital Resources

The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations:

September 30,

The following table summarizes key data regarding our liquidity, capital resources and uses of capital to fund our operations:

Balance Sheet Data (in thousands):

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Regulatory capital requirement – certain international subsidiaries

Revolving credit facility – available capacity

Available liquidity

(1) Terminated on June 16, 2020.

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flow Data (in thousands):

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Foreign exchange rate effect

(Decrease)/increase in cash and cash equivalents

Decrease in cash and cash equivalents

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

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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.

Cash and cash equivalents decreased $11.4 million during the nine months ended September 30, 2020 due to $179.0 million used to repay our debt, $31.0 million used to repurchase our common stock, $15.2 million used to pay dividends on our common stock, $5.4 million used to pay convertible notes issuance costs and $0.5 million used in other activities.

These decreases were partly offset by $175.3 million of proceeds from the issuance of convertible notes, $16.4 million of proceeds from held-to-maturity

securities maturing or called prior to maturity, $15.6 million of net cash provided by operating activities, $9.6 million of proceeds from the sale of our financial interests in AdvisorEngine and $2.8 million of net proceeds from the sale of our Canadian ETF business.

Cash and cash equivalents increased $10.8 million during the nine months ended September 30, 2019 due to $43.1 million of net cash provided by operating activities and $2.3 million of proceeds from held-to-maturity

securities called or maturing or called prior to maturity.

These increases were partly offset by $15.3 million used to pay dividends on our common stock, $15.0 million used to partially repay our long-term debt, $2.2 million used to repurchase our common stock, $1.8 million used to fund AdvisorEngine notes receivable and $0.3 million used for other activities.

Cash and cash equivalents decreased $11.1 million during the three months ended March 31, 2021 due to $5.5 million used to purchase investments, $4.9 million used to pay dividends on our common stock and $2.6 million used to repurchase our common stock.

These decreases were partly offset by $1.9 million provided by operating activities.

Cash and cash equivalents decreased $6.5 million during the three months ended March 31, 2020 due to $5.1 million used to pay dividends on our common stock, $5.0 million used to repay our debt, $2.6 million used in operating activities, $1.5 million used to repurchase our common stock and $1.1 million used in other activities.

These decreases were partly offset by $6.0 million of proceeds from held-to-maturity

securities maturing or called prior to maturity and $2.8 million of net proceeds from the sale of our Canadian ETF business.

Issuance of Convertible Notes

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

Bank National Association, as trustee (the “Trustee”), in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

The Additional Notes were issued at a price equal to 101% of the principal amount thereof, plus interest deemed to have accrued since June 16, 2020, and constitute a further issuance of, and form a single series with, the

Company’s 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”).

Immediately after giving effect to the issuance of the Additional Notes, the Company had $175.0 million aggregate principal amount of Convertible Notes outstanding.

On June 16, 2020, we issued and sold $150,000 in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 (the “Existing Notes”) pursuant to an Indenture (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.

On August 13, 2020, we issued and sold $25,000 in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 (the “Additional Notes”) 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 Existing Notes (the Additional Notes and together with the Existing Notes, the “Convertible Notes”).

After the issuance of the Additional Notes, we had $175,000 aggregate principal amount of Convertible Notes outstanding.

Key terms of the Convertible Notes are as follows:

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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;

(i) if the last reported sale price of our common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

(ii) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $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;

(iii) upon a notice of redemption that we deliver in accordance with the terms of 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.

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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.

At our election, we will also settle our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted in either cash, shares of our common stock or a combination of cash and shares of its common stock.

Redemption price of $7

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Seniority and Security

The Convertible Notes are the Company’s senior unsecured obligations, but are subordinated in right of payment to the Company’s obligations to make certain redemption payments (if and when due) in respect of its Series A Non-Voting

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 its Series A Non-Voting

Convertible Preferred Stock (See Note 11 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

Our principal source of financing is our operating cash flow.

We believe that current cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for at least the next 12 months.

We believe that cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for the foreseeable future.

Our ability to satisfy our contractual obligations as they arise are discussed in the section titled “Contractual Obligations” below.

Use of Capital

Our business does not require us to maintain a significant cash position.

However, certain of our international subsidiaries are required to maintain a minimum level of regulatory capital, which at September 30, 2020 was approximately $10.6 million in the aggregate.

However, certain of our international subsidiaries are required to maintain a minimum level of regulatory capital, which at March 31, 2021 was approximately $12.2 million in the aggregate.

Notwithstanding these regulatory capital requirements, we expect that our main uses of cash will be to fund the ongoing operations of our business.

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

During the three months ended September 30, 2020, we repurchased 1,066,261 shares of our common stock under the repurchase program for an aggregate cost of $4.5 million.

At September 30, 2020, $52.4 million remained under this program for future purchases.

During the three months ended March 31, 2021, we repurchased 489,763 shares of our common stock under the repurchase program for an aggregate cost of $2.6 million.

At March 31, 2021, $49.6 million remained under this program for future purchases.

Contractual Obligations

The following table summarizes our future payments associated with contractual obligations as of September 30, 2020:

Payments Due by Period

(in thousands)

Convertible Notes

At March 31, 2021, we had $175.0 million aggregate principal amount of Convertible Notes outstanding that are scheduled to mature on June 15, 2023, unless earlier converted, repurchased or redeemed.

Conditional conversions or a requirement to repurchase the convertible notes upon the occurrence of a fundamental change may accelerate payment.

The Convertible Notes require cash settlement of the principal amount, while settlement of the conversion obligation in excess of the aggregate principal amount may be satisfied in either cash, shares of our common stock or a combination of cash and shares of its common stock.

We currently anticipate refinancing this obligation when due.

See “Issuance of Convertible Notes” above for additional information.

Deferred Consideration – Gold Payments

Deferred consideration represents an obligation we assumed in April 2018 in connection with our acquisition of the European exchange-traded commodity, currency and leveraged-and-inverse

business of ETFS Capital Limited.

The obligation is for fixed payments to ETFS Capital Limited of physical gold bullion equating to 9,500 ounces of gold per year through March 31, 2058 and then subsequently reduced to 6,333 ounces of gold continuing into perpetuity (“Contractual Gold Payments”).

The present value of the deferred consideration was $227.1 million at March 31, 2021.

The Contractual Gold Payments are paid from advisory fee income generated by any of our sponsored financial products backed by physical gold with no recourse back to us for any unpaid amounts that exceed advisory fees earned.

See Note 9 to our Consolidated Financial Statements for additional information.

Operating Leases

Conditional conversions or a requirement to repurchase the convertible notes upon the occurrence of a fundamental change may accelerate payment (See Note 13 to our Consolidated Financial Statements).

Paid from advisory fee income generated by any Company-sponsored financial product backed by physical gold with no recourse back to us for any unpaid amounts that exceed advisory fees earned (See Note 11 to our Consolidated Financial Statements).

Our principal executive office is currently located at 245 Park Avenue, New York, New York 10167.

We lease approximately 38,000 square feet of office space under a lease that expires in August 2029, which includes a cancellation option that is effective on August 21, 2024.

Total future minimum lease payments with respect to this office space was $25.8 million at March 31, 2021.

Cash flows generated by our operating activities and existing cash balances should be sufficient to satisfy the future minimum lease payments.

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

Sheet Arrangements

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

Critical Accounting Policies

Business Combinations

We account for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations,

which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and liabilities based on the estimated fair values as of the closing date of the acquisition.

The excess of the fair value of purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill.

Critical Accounting Policies and Estimates

Goodwill and Intangible Assets

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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.

For impairment testing purposes, these components are aggregated as a single reporting unit as they fall under the same operating segment and have similar economic characteristics.

Goodwill is assessed for impairment annually on November 30 th

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

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 the reporting unit.

Indefinite-lived intangible assets are tested for impairment at least annually and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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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

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

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 7 to our Consolidated Financial Statements for information regarding a gain of $0.2 million recognized on our investment in Securrency.

Deferred Consideration – Gold Payments

Deferred consideration represents the present value of an obligation to pay gold to a third party into perpetuity and is measured using forward-looking gold prices and a selected discount rate (See Note 11 to our Consolidated Financial Statements).

Changes in the fair value of this obligation are reported as (loss)/gain on revaluation of deferred consideration – gold payments on the Company’s Consolidated Statements of Operations.

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, discount rate and perpetual growth rate were $2,136, 9.0% and 1.7%, respectively, at March 31, 2021.

Changes in the fair value of this obligation are reported as gain/(loss) on revaluation of deferred consideration – gold payments on our Consolidated Statements of Operations.

During the three months ended March 31, 2021, we reported a gain on deferred consideration – gold payments of $2.8 million.

A 1.0% increase in the weighted average forward-looking gold price per ounce would have reduced this reported gain by $1.6 million, a 1 percentage point increase in the discount rate would have increased this reported gain by $24.8 million and a 1 percentage point increase in the perpetual growth rate would have reduced this reported gain by $23.1 million.

See Note 9 to our Consolidated Financial Statements for additional information.

Revenue Recognition

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Progress is measured using the practical expedient under the output method resulting in the recognition of revenue in the amount for which we have a right to invoice.

Recently Issued Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06,

Recently Adopted Accounting Pronouncements

On January 1, 2021, we early adopted 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

under the modified retrospective approach.

Under the ASU, the accounting for convertible instruments was simplified by removing major separation models required under current GAAP.

Accordingly, more convertible instruments are reported as a single liability or equity with no separate accounting for embedded conversion features.

Certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception are removed and, as a result, more equity contracts will qualify for the scope exception.

The ASU also simplifies the diluted earnings-per-share

calculation in certain areas.

The ASU will be effective for years beginning after December 31, 2021, including interim periods within those fiscal years.

Early adoption is permitted for fiscal periods beginning after December 15, 2020 (including interim periods within the same fiscal year).

The adoption of this ASU will result in a reduction of interest expense recognized on our recently issued convertible notes (See Note 13 to our Consolidated Financial Statements) of approximately $0.4 million per quarter.

We expect to early adopt the ASU.

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

Upon the adoption of this ASU, we reclassified the equity component related to the convertible notes, net of deferred taxes, increasing retained earnings by $0.6 million, increasing the carrying value of the convertible notes by $4.1 million, reducing additional paid-in

capital by $3.7 million and reducing deferred tax liabilities by $1.0 million.

These updates also reduced interest expense recognized on our convertible notes by approximately $0.4 million per quarter.

See Note 10 to our Consolidated Financial Statements for additional information.

On January 1, 2021, we adopted ASU 2019-12,

Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes

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(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 not early adopting this ASU.

Recently Adopted Accounting Pronouncements

On January 1, 2020, we adopted ASU 2016-13,

Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments

(ASU 2016-13).

The main objective of the standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

In issuing this standard, the FASB is responding to criticism that prior guidance delayed recognition of credit losses.

The standard replaced the prior guidance’s “incurred loss” approach with an “expected loss” model.

The new model, referred to as the current expected credit loss (“CECL”) model, applies to:

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

sheet credit exposures.

The standard is applicable to loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, loan commitments and certain other off-balance

sheet credit exposures, debt securities (including those held-to-maturity)

and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets.

The CECL model does not apply to available-for-sale

debt securities.

For available-for-sale

debt securities with unrealized losses, entities measure credit losses in a manner similar to prior guidance, except that the credit losses are recognized as allowances rather than reductions in the amortized cost of the securities.

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

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

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

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

The adoption of this standard, which is applicable to our trade receivables, notes receivable and held-to-maturity

securities did not have a material impact on our consolidated financial statements.

On January 1, 2020, we adopted ASU 2018-13,

Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

(ASU 2018-13),

which modified the disclosure requirements on fair value measurements, including removing the requirement to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements.

also added new disclosures including the requirement to disclose (a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

This standard only impacted the disclosures pertaining to fair value measurements and were incorporated into the notes to our consolidated financial statements.

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

We have determined that the adoption of this standard did not have a material impact on our financial statements.

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-Q

Item 2. Management’s Discussion and Analysis