WisdomTree, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below. For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year 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 Introduction We are the only publicly-traded asset management company that focuses exclusively on exchange-traded products, or ETPs, and are a leading global ETP sponsor based on assets under management, or AUM, with AUM of $69.5 billion globally as of March 31, 2021. An ETP is a pooled investment vehicle that holds a basket of securities, financial instruments or other assets and generally seeks to track (index-based) or outperform (actively managed) the performance of a broad or specific equity, fixed income or alternatives market segment, commodity or currency (or an inverse or multiple thereof). ETPs are listed on an exchange with their shares traded in the secondary market at market prices, generally at approximately the same price as the net asset value of their underlying components. ETP is an umbrella term that includes exchange-traded funds, or ETFs, exchange-traded notes and exchange-traded commodities. Our family of ETPs includes products that track our own indexes, third-party indexes and market prices of commodities. We also offer actively managed products. Most of our equity-based funds employ a fundamentally weighted investment methodology, which weights securities based on factors such as dividends, earnings or investment factors, whereas most other industry indexes use a capitalization weighted methodology. We distribute our products through all major channels 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 products and pioneered alternative weighting we call “Modern Alpha,” which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective funds that are built to perform. Through our operating subsidiaries, we provide investment advisory and other management services to our ETPs collectively offering products covering equity, commodity, fixed income, leveraged-and-inverse, currency, cryptocurrency and alternative strategies. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETPs’ average daily AUM. Our expenses are predominantly related to selling, operating and marketing our products. We have contracted with third parties to provide certain operational services for the ETPs. We strive to deliver a better investing experience through innovative solutions. Continued investments in technology-enabled and research-driven solutions and our Advisor Solutions program, which includes portfolio construction, asset allocation, practice management services and digital tools for financial advisors, are meant to differentiate us in the market, expand our distribution and further enhance our relationships with financial advisors. We were incorporated under the laws of the state of Delaware on September 19, 1985 as Financial Data Systems, Inc. and ultimately renamed WisdomTree Investments, Inc. on September 6, 2005. 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. 30 Table of Contents Assets Under Management WisdomTree ETPs We offer ETPs covering equity, commodity, fixed income, leveraged-and-inverse, currency, cryptocurrency and alternative strategies. The chart below sets forth the asset mix of our ETPs at March 31, 2020, December 31, 2020 and March 31, 2021: Market Environment 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 strengthened 7.3% and 1.3% versus the Japanese yen and British pound, while weakening 4.4% versus the euro during the quarter. U.S. Listed ETF Industry Flows U.S. listed ETF net flows for the three months ended March 31, 2021 were $248.6 billion. U.S. equity gathered the majority of those flows. Source: Morningstar 31 Table of Contents European ETP Industry Flows European ETP net flows were $58.0 billion for the three months ended March 31, 2021. Equities gathered the majority of those flows. Source: Morningstar Our Operating and Financial Results We operate as an ETP sponsor and asset manager providing investment advisory services globally through our subsidiaries in the United States and Europe. U.S. Listed ETFs Our U.S. 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. 32 Table of Contents International Listed ETPs 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 income/(loss) for the most recent five quarters: • Revenues – 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. • Expenses – 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. 33 Table of Contents • Other Income/(Expenses) – Other income/(expenses) includes interest income and interest expense, gains/(losses) on revaluation of deferred consideration – gold payments, impairments and other net losses. For the three months ended 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 $2.9 million gain that were recorded in the prior year period. 34 Table of Contents Key Operating Statistics The following table presents key operating statistics that serve as indicators for the performance of our business: Three Months Ended March 31, 2021 December 31, 2020 March 31, 2020 GLOBAL ETPs ($ in millions) Beginning of period assets $ 67,392 $ 60,710 $ 63,615 Assets sold — — (778 ) Inflows/(outflows) 1,279 881 (536 ) Market appreciation/(depreciation) 866 5,898 (11,934 ) Fund closures — (97 ) (20 ) End of period assets $ 69,537 $ 67,392 $ 50,347 Average assets during the period $ 69,552 $ 64,125 $ 60,189 Average ETP advisory fee during the period 0.42 % 0.41 % 0.42 % Number of ETPs – end of the period 313 309 331 U.S. LISTED ETFs ($ in millions) Beginning of period assets $ 38,517 $ 33,310 $ 40,600 Inflows/(outflows) 1,343 919 (1,273 ) Market appreciation/(depreciation) 2,303 4,385 (10,397 ) Fund closures — (97 ) (10 ) End of period assets $ 42,163 $ 38,517 $ 28,920 Average assets during the period $ 40,673 $ 36,002 $ 36,940 Average ETF advisory fee during the period 0.40 % 0.40 % 0.43 % Number of ETFs – end of the period 68 67 77 INTERNATIONAL LISTED ETPs ($ in millions) Beginning of period assets $ 28,875 $ 27,400 $ 23,015 Assets sold — — (778 ) Inflows/(outflows) (64 ) (38 ) 737 Market appreciation/(depreciation) (1,437 ) 1,513 (1,537 ) Fund closures — — (10 ) End of period assets $ 27,374 $ 28,875 $ 21,427 Average assets during the period $ 28,879 $ 28,123 $ 23,249 Average ETP advisory fee during the period 0.44 % 0.42 % 0.40 % Number of ETPs—end of period 245 242 254 PRODUCT CATEGORIES ($ in millions) Commodity & Currency Beginning of period assets $ 25,879 $ 25,089 $ 19,946 Inflows/(outflows) (660 ) (302 ) 617 Market appreciation/(depreciation) (1,562 ) 1,092 (820 ) End of period assets $ 23,657 $ 25,879 $ 19,743 Average assets during the period $ 25,291 $ 25,597 $ 20,300 U.S. Equity Beginning of period assets $ 18,367 $ 15,612 $ 17,732 Inflows/(outflows) 218 395 (285 ) Market appreciation/(depreciation) 1,434 2,360 (5,296 ) End of period assets $ 20,019 $ 18,367 $ 12,151 Average assets during the period $ 19,293 $ 17,050 $ 16,011 Emerging Market Equity Beginning of period assets $ 8,539 $ 5,979 $ 6,400 Inflows/(outflows) 1,662 1,399 69 Market appreciation/(depreciation) 276 1,161 (1,869 ) End of period assets $ 10,477 $ 8,539 $ 4,600 Average assets during the period $ 9,871 $ 7,249 $ 5,919 35 Table of Contents Three Months Ended March 31, 2021 December 31, 2020 March 31, 2020 International Developed Market Equity Beginning of period assets $ 9,414 $ 8,621 $ 13,011 Inflows/(outflows) 17 (191 ) (1,097 ) Market appreciation/(depreciation) 560 984 (3,255 ) End of period assets $ 9,991 $ 9,414 $ 8,659 Average assets during the period $ 9,793 $ 8,930 $ 11,453 Fixed Income Beginning of period assets $ 3,324 $ 3,630 $ 3,585 Inflows/(outflows) 10 (330 ) 21 Market appreciation/(depreciation) (73 ) 24 (79 ) End of period assets $ 3,261 $ 3,324 $ 3,527 Average assets during the period $ 3,253 $ 3,472 $ 3,653 Leveraged & Inverse Beginning of period assets $ 1,487 $ 1,430 $ 1,138 Inflows/(outflows) (4 ) (118 ) 12 Market appreciation/(depreciation) 45 175 (254 ) End of period assets $ 1,528 $ 1,487 $ 896 Average assets during the period $ 1,564 $ 1,436 $ 1,147 Cryptocurrency Beginning of period assets $ 168 $ 33 $ 1 Inflows/(outflows) 36 48 5 Market appreciation/(depreciation) 173 87 (1 ) End of period assets $ 377 $ 168 $ 5 Average assets during the period $ 264 $ 79 $ 2 Alternatives Beginning of period assets $ 214 $ 229 $ 358 Inflows/(outflows) — (26 ) (66 ) Market appreciation/(depreciation) 13 11 (48 ) End of period assets $ 227 $ 214 $ 244 Average assets during the period $ 223 $ 224 $ 328 Closed ETPs Beginning of period assets $ — $ 87 $ 1,444 Assets sold — — (778 ) Inflows/(outflows) — 6 188 Market appreciation/(depreciation) — 4 (312 ) Fund closures — (97 ) (20 ) End of period assets $ — $ — $ 522 Average assets during the period $ — $ 88 $ 1,376 Headcount 227 217 210 Note: Previously issued statistics may be restated due to fund closures and trade adjustments Source: WisdomTree 36 Table of Contents Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Selected Operating and Financial Information Three Months Ended March 31, Change Percent Change 2021 2020 Global AUM (in millions) Average global AUM $ 69,552 $ 60,189 $ 9,363 15.6 % Operating Revenues (in thousands) Advisory fees $ 71,616 $ 62,950 $ 8,666 13.8 % Other income 1,214 924 290 31.4 % Total revenues $ 72,830 $ 63,874 $ 8,956 14.0 % Average Global AUM 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 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 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 March 31, Change Percent Change (in thousands) 2021 2020 Compensation and benefits $ 22,627 $ 17,295 $ 5,332 30.8 % Fund management and administration 15,521 14,485 1,036 7.2 % Marketing and advertising 3,006 2,468 538 21.8 % Sales and business development 2,145 3,417 (1,272 ) (37.2 %) Contractual gold payments 4,270 3,760 510 13.6 % Professional fees 2,013 1,273 740 58.1 % Occupancy, communications and equipment 1,475 1,551 (76 ) (4.9 %) Depreciation and amortization 252 256 (4 ) (1.6 %) Third-party distribution fees 1,343 1,355 (12 ) (0.9 %) Acquisition and disposition-related costs — 383 (383 ) n/a Other 1,571 1,997 (426 ) (21.3 %) Total operating expenses $ 54,223 $ 48,240 $ 5,983 12.4 % Three Months Ended March 31, As a Percent of Revenues: 2021 2020 Compensation and benefits 31.1 % 27.1 % Fund management and administration 21.3 % 22.7 % Marketing and advertising 4.1 % 3.9 % Sales and business development 3.0 % 5.3 % Contractual gold payments 5.9 % 5.9 % Professional fees 2.8 % 2.0 % Occupancy, communications and equipment 2.0 % 2.4 % 37 Table of Contents Three Months Ended March 31, As a Percent of Revenues: 2021 2020 Depreciation and amortization 0.3 % 0.4 % Third-party distribution fees 1.8 % 2.1 % Acquisition and disposition-related costs 0.0 % 0.6 % Other 2.2 % 3.1 % Total operating expenses 74.5 % 75.5 % Compensation and benefits 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 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 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 pandemic. Sales and business development 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 pandemic. Contractual gold payments 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 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 three months ended March 31, 2020. Third-party distribution fees 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 of $0.4 million during the three months ended March 31, 2020 were recognized in connection with the sale of our Canadian ETF business. 38 Table of Contents Other 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) Three Months Ended March 31, Change Percent Change (in thousands) 2021 2020 Interest expense $ (2,296 ) $ (2,419 ) $ 123 (5.1 %) Gain/(loss) on revaluation of deferred consideration 2,832 (2,208 ) 5,040 n/a Interest income 231 163 68 41.7 % Impairments (303 ) (19,672 ) 19,369 (98.5 %) Other losses, net (5,893 ) (2,507 ) (3,386 ) 135.1 % Total other income/(expenses) $ (5,429 ) $ (26,643 ) $ 21,214 (79.6 %) Three Months Ended March 31, As a Percent of Revenues: 2021 2020 Interest expense (3.2 %) (3.8 %) Gain/(loss) on revaluation of deferred consideration 3.9 % (3.5 %) Interest income 0.3 % 0.2 % Impairments (0.4 %) (30.7 %) Other losses, net (8.1 %) (3.9 %) Total other income/(expenses) (7.5 %) (41.7 %) Interest expense 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 was essentially unchanged from the three months ended March 31, 2020. Impairment 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. 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. 39 Table of Contents Income taxes 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. Non-GAAP Financial Measures In an effort to provide additional information regarding our results as determined by GAAP, we also disclose certain non-GAAP information which we believe provides useful and meaningful information. Our management reviews these non-GAAP financial measurements when evaluating our financial performance and results of operations; therefore, we believe it is useful to provide information with respect to these non-GAAP measurements so as to share this perspective of management. Non-GAAP measurements do not have any standardized meaning, do not replace nor are superior to GAAP financial measurements and are unlikely to be comparable to similar measures presented by other companies. These non-GAAP financial measurements should be considered in the context with our GAAP results. The non-GAAP financial measurements contained in this Report include: • Adjusted net income and adjusted diluted earnings per share. We disclose adjusted net income and adjusted diluted earnings per share as non-GAAP financial measurements in order to report our results exclusive of items that are non-recurring or not core to our operating business. We believe presenting these non-GAAP financial measures provides investors with a consistent way to analyze our performance. These non-GAAP financial measures exclude the following: • Unrealized gains or losses on the revaluation of deferred consideration : Deferred consideration is an obligation we assumed in connection with the ETFS acquisition that is carried at fair value. This item represents the present value of an obligation to pay fixed ounces of gold into perpetuity and is measured using forward-looking gold prices. Changes in the forward-looking price of gold and changes in the discount rate used to compute the present value of the annual payment obligations may have a material impact on the carrying value of the deferred consideration and our reported financial results. We exclude this item when arriving at adjusted net income and adjusted diluted earnings per share as it is not core to our operating business. The item is not adjusted for income taxes as the obligation was assumed by a wholly-owned subsidiary of ours that is based in Jersey, a jurisdiction where we are subject to a zero percent tax rate. • Tax shortfalls and windfalls upon vesting and exercise of stock-based compensation awards : GAAP requires the recognition of tax windfalls and shortfalls within income tax expense. These items arise upon the vesting and exercise of stock-based compensation awards and the magnitude is directly correlated to the number of awards vesting/exercised as well as the difference between the price of our stock on the date the award was granted and the date the award vested or was exercised. We exclude these items when determining adjusted net income and adjusted diluted earnings per share as they introduce volatility in earnings and are not core to our operating business. • Other items : 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: 2021 2020 Net income/(loss), as reported $ 15,147 $ (8,638 ) Deduct/Add back: (Gain)/loss on revaluation of deferred consideration (2,832 ) 2,208 Deduct: Unrealized gain recognized on our investment in Securrency, net of income taxes (179 ) — Add back: Impairments, net of income taxes (where applicable) 245 19,672 Add back: Tax shortfalls upon vesting and exercise of stock-based compensation awards 123 501 Add back: Acquisition and disposition-related costs, net of income taxes — 358 Deduct: Gain recognized upon the sale of our Canadian ETF business — (2,877 ) Adjusted net income $ 12,504 $ 11,224 Deduct: Income distributed to participating securities (558 ) (555 ) Deduct: Undistributed income allocable to participating securities (853 ) (654 ) Adjusted net income available to common stockholders $ 11,093 $ 10,015 Weighted average diluted shares, excluding participating securities (See Note 18 to our Consolidated Financial Statements) 145,770 152,535 Adjusted earnings per share - diluted $ 0.08 $ 0.07 40 Table of Contents Liquidity and Capital Resources The following table summarizes key data regarding our liquidity, capital resources and uses of capital to fund our operations: March 31, 2021 December 31, 2020 Balance Sheet Data (in thousands): Cash and cash equivalents $ 62,302 $ 73,425 Securities owned, at fair value 34,771 34,895 Accounts receivable 30,341 29,455 Securities held-to-maturity 411 451 Total: Liquid assets 127,825 138,226 Less: Total current liabilities (56,558 ) (73,999 ) Less: Regulatory capital requirement – certain international subsidiaries (12,222 ) (10,745 ) Total: Available liquidity $ 59,045 $ 53,482 Three Months Ended March 31, 2021 2020 Cash Flow Data (in thousands): Operating cash flows $ 1,865 $ (2,634 ) Investing cash flows (5,565 ) 8,754 Financing cash flows (7,188 ) (11,391 ) Foreign exchange rate effect (235 ) (1,272 ) Decrease in cash and cash equivalents $ (11,123 ) $ (6,543 ) Liquidity We consider our available liquidity to be our liquid assets, less our current liabilities and regulatory capital requirements of certain international subsidiaries. Liquid assets consist of cash and cash equivalents, securities owned, at fair value, accounts receivable and securities held-to-maturity. Our securities owned, at fair value are highly liquid investments. Certain securities are accounted for as held-to-maturity securities and we have the intention and ability to hold them to maturity. However, these securities are also readily traded and, if needed, could be sold for liquidity. Accounts receivable are current assets and primarily represent receivables from advisory fees we earn from our ETPs. Our current liabilities consist primarily of payments owed to vendors and third parties in the normal course of business, deferred consideration and accrued incentive compensation for employees. Cash and cash equivalents decreased $11.1 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. 41 Table of Contents Issuance of Convertible Notes 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: • 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. • Conversion : 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) 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 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. 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 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 . 70 : We may redeem for cash all or any portion of the notes, at our option, on or after June 20, 2021 and on or prior to the 55 th scheduled trading day immediately preceding the maturity date, if 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 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. 42 Table of Contents Capital Resources Our principal source of financing is our operating cash flow. We believe that cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for the foreseeable future. Our ability to satisfy our contractual obligations as they arise are discussed in the section titled “Contractual Obligations” below. Use of Capital Our business does not require us to maintain a significant cash position. However, certain of our international subsidiaries are required to maintain a minimum level of regulatory capital, which 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 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 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 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. Off-Balance Sheet Arrangements We do not have any off-balance sheet financing or other arrangements and have neither created nor are party to any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. 43 Table of Contents Critical Accounting Policies and Estimates Goodwill and Intangible Assets Goodwill is the excess of the purchase price over the fair values of the identifiable net assets at the acquisition date. We test goodwill for impairment at least annually and at the time of a triggering event requiring re-evaluation, if one were to occur. Goodwill is considered impaired when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying value. If the estimated fair value of such reporting unit is less than its carrying value, goodwill impairment is recognized based on that difference, not to exceed the carrying amount of goodwill. A reporting unit is an operating segment or a component of an operating segment provided that the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component. Goodwill is allocated to our U.S. Business and European Business components. 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 our market capitalization when determining the fair value of the reporting unit. Indefinite-lived intangible assets are tested for impairment at least annually and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are impaired if their estimated fair value is less than their carrying value. We may rely on a qualitative assessment when performing our intangible asset impairment test. Otherwise, the impairment evaluation is performed at the lowest level of reasonably identifiable cash flows independent of other assets. The annual impairment testing date for our intangible assets is November 30 th . Investments We account for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed within ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities , to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment (assessed quarterly), plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In addition, income is recognized when dividends are received only to the extent they are distributed from net accumulated earnings of the investee. Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment. 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, 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 We earn substantially all of our revenue in the form of advisory fees from our ETPs and recognize this revenue over time, as the performance obligation is satisfied. Advisory fees are based on a percentage of the ETPs’ average daily net assets. Progress is measured using the practical expedient under the output method resulting in the recognition of revenue in the amount for which we have a right to invoice. Recently Adopted Accounting Pronouncements On January 1, 2021, we early adopted ASU 2020-06, Debt – Debt with Conversion and Other Options (ASU 2020-06) under the modified retrospective approach. Under the ASU, the accounting for convertible instruments was simplified by removing major separation models required under current GAAP. Accordingly, more convertible instruments are reported as a single liability or equity with no separate accounting for embedded conversion features. Certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception are removed and, as a result, more equity contracts will qualify for the scope exception. The ASU also simplifies the diluted earnings-per-share calculation in certain areas. Upon the adoption of this ASU, we reclassified the equity component related to the convertible notes, net of deferred taxes, 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. 44 Table of Contents On January 1, 2021, we adopted ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (ASU 2019-12). The main objective of the standard is to reduce complexity in the accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income); (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The standard also simplifies the accounting for income taxes by enacting the following: (a) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount as a non-income-based tax; (b) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered as a separate transaction; (c) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (d) requiring that an entity reflect the enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. We have determined that the adoption of this standard did not have a material impact on our financial statements.