What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 203 added, 142 removed, 463 unchanged (43% 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, 2020.

for the fiscal year ended December 31, 2020 and our Quarterly Report on Form 10-Q

for the quarter ended June 30, 2021.

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

Executive Summary

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 $73.9 billion globally as of June 30, 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).

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

We filed for the WisdomTree Bitcoin Trust (the approval for stock exchange listing has recently been delayed), the WisdomTree Ethereum Trust and the WisdomTree Digital Short-Term Treasury Fund with the SEC, among other regulatory and product related digital asset advancements which we expect to communicate in the future.

We filed registration statements for the WisdomTree Bitcoin Trust, the WisdomTree Ethereum Trust and the WisdomTree Digital Short-Term Treasury Fund with the SEC, among other regulatory and product related digital asset advancements which we expect to communicate in the future.

The WisdomTree Enhanced Commodity Strategy Fund (GCC) became the first ETF to add bitcoin futures exposure.

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.

We also 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.

We also recently invested in Onramp Invest, a technology firm that provides access to digital assets for registered investment advisers.

Collaborations with Onramp Invest and Federal Life Insurance Company were also announced with respect to making available WisdomTree model portfolios that include digital assets in different channels.

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

Industry Developments

In September 2021, Senator Ron Wyden, Senate Finance Committee Chair, released draft tax legislation that would directly impact the tax treatment of ETFs.

The proposed legislation would eliminate ETFs’ chief tax advantage by repealing Section 852(b)(6) of the Internal Revenue Code, which allows ETFs to redeem shares in-kind

without exposing long-term investors to capital gains on any individual security in the underlying ETF structure.

We believe that ETFs are an important tool used by retail investors striving to build financial security, as well as younger investors who are participating in the financial markets for the first time.

The ETF creation and redemption process ensures accurate index tracking for the benefit of all shareholders and it is the most cost-effective and tax-efficient

way to achieve this, directly benefiting the end investor.

We believe that ETFs have proven to be a successful investment structure that should be protected.

If eliminated, ETFs would lose a valuable benefit associated with the structure;

however, overall industry growth should not be materially affected due to the other inherent benefits of ETFs – transparency and liquidity.

Termination of New York Office Lease

On September 9, 2021, we entered into a Surrender Agreement to terminate the lease for our principal executive office at 245 Park Avenue, New York, effective immediately.

In consideration for the landlord’s agreement to enter into the Surrender Agreement and accelerate the expiration date of the term of the lease from August 31, 2029, we paid a termination fee of $12.7 million.

As a result, we recognized a loss on the termination of a lease of $15.9 million during the three months ended September 30, 2021 which is included in impairments and was inclusive of the right-of-use

asset, leasehold improvements and fixed assets broker fees and a reduction in operating lease liabilities.

Cost savings were $0.2 million during the third quarter of 2021 and are estimated to be approximately $0.6 million during the fourth quarter of 2021 when compared to actual occupancy and depreciation expense recognized during the second quarter of 2021.

Cost savings for the year ending December 31, 2022 resulting from the reduction in the New York and London office footprints are estimated to be approximately $3.5 million when compared to actual occupancy and depreciation expense recognized during the year ended December 31, 2020.

Anticipated rent for new office space in New York and London with a smaller footprint is included in these estimates.

Assets Under Management

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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 June 30, 2020, March 31, 2021 and June 30, 2021:

The chart below sets forth the asset mix of our ETPs at September 30, 2020, June 30, 2021 and September 30, 2021:

Market Environment

During the second quarter of 2021, global equity markets advanced upon the acceleration of the rollout of COVID-19

Rebounds in economic activity contributed to inflationary concerns and lower government bond yields.

Gold prices also increased modestly during the quarter.

The S&P 500 rose 8.6%, MSCI EAFE (local currency) rose 5.0%, MSCI Emerging Markets Index (U.S.

dollar) rose 5.1%, and gold prices rose 4.3% during the second quarter of 2021.

During the third quarter of 2021, the U.S and Eurozone markets were flat as growth and inflation concerns arising in September erased prior gains.

Emerging markets underperformed amid a sell-off

in China and concerns over continued supply chain disruptions.

Gold prices also decreased modestly during the quarter.

The S&P 500 and MSCI EAFE (local currency) rose 0.6% and 1.4%, respectively, while MSCI Emerging Markets Index (U.S.

dollar) weakened 8.0%, and gold prices declined 1.1% during the third quarter of 2021.

In addition, the European and Japanese equities markets both appreciated with the MSCI EMU Index and MSCI Japan Index increasing 0.5% and 5.3%, respectively, in local currency terms for the quarter.

Also, the U.S.

dollar weakened 1.4%, 0.7% and 0.2% versus the euro, British pound and Japanese yen, respectively, during the quarter.

dollar rose 2.3% and 2.7% versus the euro and British pound, respectively, and weakened 1.0% versus the Japanese yen during the quarter.

listed ETF Industry Flows

listed ETF industry net flows for the three months ended June 30, 2021 were $220.3 billion.

listed ETF industry net flows for the three months ended September 30, 2021 were $170.4 billion.

equity and fixed income gathered the majority of those flows.

European ETP Industry Flows

European ETP industry net flows were $52.5 billion for the three months ended June 30, 2021.

European ETP industry net flows were $38.0 billion for the three months ended September 30, 2021.

Equities and fixed income gathered the majority of those flows.

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

listed ETFs’ AUM increased from $42.2 billion at March 31, 2021 to $45.1 billion at June 30, 2021 due to market appreciation and net inflows.

listed ETFs’ AUM decreased from $45.1 billion at June 30, 2021 to $44.7 billion at September 30, 2021 due to market depreciation, partly offset by net inflows.

European Listed ETPs

Our European listed ETPs’ AUM increased from $27.4 billion at March 31, 2021 to $28.8 billion at June 30, 2021 due to market appreciation.

Our European listed ETPs’ AUM decreased from $28.8 billion at June 30, 2021 to $28.0 billion at September 30, 2021 primarily due to market depreciation.

Consolidated Operating Results

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

– We recorded operating revenues of $77.6 million during the three months ended June 30, 2021, up 33.5% from the three months ended June 30, 2020 due to higher average global AUM arising from market appreciation and net inflows.

Prior period amounts previously disclosed have been revised to conform with our current presentation.

These revisions had no effect on previously reported net income.

See Note 2 to our Consolidated Financial Statements for additional information.

– We recorded operating revenues of $78.1 million during the three months ended September 30, 2021, up 22.5% from the three months ended September 30, 2020 due to higher average global AUM.

Operating Expenses

– Total operating expenses increased 16.4% from the three months ended June 30, 2020 to $53.9 million primarily due to higher incentive compensation and headcount, fund management and administration costs, marketing expenses, third-party distribution fees and professional fees.

– Total operating expenses increased 10.0% from the three months ended September 30, 2020 to $53.9 million primarily due to higher incentive compensation and headcount, fund management and administration costs, third-party distribution fees, professional fees and sales and business development expenses, partly offset by lower occupancy expense and contractual gold payments.

Other Income/(Expenses)

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

For the three months ended June 30, 2021 and 2020, the gains/(losses) on revaluation of deferred consideration – gold payments were $0.5 million and ($23.4) million, respectively.

Net income/(loss)

– We reported net income of $17.6 million during the three months ended June 30, 2021, compared to a net loss of ($13.3) million during the three months ended June 30, 2020.

The change in net income/(loss) was impacted by the change in revenue and expenses described above and a favorable change related to the revaluation of deferred consideration – gold payments of $23.9 million.

We recognized a loss of $15.9 million upon the termination of our New York office lease during the three months ended September 30, 2021, which is included in impairments.

For the three months ended September 30, 2021 and 2020, the gains/(losses) on revaluation of deferred consideration – gold payments were $1.7 million and ($8.9) million, respectively.

– We reported net income of $5.8 million during the three months ended September 30, 2021, compared to a net loss of $0.3 million during the three months ended September 30, 2020.

The change was impacted by the $15.9 million impairment charge, the change in revenue and expenses described above and a favorable change related to the revaluation of deferred consideration – gold payments of $10.6 million.

Key Operating Statistics

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Three Months Ended

Six 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

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Average assets during the period

Average ETP advisory fee during the period

Number of ETPs—end of period

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Average assets during the period

Emerging Market Equity

International Developed Market Equity

Beginning of period assets

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Average assets during the period

Three Months Ended

Six Months Ended

International Developed Market Equity

Emerging Market Equity

Beginning of period assets

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Average assets during the period

Three Months Ended

Nine Months Ended

September 30,

Beginning of period assets

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

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Selected Operating and Financial Information

Three Months Ended

September 30,

Global AUM (in millions)

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Total revenues

Advisory fees previously reported have been revised due to an immaterial error correction.

These revisions had no effect on previously reported net income.

See Note 2 to our Consolidated Financial Statements for additional information.

Average Global AUM

Our average global AUM increased 32.1% from $55.7 billion at June 30, 2020 to $73.7 billion at June 30, 2021 due to market appreciation and net inflows.

Our average global AUM increased 21.8% from $61.2 billion at September 30, 2020 to $74.6 billion at September 30, 2021 due to market appreciation and net inflows.

Operating Revenues

Advisory fees

Advisory fee revenues increased 32.8% from $57.2 million during the three months ended June 30, 2020 to $76.0 million in the comparable period in 2021 due to higher average global AUM.

Our average global advisory fee was 0.41% during both the three months ended June 30, 2020 and June 30, 2021, respectively.

Other income increased 74.9% from $0.9 million during the three months ended June 30, 2020 to $1.6 million in the comparable period in 2021 primarily due to higher fees associated with our European listed products.

Advisory fee revenues increased 21.2% from $63.0 million during the three months ended September 30, 2020 to $76.4 million in the comparable period in 2021 due to higher average global AUM.

Our average global advisory fee was 0.41% during both the three months ended September 30, 2020 and September 30, 2021.

Other income increased 137.4% from $0.7 million during the three months ended September 30, 2020 to $1.7 million in the comparable period in 2021 primarily due to higher fees associated with our European listed products.

Operating Expenses

Three Months Ended

September 30,

(in thousands)

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Third-party distribution fees

Acquisition and disposition-related costs

Total operating expenses

Three Months Ended

September 30,

As a Percent of Revenues:

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Depreciation and amortization

Three Months Ended

As a Percent of Revenues:

Third-party distribution fees

Acquisition and disposition-related costs

Total operating expenses

Fund management and administration expenses previously reported have been revised due to an immaterial error correction.

These revisions had no effect on previously reported net income.

See Note 2 to our Consolidated Financial Statements for additional information.

Compensation and benefits

Compensation and benefits expense increased 16.5% from $17.5 million during the three months ended June 30, 2020 to $20.3 million in the comparable period in 2021 due to higher incentive compensation and headcount.

Headcount was 214 and 227 at June 30, 2020 and June 30, 2021, respectively.

Compensation and benefits expense increased 15.3% from $19.1 million during the three months ended September 30, 2020 to $22.0 million in the comparable period in 2021 due to higher incentive compensation and headcount.

Headcount was 211 and 235 at September 30, 2020 and September 30, 2021, respectively.

Fund management and administration

Fund management and administration expense increased 12.0% from $14.5 million during the three months ended June 30, 2020 to $16.2 million in the comparable period in 2021 due to higher average global AUM.

Fund management and administration expense increased 6.0% from $14.3 million during the three months ended September 30, 2020 to $15.2 million in the comparable period in 2021 due to higher average global AUM.

Marketing and advertising

Marketing and advertising expense increased 84.4% from $1.9 million during the three months ended June 30, 2020 to $3.6 million in the comparable period in 2021 as our spending in the prior year period was reduced at the onset of the COVID-19

Marketing and advertising expense was essentially unchanged from the three months ended September 30, 2020.

Sales and business development

Sales and business development expense was essentially unchanged from the three months ended June 30, 2020.

Sales and business development expense increased 23% from $2.4 million during the three months ended September 30, 2020 to $2.9 million in the comparable period in 2021 primarily due to higher spending on conferences and sales tools.

Contractual gold payments

Contractual gold payments expense increased 6.2% from $4.1 million during the three months ended June 30, 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 $1,711 and $1,816 per ounce during the three months ended June 30, 2020 and 2021, respectively.

Contractual gold payments expense decreased 6.4% from $4.5 million during the three months ended September 30, 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 $1,911 and $1,789 per ounce during the three months ended September 30, 2020 and 2021, respectively.

Professional fees

Professional fees increased 41.6% from $1.4 million during the three months ended June 30, 2020 to $1.9 million in the comparable period in 2021 due to spending related to our digital assets initiative.

Professional fees increased 66.6% from $1.0 million during the three months ended September 30, 2020 to $1.6 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 22.9% from $1.6 million during the three months ended June 30, 2020 to $1.3 million in the comparable period in 2021 as we exited our London office.

Occupancy, communications and equipment expense decreased 27.8% from $1.6 million during the three months ended September 30, 2020 to $1.2 million in the comparable period in 2021 as we exited our New York office and reduced our office footprint in Europe.

Depreciation and amortization

Depreciation and amortization expense was essentially unchanged from the three months ended June 30, 2020.

Depreciation and amortization expense decreased 26.9% from 0.3 million during the three months ended September 30, 2020 to 0.2 million in the comparable period in 2021 due to write-off

of fixed assets related to the exit of our New York office.

Third-party distribution fees

Third-party distribution fees increased 59.0% from $1.3 million during the three months ended June 30, 2020 to $2.1 million in the comparable period in 2021 primarily due to higher fees paid to our third-party marketing agent in Latin America and higher fees for platform relationships.

Other expenses were essentially unchanged from the three months ended June 30, 2020.

Third-party distribution fees increased 51.9% from $1.2 million during the three months ended September 30, 2020 to $1.9 million in the comparable period in 2021 primarily due to higher AUM in Latin America resulting in higher fees paid to our third-party marketing agent.

Other expenses were essentially unchanged from the three months ended September 30, 2020.

Other Income/(Expenses)

Three Months Ended

September 30,

(in thousands)

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Interest income

Loss on extinguishment of debt

Other gains, net

Other losses and gains, net

Total other expenses, net

Three Months Ended

September 30,

As a Percent of Revenues:

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Interest income

Loss on extinguishment of debt

Other gains, net

Other losses and gains, net

Total other expenses, net

Interest expense

Interest expense increased 25.6% from $2.0 million during the three months ended June 30, 2020 to $2.6 million in the comparable period in 2021 due to a higher level of debt outstanding and a higher effective interest rate.

Our effective interest rate during the three months ended June 30, 2020 and 2021 was 4.5% and 5.2%, respectively.

Interest expense increased 48.5% from $2.5 million during the three months ended September 30, 2020 to $3.7 million in the comparable period in 2021 due to a higher level of debt outstanding, partly offset by a lower effective interest rate.

Our effective interest rate during the three months ended September 30, 2020 and 2021 was 6.3% and 4.6%, respectively.

Gain/(loss) on revaluation of deferred consideration

We recognized a loss on revaluation of deferred consideration of ($23.4) million during the three months ended June 30, 2020 as compared to a gain of $0.5 million during the three months ended June 30, 2021.

The gain in the current quarter arose due to a flattening of the forward-looking gold curve.

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

We recognized a loss on revaluation of deferred consideration of ($8.9) million during the three months ended September 30, 2020 as compared to a gain of $1.7 million gain during the three months ended September 30, 2021.

The gain in the current quarter was due to lower forward-looking gold prices.

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

Interest income

Interest income increased 89.1% from $0.1 million to $0.2 million due to an increase in our securities owned.

Loss on extinguishment of debt

During the three months ended June 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.

Other gains, net

Other gains, net were $1.8 million and $0.0 million during the three months ended June 30, 2020 and 2021, respectively.

Included in other gains, net during the three months ended June 30, 2020 is a gain of $0.9 million arising from an adjustment to the estimated fair value of consideration received from the exit of our investment in AdvisorEngine.

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 June 30, 2021 of 19.5% resulted in income tax expense of $4.3 million.

Our effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a lower tax rate on foreign earnings.

Our effective income tax rate for the three months ended June 30, 2020 of 5.7% resulted in an income tax benefit of $0.8 million.

Interest income increased 520.7% from $0.1 million during the three months ended September 30, 2020 to $0.7 million in the comparable period in 2021 due to an increase in our securities owned.

During the three months ended September 30, 2021, we recognized a loss of $15.9 million upon the termination of our New York office lease, which is included in impairments.

The impairment was inclusive of the write-off

of the right-of-use

asset, leasehold improvements and fixed assets, broker fees and a reduction in operating lease liabilities.

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.

Other losses and gains, net

Other losses and gains, net were $0.7 million and ($0.7) million during the three months ended September 30, 2020 and 2021, respectively.

The three months ended September 30, 2021 includes losses on our securities owned of $1.3 million and a gain of $0.8 million related to the remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business.

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

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

Our effective income tax rate for the three months ended September 30, 2021 of 7.9% resulted in income tax expense of $0.5 million.

Our effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a lower tax rate on foreign earnings and a non-taxable

gain on revaluation of deferred consideration, partly offset by higher non-deductible

compensation.

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

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

loss on revaluation of deferred consideration.

This loss was partly offset by 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.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

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

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Selected Operating and Financial Information

Six Months Ended

Nine Months Ended

September 30,

Global AUM (in millions)

Average global AUM

Revenues (in thousands)

Operating Revenues (in thousands)

Advisory fees (1)

Total revenues

Advisory fees previously reported have been revised due to an immaterial error correction.

These revisions had no effect on previously reported net income.

See Note 2 to our Consolidated Financial Statements for additional information.

Average Global AUM

Our average global AUM increased 23.6% from $57.9 billion at June 30, 2020 to $71.6 billion at June 30, 2021 arising from market appreciation and net inflows.

Our average global AUM increased 23.0% from $59.0 billion at September 30, 2020 to $72.6 billion at September 30, 2021 arising from market appreciation and net inflows.

Operating Revenues

Advisory fees

Advisory fee revenues increased 22.8% from $120.2 million during the six months ended June 30, 2020 to $147.6 million in the comparable period in 2021 due to higher average global AUM.

Our average global advisory fee was 0.42% during both the six months ended June 30, 2020 and June 30, 2021, respectively.

Other income increased 53.1% from $1.8 million during the six months ended June 30, 2020 to $2.8 million in the comparable period in 2021 primarily due to higher fees associated with our European listed products.

Advisory fee revenues increased 21.4% from $181.7 million during the nine months ended September 30, 2020 to $220.6 million in the comparable period in 2021 due to higher average global AUM.

Our average global advisory fee was 0.41% during both the nine months ended September 30, 2020 and September 30, 2021.

Other income increased 76.8% from $2.6 million during the nine months ended September 30, 2020 to $4.5 million in the comparable period in 2021 primarily due to higher fees associated with our European listed products.

Operating Expenses

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Total operating expenses

Six Months Ended

Nine Months Ended

September 30,

As a Percent of Revenues:

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Contractual gold payments

Six Months Ended

As a Percent of Revenues:

Professional fees

4 unchanged sentences

Total operating expenses

Fund management and administration expenses previously reported have been revised due to an immaterial error correction.

These revisions had no effect on previously reported net income.

See Note 2 to our Consolidated Financial Statements for additional information.

Compensation and benefits

Compensation and benefits expense increased 23.6% from $34.8 million during the six months ended June 30, 2020 to $43.0 million in the comparable period in 2021 due to higher incentive compensation and headcount.

Compensation and benefits expense increased 20.7% from $53.8 million during the nine months ended September 30, 2020 to $65.0 million in the comparable period in 2021 due to higher incentive compensation and headcount.

Fund management and administration

Fund management and administration expense increased 9.6% from $28.9 million during the six months ended June 30, 2020 to $31.7 million in the comparable period in 2021 primarily due to higher average global AUM.

Fund management and administration expense increased 4.1% from $41.8 million during the nine months ended September 30, 2020 to $43.5 million in the comparable period in 2021 primarily due to higher average global AUM.

Marketing and advertising

Marketing and advertising expense increased 49.4% from $4.4 million during the six months ended June 30, 2020 to $6.6 million in the comparable period in 2021 as our spending in the prior year was reduced at the onset of the COVID-19

Marketing and advertising expense increased 28.5% from $7.4 million during the nine months ended September 30, 2020 to $9.5 million in the comparable period in 2021 as our spending in the prior year was reduced at the onset of the COVID-19

Sales and business development

Sales and business development expense decreased 23.1% from $5.6 million during the six months ended June 30, 2020 to $4.3 million in the comparable period in 2021 primarily due to lower discretionary spending resulting from the COVID-19

Sales and business development expense decreased 9.3% from $8.0 million during the nine months ended September 30, 2020 to $7.2 million in the comparable period in 2021 primarily due to lower travel and discretionary spending resulting from the persistence of the COVID-19

Contractual gold payments

Contractual gold payments expense increased 9.7% from $7.8 million during the six months ended June 30, 2020 to $8.6 million in the comparable period in 2021.

This expense was associated with the payment of 4,750 ounces of gold and was calculated using the average daily spot price of $1,738 and $1,908 per ounce during the six months ended June 30, 2020 and 2021, respectively.

Contractual gold payments expense increased 3.8% from $12.4 million during the nine months ended September 30, 2020 to $12.8 million in the comparable period in 2021.

This expense was associated with the payment of 7,125 ounces of gold and was calculated using the average daily spot price of $1,735 and $1,801 per ounce during the nine months ended September 30, 2020 and 2021, respectively.

Professional fees

Professional fees increased 49.6% from $2.6 million during the six months ended June 30, 2020 to $3.9 million in the comparable period in 2021 due to spending related to our digital assets initiative.

Professional fees increased 54.1% from $3.6 million during the nine months ended September 30, 2020 to $5.5 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 14.2% from $3.2 million during the six months ended June 30, 2020 to $2.7 million in the comparable period in 2021 as we exited our London office.

Occupancy, communications and equipment expense decreased 18.8% from $4.8 million during the nine months ended September 30, 2020 to $3.9 million in the comparable period in 2021 as we exited our New York office and reduced our office footprint in Europe.

Depreciation and amortization

Depreciation and amortization expense was essentially unchanged from the six months ended June 30, 2020.

Depreciation and amortization expense decreased 8.8% from $0.8 million during the nine months ended September 30, 2020 to $0.7 million in the comparable period in 2021 due to the write-off

of fixed assets related to the exit of our New York office.

Third-party distribution fees

Third-party distribution fees increased 28.9% from $2.7 million during the six months ended June 30, 2020 to $3.5 million in the comparable period in 2021 due to higher fees paid to our third-party marketing agent in Latin America and higher fees for platform relationships.

Third-party distribution fees increased 36.1% from $3.9 million during the nine months ended September 30, 2020 to $5.3 million in the comparable period in 2021 due to higher AUM in Latin America resulting in higher fees paid to our third-party marketing agent, as well as additional platform relationships.

Acquisition and disposition-related costs

Acquisition and disposition-related costs of $0.4 million during the six months ended June 30, 2020 arose due to the sale of our Canadian ETF business which was completed in February 2020.

Other expenses were essentially unchanged from the six months ended June 30, 2020.

Acquisition and disposition-related costs of $0.4 million during the nine months ended September 30, 2020 arose due to the sale of our Canadian ETF business which was completed in February 2020.

Other expenses were essentially unchanged from the nine months ended September 30, 2020.

Other Income/(Expenses)

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

3 unchanged sentences

Loss on extinguishment of debt

Other losses, net

Other losses and gains, net

Total other expenses, net

Six Months Ended

Nine Months Ended

September 30,

As a Percent of Revenues:

3 unchanged sentences

Loss on extinguishment of debt

Other losses, net

Other losses and gains, net

Total other expenses, net

Interest expense

Interest expense increased 9.0% from $4.5 million during the six months ended June 30, 2020 to $4.9 million in the comparable period in 2020 due to a high level of debt outstanding, partly offset by a lower effective interest rate.

Our effective interest rate during the six months ended June 30, 2020 and 2021 was 5.5% and 5.2%, respectively.

Interest expense increased 23.2% from $7.0 million during the nine months ended September 30, 2020 to $8.6 million in the comparable period in 2021 due to a higher level of debt outstanding in the current period.

Our effective interest rate during the nine months ended September 30, 2020 and 2021 was 5.3% and 5.0%, respectively.

Gain/(loss) on revaluation of deferred consideration

We recognized a loss on revaluation of deferred consideration of ($25.6) million during the six months ended June 30, 2020 as compared to a gain of $3.3 million during the six months ended June 30, 2021.

We recognized a loss on revaluation of deferred consideration of ($34.4) million during the nine months ended September 30, 2020 as compared to a gain of $5.1 million during the nine months ended September 30, 2021.

The gain in the current period was 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 was 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 increased 61.7% from $0.3 million to $0.5 million due to an increase in our securities owned.

During the six months ended June 30, 2021, we recognized an impairment charge of $0.3 million upon exiting our London office.

During the six months ended June 30, 2020, we recognized a non-cash

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

Interest income increased 191.3% from $0.4 million during the nine months ended September 30, 2020 to $1.1 million in the comparable period in 2021 due to an increase in our securities owned.

During the nine months ended September 30, 2021, we recognized a loss of approximately $16.2 million upon exiting our New York and London offices, which is included in impairments.

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

impairment charge of $22.8 million, including $3.1 million related to our investment in Thesys and $19.7 million related to our investment in AdvisorEngine.

Loss on extinguishment of debt

During the six months ended June 30, 2020, we recognized a non-cash

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.

Other losses, net

Other losses, net were $0.7 million and $5.9 million during the six months ended June 30, 2020 and 2021, respectively.

Included in the losses recognized during the six months ended June 30, 2020 and 2021 is a charge of $6.0 million and $5.2 million,

respectively, arising from the release of a tax-related

Other losses and gains, net

Other losses and gains, net were $0.1 million and ($6.6) million during the nine months ended September 30, 2020 and 2021, respectively.

This includes a charge of $6.0 million and $5.2 million during the nine months ended September 30, 2020 and 2021, 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 six months ended June 30, 2021, we also recognized an unrealized gain of $0.4 million on our investment in Securrency.

In addition, during the six months ended June 30, 2020, we recognized a gain of $2.9 million associated with the sale of our Canadian ETF business and a gain of $0.9 million arising from an adjustment to the estimated fair value of consideration received from the exit of our investment in AdvisorEngine.

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

Our effective income tax rate for the six months ended June 30, 2021 of 6.5% resulted in income tax expense of $2.3 million.

During the nine months ended September 30, 2021, we also recognized losses on our securities owned of $2.2 million, a gain of $0.8 million related to the remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business and an unrealized gain of $0.4 million on our investment in Securrency.

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 and a gain of $1.1 million arising from an adjustment to the estimated fair value of consideration received from the exit of our investment in AdvisorEngine.

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

Our effective income tax rate for the nine months ended September 30, 2021 of 6.7% resulted in income tax expense of $2.8 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 lower tax rate on foreign earnings and a non-taxable

gain on revaluation of deferred consideration.

These items were partly offset by tax shortfalls associated with the vesting and exercise of stock-based compensation and state and local taxes.

Our effective income tax rate for the six months ended June 30, 2020 of 12.7% resulted in an income tax benefit of $3.2 million.

These items were partly offset by tax shortfalls associated with the vesting and exercise of stock-based compensation and non-deductible

executive compensation.

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

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The item is not adjusted for income taxes as the obligation was assumed by a wholly-owned subsidiary of ours that is based in Jersey, a jurisdiction where we are subject to a zero percent tax rate.

Gains or losses on securities owned

We account for our securities owned as trading securities, which requires these instruments to be measured at fair value with gains and losses reported in net income.

In the third quarter of 2021, we began excluding these items when calculating our non-GAAP

financial measurements as these securities have become a more meaningful percentage of total assets and the gains and losses introduce volatility in earnings and are not core to our operating business.

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

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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.

An unrealized gain recognized on our investment in Securrency, impairment charges, interest expense from the amortization of discount arising from the bifurcation of the conversion option embedded in the Convertible Notes (prior to January 1, 2021, the effective date of Accounting Standards Update 2020-06,

Remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business, unrealized gains recognized on our investment in Securrency, impairment charges, interest expense from the amortization of discount arising from the bifurcation of the conversion option embedded in the Convertible Notes (prior to January 1, 2021, the effective date of Accounting Standards Update 2020-06,

Debt – Debt with Conversion and Other Options, Cash Conversion)

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Three Months Ended

Six Months Ended

Nine Months Ended

Adjusted Net Income and Diluted Earnings per Share:

September 30,

Net income/(loss), as reported

Impairments, net of income taxes (where applicable)

Deduct/Add back:

(Gain)/loss on revaluation of deferred consideration

Gain recognized upon sale of Canadian ETF business

Unrealized loss on securities owned, a fair value, net of income taxes

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

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

Impairments, net of income taxes (where applicable)

Gain recognized upon sale of Canadian ETF business

Acquisition and disposition-related costs, net of income taxes

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

September 30,

Balance Sheet Data (in thousands)

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Available liquidity

Six Months Ended June 30,

Nine Months Ended September 30,

Cash Flow Data (in thousands)

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Increase/(decrease) in cash and cash equivalents

Cash flows from purchasing securities owned, at fair value of $34,683 and selling securities owned, at fair value of $18,122 during the nine months ended September 30, 2020 that were not acquired specifically for resale or associated with the Company’s business activities have been reclassified from operating activities to investing activities to conform to the current year’s presentation in the Consolidated Statements of Cash Flows.

See Note 2 for additional information.

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 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 increased $94.2 million during the six months ended June 30, 2021 due to $150.0 million of proceeds received from the issuance of the 2021 Notes and $0.9 million provided by other activities.

These increases were partly offset by $34.5 million used to repurchase our common stock, $9.9 million used to pay dividends on our common stock, $5.8 million used to purchase investments, $4.3 million used to pay the 2021 Note issuance costs and $2.2 million of net cash used in operating activities.

Cash and cash equivalents decreased $24.7 million during the six months ended June 30, 2020 due to $179.0 million used to repay our debt, $26.4 million used to repurchase our common stock, $10.3 million used to pay dividends on our common stock, $4.6 million used to pay the June 2020 Notes issuance costs and $1.2 million used in other activities.

These decreases were partly offset by $150.0 million of proceeds from the issuance of the June 2020 Notes, $19.4 million of net cash provided by operating activities, $16.4 million of proceeds from held-to-maturity

Cash and cash equivalents increased $54.5 million during the nine months ended September 30, 2021 due to $150.0 million of proceeds received from the issuance of the 2021 Notes, $50.1 million of net cash provided by operating activities, $11.0 million of proceeds from the sale of securities owned and $0.3 million provided by other activities.

These increases were partly offset by $97.6 million used to purchase securities owned, $34.5 million used to repurchase our common stock, $14.7 million used to pay dividends on our common stock, $5.8 million used to purchase investments and $4.3 million used to pay the 2021 Note issuance costs.

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, $34.7 million used to purchase securities owned, $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 the June 2020 Notes issuance costs and $0.4 million used in other activities.

These decreases were partly offset by $175.3 million of proceeds from the issuance of the June 2020 Notes, $32.1 million of net cash provided by operating activities, $18.1 million of proceeds from the sale of securities owned, $16.4 million of proceeds from held-to-maturity

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

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

On June 16, 2020, we issued and sold $150.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 (the “June 2020 Notes”) pursuant to an indenture dated June 16, 2020, between us and the trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A.

On June 16, 2020, we issued and sold $150.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due

2023 (the “June 2020 Notes”) pursuant to an indenture dated June 16, 2020, between us and the trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A.

On August 13, 2020, we issued and sold $25.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 at a price equal to 101% of the principal amount thereof, plus interest deemed to have accrued since June 16, 2020, and constitute a further issuance of, and form a single series with, our June 2020 Notes (the “August 2020 Notes” and together with the June 2020 Notes, the “2020 Notes”).

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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 June 30, 2021 was approximately $12.4 million in the aggregate.

However, certain of our international subsidiaries are required to maintain a minimum level of regulatory capital, which at September 30, 2021 was approximately $12.4 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 June 30, 2021, we repurchased 4,630,733 shares of our common stock under the repurchase program for an aggregate cost of $31.9 million.

At June 30, 2021, $17.7 million remained under this program for future purchases.

There were no shares repurchased during the three months ended September 30, 2021.

At September 30, 2021, $17.7 million remained under this program for future purchases.

Contractual Obligations

Convertible Notes

At June 30, 2021, we had $325.0 million aggregate principal amount of Convertible Notes outstanding, of which $175.0 million are scheduled to mature on June 15, 2023 and $150.0 million are scheduled to mature on June 15, 2026, unless earlier converted, repurchased or redeemed.

At September 30, 2021, we had $325.0 million aggregate principal amount of Convertible Notes outstanding, of which $175.0 million are scheduled to mature on June 15, 2023 and $150.0 million are scheduled to mature on June 15, 2026, unless earlier converted, repurchased or redeemed.

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

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We currently anticipate refinancing these obligations when due.

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

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

Deferred Consideration – Gold Payments

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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 $226.7 million at June 30, 2021.

The present value of the deferred consideration was $225.0 million at September 30, 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.

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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 our office space was $25.8 million at June 30, 2021.

Total future minimum lease payments with respect to our office space was $0.7 million at September 30, 2021.

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

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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 $0.1 million and $0.4 million recognized on our investment in Securrency during the three and six months ended June 30, 2021.

See Note 7 to our Consolidated Financial Statements for information regarding a gain of $0.4 million recognized on our investment in Securrency during the nine months ended September 30, 2021.

Deferred Consideration – Gold Payments

Deferred consideration represents the present value of an obligation to pay gold to a third party into perpetuity and is measured using forward-looking gold prices observed on the CMX exchange, a selected discount rate and perpetual growth rate.

The weighted average forward-looking gold price per ounce, discount rate and perpetual growth rate were $2,109, 9.0% and 1.4%, respectively, at June 30, 2021.

The weighted average forward-looking gold price per ounce, discount rate and perpetual growth rate were $2,093, 9.0% and 1.4%, respectively, at September 30, 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 June 30, 2021, we reported a gain on deferred consideration – gold payments of $0.5 million.

During the three months ended September 30, 2021, we reported a gain on deferred consideration – gold payments of $1.7 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 $23.7 million and a 1 percentage point increase in the perpetual growth rate would have reduced this reported gain by $20.7 million.

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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

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

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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