What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-05 · 132 added, 349 removed, 317 unchanged (60% of the section changed)

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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 and our Quarterly Report on Form 10-Q

for the quarter ended June 30, 2021.

1 on Form 10-K/A

to our Annual Report on Form 10-K

for the fiscal year ended December 31, 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 $72.8 billion globally as of September 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).

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 in 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 are an asset management company in the business of offering transparent financial exposures to our clients and are a leading global ETP sponsor based on assets under management, or AUM, with AUM of $79.4 billion as of March 31, 2022.

More recently, we have been positioning ourselves to expand beyond our existing ETP business by leveraging blockchain technology, digital assets and principles of decentralized finance, or DeFi, to deliver transparency, choice and inclusivity to customers and consumers around the world.

Our family of ETPs includes providing exposure to equities, commodities, fixed income, leveraged and inverse, currency, cryptocurrency and alternative strategies.

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.

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

We are at the forefront of innovation and have differentiated ourselves through continued investments in technology-enabled and research-driven solutions such as our Advisor Solutions program, which includes portfolio construction, asset allocation, practice management services and digital tools for financial advisors.

We seek to usher in the next chapter of financial services by introducing new revenue streams and expanding our offerings to include a new financial services mobile application, branded WisdomTree Prime ™

, a digital wallet that is native to the blockchain and being developed for saving, spending and investing in both native crypto assets and tokenized versions of mainstream financial assets (e.g., blockchain enabled investment funds).

We also are planning to launch asset- and fund-tokenization products beginning with a dollar token, gold token and digital short term treasury fund which will be available on multiple public and permissioned blockchains, leveraging federal and state regulated entities.

As we pursue our digital assets strategy, we are embracing a concept we refer to as “responsible DeFi,” which we believe upholds the foundational principles of regulation in this innovative and quickly evolving space.

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

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on September 6, 2005.

Digital Assets – Developments

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

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 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 September 30, 2020, June 30, 2021 and September 30, 2021:

The chart below sets forth the asset mix of our ETPs at March 31, 2021, December 31, 2021 and March 31, 2022:

Market Environment

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.

During the first quarter of 2022, the U.S.

and Eurozone markets declined and inflationary pressures rose.

Commodity prices surged following the Russian invasion of the sovereign territory of Ukraine and this contributed to a further increase in inflation as well as supply chain disruption.

Emerging markets were negatively affected by renewed COVID-19

Gold prices increased during the quarter.

The S&P 500, MSCI EAFE (local currency) and MSCI Emerging Markets Index (U.S.

dollar) decreased by 4.6%, 3.6% and 6.9%, respectively, while gold prices increased 6.7% during the quarter.

In addition, the European and Japanese equities markets both depreciated with the MSCI EMU Index and MSCI Japan Index decreasing 9.1% and 1.4%, respectively, in local currency terms for the quarter.

Also, the U.S.

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listed ETF Industry Flows

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 $38.0 billion for the three months ended September 30, 2021.

Equities and fixed income gathered the majority of those flows.

listed ETF industry net flows for the three months ended March 31, 2022 were $199.0 billion.

equity gathered the majority of those flows.

International ETP Industry Flows

International ETP industry net flows were $47.8 billion for the three months ended March 31, 2022.

Equities gathered the majority of those flows.

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.

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.

listed ETFs’ AUM increased from $48.2 billion at December 31, 2021 to $48.6 billion at March 31, 2022 due to net inflows, partly offset by market depreciation.

European Listed ETPs

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.

Our European listed ETPs’ AUM increased from $29.3 billion at December 31, 2021 to $30.8 billion at March 31, 2022 primarily due to market appreciation, partly offset by net outflows.

Consolidated Operating Results

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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.

– We recorded operating revenues of $78.4 million during the three months ended March 31, 2022, up 10% from the three months ended March 31, 2021 due to higher average AUM, partly offset by a lower average advisory fee.

Operating Expenses

– 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.

– Total operating expenses increased 15.3% from the three months ended March 31, 2021 to $60.7 million primarily due to expenses incurred in responding to the activist campaign by ETFS Capital Limited and Lion Point Capital, LP (collectively, the “Investor Group”), as evidenced by their Schedule 13D initially filed on January 24, 2022, and thereafter amended (the “activist campaign”), higher compensation arising from increased headcount, higher fund management and administration costs, as well as higher marketing expenses, third-party distribution fees and sales and business development expenses.

These increases were partly offset by lower occupancy expenses.

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.

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.

– 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, 2022 and 2021, the (losses)/gains on revaluation of deferred consideration – gold payments were ($17.0) million and $2.8 million, respectively.

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

indemnification asset of $19.9 million and $5.2 million during the three months ended March 31, 2022 and 2021, respectively.

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

In addition, during the three months ended March 31, 2022 we recognized losses on our securities owned of $5.1 million.

Net (loss)/income

– We reported net loss of ($10.3) million during the three months ended March 31, 2022, compared to net income of $15.1 million during the three months ended March 31, 2021.

The change was impacted by an unfavorable change related to the revaluation of deferred consideration – gold payments of $19.8 million, losses on our securities owned and the change in revenues and expenses described above.

Key Operating Statistics

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Three Months Ended

Nine Months Ended

September 30,

GLOBAL ETPs (in millions)

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

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Selected Operating and Financial Information

Three Months Ended

September 30,

Global AUM (in millions)

Average global AUM

AUM (in millions)

Operating Revenues (in thousands)

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

Average Global AUM

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.

Our average AUM increased 11.8% from $69.6 billion at March 31, 2021 to $77.8 billion at March 31, 2022 due to market appreciation and net inflows.

Operating Revenues

Advisory fees

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.

Advisory fee revenues increased 9.2% from $70.0 million during the three months ended March 31, 2021 to $76.5 million in the comparable period in 2022 due to higher average AUM, partly offset by a lower average advisory fee.

Our average advisory fee was 0.40% during the three months ended March 31, 2022 and 0.41% during the same period in 2021.

Other income increased 52.5% from $1.2 million during the three months ended March 31, 2021 to $1.9 million in the comparable period in 2022 primarily due to higher fees associated with our European listed products.

Operating Expenses

Three Months Ended

September 30,

(in thousands)

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Three Months Ended

September 30,

As a Percent of Revenues:

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Compensation and benefits

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.

Compensation and benefits expense increased 9.5% from $22.6 million during the three months ended March 31, 2021 to $24.8 million in the comparable period in 2022 due to increased headcount.

Headcount was 227 and 253 at March 31, 2021 and 2022, respectively.

Fund management and administration

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.

Fund management and administration expense increased 11.1% from $13.9 million during the three months ended March 31, 2021 to $15.5 million in the comparable period in 2022 due to higher average AUM.

Marketing and advertising

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

Marketing and advertising expense increased 33.8% from $3.0 million during the three months ended March 31, 2021 to $4.0 million in the comparable period in 2022 primarily due to higher spending on online marketing campaigns.

Sales and business development

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.

Sales and business development expense increased 21.6% from $2.1 million during the three months ended March 31, 2021 to $2.6 million in the comparable period in 2022 primarily due to higher spending on conferences and market data.

Contractual gold payments

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.

Contractual gold payments expense increased 4.2% from $4.3 million during the three months ended March 31, 2021 to $4.5 million in the comparable period in 2022.

This expense was associated with the payment of 2,375 ounces of gold and was calculated using the average daily spot price of $1,798 and $1,874 per ounce during the three months ended March 31, 2021 and 2022, respectively.

Professional fees

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.

Professional fees increased 121.5% from $2.0 million during the three months ended March 31, 2021 to $4.5 million in the comparable period in 2022 due to expenses incurred in response to the activist campaign by the Investor Group.

Occupancy, communications and equipment

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.

Occupancy, communications and equipment expense decreased 48.9% from $1.5 million during the three months ended March 31, 2021 to $0.8 million in the comparable period in 2022 due to the termination of our New York office lease in September 2021.

Depreciation and amortization

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

Depreciation and amortization expense decreased 81.3% from $0.3 million during the three months ended March 31, 2021 to $0.05 million in the comparable period in 2022 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 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.

Third-party distribution fees increased 64.7% from $1.3 million during the three months ended March 31, 2021 to $2.2 million in the comparable period in 2022 primarily due to higher AUM in Latin America resulting in higher fees paid to our third-party marketing agent, as well as new platform relationships in Europe.

Other expenses were essentially unchanged from the three months ended March 31, 2021.

Other Income/(Expenses)

Three Months Ended

September 30,

(in thousands)

Interest expense

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

(Loss)/gain on revaluation of deferred consideration – gold payments

Interest income

Other losses and gains, net

Other losses, net

Total other expenses, net

Three Months Ended

September 30,

As a Percent of Revenues:

Interest expense

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

Interest income

Other losses and gains, net

Total other expenses, net

Interest expense

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 ($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 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 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

Nine Months Ended

September 30,

Global AUM (in millions)

Average global AUM

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 23.0% 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 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

Nine Months Ended

September 30,

(in thousands)

Compensation and benefits

Fund management and administration (1)

Marketing and advertising

Sales and business development

Contractual gold payments

Professional fees

Occupancy, communications and equipment

Depreciation and amortization

Third-party distribution fees

Acquisition and disposition-related costs

Total operating expenses

Nine Months Ended

September 30,

As a Percent of Revenues:

Compensation and benefits

Fund management and administration (1)

Marketing and advertising

Sales and business development

Contractual gold payments

Professional fees

Occupancy, communications and equipment

Depreciation and amortization

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 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 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 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 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 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 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 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 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 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 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)

Nine Months Ended

September 30,

(in thousands)

Interest expense

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

Interest income

Loss on extinguishment of debt

Other losses and gains, net

Total other expenses, net

Nine Months Ended

September 30,

As a Percent of Revenues:

Interest expense

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

(Loss)/gain on revaluation of deferred consideration – gold payments

Interest income

Loss on extinguishment of debt

Other losses and gains, net

Other losses, net

Total other expenses, net

Interest expense

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 ($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.

Interest expense increased 62.5% from $2.3 million during the three months ended March 31, 2021 to $3.7 million in the comparable period in 2022 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 March 31, 2021 and 2022 was 5.3% and 4.6%, respectively.

(Loss)/gain on revaluation of deferred consideration

We recognized a gain on revaluation of deferred consideration of $2.8 million during the three months ended March 31, 2021 as compared to a loss of ($17.0) million during the three months ended March 31, 2022.

The loss in the current quarter was due to higher 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 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 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 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 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.

Interest income increased 243.7% from $0.2 million during the three months ended March 31, 2021 to $0.8 million in the comparable period in 2022 due to an increase in securities owned.

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

There were no impairment charges recognized in the comparable period in 2022.

Other losses, net

Other losses, net were $5.9 million and $24.7 million during the three months ended March 31, 2021 and 2022, respectively.

The three months ended March 31, 2022 includes a non-cash

charge of $19.9 million arising from the release of a tax-related

indemnification asset due to a favorable resolution to certain tax audits as well as the expiration of the statute of limitations (an equal and offsetting benefit was recognized in income tax expense) and losses on securities owned of $5.1 million.

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

indemnification asset upon the expiration of the statute of limitations (an equal and offsetting benefit was 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.

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 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

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

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

gain recognized upon sale of our Canadian ETF business in the first quarter of 2020, a tax benefit of $2.8 million recognized in connection with the release of a deferred tax asset valuation allowance on interest carryforwards arising from our debt previously held in the United Kingdom and a lower tax rate on foreign earnings.

Our effective income tax rate for the three months ended March 31, 2022 of 62.0% resulted in an income tax benefit of $16.7 million.

Our tax rate differs from the federal statutory rate of 21% primarily due to a $19.9 million reduction in unrecognized tax benefits (including interest and penalties), a lower tax rate on foreign earnings and tax windfalls associated with the vesting of stock-based compensation awards.

These items were partly offset by a non-taxable

loss on revaluation of deferred consideration and an increase in the deferred tax asset valuation allowance on losses recognized on securities owned.

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 tax rate of 21% primarily due to a $5.2 million reduction in unrecognized tax benefits (including interest and penalties), 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.

Financial Measurements

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financial measurements contained in this Report include:

net income and adjusted diluted earnings per share.

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

Adjusted Operating Income, Operating Expenses, Income Before Income Taxes, Income Tax Expense, Net Income and Diluted Earnings per Share

We disclose adjusted operating income, operating expenses, income before income taxes, income tax expense, net income and diluted earnings per share as non-GAAP

financial measurements in order to report our results exclusive of items that are non-recurring

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We believe presenting these non-GAAP

financial measures provides investors with a consistent way to analyze our performance.

financial measurements provides investors with a consistent way to analyze our performance.

These non-GAAP

financial measures exclude the following:

financial measurements exclude the following:

Unrealized gains or losses on the revaluation of deferred consideration:

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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.

We exclude this item when calculating our non-GAAP

financial measurements 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.

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.

We account for 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

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These items arise upon the vesting and exercise of stock-based compensation awards and the magnitude is directly correlated to the number of awards vesting/exercised as well as the difference between the price of our stock on the date the award was granted and the date the award vested or was exercised.

We exclude these items when determining adjusted net income and adjusted diluted earnings per share as they introduce volatility in earnings and are not core to our operating business.

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)

, a loss on extinguishment of debt, the release of a deferred tax asset valuation allowance recognized on interest carryforwards arising from our debt previously outstanding in the United Kingdom, a gain arising from an adjustment to the estimated fair value of consideration received from the exit of our investment in AdvisorEngine, a gain recognized upon the sale of our Canadian ETF business and acquisition and disposition-related costs are excluded when calculating our non-GAAP

financial measurements.

We exclude these items when calculating our non-GAAP

financial measurements as they introduce volatility in earnings and are not core to our operating business.

Unrealized gains and losses recognized on our investments, changes in the deferred tax asset valuation allowance on securities owned, expenses incurred in response to the activist campaign by the Investor Group, impairment charges and the remeasurement of contingent consideration payable to us from the sale of our Canadian ETF business.

Three 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

Net (loss)/income, as reported

Add back/Deduct:

Loss/(gain) on revaluation of deferred consideration

Increase in deferred tax asset valuation allowance on securities owned

Losses on securities owned, net of income taxes

Expenses incurred in response to the activist campaign by the Investor Group, net of income taxes

Deduct/Add back:

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

Loss on extinguishment of debt, net of income taxes

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

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

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

Acquisition and disposition-related costs, net of income taxes

Add back/Deduct:

Unrealized loss/(gain) recognized on our investments, net of income taxes

Impairments, net of income taxes

Adjusted net income

Income distributed to participating securities

Undistributed income allocable to participating securities

Adjusted net income available to common stockholders

Weighted average diluted shares, excluding participating securities (in thousands) (See Note 19 to our Consolidated Financial Statements)

Weighted average common shares - diluted

Adjusted earnings per share - diluted

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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

Nine Months Ended September 30,

Three Months Ended

Cash Flow Data (in thousands):

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Foreign exchange rate effect

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.

Decrease in cash and cash equivalents

Cash flows from purchasing securities owned, at fair value of ($1,657) and selling securities owned, at fair value of $1,232 during the three months ended March 31, 2021 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.

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Our current liabilities consist primarily of payments owed to vendors and third parties in the normal course of business, deferred consideration and accrued incentive compensation for employees.

Cash and cash equivalents 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.

Cash and cash equivalents decreased $30.3 million during the three months ended March 31, 2022 due to $25.5 million used to purchase securities owned, $6.9 million used to purchase investments, $4.8 million used to pay dividends on our common stock, $3.4 million used to repurchase our common stock, $2.7 million of net cash used in operating activities and $0.6 million used in other activities.

These decreases were partly offset by $13.6 million of proceeds from the sale of securities owned.

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, $2.6 million used to repurchase our common stock and $1.7 million used to purchase investments.

These decreases were partly offset by $2.3 million provided by operating activities, $1.2 million of proceeds from the sale of securities owned and $0.1 provided by other activities.

Issuance of Convertible Notes

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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 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”).

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, which 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”).

After the issuance of the 2021 Notes (and together with the 2020 Notes, the “Convertible Notes”), we had $325.0 million aggregate principal amount of Convertible Notes outstanding.

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Conversion price

Convertible at an initial conversion rate of our common stock, per $1,000 principal amount of notes (equivalent to an initial conversion price as disclosed in the table above).

Convertible at an initial conversion rate (as disclosed in the table above) of shares of our common stock per $1,000 principal amount of notes (equivalent to an initial conversion price as disclosed in the table above).

Holders may convert at their option at any time prior to the close of business on the business day immediately preceding March 15, 2026 and March 15, 2023 in respect of the 2021 Notes and 2020 Notes, respectively, only under the following circumstances:

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Upon conversion, we will pay cash up to the aggregate principal amount of the Convertible Notes to be converted.

At our election, we will also settle our conversion obligation in excess of the aggregate principal amount 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

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Seniority and Security

The 2021 Notes and 2020 Notes rank equal in right of payment, and 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 12 to our Consolidated Financial Statements).

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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 September 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 March 31, 2022 was approximately $12.6 million in the aggregate.

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

We also maintain a capital return program which includes a $0.03 per share quarterly cash dividend and authority to purchase our common stock through April 27, 2025, including purchases to offset future equity grants made under our equity plans.

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.

During the three months ended March 31, 2022, we repurchased 588,694 shares of our common stock under the repurchase program for an aggregate cost of $3.4 million.

Currently, $100.0 million remains under this program for future purchases.

Contractual Obligations

Convertible Notes

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.

At March 31, 2022, 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.

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 these obligations when due.

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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 $225.0 million at September 30, 2021.

The present value of the deferred consideration was $245.2 million at March 31, 2022.

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

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

Total future minimum lease payments with respect to our office space was $0.5 million at March 31, 2022.

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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Goodwill is assessed for impairment annually on November 30 th

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

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

The results of our analysis indicated no impairment based upon a quantitative assessment.

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

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Otherwise, 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 $0.4 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 $2,093, 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 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.

The weighted average forward-looking gold price per ounce, discount rate and perpetual growth rate were $2,263, 9.0% and 0.9%, respectively, at March 31, 2022.

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

During the three months ended March 31, 2022, we reported a loss on deferred consideration – gold payments of $17.0 million.

A 1.0% increase in the weighted average forward-looking gold price per ounce would have increased this reported loss by $1.9 million, a 1 percentage point increase in the discount rate would have reduced this reported loss by $24.7 million and a 1 percentage point increase in the perpetual growth rate would have increased this reported loss by $21.7 million.

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

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

Recently 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, reducing accumulated deficit 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 11 to our Consolidated Financial Statements for additional information.

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

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

(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

(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.

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