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Income Taxes
 9 Months Ended
Sep. 30, 2021
Income Tax Disclosure [Abstract]  
Income Taxes
20. Income Taxes
Effective Income Tax Rate – Three and Nine Months Ended September 30, 2021
The Company’s effective income tax rate during the three months ended September 30, 2021 of 7.9% resulted in income tax expense of $500. The 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.
The Company’s effective income tax rate for the nine months ended September 30, 2021 of 6.7% resulted in income tax expense of $2,790. The effective income tax rate differs from the federal statutory rate of 21% primarily due to a $5,171 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.
Effective Income Tax Rate – Three and Nine Months Ended September 30, 2020
The Company’s effective income tax rate during the three months ended September 30, 2020 of 123.7% resulted in an income tax expense of $1,408. The effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a
non-deductible
loss on revaluation of deferred consideration. This loss was partly offset by a lower tax rate on foreign earnings.
The Company’s effective income tax rate for the nine months ended September 30, 2020 of 7.4% resulted in an income tax benefit of $1,767. The 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 $5,981 reduction in unrecognized tax benefits, a $2,877
non-taxable
gain recognized upon sale of the Canadian ETF business in the first quarter of 2020, a tax benefit of $2,842 recognized in connection with the release of a deferred tax asset valuation allowance on interest carryforwards arising from the Company’s debt previously held in the United Kingdom and a lower tax rate on foreign earnings.
Deferred Tax Assets
A summary of the components of the Company’s deferred tax assets at September 30, 2021 and December 31, 2020 are as follows:
 
    
September 30,

2021
     
December 31,

2020
  
Deferred tax assets:
                  
Capital losses
    $ 16,368      $ 16,596  
Accrued expenses
      3,560        3,507  
NOLs – Foreign
      2,016        2,167  
Goodwill and intangible assets
      1,323        1,466  
Interest carryforwards
      1,223        2,235  
Stock-based compensation
      1,045        1,922  
Unrealized losses
      467        15  
NOLs – U.S.
      382        510  
Outside basis differences
      122        122  
Operating lease liabilitie
s
 
 
— 
 
 
 
 
4,953
 
Othe
r
 
 
315
 
 
 
96
 
Deferred tax assets
 
 
26,821
 
 
 
33,589
 
 
Deferred tax liabilities:
 
         
Fixed assets and prepaid assets
      267        1,261  
Foreign currency translation adjustment
      226        293  
Unremitted earnings – International subsidiaries
      185        138  
Right of use assets – operating leases
      —          3,927  
Allocated equity component of convertible notes
      —          1,022  
    
 
 
     
 
 
  
Deferred tax liabilitie
s
      678        6,641  
    
 
 
     
 
 
  
Total deferred tax assets less deferred tax liabilities
      26,143        26,948  
Less: valuation allowance
      (18,507 )       (18,885 ) 
    
 
 
     
 
 
  
Deferred tax assets, net
    $ 7,636      $ 8,063  
    
 
 
     
 
 
  
Net Operating and Capital Losses – U.S
.
The Company’s tax effected net operating losses (“NOLs”) at September 30, 2021 were $382 which expire in 2024. The net operating loss carryforwards have been reduced by the impact of annual limitations described in the Internal Revenue Code Section 382 that arose as a result of an ownership change.
The Company’s tax effected capital losses were $16,368 at September 30, 2021. These capital losses expire between the years 2023 and 2025.
Net Operating Losses – International
One of the Company’s European subsidiar
ie
s generated NOLs outside the U.S. These tax effected NOLs, all of which are carried forward indefinitely, were $2,016 at September 30, 2021.
Valuation Allowance
The Company’s valuation allowance has been established on its net capital losses, international net operating losses and outside basis differences, as it is
more-likely-than-not
that these deferred tax assets will not be realized.
Uncertain Tax Positions
Tax positions are evaluated utilizing a
two-step
process. The Company first determines whether any of its tax positions are
more-likely-than-not
to be sustained upon examination, based solely on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
In connection with the ETFS Acquisition, the Company accrued a liability for uncertain tax positions and interest and penalties at the acquisition date. The table below sets forth the aggregate changes in the balance of these gross unrecognized tax benefits during the three and nine months ended September 30, 2021:
 
    
Total
     
Unrecognized
Tax Benefits
     
Interest and
Penalties
  
Balance on January 1, 2021
    $ 27,016      $ 21,850      $ 5,166  
Decrease
-
 Lapse of statute of limitations
(1)
      (5,171 )       (3,559 )       (1,612 ) 
Increases
      39        —          39  
Foreign currency translation
(2)
      338        273        65  
    
 
 
     
 
 
     
 
 
  
Balance at March 31, 2021
    $ 22,222      $ 18,564      $ 3,658  
Increases
      40        —          40  
Foreign currency translation
(2)
      165        138        27  
    
 
 
     
 
 
     
 
 
  
Balance at June 30, 2021
    $ 22,427      $ 18,702      $ 3,725  
Increases
      39        —          39  
Foreign currency translation
(2)
      (594 )       (496 )       (98 ) 
    
 
 
     
 
 
     
 
 
  
Balance at September 30, 2021
    $ 21,872      $ 18,206      $ 3,666  
    
 
 
     
 
 
     
 
 
  
 
(1)
Recorded as an income tax benefit of $5,171 during the nine months ended
September 
30, 2021, along with an equal and offsetting amount recorded in other gains and losses, net, to recognize a reduction in the indemnification asset. During the nine months ended September 30, 2020, an income tax benefit of $5,981 was recorded along with an equal and offsetting amount in other gains and losses, net.
(2)
The gross unrecognized tax benefits were accrued in British pounds.
 
The Company also recorded an offsetting indemnification asset provided by ETFS Capital as part of its agreement to indemnify the Company for any potential claims, for which an amount is being held in escrow. ETFS Capital has also agreed to provide additional collateral by maintaining a minimum working capital balance up to a stipulated amount.
The gross unrecognized tax benefits and interest and penalties totaling $21,872 at September 30, 2021 are included in other
non-current
liabilities on the Company’s Consolidated Balance Sheets. It is reasonably possible that the total amount of unrecognized tax benefits will decrease by $6,995 (including interest and penalties of $2,041) in the next 12 months upon lapsing of the statute of limitations.
At September 30, 2021, there were $21,872 of unrecognized tax benefits (including interest and penalties) that, if recognized, would impact the effective tax rate. The recognition of any unrecognized tax benefits would result in an equal and offsetting adjustment to the indemnification asset which would be recorded in income before taxes due to the indemnity for any potential claims.
Income Tax Examinations
The Company is subject to U.S. federal income tax as well as income tax of multiple state, local and certain foreign jurisdictions. ManJer’s tax returns (a Jersey-based subsidiary) for the years ended December 31, 2014 through 2016 are currently under review by the relevant tax authorities. The Company is indemnified by ETFS Capital for any potential exposure associated with ManJer’s tax return under audit.
The Company is not currently under audit in any other income tax jurisdictions. As of September 30, 2021, with few exceptions, the Company was no longer subject to income tax examinations by any taxing authority for years before 2016.
Undistributed Earnings of Foreign Subsidiaries
ASC
740-30
Income Taxes
, provides guidance that US companies do not need to recognize tax effects on foreign earnings that are indefinitely reinvested. The Company repatriates earnings of its foreign subsidiaries and therefore has recognized a deferred tax liability of $185 and $138 at September 30, 2021 and December 31, 2020, respectively.