Income Taxes

3 Months Ended

Mar. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

19. Income Taxes

Effective Income Tax Rate – Three Months Ended March 31, 2021 and March 31, 2020

The Company’s effective income tax rate for the three months ended March 31, 2021 of negative 14.9% resulted in an income tax benefit of $1,969. The Company’s effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a $5,171 reduction in unrecognized tax benefits, a non-taxable gain on revaluation of deferred consideration and a lower tax rate on foreign earnings, partly offset by tax shortfalls associated with the vesting and exercise of stock-based compensation awards.

The Company’s effective income tax rate for the three months ended March 31, 2020 of 21.5% resulted in an income tax benefit of $2,371. The Company’s effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a $5,981 reduction in unrecognized tax benefits, a $2,877 non-taxable gain recognized upon the sale of the Company’s Canadian ETF business and a lower tax rate on foreign earnings, partly offset by a valuation allowance on capital losses, tax shortfalls associated with the vesting and exercise of stock-based compensation and a non-deductible loss on revaluation of deferred consideration.

Deferred Tax Assets

A summary of the components of the Company’s deferred tax assets at March 31, 2021 and December 31, 2020 are as follows:

	March 31, 2021			December 31, 2020
Deferred tax assets:
Capital losses	$	16,596		$	16,596
Operating lease liabilities		4,851			4,953
Interest carryforwards		2,184			2,235
NOLs – Foreign		2,084			2,167
Goodwill and intangible assets		1,418			1,466
Accrued expenses		1,363			3,507
Stock-based compensation		1,195			1,922
NOLs – U.S.		382			510
Outside basis differences		122			122
Other		263			111
Deferred tax assets		30,458			33,589
Deferred tax liabilities:
Right of use assets – operating leases		3,848			3,927
Fixed assets and prepaid assets		1,234			1,261
Foreign currency translation adjustment		262			293
Unremitted earnings – International subsidiaries		97			138
Allocated equity component of convertible notes		—			1,022
Deferred tax liabilities		5,441			6,641
Total deferred tax assets less deferred tax liabilities		25,017			26,948
Less: valuation allowance		(18,802	)		(18,885	)
Deferred tax assets, net	$	6,215		$	8,063

Net Operating and Capital Losses – U.S.

The Company’s tax effected net operating losses (“NOLs”) at March 31, 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 $16,596 at March 31, 2021 and December 31, 2020. These capital losses expire between the years 2023 and 2025.

Net Operating Losses – International

One of the Company’s European subsidiary’s generated NOLs outside the U.S. These tax effected NOLs, all of which are carried forward indefinitely, were $2,084 and $2,167 at March 31, 2021 and December 31, 2020, respectively. 

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 months ended March 31, 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

(1) Recorded as an income tax benefit of $5,171 during the three months ended March 31, 2021, along with an equal and offsetting amount recorded in other losses, net, to recognize a reduction in the indemnification asset. During the three months ended March 31, 2020, an income tax benefit of $5,981 was recorded along with an equal and offsetting amount in other 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 $22,222 at March 31, 2021 are included in other non-current liabilities on the Consolidated Balance Sheets. It is reasonably possible that the total amount of unrecognized tax benefits will decrease by $7,067 (including interest and penalties of $2,016) in the next 12 months upon lapsing of the statute of limitations.

At March 31, 2021, there were $22,222 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. The Company’s federal tax return for the year ended December 31, 2016 and 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 March 31, 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 $97 and $138 at March 31, 2021 and December 31, 2020, respectively.