VS Trust 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This information should be read in conjunction with the financial statements and notes to the financial statements included with this Annual Report on Form 10-K. The discussion and analysis that follows may contain statements that relate to future events or future performance. In some cases, such forward- looking statements can be identified by terminology such as “will,” “may,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “intend,” “project,” “seek” or the negative of these terms or other comparable terminology. None of the Trust, the Sponsor, the Commodity Sub- Adviser, the Trustee, or the Administrator assumes responsibility for the accuracy or completeness of any forward-looking statements. Except as expressly required by federal securities laws, none of the Trust, the Sponsor, the Commodity Sub-Adviser, the Trustee, or the Administrator is under a duty to update any of the forward-looking statements to conform such statements to actual results or to a change in expectations or predictions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risk and changes in circumstances that are difficult to predict and many of which are outside of the Funds’ control. The Funds’ forward-looking statements are not guarantees of future results and conditions and important factors, risks and uncertainties in the markets for financial instruments that the Funds trade, in the markets for related physical commodities, in the legal and regulatory regimes applicable to the Sponsor, the Funds, and the Funds’ service providers, and in the broader economy may cause the Funds’ actual results to differ materially from those expressed in forward-looking statements. Liquidity and Capital Resources In order to collateralize derivatives positions, a portion of the NAV of each Fund is held in cash and/or U.S. Treasury securities, agency securities, or other high credit quality short term fixed-income or similar securities (such as shares of money market funds, bank deposits, bank money market accounts, certain variable rate-demand notes and repurchase agreements collateralized by government securities). A portion of these investments may be posted as collateral in connection with swap agreements, futures, and/or forward contracts. The percentage that U.S. Treasury bills and other short-term fixed-income securities bear to the shareholders’ equity of each Fund varies from period to period as the market values of the underlying swaps, futures contracts and forward contracts change. During the year ended December 31, 2023 and December 31, 2022, each of the Funds earned total income as follows: Fund Total Income Year Ended December 31, 2023 Total Income Year Ended December 31, 2022 -1x Short VIX Futures ETF $ 521,465 $ 134,777 2x Long VIX Futures ETF 967,916 306,187 Each Fund’s underlying swaps, futures, options, forward contracts and foreign currency forward contracts, as applicable, may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, swaps and forward contracts are not traded on an exchange, do not have uniform terms and conditions, and in general are not transferable without the consent of the counterparty. In the case of futures contracts, commodity exchanges may limit fluctuations in certain futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no futures trades may be executed at prices beyond the daily limit. Once the price of a futures contract has increased or decreased by an amount equal to the daily limit, positions in such futures contracts can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Futures contract prices have occasionally moved to the daily limit for several consecutive days with little or no trading. Such market conditions could prevent a Fund from promptly liquidating its futures positions. 20 In addition, the Sponsor will seek to minimize the market impact of rebalances across all exchange traded products based on VIX futures contracts (“VIX ETPs”) that it sponsors on the price of VIX futures contracts by limiting the Funds’ participation, on any given day, in VIX futures contracts to no more than 10% of the VIX futures contracts traded on Cboe Futures Exchange, Inc. (“CFE”) during any “Rebalance Period,” defined as any fifteen minute period of continuous market trading. To limit participation during periods of market illiquidity, the Sponsor, on any given day, may vary the manner and period over which all VIX ETPs it sponsors are rebalanced, and as such, the manner and period over which the Funds are rebalanced. The Sponsor believes that a Fund will enter an extended rebalance period most often during periods of extraordinary market conditions or illiquidity in VIX futures contracts. In the event that the Fund participates in an extended rebalance period, the Fund represents that it will notify the Exchange and the SEC of such participation as soon as practicable, but no later than 9:00 a.m. ET on the trading day following the event. Entry into swap agreements or forward contracts may further impact liquidity because these contractual agreements are executed “off-exchange” between private parties and, therefore, the time required to offset or “unwind” these positions may be greater than that for exchange-traded instruments. This potential delay could be exacerbated to the extent a counterparty is not a United States person. The large size of the positions in which a Fund may acquire increases the risk of illiquidity by both making their positions more difficult to liquidate and increasing the losses incurred while trying to do so. Any type of disruption or illiquidity will potentially be exacerbated due to the fact that the Funds will typically invest in Financial Investments related to one benchmark, which in many cases is highly concentrated. Because each Fund may enter into swaps and may trade futures and forward contracts, its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). Market Risk Trading in derivatives contracts involves each Fund entering into contractual commitments to purchase or sell a commodity, currency or spot volatility product underlying such Fund’s benchmark at a specified date and price, should it hold such derivative contract into the deliverable period. Should a Fund enter into a contractual commitment to sell a physical commodity, currency or spot volatility product, it would be required to make delivery of that commodity, currency or spot volatility product at the contract price and then repurchase the contract at prevailing market prices or settle in cash. Since the repurchase price to which the value of a commodity, currency or spot volatility product can rise is unlimited, entering into commitments to sell commodities, currencies or spot volatility products would expose a Fund to theoretically unlimited risk. For more information, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report on Form 10-K. Credit Risk When a Fund enters into swap agreements, futures contracts or forward contracts, the Fund is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges as well as certain swaps is the clearing house associated with the particular exchange. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearing house is not backed by the clearing members (i.e., some foreign exchanges, which may become applicable in the future), it may be backed by a consortium of banks or other financial institutions. Certain swap and forward agreements are contracted for directly with counterparties. There can be no assurance that any counterparty, clearing member or clearing house will meet its obligations to a Fund. 21 Swap agreements do not generally involve the delivery of underlying assets either at the outset of a transaction or upon settlement. Accordingly, if the counterparty to an OTC swap agreement defaults, the Fund’s risk of loss typically consists of the net amount of payments that the Fund is contractually entitled to receive, if any. Swap counterparty risk is generally limited to the amount of any unrealized gains, although in the event of a counterparty bankruptcy, there could be delays and costs associated with the recovery of collateral posted in segregated tri-party accounts at the Fund’s custodian bank. Forward agreements do not involve the delivery of assets at the onset of a transaction, but may be settled physically in the underlying asset if such contracts are held to expiration, particularly in the case of currency forwards. Thus, prior to settlement, if the counterparty to a forward contract defaults, a Fund’s risk of loss will generally consist of the net amount of payments that the Fund is contractually entitled to receive, if any. However, if physically settled forwards are held until expiration (presently, there is no plan to do this), at the time of settlement, a Fund may be at risk for the full notional value of the forward contracts depending on the type of settlement procedures used. The Sponsor attempts to minimize certain of these market and credit risks by normally: ● executing and clearing trades with creditworthy counterparties, as determined by the Sponsor; ● limiting the outstanding amounts due from counterparties to the Funds; ● requiring that the counterparty posts collateral in amounts approximately equal to that owed to the Funds, as marked to ● market daily, subject to certain minimum thresholds; ● limiting the amount of margin or premium posted at a FCM; and ● ensuring that deliverable contracts are not held to such a date when delivery of the underlying asset could be called for. Off-Balance Sheet Arrangements and Contractual Obligations As of February 29, 2024, the Funds have not used, nor do they expect to use in the future, special purpose entities to facilitate off-balance sheet financing arrangements and have no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Funds. While each Fund’s exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on a Fund’s financial position. Management fee payments made to the Sponsor are calculated as a fixed percentage of each Fund’s NAV. As such, the Sponsor cannot anticipate the payment amounts that will be required under these arrangements for future periods as NAVs are not known until a future date. The agreement with the Sponsor may be terminated by either party upon 30 days written notice to the other party. 22 Critical Accounting Policies Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate accounting rules and guidance, as well as the use of estimates. The Trust’s and the Funds’ application of these policies involves judgments and actual results may differ from the estimates used. Each Fund has significant exposure to Financial Instruments. The Funds hold a significant portion of their assets in swaps, futures, forward contracts or foreign currency forward contracts, all of which are recorded on a trade date basis and at fair value in the financial statements, with changes in fair value reported in the Statements of Operations. The use of fair value to measure Financial Instruments, with related unrealized gains or losses recognized in earnings in each period, is fundamental to the Trust’s and the Funds’ financial statements. The fair value of a Financial Instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). For financial reporting purposes, the Funds value investments based upon the closing price in their primary markets. Accordingly, the investment valuations in these financial statements may differ from those used in the calculation of certain Funds’ final creation/redemption NAV for the year ended December 31, 2023. Short-term investments are valued at amortized cost which approximates fair value for daily NAV purposes. For financial reporting purposes, short- term investments are valued at their market price using information provided by a third-party pricing service or market quotations. Derivatives (e.g., futures contracts, options, swap agreements, forward agreements and foreign currency forward contracts) are generally valued using independent sources and/or agreements with counterparties or other procedures as determined by the Sponsor. Futures contracts, except for those entered into by the Gold, Silver, Australian Dollar and Short Euro Funds, are generally valued at the last settled price on the applicable exchange on which that future trades. Futures contracts entered into by the Gold, Silver, Fair value pricing may require subjective determinations about the value of an investment. While each Fund’s policy is intended to result in a calculation of the Fund’s NAV that fairly reflects investment values as of the time of pricing, the Funds cannot ensure that fair values determined by the Sponsor or persons acting at their direction would accurately reflect the price that the Fund could obtain for an investment if it were to dispose of that investment as of the time of pricing (for instance, in a forced or distressed sale). The prices used by a Fund may differ from the value that would be realized if the investments were sold and the differences could be material to the financial statements. The Funds disclose the fair value of their investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Discounts on short-term securities purchased are amortized and reflected as Interest Income in the Statements of Operations. Realized gains (losses) and changes in unrealized gain (loss) on open investments are determined on a specific identification basis and recognized in the Statements of Operations in the period in which the contract is closed or the changes occur, respectively. Each Fund pays its respective brokerage commissions, including applicable exchange fees, NFA fees, give up fees, pit futures account fees and other transaction related fees and expenses charged in connection with trading activities for each Fund’s investment in U.S. Commodity Futures Trading Commission regulated investments. Brokerage commissions on futures contracts are recognized on a half-turn basis. 23 Results of Operations for the Years Ended December 31, 2023 and December 31, 2022 -1x Short VIX Futures ETF Fund Performance The following table provides summary performance information for the Fund for the year ended December 31, 2023 and December 31, 2022: Year Ended December 31, 2023 Year Ended December 31, 2022 NAV beginning of period $ 46,378,603 $ - NAV end of period $ 125,057,419 $ 46,378,603 Percentage change in NAV 170 % 100 % Shares outstanding beginning of period 3,170,000 - Shares outstanding end of period 3,310,000 3,170,000 Percentage change in shares outstanding 4 % 100 % Shares created 13,120,000 16,980,000 Shares redeemed (12,980,000 ) (13,810,000 ) Per share NAV beginning of period $ 14.63 $ 15.00 Per share NAV end of period $ 37.78 $ 14.63 Percentage change in per share NAV 158.24 % -2.5 % Percentage change in benchmark 174.77 % 5.86 % Benchmark annualized volatility 56.21 % 68.53 % The Fund’s inception of operation was March 28, 2022. Neither the Trust nor the Fund had any operations prior to March 28, 2022, other than matters relating to its organization and the registration of each series under the Securities Act of 1933. During the year ended December 31, 2023, the increase in the Fund’s NAV resulted primarily from the cumulative effect of the Fund seeking daily investment results, before fees and expenses, that correspond to the performance of the Short Index. The increase in the Fund’s NAV also resulted in part from an increase from 3,170,000 outstanding Shares at December 31, 2022 to 3,310,000 outstanding Shares at December 31, 2023. By comparison, during the year ended December 31, 2022, the increase in the Fund’s NAV resulted primarily from an increase of 3,170,000 outstanding Shares during the period. The increase in the Fund’s NAV also resulted in part from the cumulative effect of the Fund seeking daily investment results, before fees and expenses, that correspond to the performance of the Short Index. Net Income/Loss The following table provides summary income information for the Fund for the years ended December 31, 2023 and December 31, 2022: Year Ended December 31, 2023 Year Ended December 31, 2022 Net investment income (loss) $ (1,200,955 ) $ (737,456 ) Management fee 1,180,598 489,398 Brokerage commissions / Futures account fees 33,299 41,169 Non-recurring fees and expenses 508,523 341,666 Net realized gain (loss) 98,694,527 16,573,828 Change in net unrealized appreciation (depreciation) 6,013,245 1,156,106 Net income (loss) 103,506,817 16,992,478 The Fund’s net income increased for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a greater decrease in the value of the futures prices during the year ended December 31, 2023. 24 Futures Positions as of December 31, 2023 Contract Long or Short Expiration Contracts Valuation Price Contract Multiplier Notional Amount at Value CBOE VIX FUTURE Jan24 Short Jan-24 (5,055 ) 14.04 1,000 (70,972,200 ) CBOE VIX FUTURE Feb24 Short Feb-24 (3,538 ) 15.29 1,000 (54,096,020 ) Futures Positions as of December 31, 2022 (1) Contract Long or Short Expiration Contracts Valuation Price Contract Multiplier Notional Amount at Value CBOE VIX FUTURE Jan23 Short Jan-23 (1,150 ) $ 23.16 1,000 $ (26,634,000 ) CBOE VIX FUTURE Feb23 Short Feb-23 (804 ) 24.57 1,000 (19,754,280 ) (1) The Fund commenced operations on March 28, 2022. The December 31, 2023 and the December 31, 2022 futures notional values are calculated by multiplying the number of contracts held times the valuation price times the contract multiplier. The notional values will increase (decrease) proportionally with increases (decreases) in the price of the futures contract. Additional gains (losses) associated with these contracts will be equal to any such subsequent increases (decreases) in notional values, before accounting for spreads or transaction or financing costs. The Fund will generally attempt to adjust its positions in Financial Instruments each day to match the performance of the Short Index. Future period returns, before fees and expenses, cannot be estimated simply by estimating the return of the Short Index. 2x Long VIX Futures ETF Fund Performance The following table provides summary performance information for the Fund for the year ended December 31, 2023 and December 31, 2022: Year Ended December 31, 2023 Year Ended December 31, 2022 NAV beginning of period $ 125,488,766 $ - NAV end of period $ 69,664,996 $ 125,488,766 Percentage change in NAV -44 % 100.0 % Shares outstanding beginning of period 429,000 - Shares outstanding end of period 5,074,975 429,000 Percentage change in shares outstanding 1,083 % 100 % Shares created 9,477,000 727,800 Shares redeemed (4,831,025 ) (298,800 ) Per share NAV beginning of period $ 292.51 $ 750.00 Per share NAV end of period $ 13.73 $ 292.51 Percentage change in per share NAV -95.3 % -61.0 % Percentage change in benchmark -73.5 % -30.1 % Benchmark annualized volatility 56.21 % 68.53 % The Fund’s inception of operation was March 28, 2022. Neither the Trust nor the Fund had any operations prior to March 28, 2022, other than matters relating to its organization and the registration of each series under the Securities Act of 1933. During the year ended December 31, 2022, the decrease in the Fund’s NAV resulted primarily from the cumulative effect of the Fund seeking daily investment results, before fees and expenses, that correspond to the performance of the Long Index. The decrease in the Fund’s NAV was partially offset by an incase from 429,000 outstanding Shares at December 31, 2022 to 5,075,000 outstanding Shares at December 31, 2023. By comparison, during the year ended December 31, 2022, the increase in the Fund’s NAV resulted primarily from an increase of 21,450,000 outstanding Shares during the period. This increase was partially offset by the cumulative effect of the Fund seeking daily investment results, before fees and expenses, that correspond to the performance of the Long Index. 25 Net Income/Loss The following table provides summary income information for the Fund for the years ended December 31, 2023 and December 31, 2022: Year Ended December 31, 2023 Year Ended December 31, 2022 Net investment income (loss) $ (1,174,446 ) $ (1,191,352 ) Management fee 1,618,811 1,004,754 Brokerage commissions / Futures account fees 3,834 43,638 Non-recurring fees and expenses 519,717 449,147 Net realized gain (loss) (276,774,495 ) (67,298,832 ) Change in net unrealized appreciation (depreciation) 1,025,904 (9,203,522 ) Net income (loss) (276,923,037 ) (77,693,706 ) The Fund’s net income decreased for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a greater decrease in the value of futures prices during the year ended December 31, 2023. Futures Positions as of December 31, 2023 Contract Long or Short Expiration Contracts Valuation Price Contract Multiplier Notional Amount at Value CBOE VIX FUTURE Jan24 Long Jan-24 5,633 14.04 1,000 79,087,320 CBOE VIX FUTURE Feb24 Long Feb-24 3,943 15.29 1,000 60,288,470 Futures Positions as of December 31, 2022 (1) Contract Long or Short Expiration Contracts Valuation Price Contract Multiplier Notional Amount at Value CBOE VIX FUTURE Jan23 Long Jan-23 6,221 $ 23.16 1,000 $ 144,078,360 CBOE VIX FUTURE Feb23 Long Feb-23 4,355 24.57 1,000 107,002,350 (1) The Fund commenced operations on March 28, 2022. The December 31, 2023 and the December 31, 2022 futures notional values are calculated by multiplying the number of contracts held times the valuation price times the contract multiplier. The notional values will increase (decrease) proportionally with increases (decreases) in the price of the futures contract. Additional gains (losses) associated with these contracts will be equal to any such subsequent increases (decreases) in notional values, before accounting for spreads or transaction or financing costs. The Fund will generally attempt to adjust its positions in Financial Instruments each day to match the performance of the Long Index. Future period returns, before fees and expenses, cannot be estimated simply by estimating the return of the Long Index. Qualitative Disclosure The primary market risks that the Funds are exposed to depend on each Fund’s investment objective and corresponding benchmark. For example, the primary market risk that SVIX and UVIX are exposed to are inverse and long exposure, respectively, to the price of certain VIX futures contracts as measured by the return of holding and periodically rolling such futures contracts. 26