Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. 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, 2022. 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 a global financial innovator, offering a well-diversified suite of ETPs, models and solutions. We empower investors to shape their future and support financial professionals to better serve their clients and grow their businesses. We leverage the latest financial infrastructure to create products that provide access, transparency and an enhanced user experience. Building on our heritage of innovation, we are also developing next-generation digital products and structures, including Digital Funds and tokenized assets, as well as our blockchain-native digital wallet, WisdomTree Prime ™ .
We have approximately $90.7 billion in AUM as of March 31, 2023. Our family of ETPs includes products that provide 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. 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. 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 believe technology is altering the way financial advisors conduct business and through our Advisor Solutions program we offer technology-enabled and research-driven solutions including portfolio construction, asset allocation, practice management services and digital tools to help financial advisors address technology challenges and grow and scale their businesses.
We are at the forefront of innovation and believe that tokenization and leveraging the utility of blockchain technology is the next evolution in financial services. We are building the foundation that will allow us to lead in this coming evolution. WisdomTree Prime ™ , our blockchain-native digital wallet, is currently in beta testing and positions us to expand our blockchain-enabled financial services product offerings with a new direct-to-consumer channel where spending, saving and investing are united. As we continue to 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 believe that our expansion into digital assets will complement our existing core competencies in a holistic manner, diversify our revenue streams and contribute to our growth.
We were incorporated under the laws of the state of Delaware on September 19, 1985 as Financial Data Systems, Inc., were renamed WisdomTree Investments, Inc. on September 6, 2005, and ultimately renamed WisdomTree, Inc. on November 7, 2022.
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Assets Under Management
WisdomTree ETPs
We offer ETPs covering equity, commodity, fixed income, leveraged-and-inverse, currency, alternatives and cryptocurrency. The chart below sets forth the asset mix of our ETPs at March 31, 2023, December 31, 2022 and March 31, 2022:
Market Environment
The outlook for the first quarter of 2023 improved as developed markets continued to stave off a recession despite rising interest rates. The outlook for emerging markets has improved since the zero-Covid policy was abandoned in China. In March, gold prices increased to over $2,000 per ounce for the first time in over a year amid market volatility sparked by the Silicon Valley Bank’s collapse and further turbulence in the banking sector.
The S&P 500, MSCI EAFE (local currency), MSCI Emerging Markets Index (U.S. dollar) and gold prices increased by 7.5%, 7.7%, 4.0% and 9.2%, respectively, during the quarter. In addition, the European and Japanese equities markets both appreciated with the MSCI EMU Index and MSCI Japan Index increasing 12.3% and 7.3%, respectively, in local currency terms for the quarter. Also, the U.S. dollar weakened 1.8%, 2.6% and 1.3% versus the euro, British pound and the Japanese yen, respectively, the during the quarter.
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U.S. Listed ETF Industry Flows
U.S. listed ETF net flows for the three months ended March 31, 2023 were $467 billion. Fixed income and U.S. equity gathered the majority of those flows.
Source: Morningstar
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European Listed ETP Industry Flows
European listed ETP net flows were $71.1 billion for the three months ended March 31, 2023. Equities and fixed income gathered the majority of those flows.
Source: Morningstar
Our Operating and Financial Results
We operate as an ETP sponsor and asset manager, providing investment advisory services globally through our subsidiaries in the U.S. and Europe.
U.S. Listed ETFs
The AUM of our U.S. listed exchange traded funds, or U.S. listed ETFs, increased from $56.0 billion at December 31, 2022 to $61.3 billion at March 31, 2023 due to net inflows and market appreciation.
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European Listed ETPs
The AUM of our European listed (including internationally cross-listed) ETPs, or European listed ETPs, increased from $26.0 billion at December 31, 2022 to $29.5 billion at March 31, 2023, due to net inflows and market appreciation.
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Consolidated Operating Results
The following table sets forth our revenues and net income/(loss) for the most recent five quarters.
•
Revenues – Total revenues increased 4.7% from the three months ended March 31, 2022 to $82.0 million due to higher average AUM and higher other income from large flows into some of our European products. These items were partly offset by a lower average advisory fee.
•
Expenses – Total operating expenses increased 7.9% from the three months ended March 31, 2022 to $65.5 million primarily due to higher compensation from increased headcount and stock-based compensation expense, fund management and administration costs and other expenses. These increases were partly offset by lower professional fees.
•
Other Income/(Expenses) – Other income/(expenses) includes interest income and interest expense, gains/(losses) on revaluation of deferred consideration–gold payments, impairments, loss on extinguishment of convertible notes and other losses and gains. Further information is provided herein.
•
Net income/(loss) – We reported net income of $16.2 million and a net loss of ($10.3) million during the three months ended March 31, 2023 and 2022, respectively.
Expense Guidance Update for the Year Ending December 31, 2023
Compensation Expense
Our compensation expense for the year ending December 31, 2023 is currently estimated to range from $100.0 million to $106.0 million. This range considers variability in incentive compensation, with drivers including the magnitude of our flows, our share price performance in relation to our peers as well as revenue, operating income and operating margin performance. Given the strong start to 2023, we anticipate trending toward the high end of this range.
Discretionary Spending
Discretionary spending includes, marketing, sales, professional fees, occupancy and equipment, depreciation and amortization and other expenses. During the three months ended March 31, 2023, our discretionary spending was $13.2 million. We currently estimate our discretionary spending for the year ending December 31, 2023 to range from $56.0 million to $59.0 million (unchanged from our guidance provided last quarter), as we anticipate an uptick in marketing spend.
Not included in the guidance above are potential non-recurring expenses in response to an activist campaign, including $1.0 million incurred during the three months ended March 31, 2023.
Gross Margin
We define gross margin as total operating revenues less fund management and administration expenses. Gross margin percentage is calculated as gross margin divided by total operating revenues. Our gross margin was 79.1% during the three months ended March 31, 2023. Our gross margin guidance for the year ending December 31, 2023 is estimated to be 78% given anticipated product launches, changes in other income which may rise or fall depending upon the magnitude of flows of our European-listed products and uncertain market conditions.
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Contractual Gold Payments
We currently estimate our contractual gold payments expense for the year ending December 31, 2023 to be approximately $18.0 million (unchanged from our guidance provided last quarter) taking into consideration current gold prices.
Third-Party Distribution Fees
We currently estimate third-party distribution fees to range from $8.0 million to $9.0 million (unchanged from our guidance provided last quarter) for the year ending December 31, 2023. Given the AUM on our platforms we anticipate trending toward the high end of this guidance.
Interest Expense
Our interest expense for the year ending December 31, 2023 is currently estimated to be $15.0 million. Our interest cost for the three months ended June 30, 2023 is estimated to be $4.1 million, which should then reduce to $3.5 million per quarter going forward upon the settlement of $60.0 million in aggregate principal amount of our 2020 Notes (defined below) maturing in June 2023.
Income Tax Expense
We currently estimate that our consolidated normalized effective tax rate will be 23% (unchanged from our guidance provided last quarter). This estimated rate may change and is dependent upon our actual taxable income earned in relation to our forecasts.
This normalized effective tax rate excludes items that are non-recurring and not core to our operating business including but not limited to the impact of any revaluation on deferred consideration – gold payments, the loss on extinguishment of convertible notes, remeasurement of contingent consideration from the sale of our former Canadian ETF business, gains and losses on financial instruments owned and investments, valuation allowances on capital losses, reductions in unrecognized tax benefits and any stock-based compensation windfalls or shortfalls.
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Key Operating Statistics
The following table presents key operating statistics that serve as indicators for the performance of our business:
Three Months Ended
March 31,
2023
December 31,
2022
March 31,
2022
GLOBAL ETPs (in millions)
Beginning of period assets
$
81,993
$
70,878
$
77,479
Inflows/(outflows)
6,341
5,264
1,319
Market appreciation/(depreciation)
2,406
5,851
609
End of period assets
$
90,740
$
81,993
$
79,407
Average assets during the period
$
87,508
$
77,649
$
77,809
Average advisory fee during the period
0.36%
0.36%
0.40%
Number of ETPs—end of the period
350
348
341
US LISTED ETFs (in millions)
Beginning of period assets
$
55,973
$
48,043
$
48,210
Inflows/(outflows)
4,012
4,232
2,250
Market appreciation/(depreciation)
1,298
3,698
(1,838)
End of period assets
$
61,283
$
55,973
$
48,622
Average assets during the period
$
59,430
$
53,655
$
47,499
Number of ETPs—end of the period
80
79
77
EUROPEAN LISTED ETPs (in millions)
Beginning of period assets
$
26,020
$
22,835
$
29,269
Inflows/(outflows)
2,329
1,032
(931)
Market appreciation/(depreciation)
1,108
2,153
2,447
End of period assets
$
29,457
$
26,020
$
30,785
Average assets during the period
$
28,078
$
23,994
$
30,310
Number of ETPs—end of the period
270
269
264
PRODUCT CATEGORIES (in millions)
Commodity & Currency
Beginning of period assets
$
22,097
$
19,561
$
24,598
Inflows/(outflows)
2,003
796
(1,053)
Market appreciation/(depreciation)
824
1,740
2,757
End of period assets
$
24,924
$
22,097
$
26,302
Average assets during the period
$
23,806
$
20,345
$
25,891
U.S. Equity
Beginning of period assets
$
24,112
$
20,952
$
23,860
(Outflows)/inflows
(149)
1,021
779
Market appreciation/(depreciation)
571
2,139
(901)
End of period assets
$
24,534
$
24,112
$
23,738
Average assets during the period
$
24,726
$
23,492
$
23,134
Fixed Income
Beginning of period assets
$
15,273
$
11,695
$
4,356
Inflows/(outflows)
3,513
3,393
1,242
Market (depreciation)/appreciation
(78)
185
(180)
End of period assets
$
18,708
$
15,273
$
5,418
Average assets during the period
$
17,176
$
13,962
$
4,691
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Three Months Ended
March 31,
2023
December 31,
2022
March 31,
2022
International Developed Market Equity
Beginning of period assets
$
10,195
$
9,183
$
11,894
Inflows/(outflows)
450
40
97
Market appreciation/(depreciation)
788
972
(569
)
End of period assets
$
11,433
$
10,195
$
11,422
Average assets during the period
$
10,879
$
10,000
$
11,543
Emerging Market Equity
Beginning of period assets
$
8,116
$
7,495
$
10,375
Inflows/(outflows)
486
(53
)
189
Market appreciation/(depreciation)
209
674
(573
)
End of period assets
$
8,811
$
8,116
$
9,991
Average assets during the period
$
8,666
$
7,770
$
10,116
Leveraged & Inverse
Beginning of period assets
$
1,754
$
1,523
$
1,775
Inflows/(outflows)
43
59
(2
)
Market (depreciation)/appreciation
(12
)
172
83
End of period assets
$
1,785
$
1,754
$
1,856
Average assets during the period
$
1,757
$
1,623
$
1,830
Alternatives
Beginning of period assets
$
310
$
306
$
261
(Outflows)/inflows
(18
)
12
29
Market appreciation/(depreciation)
14
(8
)
3
End of period assets
$
306
$
310
$
293
Average assets during the period
$
308
$
305
$
275
Cryptocurrency
Beginning of period assets
$
136
$
163
$
357
Inflows/(outflows)
13
(4
)
37
Market appreciation/(depreciation)
90
(23
)
(11
)
End of period assets
$
239
$
136
$
383
Average assets during the period
$
190
$
152
$
324
Closed ETPs
Beginning of period assets
$
—
$
—
$
3
Inflows/(outflows)
—
—
1
End of period assets
$
—
$
—
$
4
Average assets during the period
$
—
$
—
$
5
Headcount
279
273
253
Note: Previously issued statistics may be restated due to fund closures and trade adjustments
Source: WisdomTree
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Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Selected Operating and Financial Information
Three Months Ended
March 31,
Change
Percent
Change
2023
2022
AUM (in millions)
Average AUM
$
87,508
$
77,809
$
9,699
12.5
%
Operating Revenues (in thousands)
Advisory fees
$
77,637
$
76,517
$
1,120
1.5
%
Other income
4,407
1,851
2,556
138.1
%
Total revenues
$
82,044
$
78,368
$
3,676
4.7
%
Average AUM
Our average AUM increased 12.5 % from $77.8 billion at March 31, 2022 to $87.5 billion at March 31, 2023 due to net inflows partly offset by market depreciation.
Operating Revenues
Advisory fees
Advisory fee revenues increased 1.5% from $76.5 million during the three months ended March 31, 2022 to $77.6 million in the comparable period in 2023 due to higher average AUM, partly offset by a decline in our average advisory fee. Our average advisory fee decreased from 0.40% during the three months ended March 31, 2022 to 0.36% during the comparable period in 2023 due to AUM mix shift.
Other income
Other income increased 138.1% from $1.9 million during the three months ended March 31, 2022 to $4.4 million in the comparable period in 2023 primarily due to large flows into some of our European products.
Operating Expenses
(in thousands)
Three Months Ended
March 31,
Change
Percent
Change
2023
2022
Compensation and benefits
$
27,398
$
24,787
$
2,611
10.5%
Fund management and administration
17,153
15,494
1,659
10.7%
Marketing and advertising
4,007
4,023
(16
)
(0.4%)
Sales and business development
2,994
2,609
385
14.8%
Contractual gold payments
4,486
4,450
36
0.8%
Professional fees
3,715
4,459
(744
)
(16.7%)
Occupancy, communications and equipment
1,101
753
348
46.2%
Depreciation and amortization
109
47
62
131.9%
Third-party distribution fees
2,253
2,212
41
1.9%
Other
2,257
1,845
412
22.3%
Total operating expenses
$
65,473
$
60,679
$
4,794
7.9%
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Three Months Ended
March 31,
As a Percent of Revenues:
2023
2022
Compensation and benefits
33.5%
31.5%
Fund management and administration
20.9%
19.8%
Marketing and advertising
4.9%
5.1%
Sales and business development
3.6%
3.3%
Contractual gold payments
5.5%
5.7%
Professional fees
4.5%
5.7%
Occupancy, communications and equipment
1.3%
1.0%
Depreciation and amortization
0.1%
0.1%
Third-party distribution fees
2.7%
2.8%
Other
2.8%
2.4%
Total operating expenses
79.8%
77.4%
Compensation and benefits
Compensation and benefits expense increased 10.5% from $24.8 million during the three months ended March 31, 2022 to $27.4 million in the comparable period in 2023 due to increased headcount and higher stock-based compensation expense. Headcount was 253 and 279 at March 31, 2022 and 2023, respectively.
Fund management and administration
Fund management and administration expense increased 10.7% from $15.5 million during the three months ended March 31, 2022 to $17.2 million in the comparable period in 2023 primarily due to higher average AUM, product launches and inflows. We had 77 U.S. listed ETFs and 264 European listed ETPs at March 31, 2022 compared to 80 U.S. listed ETFs and 270 European listed ETPs at March 31, 2023.
Marketing and advertising
Marketing and advertising expense was essentially unchanged from the three months ended March 31, 2022.
Sales and business development
Sales and business development expense increased 14.8% from $2.6 million during the three months ended March 31, 2022 to $3.0 million in the comparable period in 2023 primarily resulting from increases in conference and events spending as well as market data costs.
Contractual gold payments
Contractual gold payments expense was essentially unchanged from the three months ended March 31, 2022. This expense was associated with the annual payment of 9,500 ounces of gold and was calculated using the average daily spot price of $1,874 and $1,889 per ounce during the three months ended March 31, 2022 and 2023, respectively.
Professional fees
Professional fees decreased 16.7% from $4.5 million during the three months ended March 31, 2022 to $3.7 million in the comparable period in 2023 primarily due to lower expenses incurred in response to an activist campaign.
Occupancy, communications and equipment
Occupancy, communications and equipment expense increased 46.2% from $0.8 million during the three months ended March 31, 2022 to $1.1 million in the comparable period in 2023 as we signed new office leases in the U.S. and Europe.
Depreciation and amortization
Depreciation and amortization expense increased 131.9% from $0.05 million during the three months ended March 31, 2022 to $0.1 million in the comparable period in 2023 due to amortization of software development costs.
Third-party distribution fees
Third-party distribution fees were essentially unchanged from the three months ended March 31, 2022.
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Other
Other expenses increased 22.3% from $1.8 million during the three months ended March 31, 2022 to $2.3 million in the comparable period in 2023 primarily due to higher insurance, public relations, travel and directors expenses.
Other Income/(Expenses)
Three Months Ended
March 31,
Change
Percent
Change
(in thousands)
2023
2022
Interest expense
$
(4,002)
$
(3,732)
$
(270)
7.2%
Gain/(loss) on revaluation of deferred consideration
20,592
(17,018)
37,610
n/a
Interest income
1,083
794
289
36.4%
Impairments
(4,900)
—
(4,900)
100.0%
Loss on extinguishment of convertible notes
(9,721)
—
(9,721)
100.0%
Other losses, net
(2,007)
(24,707)
22,700
(91.9%)
Total other income/(expenses), net
$
1,045
$
(44,663)
$
45,708
n/a
Three Months Ended March 31,
As a Percent of Revenues:
2023
2022
Interest expense
(4.9%)
(4.8%)
Gain/(loss) on revaluation of deferred consideration
25.1%
(21.7%)
Interest income
1.3%
1.0%
Impairments
(6.0%)
—
Loss on extinguishment of convertible notes
(11.8%)
—
Other losses, net
(2.4%)
(31.5%)
Total other income/(expenses), net
1.3%
(57.0%)
Interest expense
Interest expense increased 7.2% from $3.7 million during the three months ended March 31, 2022 to $4.0 million in the comparable period in 2023 due to a higher level of debt outstanding and a higher effective interest rate. Our effective interest rate during the three months ended March 31, 2022 and 2023 was 4.6% and 5.0%, respectively.
Gain/(loss) on revaluation of deferred consideration
We recognized a loss on revaluation of deferred consideration of ($17.0) million and a gain on revaluation of deferred consideration of $20.6 million during the three months ended March 31, 2022 and 2023, respectively. The gain recognized during the three months ended March 31, 2023, was primarily due to an increase in the discount rate used to compute the present value of the annual payment obligations, partly offset by higher gold prices. The magnitude of any gain or loss is highly correlated to changes in the discount rate and the magnitude of the change in the forward-looking price of gold.
Interest income
Interest income increased 36.4% from $0.8 million during the three months ended March 31, 2022 to $1.1 million in the comparable period in 2023 due to rising interest rates.
Impairments
During the three months ended March 31, 2023, we recognized a non-cash impairment charge of $4.9 million on the Securrency Series A Shares.
Loss on Extinguishment of Convertible Notes
During the three months ended March 31, 2023, we recognized a loss on extinguishment of convertible notes of $9.7 million arising from the repurchase of $115.0 million in aggregate principal amount of our 2020 Notes.
Other losses, net
Other net losses were $2.0 million for the first quarter of 2023. This quarter includes a non-cash charge of $1.4 million 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). This quarter also includes losses on our investments of $3.9 million. These items were partly offset by gains on our financial instruments owned of $2.0 million and a gain of $1.5 million related to the remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business. Gains and losses also generally arise from the sale of gold earned from management fees paid by our physically-backed gold exchange-traded products (“ETPs”), foreign exchange fluctuations and other miscellaneous items.
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Income Taxes
Our effective income tax rate for the first quarter of 2023 was 7.9%, resulting in income tax expense of $1.4 million. The effective tax rate differs from the federal statutory rate of 21% primarily due to a non-taxable gain on revaluation of deferred consideration and a reduction in unrecognized tax benefits upon the expiration of the statute of limitations. These items were partly offset by a non-deductible loss on extinguishment of our convertible notes and an increase in the deferred tax asset valuation allowance on losses recognized on our investments.
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.
Non-GAAP Financial Measurements
In an effort to provide additional information regarding our results as determined by GAAP, we also disclose certain non-GAAP information which we believe provides useful and meaningful information. Our management reviews these non-GAAP financial measurements when evaluating our financial performance and results of operations; therefore, we believe it is useful to provide information with respect to these non-GAAP measurements so as to share this perspective of management. Non-GAAP measurements do not have any standardized meaning, do not replace nor are superior to GAAP financial measurements and are unlikely to be comparable to similar measures presented by other companies. These non-GAAP financial measurements should be considered in the context with our GAAP results. The non-GAAP financial measurements contained in this Report include:
•
Adjusted net income and diluted earnings per share. We disclose adjusted 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 or not core to our operating business. We believe presenting these non-GAAP financial measures provides investors with a consistent way to analyze our performance. These non-GAAP financial measures exclude the following:
•
Unrealized gains or losses on the revaluation of deferred consideration: Deferred consideration is an obligation we assumed in connection with the ETFS Acquisition that is carried at fair value. This item represents the present value of an obligation to pay fixed ounces of gold into perpetuity and is measured using forward-looking gold prices. 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 diluted earnings per share 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 financial instruments owned: We account for our financial instruments owned as trading securities, which requires these instruments to be measured at fair value with gains and losses reported in net income. We exclude these items when calculating our non-GAAP financial measurements as the gains and losses introduce volatility in earnings and are not core to our operating business.
•
Tax shortfalls and windfalls upon vesting and exercise of stock-based compensation awards: GAAP requires the recognition of tax windfalls and shortfalls within income tax expense. 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 diluted earnings per share as they introduce volatility in earnings and are not core to our operating business.
•
Other items: Loss on extinguishment of convertible notes, impairments, remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business, unrealized gains and losses recognized on our investments, changes in deferred tax asset valuation allowance and expenses incurred in response to an activist campaign are excluded when calculating our non-GAAP financial measurements.
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Three Months Ended
Adjusted Net Income and Diluted Earnings per Share:
March 31,
2023
March 31,
2022
Net income/(loss), as reported
$
16,233
$
(10,261
)
(Deduct)/add back: (Gain)/loss on revaluation of deferred consideration
(20,592
)
17,018
Add back: Loss on extinguishment of convertible notes, net of income taxes
9,623
—
Add back: Impairments
4,900
—
Deduct: Remeasurement of contingent consideration – sale of former Canadian ETF business
(1,477
)
—
(Deduct)/add back: (Gains)/losses on financial instruments owned, net of income taxes
(1,479
)
3,893
Add back: Increase in deferred tax asset valuation allowance on financial instruments owned and investments
477
2,010
Add back: Unrealized loss recognized on our investments, net of income taxes
2,966
124
Deduct: Tax windfalls upon vesting and exercise of stock-based compensation awards
(185
)
(565
)
Add back: Expenses incurred in response to an activist campaign, net of income taxes
732
1,844
Adjusted net income
$
11,198
$
14,063
Deduct: Income distributed to participating securities
(498
)
(549
)
Deduct: Undistributed income allocable to participating securities
(672
)
(1,041
)
Adjusted net income available to common stockholders
10,028
12,473
Weighted average diluted shares, excluding participating securities (See Note 11 to our Consolidated Financial Statements)
144,431
142,814
Adjusted earnings per share—diluted
$
0.07
$
0.09
Liquidity and Capital Resources
The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations:
March 31,
2023
December 31,
2022
Balance Sheet Data (in thousands):
Cash and cash equivalents
$
119,099
$
132,101
Financial instruments owned, at fair value
130,180
126,239
Accounts receivable
35,496
30,549
Securities held-to-maturity
253
259
Total: Liquid assets
285,028
289,148
Less: Total current liabilities
(130,926)
(148,434)
Less: Other assets—seed capital (WisdomTree blockchain-enabled funds)
(12,413)
(1,765)
Less: Regulatory capital requirements
(28,726)
(25,988)
Total: Available liquidity
$
112,963
$
112,961
Three Months Ended March 31,
2023
2022
Cash Flow Data (in thousands):
Operating cash flows
$
(5,397
)
$
(2,692
)
Investing cash flows
(2,008
)
(18,721
)
Financing cash flows
(6,070
)
(8,236
)
Foreign exchange rate effect
473
(665
)
Decrease in cash and cash equivalents
$
(13,002
)
$
(30,314
)
Liquidity
We consider our available liquidity to be our liquid assets, less our current liabilities and regulatory capital requirements of certain European subsidiaries. Liquid assets consist of cash and cash equivalents, financial instruments owned, at fair value, accounts receivable and securities held-to-maturity. Our financial instruments owned, at fair value are highly liquid investments. Accounts receivable are current assets and primarily represent receivables from advisory fees we earn from our ETPs. Our current liabilities consist primarily of convertible notes maturing in the next 12 months, payments owed to vendors and third parties in the normal course of business, deferred consideration and accrued incentive compensation for employees.
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Cash and cash equivalents decreased by $13.0 million during the three months ended March 31, 2023 due to $130.0 million of proceeds from the issuance of convertible notes, $18.3 million of proceeds from the sale of financial instruments owned, at fair value and $0.4 million from other activities. These increases were offset by $124.3 million used to repurchase convertible notes, $20.3 million used to purchase financial instruments owned, at fair value, $5.4 million used in operating activities, $4.8 million used to pay dividends, $3.5 million used to cover convertible notes issuance costs and $3.4 million used to repurchase our common stock.
Cash and cash equivalents decreased by $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.
Issuance of Convertible Notes
On February 14, 2023, we issued and sold $130.0 million in aggregate principal amount of 5.75% Convertible Senior Notes due 2028 (the “2023 Notes”) pursuant to an indenture dated February 14, 2023, between us and U.S. Bank Trust Company, 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 14, 2021, we issued and sold $150.0 million in aggregate principal amount of 3.25% Convertible Senior Notes due 2026 (the “2021 Notes”) pursuant to an indenture dated June 14, 2021, between us and the trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A.
On June 16, 2020, we issued and sold $150.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 (the “June 2020 Notes”) pursuant to an indenture dated June 16, 2020, between us and the trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A. On August 13, 2020, we issued and sold $25.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 at a price equal to 101% of the principal amount thereof, plus interest deemed to have accrued since June 16, 2020, 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”).
In connection with the issuance of the 2023 Notes, we repurchased $115.0 million in aggregate principal amount of the 2020 Notes. As a result of this repurchase, we recognized a loss on extinguishment of approximately $9.7 million during the three months ended March 31, 2023.
After the issuance of the 2023 Notes (and together with the remaining 2020 Notes and the 2021 Notes, the “Convertible Notes”), we had $340.0 million in aggregate principal amount of Convertible Notes outstanding.
Key terms of the Convertible Notes are as follows:
2023 Notes
2021 Notes
2020 Notes
Principal outstanding
$130.0
$150.0
$60.0
Maturity date (unless earlier converted, repurchased or redeemed)
August 15, 2028
June 15, 2026
June 15, 2023
Interest rate
5.75%
3.25%
4.25%
Conversion price
$9.54
$11.04
$5.92
Conversion rate
104.8658
90.5797
168.9189
Redemption price
$12.40
$14.35
$7.70
•
Interest rate: Payable semiannually in arrears on February 15 and August 15 of each year for the 2023 Notes (beginning on August 15, 2023) and June 15 and December 15 of each year for the 2020 Notes and the 2021 Notes.
•
Conversion price: Convertible at an initial conversion rate into shares of our common stock, per $1,000 principal amount of notes (equivalent to an initial conversion price set forth in the table above), subject to adjustment.
•
Conversion: Holders may convert at their option at any time prior to the close of business on the business day immediately preceding May 15, 2028, March 15, 2026 and March 15, 2023 for the 2023 Notes, 2021 Notes and 2020 Notes, respectively, only under the following circumstances: (i) if the last reported sale price of our common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the respective Convertible Notes on each applicable trading day; (ii) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sales price of our common stock and the conversion rate on each such trading day; (iii) upon a notice of redemption delivered by us in accordance with the terms of the indentures but only with respect to the Convertible Notes called (or deemed called) for redemption; or (iv) upon the occurrence of specified corporate events. On or after May 15, 2028, March 15, 2026 and March 15, 2023 in
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respect of the 2023 Notes, 2021 Notes and 2020 Notes, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances.
•
Cash settlement of principal amount: 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: We may redeem for cash all or any portion of the Convertible Notes, at our option, on or after August 20, 2025, June 20, 2023 and June 20, 2021 in respect of the 2023 Notes, 2021 Notes and 2020 Notes, respectively, and on or prior to the 55th scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least 130% of the conversion price for the respective Convertible Notes then in effect for at least 20 trading days, including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding the redemption date. No sinking fund is provided for the Convertible Notes.
•
Limited investor put rights: Holders of the Convertible Notes have the right to require us to repurchase for cash all or a portion of their notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of certain change of control transactions or liquidation, dissolution or common stock delisting events.
•
Conversion rate increase in certain customary circumstances: In certain circumstances, conversions in connection with a “make-whole fundamental change” (as defined in the indentures) or conversions of Convertible Notes called (or deemed called) for redemption may result in an increase to the conversion rate, provided that the conversion rate will not exceed 167.7853 shares, 144.9275 shares and 270.2702 shares of our common stock per $1,000 principal amount of the 2023 Notes, 2021 Notes and 2020 Notes, respectively (the equivalent of 59,767,426 shares of our common stock), subject to adjustment.
•
Seniority and Security: The Convertible 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 11 to our Consolidated Financial Statements).
The indentures contain customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes outstanding may declare the entire principal amount of all the Convertible Notes to be repurchased, plus any accrued special interest, if any, to be immediately due and payable.
Capital Resources
Our principal source of financing is our operating cash flow. We believe that current cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for the foreseeable future.
Our ability to satisfy our contractual obligations as they arise are discussed in the section titled “Contractual Obligations” below.
Use of Capital
Our business does not require us to maintain a significant cash position. However, certain of our subsidiaries are required to maintain a minimum level of regulatory capital, which at March 31, 2023 was approximately $28.7 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.
During the three months ended March 31, 2023, we repurchased 604,505 shares of our common stock under the repurchase program for an aggregate cost of $3.4 million. Currently, approximately $96.6 million remains under this program for future purchases.
Contractual Obligations
Convertible Notes
We currently have $340.0 million in aggregate principal amount of Convertible Notes outstanding, of which $60.0 million, $150.0 million and $130.0 million are scheduled to mature on June 15, 2023, June 15, 2026 and August 15, 2028, respectively, unless earlier converted, repurchased or redeemed. Conditional conversions or a requirement to repurchase the Convertible Notes upon the occurrence of a fundamental change may accelerate payment.
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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 our common stock. We anticipate settling the $60.0 million in aggregate principal amount of 2020 Notes scheduled to mature in June 2023 and may settle and/or refinance the remaining obligations when due.
See the section titled “Issuance of Convertible Notes” above for additional information.
Deferred Consideration—Gold Payments
Deferred consideration represents an obligation we assumed in April 2018 in connection with our acquisition of the European exchange-traded commodity, currency and leveraged-and-inverse business of ETFS Capital. The obligation is for fixed payments to ETFS Capital 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 per year continuing into perpetuity (“Contractual Gold Payments”). The present value of the deferred consideration was $179.8 million at March 31, 2023.
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.
Operating Leases
Total future minimum lease payments with respect to our operating lease liabilities were $1.2 million at March 31, 2023. Cash flows generated by our operating activities and existing cash balances should be sufficient to satisfy the future minimum lease payments.
See Note 12 to our Consolidated Financial Statements for additional information.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing or other arrangements and have neither created nor are party to any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business.
Critical Accounting Policies and Estimates
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price over the fair values of the identifiable net assets at the acquisition date. We test goodwill for impairment at least annually and at the time of a triggering event requiring re-evaluation, if one were to occur. Goodwill is considered impaired when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying value. If the estimated fair value of such reporting unit is less than its carrying value, goodwill impairment is recognized based on that difference, not to exceed the carrying amount of goodwill. A reporting unit is an operating segment or a component of an operating segment provided that the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.
Goodwill is allocated to our U.S. Business and European Business components. For impairment testing purposes, these components are aggregated as a single reporting unit as they fall under the same operating segment and have similar economic characteristics.
Goodwill is assessed for impairment annually on November 30 th . When performing our goodwill impairment test, we consider a qualitative assessment, when appropriate, and the market approach and its market capitalization when determining the fair value of the reporting unit. The results of our most recent 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. Indefinite-lived intangible assets are impaired if their estimated fair value is less than their carrying value. We may rely on a qualitative assessment when performing our intangible asset impairment test. Otherwise, the impairment evaluation is performed at the lowest level of reasonably identifiable cash flows independent of other assets. The annual impairment testing date for our intangible assets is November 30 th . The results of our most recent analysis indicated no impairment based upon a quantitative assessment (discounted cash flow analysis) which relied upon significant unobservable inputs including projected revenue growth rates ranging from 3% to 8% (5% weighted average) and a weighted average cost of capital of 11.0%.
Investments
We account for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed within ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities ,
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to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment (assessed quarterly), plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In addition, income is recognized when dividends are received only to the extent they are distributed from net accumulated earnings of the investee. Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment.
Investments in debt instruments are accounted for at fair value, with changes in fair value reported in other income/(expenses).
See Note 8 to our Consolidated Financial Statements for information.
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 $2,401, 13.3% and 1.5%, respectively, at March 31, 2023. 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 March 31, 2023, we reported a gain on deferred consideration—gold payments of $20.6 million. A 1.0% increase in the weighted average forward-looking gold price per ounce would have decreased this reported gain by $1.3 million, a 1 percentage point increase in the discount rate would have increased this reported gain by $12.9 million and a 1 percentage point increase in the perpetual growth rate would have decreased this reported gain by $9.3 million. See Note 9 to our Consolidated Financial Statements for additional information.
Revenue Recognition
We earn substantially all of our revenue in the form of advisory fees from our ETPs and recognize this revenue over time, as the performance obligation is satisfied. Advisory fees are based on a percentage of the ETPs’ average daily net assets. 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.