WisdomTree, Inc. 10-Q

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, solutions and products leveraging blockchain-enabled technology. 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 and recently launched next-generation digital products and structures, including WisdomTree Digital Funds, or “Digital Funds” and tokenized assets, as well as our blockchain-native digital wallet, WisdomTree Prime ™ . We have approximately $93.7 billion in AUM as of June 30, 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, 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 and blockchain-enabled finance 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. 37 Table of Contents 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 June 30, 2023, March 31, 2023 and June 30, 2022: Market Environment During the second quarter of 2023, developed markets continued to stave off a recession, as interest rates were relatively stable as compared to the prior quarter. The faster-than-expected re-opening of the Chinese economy has also improved the outlook for global growth. The S&P 500, MSCI EAFE (local currency) and MSCI Emerging Markets Index (U.S. dollar) increased by 8.7%, 4.6% and 1.0%, respectively, during the quarter. In addition, the European and Japanese equities markets both appreciated with the MSCI EMU Index and MSCI Japan Index increasing 3.3% and 15.6%, respectively, in local currency terms for the quarter. Gold prices decreased by 3.4%. The U.S. dollar weakened 0.1% and 2.2% versus the euro and British pound, respectively, and strengthened 8.3% versus the Japanese yen, during the quarter. 38 Table of Contents U.S. Listed ETF Industry Flows U.S. listed ETF industry net flows were $135 billion for the three months ended June 30, 2023. U.S. equity and fixed income gathered the majority of those flows. 39 Table of Contents European Listed ETP Industry Flows European listed ETP industry net flows were $28.9 billion for the three months ended June 30, 2023. Fixed income and 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 U.S. and Europe. 40 Table of Contents U.S. Listed ETFs The AUM of our U.S. listed exchange traded funds, or U.S. listed ETFs, increased from $61.3 billion at March 31, 2023 to $65.9 billion at June 30, 2023 due to net inflows and market appreciation. 41 Table of Contents European Listed ETPs The AUM of our European listed (including internationally cross-listed) ETPs, or European listed ETPs, decreased from $29.5 billion at March 31, 2023 to $27.8 billion at June 30, 2023, due to net outflows and market depreciation. 42 Table of Contents Consolidated Operating Results The following table sets forth our revenues and net income/(loss) for the most recent five quarters. • Revenues – Total revenues increased 11.0% from the three months ended June 30, 2022 to $85.7 million in the comparable period in 2023 primarily due to higher average AUM. • Expenses – Total operating expenses increased 9.9% from the three months ended June 30, 2022 to $67.5 million in the comparable period in 2023 primarily due to higher professional fees incurred in connection with an activist campaign, incentive compensation and headcount, and fund management and administration costs. These increases were partly offset by lower contractual gold payments. • Other Income/(Expenses) – Other income/(expenses) includes interest income and interest expense, gains on revaluation/termination of deferred consideration–gold payments and other losses and gains. Further information is provided herein. • Net income/(loss) – We reported net income of $54.3 million and $8.0 million during the three months ended June 30, 2023 and 2022, respectively. 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 $104.0 million to $110.0 million (previously $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 potential volatility in our performance-based metrics, we consider the midpoint of this range to be a reasonable estimate. Discretionary Spending Discretionary spending includes, marketing, sales, professional fees, occupancy and equipment, depreciation and amortization and other expenses. During the six months ended June 30, 2023, our discretionary spending was $28.3 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). Not included in the guidance above are potential non-recurring expenses in response to an activist campaign, including $5.9 million incurred during the six months ended June 30, 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 79.2% during the six months ended June 30, 2023. Our gross margin guidance for the year ending December 31, 2023 is estimated to be 79% (previously 78%) which we believe should be sustainable at current AUM levels. 43 Table of Contents Contractual Gold Payments Our contractual gold payments expense of $6.1 million during the six months ended June 30, 2023 will be zero going forward as our obligation to make continuing gold payments was terminated in May 2023. 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. Interest Expense Our interest expense for the year ending December 31, 2023 is currently estimated to be $15.0 million (unchanged from our guidance provided last quarter). Interest Income Our interest income for the year ending December 31, 2023 is currently estimated to be approximately $3.0 million taking into consideration the magnitude of our investments which has been reduced from the prior quarter after having paid approximately $110 million to settle our convertible notes maturing in June and to terminate our deferred consideration—gold payments obligation. Income Tax Expense We currently estimate that our consolidated normalized effective tax rate will be 24% (previously 23%) taking into consideration the current distribution of profits amongst our U.S. and European businesses. 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. Diluted Shares Outstanding Our weighted average diluted shares outstanding were 170.7 million during the three months ended June 30, 2023 after having issued approximately 14 million shares of common stock or instruments convertible into common stock in connection with the termination of our deferred consideration—gold payments obligation and the maturity of our convertible notes during the second quarter. The impact of the share issuance on our second quarter diluted shares was affected by the timing of when the shares were issued. Going forward, we anticipate our diluted shares outstanding to be approximately 177 million per quarter. 44 Table of Contents Key Operating Statistics The following table presents key operating statistics that serve as indicators for the performance of our business: Three Months Ended Six Months Ended June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 GLOBAL ETPs (in millions) Beginning of period assets $ 90,740 $ 81,993 $ 79,407 $ 81,993 $ 77,479 Inflows/(outflows) 2,327 6,341 3,852 8,668 5,171 Market appreciation/(depreciation) 599 2,406 (8,953) 3,005 (8,344) Fund closures — — (4) — (4) End of period assets $ 93,666 $ 90,740 $ 74,302 $ 93,666 $ 74,302 Average assets during the period $ 91,578 $ 87,508 $ 77,738 $ 89,543 $ 77,774 Average ETP advisory fee during the period 0.36% 0.36% 0.39% 0.36% 0.39% Revenue days 91 90 91 181 181 Number of ETPs—end of period 353 350 344 353 344 U.S. LISTED ETFs (in millions) Beginning of period assets $ 61,283 $ 55,973 $ 48,622 $ 55,973 $ 48,210 Inflows/(outflows) 3,249 4,012 4,278 7,261 6,528 Market appreciation/(depreciation) 1,371 1,298 (5,645) 2,669 (7,483) End of period assets $ 65,903 $ 61,283 $ 47,255 $ 65,903 $ 47,255 Average assets during the period $ 62,712 $ 59,430 $ 48,270 $ 61,071 $ 47,885 Number of ETFs – end of the period 80 80 77 80 77 EUROPEAN LISTED ETPs (in millions) Beginning of period assets $ 29,457 $ 26,020 $ 30,785 $ 26,020 $ 29,269 (Outflows)/inflows (922) 2,329 (426) 1,407 (1,357) Market (depreciation)/appreciation (772) 1,108 (3,308) 336 (861) Fund closures — — (4) — (4) End of period assets $ 27,763 $ 29,457 $ 27,047 $ 27,763 $ 27,047 Average assets during the period $ 28,866 $ 28,078 $ 29,468 $ 28,472 $ 29,889 Number of ETPs—end of period 273 270 267 273 267 PRODUCT CATEGORIES (in millions) U.S. Equity Beginning of period assets $ 24,534 $ 24,112 $ 23,738 $ 24,112 $ 23,860 Inflows/(outflows) 414 (149) 306 265 1,085 Market appreciation/(depreciation) 1,053 571 (2,986) 1,624 (3,887) End of period assets $ 26,001 $ 24,534 $ 21,058 $ 26,001 $ 21,058 Average assets during the period $ 24,732 $ 24,726 $ 22,362 $ 24,729 $ 22,748 Commodity & Currency Beginning of period assets $ 24,924 $ 22,097 $ 26,302 $ 22,097 $ 24,598 (Outflows)/inflows (1,512) 2,003 (475) 491 (1,528) Market (depreciation)/appreciation (1,028) 824 (2,203) (204) 554 End of period assets $ 22,384 $ 24,924 $ 23,624 $ 22,384 $ 23,624 Average assets during the period $ 24,033 $ 23,806 $ 25,767 $ 23,918 $ 25,827 Fixed Income Beginning of period assets $ 18,708 $ 15,273 $ 5,418 $ 15,273 $ 4,356 Inflows/(outflows) 1,471 3,513 4,038 4,984 5,280 Market appreciation/(depreciation) 36 (78) (264) (42) (444) End of period assets $ 20,215 $ 18,708 $ 9,192 $ 20,215 $ 9,192 Average assets during the period $ 19,185 $ 17,176 $ 7,426 $ 18,181 $ 6,059 International Developed Market Equity Beginning of period assets $ 11,433 $ 10,195 $ 11,422 $ 10,195 $ 11,894 Inflows/(outflows) 1,592 450 79 2,042 176 Market appreciation/(depreciation) 398 788 (1,533) 1,186 (2,102) End of period assets $ 13,423 $ 11,433 $ 9,968 $ 13,423 $ 9,968 Average assets during the period $ 12,276 $ 10,879 $ 10,695 $ 11,578 $ 11,119 45 Table of Contents Three Months Ended Six Months Ended June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Emerging Market Equity Beginning of period assets $ 8,811 $ 8,116 $ 9,991 $ 8,116 $ 10,375 Inflows/(outflows) 329 486 (223) 815 (34) Market appreciation/(depreciation) 51 209 (1,382) 260 (1,955) End of period assets $ 9,191 $ 8,811 $ 8,386 $ 9,191 $ 8,386 Average assets during the period $ 8,998 $ 8,666 $ 9,155 $ 8,832 $ 9,636 Leveraged & Inverse Beginning of period assets $ 1,785 $ 1,754 $ 1,856 $ 1,754 $ 1,775 Inflows/(outflows) 12 43 90 55 88 Market appreciation/(depreciation) 67 (12) (328) 55 (245) End of period assets $ 1,864 $ 1,785 $ 1,618 $ 1,864 $ 1,618 Average assets during the period $ 1,798 $ 1,757 $ 1,765 $ 1,778 $ 1,798 Alternatives Beginning of period assets $ 306 $ 310 $ 293 $ 310 $ 261 Inflows/(outflows) 22 (18) 34 4 63 Market appreciation/(depreciation) 12 14 (22) 26 (19) End of period assets $ 340 $ 306 $ 305 $ 340 $ 305 Average assets during the period $ 320 $ 308 $ 299 $ 314 $ 287 Cryptocurrency Beginning of period assets $ 239 $ 136 $ 383 $ 136 $ 357 (Outflows)/inflows (1) 13 3 12 40 Market appreciation/(depreciation) 10 90 (235) 100 (246) End of period assets $ 248 $ 239 $ 151 $ 248 $ 151 Average assets during the period $ 236 $ 190 $ 265 $ 213 $ 295 Closed ETPs Beginning of period assets $ — $ — $ 4 $ — $ 3 Inflows/(outflows) — — — — 1 Fund closures — — (4) — (4) End of period assets $ — $ — $ — $ — $ — Average assets during the period $ — $ — $ 4 $ — $ 5 Headcount: 291 279 264 291 264 Note: Previously issued statistics may be restated due to fund closures and trade adjustments Source: WisdomTree Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 Selected Operating and Financial Information Three Months Ended June 30, Change Percent Change 2023 2022 AUM (in millions) Average AUM $ 91,578 $ 77,738 $ 13,840 17.8% Operating Revenues (in thousands) Advisory fees $ 82,004 $ 75,586 $ 6,418 8.5% Other income 3,720 1,667 2,053 123.2% Total revenues $ 85,724 $ 77,253 $ 8,471 11.0% Operating Revenues Advisory fees Advisory fee revenues increased 8.5% from $75.6 million during the three months ended June 30, 2022 to $82.0 million in the comparable period in 2023 due to higher average AUM, partially offset by lower average advisory fee. Our average advisory fee was 0.36% during the three months ended June 30, 2023 and 0.39% during the comparable period in 2022. 46 Table of Contents Other income Other income increased 123.2% from $1.7 million during the three months ended June 30, 2022 to $3.7 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 June 30, Change Percent Change 2023 2022 Compensation and benefits $ 26,319 $ 24,565 $ 1,754 7.1% Fund management and administration 17,727 16,076 1,651 10.3% Marketing and advertising 4,465 3,894 571 14.7% Sales and business development 3,326 3,131 195 6.2% Contractual gold payments 1,583 4,446 (2,863) (64.4%) Professional fees 8,334 4,308 4,026 93.5% Occupancy, communications and equipment 1,172 1,049 123 11.7% Depreciation and amortization 121 53 68 128.3% Third-party distribution fees 1,881 1,818 63 3.5% Other 2,615 2,109 506 24.0% Total operating expenses $ 67,543 $ 61,449 $ 6,094 9.9% As a Percent of Revenues: Three Months Ended June 30, 2023 2022 Compensation and benefits 30.7% 31.6% Fund management and administration 20.7% 20.8% Marketing and advertising 5.2% 5.0% Sales and business development 3.9% 4.1% Contractual gold payments 1.8% 5.8% Professional fees 9.7% 5.6% Occupancy, communications and equipment 1.4% 1.4% Depreciation and amortization 0.1% 0.1% Third-party distribution fees 2.2% 2.4% Other 3.1% 2.7% Total operating expenses 78.8% 79.5% Compensation and benefits Compensation and benefits expense increased 7.1% from $24.6 million during the three months ended June 30, 2022 to $26.3 million in the comparable period in 2023 due to increased headcount and higher stock-based compensation expense, partly offset by lower incentive compensation. Headcount was 264 and 291 at June 30, 2022 and 2023, respectively. Fund management and administration Fund management and administration expense increased 10.3% from $16.1 million during the three months ended June 30, 2022 to $17.7 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 267 European listed ETPs at June 30, 2022 compared to 80 U.S. listed ETFs and 273 European listed ETPs at June 30, 2023. Marketing and advertising Marketing and advertising expense increased 14.7% from $3.9 million during the three months ended June 30, 2022 to $4.5 million in the comparable period in 2023 primarily due to higher spending related to our U.S. listed products. Sales and business development Sales and business development expense was essentially unchanged from the three months ended June 30, 2022. 47 Table of Contents Contractual gold payments Contractual gold payments expense decreased 64.4% from $4.4 million during the three months ended June 30, 2022 to $1.6 million in the comparable period in 2023 due to the termination of our deferred consideration—gold payments obligation on May 10, 2023. See Note 9 to our Consolidated Financial Statements for additional information. Professional fees Professional fees increased 93.5% from $4.3 million during the three months ended June 30, 2022 to $8.3 million in the comparable period in 2023 primarily due to higher expenses incurred in response to an activist campaign as well as expenses incurred to settle our deferred consideration—gold payments obligation and our acquisition of WisdomTree Transfers, Inc. Occupancy, communications and equipment Occupancy, communications and equipment expense was essentially unchanged from the three months ended June 30, 2022. Depreciation and amortization Depreciation and amortization expense increased 128.3% due to amortization of software development costs. Third-party distribution fees Third-party distribution fees were essentially unchanged from the three months ended June 30, 2022. Other Other expenses increased 24.0% from $2.1 million during the three months ended June 30, 2022 to $2.6 million in the comparable period in 2023 primarily due to higher travel, public relations and directors expenses. Other Income/(Expenses) (in thousands) Three Months Ended June 30, Change Percent Change 2023 2022 Interest expense $ (4,021 ) $ (3,733 ) $ (288 ) 7.7 % Gain on revaluation/termination of deferred consideration—gold payments 41,361 2,311 39,050 1,689.7 % Interest income 1,000 770 230 29.9 % Other gains and losses, net 1,286 (4,474 ) 5,760 n/a Total other income/(expenses), net $ 39,626 $ (5,126 ) $ 44,752 n/a Three Months Ended June 30, As a Percent of Revenues: 2023 2022 Interest expense (4.7 %) (4.8 %) Gain on revaluation/termination of deferred consideration—gold payments 48.2 % 3.0 % Interest income 1.2 % 1.0 % Other gains and losses, net 1.5 % (5.8 %) Total other income/(expenses), net 46.2 % (6.6 %) Interest expense Interest expense increased 7.7% from $3.7 million during the three months ended June 30, 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 June 30, 2022 and 2023 was 4.6% and 5.0%, respectively. Gain on revaluation/termination of deferred consideration—gold payments We recognized a gain on revaluation/termination of deferred consideration—gold payments of $41.4 million and $2.3 million during the three months ended June 30, 2023 and 2022, respectively. This obligation was settled on May 10, 2023 for approximately $137.0 million. See Note 9 to our Consolidated Financial Statements for additional information. 48 Table of Contents Interest income Interest income increased 29.9% from $0.8 million during the three months ended June 30, 2022 to $1.0 million in the comparable period in 2023 due to, partially offset by a decrease in our financial instruments owned. Other gains and losses, net Other gains and losses, net was $1.3 million for the second quarter of 2023. This quarter includes gains on our investments of $3.1 million, partly offset by losses on our financial instruments owned of $1.0 million. 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. Income Taxes Our effective income tax rate for the second quarter of 2023 was 6.1%, resulting in income tax expense of $3.6 million. The effective tax rate differs from the federal statutory rate of 21% primarily due to a non-taxable gain on revaluation/termination of deferred consideration—gold payments and a decrease in the deferred tax asset valuation allowance on losses recognized on our investments. These items were partly offset by non-deductible executive compensation. Our effective income tax rate for the second quarter of 2022 of 25.0% resulted in an income tax expense of $2.7 million. Our tax rate differs from the federal statutory rate of 21% primarily due to a valuation allowance on losses recognized on securities owned and non-deductible compensation. These items were partly offset by a non-taxable gain on revaluation of deferred consideration—gold payments and a lower tax rate on foreign earnings. Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022 Selected Operating and Financial Information Six Months Ended June 30, Change Percent Change 2023 2022 AUM (in millions) Average AUM $ 89,543 $ 77,774 $ 11,769 15.1% Operating Revenues (in thousands) Advisory fees $ 159,641 $ 152,103 $ 7,538 5.0% Other income 8,127 3,518 4,609 131.0% Total revenues $ 167,768 $ 155,621 $ 12,147 7.8% Operating Revenues Advisory fees Advisory fee revenues increased 5.0% from $152.1 million during the six months ended June 30, 2022 to $159.6 million in the comparable period in 2023 due to higher average AUM, partially offset by lower average advisory fee. Our average advisory fee was 0.39% during the six months ended June 30, 2022 and 0.36% during the comparable period in 2023. Other income Other income increased 131.0% from $3.5 million during the six months ended June 30, 2022 to $8.1 million in the comparable period in 2023 primarily due to large flows into some of our European products. 49 Table of Contents Operating Expenses (in thousands) Six Months Ended June 30, Change Percent Change 2023 2022 Compensation and benefits $ 53,717 $ 49,352 $ 4,365 8.8% Fund management and administration 34,880 31,570 3,310 10.5% Marketing and advertising 8,472 7,917 555 7.0% Sales and business development 6,320 5,740 580 10.1% Contractual gold payments 6,069 8,896 (2,827) (31.8%) Professional fees 12,049 8,767 3,282 37.4% Occupancy, communications and equipment 2,273 1,802 471 26.1% Depreciation and amortization 230 100 130 130.0% Third-party distribution fees 4,134 4,030 104 2.6% Other 4,872 3,954 918 23.2% Total operating expenses $ 133,016 $ 122,128 $ 10,888 8.9% As a Percent of Revenues: Six Months Ended June 30, 2023 2022 Compensation and benefits 32.0% 31.7% Fund management and administration 20.8% 20.3% Marketing and advertising 5.0% 5.1% Sales and business development 3.8% 3.7% Contractual gold payments 3.6% 5.7% Professional fees 7.2% 5.6% Occupancy, communications and equipment 1.4% 1.2% Depreciation and amortization 0.1% 0.1% Third-party distribution fees 2.5% 2.6% Other 2.9% 2.5% Total operating expenses 79.3% 78.5% Compensation and benefits Compensation and benefits expense increased 8.8% from $49.4 million during the six months ended June 30, 2022 to $53.7 million in the comparable period in 2023 due to increased headcount, stock-based compensation expense, payroll taxes and benefits, partly offset by lower incentive compensation. Fund management and administration Fund management and administration expense increased 10.5% from $31.6 million during the six months ended June 30, 2022 to $34.9 million in the comparable period in 2023 primarily due to higher average AUM, product launches and inflows. Marketing and advertising Marketing and advertising expense increased 7.0% from $7.9 million during the three months ended June 30, 2022 to $8.5 million in the comparable period in 2023 primarily due to higher spending related to our U.S. listed products. Sales and business development Sales and business development expense increased 10.1% from $5.7 million during the six months ended June 30, 2022 to $6.3 million in the comparable period in 2023 primarily resulting from increases in travel, conference and events spending. Contractual gold payments Contractual gold payments expense decreased 31.8% from $8.9 million during the six months ended June 30, 2022 to $6.1 million in the comparable period in 2023 due to the termination of our deferred consideration—gold payments obligation on May 10, 2023. See Note 9 to our Consolidated Financial statements for additional information. 50 Table of Contents Professional fees Professional fees increased 37.4% from $8.8 million during the six months ended June 30, 2022 to $12.0 million in the comparable period in 2023 primarily due to higher expenses incurred in response to an activist campaign, as well as expenses incurred to settle our deferred consideration—gold payments obligation and our acquisition of WisdomTree Transfers, Inc. Occupancy, communications and equipment Occupancy, communications and equipment expense increased 26.1% from $1.8 million during the six months ended June 30, 2022 to $2.3 million in the comparable period in 2023 as our New York office lease became effective in May 2022. Depreciation and amortization Depreciation and amortization expense increased 130.0% from $0.1 million during the six months ended June 30, 2022 to $0.2 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 six months ended June 30, 2022. Other Other expenses increased 23.2% from $4.0 million during the six months ended June 30, 2022 to $4.9 million in the comparable period in 2023 primarily due to higher travel, public relations and directors expenses. Other Income/(Expenses) (in thousands) Six Months Ended June 30, Change Percent Change 2023 2022 Interest expense $ (8,023) $ (7,465) $ (558) 7.5% Gain/(loss) on revaluation/termination of deferred consideration—gold payments 61,953 (14,707) 76,660 n/a Interest income 2,083 1,564 519 33.2% Impairments (4,900) — (4,900) n/a Loss on extinguishment of convertible notes (9,721) — (9,721) n/a Other losses, net (721) (29,181) 28,460 (97.5%) Total other income/(expenses), net $ 40,671 $ (49,789) $ 90,460 n/a Six Months Ended June 30, As a Percent of Revenues: 2023 2022 Interest expense (4.8%) (4.8%) Gain/(loss) on revaluation/termination of deferred consideration—gold payments 36.9% (9.5%) Interest income 1.2% 1.0% Impairments (2.9%) — Loss on extinguishment of convertible notes (5.8%) — Other losses, net (0.4%) (18.7%) Total other income/(expenses), net 24.2% (32.0%) Interest expense Interest expense increased 7.5% from $7.5 million during the six months ended June 30, 2022 to $8.0 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 six months ended June 30, 2022 and 2023 was 4.6% and 4.9%, respectively. Gain/(loss) on revaluation/termination of deferred consideration—gold payments We recognized a loss on revaluation of deferred consideration—gold payments of ($14.7) million and a gain on revaluation/termination of deferred consideration—gold payments of $62.0 million during the six months ended June 30, 2022 and 2023, respectively. This obligation was settled on May 10, 2023 for approximately $137.0 million. See Note 9 to our Consolidated Financial Statements for additional information. 51 Table of Contents Interest income Interest income increased 33.2% from $1.6 million during the six months ended June 30, 2022 to $2.1 million in the comparable period in 2023 due to rising interest rates, partially offset by a decrease in our financial instruments owned. Impairments During the six months ended June 30, 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 six months ended June 30, 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 $0.7 million during the six months ended June 30, 2023. This period includes a non-cash charge of $1.4 million arising from the release of tax-related indemnification assets upon the expiration of the statute of limitations (an equal and offsetting benefit was recognized in income tax expense); gains on our financial instruments owned of $0.9 million and losses on our investments of $0.8 million. Gains and losses also generally arise from the sale of gold earned on management fees paid by our physically-backed gold ETPs, foreign exchange fluctuations and other miscellaneous items. Income Taxes Our effective income tax rate for the six months ended June 30, 2023 was 6.5%, resulting in an income tax expense of $4.9 million. Our tax rate differs from the federal statutory rate of 21% primarily due to a non-taxable gain on revaluation/termination of deferred consideration—gold payments, a reduction in unrecognized tax benefits associated with the release of the tax-related indemnification asset described above and a lower tax rate on foreign earnings. These items were partly offset by a non-deductible loss on extinguishment of our convertible notes during the first quarter of 2023, non-deductible executive compensation and an increase in the deferred tax asset valuation allowance on losses recognized on our investments. Our effective income tax rate benefit for the six months ended June 30, 2022 was 86.2% resulting in an income tax benefit of $14.0 million. Our tax rate differs from the federal statutory rate of 21% primarily due to a reduction in unrecognized tax benefits associated with the release of the tax-related indemnification asset described above and a lower tax rate on foreign earnings. These items were partly offset by a non-taxable loss on revaluation of deferred consideration—gold payments and an increase in the deferred tax asset valuation allowance on losses recognized on our financial instruments 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 measurements provides investors with a consistent way to analyze our performance. These non-GAAP financial measurements exclude the following: • Unrealized gains or losses on revaluation/termination of deferred consideration—gold payments: Deferred consideration—gold payments was an obligation we assumed in connection with the ETFS Acquisition that was carried at fair value. This item represented 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 have had 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 was 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. During the second quarter of 2023, we terminated this obligation for aggregate consideration totaling approximately $137.0 million. 52 Table of Contents • 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 windfalls and shortfalls 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 our 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, expenses incurred in response to an activist campaign and litigation expenses associated with certain provisions of our Stockholder Rights Agreement are excluded when calculating our non-GAAP financial measurements. Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Adjusted Net Income and Diluted Earnings per Share: 2023 2022 2023 2022 Net income/(loss), as reported $ 54,252 $ 8,005 $ 70,485 $ (2,256 ) Deduct/add back: (Gain)/loss on revaluation/termination of deferred consideration—gold payments (41,361 ) (2,311 ) (61,953 ) 14,707 Add back: Expenses incurred in response to an activist campaign, net of income taxes 3,720 1,532 4,452 3,376 Deduct/add back: Unrealized (gain)/loss recognized on our investments, net of income taxes (2,346 ) (55 ) 620 69 Add back/(deduct): Losses/(gains) on financial instruments owned, net of income taxes 762 3,165 (717 ) 7,058 (Deduct)/add back: (Decrease)/increase in deferred tax asset valuation allowance on financial instruments owned and investments (508 ) 901 (31 ) 2,911 Add back: Litigation expenses associated with certain provisions of the Stockholder Rights Agreement, net of income taxes 367 — 367 — Add back/(deduct): Tax shortfalls/(windfalls) upon vesting and exercise of stock-based compensation awards 33 20 (152 ) (545 ) Add back: Loss on extinguishment of convertible notes, net of income taxes — — 9,623 — Add back: Impairments, net of income taxes (where applicable) — — 4,900 — Deduct: Remeasurement of contingent consideration—sale of former Canadian ETF business — — (1,477 ) — Adjusted net income $ 14,919 $ 11,257 $ 26,117 $ 25,320 Deduct: Income distributed to participating securities (496 ) (548 ) (994 ) (1,097 ) Deduct: Undistributed income allocable to participating securities (1,410 ) (724 ) (2,028 ) (1,763 ) Adjusted net income available to common stockholders $ 13,013 $ 9,985 $ 23,095 $ 22,460 Weighted average diluted shares, excluding participating securities (in thousands) (See Note 11 to our Consolidated Financial Statements) 147,815 143,425 146,155 143,271 Adjusted earnings per share – diluted $ 0.09 $ 0.07 $ 0.16 $ 0.16 53 Table of Contents Liquidity and Capital Resources The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations: June 30, 2023 December 31, 2022 Balance Sheet Data (in thousands): Cash and cash equivalents $ 83,735 $ 132,101 Financial instruments owned, at fair value 65,492 126,239 Accounts receivable 34,208 30,549 Securities held-to-maturity 245 259 Total: Liquid assets 183,680 289,148 Less: Total current liabilities (68,281 ) (148,434 ) Less: Other assets—seed capital (WisdomTree Digital Funds) (12,876 ) (1,765 ) Less: Regulatory capital requirements (24,912 ) (25,988 ) Total: Available liquidity $ 77,611 $ 112,961 Six Months Ended June 30, 2023 2022 Cash Flow Data (in thousands): Operating cash flows $ 20,029 $ 8,542 Investing cash flows 51,936 (23,070) Financing cash flows (121,109) (13,073) Foreign exchange rate effect 778 (3,372) Decrease in cash and cash equivalents $ (48,366) $ (30,973) Liquidity We consider our available liquidity to be our liquid assets, less our current liabilities, seed capital in WisdomTree Digital Funds and regulatory capital requirements. 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 payments owed to vendors and third parties in the normal course of business and accrued incentive compensation for employees. Cash and cash equivalents decreased by $48.3 million during the six months ended June 30, 2023 due to $184.3 million used to repurchase and settle at maturity our convertible notes, $50.0 million used to settle our deferred consideration—gold payments obligation, $40.5 million used to purchase financial instruments owned, at fair value, $10.0 million used to purchase investments, $9.7 million used to pay dividends, $3.5 million used to repurchase our common stock, $3.5 million used for convertible notes issuance costs and $1.0 million used to acquire Securrency Transfers, Inc (renamed WisdomTree Transfers, Inc.). These decreases were partly offset by $130.0 million of proceeds from the issuance of convertible notes, $102.0 million of proceeds from the sale of financial instruments owned, at fair value, $20.0 million provided by operating activities, $1.5 million from receipt of contingent consideration and $0.7 million from other activities. Cash and cash equivalents decreased $31.0 million during the six months ended June 30, 2022 due to $32.5 million used to purchase securities owned, $11.9 million used to purchase investments, $9.7 million used to pay dividends on our common stock, $3.4 million used to repurchase our common stock, $3.4 million of foreign exchange rate losses and $0.1 million used in other activities. These decreases were partly offset by $21.5 million of proceeds from the sale of securities owned and $8.5 million of net cash provided by operating activities. 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. 54 Table of Contents 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 six months ended June 30, 2023. The remainder of the 2020 Notes matured on June 15, 2023 and were settled for approximately $59.9 million of cash and approximately 1.0 million shares of common stock of the Company. After the repurchase and maturity of the 2020 Notes and the issuance of the 2023 Notes (and together with the 2021 Notes, the “Convertible Notes”), we had $280.0 million in aggregate principal amount of Convertible Notes outstanding. Key terms of the Convertible Notes are as follows: 2023 Notes 2021 Notes Principal outstanding $130.0 $150.0 Maturity date (unless earlier converted, repurchased or redeemed) August 15, 2028 June 15, 2026 Interest rate 5.75% 3.25% Conversion price $9.54 $11.04 Conversion rate 104.8658 90.5797 Redemption price $12.40 $14.35 • 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 on June 15 and December 15 of each year for 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 and March 15, 2026 for the 2023 Notes and the 2021 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 and March 15, 2026 in respect of the 2023 Notes, and the 2021 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 and June 20, 2023 in respect of the 2023 Notes and the 2021 Notes, respectively, and on or prior to the 55 th 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. 55 Table of Contents • 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 and 144.9275 shares of our common stock per $1,000 principal amount of the 2023 Notes and the 2021 Notes, respectively (the equivalent of 43,551,214 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 respective holders of not less than 25% in aggregate principal amount of the respective series of Convertible Notes outstanding may declare the entire principal amount of all such respective 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 June 30, 2023 was approximately $24.9 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 and purchases made in open market or privately negotiated transactions. During the six months ended June 30, 2023, we repurchased 631,087 shares of our common stock under the repurchase program for an aggregate cost of $3.5 million. Currently, approximately $96.4 million remains under this program for future purchases. In addition, during the three months ended June 30, 2023, we paid approximately $50.0 million in cash to settle our deferred consideration—gold payments obligation (see Note 10 to our Consolidated Financial Statements for additional information) and also paid approximately $59.9 million in cash upon the maturity of our 2020 Notes. Contractual Obligations Convertible Notes We currently have $280.0 million in aggregate principal amount of Convertible Notes outstanding, of which $150.0 million and $130.0 million are scheduled to mature on June 15, 2026 and August 15, 2028 in respect of the 2021 Notes and the 2023 Notes, 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. The Convertible Notes require cash settlement of up to 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 may settle and/or refinance these obligations when due. See the section titled “Issuance of Convertible Notes” above for additional information. Deferred Consideration—Gold Payments On May 10, 2023, the Company entered into and closed on a Sale, Purchase and Assignment Deed to terminate the Company’s obligations relating to the contractual gold payments. Pursuant to that agreement, the Company paid consideration totaling $136.9 million, including an aggregate of $50.0 million in cash and the issuance of 13,087 shares of Series C Non-Voting Convertible Preferred Stock (valued at $86.9 million), which are convertible into 13,087,000 shares of the Company’s common stock. See Note 9 to our Consolidated Financial Statements for additional information. Operating Leases Total future minimum lease payments with respect to our operating lease liabilities were $0.9 million at June 30, 2023. Cash flows generated by our operating activities and existing cash balances should be sufficient to satisfy the future minimum lease payments. 56 Table of Contents 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 , 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 7 to our Consolidated Financial Statements for 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.