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 and consumers to shape their future and support financial professionals to better serve their clients and grow their businesses. We are leveraging 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 have launched next-generation digital products, services and structures, including WisdomTree 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 September 30, 2023. Our family of ETPs includes products that provide exposure to equities, fixed income, commodities, leveraged-and-inverse, currency, alternatives and cryptocurrency 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 product and services 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. 34 Table of Contents Assets Under Management WisdomTree ETPs We offer ETPs covering equities, fixed income, commodities, leveraged-and-inverse, currency, alternatives and cryptocurrency. The chart below sets forth the asset mix of our ETPs at September 30, 2023, June 30, 2023 and September 30, 2022: Market Environment Global equities posted a negative return during the third quarter of 2023 after generating strong gains in the first half of the year. Government bonds also declined in the quarter, with yields rising. Expectations that the Federal Reserve would soon be pivoting to lowering interest rates did not materialize, leading to an end to bullish sentiment and a general market selloff. The energy sector was the best performer during the quarter, attributable to a rise in oil prices. The S&P 500, MSCI EAFE Index (local currency), MSCI EMU Index (local currency) and MSCI Emerging Markets Index (U.S. dollar) decreased by 3.3%, 1.2%, 4.3% and 2.8%, respectively, during the quarter. In addition, the Japanese equities markets appreciated with the MSCI Japan Index increasing 1.7% in local currency terms for the quarter. Gold prices decreased by 2.2%. The U.S. dollar strengthened 2.8%, 3.2% and 3.1% versus the euro, British pound and Japanese yen, respectively. 35 Table of Contents U.S. Listed ETF Industry Flows U.S. listed ETF industry net flows were $110.4 billion for the three months ended September 30, 2023. U.S. equity and fixed income gathered the majority of those flows. Source: Morningstar 36 Table of Contents European Listed ETP Industry Flows European listed ETP industry net flows were $34.0 billion for the three months ended September 30, 2023. Equity and fixed income gathered the majority of those flows. Source: Morningstar 37 Table of Contents 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 $65.9 billion at June 30, 2023 to $68.0 billion at September 30, 2023 due to net inflows, partly offset by market depreciation. 38 Table of Contents European Listed ETPs The AUM of our European listed (including internationally cross-listed) ETPs, or European listed ETPs, decreased from $27.8 billion at June 30, 2023 to $25.7 billion at September 30, 2023, due to net outflows and market depreciation. 39 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 24.9% from the three months ended September 30, 2022 to $90.4 million in the comparable period in 2023 primarily due to higher average AUM. ● Expenses – Total operating expenses increased 10.7% from the three months ended September 30, 2022 to $63.7 million in the comparable period in 2023 primarily due to higher stock-based compensation and headcount, fund management and administration costs, professional fees, third-party distribution fees, marketing expenses and sales and business development expenses. These increases were partly offset by the termination of our deferred consideration—gold payments obligation. ● Other Income/(Expenses) – Other income/(expenses) includes interest income and interest expense, gains on revaluation/termination of deferred consideration–gold payments, impairments and other losses and gains. Further information is provided herein. ● Net income/(loss) – We reported net income of $13.0 million and $81.2 million during the three months ended September 30, 2023 and 2022, respectively. 40 Table of Contents 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 (unchanged from our guidance provided last quarter). 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 our performance to date, we anticipate our compensation expense to be near the high-end of our guidance range. Discretionary Spending Discretionary spending includes marketing, sales, professional fees, occupancy and equipment, depreciation and amortization and other expenses. During the nine months ended September 30, 2023, our discretionary spending was $43.4 million. We currently estimate our discretionary spending for the year ending December 31, 2023 to be near the high-end of our guidance range of $56.0 million to $59.0 million (unchanged from our guidance range 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 nine months ended September 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 79.6% during the nine months ended September 30, 2023. Our gross margin guidance for the year ending December 31, 2023 is estimated to be 79% to 80% (previously 79%) which we believe should be sustainable at current AUM levels. Contractual Gold Payments Our contractual gold payments expense of $6.1 million during the nine months ended September 30, 2023 will be zero going forward as our obligation to make continuing contractual gold payments was terminated in May 2023. Third-Party Distribution Fees We currently estimate third-party distribution fees to range from $9.0 million to $10.0 million (previously $8.0 million to $9.0 million) driven largely by AUM growth we are experiencing in Latin America. 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 $3.5 million to $4.0 million (previously $3.0 million) taking into consideration the magnitude of our investments and higher interest rates. Income Tax Expense We currently estimate that our consolidated normalized effective tax rate will be 24% (unchanged from our guidance provided last quarter) taking into consideration the current distribution of profits among 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 previously recognized, 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. 41 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 Nine Months Ended September 30, June 30, September 30, September 30, September 30, 2023 2023 2022 2023 2022 GLOBAL ETPs (in millions ) Beginning of period assets $ 93,666 $ 90,740 $ 74,302 $ 81,993 $ 77,479 Inflows 1,983 2,327 1,747 10,651 6,918 Market (depreciation)/appreciation (1,907 ) 599 (5,171 ) 1,098 (13,515 ) Fund closures (7 ) — — (7 ) (4 ) End of period assets $ 93,735 $ 93,666 $ 70,878 $ 93,735 $ 70,878 Average assets during the period $ 95,743 $ 91,578 $ 74,677 $ 91,609 $ 76,742 Average ETP advisory fee during the period 0.36 % 0.36 % 0.38 % 0.36 % 0.39 % Revenue days 92 91 92 273 273 Number of ETPs—end of period 353 353 347 353 347 U.S. LISTED ETFs (in millions ) Beginning of period assets $ 65,903 $ 61,283 $ 47,255 $ 55,973 $ 48,210 Inflows 3,601 3,249 3,812 10,862 10,340 Market (depreciation)/appreciation (1,486 ) 1,371 (3,024 ) 1,183 (10,507 ) End of period assets $ 68,018 $ 65,903 $ 48,043 $ 68,018 $ 48,043 Average assets during the period $ 68,008 $ 62,712 $ 49,466 $ 63,383 $ 48,412 Number of ETFs – end of the period 80 80 78 80 78 EUROPEAN LISTED ETPs (in millions ) Beginning of period assets $ 27,763 $ 29,457 $ 27,047 $ 26,020 $ 29,269 Outflows (1,618 ) (922 ) (2,065 ) (211 ) (3,422 ) Market depreciation (421 ) (772 ) (2,147 ) (85 ) (3,008 ) Fund closures (7 ) — — (7 ) (4 ) End of period assets $ 25,717 $ 27,763 $ 22,835 $ 25,717 $ 22,835 Average assets during the period $ 27,735 $ 28,866 $ 25,211 $ 28,226 $ 28,330 Number of ETPs—end of period 273 273 269 273 269 PRODUCT CATEGORIES (in millions ) U.S. Equity Beginning of period assets $ 26,001 $ 24,534 $ 21,058 $ 24,112 $ 23,860 Inflows 864 414 1,239 1,129 2,324 Market (depreciation)/appreciation (1,222 ) 1,053 (1,345 ) 402 (5,232 ) End of period assets $ 25,643 $ 26,001 $ 20,952 $ 25,643 $ 20,952 Average assets during the period $ 26,502 $ 24,732 $ 22,534 $ 25,321 $ 22,677 Fixed Income Beginning of period assets $ 20,204 $ 18,696 $ 9,178 $ 15,259 $ 4,321 Inflows 1,675 1,472 2,628 6,663 7,923 Market (depreciation)/appreciation (82 ) 36 (123 ) (125 ) (561 ) End of period assets $ 21,797 $ 20,204 $ 11,683 $ 21,797 $ 11,683 Average assets during the period $ 20,955 $ 19,173 $ 10,065 $ 19,097 $ 7,380 Commodity & Currency Beginning of period assets $ 22,384 $ 24,924 $ 23,624 $ 22,097 $ 24,599 Outflows (1,815 ) (1,513 ) (2,179 ) (1,325 ) (3,707 ) Market depreciation (103 ) (1,027 ) (1,884 ) (306 ) (1,331 ) End of period assets $ 20,466 $ 22,384 $ 19,561 $ 20,466 $ 19,561 Average assets during the period $ 22,278 $ 24,033 $ 21,625 $ 23,372 $ 24,427 International Developed Market Equity Beginning of period assets $ 13,423 $ 11,433 $ 9,968 $ 10,195 $ 11,894 Inflows/(outflows) 798 1,592 (115 ) 2,840 61 Market (depreciation)/appreciation (319 ) 398 (670 ) 867 (2,772 ) End of period assets $ 13,902 $ 13,423 $ 9,183 $ 13,902 $ 9,183 Average assets during the period $ 13,873 $ 12,276 $ 10,032 $ 12,343 $ 10,757 42 Table of Contents Three Months Ended Nine Months Ended September 30, June 30, September 30, September 30, September 30, 2023 2023 2022 2023 2022 Emerging Market Equity Beginning of period assets $ 9,191 $ 8,811 $ 8,386 $ 8,116 $ 10,375 Inflows 451 329 114 1,266 80 Market (depreciation)/appreciation (73 ) 51 (1,005 ) 187 (2,960 ) End of period assets $ 9,569 $ 9,191 $ 7,495 $ 9,569 $ 7,495 Average assets during the period $ 9,652 $ 8,998 $ 8,329 $ 9,105 $ 9,200 Leveraged & Inverse Beginning of period assets $ 1,864 $ 1,785 $ 1,618 $ 1,754 $ 1,775 (Outflows)/inflows (1 ) 12 45 54 133 Market (depreciation)/appreciation (82 ) 67 (140 ) (27 ) (385 ) End of period assets $ 1,781 $ 1,864 $ 1,523 $ 1,781 $ 1,523 Average assets during the period $ 1,894 $ 1,798 $ 1,589 $ 1,816 $ 1,728 Alternatives Beginning of period assets $ 340 $ 306 $ 305 $ 310 $ 261 Inflows 5 22 16 9 79 Market (depreciation)/appreciation (11 ) 12 (15 ) 15 (34 ) End of period assets $ 334 $ 340 $ 306 $ 334 $ 306 Average assets during the period $ 342 $ 320 $ 313 $ 323 $ 296 Cryptocurrency Beginning of period assets $ 248 $ 239 $ 151 $ 136 $ 357 Inflows/(outflows) 10 (1 ) — 22 40 Market (depreciation)/appreciation (15 ) 10 12 85 (234 ) End of period assets $ 243 $ 248 $ 163 $ 243 $ 163 Average assets during the period $ 238 $ 236 $ 178 $ 221 $ 256 Closed ETPs Beginning of period assets $ 11 $ 12 $ 14 $ 14 $ 37 Outflows (4 ) — (1 ) (7 ) (15 ) Market depreciation — (1 ) (1 ) — (6 ) Fund closures (7 ) — — (7 ) (4 ) End of period assets $ — $ 11 $ 12 $ — $ 12 Average assets during the period $ 9 $ 12 $ 12 $ 11 $ 21 Headcount: 299 291 274 299 274 Note: Previously issued statistics may be restated due to fund closures and trade adjustments Source: WisdomTree 43 Table of Contents Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Selected Operating and Financial Information Three Months Ended September 30, Percent 2023 2022 Change Change AUM (in millions) Average AUM $ 95,743 $ 74,677 $ 21,066 28.2% Operating Revenues (in thousands) Advisory fees $ 86,598 $ 70,616 $ 15,982 22.6% Other income 3,825 1,798 2,027 112.7% Total operating revenues $ 90,423 $ 72,414 $ 18,009 24.9% Operating Revenues Advisory fees Advisory fee revenues increased 22.6% from $70.6 million during the three months ended September 30, 2022 to $86.6 million in the comparable period in 2023 due to higher average AUM, partially offset by a lower average advisory fee. Our average advisory fee was 0.36% during the three months ended September 30, 2023 and 0.38% during the comparable period in 2022. Other income Other income increased 112.7% from $1.8 million during the three months ended September 30, 2022 to $3.8 million in the comparable period in 2023 primarily due to large flows from some of our European products. Operating Expenses Three Months Ended September 30, Percent (in thousands) 2023 2022 Change Change Compensation and benefits $ 27,955 $ 23,714 $ 4,241 17.9% Fund management and administration 18,023 16,285 1,738 10.7% Marketing and advertising 3,833 3,145 688 21.9% Sales and business development 3,383 2,724 659 24.2% Contractual gold payments — 4,105 (4,105 ) n/a Professional fees 3,719 2,367 1,352 57.1% Occupancy, communications and equipment 1,203 986 217 22.0% Depreciation and amortization 307 58 249 429.3% Third-party distribution fees 2,694 1,833 861 47.0% Other 2,601 2,324 277 11.9% Total operating expenses $ 63,718 $ 57,541 $ 6,177 10.7% Three Months Ended September 30, As a Percent of Revenues: 2023 2022 Compensation and benefits 31.0 % 32.7 % Fund management and administration 20.0 % 22.5 % Marketing and advertising 4.2 % 4.3 % Sales and business development 3.7 % 3.8 % Contractual gold payments 0.0 % 5.7 % Professional fees 4.1 % 3.3 % Occupancy, communications and equipment 1.3 % 1.4 % Depreciation and amortization 0.3 % 0.1 % Third-party distribution fees 3.0 % 2.5 % Other 2.9 % 3.2 % Total operating expenses 70.5 % 79.5 % 44 Table of Contents Compensation and benefits Compensation and benefits expense increased 17.9% from $23.7 million during the three months ended September 30, 2022 to $28.0 million in the comparable period in 2023 due to higher incentive and stock-based compensation expense, as well as increased headcount. Headcount was 274 and 299 at September 30, 2022 and 2023, respectively. Fund management and administration Fund management and administration expense increased 10.7% from $16.3 million during the three months ended September 30, 2022 to $18.0 million in the comparable period in 2023 primarily due to higher average AUM, product launches and inflows. We had 78 U.S. listed ETFs and 269 European listed ETPs at September 30, 2022 compared to 80 U.S. listed ETFs and 273 European listed ETPs at September 30, 2023. Marketing and advertising Marketing and advertising expense increased 21.9% from $3.1 million during the three months ended September 30, 2022 to $3.8 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 24.2% from $2.7 million during the three months ended September 30, 2022 to $3.4 million in the comparable period in 2023 primarily resulting from increases in travel and events spending, as well as higher spending on sales tools and data. Contractual gold payments Contractual gold payments expense decreased from $4.1 million during the three months ended September 30, 2022 to $0.0 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 57.1% from $2.4 million during the three months ended September 30, 2022 to $3.7 million in the comparable period in 2023 primarily due to higher expenses related to our digital assets initiative. Occupancy, communications and equipment Occupancy, communications and equipment expense was essentially unchanged from the three months ended September 30, 2022. Depreciation and amortization Depreciation and amortization expense increased 429.3% from $0.1 million during the three months ended September 30, 2022 to $0.3 million in the comparable period in 2023 due to amortization of software development costs. Third-party distribution fees Third-party distribution fees increased 47.0% from $1.8 million during the three months ended September 30, 2022 to $2.7 million in the comparable period in 2023 primarily due to AUM growth we are experiencing in Latin America. Other Other expenses were essentially unchanged from the three months ended September 30, 2022. 45 Table of Contents Other Income/(Expenses) Three Months Ended September 30, Percent (in thousands) 2023 2022 Change Change Interest expense $ (3,461 ) $ (3,734 ) $ 273 (7.3% ) Gain on revaluation/termination of deferred consideration—gold payments — 77,895 (77,895 ) n/a Interest income 791 811 (20 ) (2.5% ) Impairments (2,703 ) — (2,703 ) n/a Other losses, net (2,512 ) (5,289 ) 2,777 (52.5% ) Total other income/(expenses), net $ (7,885 ) $ 69,683 $ (77,568 ) (111.3% ) Three Months Ended September 30, As a Percent of Revenues: 2023 2022 Interest expense (3.8 %) (5.2 %) Gain on revaluation/termination of deferred consideration—gold payments n/ a 107.6 % Interest income 0.9 % 1.1 % Impairments (3.0 %) 0.0 % Other losses, net (2.8 %) (7.3 %) Total other income/(expenses), net (8.7 %) 96.2 % Interest expense Interest expense decreased 7.3% from $3.7 million during the three months ended September 30, 2022 to $3.5 million in the comparable period in 2023 due to a lower level of debt outstanding. Our effective interest rate during the three months ended September 30, 2022 and 2023 was 4.6% and 5.0%, respectively. Interest income Interest income was essentially unchanged from the three months ended September 30, 2022. Impairments During the three months ended September 30, 2023, we recognized a non-cash impairment charge of $2.7 million, primarily related to our investment in Securrency, Inc., as we marked our investment to its estimated realizable value in connection with Securrency entering into an agreement to be acquired by an unrelated third party. Other losses, net Other losses, net was $5.3 million and $2.5 million during the three months ended September 30, 2022 and 2023, respectively. This quarter includes losses on our financial instruments of $2.0 million and other losses on our investments of $0.4 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 during the three months ended September 30, 2023 was 31.0%, resulting in income tax expense of $5.8 million. The effective tax rate differs from the federal statutory rate of 21% primarily due to an increase in the deferred tax asset valuation allowance on losses recognized on the Company's investments and non-deductible executive compensation. Our effective income tax rate during the three months ended September 30, 2022 of 3.9% resulted in an income tax expense of $3.3 million. Our effective tax rate differs from the federal statutory rate of 21% primarily due to a non-taxable gain on revaluation of deferred consideration. This was partly offset by an increase in the deferred tax asset valuation allowance on losses recognized on financial instruments owned. 46 Table of Contents Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Selected Operating and Financial Information Nine Months Ended September 30, Percent 2023 2022 Change Change AUM (in millions) Average AUM $ 91,609 $ 76,742 $ 14,867 19.4% Operating Revenues (in thousands) Advisory fees $ 246,239 $ 222,719 $ 23,520 10.6% Other income 11,952 5,316 6,636 124.8% Total operating revenues $ 258,191 $ 228,035 $ 30,156 13.2% Operating Revenues Advisory fees Advisory fee revenues increased 10.6% from $222.7 million during the nine months ended September 30, 2022 to $246.2 million in the comparable period in 2023 due to higher average AUM, partially offset by a lower average advisory fee. Our average advisory fee was 0.39% during the nine months ended September 30, 2022 and 0.36% during the comparable period in 2023. Other income Other income increased 124.8% from $5.3 million during the nine months ended September 30, 2022 to $12.0 million in the comparable period in 2023 primarily due to large flows from some of our European products. Operating Expenses Nine Months Ended September 30, Percent (in thousands) 2023 2022 Change Change Compensation and benefits $ 81,672 $ 73,066 $ 8,606 11.8% Fund management and administration 52,903 47,855 5,048 10.5% Marketing and advertising 12,305 11,062 1,243 11.2% Sales and business development 9,703 8,464 1,239 14.6% Contractual gold payments 6,069 13,001 (6,932 ) (53.3% ) Professional fees 15,768 11,134 4,634 41.6% Occupancy, communications and equipment 3,476 2,788 688 24.7% Depreciation and amortization 537 158 379 239.9% Third-party distribution fees 6,828 5,863 965 16.5% Other 7,473 6,278 1,195 19.0% Total operating expenses $ 196,734 $ 179,669 $ 17,065 9.5% Nine Months Ended September 30, As a Percent of Revenues: 2023 2022 Compensation and benefits 31.6 % 31.9 % Fund management and administration 20.5 % 21.0 % Marketing and advertising 4.8 % 4.9 % Sales and business development 3.8 % 3.7 % Contractual gold payments 2.4 % 5.7 % Professional fees 6.1 % 4.9 % Occupancy, communications and equipment 1.3 % 1.2 % Depreciation and amortization 0.2 % 0.1 % Third-party distribution fees 2.6 % 2.6 % Other 2.9 % 2.8 % Total operating expenses 76.2 % 78.8 % 47 Table of Contents Compensation and benefits Compensation and benefits expense increased 11.8% from $73.1 million during the nine months ended September 30, 2022 to $81.7 million in the comparable period in 2023 primarily due to higher stock-based compensation and increased headcount. Fund management and administration Fund management and administration expense increased 10.5% from $47.9 million during the nine months ended September 30, 2022 to $52.9 million in the comparable period in 2023 primarily due to higher average AUM. Marketing and advertising Marketing and advertising expense increased 11.2% from $11.1 million during the nine months ended September 30, 2022 to $12.3 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 14.6% from $8.5 million during the nine months ended September 30, 2022 to $9.7 million in the comparable period in 2023 primarily resulting from increases in travel and events spending. Contractual gold payments Contractual gold payments expense decreased 53.3% from $13.0 million during the nine months ended September 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. Professional fees Professional fees increased 41.6% from $11.1 million during the nine months ended September 30, 2022 to $15.8 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 terminate our deferred consideration—gold payments obligation and expenses related to our digital assets initiative. Occupancy, communications and equipment Occupancy, communications and equipment expense increased 24.7% from $2.8 million during the nine months ended September 30, 2022 to $3.5 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 239.9% from $0.2 million during the nine months ended September 30, 2022 to $0.5 million in the comparable period in 2023 due to amortization of software development costs. Third-party distribution fees Third-party distribution fees increased 16.5% from $5.9 million during the nine months ended September 30, 2022 to $6.8 million in the comparable period in 2023 primarily due to AUM growth we are experiencing in Latin America. Other Other expenses increased 19.0% from $6.3 million during the nine months ended September 30, 2022 to $7.5 million in the comparable period in 2023 primarily due to higher travel, public relations and directors expenses. 48 Table of Contents Other Income/(Expenses) Nine Months Ended September 30, Percent (in thousands) 2023 2022 Change Change Interest expense $ (11,484 ) $ (11,199 ) $ (285 ) 2.5 % Gain on revaluation/termination of deferred consideration—gold payments 61,953 63,188 (1,235 ) (2.0 %) Interest income 2,874 2,375 499 21.0 % Impairments (7,603 ) — (7,603 ) n/a Loss on extinguishment of convertible notes (9,721 ) — (9,721 ) n/a Other losses, net (3,233 ) (34,470 ) 31,237 (90.6 %) Total other income/(expenses), net $ 32,786 $ 19,894 $ 12,892 64.8 % Nine Months Ended September 30, As a Percent of Revenues: 2023 2022 Interest expense (4.4 %) (4.9 %) Gain on revaluation/termination of deferred consideration—gold payments 24.0 % 27.7 % Interest income 1.1 % 1.0 % Impairments (2.9 %) n/a Loss on extinguishment of convertible note (3.8 %) n/a Other losses, net (1.3 %) (15.1 %) Total other income/(expenses), net 12.7 % 8.7 % Interest expense Interest expense was essentially unchanged from the nine months ended September 30, 2022. Gain on revaluation/termination of deferred consideration—gold payments We recognized a gain on revaluation of deferred consideration—gold payments of $63.2 million and $62.0 million during the nine months ended September 30, 2022 and 2023, respectively. This obligation was terminated on May 10, 2023 for approximately $137.0 million. See Note 9 to our Consolidated Financial Statements for additional information. Interest income Interest income increased 21.0% from $2.4 million during the nine months ended September 30, 2022 to $2.9 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 nine months ended September 30, 2023, we recognized a non-cash impairment charge of $7.6 million primarily related to our investment in Securrency, Inc., as we marked our investment to its estimated realizable value in connection with Securrency's announced sale to an unrelated third party. Loss on Extinguishment of Convertible Notes During the nine months ended September 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 $34.5 million and $3.2 million during the nine months ended September 30, 2022 and 2023, respectively. 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); losses on our financial instruments owned of $1.0 million and losses on our investments of $1.2 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 during the nine months ended September 30, 2023 was 11.4%, resulting in an income tax expense of $10.8 million. Our effective tax rate differs from the federal statutory rate of 21% primarily due to a non-taxable gain on revaluation/termination of deferred consideration, 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, an increase in the deferred tax asset valuation allowance on losses recognized on our investments and non-deductible executive compensation. 49 Table of Contents Our effective income tax rate during the nine months ended September 30, 2022 was negative 15.7%, resulting in an income tax benefit of $10.7 million. Our effective tax rate differs from the federal statutory rate of 21% primarily due to the reduction in unrecognized tax benefits, a non-taxable gain on revaluation of deferred consideration and a lower tax rate on foreign earnings. These items were partly offset by an increase in the deferred tax asset valuation allowance on losses recognized on 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 calculating our non-GAAP financial measurements as it was not core to our operating business. The item was 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. ● 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 calculating our non-GAAP financial measurements 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. 50 Table of Contents Three Months Ended Nine Months Ended Adjusted Net Income and Diluted Earnings per Share: September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Net income, as reported $ 12,984 $ 81,229 $ 83,469 $ 78,973 Add back: Impairments, net of income taxes 2,046 — 5,756 — Add back: Losses on financial instruments owned, net of income taxes 1,479 4,778 762 11,836 Add back: Increase in deferred tax asset valuation allowance on financial instruments owned and investments 1,234 1,454 2,393 4,365 Add back/deduct: Unrealized loss/(gain) recognized on our investments, net of income taxes 323 (248 ) 943 (179 ) (Deduct)/add back: Tax (windfalls)/shortfalls upon vesting and exercise of stock-based compensation awards (18 ) 4 (170 ) (541 ) Deduct: Gain on revaluation/termination of deferred consideration—gold payments — (77,895 ) (61,953 ) (63,188 ) Add back: Loss on extinguishment of convertible notes, net of income taxes — — 9,623 — Add back: Expenses incurred in response to an activist campaign, net of income taxes — — 4,452 3,376 Deduct: Remeasurement of contingent consideration—sale of former Canadian ETF business — — (1,477 ) — Add back: Litigation expenses associated with certain provisions of the Stockholder Rights Agreement, net of income taxes — — 367 — Adjusted net income $ 18,048 $ 9,322 $ 44,165 $ 34,642 Deduct: Income distributed to participating securities (889 ) (546 ) (1,884 ) (1,644 ) Deduct: Undistributed income allocable to participating securities (2,128 ) (503 ) (4,033 ) (2,266 ) Adjusted net income available to common stockholders $ 15,031 $ 8,273 $ 38,248 $ 30,732 Weighted average diluted shares, excluding participating securities (in thousands) (See Note 11 to our Consolidated Financial Statements) 148,432 143,407 147,572 143,245 Adjusted earnings per share – diluted $ 0.10 $ 0.06 $ 0.26 $ 0.21 Liquidity and Capital Resources The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations: September 30, 2023 December 31, 2022 Balance Sheet Data (in thousands): Cash and cash equivalents $ 89,481 $ 132,101 Financial instruments owned, at fair value 78,950 126,239 Accounts receivable 35,868 30,549 Securities held-to-maturity 237 259 Total: Liquid assets 204,536 289,148 Less: Total current liabilities (75,361 ) (148,434 ) Less: Other assets — seed capital (WisdomTree Digital Funds) (12,149 ) (1,765 ) Less: Regulatory capital requirements (27,844 ) (25,988 ) Total: Available liquidity $ 89,182 $ 112,961 Nine Months Ended September 30, 2023 2022 Cash Flow Data (in thousands): Operating cash flows $ 48,350 $ 43,113 Investing cash flows 35,860 (25,626 ) Financing cash flows (126,389 ) (17,939 ) Foreign exchange rate effect (441 ) (7,557 ) Decrease in cash and cash equivalents $ (42,620 ) $ (8,009 ) 51 Table of Contents 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 $42.6 million during the nine months ended September 30, 2023 due to $184.3 million used to repurchase and settle at maturity our convertible notes, $56.8 million used to purchase financial instruments owned, at fair value, $50.0 million used to settle our deferred consideration—gold payments obligation, $14.9 million used to pay dividends, $10.0 million used to purchase investments, $3.6 million used to repurchase our common stock, $3.5 million used for convertible notes issuance costs, $1.0 million used to acquire Securrency Transfers, Inc. (renamed WisdomTree Transfers, Inc.) and $0.7 million used for other activities. These decreases were partly offset by $130.0 million of proceeds from the issuance of convertible notes, $102.3 million of proceeds from the sale of financial instruments owned, at fair value, $48.4 million provided by operating activities and $1.5 million from receipt of contingent consideration. Cash and cash equivalents decreased $8.0 million during the nine months ended September 30, 2022 due to $41.2 million used to purchase securities owned, $11.9 million used to purchase investments, $14.5 million used to pay dividends on our common stock, $3.4 million used to repurchase our common stock, $7.6 million of foreign exchange rate losses and $0.2 million used in other activities. These decreases were partly offset by $27.7 million of proceeds from the sale of securities owned and $43.1 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. 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 nine months ended September 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. 52 Table of Contents ● 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. ● 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 our 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 September 30, 2023 was approximately $27.8 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. 53 Table of Contents During the nine months ended September 30, 2023, we repurchased 635,653 shares of our common stock under the repurchase program for an aggregate cost of $3.6 million. Currently, approximately $96.4 million remains under this program for future purchases. In addition, during the nine months ended September 30, 2023, we paid approximately $50.0 million in cash to settle our deferred consideration—gold payments obligation (see Note 9 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 September 30, 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. 54 Table of Contents 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 performed on November 30, 2022 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.