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, 2023 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2024. 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 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 Digital Funds and tokenized assets, as well as our blockchain-native digital wallet, WisdomTree Prime. WisdomTree Prime is available in the U.S. in 44 states and to approximately 79% of the U.S. population. We had approximately $109.7 billion in AUM as of June 30, 2024. Our family of ETPs includes products that provide exposure to equities, fixed income, commodities, leveraged-and-inverse, currency, cryptocurrency and alternatives 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 and Portfolio Solutions programs 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 we believe 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 what 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 complements our existing core competencies in a holistic manner and will 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. and were ultimately renamed WisdomTree, Inc. on November 7, 2022. 35 Table of Contents Assets Under Management WisdomTree ETPs We offer ETPs covering equities, commodities and currency, fixed income, leveraged-and-inverse, cryptocurrency and alternatives. The chart below sets forth the asset mix of our ETPs at June 30, 2024, March 31, 2024 and June 30, 2023: Market Environment Emerging markets outperformed developed markets in the second quarter of 2024. U.S. shares gained, led higher by the information technology and communication service sectors. Annual U.S. inflation eased slightly and the labor market remained strong. Eurozone shares moved lower in the second quarter of 2024 amid political uncertainty and sticky inflation. The S&P 500, MSCI EAFE Index (local currency), MSCI EMU Index (local currency), MSCI Japan Index (local currency), MSCI Emerging Markets Index (U.S. dollar) and gold prices increased by 9.9%, 8.0%, 8.1%, 12.8%, 2.4% and 5.3%, respectively, during the quarter. The U.S. dollar strengthened 0.7% and 5.9% versus the euro and the Japanese yen, respectively, and weakened 0.1% versus the British pound during the quarter. 36 Table of Contents U.S. Listed ETF Industry Flows U.S. listed ETF industry net flows were $208.9 billion for the three months ended June 30, 2024. U.S. equity and fixed income gathered the majority of those flows. Source: Morningstar 37 Table of Contents European Listed ETP Industry Flows European listed ETP industry net flows were $53.9 billion for the three months ended June 30, 2024. Equity and fixed income gathered the majority of those flows. Source: Morningstar 38 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 $78.1 billion at March 31, 2024 to $79.7 billion at June 30, 2024 due to market appreciation and net inflows. European Listed ETPs The AUM of our European listed (including internationally cross-listed) ETPs, or European listed ETPs, increased from $29.1 billion at March 31, 2024 to $30.0 billion at June 30, 2024 due to market appreciation, partly offset by net outflows. 39 Table of Contents Consolidated Operating Results The following table sets forth our revenues and net income for the most recent five quarters. ● Revenues – Total revenues increased 24.9% from the three months ended June 30, 2023 to $107.0 million in the comparable period in 2024 primarily due to higher average AUM and higher other revenues attributable to our European listed products. ● Expenses – Total operating expenses increased 8.9% from the three months ended June 30, 2023 to $73.5 million in the comparable period in 2024 primarily due to higher incentive and stock-based compensation expense and increased headcount, fund management and administration costs, third-party distribution fees and marketing expenses. These increases were partly offset by lower professional fees and the termination of the deferred consideration—gold payments obligation on May 10, 2023. ● 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 – We reported net income of $21.8 million and $54.3 million during the three months ended June 30, 2024 and 2023, respectively. Guidance Update for the Year Ending December 31, 2024 Compensation Expense Our compensation to revenue ratio for the year ending December 31, 2024 is currently estimated to range from 28% to 29% (our prior compensation expense guidance was $108.0 million to $118.0 million). Our estimated compensation to revenue ratio takes into consideration planned hires for 2024 and variability in incentive compensation, with drivers including the magnitude of flows, revenues and operating income growth, margin expansion and share price performance in relation to our peers. 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, 2024, discretionary spending was $30.5 million. We currently estimate discretionary spending for the year ending December 31, 2024 to range from $64.0 million to $68.0 million (unchanged from our guidance range provided last quarter). Due to seasonality, the discretionary spend for the remainder of the year will likely be more skewed toward the fourth quarter. Not included in the guidance above are non-recurring expenses in response to an activist campaign, including $5.0 million incurred during the six months ended June 30, 2024. 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 80.3% during the six months ended June 30, 2024 and we have updated our gross margin guidance for the year ending December 31, 2024 to be between 80% and 81% (previously 79.0% to 80.0%) considering current AUM levels and higher forecasted other revenues going forward. If AUM increases from continued organic flow growth or favorable market conditions, we would anticipate further gross margin expansion. 40 Table of Contents Third-Party Distribution Fees We currently estimate third-party distribution fees to range from $10.0 million to $11.0 million (unchanged from our guidance range provided last quarter), which is dependent upon the AUM growth on our respective platforms. Interest Expense We currently estimate our interest expense for the year ending December 31, 2024 to be $16.5 million, which is inclusive of approximately $2.6 million of interest cost we are required to impute under U.S. GAAP related to our interest-free financing of the shares of Series C Non-Voting Convertible Preferred Stock (the “Series C Preferred Stock”) we repurchased from GBH in November 2023. Interest Income We currently estimate our interest income for the year ending December 31, 2024 to be $5.0 million, based upon the magnitude of our forecasted interest earning assets. Income Tax Expense We currently estimate that our consolidated normalized effective tax rate will be 24.0% to 25.0% (unchanged from our guidance range provided last quarter) taking into consideration the current distribution of profits among our U.S. and European businesses. This estimated rate may change and is dependent upon our actual taxable income earned in relation to our forecasts as well as any other items which may arise that are not currently forecasted. Such items may include, but are not limited to, increases or decreases in valuation allowances and any stock-based compensation windfalls or shortfalls. Additional corporate tax legislation could also impact our normalized effective tax rate. Weighted Average Diluted Shares We currently estimate our weighted average diluted shares to be between 166.0 million and 168.0 million during the year ending December 31, 2024. This guidance does not take into consideration any variability in shares associated with our convertible notes. While our convertible notes require principal to be paid in cash, our diluted shares would need to be increased for any incremental shares associated with an exercise of the conversion option if our stock price exceeds the applicable conversion price of our convertible notes of $9.54 per share for the 5.75% Convertible Senior Notes due 2028 and $11.04 per share for the 3.25% Convertible Senior Notes due 2026. 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 Six Months Ended June 30, March 31, June 30, June 30, June 30, 2024 2024 2023 2024 2023 GLOBAL ETPs (in millions ) Beginning of period assets $ 107,230 $ 100,124 $ 90,740 $ 100,124 $ 81,993 Inflows 340 1,990 2,327 2,330 8,668 Market appreciation 2,116 5,116 599 7,232 3,005 End of period assets $ 109,686 $ 107,230 $ 93,666 $ 109,686 $ 93,666 Average assets during the period $ 108,392 $ 102,360 $ 91,578 $ 105,376 $ 89,543 Average advisory fee during the period 0.37 % 0.36 % 0.36 % 0.37 % 0.36 % Number of ETPs—end of period 350 338 344 350 344 U.S. LISTED ETFs (in millions ) Beginning of period assets $ 78,087 $ 72,486 $ 61,283 $ 72,486 $ 55,973 Inflows 1,106 1,983 3,249 3,089 7,261 Market appreciation 529 3,618 1,371 4,147 2,669 End of period assets $ 79,722 $ 78,087 $ 65,903 $ 79,722 $ 65,903 Average assets during the period $ 78,436 $ 74,730 $ 62,712 $ 76,583 $ 61,071 Number of ETFs – end of the period 78 77 80 78 80 EUROPEAN LISTED ETPs (in millions) Beginning of period assets $ 29,143 $ 27,638 $ 29,457 $ 27,638 $ 26,020 (Outflows)/inflows (766 ) 7 (922 ) (759 ) 1,407 Market appreciation/(depreciation) 1,587 1,498 (772 ) 3,085 336 End of period assets $ 29,964 $ 29,143 $ 27,763 $ 29,964 $ 27,763 Average assets during the period $ 29,956 $ 27,630 $ 28,866 $ 28,793 $ 28,472 Number of ETPs—end of period 272 261 264 272 264 PRODUCT CATEGORIES (in millions) U.S. Equity Beginning of period assets $ 31,670 $ 29,156 $ 24,534 $ 29,156 $ 24,112 Inflows 221 536 414 757 265 Market (depreciation)/appreciation (57 ) 1,978 1,053 1,921 1,624 End of period assets $ 31,834 $ 31,670 $ 26,001 $ 31,834 $ 26,001 Average assets during the period $ 31,252 $ 30,056 $ 24,732 $ 30,654 $ 24,729 Commodity & Currency Beginning of period assets $ 21,944 $ 21,336 $ 24,924 $ 21,336 $ 22,097 (Outflows)/inflows (1,499 ) (460 ) (1,513 ) (1,959 ) 490 Market appreciation/(depreciation) 1,542 1,068 (1,027 ) 2,610 (203 ) End of period assets $ 21,987 $ 21,944 $ 22,384 $ 21,987 $ 22,384 Average assets during the period $ 22,437 $ 20,837 $ 24,033 $ 21,635 $ 23,918 Fixed Income Beginning of period assets $ 21,218 $ 21,197 $ 18,708 $ 21,197 $ 15,273 Inflows/(outflows) 236 (14 ) 1,471 222 4,984 Market (depreciation)/appreciation (24 ) 35 36 11 (42 ) End of period assets $ 21,430 $ 21,218 $ 20,215 $ 21,430 $ 20,215 Average assets during the period $ 21,277 $ 21,082 $ 19,185 $ 21,180 $ 18,181 International Developed Market Equity Beginning of period assets $ 18,103 $ 15,103 $ 11,433 $ 15,103 $ 10,195 Inflows 1,253 1,599 1,593 2,852 2,043 Market appreciation 29 1,401 397 1,430 1,185 End of period assets $ 19,385 $ 18,103 $ 13,423 $ 19,385 $ 13,423 Average assets during the period $ 18,809 $ 16,688 $ 12,276 $ 17,749 $ 11,578 42 Table of Contents Three Months Ended Six Months Ended June 30, March 31, June 30, June 30, June 30, 2024 2024 2023 2024 2023 Emerging Market Equity Beginning of period assets $ 11,189 $ 10,726 $ 8,811 $ 10,726 $ 8,116 Inflows 57 217 329 274 815 Market appreciation 629 246 51 875 260 End of period assets $ 11,875 $ 11,189 $ 9,191 $ 11,875 $ 9,191 Average assets during the period $ 11,448 $ 10,900 $ 8,998 $ 11,174 $ 8,832 Leveraged & Inverse Beginning of period assets $ 1,828 $ 1,815 $ 1,785 $ 1,815 $ 1,754 (Outflows)/inflows (18 ) (50 ) 12 (68 ) 55 Market appreciation 112 63 67 175 55 End of period assets $ 1,922 $ 1,828 $ 1,864 $ 1,922 $ 1,864 Average assets during the period $ 1,905 $ 1,792 $ 1,798 $ 1,849 $ 1,778 Cryptocurrency Beginning of period assets $ 874 $ 414 $ 239 $ 414 $ 136 Inflows/(outflows) 75 158 (1 ) 233 12 Market (depreciation)/appreciation (111 ) 302 10 191 100 End of period assets $ 838 $ 874 $ 248 $ 838 $ 248 Average assets during the period $ 856 $ 614 $ 236 $ 735 $ 213 Alternatives Beginning of period assets $ 404 $ 377 $ 306 $ 377 $ 310 Inflows 15 4 22 19 4 Market (depreciation)/appreciation (4 ) 23 12 19 26 End of period assets $ 415 $ 404 $ 340 $ 415 $ 340 Average assets during the period $ 408 $ 391 320 $ 400 $ 314 Headcount: 304 300 291 304 291 Note: Previously issued statistics may be restated due to fund closures and trade adjustments. Source: WisdomTree Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 Selected Operating and Financial Information Three Months Ended June 30, Percent 2024 2023 Change Change AUM (in millions) Average AUM $ 108,392 $ 91,578 $ 16,814 18.4% Operating Revenues (in thousands) Advisory fees $ 98,938 $ 82,004 $ 16,934 20.7% Other revenues 8,096 3,720 4,376 117.6% Total operating revenues $ 107,034 $ 85,724 $ 21,310 24.9% Operating Revenues Advisory fees Advisory fee revenues increased 20.7% from $82.0 million during the three months ended June 30, 2023 to $98.9 million in the comparable period in 2024 primarily due to higher average AUM. Our average advisory fee was 0.36% and 0.37% during the three months ended June 30, 2023 and 2024, respectively. Other revenues Other revenues increased 117.6% from $3.7 million during the three months ended June 30, 2023 to $8.1 million in the comparable period in 2024 due to higher other revenues attributable to our European listed products. 43 Table of Contents Operating Expenses Three Months Ended June 30, Percent (in thousands) 2024 2023 Change Change Compensation and benefits $ 30,790 $ 26,319 $ 4,471 17.0% Fund management and administration 20,139 17,727 2,412 13.6% Marketing and advertising 5,110 4,465 645 14.4% Sales and business development 3,640 3,326 314 9.4% Contractual gold payments — 1,583 (1,583 ) n/a Professional fees 6,594 8,334 (1,740 ) (20.9% ) Occupancy, communications and equipment 1,314 1,172 142 12.1% Depreciation and amortization 418 121 297 245.5% Third-party distribution fees 2,687 1,881 806 42.8% Other 2,831 2,615 216 8.3% Total operating expenses $ 73,523 $ 67,543 $ 5,980 8.9% Three Months Ended June 30, As a Percent of Revenues: 2024 2023 Compensation and benefits 28.8 % 30.7 % Fund management and administration 18.8 % 20.7 % Marketing and advertising 4.8 % 5.2 % Sales and business development 3.4 % 3.9 % Contractual gold payments n/a 1.8 % Professional fees 6.2 % 9.7 % Occupancy, communications and equipment 1.2 % 1.4 % Depreciation and amortization 0.4 % 0.1 % Third-party distribution fees 2.5 % 2.2 % Other 2.6 % 3.1 % Total operating expenses 68.7 % 78.8 % Compensation and benefits Compensation and benefits expense increased 17.0% from $26.3 million during the three months ended June 30, 2023 to $30.8 million in the comparable period in 2024 due to higher incentive and stock-based compensation expense, as well as increased headcount. Headcount was 291 and 304 at June 30, 2023 and 2024, respectively. Fund management and administration Fund management and administration expense increased 13.6% from $17.7 million during the three months ended June 30, 2023 to $20.1 million in the comparable period in 2024 primarily due to higher average AUM. We had 80 U.S. listed ETFs and 264 European listed ETPs at June 30, 2023 compared to 78 U.S. listed ETFs and 272 European listed ETPs at June 30, 2024. Marketing and advertising Marketing and advertising expense increased 14.4% from $4.5 million during the three months ended June 30, 2023 to $5.1 million in the comparable period in 2024 primarily due to higher spending related to our U.S. listed products. Sales and business development Sales and business development expense increased 9.4% from $3.3 million during the three months ended June 30, 2023 to $3.6 million in the comparable period in 2024 primarily due to increases in travel and events spending. Contractual gold payments Contractual gold payments expense decreased from $1.6 million during the three months ended June 30, 2023 to zero in the comparable period in 2024 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. 44 Table of Contents Professional fees Professional fees expense decreased 20.9% from $8.3 million during the three months ended June 30, 2023 to $6.6 million in the comparable period in 2024 due to non-recurring expenses incurred during the three months ended June 30, 2023 to settle our deferred consideration—gold payments obligation and our acquisition of WisdomTree Transfers, Inc. (formerly Securrency Transfers, Inc.). Occupancy, communications and equipment Occupancy, communications and equipment expense was essentially unchanged from the three months ended June 30, 2023. Depreciation and amortization Depreciation and amortization expense increased 245.5% from $0.1 million during the three months ended June 30, 2023 to $0.4 million in the comparable period in 2024 due to amortization of software development costs. Third-party distribution fees Third-party distribution fees expense increased 42.8% from $1.9 million during the three months ended June 30, 2023 to $2.7 million in the comparable period in 2024 due to AUM growth we are experiencing on our various platforms and new platform relationships. Other Other expenses were essentially unchanged from the three months ended June 30, 2023. Other Income/(Expenses) Three Months Ended June 30, Percent (in thousands) 2024 2023 Change Change Interest expense $ (4,140 ) $ (4,021 ) $ (119 ) 3.0% Gain on revaluation/termination of deferred consideration—gold payments — 41,361 (41,361 ) n/a Interest income 1,438 1,000 438 43.8% Other losses and gains, net (1,283 ) 1,286 (2,569 ) (199.8% ) Total other (expenses)/income, net $ (3,985 ) $ 39,626 $ (43,611 ) (110.0% ) Three Months Ended June 30, As a Percent of Revenues: 2024 2023 Interest expense (3.8% ) (4.7% ) Gain on revaluation/termination of deferred consideration—gold payments n/a 48.2% Interest income 1.3% 1.2% Other losses and gains, net (1.2% ) 1.5% Total other (expenses)/income, net (3.7% ) 46.2% Interest expense Interest expense was essentially unchanged from the three months ended June 30, 2023. Our effective interest rate during the three months ended June 30, 2023 and 2024 was 5.0% and 4.95%, 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 during the three months ended June 30, 2023. This obligation was settled 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 43.8% from $1.0 million during the three months ended June 30, 2023 to $1.4 million in the comparable period in 2024 due to a higher level of interest-earning assets. Other losses and gains, net Other losses and gains, net were $1.3 million and ($1.3) million during the three months ended June 30, 2023 and 2024, respectively. The three months ended June 30, 2024 include losses of $1.3 million and $0.3 million on our investments and financial instruments owned, respectively. 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. 45 Table of Contents Income Taxes Our effective income tax rate during the three months ended June 30, 2024 was 26.3%, resulting in income tax expense of $7.8 million. The effective tax rate differs from the federal statutory rate of 21.0% primarily due to non-deductible executive compensation, an increase in the deferred tax asset valuation allowance on losses recognized on our investments and state and local income taxes. These items were partly offset by a lower tax rate on foreign earnings. Our effective income tax rate for the three months ended June 30, 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. Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 Selected Operating and Financial Information Six Months Ended June 30, Percent 2024 2023 Change Change AUM (in millions) Average AUM $ 105,376 $ 89,543 $ 15,833 17.7% Operating Revenues (in thousands) Advisory fees $ 191,439 $ 159,641 $ 31,798 19.9% Other revenues 12,433 8,127 4,306 53.0% Total revenues $ 203,872 $ 167,768 $ 36,104 21.5% Operating Revenues Advisory fees Advisory fee revenues increased 19.9% from $159.6 million during the six months ended June 30, 2023 to $191.4 million in the comparable period in 2024 primarily due to higher average AUM. Our average advisory fee was 0.36% during the six months ended June 30, 2023 and 0.37% during the comparable period in 2024. Other revenues Other revenues increased 53.0% from $8.1 million during the six months ended June 30, 2023 to $12.4 million in the comparable period in 2024 due to higher other revenues attributable to our European listed products. Operating Expenses Six Months Ended June 30, Percent (in thousands) 2024 2023 Change Change Compensation and benefits $ 61,844 $ 53,717 $ 8,127 15.1% Fund management and administration 40,101 34,880 5,221 15.0% Marketing and advertising 9,518 8,472 1,046 12.3% Sales and business development 7,251 6,320 931 14.7% Contractual gold payments — 6,069 (6,069 ) n/a Professional fees 10,224 12,049 (1,825 ) (15.1% ) Occupancy, communications and equipment 2,524 2,273 251 11.0% Depreciation and amortization 801 230 571 248.3% Third-party distribution fees 4,994 4,134 860 20.8% Other 5,154 4,872 282 5.8% Total operating expenses $ 142,411 $ 133,016 $ 9,395 7.1% 46 Table of Contents Six Months Ended June 30, As a Percent of Revenues: 2024 2023 Compensation and benefits 30.4% 32.0% Fund management and administration 19.7% 20.8% Marketing and advertising 4.7% 5.0% Sales and business development 3.6% 3.8% Contractual gold payments n/a 3.6% Professional fees 5.0% 7.2% Occupancy, communications and equipment 1.2% 1.4% Depreciation and amortization 0.4% 0.1% Third-party distribution fees 2.4% 2.5% Other 2.5% 2.9% Total operating expenses 69.9% 79.3% Compensation and benefits Compensation and benefits expense increased 15.1% from $53.7 million during the six months ended June 30, 2023 to $61.8 million in the comparable period in 2024 due to higher incentive and stock-based compensation expense and increased headcount. Fund management and administration Fund management and administration expense increased 15.0% from $34.9 million during the six months ended June 30, 2023 to $40.1 million in the comparable period in 2024 primarily due to higher average AUM and product launches. Marketing and advertising Marketing and advertising expense increased 12.3% from $8.5 million during the six months ended June 30, 2023 to $9.5 million in the comparable period in 2024 primarily due to higher spending related to our U.S. listed products. Sales and business development Sales and business development expense increased 14.7% from $6.3 million during the six months ended June 30, 2023 to $7.3 million in the comparable period in 2024 primarily due to increases in travel and events spending. Contractual gold payments Contractual gold payments expense decreased from $6.1 million during the six months ended June 30, 2023 to zero in the comparable period in 2024 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 decreased 15.1% from $12.0 million during the six months ended June 30, 2023 to $10.2 million in the comparable period in 2024 primarily due to lower activist campaign expenses and non-recurring expenses incurred in the prior year 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 six months ended June 30, 2023. Depreciation and amortization Depreciation and amortization expense increased 248.3% from $0.2 million during the six months ended June 30, 2023 to $0.8 million in the comparable period in 2024 due to amortization of software development costs. Third-party distribution fees Third-party distribution fees increased 20.8% from $4.1 million during the six months ended June 30, 2023 to $5.0 million in the comparable period in 2024 due to AUM growth we are experiencing on our various platforms and new platform relationships. 47 Table of Contents Other Other expenses were essentially unchanged from the six months ended June 30, 2023. Other Income/(Expenses) Six Months Ended June 30, Percent (in thousands) 2024 2023 Change Change Interest expense $ (8,268 ) $ (8,023 ) $ (245 ) 3.1% Gain on revaluation/termination of deferred consideration—gold payments — 61,953 (61,953 ) n/a Interest income 2,836 2,083 753 36.1% Impairments — (4,900 ) 4,900 n/a Loss on extinguishment of convertible notes — (9,721 ) 9,721 n/a Other gains and losses, net 1,309 (721 ) 2,030 (281.6% ) Total other income/(expenses), net $ (4,123 ) $ 40,671 $ (44,794 ) (110.1% ) Six Months Ended June 30, As a Percent of Revenues: 2024 2023 Interest expense (4.0% ) (4.8% ) Gain on revaluation/termination of deferred consideration—gold payments n/a 36.9% Interest income 1.4% 1.2% Impairments n/a (2.9% ) Loss on extinguishment of convertible notes n/a (5.8% ) Other gains and losses, net 0.6% (0.4% ) Total other income/(expenses), net (2.0% ) 24.2% Interest expense Interest expense was essentially unchanged from the six months ended June 30, 2023. Our effective interest rate during the six months ended June 30, 2023 and 2024 was 4.9% and 4.95%, respectively. Gain on revaluation/termination of deferred consideration—gold payments We recognized a gain on revaluation/termination of deferred consideration—gold payments of $62.0 million during the six months ended June 30, 2023. This obligation was settled 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 36.1% from $2.1 million during the six months ended June 30, 2023 to $2.8 million in the comparable period in 2024 due to a higher level of interest-earning assets. Impairments During the six months ended June 30, 2023, we recognized a non-cash impairment charge of $4.9 million on our investment in Securrency, Inc. 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 gains and losses, net Other gains and losses, net were ($0.7) million and $1.3 million during the six months ended June 30, 2023 and 2024, respectively. This period includes gains on our financial instruments owned of $1.8 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. 48 Table of Contents Income Taxes Our effective income tax rate for the six months ended June 30, 2024 was 23.5%, resulting in an income tax expense of $13.5 million. Our tax rate differs from the federal statutory rate of 21% primarily due to non-deductible executive compensation and state and local income taxes. These items were partly offset by a lower tax rate on foreign earnings and tax windfalls associated with the vesting of stock-based compensation awards. 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 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. 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 of stock-based compensation awards: GAAP requires the recognition of tax windfalls and shortfalls within income tax expense. These items arise upon the vesting of stock-based compensation awards and the magnitude is directly correlated to the number of awards vesting as well as the difference between the price of our stock on the date the award was granted and the date the award vested. 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. ● Imputed interest on our payable to GBH: During the fourth quarter of 2023, we repurchased our Series C Preferred Stock, which was convertible into approximately 13.1 million shares of our common stock, from GBH for aggregate cash consideration of approximately $84.4 million. Under the terms of the transaction, we paid GBH $40.0 million on the closing date, with the remainder of the purchase price payable in equal, interest-free installments on the first, second and third anniversaries of the closing date. Under U.S. GAAP, the obligation is recorded at its present value utilizing a market rate of interest on the closing date of 7.0% and the corresponding discount is amortized as interest expense pursuant to the effective interest method of accounting over the life of the obligation. We exclude this item when calculating our non-GAAP financial measurements as recognition of interest expense is non-cash and contrary to the stated terms of our obligation. 49 Table of Contents ● Other items: Gains and losses recognized on our investments, changes in deferred tax asset valuation allowance, expenses incurred in response to an activist campaign, loss on extinguishment of convertible notes, impairments, remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business, and litigation expenses associated with certain provisions of our Stockholder Rights Agreement, dated as of March 17, 2023, as amended, are excluded when calculating our non-GAAP financial measurements. Three Months Ended Six Months Ended Adjusted Net Income and Diluted Earnings per Share: June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Net income, as reported $ 21,759 $ 54,252 $ 43,870 $ 70,485 Deduct: Gain on revaluation/termination of deferred consideration—gold payments — (41,361 ) — (61,953 ) Add back: Expenses incurred in response to an activist campaign, net of income taxes 3,234 3,720 3,760 4,452 Add back/(deduct): Losses/(gains) recognized on our investments, net of income taxes 998 (2,346 ) 905 620 Add back: Imputed interest on payable to GBH, net of income taxes 513 — 1,017 — Add back/(deduct): Increase/(decrease) in deferred tax asset valuation allowance on financial instruments owned and investments 391 (508 ) (140 ) (31 ) Add back/(deduct): Losses/(gains) on financial instruments owned, net of income taxes 220 762 (1,342 ) (717 ) (Deduct)/add back: Tax (windfalls)/shortfalls upon vesting and exercise of stock-based compensation awards (40 ) 33 (739 ) (152 ) Add back: Litigation expenses associated with certain provisions of the Stockholder Rights Agreement, net of income taxes — 367 — 367 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 Canadian ETF business — — — (1,477 ) Adjusted net income $ 27,075 $ 14,919 $ 47,331 $ 26,117 Deduct: Income distributed to participating securities (462 ) (496 ) (924 ) (994 ) Deduct: Undistributed income allocable to participating securities (2,053 ) (1,410 ) (3,506 ) (2,028 ) Adjusted net income available to common stockholders $ 24,560 $ 13,013 $ 42,901 $ 23,095 Weighted average diluted shares, excluding participating securities (in thousands) (See Note 20 to our Consolidated Financial Statements) 151,208 147,815 150,642 146,155 Adjusted earnings per share – diluted $ 0.16 $ 0.09 $ 0.28 $ 0.16 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, 2024 December 31, 2023 Balance Sheet Data (in thousands): Cash, cash equivalents and restricted cash $ 132,459 $ 129,305 Financial instruments owned, at fair value 69,783 58,722 Accounts receivable 42,664 35,473 Securities held-to-maturity 218 230 Total: Liquid assets 245,124 223,730 Less: Total current liabilities (84,688 ) (103,216 ) Less: Other assets—seed capital (WisdomTree Digital Funds) (19,890 ) (18,308 ) Less: Regulatory capital requirements (36,964 ) (29,156 ) Total: Available liquidity $ 103,582 $ 73,050 50 Table of Contents Six Months Ended June 30, 2024 2023 Cash Flow Data (in thousands): Operating cash flows $ 31,172 $ 20,029 Investing cash flows (9,699 ) 51,936 Financing cash flows (17,693 ) (121,109 ) Foreign exchange rate effect (626 ) 778 Increase/(decrease) in cash, cash equivalents and restricted cash $ 3,154 $ (48,366 ) 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 of certain of our subsidiaries. Liquid assets consist of cash, cash equivalents and restricted cash, 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, accrued incentive compensation for employees and the current portion of our payable to GBH. Cash, cash equivalents and restricted cash increased by $3.2 million during the six months ended June 30, 2024 due to $14.2 million used to purchase financial instruments owned, at fair value, $9.9 million used to pay dividends, $7.8 million used to repurchase our common stock, $1.2 million used to pay for software development and $0.7 million used for other activities. These decreases were partly offset by $31.2 million provided by operating activities, $5.3 million of proceeds from the sale of financial instruments owned, at fair value, and $0.5 million of proceeds from the exit from our investment in Securrency, Inc. 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. 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 constituted a further issuance of, and formed a single series with, our June 2020 Notes (the “August 2020 Notes” and together with the June 2020 Notes, the “2020 Notes”). In connection with the issuance of the 2023 Notes, we repurchased $115.0 million in aggregate principal amount of the 2020 Notes. As a result of this repurchase, we recognized a loss on extinguishment of approximately $9.7 million during the three months ended March 31, 2023. 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 our common stock. After the repurchase and settlement at maturity of the 2020 Notes and the issuance of the 2023 Notes (such 2023 Notes, together with the 2021 Notes, the “Convertible Notes”), we had $280.0 million in aggregate principal amount of Convertible Notes outstanding. 51 Table of Contents 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 set forth in the table above 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. ● 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 in the aggregate), subject to adjustment. ● Seniority and Security: The 2023 Notes and 2021 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 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. 52 Table of Contents 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, 2024 was approximately $37.0 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, 2024, we repurchased 1,096,278 shares of our common stock under the repurchase program for an aggregate cost of $7.8 million. Currently, approximately $88.6 million remains under this program for future purchases. 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. Payable to GBH On November 20, 2023, we repurchased our Series C Preferred Stock from GBH for aggregate cash consideration of approximately $84.4 million. The Series C Preferred Stock was originally issued to GBH on May 10, 2023 in connection with the termination of the Company’s obligations relating to the contractual gold payments. Under the terms of the transaction, we paid GBH $40.0 million on the closing date, with the remainder of the purchase price payable in equal, interest-free installments on the first, second and third anniversaries of the closing date. Operating Leases Total future minimum lease payments with respect to our operating lease liabilities were $0.9 million at June 30, 2024. Cash flows generated by our operating activities and existing cash balances should be sufficient to satisfy the future minimum lease payments. See Note 13 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. 53 Table of Contents 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 identified no indicators of impairment to be recognized based upon a quantitative assessment (discounted cash flow analysis) which relied upon significant unobservable inputs including projected revenue growth rates of 3.0% and a weighted average cost of capital of 10.5%. 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. 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.