Table of Contents
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Losses on revaluation of deferred consideration—gold payments result from an increase in spot gold prices, an increase in the forward-looking price of gold, an increase in the perpetual growth rate and a decrease in the discount rate used to compute the present value of the annual payment obligations.Excludes 15,521 participating securities and 31 potentially dilutive non-participating common stock equivalents for the three months ended March 31, 2022, as the Company reported a net loss for the period (shares herein are reported in thousands). 0000880631 2023-01-01 2023-03-31 0000880631 2022-01-01 2022-03-31 0000880631 2023-03-31 0000880631 2022-12-31 0000880631 2022-06-16 2022-07-15 0000880631 2018-04-11 0000880631 2022-03-31 0000880631 2023-05-04 0000880631 2022-01-01 2022-12-31 0000880631 2023-03-17 2023-03-17 0000880631 2021-12-31 0000880631 wt:FederalAgencyMember 2022-12-31 0000880631 us-gaap:EquipmentMember 2022-12-31 0000880631 wt:WisdomTreeTrustMember 2022-12-31 0000880631 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form
10-Q
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
or
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
    
    
to
    
    
    
    
.
Commission File Number
001-10932
 
WisdomTree, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
  
13-3487784
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification No.)
   
250 West 34
th
Street
3
rd
Floor
New York, New York
  
10119
(Address of principal executive offices)
  
(Zip Code)
212-801-2080
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
  
WT
  
The New York Stock Exchange
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer  
☒
    Accelerated filer   ☐
       
Non-accelerated
filer		   ☐    Smaller reporting company  
☐
       
         Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act   ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  ☒
As of May 4, 2023, there
 were 149,263,168 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.

Table of Contents

WISDOMTREE, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2023

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

      4  

ITEM 1.

    FINANCIAL STATEMENTS      4  

ITEM 2.

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      33  

ITEM 3.

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      50  

ITEM 4.

    CONTROLS AND PROCEDURES      51  

PART II: OTHER INFORMATION

      51  

ITEM 1.

    LEGAL PROCEEDINGS      51  

ITEM 1A.

    RISK FACTORS      51  

ITEM 2.

    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      51  

ITEM 3.

    DEFAULTS UPON SENIOR SECURITIES      52  

ITEM 4.

    MINE SAFETY DISCLOSURES      52  

ITEM 5.

    OTHER INFORMATION      52  

ITEM 6.

    EXHIBITS      53  

Unless otherwise indicated, references to “the Company,” “we,” “us,” “our” and “WisdomTree” mean WisdomTree, Inc. and its subsidiaries.

WisdomTree®, WisdomTree Prime™ and Modern Alpha® are trademarks of WisdomTree, Inc. in the United States and in other countries. All other trademarks are the property of their respective owners.

 

2

Table of Contents
P5DP5DP5DP5DP10DP10DP10DP10D0.1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q,
or Report, contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the section entitled “Risk Factors” included in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2022. If one or more of these or other risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission, or the SEC, as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.
In particular, forward-looking statements in this Report may include statements about:
 
  •  
anticipated trends, conditions and investor sentiment in the global markets and exchange-traded products, or ETPs;
 
  •  
anticipated levels of inflows into and outflows out of our ETPs;
 
  •  
our ability to deliver favorable rates of return to investors;
 
  •  
competition in our business;
 
  •  
whether we will experience future growth;
 
  •  
our ability to develop new products and services;
 
  •  
our ability to maintain current vendors or find new vendors to provide services to us at favorable costs;
 
  •  
our ability to successfully implement our strategy related to digital assets and blockchain-enabled financial services, including WisdomTree Prime
™
, and achieve its objectives;
 
  •  
our ability to successfully operate and expand our business in
non-U.S.
markets;
 
  •  
the effect of laws and regulations that apply to our business; and
 
  •  
actions of activist stockholders.
The forward-looking statements in this Report represent our views as of the date of this Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this Report.
 
3
Table of Contents
PART I: FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
WisdomTree, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
 
    
  March 31,  

2023
     
  December 31,  
2022
  
     
    
(unaudited)
         
Assets
                  
Current assets:
                  
Cash and cash equivalents (Note 3)
      $ 119,099            $ 132,101   
Financial instruments owned, at fair value (including $45,214 and $25,283 invested in WisdomTree products at March 31, 2023 and December 31, 2022, respectively) (Note 5)
      130,180            126,239   
Accounts receivable (including $32,446 and $24,139 due from related parties at March 31, 2023 and December 31, 2022, respectively)
      35,496            30,549   
Prepaid expenses
      5,877            4,684   
Income taxes receivable
      1,799            —   
Other current assets
      291            390   
    
 
 
     
 
 
  
Total current assets
      292,742            293,963   
Fixed assets, net
      515            544   
Indemnification receivable (Note 20)
      —            1,353   
Securities
held-to-maturity
      253            259   
Deferred tax assets, net (Note 20)
      5,871            10,536   
Investments (Note 7)
      26,902            35,721   
Right of use assets—operating leases (Note 12)
      1,153            1,449   
Goodwill (Note 22)
      85,856            85,856   
Intangible assets, net (Note 22)
      603,968            603,567   
Other noncurrent assets
      507            571   
    
 
 
     
 
 
  
Total assets
      $ 1,017,767            $ 1,033,819   
    
 
 
     
 
 
  
Liabilities and stockholders’ equity
                  
Liabilities
                  
Current liabilities:
                  
Convertible notes—current (Note 10)
      $ 59,884            $ 59,197   
Fund management and administration payable
      27,830            36,521   
Deferred consideration—gold payments (Note 9)
      17,984            16,796   
Compensation and benefits payable
      9,341            24,121   
Income taxes payable
      —              1,599   
Operating lease liabilities (Note 12)
      1,041            1,125   
Accounts payable and other liabilities
      14,846            9,075   
    
 
 
     
 
 
  
Total current liabilities
      130,926            148,434   
Convertible notes (Note 10)
      273,767            262,019   
Deferred consideration—gold payments (Note 9)
      161,847            183,494   
Operating lease liabilities (Note 12)
      120            339   
Other noncurrent liabilities (Note 20)
      —              1,353   
    
 
 
     
 
 
  
Total liabilities
      566,660            595,639   
Preferred stock—Series A
Non-Voting
Convertible, par value $0.01; 14.750 shares authorized, issued and outstanding; redemption value of $86,638 and $77,969 at March 31, 2023 and December 31, 2022, respectively) (Note 11)
      132,569            132,569   
    
 
 
     
 
 
  
Contingencies (Note 13)
                  
Stockholders’ equity
                  
Preferred stock, par value $0.01; 2,000 shares authorized:
      —              —   
Common stock, par value $0.01; 400,000 shares authorized; issued and outstanding: 149,291 and 146,517 at March 31, 2023 and December 31, 2022, respectively
      1,493            1,465   
Additional
paid-in
capital
      292,971            291,847   
Accumulated other comprehensive loss
      (954)           (1,420)  
Retained earnings
      25,028            13,719   
    
 
 
     
 
 
  
Total stockholders’ equity
      318,538            305,611   
    
 
 
     
 
 
  
Total liabilities and stockholders’ equity
      $     1,017,767            $ 1,033,819   
    
 
 
     
 
 
  
The accompanying notes are an integral part of these consolidated financial statements
 
4
Table of Contents
WisdomTree, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
                 
    
Three Months Ended

March 31,
    
2023
  
2022
Operating Revenues:
                 
Advisory fees
     $ 77,637      $ 76,517  
Other income
      4,407       1,851  
    
 
 
 
  
 
 
 
Total revenues
      82,044       78,368  
    
 
 
 
  
 
 
 
Operating Expenses:
                 
Compensation and benefits
      27,398       24,787  
Fund management and administration
      17,153       15,494  
Marketing and advertising
      4,007       4,023  
Sales and business development
      2,994       2,609  
Contractual gold payments (Note 9)
      4,486       4,450  
Professional fees
      3,715       4,459  
Occupancy, communications and equipment
      1,101       753  
Depreciation and amortization
      109       47  
Third-party distribution fees
      2,253       2,212  
Other
      2,257       1,845  
    
 
 
 
  
 
 
 
Total operating expenses
      65,473       60,679  
    
 
 
 
  
 
 
 
Operating income
      16,571       17,689  
Other Income/(Expenses):
                 
Interest expense
      (4,002 )      (3,732 ) 
Gain/(loss) on revaluation of deferred consideration—gold payments (Note 9)
      20,592       (17,018 ) 
Interest income
      1,083       794  
Impairments (Note 7)
      (4,900 )      —  
Loss on extinguishment of convertible notes (Note 10)
      (9,721 )      —  
Other losses, net
      (2,007 )      (24,707 ) 
    
 
 
 
  
 
 
 
Income/(loss) before income taxes
      17,616       (26,974 ) 
Income tax expense/(benefit)
      1,383       (16,713 ) 
    
 
 
 
  
 
 
 
Net income/(loss)
     $ 16,233      $ (10,261 ) 
    
 
 
 
  
 
 
 
Earnings/(loss) per share—basic
     $ 0.10      $ (0.08 ) 
    
 
 
 
  
 
 
 
Earnings/(loss) per share—diluted
     $ 0.10      $ (0.08 ) 
    
 
 
 
  
 
 
 
Weighted-average common shares—basic
      143,862         142,782  
    
 
 
 
  
 
 
 
Weighted-average common shares—diluted
          159,887       142,782  
    
 
 
 
  
 
 
 
Cash dividends declared per common share
     $ 0.03      $ 0.03  
    
 
 
 
  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
5
Table of Contents
WisdomTree, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income/(Loss)
(In Thousands)
(Unaudited)
 
                 
    
Three Months Ended

March 31,
  
    
2023
    
2022
  
Net income/(loss)
     $ 16,233        $ (10,261)   
Other comprehensive income/(loss)
                 
Foreign currency translation adjustment, net of income taxes
      466         (486)   
    
 
 
    
 
 
  
Other comprehensive income/(loss)
      466         (486)   
    
 
 
    
 
 
  
Comprehensive income/(loss)
     $     16,699        $     (10,747)   
    
 
 
    
 
 
  
The accompanying notes are an integral part of these consolidated financial statements
 
6
Table of Contents
WisdomTree, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands)
(Unaudited)
 
      
For the Three Months Ended March 31, 2023
      
Common Stock
   
Additional
Paid-In

Capital
   
Accumulated
Other
Comprehensive
Loss
   
Retained

Earnings/

(Accumulated
Deficit)
   
Total
      
Shares
Issued
   
Par
Value
Balance—January 1, 2023
        146,517       $ 1,465       $ 291,847       $ (1,420 )      $ 13,719       $ 305,611  
Restricted stock issued and vesting of restricted stock units, net
        3,379        34        (34 )       —        —        —  
Shares repurchased
        (605 )       (6 )       (3,378 )       —        —        (3,384 ) 
Stock-based compensation
        —        —        4,536        —        —        4,536  
Other comprehensive income
        —        —        —        466        —        466  
Dividends
        —        —        —        —        (4,924 )       (4,924 ) 
Net income
        —        —        —        —        16,233        16,233  
      
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Balance—March 31, 2023
            149,291       $     1,493       $     292,971       $       (954 )      $     25,028       $   318,538  
      
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
      
For the Three Months Ended March 31, 2022
      
Common Stock
   
Additional
Paid-In

Capital
   
Accumulated

Other

Comprehensive
Income
   
Accumulated

Deficit
   
Total
    
Shares
Issued
   
Par
Value
Balance—January 1, 2022
        145,107      $ 1,451      $ 289,736      $ 682      $ (22,445 )     $ 269,424  
Restricted stock issued and vesting of restricted stock units, net
        2,042        21        (21 )       —        —        —  
Shares repurchased
        (589 )       (6 )       (3,388 )       —        —        (3,394 ) 
Stock-based compensation
        —        —        2,936        —        —        2,936  
Other comprehensive loss
        —        —        —        (486 )       —        (486 ) 
Dividends
        —        —        (4,842 )       —        —        (4,842 ) 
Net loss
        —        —        —        —        (10,261 )       (10,261 ) 
      
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Balance—March 31, 2022
            146,560       $   1,466       $   284,421       $       196       $     (32,706 )     $   253,377  
      
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
7
Table of Contents
WisdomTree, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
                 
    
Three Months Ended

March 31,
    
        2023        
   
        2022        
Cash flows from operating activities:
                  
Net income/(loss)
     $ 16,233       $ (10,261 ) 
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
                  
(Gain)/loss on revaluation of deferred consideration—gold payments
      (20,592 )       17,018  
Advisory and license fees paid in gold, other precious metals and cryptocurrency
      (12,760 )       (16,052 ) 
Loss on extinguishment of convertible notes
      9,721        —  
Impairments
      4,900        —  
Deferred income taxes
      4,783        5,273  
Stock-based compensation
      4,536        2,936  
Contractual gold payments
      4,486        4,450  
Losses on investments
      3,919        163  
(Gains)/losses on financial instruments owned, at fair value
      (1,954 )       5,142  
Amortization of issuance costs—convertible notes
      579        645  
Amortization of right of use asset
      319        89  
Depreciation and amortization
      109        47  
Changes in operating assets and liabilities:
                  
Accounts receivable
      (4,791 )       (3,710 ) 
Prepaid expenses
      (1,161 )       (2,264 ) 
Gold and other precious metals
      8,332        11,959  
Other assets
      167        (52 ) 
Intangibles—software development
      (452 )       —  
Fund management and administration payable
      3,638        3,199  
Compensation and benefits payable
      (27,271 )       (23,690 ) 
Income taxes payable
      (3,418 )       (4,228 ) 
Operating lease liabilities
      (326 )       (97 ) 
Accounts payable and other liabilities
      5,606        6,741  
    
 
 
 
   
 
 
 
Net cash used in operating activities
      (5,397 )       (2,692 ) 
    
 
 
 
   
 
 
 
Cash flows from investing activities:
                  
Purchase of financial instruments owned, at fair value
      (20,278 )       (25,461 ) 
Purchase of investments
      —        (6,863 ) 
Purchase of fixed assets
      (26 )       (54 ) 
Proceeds from the sale of financial instruments owned, at fair value
      18,290        13,639  
Proceeds from
held-to-maturity
securities maturing or called prior to maturity
      6        18  
    
 
 
 
   
 
 
 
Net cash used in investing activities
      (2,008 )       (18,721 ) 
    
 
 
 
   
 
 
 
Cash flows from financing activities:
                  
Repurchase of convertible notes (See Note 10)
      (124,317 )       —  
Dividends paid
      (4,821 )       (4,842 ) 
Shares repurchased
      (3,384 )       (3,394 ) 
Convertible notes issuance costs
      (3,548 )       —  
Proceeds from the issuance of convertible notes (Note 10)
      130,000        —  
    
 
 
 
   
 
 
 
Net cash used in financing activities
      (6,070 )       (8,236 ) 
    
 
 
 
   
 
 
 
Increase/(decrease) in cash flow due to changes in foreign exchange rate
      473        (665 ) 
    
 
 
 
   
 
 
 
Net decrease in cash and cash equivalents
      (13,002 )       (30,314 ) 
Cash and cash equivalents—beginning of year
      132,101        140,709  
    
 
 
 
   
 
 
 
Cash and cash equivalents—end of period
     $ 119,099       $ 110,395  
    
 
 
 
   
 
 
 
Supplemental disclosure of cash flow information:
                  
Cash paid for income taxes
     $ 1,422       $ 2,123  
    
 
 
 
   
 
 
 
Cash paid for interest
     $ 801       $             —  
    
 
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
8
Table of Contents
WisdomTree, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
1. Organization and Description of Business
WisdomTree, Inc., through its global subsidiaries (collectively, “WisdomTree” or the “Company”), is a global financial innovator, offering a well-diversified suite of exchange-traded products (“ETPs”), models and solutions. Building on its heritage of innovation, the Company is also developing next-generation digital products and structures, including digital or blockchain-enabled mutual funds (“Digital Funds”) and tokenized assets, as well as its blockchain-native digital wallet, WisdomTree Prime
™
. The Company has the following wholly-owned operating subsidiaries:
 
  •  
WisdomTree Asset Management, Inc.
is a New York based investment adviser registered with the SEC, providing investment advisory and other management services to the WisdomTree Trust (“WTT”) and WisdomTree exchange-traded funds (“ETFs”). The WisdomTree ETFs are issued in the U.S. by WTT. WTT is a
non-consolidated
Delaware statutory trust registered with the SEC as an
open-end
management investment company. The Company has licensed to WTT the use of certain of its own indexes on an exclusive basis for the WisdomTree ETFs in the U.S.
 
  •  
WisdomTree Management Jersey Limited
(“ManJer”) is a Jersey based management company providing management services to seven issuers (the “ManJer Issuers”) in respect of the ETPs issued and listed by the ManJer Issuers covering commodity, currency, cryptocurrency and
leveraged-and-inverse
strategies.
 
  •  
WisdomTree Multi Asset Management Limited
(“WTMAML”) is a Jersey based management company providing management services to WisdomTree Multi Asset Issuer PLC (“WMAI”) in respect of the ETPs issued by WMAI. WMAI is a
non-consolidated
public limited company domiciled in Ireland.
 
  •  
WisdomTree Management Limited
(“WML”) is an Ireland based management company providing management services to WisdomTree Issuer ICAV (“WTICAV”) in respect of the WisdomTree UCITS ETFs issued by WTICAV. WTICAV is a
non-consolidated
public limited company domiciled in Ireland.
 
  •  
WisdomTree UK Limited
(“WTUK”) is a U.K. based company registered with the Financial Conduct Authority currently providing distribution and support services to ManJer, WTMAML and WML.
 
  •  
WisdomTree Europe Limited
is a U.K. based company which is the legacy distributor of the WMAI ETPs and WisdomTree UCITS ETFs. These services are now provided directly by WTUK. WisdomTree Europe Limited is no longer regulated and does not provide any regulated services.
 
  •  
WisdomTree Ireland Limited
is an Ireland based company authorized by the Central Bank of Ireland providing distribution services to ManJer, WTMAML and WML.
 
  •  
WisdomTree Digital Commodity Services, LLC
is a New York based company that has been formed to serve as the sponsor of the WisdomTree Bitcoin Trust and WisdomTree Ethereum Trust, each an ETF currently under review with the SEC.
 
  •  
WisdomTree Digital Management, Inc. (“WT Digital Management”) is a New York based investment adviser registered with the SEC, providing investment advisory and other management services to the WisdomTree Digital Trust (“WTDT”) and WisdomTree Digital Funds. The WisdomTree Digital Funds are issued in the U.S. by WTDT. WTDT is a Delaware statutory trust registered with the SEC as an open-end management investment company. Each Digital Fund will use blockchain technology to maintain a secondary record of its shares on one or more blockchains (e.g., Stellar or Ethereum), but will not directly or indirectly invest in any assets that rely on blockchain technology, such as cryptocurrencies. 
 
  •  
WisdomTree Digital Movement, Inc
. is a New York based company operating as a money services business registered with the Financial Crimes Enforcement Network (“FinCEN”) and seeking state money transmitter licenses to operate a platform for the purchase, sale and exchange of digital assets, while also providing digital wallet services through WisdomTree Prime
™
to facilitate such activity.
 
  •  
WisdomTree Securities, Inc
. is a New York based limited purpose broker-dealer (i.e., mutual fund retailer), facilitating transactions in WisdomTree Digital Funds.
 
9
Table of Contents
2. Significant Accounting Policies
Basis of Presentation
These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and in the opinion of management reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of financial condition, results of operations, and cash flows for the periods presented. The consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Consolidation
The Company consolidates entities in which it has a controlling financial interest. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). The usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. If the Company has a majority voting interest in a VOE, the entity is consolidated. The Company has a controlling financial interest in a VIE when the Company has a variable interest that provides it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company reassesses its evaluation of whether an entity is a VOE or VIE when certain reconsideration events occur.
Segment and Geographic Information
The Company, through its subsidiaries in the U.S. and Europe, conducts business as a single operating segment as an ETP sponsor and asset manager which is based upon the Company’s current organizational and management structure, as well as information used by the chief operating decision maker to allocate resources and other factors.
Foreign Currency Translation
Assets and liabilities of subsidiaries whose functional currency is not the U.S. dollar are translated based on the end of period exchange rates from local currency to U.S. dollars. Results of operations are translated at the average exchange rates in effect during the period. The impact of the foreign currency translation adjustment is included in the Consolidated Statements of Comprehensive Income/(Loss) as a component of other comprehensive (loss)/income.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. Actual results could differ materially from those estimates.
Revenue Recognition
The Company earns substantially all of its revenue in the form of advisory fees from its ETPs and recognizes 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 the Company has a right to invoice.
Contractual Gold Payments
Contractual gold payments are measured and paid monthly based upon the average daily spot price of gold (Note 9).
Marketing and Advertising
Marketing and advertising costs, including media advertising and production costs, are expensed when incurred.
Depreciation and Amortization
Depreciation and amortization is provided for using the straight-line method over the estimated useful lives of the related assets as follows:
 
Equipment
      3 to 5 years  
Internally-developed software
      3 years  
The assets listed above are recorded at cost less accumulated depreciation and amortization.
 
10
Stock-Based Awards
Accounting for stock-based compensation requires the measurement and recognition of compensation expense for all equity awards based on estimated fair values. Stock-based compensation is measured based on the grant-date fair value of the award and is amortized over the relevant service period. Forfeitures are recognized when they occur.
Third-Party Distribution Fees
The Company pays a percentage of its advisory fee revenues based on incremental growth in assets under management (“AUM”), subject to caps or minimums, to marketing agents to sell WisdomTree ETFs and for including WisdomTree ETFs on third-party customer platforms and recognizes these expenses as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be classified as cash equivalents. The Company maintains deposits with financial institutions in an amount that is in excess of federally insured limits.
Accounts Receivable
Accounts receivable are customer and other obligations due under normal trade terms. The Company measures credit losses, if any, by applying historical loss rates, adjusted for current conditions and reasonable and supportable forecasts to amounts outstanding using the aging method.
Impairment of Long-Lived Assets
The Company performs a review for the impairment of long-lived assets when events or changes in circumstances indicate that the estimated undiscounted future cash flows expected to be generated by the assets are less than their carrying amounts or when other events occur which may indicate that the carrying amount of an asset may not be recoverable.
Financial Instruments Owned and Financial Instruments Sold, but Not yet Purchased (at Fair Value)
Financial instruments owned and financial instruments sold, but not yet purchased are financial instruments classified as either trading or
available-for-sale
(“AFS”). These financial instruments are recorded on their trade date and are measured at fair value. All equity instruments that have readily determinable fair values are classified by the Company as trading. Debt instruments are classified based primarily on the Company’s intent to hold or sell the instrument. Changes in the fair value of debt instruments classified as trading and AFS are reported in other income/(expenses) and other comprehensive income, respectively, in the period the change occurs. Debt instruments classified as AFS are assessed for impairment on a quarterly basis and an estimate for credit loss is provided when the fair value of the AFS debt instrument is below its amortized cost basis. Credit-related impairments are recognized in earnings with a corresponding adjustment to the instrument’s amortized cost basis if the Company intends to sell the impaired AFS debt instrument or it is more likely than not the Company will be required to sell the instrument before recovering its amortized cost basis. Other credit-related impairments are recognized as an allowance with a corresponding adjustment to earnings. Impairments resulting from noncredit-related factors are recognized in other comprehensive income. Amounts recorded in other comprehensive income are reclassified into earnings upon sale of the AFS debt instrument using the specific identification method.
Securities
Held-to-Maturity
The Company accounts for certain of its securities as
held-to-maturity
on a trade date basis, which are recorded at amortized cost. For
held-to-maturity
securities, the Company has the intent and ability to hold these securities to maturity and it is not
more-likely-than-not
that the Company will be required to sell these securities before recovery of their amortized cost bases, which may be maturity.
Held-to-maturity
securities are placed on
non-accrual
status when the Company is in receipt of information indicating collection of interest is doubtful. Cash received on
held-to-maturity
securities placed on
non-accrual
status is recognized on a cash basis as interest income if and when received.
The Company reviews its portfolio of
held-to-maturity
securities for impairment on a quarterly basis, recognizing an allowance, if any, by applying an estimated loss rate after consideration for the nature of collateral securing the financial asset as well as potential future changes in collateral values and historical loss information for financial assets secured with similar collateral.
Investments in pass-through government-sponsored enterprises (“GSEs”) are determined to have an estimated loss rate of zero due to an implicit U.S. government guarantee.
 
11
Investments
The Company accounts for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed in Accounting Standards Codification (“ASC”) Topic 321,
Investments – Equity Securities
(“ASC 321”), 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).
Goodwill
Goodwill is the excess of the purchase price over the fair values of the identifiable net assets at the acquisition date. The Company tests 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 the Company’s 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 its goodwill impairment test, the Company considers a qualitative assessment, when appropriate, and a quantitative assessment using the market approach and its market capitalization when determining the fair value of the reporting unit.
Intangible Assets
Indefinite-lived intangible assets are tested for impairment at least annually and are also 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 values are less than their carrying values.
Finite-lived intangible assets, if any, are amortized over their estimated useful life, which is the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the Company. These intangible assets are tested for impairment at the time of a triggering event, if one were to occur. Finite-lived intangible assets may be impaired when the estimated undiscounted future cash flows generated from the assets are less than their carrying amounts.
The Company may rely on a qualitative assessment when performing its 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 all of the Company’s intangible assets is November 30
th
.
Software Development Costs
Software development costs incurred after the preliminary project stage is complete are capitalized if it is probable that the project will be completed and the software will be used as intended. Capitalized costs consist of employee compensation costs and fees paid to third parties who are directly involved in the application development efforts and are included in intangible assets, net in the Consolidated Balance Sheets. Such costs are amortized over the estimated useful life of the software on a straight-line basis and are included in depreciation and amortization in the Consolidated Statements of Operations. Once the application development stage is complete, additional costs are expensed as incurred.
Leases
The Company accounts for its lease obligations in accordance with ASC Topic 842,
Leases
(“ASC 842”), which requires the recognition of both (i) a lease liability equal to the present value of the remaining lease payments and (ii) an offsetting
right-of-use
asset. The remaining lease payments are discounted using the rate implicit in the lease, if known, or otherwise the Company’s incremental borrowing rate. After lease commencement,
right-of-use
assets are assessed for impairment and otherwise are amortized over the remaining lease term on a straight-line basis. These recognition requirements are not applied to short-term leases which are those with a lease term of 12 months or less. Instead, lease payments associated with short-term leases are recognized as an expense on a straight-line basis over the lease term.
ASC 842 also provides a practical expedient which allows for consideration in a contract to be accounted for as a single lease component rather than allocated between lease and
non-lease
components. The Company has elected to apply this practical expedient to all lease contracts, where applicable.
 
12
Deferred Consideration—Gold Payments
Deferred consideration represents the present value of an obligation to pay gold to a third party into perpetuity and is measured using forward-looking gold prices observed on the CMX exchange, a selected discount rate and perpetual growth rate (Note 9). Changes in the fair value of this obligation are reported as gain/(loss) on revaluation of deferred consideration—gold payments in the Consolidated Statements of Operations.
Convertible Notes
Convertible notes are carried at amortized cost, net of issuance costs. In accordance with Accounting Standards Update (“ASU”)
2020-06,
Debt – Debt with Conversion and Other Options
, the Company accounts for convertible instruments as a single liability (applicable to the convertible notes) or equity with no separate accounting for embedded conversion features unless the conversion feature meets the criteria for accounting under the substantial premium model or does not qualify for a derivative scope exception. Interest expense is recognized using the effective interest method and includes amortization of issuance costs over the life of the debt.
Contingencies
The Company may be subject to reviews, inspections and investigations by regulatory authorities as well as legal proceedings arising in the ordinary course of business. The Company evaluates the likelihood of an unfavorable outcome of all legal or regulatory proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable.
Contingent Payments
The Company recognizes a gain on contingent payments when the contingency is resolved and the gain is realized.
Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Net income available to common stockholders represents net income of the Company reduced by an allocation of earnings to participating securities. The Series A
non-voting
convertible preferred stock (Note 11) and unvested share-based payment awards that contain
non-forfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of EPS pursuant to the
two-class
method. Share-based payment awards that do not contain such rights are not deemed participating securities and are included in diluted shares outstanding (if dilutive).
Diluted EPS is calculated under the treasury stock method and the
two-class
method. The calculation that results in the lowest diluted EPS amount for the common stock is reported in the Company’s consolidated financial statements. The treasury stock method includes the dilutive effect of potential common shares including unvested stock-based awards, the Series A
non-voting
convertible preferred stock and the convertible notes, if any. Potential common shares associated with the Series A
non-voting
convertible preferred stock and the convertible notes are computed under the
if-converted
method. Potential common shares associated with the conversion option embedded in the convertible notes are dilutive when the Company’s average stock price exceeds the conversion price.
Income Taxes
The Company accounts for income taxes using the liability method, which requires the determination of deferred tax assets and liabilities based on the differences between the financial and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is
more-likely-than-not
that some portion or all the deferred tax assets will not be realized.
Tax positions are evaluated utilizing a
two-step
process. The Company first determines whether any of its tax positions are
more-likely-than-not
to be sustained upon examination, based solely on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company records interest expense and penalties related to tax expenses as income tax expense.
The Global Intangible
Low-Taxed
Income (“GILTI”) provisions of the Tax Reform Act requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. An accounting policy election is available to either account for the tax effects of GILTI in the period that is subject to such taxes or to provide deferred taxes for book and tax basis differences that upon reversal may be subject to such taxes. The Company accounts for the tax effects of these provisions in the period that is subject to such tax.
Non-income
based taxes are recorded as part of other liabilities and other expenses.
 
13
Table of Contents
3. Cash and Cash Equivalents
Of the total cash and cash equivalents of $119,099 and $132,101 at March 31, 2023 and December 31, 2022, $118,306 and $131,104, respectively, were held at two financial institutions. At March 31, 2023 and December 31, 2022, cash equivalents were approximately $336 and $930, respectively.
Certain of the Company’s subsidiaries are required to maintain a minimum level of regulatory capital, which was $28,726 and $25,988 at March 31, 2023 and December 31, 2022, respectively. These requirements are generally satisfied by cash on hand.
4. Fair Value Measurements
The fair value of financial instruments is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. ASC 820,
Fair Value Measurement
, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:
 
Level 1   –   Quoted prices for identical instruments in active markets.
     
Level 2   –   Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
     
Level 3   –   Instruments whose significant drivers are unobservable.
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The tables below summarize the categorization of the Company’s assets and liabilities measured at fair value. During the three months ended March 31, 2023 and 2022, there were no transfers between Levels 2 and 3.
 
                                                                                                     
    
March 31, 2023
  
    
Total
     
Level 1
     
Level 2
  
Level 3
  
Assets:
                                   
Recurring fair value measurements:
                                   
Cash equivalents
   
  $
336
 
   
  $
336
 
   
  $
—
 
  
  $
—  
 
Financial instruments owned, at fair value
                             
 
  
 
ETFs
   
 
33,728
 
   
 
33,728
 
   
 
—
 
  
 
—  
 
U.S. treasuries
   
 
2,993
 
   
 
2,993
 
   
 
—
 
  
 
—  
 
Pass-through GSEs
   
 
81,046
 
   
 
23,352
 
   
 
  57,694
 
  
 
—  
 
Other assets—seed capital (WisdomTree blockchain-enabled funds)
                             
 
  
 
U.S. treasuries
   
 
4,901
 
   
 
4,901
 
   
 
—
 
  
 
—  
 
Equities
   
 
4,937
 
   
 
4,937
 
   
 
—
 
  
 
—  
 
Fixed income
   
 
1,915
 
   
 
—
 
   
 
1,915
 
  
 
—  
 
Other
   
 
660
 
   
 
—
 
   
 
660
 
  
 
—  
 
Investments in Convertible Notes
                                   
Securrency, Inc.—convertible note (Note 7)
   
 
10,051
 
   
 
—
 
   
 
—
 
  
 
10,051  
 
Fnality International Limited—convertible note (Note 7)
   
 
7,451
 
   
 
—
 
   
 
—
 
  
 
7,451  
 
    
 
 
     
 
 
     
 
 
 
  
 
 
  
Total
   
  $
    148,018
 
   
  $
    70,247
 
   
  $
    60,269
   
  
  $
      17,502  
 
    
 
 
     
 
 
     
 
 
 
  
 
 
  
 
14
                                                                                                     
    
March 31, 2023
  
    
Total
     
Level 1
     
Level 2
     
Level 3
  
Non-recurring
fair value measurements:
                                    
Securrency, Inc.—Series A convertible preferred stock
(1)
   
  $
    3,588
 
   
  $
—
 
   
  $
—
 
   
  $
3,588  
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Liabilities:
                                    
Recurring fair value measurements:
                                    
Deferred consideration (Note 9)
   
  $
    179,831
 
   
  $
            —
 
   
  $
        —
 
   
  $
    179,831  
 
    
 
 
     
 
 
     
 
 
     
 
 
  
   
    
December 31, 2022
  
    
Total
     
Level 1
     
Level 2
     
Level 3
  
Assets:
                                    
Recurring fair value measurements:
                                    
Cash equivalents
   
  $
930 
 
   
  $
930 
 
   
  $
— 
 
   
  $
—
 
Financial instruments owned, at fair value
                                    
ETFs
   
 
23,772 
 
   
 
23,772 
 
   
 
— 
 
   
 
—
 
U.S. treasuries
   
 
2,980 
 
   
 
2,980 
 
   
 
— 
 
   
 
—
 
Pass-through GSEs
   
 
96,837 
 
   
 
23,290 
 
   
 
73,547 
 
   
 
—
 
Corporate bonds
   
 
885 
 
   
 
— 
 
   
 
885 
 
   
 
—
 
Other assets—seed capital (WisdomTree blockchain-enabled funds)
   
 
1,765 
 
   
 
— 
 
   
 
1,765 
 
   
 
—
 
Investments in Convertible Notes
            
 
 
 
                  
Securrency, Inc.—convertible note (Note 7)
   
 
14,500 
 
   
 
— 
 
   
 
— 
 
   
 
14,500
 
Fnality International Limited—convertible note (Note 7)
   
 
6,921 
 
   
 
— 
 
   
 
— 
 
   
 
6,921
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
  $
  148,590 
 
   
  $
  50,972 
 
   
  $
  76,197 
 
   
  $
21,421
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Non-recurring
fair value measurements:
                                    
Other investments
(2)
   
  $
312 
 
   
  $
— 
 
   
  $
— 
 
   
  $
312
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Liabilities:
                                    
Recurring fair value measurements:
                                    
Deferred consideration (Note 9)
   
  $
200,290 
 
   
  $
— 
 
   
  $
— 
 
   
  $
   200,290
 
    
 
 
     
 
 
     
 
 
     
 
 
  
 
(1)
Fair value determined on March 31, 2023.
(2)
Fair value determined on May 10, 2022.
Recurring Fair Value Measurements—Methodology
Cash Equivalents (Note 3)
– These financial assets represent cash invested in highly liquid investments with original maturities of less than 90 days. These investments are valued at par, which approximates fair value, and are classified as Level 1 in the fair value hierarchy.
Financial instruments owned (Note 5)
– Financial instruments owned are investments in ETFs, U.S. treasuries, pass-through GSEs, corporate bonds, equities, fixed income and other assets. ETFs, U.S. treasuries and equities are generally traded in active, quoted and highly liquid markets and are therefore classified as Level 1 in the fair value hierarchy. Pricing of pass-through GSEs, corporate bonds and fixed income include consideration given to collateral characteristics and market assumptions related to yields, credit risk and timing of prepayments and are therefore generally classified as Level 2. Pass-through GSE positions invested in through a fund structure with a quoted market price on an exchange are generally classified as Level 1.
 
15
Fair Value Measurements classified as Level
 3
– The following table presents a reconciliation of beginning and ending balances of recurring fair value measurements classified as Level 3:
 
        
Three Months Ended,

March 31,
  
        
2023
    
2022
  
   
Investments in Convertible Notes (Note 7)
                 
   
Beginning balance
      $ 21,421       $ —  
    
  
Purchases
      —       6,863  
   
Net unrealized losses
(1)
      (3,919 )      (163 ) 
        
 
 
    
 
 
  
   
Ending balance
      $ 17,502       $ 6,700  
        
 
 
    
 
 
  
   
Deferred Consideration (Note 9)
                 
   
Beginning balance
      $     200,290       $ 228,062  
   
Net realized losses
(2)
      4,486       4,450  
   
Net unrealized (gains)/losses
(3)
      (20,592 )      17,018  
   
Settlements
      (4,353 )      (4,353 ) 
        
 
 
    
 
 
  
   
Ending balance
      $ 179,831        $     245,177    
        
 
 
    
 
 
  
 
(1)
Recorded in other losses, net in the Consolidated Statements of Operations.
(2)
Recorded as contractual gold payments expense in the Consolidated Statements of Operations.
(3)
Recorded as gain/(loss) on revaluation of deferred consideration—gold payments in the Consolidated Statements of Operations.
5.  Financial instruments owned
These instruments consist of the following:
 
        
    March 31,    

2023
    
    December 31,    
2022
  
          
  
Financial instruments owned
                 
   
Trading securities
      $ 117,767       $ 124,474  
   
Other assets—seed capital (WisdomTree blockchain-enabled funds)
      12,413       1,765  
        
 
 
    
 
 
  
           $     130,180         $     126,239   
        
 
 
    
 
 
  
The Company recognized net trading gains/(losses) on financial instruments owned that were still held at the reporting dates of $4,722 and ($4,316) during the three months ended March 31, 2023 and 2022, respectively, which were recorded in other losses, net, in the Consolidated Statements of Operations.
6.  Securities
Held-to-Maturity
The following table is a summary of the Company’s securities
held-to-maturity:
 
                                            
       
    March 31,    

2023
   
    December 31,    

2022
 
Debt instruments: Pass-through GSEs (amortized cost)
      $           253          $           259    
      
 
 
 
   
 
 
 
During the three months ended March 31, 2023 and 2022, the Company received proceeds of $6 and $18, respectively, from
held-to-maturity
securities maturing or being called prior to maturity.
The following table summarizes unrealized losses, gains and fair value (classified as Level 2 within the fair value hierarchy) of securities
held-to-maturity:
 
                                            
       
    March 31,    

2023
   
    December 31,    
2022
 
Cost/amortized cost
      $ 253      $ 259  
 
Gross unrealized losses
      (17 )       (20 ) 
 
Gross unrealized gains
      —        —  
      
 
 
 
   
 
 
 
 
Fair value
      $           236        $           239    
      
 
 
 
   
 
 
 
An allowance for credit losses was not provided on the Company’s
held-to-maturity
securities as all securities are investments in pass-through GSEs which are determined to have an estimated loss rate of zero due to an implicit U.S. government guarantee.
 
16
The following table sets forth the maturity profile of the securities
held-to-maturity;
however, these securities may be called prior to the maturity date:
 
                                
       
    March 31,    

2023
   
    December 31,    

2022
 
Due within one year
      $ —        $ —  
 
Due one year through five years
      —        —  
 
Due five years through ten years
      26        27  
 
Due over ten years
      227        232  
      
 
 
 
   
 
 
 
 
Total
      $           253          $           259    
      
 
 
 
   
 
 
 
7. Investments
The following table sets forth the Company’s investments:
 
      
       
        March 31, 2023        
     
        December 31, 2022        
  
      
Carrying

Value
     
Cost
     
Carrying

Value
     
Cost
  
 
Securrency, Inc.—Series A convertible preferred stock
      $ 3,588          $ 8,112          $ 8,488          $ 8,112    
 
Securrency, Inc.—Series B convertible preferred stock
      5,500          5,500          5,500          5,500    
 
Securrency, Inc.—convertible note
      10,051          15,000          14,500          15,000    
      
 
 
     
 
 
     
 
 
     
 
 
  
 
Subtotal—Securrency, Inc.
      $ 19,139          $ 28,612          $ 28,488          $ 28,612    
 
Fnality International Limited—convertible note
      7,451          6,863          6,921          6,863    
 
Other investments
      312          250          312          250    
      
 
 
     
 
 
     
 
 
     
 
 
  
         $     26,902          $     35,725          $  35,721          $     35,725    
      
 
 
     
 
 
     
 
 
     
 
 
  
Securrency, Inc. – Preferred Stock
The Company owns approximately 22% (or 17 % on a fully-diluted basis) of the capital stock of Securrency, Inc. (“Securrency”), a developer of institutional-grade blockchain-based financial and regulatory technology, issued as a result of strategic investments totaling $13,612. In consideration of such investments, the Company received 5,178,488
shares of Series A convertible preferred stock (“Securrency Series A Shares”) in December
 2019 and 2,004,665
shares of Series B convertible preferred stock (“Securrency Series B Shares”) in March 2021. The Securrency Series B Shares contain a liquidation preference that is pari passu with shares of Series
B-1
convertible preferred stock (which are substantially the same as the Securrency Series B Shares except that they have limited voting rights) and senior to that of the holders of the Securrency Series A Shares, which are senior to the holders of common stock. Otherwise, the Securrency Series A Shares and Securrency Series B Shares have substantially the same terms, are convertible into common stock at the option of the Company and contain various rights and protections including a
non-cumulative
 
6.0
%
dividend, payable if and when declared by the board of directors of Securrency. In addition, the Securrency Series A Shares and Securrency Series B Shares (together with the Securrency Series
B-1
convertible preferred stock) are separately redeemable, with respect to all of the shares outstanding of the applicable series of preferred stock (subject to certain regulatory restrictions of certain investors), for the original issue price thereof, plus all declared and unpaid dividends, upon approval by holders of at
least
60
% of the
Securrency 
Series A Shares (at any time on or after December 31, 2029) and
90
%
of the Securrency Series B Shares (at any time on or after March 31, 2031).
These investments are accounted for under the measurement alternative prescribed in ASC 321, as they do not have a readily determinable fair value and are not considered to be
in-substance
common stock. The investments are assessed for impairment and similar observable transactions on a quarterly basis. During the three months ending March, 31, 2023, the Company recognized an impairment of $4,900
on its Securrency Series A Shares to reduce the carrying value of its investment to fair value. Fair value was determined using the probability-weighted expected return method (“PWERM”), a valuation approach that estimates fair value assuming various outcomes.
The table below presents the probability ascribed to potential outcomes used in the PWERM (classified as Level 3 in the fair value hierarchy):
 
    
March 31,

2023
  
Conversion of Securrency Series A Shares upon a future equity financing
      33.3%  
Redemption of Securrency Series A Shares upon a corporate transaction
      33.3%  
Default
      33.4%  
There was no impairment recognized during the three months ended March 31, 2022 based upon a qualitative assessment.
 
17
Table of Contents
Securrency – Convertible Note
In April and November 2022, the Company participated in a convertible note financing, making an aggregate investment of $15,000 in convertible notes of Securrency. In consideration for its investment, the Company was issued a 7% Convertible Promissory Note maturing on
October 20, 2023.
The notes are convertible into either common stock or a class of securities convertible into, exchangeable for, or conferring the right to purchase Securrency’s common stock that is issued in the event of a future equity financing of Securrency. The notes will convert at a conversion price equal to a discount of 25% (or, if applicable, a greater discount offered to other holders of convertible securities in such future equity financing round) to the lowest price paid per equity share issued in the future equity financing round.
The notes are redeemable upon the occurrence of a corporate transaction for an amount which is the greater of (i) the principal amount and all accrued interest and (ii) the amount that would be received had the note been converted, in accordance with the terms of the notes, to common stock immediately prior to the occurrence of the corporate transaction. At maturity, redemption or conversion may occur upon the election by the holders of a
majority-in-interest
of the aggregate principal amount of outstanding notes. If no such election is made, Securrency may elect to pay or convert the notes in its sole discretion.
The notes are accounted for at fair value. Fair value is determined by the Company using PWERM. During the three months ended March 31, 2023, the Company recognized an unrealized loss of $4,449 when
re-measuring
the notes to fair value.
The table below presents the probability ascribed to potential outcomes used in the PWERM (classified as Level 3 in the fair value hierarchy) and the time to exit:
 
    
  March 31,  

2023
   
  December 31,  

2022
Conversion of note upon a future equity financing
        33.3%          60%
Redemption of note upon a corporate transaction
        33.3%          25%
Default
        33.4%          15%
Time to potential outcome (in years)
          0.56          0.33
Fnality International Limited – Convertible Note
In February 2022, the Company participated in a convertible note financing, making an investment of £5,000 ($6,863) in convertible notes of Fnality International Limited (“Fnality”), a company incorporated in England and Wales and focused on creating a
peer-to-peer
digital wholesale settlement ecosystem comprised of a consortium of financial institutions, offering real time cross-border payments from a single pool of liquidity. In consideration for its investment, the Company was issued a 5% Convertible Unsecured Loan Note maturing on December 31, 2023.
The note is convertible into equity shares in the event of a future equity financing of Fnality. The note will convert at a conversion price equal to the lower of (i) a discount of 20% to lowest price paid per equity share issued pursuant to such future financing round and (ii) an amount paid per share subject to a
pre-money
valuation cap. Mandatory conversion may occur on or after the maturity date or, if earlier, in the event a future financing round has not been completed within a specified time from an initial closing of such financing round (“Long Stop Date”), upon the approval of holders of at least 75% of the outstanding notes. The note is also convertible, at the option of the Company, following the earlier of the maturity date or such Long Stop Date.
The note is redeemable upon the occurrence of a change of control for an amount which is the greater of (i) the principal amount and all accrued interest and (ii) the amount that would be received had the note been converted to equity shares immediately prior to the occurrence of the change of control. Redemption may also occur on or after maturity or prior to maturity upon approval by holders of at least 50% and 75%, respectively, of the outstanding notes, or in connection with bankruptcy or other liquidation events.
The note is accounted for at fair value. Fair value is determined by the Company using the PWERM and is also remeasured for changes in the British pound and U.S. dollar exchange rate. During the three months ended March 31, 2023, the Company recognized a gain of $530 when
re-measuring
the notes to fair value.
The table below presents the probability ascribed to potential outcomes used in the PWERM (classified as Level 3 in the fair value hierarchy) and the time to exit:
 
    
  March 31,  

2023
  
  December 31,  

2022
Conversion of note upon a future financing round
          85%         85%
Redemption of note upon a change of control
          10%         10%
Default
            5%           5%
Time to potential outcome (in years)
          0.08         0.25
 
18
Table of Contents
8. Fixed Assets, net
The following table summarizes fixed assets:
 
    
March 31,

2023
     
December 31,
2022
  
Equipment
     $             997          $             962    
Less: accumulated depreciation
      (482)          (418)   
    
 
 
     
 
 
  
Total
     $ 515          $ 544    
    
 
 
     
 
 
  
9. Deferred Consideration
Deferred consideration represents an obligation the Company assumed in connection with its acquisition of the European exchange-traded commodity, currency and
leveraged-and-inverse
business of ETFS Capital Limited (“ETFS Capital”) which occurred on April 11, 2018 (“ETFS Acquisition”). The obligation is for fixed payments to ETFS Capital of physical gold bullion equating to 9,500 ounces of gold per year through March 31, 2058 and then subsequently reduced to 6,333 ounces of gold per year continuing into perpetuity (“Contractual Gold Payments”).
The Contractual Gold Payments are paid from advisory fee income generated by any Company-sponsored financial product backed by physical gold and are subject to adjustment and reduction for declines in advisory fee income generated by such products, with any reduction remaining due and payable until paid in full. ETFS Capital’s recourse is limited to such advisory fee income and it has no recourse back to the Company for any unpaid amounts that exceed advisory fees earned. ETFS Capital ultimately has the right to claw back Gold Bullion Securities Ltd. (a physically backed gold ETP issuer) if the Company fails to remit any amounts due.
The Company determined the present value of the deferred consideration of $179,831 and $200,290 at March 31, 2023 and December 31, 2022 using the following assumptions:
 
    
March 31,
2023
    
December 31,
2022
  
Forward-looking gold price (low)—per ounce
      $ 1,999        $ 1,858  
Forward-looking gold price (high)—per ounce
      $ 3,567        $ 3,126  
Forward-looking gold price (weighted average)—per ounce
      $ 2,401        $         2,237  
Discount rate
              13.3%        11.0%  
Perpetual growth rate
      1.5%        1.3%  
Fair value as of March 31, 2023 was determined using an equal weighting of a discounted cash flow approach and market approach. The forward-looking gold prices at March 31, 2023 were extrapolated from the last observable CMX exchange price (beyond 2028) and the weighted-average price per ounce was derived from the relative present values of the annual payment obligations. The perpetual growth rate at March 31, 2023 was determined based upon the increase in observable forward-looking gold prices through 2028. This obligation is classified as Level 3 as the discount rate, the extrapolated forward-looking gold prices and perpetual growth rate are significant unobservable inputs. An increase in spot gold prices, forward-looking gold prices and the perpetual growth rate would result in an increase in deferred consideration, whereas an increase in the discount rate would reduce the fair value.
Current amounts payable were $17,984 and $16,796 and long-term amounts payable were $161,847 and $183,494 at March 31, 2023 and December 31, 2022, respectively.
During the three months ended March 31, 2023 and 2022, the Company recognized the following in respect of deferred consideration:
 
    
Three Months Ended

March 31,
  
    
2023
     
2022
  
Contractual Gold Payments
     $ 4,486        $ 4,450    
Contractual Gold Payments—gold ounces paid
      2,375          2,375    
Gain/(loss) on revaluation of deferred consideration—gold payments
(1)
     $     20,592        $     (17,018)   
 
(1)
 
Gains on revaluation of deferred consideration—gold payments result from a decrease in spot gold prices, a decrease in the forward-looking price of gold, a decrease in the perpetual growth rate and an increase in the discount rate used to compute the present value of the annual payment obligations. Losses on revaluation of deferred consideration—gold payments result from an increase in spot gold prices, an increase in the forward-looking price of gold, an increase in the perpetual growth rate and a decrease in the discount rate used to compute the present value of the annual payment obligations.
 

19
Table of Contents
10. Convertible Notes
On February 14, 2023, the Company issued and sold $130,000 in aggregate principal amount of 5.75% Convertible Senior Notes due 2028 (the “2023 Notes”) pursuant to an indenture dated February 14, 2023, between the Company and U.S. Bank Trust Company, National Association, as trustee (or its successor in interest, the “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, the Company issued and sold $150,000 in aggregate principal amount of 3.25% Convertible Senior Notes due 2026 (the “2021 Notes”) pursuant to an indenture dated June 14, 2021, between the Company and the Trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A.
On June 16, 2020, the Company issued and sold $150,000 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 the Company and the Trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A. On August 13, 2020, the Company issued and sold $25,000 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, and constitute a further issuance of, and form a single series with, the Company’s 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, the Company repurchased $115,000 in aggregate principal amount of the 2020 Notes. As a result of this repurchase, the Company recognized a loss on extinguishment of approximately $9,721 during the three months ended March 31, 2023.
After the issuance of the 2023 Notes (and together with the remaining 2020 Notes and the 2021 Notes, the “Convertible Notes”), the Company had $340,000 in aggregate principal amount of Convertible Notes outstanding.
Key terms of the Convertible Notes are as follows:
 
    
  2023 Notes  
     
  2021 Notes  
     
  2020 Notes  
  
Principal outstanding
      $130.0        $150.0        $60.0    
Maturity date (unless earlier converted, repurchased or redeemed)
      August 15, 2028        June 15, 2026        June 15, 2023    
Interest rate
      5.75%        3.25%        4.25%    
Conversion price
      $9.54        $11.04        $5.92    
Conversion rate
      104.8658        90.5797        168.9189    
Redemption price
      $12.40        $14.35        $7.70    
 
  •  
Interest rate:
Payable semiannually in arrears on February 15 and August 15 of each year for the 2023 Notes (beginning on August 15, 2023) and June 15 and December 15 of each year for the 2020 Notes and the 2021 Notes.
 
  •  
Conversion price:
Convertible at an initial conversion rate into shares of the Company’s common stock, per $1,000 principal amount of notes (equivalent to an initial conversion price set forth in the table above), subject to adjustment.
 
  •  
Conversion:
Holders may convert at their option at any time prior to the close of business on the business day immediately preceding May 15, 2028, March 15, 2026 and March 15, 2023 for the 2023 Notes, 2021 Notes and 2020 Notes, respectively, only under the following circumstances: (i) if the last reported sale price of the Company’s 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 the Company’s common stock and the conversion rate on each such trading day; (iii) upon a notice of redemption delivered by the Company in accordance with the terms of the indentures but only with respect to the Convertible Notes called (or deemed called) for redemption; or (iv) upon the occurrence of specified corporate events. On or after May 15, 2028, March 15, 2026 and March 15, 2023 in respect of the 2023 Notes, 2021 Notes and 2020 Notes, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances.
 
  •  
Cash settlement of principal amount:
Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted. At its election, the Company will also settle its conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted in either cash, shares of its common stock or a combination of cash and shares of its common stock.
 
  •  
Redemption price:
The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after August 20, 2025, June 20, 2023 and June 20, 2021 in respect of the 2023 Notes, 2021 Notes and 2020 Notes, respectively, and on or prior to the 55th scheduled trading day immediately preceding the maturity date, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price for the respective
 
20
 
Convertible Notes then in effect for at least 20 trading days, including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides 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 the Company to repurchase for cash all or a portion of their notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of certain change of control transactions or liquidation, dissolution or common stock delisting events.
 
  •  
Conversion rate increase in certain customary circumstances:
In certain circumstances, conversions in connection with a “make-whole fundamental change” (as defined in the indentures) or conversions of Convertible Notes called (or deemed called) for redemption may result in an increase to the conversion rate, provided that the conversion rate will not exceed 167.7853 shares, 144.9275 shares and 270.2702 shares of the Company’s common stock per $1,000 principal amount of the 2023 Notes, 2021 Notes and 2020 Notes, respectively (the equivalent of 59,767,426 shares of the Company’s common stock), subject to adjustment.
 
  •  
Seniority and Security:
The Convertible Notes rank equal in right of payment, and are the Company’s senior unsecured obligations, but are subordinated in right of payment to the Company’s obligations to make certain redemption payments (if and when due) in respect of its Series A
Non-Voting
Convertible Preferred Stock (Note 11).
The indentures contain customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes outstanding may declare the entire principal amount of all the Convertible Notes to be repurchased, plus any accrued special interest, if any, to be immediately due and payable.
The following table provides a summary of the carrying value of the Convertible Notes at March 31, 2023 and December 31, 2022:
 
    
March 31, 2023
  
December 31, 2022
    
2023
Notes
  
2021
Notes
  
2020 Notes
  
Total
  
2021 Notes
  
2020 Notes
  
Total
Principal amount
     $  130,000      $  150,000      $  60,000      $   340,000      $   150,000      $   175,000      $   325,000  
Plus: Premium
      —       —       250       250       —       250       250  
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Gross proceeds
      130,000       150,000       60,250       340,250       150,000       175,250       325,250  
Less: Unamortized issuance costs
      (3,465)       (2,768)       (366)
    (6,599)       (2,981)       (1,053)       (4,034)  
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Carrying amount
      126,535      $ 147,232      $ 59,884      $ 333,651      $ 147,019      $ 174,197      $ 321,216  
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Effective interest rate
(1)
      6.25%       3.83%       5.18%       5.00%       3.83%       5.26%       4.60%  
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
        
                                                                                                   
(1)
Includes amortization of the issuance costs and premium.
Interest expense on the Convertible Notes during the three months ended March 31, 2023 and 2022 was $4,002 and $3,732, respectively. Interest payable of $3,243 and $621 at March 31, 2023 and December 31, 2022, respectively, is included in accounts payable and other liabilities on the Consolidated Balance Sheets.
The fair value of the Convertible Notes (classified as Level 2 in the fair value hierarchy) was $331,766 and $320,513 at March 31, 2023 and December 31, 2022, respectively. The
if-converted
value of the Convertible Notes did not exceed the principal amount at March 31, 2023 and December 31, 2022.
11. Series A Preferred Stock
On April 10, 2018, the Company filed a Certificate of Designations of Series A
Non-Voting
Convertible Preferred Stock (the “Series A Certificate of Designations”) with the Delaware Secretary of State establishing the rights, preferences, privileges, qualifications, restrictions, and limitations relating to the Series A Preferred Stock (defined below). The Series A Preferred Stock is intended to provide ETFS Capital with economic rights equivalent to the Company’s common stock on an
as-converted
basis. The Series A Preferred Stock has no voting rights, is not transferable and has the same priority with regard to dividends, distributions and payments as the common stock.
As described in the Series A Certificate of Designations, the Company will not issue, and ETFS Capital does not have the right to require the Company to issue, any shares of common stock upon conversion of the Series A Preferred Stock, if, as a result of such conversion, ETFS Capital (together with certain attribution parties) would beneficially own more than 9.99% of the Company’s outstanding common stock immediately after giving effect to such conversion.
 
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Table of Contents
In connection with the completion of the ETFS Acquisition, the Company issued 14,750 shares of Series A
Non-Voting
Convertible Preferred Stock (the “Series A Preferred Stock”), which are convertible into an aggregate of 14,750,000 shares of common stock. The fair value of this consideration was $132,750, based on the closing price of the Company’s common stock on April 10, 2018 of $9.00 per share, the trading day prior to the closing of the acquisition.
The following is a summary of the Series A Preferred Stock balance:
 
    
March 31,

2023
  
December 31,
2022
Issuance of Series A Preferred Stock
    $     132,750     $     132,750  
Less: Issuance costs
      (181 )      (181 ) 
    
 
 
 
  
 
 
 
Series A Preferred Stock—carrying value
    $ 132,569     $ 132,569  
    
 
 
 
  
 
 
 
Cash dividends declared per share (quarterly)
    $ 0.03     $ 0.03  
    
 
 
 
  
 
 
 
Temporary equity classification is required for redeemable instruments for which redemption triggers are outside of the issuer’s control. ETFS Capital has the right to redeem all the Series A Preferred Stock specified to be converted during the period of time specified in the Series A Certificate of Designations in the event that: (a) the number of shares of the Company’s common stock authorized by its certificate of incorporation is insufficient to permit the Company to convert all of the Series A Preferred Stock requested by ETFS Capital to be converted; or (b) ETFS Capital does not, upon completion of a change of control of the Company, receive the same amount per Series A Preferred Stock as it would have received had each outstanding Series A Preferred Stock been converted into common stock immediately prior to the change of control. However, the Company will not be obligated to make any such redemption payments to the extent such payments would be a breach of any covenant or obligation the Company owes to any of its secured creditors or is otherwise prohibited by applicable law.
Any such redemption will be at a price per Series A Preferred Stock equal to the dollar volume-weighted average price for a share of common stock for the
30-trading
day period ending on the date of such attempted conversion or change of control, as applicable, multiplied by 1,000. Such redemption payment will be made in one payment no later than 10 business days following the last day of the Company’s first fiscal quarter that begins on a date following the date ETFS Capital exercises such redemption right. The redemption value of the Series A Preferred Stock was $86,638 and $77,969 at March 31, 2023 and December 31, 2022, respectively.
The carrying amount of the Series A Preferred Stock was not adjusted as it was not probable that the Series A Preferred Stock would become redeemable.
12. Leases
The Company has entered into operating leases for its office facilities (including its corporate headquarters) and equipment. The Company has no finance leases.
The following table provides additional information regarding the Company’s leases:
 
    
Three Months Ended

March 31,
  
    
        2023        
     
        2022        
  
Lease cost:
                  
Operating lease cost
    $ 319          $ 89      
Short-term lease cost
      56            276      
    
 
 
     
 
 
  
Total lease cost
    $ 375          $             365      
    
 
 
     
 
 
  
Other information:
                  
Cash paid for amounts included in the measurement of operating liabilities (operating leases)
    $             326          $ 97      
    
 
 
     
 
 
  
Right-of-use
assets obtained in exchange for new operating lease liabilities
      n/a            n/a      
    
 
 
     
 
 
  
Weighted-average remaining lease term (in years)—operating leases
      1.0            1.3      
    
 
 
     
 
 
  
Weighted-average discount rate—operating leases
      6.5%         4.4%   
    
 
 
     
 
 
  
None of the Company’s leases include variable payments, residual value guarantees or any restrictions or covenants relating to the Company’s ability to pay dividends or incur additional financing obligations.
 
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Table of Contents
The following table discloses future minimum lease payments at March 31, 2023 with respect to the Company’s operating lease liabilities:
            
 
Remainder of 2023
     $ 803    
 
2024
      397    
 
2025
      —    
 
2026
      —    
 
2027
      —    
 
2028 and thereafter
      —    
      
 
 
  
 
Total future minimum lease payments (undiscounted)
     $         1,200    
      
 
 
  
The following table reconciles the future minimum lease payments (disclosed above) at March 31, 2023 to the operating lease liabilities recognized in the Company’s Consolidated Balance Sheets:
 
            
 
Amounts recognized in the Company’s Consolidated Balance     Sheets
         
 
Lease liability—short term
    $ 1,041    
 
Lease liability—long term
      120    
      
 
 
  
 
Subtotal
      1,161    
 
Difference between undiscounted and discounted cash flows
      39    
      
 
 
  
 
Total future minimum lease payments (undiscounted)
      $       1,200    
      
 
 
  
13. Contingencies
The Company may be subject to reviews, inspections and investigations by regulatory authorities as well as legal proceedings arising in the ordinary course of business.
Closure of the WisdomTree WTI Crude Oil 3x Daily Leveraged ETP
In December 2020, WMAI, WTMAML, WTUK and WisdomTree Ireland Limited (“WT Ireland”) were served with a writ of summons to appear before the Court of Milan, Italy. In January 2021, WTUK was served with a writ of summons to appear before the Court of Udine, Italy. Investors had filed actions seeking damages resulting from the closure of the WisdomTree WTI Crude Oil 3x Daily Leveraged ETP (“3OIL”) in March 2020. The product was dependent on the receipt of payments from a swap provider to satisfy payment obligations to the investors. Due to an extreme adverse move in oil futures relative to the oil futures’ closing price, the swap contract underlying 3OIL was terminated by the swap provider, which resulted in the compulsory redemption of 3OIL, all in accordance with the prospectus.
In February 2022, the Court of Udine ruled in the Company’s favor. Also in February 2022, WMAI, WTMAML, WTUK and WT Ireland were served with another writ of summons to appear before the Court of Milan by additional investors seeking damages resulting from the closure of 3OIL.
In March 2022, WMAI and WTUK were served with writs of summons to appear before the Court of Turin and the Court of Milan by additional investors seeking damages. These writs also were served on the intermediary brokers for the respective claimants, with the claimants alleging joint and several liability of WMAI, WTUK and such intermediary brokers.
Total damages sought by all investors are approximately €15,800 ($17,186) at March 31, 2023.
The Company is currently assessing these claims with its external counsel. An accrual has not been made with respect to these matters at March 31, 2023 and December 31, 2022.
14. Variable Interest Entities
VIEs are entities with any of the following characteristics: (i) the entity does not have enough equity to finance its activities without additional financial support; (ii) the equity holders, as a group, lack the characteristics of a controlling financial interest; or (iii) the entity is structured with
non-substantive
voting rights.
Consolidation of a VIE is required for the party deemed to be the primary beneficiary, if any. The primary beneficiary is the party who has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. The Company is not the primary beneficiary of any entities in which it has a variable interest as it does not have the power to direct the activities that most significantly impact the entities’ economic performance. Such power is conveyed through the entities’ boards of directors and the Company does not have control over the boards.
 
23
The following table presents information about the Company’s variable interests in
non-consolidated
VIEs:
 
    
      March 31,      

2023
     
      December 31,      

2022
     
                                                    
Carrying Amount—Assets (Securrency):
                  
Preferred stock—Series A Shares
    $ 3,588         $ 8,488    
Preferred stock—Series B Shares
      5,500          5,500    
Convertible note
      10,051          14,500    
    
 
 
     
 
 
  
Subtotal—Securrency
    $ 19,139         $ 28,488    
Carrying Amount—Assets (Fnality):
                    
Convertible note
      7,451          6,921    
Carrying Amount—Assets (Other investments):
      312          312    
    
 
 
     
 
 
  
Total (Note 7)
    $ 26,902         $ 35,721    
    
 
 
     
 
 
  
 
Maximum exposure to loss
    $         26,902         $         35,721    
    
 
 
     
 
 
  
15. Revenues from Contracts with Customers
The following table presents the Company’s total revenues from contracts with customers:
 
    
Three Months Ended March 31,
  
    
2023
     
2022
  
Revenues from contracts with customers:
                  
Advisory fees
     $ 77,637         $ 76,517    
Other
      4,407          1,851    
    
 
 
     
 
 
  
Total operating revenues
     $       82,044         $       78,368    
    
 
 
     
 
 
  
The Company recognizes revenues from contracts with customers when the performance obligation is satisfied, which is when the promised services are transferred to the customer. A service is considered to be transferred when the customer obtains control, which is represented by the transfer of rights with regard to the service. Transfer of control happens either over time or at a point in time. When a performance obligation is satisfied over time, an entity is required to select a single method of measuring progress for each performance obligation that depicts the entity’s performance in transferring control of services to the customer.
Substantially all the Company’s revenues from contracts with customers are derived primarily from investment advisory agreements with related parties (Note 16). These advisory fees are recognized over time, are earned from the Company’s ETPs and are calculated based on a percentage of the ETPs’ average daily net assets. There is no significant judgment in calculating amounts due which are invoiced monthly in arrears and are not subject to any potential reversal. Progress is measured using the practical expedient under the output method resulting in the recognition of revenue in the amount for which the Company has a right to invoice.
There are no contract assets or liabilities that arise in connection with the recognition of advisory fee revenue. In addition, there are no costs incurred to obtain or fulfill the contracts with customers, all of which are investment advisory agreements with related parties.
Other income includes revenues
the Company earns
from swap providers associated with certain of the Company’s European-listed ETPs, the nature of which are either based on a percentage of the ETPs’ average daily net assets or flows associated with certain products. There is no significant judgment in calculating amounts due
,
which are invoiced monthly or quarterly in arrears and are not subject to any potential reversal. Progress is measured using the practical expedient under the output method resulting in the recognition of revenue in the amount for which the Company has a right to invoice.
Geographic Distribution of Revenue
The following table presents the Company’s total revenues geographically as determined by where the respective management companies reside:
 
    
Three Months Ended March 31,
  
    
2023
     
2022
  
Revenues from contracts with customers:
                  
United States
     $ 49,681         $ 46,229    
Jersey
      29,053          28,598    
Ireland
      3,310          3,541    
    
 
 
     
 
 
  
Total operating revenues
     $     82,044         $     78,368    
    
 
 
     
 
 
  
 
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Table of Contents
16. Related Party Transactions
The Company’s revenues are derived primarily from investment advisory agreements with related parties. Under these agreements, the Company has licensed to related parties the use of certain of its own indexes for the U.S. WisdomTree ETFs and WisdomTree UCITS ETFs. The Board of Trustees and Board of Directors (including certain officers of the Company) of the related parties are primarily responsible for overseeing the management and affairs of the entities for the benefit of their stakeholders and have contracted with the Company to provide for general management and administration services. The Company is also responsible for certain expenses of the related parties, including the cost of transfer agency, custody, fund administration and accounting, legal, audit, and other
non-distribution
services, excluding extraordinary expenses, taxes and certain other expenses, which are included in fund management and administration in the Consolidated Statements of Operations. In exchange, the Company receives fees based on a percentage of the ETPs’ average daily net assets. A majority of the independent members of the Board of Trustees are required to annually approve the advisory agreements of the U.S. WisdomTree ETFs and these agreements may be terminated by the Board of Trustees upon notice.
The following table summarizes accounts receivable from related parties which are included as a component of accounts receivable in the Consolidated Balance Sheets:
 
    
March 31,

2023
     
December 31,

2022
     
            
Receivable from WTT
     $ 17,124         $ 16,399    
Receivable from ManJer Issuers
      12,790          4,485    
Receivable from WMAI and WTICAV
      2,532          3,255    
    
 
 
     
 
 
  
Total
     $       32,446         $       24,139    
    
 
 
     
 
 
  
The allowance for credit losses on accounts receivable from related parties is insignificant when applying historical loss rates, adjusted for current conditions and supportable forecasts, to the amounts outstanding in the table above. Amounts outstanding are all invoiced in arrears, are less than 30 days aged and are collected shortly after the applicable reporting period.
The following table summarizes revenues from advisory services provided to related parties:
 
    
Three Months Ended March 31,
     
            
    
2023
     
2022
  
Advisory services provided to WTT
     $ 49,487         $ 46,070    
Advisory services provided to ManJer Issuers
      24,840          26,905    
Advisory services provided to WMAI and WTICAV
      3,310          3,542    
    
 
 
     
 
 
  
Total
     $       77,637         $       76,517    
    
 
 
     
 
 
  
The Company also has investments in certain WisdomTree products of approximately $45,214 and $25,283 at March 31, 2023 and December 31, 2022, respectively. This includes $12,413 and $1,765,
respectively, of investments in certain consolidated affiliated blockchain-enabled funds advised by WT Digital Management, referred to herein as “other assets–seed capital.” Net unrealized and realized gains/(losses) related to trading WisdomTree products during the three months ended March 31, 2023 and 2022
were $422 and ($806), respectively, which are recorded in other losses, net on the Consolidated Statements of Operations.
17. Stock-Based Awards
On July 15, 2022, the Company’s stockholders approved the 2022 Equity Plan under which the Company may issue up to 16,000,000 shares of common stock (less one share for every share granted under the 2016 Equity Plan since March 31, 2022 and inclusive of shares available under the 2016 Equity Plan as of March 31, 2022) in the form of stock options and other stock-based awards.
The Company grants equity awards to employees and directors which include restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance-based restricted stock units (“PRSUs”) and stock options. Certain awards described below are subject to acceleration under certain conditions.
 
Stock options:
   
Generally issued for terms of ten years and may vest after at least one year of service and have an exercise price equal to the Company’s stock price on the grant date. The Company estimates the fair value of stock options (when granted) using the Black-Scholes option pricing model.
   
RSAs/RSUs:
   
Awards are valued based on the Company’s stock price on grant date and generally vest ratably, on an annual basis, over three years.
 
25
PRSUs:    These awards cliff vest three years from the grant date and contain a market condition whereby the number of PRSUs ultimately vesting is tied to how the Company’s total shareholder return (“TSR”) compares to a peer group of other publicly traded asset managers over the three-year period. A Monte Carlo simulation is used to value these awards.
   
    
The number of PRSUs vesting ranges from 0% to 200% of the target number of PRSUs granted, as follows:
 
•   If the relative TSR is below the 25
th
percentile, then 0% of the target number of PRSUs granted will vest;
 
•   If the relative TSR is at the 25th percentile, then 50% of the target number of PRSUs granted will vest;
 
•   If the relative TSR is above the 25th percentile, then linear scaling is applied such that the percent of the target number of PRSUs vesting is 100% at the 50th percentile and capped at 200% of the target number of PRSUs granted for performance at the 85th percentile (or 100th percentile for grants made in 2020); and
 
•   If the Company’s TSR is negative, the target number of PRSUs vesting is capped at 100% regardless of the relative TSR percentile.
Stock-based compensation expense during the three months ended March 31, 2023 and 2022 was $4,536 and $2,936, respectively.
A summary of unrecognized stock-based compensation expense and average remaining vesting period is as follows:
 
       
March 31, 2023
     
Unrecognized Stock-
Based

Compensation
   
Weighted-Average

Remaining
  Vesting Period (Years)  
 
Employees and directors
    $             30,415                  2.10
A summary of stock-based compensation award activity (shares) during the three months ended March 31, 2023 is as follows:
 
    
RSA
  
RSU
  
PRSU
Balance at January 1, 2023
      3,391,082       141,963       668,188  
Granted
      3,273,263       73,855       576,240
(1)
 
Vested
      (1,498,171 )      (26,837 )      (83,158 )
(2)
 
Forfeited
      (11,885 )       (233 )       (24,955 )
(2)
 
    
 
 
 
  
 
 
 
  
 
 
 
Balance at March 31, 2023
          5,154,289           188,748             1,136,315  
    
 
 
 
  
 
 
 
  
 
 
 
 
                                                                                
 
 
 
(1)
Represents the target number of PRSUs granted and outstanding. The number of PRSUs that ultimately vest ranges from 0% to 200% of this amount. A Monte-Carlo simulation was used to value these awards using the following assumptions for the Company and the peer group: (i) beginning
90-day
average stock prices; (ii) valuation date stock prices; (iii) historical stock price volatilities ranging from 37% to 56% (average 47%); (iv) correlation coefficients based upon the price data used to calculate the historical volatilities; (v) a risk free interest rate of 3.8%; and (vi) an expected dividend yield of 0%.
 
 
(2)
The payout on PRSUs vesting in January 2023 was 77%. The remainder of the awards were forfeited.
18. Stockholder Rights Plan
On March 17, 2023, the Board of Directors of the Company adopted a stockholder rights plan, as set forth in the Stockholder Rights Agreement, dated March 17, 2023, between the Company and Continental Stock Transfer & Trust Company, as Rights Agent (the “Stockholder Rights Agreement”).
Pursuant to the terms of the Stockholder Rights Agreement, the Board of Directors declared a dividend distribution of (i) one Right (as defined below) for each outstanding share of common stock, par value $0.01 per share, of the Company’s common stock and (ii) 1,000 Rights for each outstanding share of Series A Preferred Stock”, to stockholders of record as of the close of business on March 28, 2023 (the “Record Date”). In addition, one Right will automatically attach to each share of common stock and 1,000 Rights will automatically attach to each share of Series A Preferred Stock, in each case, issued between the Record Date and the earlier of the Distribution Date (as defined below) and the expiration date of the Rights. Each “Right” entitles the registered holder thereof to purchase from the Company a unit consisting of one
ten-thousandth
of a share (a “Unit”) of Series B Junior Participating Cumulative Preferred Stock, par value $0.01 per share, of the Company (the “Series B Preferred Stock”) at a cash exercise price of $32.00 per Unit (the “Exercise Price”), subject to adjustment, under certain conditions specified in the Stockholder Rights Agreement and summarized below.
 
26
Initially, the Rights are not exercisable and are attached to and trade with all shares of common stock and Series A Preferred Stock outstanding as of, and issued subsequent to, the Record Date. The Rights will separate from the common stock and Series A Preferred Stock and will become exercisable upon the earlier of (i) the close of business on the tenth calendar day following the first public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership of 10% (or 20% in the case of a person or group which, together with all affiliates and associates of such person or group, is the beneficial owner of shares of common stock of the Company representing less than 20% of the shares of common stock of the Company then outstanding, and which is entitled to file, and files, a statement on Schedule 13G pursuant to Rule
13d-1(b)
or Rule
13d-1(c)
of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, as in effect at the time of the first public announcement of the declaration of the Rights dividend with respect to the shares of common stock beneficially owned by such person or group) or more of the outstanding shares of common stock, other than as a result of repurchases of stock by the Company or certain inadvertent actions by a stockholder (the date of such announcement being referred to as the “Stock Acquisition Date”), or (ii) the close of business on the tenth business day (or such later day as the Board of Directors may determine) following the commencement of a tender offer or exchange offer that could result upon its consummation in a person or group becoming an Acquiring Person (the earlier of such dates being herein referred to as the “Distribution Date”). A person or group who beneficially owned 10% or more (or 20% or more in the case of passive stockholders) of the Company’s outstanding common stock prior to the first public announcement by the Company of the adoption of the Stockholder Rights Agreement will not trigger the Stockholder Rights Agreement so long as they do not acquire beneficial ownership of any additional shares of common stock at a time when they still beneficially own 10% or more (or 20% or more in the case of passive stockholders) of such common stock, subject to certain exceptions as set forth in the Stockholder Rights Agreement.
For purposes of the Stockholder Rights Agreement, beneficial ownership is defined to include ownership of securities that are subject to a derivative transaction and acquired derivative securities. Swaps dealers unassociated with any control intent or intent to evade the purposes of the Stockholder Rights Agreement are excepted from such imputed beneficial ownership.
In the event that a Stock Acquisition Date occurs, proper provision will be made so that each holder of a Right (other than an Acquiring Person or its associates or affiliates, whose Rights shall become null and void) will thereafter have the right to receive upon exercise, in lieu of a number of shares of
Series B 
Preferred Stock, that number of shares of common stock of the Company (or, in certain circumstances, including if there are insufficient shares of common stock to permit the exercise in full of the Rights, Units of
Series B 
Preferred Stock, other securities, cash or property, or any combination of the foregoing) having a market value of two times the Exercise Price of the Right (such right being referred to as the “Subscription Right”). In the event that, at any time following the Stock Acquisition Date, (i) the Company consolidates with, or merges with and into, any other person, and the Company is not the continuing or surviving corporation, (ii) any person consolidates with the Company, or merges with and into the Company and the Company is the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the shares of common stock are changed into or exchanged for stock or other securities of any other person or cash or any other property, or (iii) 50% or more of the Company’s assets or earning power is sold, mortgaged or otherwise transferred, each holder of a Right (other than an Acquiring Person or its associates or affiliates, whose Rights shall become null and void) will thereafter have the right to receive, upon exercise, common stock of the acquiring company having a market value equal to two times the Exercise Price of the Right (such right being referred to as the “Merger Right”). The holder of a Right will continue to have the Merger Right whether or not such holder has exercised the Subscription Right. Rights that are or were beneficially owned by an Acquiring Person may (under certain circumstances specified in the Stockholder Rights Agreement) become null and void.
The Rights may be redeemed in whole, but not in part, at a price of $0.01 per Right (payable in cash, common stock or other consideration deemed appropriate by the Board of Directors) by the Board of Directors only until the earlier of (i) the time at which any person becomes an Acquiring Person or (ii) the expiration date of the Stockholder Rights Agreement. Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and thereafter the only right of the holders of Rights will be to receive the redemption price.
The Stockholder Rights Agreement may be amended by the Board of Directors in its sole discretion at any time prior to the time at which any person becomes an Acquiring Person. After such time the Board of Directors may, subject to certain limitations set forth in the Stockholder Rights Agreement, amend the Stockholder Rights Agreement only to cure any ambiguity, defect or inconsistency, to shorten or lengthen any time period, or to make changes that do not adversely affect the interests of Rights holders (excluding the interests of an Acquiring Person or its associates or affiliates).
Until a Right is exercised, the holder will have no rights as a stockholder of the Company (beyond those as an existing stockholder), including the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to stockholders or to the Company, stockholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for shares of common stock, other securities of the Company, other consideration or for common stock of an acquiring company.
The Rights are not exercisable until the Distribution Date and will expire at the close of business on March 16, 2024; provided that if the Company’s stockholders have not ratified the Stockholder Rights Agreement by the close of business on the first day after the Company’s 2023 annual meeting of stockholders (including any adjournments or postponements thereof), the Rights will expire at such time, in each case, unless previously redeemed or exchanged by the Company.
 
27
The Stockholder Rights Agreement provides the holders of the common stock with the ability to exempt an offer to acquire, or engage in another business combination transaction involving, the Company that is deemed a “Qualifying Offer” (as defined in the Stockholder Rights Agreement) from the terms of the Stockholder Rights Agreement. A Qualifying Offer is, in summary, an offer determined by a majority of the independent members of the Board to have specific characteristics that are generally intended to preclude offers that are coercive, abusive or highly contingent. Among those characteristics are that it be: (i) a fully financed
all-cash
tender offer or an exchange offer offering shares of common stock of the offeror, or a combination thereof, for any and all of the common stock; and (ii) an offer that is otherwise in the best interests of the Company’s stockholders. The Stockholder Rights Agreement provides additional characteristics necessary for an acquisition offer to be deemed a “Qualifying Offer,” including if the consideration offered in a proposed transaction is stock of the acquiror.
Pursuant to the Stockholder Rights Agreement, if the Company receives a Qualifying Offer and the Board
of Directors
 
has not redeemed the outstanding Rights or exempted such Qualifying Offer from the terms of the Stockholder Rights Agreement or called a special meeting of stockholders (the “Special Meeting”) for the purpose of voting on whether to exempt such Qualifying Offer from the terms of the Stockholder Rights Agreement, in each case by the end of the 90 business day period following the commencement of such Qualifying Offer, provided such offer remains a Qualifying Offer during such period, the holders of 10% of the common stock may request that the Board call a Special Meeting to vote on a resolution authorizing the exemption of the Qualifying Offer from the terms of the Stockholder Rights Agreement. If such a Special Meeting is not held by the 90th business day following the receipt of such a request from stockholders to call a Special Meeting, the Qualifying Offer will be deemed exempt from the terms of the Stockholder Rights Agreement on the 10th business day thereafter.
19. Earnings/(Loss) Per Share
The following tables set forth reconciliations of the basic and diluted earnings/(loss) per share computations for the periods presented:
 
      
Three Months Ended

March 31,
Basic Earnings/(Loss) per Share
     
          2023          
   
          2022          
Net income/(loss)
       $ 16,233       $ (10,261 ) 
Less: Income distributed to participating securities
        (498 )       (549 ) 
Less: Undistributed income allocable to participating securities
        (1,206 )         —    
      
 
 
 
   
 
 
 
Net income/(loss) available to common stockholders—Basic EPS
       $ 14,529       $ (10,810 ) 
     
Weighted average common shares (in thousands)
        143,862          142,782  
      
 
 
 
   
 
 
 
Basic earnings/(loss) per share
       $         0.10       $ (0.08 )     
      
 
 
 
   
 
 
 
 
      
Three Months Ended

March 31,
Diluted Earnings/(Loss) per Share
     
          2023          
   
          2022          
Net earnings/(loss) available to common stockholders
       $ 14,529       $ (10,810 ) 
Add back: Undistributed income allocable to participating securities
        1,206        —    
Less: Reallocation of undistributed income allocable to participating securities considered potentially dilutive
        (1,202 )         —    
      
 
 
 
   
 
 
 
Net income/(loss) available to common stockholders—Diluted EPS
       $ 14,533       $ (10,810 )     
      
 
 
 
   
 
 
 
Weighted Average Diluted Shares (in thousands)
:
                    
Weighted average common shares
        143,862        142,782  
Dilutive effect of common stock equivalents, excluding participating securities
        569        —    
      
 
 
 
   
 
 
 
Weighted average diluted shares, excluding participating securities (in thousands)
        144,431        142,782  
      
 
 
 
   
 
 
 
Diluted earnings/(loss) per share
       $ 0.10       $ (0.08 ) 
      
 
 
 
   
 
 
 
Diluted earnings/(loss) per share presented above is calculated using the
two-class
method as this method results in the lowest diluted earnings per share amount for common stock. During the three months ended March 31, 2022, there were no dilutive common stock equivalents as the Company reported a net loss for the period. Total antidilutive
non-participating
common stock equivalents were 695 and 509 for the three months ended March 31, 2023 and 2022, respectively.
 
28
There were no potential common shares associated with the conversion options embedded in the Convertible Notes included in weighted average diluted shares for the three months ended March 31, 2023 and 2022 as the Company’s average stock price was lower than the conversion price.
The following table reconciles weighted average diluted shares as reported on the Company’s Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, which are determined pursuant to the treasury stock method, to the weighted average diluted shares used to calculate diluted earnings/(loss) per share as disclosed in the table above:
 
      
Three Months Ended

March 31,
Reconciliation of Weighted Average Diluted Shares (in thousands)
     
2023
   
2022
Weighted average diluted shares as disclosed on the Consolidated Statements of Operations
        159,887        142,782
(1)
 
Less: Participating securities:
                    
Weighted average shares of common stock issuable upon conversion of the Series A Preferred Stock (Note 11)
        (14,750 )       —    
Potentially dilutive restricted stock awards
        (706 )       —    
      
 
 
 
   
 
 
 
Weighted average diluted shares used to calculate diluted earnings/(loss) per share as disclosed in the table above
              144,431            142,782  
      
 
 
 
   
 
 
 
 
(1)
 
Excludes 15,521 participating securities and 31 potentially dilutive
non-participating
common stock equivalents for the three months ended March 31, 2022, as the Company reported a net loss for the period (shares herein are reported in thousands).
20. Income Taxes
Effective Income Tax Rate – Three Months Ended March 31, 2023 and March 31, 2022
The Company’s effective income tax rate during the three months ended March 31, 2023 was 7.9% resulting in income tax expense of $1,383. The effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a
non-taxable
gain on revaluation of deferred consideration and a $1,353 reduction in unrecognized tax benefits (including interest and penalties). These items were partly offset by a
non-deductible
loss on extinguishment of our convertible notes and an increase in the deferred tax asset valuation allowance on losses recognized on the Company’s investments.
The Company’s effective income tax rate during the three months ended March 31, 2022 of 62.0% resulted in an income tax benefit of $16,713. The effective income tax rate differs from the federal statutory tax rate of 21% primarily due to a $19,897 reduction in unrecognized tax benefits (including interest and penalties), a lower tax rate on foreign earnings and tax windfalls associated with the vesting of stock-based compensation awards. These items were partly offset by a
non-taxable
loss on revaluation of deferred consideration and an increase in the deferred tax asset valuation allowance on losses recognized on securities owned.
Deferred Tax Assets
A summary of the components of the Company’s deferred tax assets at March 31, 2023 and December 31, 2022 is as follows:
 
        
March 31,

2023
     
December 31,

2022
  
 
Deferred tax assets:
                  
 
Capital losses
      $         17,740             $         17,541       
 
Unrealized losses
      4,781             3,821       
 
NOLs—Foreign
      1,625             1,609       
 
Accrued expenses
      1,527             6,030       
 
Goodwill and intangible assets
      1,038             1,085       
 
Stock-based compensation
      865             1,526       
 
Interest carryforwards
      476             —       
 
Operating lease liabilities
      260             313       
 
Foreign currency translation adjustment
      254             173       
 
NOLs—U.S.
      127             255       
 
Outside basis differences
      122             122       
 
29
        
March 31,

2023
     
December 31,
2022
  
 
Other
      355             341       
      
 
 
     
 
 
  
 
Deferred tax assets
      29,170             32,816       
      
 
 
     
 
 
  
 
Deferred tax liabilities:
                  
 
Fixed assets and prepaid assets
      150             278       
 
Unremitted earnings—European subsidiaries
      246             205       
 
Right of use assets—operating leases
      260             313       
      
 
 
     
 
 
  
 
Deferred tax liabilities
      656             796       
      
 
 
     
 
 
  
 
Total deferred tax assets less deferred tax liabilities
      28,514             32,020       
 
Less: Valuation allowance
      (22,643)            (21,484)      
      
 
 
     
 
 
  
 
Deferred tax assets, net
      $ 5,871             $ 10,536       
      
 
 
     
 
 
  
Net Operating and Capital Losses—U.S.
The Company’s tax effected net operating losses (“NOLs”) at March 31, 2023 were $127, which expire in 2024. The net operating loss carryforwards have been reduced by the impact of annual limitations described in the Internal Revenue Code Section 382 that arose as a result of an ownership change.
The Company’s tax effected capital losses at March 31, 2023 were $17,740. These capital losses expire between the years 2023 and 2028.
Net Operating Losses—Europe
One of the Company’s European subsidiaries generated NOLs outside the U.S. These tax effected NOLs, all of which are carried forward indefinitely, were $1,625 at March 31, 2023.
Valuation Allowance
The Company’s valuation allowance has been established on its net capital losses, unrealized losses and outside basis differences, as it is
more-likely-than-not
that these deferred tax assets will not be realized.
Uncertain Tax Positions
Tax positions are evaluated utilizing a
two-step
process. The Company first determines whether any of its tax positions are
more-likely-than-not
to be sustained upon examination, based solely on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
In connection with the ETFS Acquisition, the Company accrued a liability for uncertain tax positions and interest and penalties at the acquisition date. The Company also recorded an offsetting indemnification asset provided by ETFS Capital as part of its agreement to indemnify the Company for any potential claims. The table below sets forth the aggregate changes in the balance of these gross unrecognized tax benefits:
 
      
Total
   
Unrecognized
Tax Benefits
   
Interest and
Penalties
Balance at January 1, 2023
        $         1,353      $         957      $         396  
Decrease—Lapse of statute of limitations
        (1,353 )         (957 )         (396 )   
      
 
 
 
   
 
 
 
   
 
 
 
Balance at March 31, 2023
        $ —        $ —        $ —    
      
 
 
 
   
 
 
 
   
 
 
 
 
 
(1)
The gross unrecognized tax benefits were accrued in British pounds.
Income Tax Examinations
The Company is subject to U.S. federal income tax as well as income tax of multiple state, local and certain foreign jurisdictions. As of March 31, 2023, with few exceptions, the Company was no longer subject to income tax examinations by any taxing authority for the years before 2018.
Undistributed Earnings of Foreign Subsidiaries
ASC
740-30
Income Taxes provides guidance that US companies do not need to recognize tax effects on foreign earnings that are indefinitely reinvested. The Company repatriates earnings of its foreign subsidiaries and therefore has recognized a deferred tax liability of $246 and $205 at March 31, 2023 and December 31, 2022, respectively.
 
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21. Shares Repurchased
On February 22, 2022, the Company’s Board of Directors approved an increase of $85,709 to the Company’s share repurchase program to $100,000 and extended the term for three years through April 27, 2025. Included under the Company’s share repurchase program are purchases to offset future equity grants made under the Company’s equity plans and purchases made in open market or privately negotiated transactions. This authority may be exercised from time to time, subject to regulatory considerations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The repurchase program may be suspended or terminated at any time without prior notice. Shares repurchased under this program are returned to the status of authorized and unissued on the Company’s books and records.
During the three months ended March 31, 2023 and 2022, the Company repurchased 604,505 and 588,694 shares of its common stock, respectively, under this program for an aggregate cost of $3,384 and $3,394, respectively. Shares repurchased under this program were returned to the status of authorized and unissued on the Company’s books and records.
As of March 31, 2023, $96,591,597 remained under this program for future purchases.
22. Goodwill and Intangible Assets
Goodwill
The table below sets forth goodwill which is tested annually for impairment on November 30
th
:
 
    
Total
  
Balance at January 1, 2023
    $               85,856      
Changes
      —      
    
 
 
  
Balance at March 31, 2023
    $ 85,856      
    
 
 
  
Goodwill arising from the ETFS Acquisition of $84,057 is not deductible for tax purposes as the acquisition was structured as a stock acquisition occurring in the U.K. The remainder of the goodwill is deductible for U.S. tax purposes.
Intangible Assets
The table below sets forth the Company’s intangible assets which are tested annually for impairment on November 30
th
:
 
Balance at March 31, 2023
  
Item
   
Gross Asset
     
Accumulated
Amortization
     
Net Asset
  
ETFS acquisition
     $     601,247        $         —           $     601,247   
Software development
      2,822         (101)           2,721   
    
 
 
     
 
 
     
 
 
  
Balance at March 31, 2023
     $ 604,069        $ (101)          $ 603,968   
    
 
 
     
 
 
     
 
 
  
 
Balance at December 31, 2022
  
Item
   
Gross Asset
     
Accumulated
Amortization
     
Net Asset
  
ETFS acquisition
     $     601,247        $         —           $     601,247   
Software development
      2,370         (50)           2,320   
    
 
 
     
 
 
     
 
 
  
Balance at December 31, 2022
     $ 603,617        $ (50)          $ 603,567   
    
 
 
     
 
 
     
 
 
  
ETFS Acquisition (Indefinite-Lived)
In connection with the ETFS Acquisition, which was completed on April 11, 2018, the Company identified intangible assets valued at $601,247 related to the right to manage AUM through customary advisory agreements. These intangible assets were determined to have indefinite useful lives and are not deductible for tax purposes.
Software Development (Finite-Lived)
Internally-developed software is amortized over a useful life of three years. During the three-month period ended March 31, 2023, the Company recognized amortization expense on internally-developed software of $51.
 
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As of March 31, 2023, expected amortization expense for the unamortized finite-lived intangible assets for the next five years and thereafter is as follows:
 
Remained of 2023
     $ 656      
2024
      940      
2025
      891      
2026
      234      
2027
      —      
2028 and thereafter
      —      
    
 
 
  
Total expected amortization expense
     $       2,721      
    
 
 
  
The weighted-average remaining useful life of the finite-lived intangible assets is 2.9 years.
23. Contingent Payments
Sale of Canadian ETF Business
On February 19, 2020, the Company completed the sale of all the outstanding shares of
WisdomTree Asset Management Canada, Inc.
to CI Financial Corp. The Company received CDN $3,720 (USD $2,774) in cash at closing and was paid CDN $3,000 (USD $2,360) and CDN $2,000 (USD $1,477) of additional cash consideration based upon the achievement of certain AUM growth targets as determined on the
18-month
and the
36-month
anniversaries of the closing date, respectively.
A gain of $1,477 was recognized during the three months ended March 31, 2023, from remeasuring the contingent payment to its realizable value. These gains were recorded in other losses, net.
24. Subsequent Events
The Company evaluated subsequent events through the date of issuance of the accompanying consolidated financial statements.
There were no events requiring disclosure. 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below. For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Executive Summary

We are a global financial innovator, offering a well-diversified suite of ETPs, models and solutions. We empower investors to shape their future and support financial professionals to better serve their clients and grow their businesses. We leverage the latest financial infrastructure to create products that provide access, transparency and an enhanced user experience. Building on our heritage of innovation, we are also developing next-generation digital products and structures, including Digital Funds and tokenized assets, as well as our blockchain-native digital wallet, WisdomTree Prime™.

We have approximately $90.7 billion in AUM as of March 31, 2023. Our family of ETPs includes products that provide exposure to equities, commodities, fixed income, leveraged-and-inverse, currency, cryptocurrency and alternative strategies. We have launched many first-to-market products and pioneered alternative weighting we call “Modern Alpha,” which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective funds that are built to perform. Most of our equity-based funds employ a fundamentally weighted investment methodology, which weights securities based on factors such as dividends, earnings or investment factors, whereas most other industry indexes use a capitalization weighted methodology. These products are distributed through all major channels in the asset management industry, including banks, brokerage firms, registered investment advisers, institutional investors, private wealth managers and online brokers primarily through our sales force. We believe technology is altering the way financial advisors conduct business and through our Advisor Solutions program we offer technology-enabled and research-driven solutions including portfolio construction, asset allocation, practice management services and digital tools to help financial advisors address technology challenges and grow and scale their businesses.

We are at the forefront of innovation and believe that tokenization and leveraging the utility of blockchain technology is the next evolution in financial services. We are building the foundation that will allow us to lead in this coming evolution. WisdomTree Prime™, our blockchain-native digital wallet, is currently in beta testing and positions us to expand our blockchain-enabled financial services product offerings with a new direct-to-consumer channel where spending, saving and investing are united. As we continue to pursue our digital assets strategy, we are embracing a concept we refer to as “responsible DeFi,” which we believe upholds the foundational principles of regulation in this innovative and quickly evolving space. We believe that our expansion into digital assets will complement our existing core competencies in a holistic manner, diversify our revenue streams and contribute to our growth.

We were incorporated under the laws of the state of Delaware on September 19, 1985 as Financial Data Systems, Inc., were renamed WisdomTree Investments, Inc. on September 6, 2005, and ultimately renamed WisdomTree, Inc. on November 7, 2022.

 

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Assets Under Management

WisdomTree ETPs

We offer ETPs covering equity, commodity, fixed income, leveraged-and-inverse, currency, alternatives and cryptocurrency. The chart below sets forth the asset mix of our ETPs at March 31, 2023, December 31, 2022 and March 31, 2022:

 

LOGO

Market Environment

The outlook for the first quarter of 2023 improved as developed markets continued to stave off a recession despite rising interest rates. The outlook for emerging markets has improved since the zero-Covid policy was abandoned in China. In March, gold prices increased to over $2,000 per ounce for the first time in over a year amid market volatility sparked by the Silicon Valley Bank’s collapse and further turbulence in the banking sector.

The S&P 500, MSCI EAFE (local currency), MSCI Emerging Markets Index (U.S. dollar) and gold prices increased by 7.5%, 7.7%, 4.0% and 9.2%, respectively, during the quarter. In addition, the European and Japanese equities markets both appreciated with the MSCI EMU Index and MSCI Japan Index increasing 12.3% and 7.3%, respectively, in local currency terms for the quarter. Also, the U.S. dollar weakened 1.8%, 2.6% and 1.3% versus the euro, British pound and the Japanese yen, respectively, the during the quarter.

 

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U.S. Listed ETF Industry Flows

U.S. listed ETF net flows for the three months ended March 31, 2023 were $467 billion. Fixed income and U.S. equity gathered the majority of those flows.

 

LOGO

                Source: Morningstar

 

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European Listed ETP Industry Flows

European listed ETP net flows were $71.1 billion for the three months ended March 31, 2023. Equities and fixed income gathered the majority of those flows.

 

LOGO

                Source: Morningstar

Our Operating and Financial Results

We operate as an ETP sponsor and asset manager, providing investment advisory services globally through our subsidiaries in the U.S. and Europe.

U.S. Listed ETFs

The AUM of our U.S. listed exchange traded funds, or U.S. listed ETFs, increased from $56.0 billion at December 31, 2022 to $61.3 billion at March 31, 2023 due to net inflows and market appreciation.

 

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LOGO

European Listed ETPs

The AUM of our European listed (including internationally cross-listed) ETPs, or European listed ETPs, increased from $26.0 billion at December 31, 2022 to $29.5 billion at March 31, 2023, due to net inflows and market appreciation.

 

LOGO

 

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Consolidated Operating Results

The following table sets forth our revenues and net income/(loss) for the most recent five quarters.

 

LOGO

 

  •  

Revenues – Total revenues increased 4.7% from the three months ended March 31, 2022 to $82.0 million due to higher average AUM and higher other income from large flows into some of our European products. These items were partly offset by a lower average advisory fee.

 

  •  

Expenses – Total operating expenses increased 7.9% from the three months ended March 31, 2022 to $65.5 million primarily due to higher compensation from increased headcount and stock-based compensation expense, fund management and administration costs and other expenses. These increases were partly offset by lower professional fees.

 

  •  

Other Income/(Expenses) – Other income/(expenses) includes interest income and interest expense, gains/(losses) on revaluation of deferred consideration–gold payments, impairments, loss on extinguishment of convertible notes and other losses and gains. Further information is provided herein.

 

  •  

Net income/(loss) – We reported net income of $16.2 million and a net loss of ($10.3) million during the three months ended March 31, 2023 and 2022, respectively.

Expense Guidance Update for the Year Ending December 31, 2023

Compensation Expense

Our compensation expense for the year ending December 31, 2023 is currently estimated to range from $100.0 million to $106.0 million. This range considers variability in incentive compensation, with drivers including the magnitude of our flows, our share price performance in relation to our peers as well as revenue, operating income and operating margin performance. Given the strong start to 2023, we anticipate trending toward the high end of this range.

Discretionary Spending

Discretionary spending includes, marketing, sales, professional fees, occupancy and equipment, depreciation and amortization and other expenses. During the three months ended March 31, 2023, our discretionary spending was $13.2 million. We currently estimate our discretionary spending for the year ending December 31, 2023 to range from $56.0 million to $59.0 million (unchanged from our guidance provided last quarter), as we anticipate an uptick in marketing spend.

Not included in the guidance above are potential non-recurring expenses in response to an activist campaign, including $1.0 million incurred during the three months ended March 31, 2023.

Gross Margin

We define gross margin as total operating revenues less fund management and administration expenses. Gross margin percentage is calculated as gross margin divided by total operating revenues. Our gross margin was 79.1% during the three months ended March 31, 2023. Our gross margin guidance for the year ending December 31, 2023 is estimated to be 78% given anticipated product launches, changes in other income which may rise or fall depending upon the magnitude of flows of our European-listed products and uncertain market conditions.

 

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Contractual Gold Payments

We currently estimate our contractual gold payments expense for the year ending December 31, 2023 to be approximately $18.0 million (unchanged from our guidance provided last quarter) taking into consideration current gold prices.

Third-Party Distribution Fees

We currently estimate third-party distribution fees to range from $8.0 million to $9.0 million (unchanged from our guidance provided last quarter) for the year ending December 31, 2023. Given the AUM on our platforms we anticipate trending toward the high end of this guidance.

Interest Expense

Our interest expense for the year ending December 31, 2023 is currently estimated to be $15.0 million. Our interest cost for the three months ended June 30, 2023 is estimated to be $4.1 million, which should then reduce to $3.5 million per quarter going forward upon the settlement of $60.0 million in aggregate principal amount of our 2020 Notes (defined below) maturing in June 2023.

Income Tax Expense

We currently estimate that our consolidated normalized effective tax rate will be 23% (unchanged from our guidance provided last quarter). This estimated rate may change and is dependent upon our actual taxable income earned in relation to our forecasts.

This normalized effective tax rate excludes items that are non-recurring and not core to our operating business including but not limited to the impact of any revaluation on deferred consideration – gold payments, the loss on extinguishment of convertible notes, remeasurement of contingent consideration from the sale of our former Canadian ETF business, gains and losses on financial instruments owned and investments, valuation allowances on capital losses, reductions in unrecognized tax benefits and any stock-based compensation windfalls or shortfalls.

 

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Key Operating Statistics

The following table presents key operating statistics that serve as indicators for the performance of our business:

 

     Three Months Ended  
     March 31,
2023		     December 31,
2022		   March 31,
2022		  

GLOBAL ETPs (in millions)

       

Beginning of period assets

     $ 81,993         $ 70,878           $ 77,479     

Inflows/(outflows)

      6,341          5,264       1,319     

Market appreciation/(depreciation)

      2,406          5,851       609     

End of period assets

     $ 90,740         $ 81,993      $ 79,407     
  

 

 

    

 

 

 

  

 

 

  

Average assets during the period

     $         87,508        $         77,649      $         77,809     

Average advisory fee during the period

      0.36%               0.36%               0.40%  

Number of ETPs—end of the period

      350          348       341     

US LISTED ETFs (in millions)

       

Beginning of period assets

     $ 55,973         $ 48,043      $ 48,210     

Inflows/(outflows)

      4,012          4,232       2,250     

Market appreciation/(depreciation)

      1,298          3,698       (1,838)    

End of period assets

     $ 61,283         $ 55,973      $ 48,622     
  

 

 

    

 

 

 

  

 

 

  

Average assets during the period

     $ 59,430         $ 53,655      $ 47,499     

Number of ETPs—end of the period

      80          79       77     

EUROPEAN LISTED ETPs (in millions)

       

Beginning of period assets

     $ 26,020         $ 22,835      $ 29,269     

Inflows/(outflows)

      2,329          1,032       (931)    

Market appreciation/(depreciation)

      1,108          2,153       2,447     

End of period assets

     $ 29,457         $ 26,020      $ 30,785     
  

 

 

    

 

 

 

  

 

 

  

Average assets during the period

     $ 28,078         $ 23,994      $ 30,310     

Number of ETPs—end of the period

      270          269       264     

PRODUCT CATEGORIES (in millions)

       

Commodity & Currency

       

Beginning of period assets

     $ 22,097         $ 19,561      $ 24,598     

Inflows/(outflows)

      2,003          796       (1,053)    

Market appreciation/(depreciation)

      824          1,740       2,757     
  

 

 

    

 

 

 

  

 

 

  

End of period assets

     $ 24,924         $ 22,097      $ 26,302     
  

 

 

    

 

 

 

  

 

 

  

Average assets during the period

     $ 23,806         $ 20,345      $ 25,891     

U.S. Equity

       

Beginning of period assets

     $ 24,112         $ 20,952      $ 23,860     

(Outflows)/inflows

      (149)         1,021       779     

Market appreciation/(depreciation)

      571          2,139       (901)    
  

 

 

    

 

 

 

  

 

 

  

End of period assets

     $ 24,534         $ 24,112      $ 23,738     
  

 

 

    

 

 

 

  

 

 

  

Average assets during the period

     $ 24,726         $ 23,492      $ 23,134     

Fixed Income

       

Beginning of period assets

     $ 15,273         $ 11,695      $ 4,356     

Inflows/(outflows)

      3,513          3,393       1,242     

Market (depreciation)/appreciation

      (78)         185       (180)    
  

 

 

    

 

 

 

  

 

 

  

End of period assets

     $ 18,708         $ 15,273      $ 5,418     
  

 

 

    

 

 

 

  

 

 

  

Average assets during the period

     $ 17,176         $ 13,962      $ 4,691     

 

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Table of Contents
     Three Months Ended
     March 31,
2023		   December 31,
2022		   March 31,
2022

International Developed Market Equity

       

Beginning of period assets

     $ 10,195           $ 9,183           $ 11,894       

Inflows/(outflows)

      450       40       97  

Market appreciation/(depreciation)

      788       972       (569 ) 
  

 

 

 

  

 

 

 

  

 

 

 

End of period assets

     $ 11,433      $ 10,195      $ 11,422  
  

 

 

 

  

 

 

 

  

 

 

 

Average assets during the period

     $         10,879      $         10,000      $         11,543  

Emerging Market Equity

       

Beginning of period assets

     $ 8,116      $ 7,495      $ 10,375  

Inflows/(outflows)

      486       (53 )      189  

Market appreciation/(depreciation)

      209       674       (573 ) 
  

 

 

 

  

 

 

 

  

 

 

 

End of period assets

     $ 8,811      $ 8,116      $ 9,991  
  

 

 

 

  

 

 

 

  

 

 

 

Average assets during the period

     $ 8,666      $ 7,770      $ 10,116  

Leveraged & Inverse

       

Beginning of period assets

     $ 1,754      $ 1,523      $ 1,775  

Inflows/(outflows)

      43       59       (2 ) 

Market (depreciation)/appreciation

      (12 )      172       83  
  

 

 

 

  

 

 

 

  

 

 

 

End of period assets

     $ 1,785      $ 1,754      $ 1,856  
  

 

 

 

  

 

 

 

  

 

 

 

Average assets during the period

     $ 1,757      $ 1,623      $ 1,830  

Alternatives

       

Beginning of period assets

     $ 310      $ 306      $ 261  

(Outflows)/inflows

      (18 )      12       29  

Market appreciation/(depreciation)

      14       (8 )      3  
  

 

 

 

  

 

 

 

  

 

 

 

End of period assets

     $ 306      $ 310      $ 293  
  

 

 

 

  

 

 

 

  

 

 

 

Average assets during the period

     $ 308      $ 305      $ 275  

Cryptocurrency

       

Beginning of period assets

     $ 136      $ 163      $ 357  

Inflows/(outflows)

      13       (4 )      37  

Market appreciation/(depreciation)

      90       (23 )      (11 ) 
  

 

 

 

  

 

 

 

  

 

 

 

End of period assets

     $ 239      $ 136      $ 383  
  

 

 

 

  

 

 

 

  

 

 

 

Average assets during the period

     $ 190      $ 152      $ 324  

Closed ETPs

       

Beginning of period assets

     $ —      $ —      $ 3  

Inflows/(outflows)

      —       —       1  
  

 

 

 

  

 

 

 

  

 

 

 

End of period assets

     $ —      $ —      $ 4  
  

 

 

 

  

 

 

 

  

 

 

 

Average assets during the period

     $ —      $ —      $ 5  

Headcount

      279       273       253  

Note: Previously issued statistics may be restated due to fund closures and trade adjustments

Source: WisdomTree

 

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Table of Contents

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Selected Operating and Financial Information

 

     Three Months Ended
March 31,		              Change              Percent
        Change        
             2023                      2022          

AUM (in millions)

            

Average AUM

     $ 87,508         $ 77,809         $ 9,699          12.5 %   
  

 

 

     

 

 

     

 

 

     

 

 

 

Operating Revenues (in thousands)

            

Advisory fees

     $ 77,637         $ 76,517         $ 1,120          1.5 %   

Other income

      4,407          1,851          2,556          138.1 %   
  

 

 

     

 

 

     

 

 

     

 

 

 

Total revenues

     $ 82,044         $ 78,368         $ 3,676          4.7 %   
  

 

 

     

 

 

     

 

 

     

 

 

 

Average AUM

Our average AUM increased 12.5 % from $77.8 billion at March 31, 2022 to $87.5 billion at March 31, 2023 due to net inflows partly offset by market depreciation.

Operating Revenues

Advisory fees

Advisory fee revenues increased 1.5% from $76.5 million during the three months ended March 31, 2022 to $77.6 million in the comparable period in 2023 due to higher average AUM, partly offset by a decline in our average advisory fee. Our average advisory fee decreased from 0.40% during the three months ended March 31, 2022 to 0.36% during the comparable period in 2023 due to AUM mix shift.

Other income

Other income increased 138.1% from $1.9 million during the three months ended March 31, 2022 to $4.4 million in the comparable period in 2023 primarily due to large flows into some of our European products.

Operating Expenses

 

(in thousands)

    Three Months Ended
March 31,		   Change   Percent
    Change    
   2023   2022

Compensation and benefits

      $ 27,398        $ 24,787        $ 2,611       10.5%   

Fund management and administration

      17,153       15,494       1,659       10.7%   

Marketing and advertising

      4,007       4,023       (16 )      (0.4%)  

Sales and business development

      2,994       2,609       385       14.8%   

Contractual gold payments

      4,486       4,450       36       0.8%   

Professional fees

      3,715       4,459       (744 )       (16.7%)  

Occupancy, communications and equipment

      1,101       753       348       46.2%   

Depreciation and amortization

      109       47       62       131.9%   

Third-party distribution fees

      2,253       2,212       41       1.9%   

Other

      2,257       1,845       412       22.3%   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total operating expenses

      $        65,473       $        60,679       $        4,794                7.9%   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

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     Three Months Ended
March 31,		  

As a Percent of Revenues:

    2023      2022  

Compensation and benefits

      33.5%          31.5%  

Fund management and administration

      20.9%          19.8%  

Marketing and advertising

      4.9%          5.1%  

Sales and business development

      3.6%          3.3%  

Contractual gold payments

      5.5%          5.7%  

Professional fees

      4.5%          5.7%  

Occupancy, communications and equipment

      1.3%          1.0%  

Depreciation and amortization

      0.1%          0.1%  

Third-party distribution fees

      2.7%          2.8%  

Other

      2.8%          2.4%  
  

 

 

     

 

 

  

Total operating expenses

      79.8%          77.4%  
  

 

 

     

 

 

  

Compensation and benefits

Compensation and benefits expense increased 10.5% from $24.8 million during the three months ended March 31, 2022 to $27.4 million in the comparable period in 2023 due to increased headcount and higher stock-based compensation expense. Headcount was 253 and 279 at March 31, 2022 and 2023, respectively.

Fund management and administration

Fund management and administration expense increased 10.7% from $15.5 million during the three months ended March 31, 2022 to $17.2 million in the comparable period in 2023 primarily due to higher average AUM, product launches and inflows. We had 77 U.S. listed ETFs and 264 European listed ETPs at March 31, 2022 compared to 80 U.S. listed ETFs and 270 European listed ETPs at March 31, 2023.

Marketing and advertising

Marketing and advertising expense was essentially unchanged from the three months ended March 31, 2022.

Sales and business development

Sales and business development expense increased 14.8% from $2.6 million during the three months ended March 31, 2022 to $3.0 million in the comparable period in 2023 primarily resulting from increases in conference and events spending as well as market data costs.

Contractual gold payments

Contractual gold payments expense was essentially unchanged from the three months ended March 31, 2022. This expense was associated with the annual payment of 9,500 ounces of gold and was calculated using the average daily spot price of $1,874 and $1,889 per ounce during the three months ended March 31, 2022 and 2023, respectively.

Professional fees

Professional fees decreased 16.7% from $4.5 million during the three months ended March 31, 2022 to $3.7 million in the comparable period in 2023 primarily due to lower expenses incurred in response to an activist campaign.

Occupancy, communications and equipment

Occupancy, communications and equipment expense increased 46.2% from $0.8 million during the three months ended March 31, 2022 to $1.1 million in the comparable period in 2023 as we signed new office leases in the U.S. and Europe.

Depreciation and amortization

Depreciation and amortization expense increased 131.9% from $0.05 million during the three months ended March 31, 2022 to $0.1 million in the comparable period in 2023 due to amortization of software development costs.

Third-party distribution fees

Third-party distribution fees were essentially unchanged from the three months ended March 31, 2022.

 

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Other

Other expenses increased 22.3% from $1.8 million during the three months ended March 31, 2022 to $2.3 million in the comparable period in 2023 primarily due to higher insurance, public relations, travel and directors expenses.

Other Income/(Expenses)

 

     Three Months Ended
March 31,		      Change      Percent
Change		  

(in thousands)

    2023      2022  

Interest expense

     $ (4,002)        $ (3,732)         $ (270)           7.2%   

Gain/(loss) on revaluation of deferred consideration

      20,592          (17,018)          37,610           n/a     

Interest income

      1,083          794           289           36.4%   

Impairments

      (4,900)         —           (4,900)          100.0%   

Loss on extinguishment of convertible notes

      (9,721)         —           (9,721)          100.0%   

Other losses, net

      (2,007)         (24,707)          22,700         (91.9%)  
  

 

 

     

 

 

     

 

 

     

 

 

  

Total other income/(expenses), net

     $ 1,045         $ (44,663)         $ 45,708         n/a     
  

 

 

     

 

 

     

 

 

     

 

 

  

 

     Three Months Ended March 31,  

As a Percent of Revenues:

    2023      2022  

Interest expense

      (4.9%)         (4.8%)   

Gain/(loss) on revaluation of deferred consideration

      25.1%          (21.7%)   

Interest income

      1.3%          1.0%   

Impairments

      (6.0%)         —      

Loss on extinguishment of convertible notes

      (11.8%)         —      

Other losses, net

      (2.4%)         (31.5%)   
  

 

 

     

 

 

  

Total other income/(expenses), net

      1.3%          (57.0%)   
  

 

 

     

 

 

  

Interest expense

Interest expense increased 7.2% from $3.7 million during the three months ended March 31, 2022 to $4.0 million in the comparable period in 2023 due to a higher level of debt outstanding and a higher effective interest rate. Our effective interest rate during the three months ended March 31, 2022 and 2023 was 4.6% and 5.0%, respectively.

Gain/(loss) on revaluation of deferred consideration

We recognized a loss on revaluation of deferred consideration of ($17.0) million and a gain on revaluation of deferred consideration of $20.6 million during the three months ended March 31, 2022 and 2023, respectively. The gain recognized during the three months ended March 31, 2023, was primarily due to an increase in the discount rate used to compute the present value of the annual payment obligations, partly offset by higher gold prices. The magnitude of any gain or loss is highly correlated to changes in the discount rate and the magnitude of the change in the forward-looking price of gold.

Interest income

Interest income increased 36.4% from $0.8 million during the three months ended March 31, 2022 to $1.1 million in the comparable period in 2023 due to rising interest rates.

Impairments

During the three months ended March 31, 2023, we recognized a non-cash impairment charge of $4.9 million on the Securrency Series A Shares.

Loss on Extinguishment of Convertible Notes

During the three months ended March 31, 2023, we recognized a loss on extinguishment of convertible notes of $9.7 million arising from the repurchase of $115.0 million in aggregate principal amount of our 2020 Notes.

Other losses, net

Other net losses were $2.0 million for the first quarter of 2023. This quarter includes a non-cash charge of $1.4 million arising from the release of a tax-related indemnification asset upon the expiration of the statute of limitations (an equal and offsetting benefit has been recognized in income tax expense). This quarter also includes losses on our investments of $3.9 million. These items were partly offset by gains on our financial instruments owned of $2.0 million and a gain of $1.5 million related to the remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business. Gains and losses also generally arise from the sale of gold earned from management fees paid by our physically-backed gold exchange-traded products (“ETPs”), foreign exchange fluctuations and other miscellaneous items.

 

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Income Taxes

Our effective income tax rate for the first quarter of 2023 was 7.9%, resulting in income tax expense of $1.4 million. The effective tax rate differs from the federal statutory rate of 21% primarily due to a non-taxable gain on revaluation of deferred consideration and a reduction in unrecognized tax benefits upon the expiration of the statute of limitations. These items were partly offset by a non-deductible loss on extinguishment of our convertible notes and an increase in the deferred tax asset valuation allowance on losses recognized on our investments.

Our effective income tax rate for the three months ended March 31, 2022 of 62.0% resulted in an income tax benefit of $16.7 million. Our tax rate differs from the federal statutory rate of 21% primarily due to a $19.9 million reduction in unrecognized tax benefits (including interest and penalties), a lower tax rate on foreign earnings and tax windfalls associated with the vesting of stock-based compensation awards. These items were partly offset by a non-taxable loss on revaluation of deferred consideration and an increase in the deferred tax asset valuation allowance on losses recognized on securities owned.

Non-GAAP Financial Measurements

In an effort to provide additional information regarding our results as determined by GAAP, we also disclose certain non-GAAP information which we believe provides useful and meaningful information. Our management reviews these non-GAAP financial measurements when evaluating our financial performance and results of operations; therefore, we believe it is useful to provide information with respect to these non-GAAP measurements so as to share this perspective of management. Non-GAAP measurements do not have any standardized meaning, do not replace nor are superior to GAAP financial measurements and are unlikely to be comparable to similar measures presented by other companies. These non-GAAP financial measurements should be considered in the context with our GAAP results. The non-GAAP financial measurements contained in this Report include:

 

  •  

Adjusted net income and diluted earnings per share. We disclose adjusted net income and diluted earnings per share as non-GAAP financial measurements in order to report our results exclusive of items that are non-recurring or not core to our operating business. We believe presenting these non-GAAP financial measures provides investors with a consistent way to analyze our performance. These non-GAAP financial measures exclude the following:

 

  •  

Unrealized gains or losses on the revaluation of deferred consideration: Deferred consideration is an obligation we assumed in connection with the ETFS Acquisition that is carried at fair value. This item represents the present value of an obligation to pay fixed ounces of gold into perpetuity and is measured using forward-looking gold prices. Changes in the forward-looking price of gold and changes in the discount rate used to compute the present value of the annual payment obligations may have a material impact on the carrying value of the deferred consideration and our reported financial results. We exclude this item when arriving at adjusted net income and diluted earnings per share as it is not core to our operating business. The item is not adjusted for income taxes as the obligation was assumed by a wholly-owned subsidiary of ours that is based in Jersey, a jurisdiction where we are subject to a zero percent tax rate.

 

  •  

Gains or losses on financial instruments owned: We account for our financial instruments owned as trading securities, which requires these instruments to be measured at fair value with gains and losses reported in net income. We exclude these items when calculating our non-GAAP financial measurements as the gains and losses introduce volatility in earnings and are not core to our operating business.

 

  •  

Tax shortfalls and windfalls upon vesting and exercise of stock-based compensation awards: GAAP requires the recognition of tax windfalls and shortfalls within income tax expense. These items arise upon the vesting and exercise of stock-based compensation awards and the magnitude is directly correlated to the number of awards vesting/exercised as well as the difference between the price of our stock on the date the award was granted and the date the award vested or was exercised. We exclude these items when determining adjusted net income and diluted earnings per share as they introduce volatility in earnings and are not core to our operating business.

 

  •  

Other items: Loss on extinguishment of convertible notes, impairments, remeasurement of contingent consideration payable to us from the sale of our former Canadian ETF business, unrealized gains and losses recognized on our investments, changes in deferred tax asset valuation allowance and expenses incurred in response to an activist campaign are excluded when calculating our non-GAAP financial measurements.

 

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Table of Contents
     Three Months Ended

Adjusted Net Income and Diluted Earnings per Share:

   

 

  March 31,  
2023

     March 31,  
2022

Net income/(loss), as reported

    $ 16,233     $ (10,261 )  

(Deduct)/add back: (Gain)/loss on revaluation of deferred consideration

      (20,592 )       17,018  

Add back: Loss on extinguishment of convertible notes, net of income taxes

      9,623       —  

Add back: Impairments

      4,900       —  

Deduct: Remeasurement of contingent consideration – sale of former Canadian ETF business

      (1,477 )      —  

(Deduct)/add back: (Gains)/losses on financial instruments owned, net of income taxes

      (1,479 )      3,893  

Add back: Increase in deferred tax asset valuation allowance on financial instruments owned and investments

      477       2,010  

Add back: Unrealized loss recognized on our investments, net of income taxes

      2,966       124  

Deduct: Tax windfalls upon vesting and exercise of stock-based compensation awards

      (185 )      (565 ) 

Add back: Expenses incurred in response to an activist campaign, net of income taxes

      732       1,844  
  

 

 

 

  

 

 

 

Adjusted net income

    $ 11,198     $ 14,063  

Deduct: Income distributed to participating securities

      (498 )      (549 ) 

Deduct: Undistributed income allocable to participating securities

      (672 )      (1,041 ) 
  

 

 

 

  

 

 

 

Adjusted net income available to common stockholders

      10,028       12,473  

Weighted average diluted shares, excluding participating securities (See Note 11 to our Consolidated Financial Statements)

            144,431           142,814  
  

 

 

 

  

 

 

 

Adjusted earnings per share—diluted

    $ 0.07     $ 0.09  
  

 

 

 

  

 

 

 

Liquidity and Capital Resources

The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations:

 

         March 31,
2023		    December 31,
2022		  
 

Balance Sheet Data (in thousands):

      
 

Cash and cash equivalents

    $ 119,099       $ 132,101  
 

Financial instruments owned, at fair value

      130,180         126,239  
 

Accounts receivable

      35,496         30,549  
 

Securities held-to-maturity

      253         259  
    

 

 

 

   

 

 

  
 

Total: Liquid assets

      285,028         289,148  
 

Less: Total current liabilities

      (130,926)        (148,434)  
 

Less: Other assets—seed capital (WisdomTree blockchain-enabled funds)

      (12,413)        (1,765)  
 

Less: Regulatory capital requirements

      (28,726)        (25,988)  
    

 

 

 

   

 

 

  
 

Total: Available liquidity

    $             112,963       $             112,961  
    

 

 

 

   

 

 

  

 

        Three Months Ended March 31,
     

 

            2023            

               2022            
 

Cash Flow Data (in thousands):

    
  Operating cash flows   $ (5,397 )    $ (2,692 ) 
  Investing cash flows     (2,008 )        (18,721 )   
  Financing cash flows     (6,070 )      (8,236 ) 
  Foreign exchange rate effect     473       (665 ) 
   

 

 

 

  

 

 

 

  Decrease in cash and cash equivalents   $               (13,002 )    $               (30,314 ) 
   

 

 

 

  

 

 

 

Liquidity

We consider our available liquidity to be our liquid assets, less our current liabilities and regulatory capital requirements of certain European subsidiaries. Liquid assets consist of cash and cash equivalents, financial instruments owned, at fair value, accounts receivable and securities held-to-maturity. Our financial instruments owned, at fair value are highly liquid investments. Accounts receivable are current assets and primarily represent receivables from advisory fees we earn from our ETPs. Our current liabilities consist primarily of convertible notes maturing in the next 12 months, payments owed to vendors and third parties in the normal course of business, deferred consideration and accrued incentive compensation for employees.

 

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Cash and cash equivalents decreased by $13.0 million during the three months ended March 31, 2023 due to $130.0 million of proceeds from the issuance of convertible notes, $18.3 million of proceeds from the sale of financial instruments owned, at fair value and $0.4 million from other activities. These increases were offset by $124.3 million used to repurchase convertible notes, $20.3 million used to purchase financial instruments owned, at fair value, $5.4 million used in operating activities, $4.8 million used to pay dividends, $3.5 million used to cover convertible notes issuance costs and $3.4 million used to repurchase our common stock.

Cash and cash equivalents decreased by $30.3 million during the three months ended March 31, 2022 due to $25.5 million used to purchase securities owned, $6.9 million used to purchase investments, $4.8 million used to pay dividends on our common stock, $3.4 million used to repurchase our common stock, $2.7 million of net cash used in operating activities and $0.6 million used in other activities. These decreases were partly offset by $13.6 million of proceeds from the sale of securities owned.

Issuance of Convertible Notes

On February 14, 2023, we issued and sold $130.0 million in aggregate principal amount of 5.75% Convertible Senior Notes due 2028 (the “2023 Notes”) pursuant to an indenture dated February 14, 2023, between us and U.S. Bank Trust Company, National Association, as trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (“Rule 144A”).

On June 14, 2021, we issued and sold $150.0 million in aggregate principal amount of 3.25% Convertible Senior Notes due 2026 (the “2021 Notes”) pursuant to an indenture dated June 14, 2021, between us and the trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A.

On June 16, 2020, we issued and sold $150.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 (the “June 2020 Notes”) pursuant to an indenture dated June 16, 2020, between us and the trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A. On August 13, 2020, we issued and sold $25.0 million in aggregate principal amount of 4.25% Convertible Senior Notes due 2023 at a price equal to 101% of the principal amount thereof, plus interest deemed to have accrued since June 16, 2020, which constitute a further issuance of, and form a single series with, our June 2020 Notes (the “August 2020 Notes” and together with the June 2020 Notes, the “2020 Notes”).

In connection with the issuance of the 2023 Notes, we repurchased $115.0 million in aggregate principal amount of the 2020 Notes. As a result of this repurchase, we recognized a loss on extinguishment of approximately $9.7 million during the three months ended March 31, 2023.

After the issuance of the 2023 Notes (and together with the remaining 2020 Notes and the 2021 Notes, the “Convertible Notes”), we had $340.0 million in aggregate principal amount of Convertible Notes outstanding.

Key terms of the Convertible Notes are as follows:

 

                  2023 Notes                      2021 Notes                      2020 Notes          
 

Principal outstanding

      $130.0        $150.0        $60.0  
 

Maturity date (unless earlier converted, repurchased or redeemed)

      August 15, 2028        June 15, 2026        June 15, 2023  
 

Interest rate

      5.75%        3.25%        4.25%  
 

Conversion price

      $9.54        $11.04        $5.92  
 

Conversion rate

      104.8658        90.5797        168.9189  
 

Redemption price

      $12.40        $14.35        $7.70  

 

  •  

Interest rate: Payable semiannually in arrears on February 15 and August 15 of each year for the 2023 Notes (beginning on August 15, 2023) and June 15 and December 15 of each year for the 2020 Notes and the 2021 Notes.

 

  •  

Conversion price: Convertible at an initial conversion rate into shares of our common stock, per $1,000 principal amount of notes (equivalent to an initial conversion price set forth in the table above), subject to adjustment.

 

  •  

Conversion: Holders may convert at their option at any time prior to the close of business on the business day immediately preceding May 15, 2028, March 15, 2026 and March 15, 2023 for the 2023 Notes, 2021 Notes and 2020 Notes, respectively, only under the following circumstances: (i) if the last reported sale price of our common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the respective Convertible Notes on each applicable trading day; (ii) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sales price of our common stock and the conversion rate on each such trading day; (iii) upon a notice of redemption delivered by us in accordance with the terms of the indentures but only with respect to the Convertible Notes called (or deemed called) for redemption; or (iv) upon the occurrence of specified corporate events. On or after May 15, 2028, March 15, 2026 and March 15, 2023 in

 

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respect of the 2023 Notes, 2021 Notes and 2020 Notes, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances.

 

  •  

Cash settlement of principal amount: Upon conversion, we will pay cash up to the aggregate principal amount of the Convertible Notes to be converted. At our election, we will also settle our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted in either cash, shares of our common stock or a combination of cash and shares of its common stock.

 

  •  

Redemption price: We may redeem for cash all or any portion of the Convertible Notes, at our option, on or after August 20, 2025, June 20, 2023 and June 20, 2021 in respect of the 2023 Notes, 2021 Notes and 2020 Notes, respectively, and on or prior to the 55th scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least 130% of the conversion price for the respective Convertible Notes then in effect for at least 20 trading days, including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding the redemption date. No sinking fund is provided for the Convertible Notes.

 

  •  

Limited investor put rights: Holders of the Convertible Notes have the right to require us to repurchase for cash all or a portion of their notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of certain change of control transactions or liquidation, dissolution or common stock delisting events.

 

  •  

Conversion rate increase in certain customary circumstances: In certain circumstances, conversions in connection with a “make-whole fundamental change” (as defined in the indentures) or conversions of Convertible Notes called (or deemed called) for redemption may result in an increase to the conversion rate, provided that the conversion rate will not exceed 167.7853 shares, 144.9275 shares and 270.2702 shares of our common stock per $1,000 principal amount of the 2023 Notes, 2021 Notes and 2020 Notes, respectively (the equivalent of 59,767,426 shares of our common stock), subject to adjustment.

 

  •  

Seniority and Security: The Convertible Notes rank equal in right of payment, and are our senior unsecured obligations, but are subordinated in right of payment to our obligations to make certain redemption payments (if and when due) in respect of its Series A Non-Voting Convertible Preferred Stock (See Note 11 to our Consolidated Financial Statements).

The indentures contain customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes outstanding may declare the entire principal amount of all the Convertible Notes to be repurchased, plus any accrued special interest, if any, to be immediately due and payable.

Capital Resources

Our principal source of financing is our operating cash flow. We believe that current cash flows generated by our operating activities and existing cash balances should be sufficient for us to fund our operations for the foreseeable future.

Our ability to satisfy our contractual obligations as they arise are discussed in the section titled “Contractual Obligations” below.

Use of Capital

Our business does not require us to maintain a significant cash position. However, certain of our subsidiaries are required to maintain a minimum level of regulatory capital, which at March 31, 2023 was approximately $28.7 million in the aggregate. Notwithstanding these regulatory capital requirements, we expect that our main uses of cash will be to fund the ongoing operations of our business. We also maintain a capital return program which includes a $0.03 per share quarterly cash dividend and authority to purchase our common stock through April 27, 2025, including purchases to offset future equity grants made under our equity plans.

During the three months ended March 31, 2023, we repurchased 604,505 shares of our common stock under the repurchase program for an aggregate cost of $3.4 million. Currently, approximately $96.6 million remains under this program for future purchases.

Contractual Obligations

Convertible Notes

We currently have $340.0 million in aggregate principal amount of Convertible Notes outstanding, of which $60.0 million, $150.0 million and $130.0 million are scheduled to mature on June 15, 2023, June 15, 2026 and August 15, 2028, respectively, unless earlier converted, repurchased or redeemed. Conditional conversions or a requirement to repurchase the Convertible Notes upon the occurrence of a fundamental change may accelerate payment.

 

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The Convertible Notes require cash settlement of the principal amount, while settlement of the conversion obligation in excess of the aggregate principal amount may be satisfied in either cash, shares of our common stock or a combination of cash and shares of our common stock. We anticipate settling the $60.0 million in aggregate principal amount of 2020 Notes scheduled to mature in June 2023 and may settle and/or refinance the remaining obligations when due.

See the section titled “Issuance of Convertible Notes” above for additional information.

Deferred Consideration—Gold Payments

Deferred consideration represents an obligation we assumed in April 2018 in connection with our acquisition of the European exchange-traded commodity, currency and leveraged-and-inverse business of ETFS Capital. The obligation is for fixed payments to ETFS Capital of physical gold bullion equating to 9,500 ounces of gold per year through March 31, 2058 and then subsequently reduced to 6,333 ounces of gold per year continuing into perpetuity (“Contractual Gold Payments”). The present value of the deferred consideration was $179.8 million at March 31, 2023.

The Contractual Gold Payments are paid from advisory fee income generated by any of our sponsored financial products backed by physical gold with no recourse back to us for any unpaid amounts that exceed advisory fees earned.

Operating Leases

Total future minimum lease payments with respect to our operating lease liabilities were $1.2 million at March 31, 2023. Cash flows generated by our operating activities and existing cash balances should be sufficient to satisfy the future minimum lease payments.

See Note 12 to our Consolidated Financial Statements for additional information.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing or other arrangements and have neither created nor are party to any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business.

Critical Accounting Policies and Estimates

Goodwill and Intangible Assets

Goodwill is the excess of the purchase price over the fair values of the identifiable net assets at the acquisition date. We test goodwill for impairment at least annually and at the time of a triggering event requiring re-evaluation, if one were to occur. Goodwill is considered impaired when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying value. If the estimated fair value of such reporting unit is less than its carrying value, goodwill impairment is recognized based on that difference, not to exceed the carrying amount of goodwill. A reporting unit is an operating segment or a component of an operating segment provided that the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.

Goodwill is allocated to our U.S. Business and European Business components. For impairment testing purposes, these components are aggregated as a single reporting unit as they fall under the same operating segment and have similar economic characteristics.

Goodwill is assessed for impairment annually on November 30th. 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 30th. The results of our most recent analysis indicated no impairment based upon a quantitative assessment (discounted cash flow analysis) which relied upon significant unobservable inputs including projected revenue growth rates ranging from 3% to 8% (5% weighted average) and a weighted average cost of capital of 11.0%.

Investments

We account for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed within ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities,

 

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to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment (assessed quarterly), plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In addition, income is recognized when dividends are received only to the extent they are distributed from net accumulated earnings of the investee. Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment.

Investments in debt instruments are accounted for at fair value, with changes in fair value reported in other income/(expenses).

See Note 8 to our Consolidated Financial Statements for information.

Deferred Consideration—Gold Payments

Deferred consideration represents the present value of an obligation to pay gold to a third party into perpetuity and is measured using forward-looking gold prices observed on the CMX exchange, a selected discount rate and perpetual growth rate. The weighted average forward-looking gold price per ounce, discount rate and perpetual growth rate were $2,401, 13.3% and 1.5%, respectively, at March 31, 2023. Changes in the fair value of this obligation are reported as (gain)/loss on revaluation of deferred consideration–gold payments on our Consolidated Statements of Operations.

During the three months ended March 31, 2023, we reported a gain on deferred consideration—gold payments of $20.6 million. A 1.0% increase in the weighted average forward-looking gold price per ounce would have decreased this reported gain by $1.3 million, a 1 percentage point increase in the discount rate would have increased this reported gain by $12.9 million and a 1 percentage point increase in the perpetual growth rate would have decreased this reported gain by $9.3 million. See Note 9 to our Consolidated Financial Statements for additional information.

Revenue Recognition

We earn substantially all of our revenue in the form of advisory fees from our ETPs and recognize this revenue over time, as the performance obligation is satisfied. Advisory fees are based on a percentage of the ETPs’ average daily net assets. Progress is measured using the practical expedient under the output method resulting in the recognition of revenue in the amount for which we have a right to invoice.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following information, together with information included in other parts of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, describes key aspects of our market risk.

Market Risk

Market risk to us generally represents the risk of changes in the value of our ETPs that results from fluctuations in securities or commodity prices, foreign currency exchange rates against the U.S. dollar, and interest rates. Nearly all our revenues are derived from advisory agreements for the WisdomTree ETPs. Under these agreements, the advisory fee we receive is based on the average market value of the assets in the WisdomTree ETP portfolios we manage.

Fluctuations in the value of the ETPs are common and are generated by numerous factors such as market volatility, the global economy, inflation, changes in investor strategies and sentiment, availability of alternative investment vehicles, domestic and foreign government regulations, emerging markets developments and others. Accordingly, changes in any one or a combination of these factors may reduce the value of investment securities and, in turn, the underlying AUM on which our revenues are earned. These declines may cause investors to withdraw funds from our ETPs in favor of investments that they perceive as offering greater opportunity or lower risk, thereby compounding the impact on our revenues. We believe challenging and volatile market conditions will continue to be present in the foreseeable future.

Interest Rate Risk

We invest our corporate cash in short-term interest earning assets, primarily in federal agency debt instruments, WisdomTree fixed income ETFs, U.S. treasuries, corporate bonds, money market instruments at a commercial bank and other securities which totaled $134.3 million and $130.8 million as of March 31, 2022 and 2023, respectively. During the three months ended March 31, 2023, we recognized losses on these securities of $2.0 million and any losses recognized in the future may be material to our operating results. We do not anticipate that changes in interest rates will have a material impact on our financial condition or cash flows.

In addition, our Convertible Notes bear interest at fixed rates of 5.75%, 3.25% and 4.25% for the 2023 Notes, 2021 Notes and 2020 Notes, respectively. Therefore, we have no direct financial statement risk associated with changes in interest rates. However, the fair value of the Convertible Notes changes primarily when the market price of our common stock fluctuates or interest rates change.

 

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Exchange Rate Risk

We are subject to currency translation exposure on the results of our non-U.S. operations, primarily in the United Kingdom and Europe. Foreign currency translation risk is the risk that exchange rate gains or losses arise from translating foreign entities’ statements of earnings and balance sheets from functional currency to our reporting currency (the U.S. dollar) for consolidation purposes. The advisory fees earned on our international listed ETPs are predominantly in U.S. dollars (and also paid in gold ounces, as described below); however, expenses for corporate overhead are generally incurred in British pounds. Currently, we do not enter into derivative financial instruments aimed at offsetting certain exposures in the statement of operations or the balance sheet but may seek to do so in the future.

Exchange rate risk associated with the euro is not considered to be significant.

Commodity and Cryptocurrency Price Risk

Fluctuations in the prices of commodities and cryptocurrencies that are linked to certain of our ETPs could have a material adverse effect on our AUM and revenues. In addition, a portion of the advisory fee revenues we receive on our ETPs backed by gold, other precious metals and cryptocurrencies are paid in the underlying metal or cryptocurrency. In addition, we pay gold ounces to satisfy our deferred consideration obligation (See Note 9 to our Consolidated Financial Statements). While we readily sell the gold, precious metals and cryptocurrencies that we earn under these advisory contracts, we still may maintain a position. We currently do not enter into arrangements to hedge against fluctuations in the price of these commodities and cryptocurrencies and any hedging we may undertake in the future may not be cost-effective or sufficient to hedge against this exposure.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of March 31, 2023, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, our disclosure controls and procedures were effective at a reasonable assurance level in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules, regulations and forms of the SEC, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2023, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We may be subject to reviews, inspections and investigations by the SEC, Commodity Futures Trading Commission (CFTC), National Futures Association (NFA), state and foreign regulators, as well as legal proceedings arising in the ordinary course of business. See Note 13 to our Consolidated Financial Statements for additional information regarding claims brought by investors in our WisdomTree WTI Crude Oil 3x Daily Leveraged ETP totaling approximately €15.8 million ($17.2 million).

ITEM 1A. RISK FACTORS

You should carefully consider the information set forth in Part 1, Item1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent sales of Unregistered Securities

None.

Use of Proceeds

Not applicable.

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” of shares of our common stock.

 

      Total Number  
of Shares
Purchased		   Average Price
   Paid Per Share   		     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
      or Programs       		   Approximate
Dollar Value of
Shares that
  May Yet Be Purchased  
Under the Plans or
Programs

Period

                 (in thousands)

January 1, 2023 to January 31, 2023

     602,327     $ 5.60       602,327    

February 1, 2023 to February 28, 2023

     —     $ —       —    

March 1, 2023 to March 31, 2023

     2,178     $ 5.62       2,178    
 

 

 

 

    

 

 

 

  

Total

                 604,505         $             5.60                   604,505         $             96,592      
 

 

 

 

    

 

 

 

  

 

 

 

On February 22, 2022, our Board of Directors approved an increase of $85.7 million to our share repurchase program and extended the term for three years through April 27, 2025. During the three months ended March 31, 2023, we repurchased 604,505 shares of our common stock under this program for an aggregate cost of approximately $3.4 million. As of March 31, 2023, $96.6 million remained under this program for future repurchases.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

EXHIBIT INDEX

 

    Exhibit    
    Number    		   

Description

    3.1    Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form 10, filed with the SEC on March 31, 2011)
    3.2    Certificate of Amendment to the Amended and Restated Certificate of Incorporation (Name Change) (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on November 7, 2022)
    3.3    Certificate of Amendment to the Amended and Restated Certificate of Incorporation (Declassification of Board of Directors) (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on July 20, 2022).
    3.4    Certificate of Amendment to the Amended and Restated Certificate of Incorporation (Increase in Authorized Shares) (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K, filed with the SEC on July 20, 2022).
    3.5    Certificate of Designations of Series A Non-Voting Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 13, 2018)
    3.6    Certificate of Designations of Series B Junior Participating Cumulative Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form 8-A filed with the SEC on March 20, 2023)
    3.7    Fourth Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K, filed with the SEC on November 7, 2022)
    4.1    Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form 10, filed with the SEC on March 31, 2011)
    4.2    Amended and Restated Stockholders Agreement among the Registrant and certain investors dated December 21, 2006 (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form 10, filed with the SEC on March 31, 2011)
    4.3    Securities Purchase Agreement among the Registrant and certain investors dated December 21, 2006 (incorporated by reference to Exhibit 4.3 of the Registrant’s Registration Statement on Form 10, filed with the SEC on March 31, 2011)
    4.4    Securities Purchase Agreement among the Registrant and certain investors dated October 15, 2009 (incorporated by reference to Exhibit 4.4 of the Registrant’s Registration Statement on Form 10, filed with the SEC on March 31, 2011)
    4.5    Third Amended and Restated Registration Rights Agreement dated October 15, 2009 (incorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on Form 10, filed with the SEC on March 31, 2011)
    4.6    Investor Rights Agreement, dated April 11, 2018, between the Registrant and ETFS Capital (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 13, 2018)
    4.7    Indenture, dated as of June 16, 2020, by and between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 17, 2020)
    4.8    Form of Global Note, representing the Registrant’s 4.25% Convertible Senior Notes due 2023 (included as Exhibit A to the Indenture filed as Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 17, 2020)
    4.9    Indenture, dated as of June 14, 2021, by and between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 14, 2021)
    4.10    Form of Global Note, representing the Registrant’s 3.25% Convertible Senior Notes due 2026 (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 14, 2021)
    4.11    Indenture, dated as of February 14, 2023, by and between the Registrant and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on February 14, 2023)
    4.12    Form of Global Note, representing the Registrant’s 5.75% Convertible Senior Notes due 2028 (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on February 14, 2023)

 

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    Exhibit    

    Number    

   

Description

  4.13

    Stockholder Rights Agreement, dated March 17, 2023, between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form 8-A filed with the SEC on March 20, 2023)

   4.14

    Amendment No. 1 to Stockholder Rights Agreement, dated as of May 4, 2023, between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 5, 2023).

  10.1(1)

    Amendment to Employment Agreement between the Registrant and Alexis Marinof, dated April 21, 2023

  10.2(1)

    Form of Amendment, dated April 21, 2023, to Employment Agreements between the Registrant and each of Jonathan Steinberg, Peter M. Ziemba, R. Jarrett Lilien and Marci Frankenthaler

  10.3(1)

    WisdomTree, Inc. Executive Severance Plan

  10.4(1)

    Form of Employee Confidentiality, Assignment and Restrictive Covenant Agreement executed by participants of the WisdomTree, Inc. Executive Severance Plan

  31.1(1)

    Rule 13a-14(a) / 15d—14(a) Certification

  31.2(1)

    Rule 13a-14(a) / 15d—14(a) Certification

  32.1(2)

    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101(1)

    Financial Statements from the Quarterly Report on Form 10-Q of the Company for the three months ended March 31, 2023, formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2023 (Unaudited) and December 31, 2022; (ii) Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2023 and March 31, 2022 (Unaudited); (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and March 31, 2022 (Unaudited) (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and March 31, 2022 (Unaudited); and (v) Notes to Consolidated Financial Statements, as blocks of text and in detail.

101.SCH(1)

    Inline XBRL Taxonomy Extension Schema Document

101.CAL(1)

    Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF(1)

    Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB(1)

    Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE(1)

    Inline XBRL Taxonomy Extension Presentation Linkbase Document

104(1)

    Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*)

 

(1) 

Filed herewith.

(2) 

Furnished herewith.

 

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SIGNATURE

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on this 9th day of May 2023.

 

WISDOMTREE, INC.
By:  

/s/ Jonathan Steinberg

  Jonathan Steinberg
 

Chief Executive Officer

(Principal Executive Officer)

WISDOMTREE, INC.
By:  

/s/ Bryan Edmiston

  Bryan Edmiston
  Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

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