WisdomTree(WT) - 2022 Q4 - Annual Report

PART I ITEM 1. Business WisdomTree is a global financial innovator managing approximately $82.0 billion in Assets Under Management (AUM) as of December 31, 2022, offering diverse ETPs and developing next-generation digital products and blockchain-enabled financial services - WisdomTree is a global financial innovator offering ETPs, models, and solutions, with approximately $82.0 billion in AUM as of December 31, 2022[19][20] - The company is developing next-generation digital products and structures, including Digital Funds and tokenized assets, and its blockchain-native digital wallet, WisdomTree Prime™[19][21] - WisdomTree has achieved key milestones in its digital assets strategy, including SEC declaration of effectiveness for the WisdomTree Short-Term Treasury Digital Fund and nine other Digital Funds, and FINRA approval for WisdomTree Securities, Inc. to facilitate Digital Fund transactions[21] Our Company WisdomTree is a global financial innovator providing ETPs, models, and digital asset solutions, with significant AUM and ongoing development in blockchain-enabled financial services - WisdomTree is a global financial innovator offering ETPs, models, and solutions, with approximately $82.0 billion in AUM as of December 31, 2022[19][20] - The company is developing next-generation digital products and structures, including Digital Funds and tokenized assets, and its blockchain-native digital wallet, WisdomTree Prime™[19][21] - WisdomTree has achieved key milestones in its digital assets strategy, including SEC declaration of effectiveness for the WisdomTree Short-Term Treasury Digital Fund and nine other Digital Funds, and FINRA approval for WisdomTree Securities, Inc. to facilitate Digital Fund transactions[21] Assets Under Management AUM for U.S. listed ETFs increased to $56.0 billion in 2022 due to net inflows, while European listed ETPs decreased to $26.0 billion due to net outflows and market depreciation AUM Changes (December 31, 2021 to December 31, 2022) | Category | 2021 AUM (Billion USD) | 2022 AUM (Billion USD) | Change | | :------- | :--------------------- | :--------------------- | :----- | | U.S. Listed ETFs | $48.2 | $56.0 | +$7.8B | | European Listed ETPs | $29.3 | $26.0 | -$3.3B | - U.S. listed ETFs AUM increased due to net inflows, offset by market depreciation, while European listed ETPs AUM decreased due to net outflows and market depreciation[25][27] Our Operating and Financial Results In 2022, WisdomTree's revenues remained stable at $301.3 million, while operating expenses increased by 12.1% to $241.3 million, leading to a slight increase in net income to $50.7 million Consolidated Operating Results (2020-2022) | Metric | 2022 (Million USD) | 2021 (Million USD) | 2020 (Million USD) | | :----- | :----------------- | :----------------- | :----------------- | | Revenues | $301.3 | $301.3 | $249.9 | | Total Operating Expenses | $241.3 | $215.3 | $194.8 | | Net Income/(Loss) | $50.7 | $49.8 | ($35.7) | - Total operating expenses increased 12.1% in 2022 to $241.3 million, driven by higher incentive compensation, headcount, professional fees (including $4.5 million for an activist campaign and digital assets business), and fund management costs[37] - Net income increased slightly from $49.8 million in 2021 to $50.7 million in 2022, influenced by changes in revenues, expenses, a favorable revaluation of deferred consideration–gold payments ($25.7 million gain), and higher losses on financial instruments owned ($12.8 million)[37] Our Industry – ETPs The global ETP industry reached $9.3 trillion in AUM by December 2022, with WisdomTree ranking as the thirteenth largest sponsor, benefiting from ETPs' transparency, efficiency, and diversification advantages - The global ETP industry reached $9.3 trillion in AUM as of December 31, 2022, with WisdomTree ranking as the thirteenth largest ETP sponsor globally[35][38] Global ETP Sponsor Ranking by AUM (December 31, 2022) | Rank | ETP Sponsor | AUM (in billions USD) | | :--- | :---------- | :-------------------- | | 1 | iShares | $2,952 | | 2 | Vanguard | $2,037 | | 3 | State Street | $1,048 | | ... | ... | ... | | 13 | WisdomTree | $82 | | 14 | UBS | $75 | | 15 | Dimensional | $72 | - ETFs are favored by investors due to benefits like transparency, intraday trading, tax efficiency, uniform pricing, low-cost index investing, improved access to asset classes, asset allocation, protective hedging, income generation, speculative investing, and diversification[42][43] Our Industry – Digital Assets WisdomTree believes digital assets and blockchain technology will transform financial services by enhancing transparency and efficiency, while actively engaging with regulators to navigate industry scrutiny and cybersecurity risks - WisdomTree believes digital assets, tokenization, and blockchain technology will innovate financial services by offering transparency, economic benefits, streamlined processes, new products, programmable capabilities, and scalability[46][47][50] - The company is embracing 'responsible DeFi' to bridge traditional finance and blockchain-enabled finance, committed to proactive engagement and collaboration with regulators amidst increasing scrutiny and cybersecurity risks in the digital assets industry[47] Our Competitive Strengths WisdomTree leverages its strong position in ETPs and digital assets, a seasoned management team, differentiated products, and efficient operations to drive growth and maintain competitive advantage - WisdomTree is well-positioned in growing ETP and digital asset markets, demonstrated by the development of WisdomTree Prime™, tokenization of real-world assets, SEC-effective Digital Funds, and FINRA approval for WT Securities[51] - The company boasts a strong, seasoned management team with significant ETP and financial services experience, focused on innovation and regulatory collaboration, and a differentiated product set including Modern Alpha strategies and first-to-market ETPs[51][52][54] - Competitive advantages include strong product performance (over 80% of U.S. listed AUM in top two quartiles), self-indexing capabilities to minimize licensing fees and enhance speed to market, and an efficient business model with outsourced non-core services[53][54][57] Our Growth Strategies WisdomTree's growth strategies focus on launching innovative ETPs, establishing leadership in digital assets, deepening client relationships through Advisor Solutions, and expanding distribution platforms - WisdomTree's growth strategies include launching innovative ETPs (e.g., ESG offerings), establishing leadership in digital assets and blockchain-enabled financial services (WisdomTree Prime™ rollout in 2023, tokenization of gold/USD, SEC-effective Digital Funds, FINRA approval for WT Securities)[56][58] - The company aims to foster deeper client relationships through its Advisor Solutions program, offering over 40 model portfolios, customized portfolio services, and portfolio construction tools[58][60] - Other strategies involve deepening relationships with distribution platforms for commission-free trading, leveraging data intelligence for sales and marketing effectiveness, and selectively pursuing acquisitions or strategic transactions[60][61] Human Capital Resources WisdomTree employs 273 full-time individuals globally, emphasizing diversity, equity, and inclusion, and maintaining a 'remote first' philosophy with flexible work arrangements and competitive benefits Employee Profile (December 31, 2022) | Metric | Value | | :----- | :---- | | Total Full-time Employees | 273 | | U.S. Employees | 173 | | Europe Employees | 100 | | Employee Retention Rate (2022) | 88% | | Global Employee Engagement Survey Participation Rate (2022) | 96% | - WisdomTree emphasizes diversity, equity, and inclusion (DEI) through initiatives like the Women's Initiative Network (WIN) and an employee-led DEI Council, aiming to foster an inclusive culture and provide growth opportunities[64][65][66] - The company maintains a 'remote first' philosophy, offering flexible work arrangements, comprehensive wellness programs, and competitive compensation and benefits, including equity awards to align employee and stockholder interests[67][68][69][75] Our Product Categories WisdomTree offers a diverse range of ETPs, with U.S. Equity, Commodity & Currency, and Fixed Income representing the largest AUM categories, alongside European ETPs and digital asset exposures AUM by Product Category (December 31, 2022) | Product Category | AUM (Billion USD) | | :--------------- | :---------------- | | U.S. Equity | $24.1 | | Commodity & Currency | $22.1 | | Fixed Income | $15.3 | | International Developed Market Equity | $10.2 | | Emerging Market Equity | $8.1 | | Leveraged & Inverse | $1.8 | | Alternatives | $0.3 | | Cryptocurrency | $0.1 | - U.S. Equity products primarily use fundamentally weighted investment methodologies, focusing on dividends or earnings, aiming for better risk-adjusted returns[76][78] - The company offers a diverse range of products, including European ETPs with exposure to gold, other precious metals, commodities, and cryptocurrencies, as well as Fixed Income products designed to enhance income potential[79][80][85] Our Sales, Marketing and Research Efforts WisdomTree distributes ETPs through major channels, targeting financial advisors without commissions, while marketing focuses on brand awareness and client acquisition, supported by a research team for product development and investment insights - WisdomTree distributes ETPs through major asset management channels, primarily targeting financial/investment advisors, and does not pay commissions or 12b-1 fees[86] - Marketing efforts focus on increasing global brand awareness, generating new clients, driving inflows, and retaining existing clients through targeted advertising, media relations, database messaging, and social media, with plans to promote WisdomTree Prime™[92][95] - The research team and Chief Investment Office (CIO) are responsible for product development, investment research, model portfolio management, and sales support across various asset classes, utilizing academic-type research and market insights[94][96] Product Development WisdomTree's product development strategy centers on its Modern Alpha approach, leveraging proprietary index development to launch innovative ETPs and next-generation digital products - WisdomTree's product development strategy centers on its Modern Alpha approach, combining active and passive management benefits for cost-effective, performance-driven funds[97] - The company leverages proprietary index development capabilities to launch innovative and differentiated ETPs, aiming to be first-to-market or offer structural/strategic improvements, and is developing next-generation digital products and tokenized assets[98] Competition The asset management industry is highly competitive, with WisdomTree facing pressure from other ETP sponsors and mutual funds, exacerbated by lower barriers to entry and a trend towards low-fee products - The asset management industry is highly competitive, with WisdomTree facing competition from other ETP sponsors, mutual fund companies, and larger financial institutions, leading to pressures on pricing and market share[99][101][102] - The adoption of Rule 6c-11 (ETF Rule) has lowered barriers to entry, increasing competition, and the trend of offering low/no-fee products persists, attracting significant net flows to lower-cost funds[101][162][164] - WisdomTree aims to differentiate through its self-indexing model, active ETFs designed to generate alpha, and expansion into blockchain-enabled financial services, including asset tokenization and digital funds, embracing 'responsible DeFi' principles[102][104] Regulatory Framework of the ETP Industry and Digital Assets Business The ETP industry is extensively regulated under the Investment Company Act of 1940, while WisdomTree's digital assets business actively seeks various U.S. and international regulatory approvals amidst complex and evolving global policy frameworks - The ETP industry is subject to extensive regulation, with ETFs regulated by the Investment Company Act of 1940 in the U.S., requiring compliance with operational, fee, sales, disclosure, and governance rules[106][110] - WisdomTree's digital assets business is actively seeking regulatory, registration, and licensing approvals from various U.S. federal and state regulators (SEC, FINRA, FinCEN, NYDFS) and similar foreign markets, navigating complex and evolving global policy frameworks[107][202] - International operations are subject to non-U.S. jurisdictions and regulatory bodies, including Jersey-domiciled issuers (ManJer Issuers) and Irish-domiciled UCITS ETFs (WTICAV), which must comply with EU regulations like Prospectus Regulation, EMIR, BMR, PRIIPs, and SFDR[113][114][118][121][123][124][125][130] Intellectual Property WisdomTree protects its brand and proprietary investment methodologies through trademarks like 'WisdomTree' and 'Modern Alpha', and a U.S. patent for its financial instrument selection system - WisdomTree regards its name, logo, and 'Modern Alpha' as material trademarks, registered in the U.S. and other countries, and has applied for trademark registration of 'WisdomTree Prime™'[11][129] - Many of its index-based equity ETFs use proprietary indexes, minimizing third-party licensing fees, and the company holds a U.S. patent on its 'Financial Instrument Selection and Weighting System and Method'[129][131] Available Information WisdomTree provides public access to its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K via its investor relations website and the SEC's website - WisdomTree makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K available free of charge on its investor relations website (ir.wisdomtree.com) and the SEC's website (www.sec.gov)[132](index=132&type=chunk) ITEM 1A. Risk Factors WisdomTree faces a high degree of risk across various aspects of its business, including market volatility impacting AUM and revenues, concentration in specific products, reliance on third-party service providers, intense competition, and operational challenges from international expansion and digital asset initiatives - Substantially all revenues are derived from advisory fees on AUM, making the business highly sensitive to declining security/commodity prices, interest rate changes, and general market conditions[135][136] - A significant portion of AUM (55% in top ten ETPs, 16% in gold, 11% in other commodities) creates concentration risk, making operating results vulnerable to performance and investor sentiment in these specific products[140][141] - The digital assets business faces high regulatory uncertainty, increasing competition, reliance on third-party service providers, cybersecurity threats, and inherent risks of blockchain technology (e.g., forks, consensus changes), AML, and data privacy[197][198][199][200][203][204][205][206][208] Market Risks WisdomTree's business is vulnerable to market fluctuations in securities, commodities, and interest rates, which can reduce AUM, impact revenues, and undermine investor confidence in ETPs - Declining prices of securities, gold, other precious metals, and commodities, along with changes in interest rates and general market conditions, can adversely affect WisdomTree's business by reducing AUM and causing investor redemptions[135] - Fluctuations in the amount and mix of AUM, driven by market conditions, can negatively impact revenues and operating margins, as advisory fees are based on a percentage of AUM[136] - Abnormally wide bid/ask spreads and market disruptions could undermine investor confidence in the ETP structure, limiting acceptance and potentially reducing revenues[137][139] Concentration Risks WisdomTree faces significant concentration risk with 55% of its AUM in ten ETPs and substantial exposure to gold, other commodities, and specific equity markets, making it vulnerable to sector-specific downturns and investor sentiment - 55% of WisdomTree's AUM is concentrated in ten ETPs, making operating results highly exposed to the performance of these funds and investor sentiment towards their strategies[140] - Approximately 16% of AUM is in gold-backed ETPs and 11% in other commodities, exposing the business to declining commodity prices, especially gold, and changes in demand cycles[141] - A significant portion of AUM is exposed to U.S. (29%) and international developed markets (12%), subjecting the company to domestic and foreign market conditions and currency exchange rate risks[143][144] Third-Party Provider Risks WisdomTree's operations heavily rely on third-party vendors for critical services like portfolio management, administration, and custody of assets, exposing the company to significant business and financial risks if these providers fail - WisdomTree heavily relies on third-party vendors for critical services like portfolio management (Mellon, Newton, Voya), administration (State Street), and custody of physical precious metals (HSBC, JP Morgan) and digital currencies (Swissquote, Coinbase)[147][148][149][150] - Failure of these key vendors to adequately provide services or safeguard assets could materially affect the business and harm investors, potentially leading to financial loss[148][149][150][151] - European business products are subject to counterparty risks, including creditworthiness of swap providers and custodians, which could negatively impact AUM and product pricing[155][159] Competition and Distribution Risks The asset management industry's intense competition, exacerbated by lower barriers to entry and low-fee products, creates pressure on WisdomTree's pricing, market share, and distribution capabilities - The asset management industry is intensely competitive, leading to pressures on pricing and market share, with competitors offering similar products at lower fees, especially in commoditized categories[161][164] - The ETF Rule (Rule 6c-11) has reduced barriers to entry, increasing competition, and the emergence of non-transparent active ETFs may allow traditional mutual fund sponsors to compete more effectively[162][163] - Reliance on third-party distribution channels means increased competition or failure to maintain relationships could impair distribution capabilities and increase costs, negatively impacting AUM[167] Performance and Investment Risks Poor investment performance of ETPs with limited track records could reduce AUM and revenues, and the company risks losing its entire investments in strategic companies like Securrency and Fnality if their business plans fail - Many ETPs have limited track records, and poor investment performance (absolute or relative to benchmarks) could decrease sales or stimulate redemptions, reducing AUM and revenues[169] - WisdomTree could lose its entire investments in companies like Securrency and Fnality (valued at $35.7 million in aggregate at December 31, 2022) if they fail to raise capital or execute business plans, materially impacting financial condition[170] Operational Risks WisdomTree's international operations and pursuit of acquisitions expose it to increased operational, regulatory, and financial risks, while failures in managing complex products like crypto basket ETPs could lead to financial losses - International business operations expose WisdomTree to increased operational, regulatory, financial, and foreign exchange rate risks, with potential for failures in compliance or infrastructure[171] - Pursuing acquisitions or strategic transactions places increased demands on management and resources, with potential for dilution, substantial borrowings, and significant changes to the business[172][175] - Operational failures in managing crypto basket ETPs in Europe, where WisdomTree acts as determination agent for rebalancing, could lead to financial loss for the company and investors[177] Technology Risks Significant limitations or failures in technology systems, including cybersecurity breaches, could disrupt operations, cause financial loss, and harm reputation, especially with the rapid development of new mobile applications - Significant limitations or failures in technology systems, or security breaches of information and cybersecurity infrastructure, could interrupt or damage operations, leading to financial loss, regulatory violations, reputational harm, or legal liability[182] - These risks are exacerbated by the rapid pace of technological change and the development and launch of new mobile applications like WisdomTree Prime™[182] Human Capital Risks WisdomTree's operational effectiveness is vulnerable to its ability to retain and recruit key personnel amidst intense industry competition, and stock price volatility could impact compensation methods, potentially reducing net income - The ability to operate effectively is impaired if WisdomTree fails to retain or recruit key personnel, especially in operations, product development, research, sales, and marketing, due to intense competition in the asset management and digital assets industries[183] - Compensation methods, including equity grants, may be impacted by stock price volatility, potentially requiring increased compensation levels that could decrease net income[183] Expense and Cash Management Risks WisdomTree's operating results are subject to fluctuations in discretionary expenses, including headcount, incentive compensation, marketing, and digital assets development, which can materially affect profitability - Operating results are subject to fluctuations in expenses, including discretionary spending on headcount, incentive compensation, marketing, and digital assets business development, which can materially affect profitability[184] Legal and Regulatory Risks WisdomTree faces substantial financial and strategic costs from complying with extensive and evolving regulations, with non-compliance risking fines and reputational harm, while ongoing legal proceedings could result in unfavorable outcomes - Compliance with extensive, complex, and changing regulations (SEC, Investment Advisers Act, Investment Company Act, FINRA, CFTC, NFA, foreign authorities) imposes significant financial and strategic costs, with non-compliance potentially leading to fines, sanctions, and reputational harm[185][186][187][190] - The regulatory environment is subject to modifications, new rules (e.g., on data reporting, fund liquidity, derivatives), and revised interpretations, which could increase compliance costs or reduce advisory fees[188][189] - Involvement in legal proceedings, such as claims related to the WisdomTree WTI Crude Oil 3x Daily Leveraged ETP (€15.8 million sought), could require significant management time, expense, and result in unfavorable outcomes[191] Digital Assets Risks The digital assets industry presents high regulatory uncertainty, intense competition, reliance on third-party infrastructure, and heightened cybersecurity and blockchain technology risks for WisdomTree - The digital assets industry is characterized by high regulatory uncertainty, increasing global competition, and reliance on third-party service providers for critical infrastructure (custody, blockchain, banking, cloud computing)[197][198][200] - Cybersecurity risks are heightened due to the use of various technologies in digital assets, making the company susceptible to breaches, data theft, and operational disruptions[199] - Blockchain infrastructure and technology risks include potential changes in consensus mechanisms, malfunctions, vulnerability to fraud, loss of individualized keys, and the impact of 'forks' (blockchain splits) on asset value and transaction speed[203][204][205] Other Company Risks Activist stockholder campaigns can be costly and disruptive, while a change of control could terminate investment management agreements, and non-approval of advisory agreements by Independent Trustees could adversely affect revenues - Responding to activist stockholders has been costly and disruptive, and future activism could cause uncertainty about strategic direction, divert management attention, and impact stock price[210][211] - A change of control would automatically terminate investment management agreements for U.S. listed ETFs, requiring new approvals from Trustees and shareholders, which is not guaranteed and could be expensive[212][214] - Revenues could be adversely affected if Independent Trustees do not approve the continuation of advisory agreements or determine that advisory fees should be reduced[215] Risks Relating to our Common and Preferred Stock and Convertible Notes WisdomTree's common stock price is subject to significant fluctuations, and the company may face challenges in settling or repurchasing Convertible Notes, while redemption rights for Preferred Shares could materially impact its financial position - The market price of common stock has fluctuated significantly and may continue to do so due to various factors, including AUM changes, operating results, analyst reports, strategic moves, regulatory changes, and activist stockholder actions[217] - WisdomTree may lack the ability to raise funds necessary to settle conversions of Convertible Notes or repurchase them upon a fundamental change, potentially leading to default[220] - Preferred Shares issued in connection with the ETFS Acquisition contain redemption rights (valued at $78.0 million at December 31, 2022) that, if triggered, could materially impact the financial position[222] ITEM 1B. Unresolved Staff Comments WisdomTree, Inc. has no unresolved comments from the SEC staff regarding its periodic or current reports filed under the Exchange Act - The registrant has no unresolved comments from the SEC staff relating to its periodic or current reports filed with the SEC pursuant to the Exchange Act[230] ITEM 2. Properties Effective May 1, 2022, WisdomTree relocated its principal executive office to a smaller footprint in New York City, aligning with its 'remote first' philosophy where employees primarily work remotely - Effective May 1, 2022, WisdomTree relocated its principal executive office to 250 West 34th Street, 3rd Floor, New York, New York, under a license agreement expiring in April 2025 (with an option to terminate in April 2024)[231] - The company maintains a 'remote first' philosophy, with a reduced office footprint to better align with the number of employees expected to collaborate in person[68][69][231] ITEM 3. Legal Proceedings WisdomTree is subject to ongoing reviews, inspections, and investigations by regulatory authorities and legal proceedings in the ordinary course of business, including claims totaling approximately €15.8 million ($16.9 million) from investors related to the closure of a leveraged ETP - WisdomTree is subject to reviews, inspections, and investigations by the SEC, CFTC, NFA, state, and foreign regulators, as well as legal proceedings in the ordinary course of business[233] - Total damages sought by investors in the WisdomTree WTI Crude Oil 3x Daily Leveraged ETP are approximately €15.8 million ($16.9 million) as of December 31, 2022, with the company currently assessing these claims[191][233][596][597] ITEM 4. Mine Safety Disclosures This item is not applicable to WisdomTree, Inc - Mine Safety Disclosures are not applicable to WisdomTree, Inc[234] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities WisdomTree's common stock trades on the NYSE under 'WT', with the company maintaining a quarterly cash dividend policy and a share repurchase program with approximately $100.0 million remaining authorization as of December 31, 2022 - WisdomTree's common stock is traded on the New York Stock Exchange under the symbol 'WT', with 247 holders of record and approximately 14,000 beneficial owners as of December 31, 2022[3][236] - The company commenced a quarterly cash dividend in November 2014 and intends to continue payments, subject to financial conditions and legal limitations[237] Share Repurchase Program Status (December 31, 2022) | Metric | Value | | :----- | :---- | | Repurchase Authorization | $100.0 million (approved Feb 22, 2022, extended to April 27, 2025) | | Shares Repurchased (Q4 2022) | 0 | | Remaining Authorization | $99,976 thousand | ITEM 6. [Reserved] This item is reserved and not applicable - This item is reserved and not applicable[241] ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive discussion of WisdomTree's financial condition and results of operations, highlighting its strategic focus on ETPs and digital assets, significant net inflows in 2022, stable revenues, and increased expenses due to growth and digital initiatives - WisdomTree achieved its 10th consecutive quarter of net inflows, generating over $12 billion in net flows in 2022, representing 16% organic flow growth, with inflows across 7 of 8 major product categories[247] - Key milestones in digital assets include the continued development of WisdomTree Prime™ (nationwide rollout targeted in 2023), tokenization of physical gold and U.S. dollars, SEC-effective registration of 10 Digital Funds, and FINRA approval for WT Securities as a mutual fund retailer[250] Key Financial Highlights (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (Million USD) | 2021 (Million USD) | Change (USD) | % Change | | :----------------------------- | :----------------- | :----------------- | :----------- | :------- | | Average AUM | $76,974 | $73,441 | $3,533 | 4.8% | | Total Operating Revenues | $301,345 | $304,318 | ($2,973) | (1.0%) | | Advisory Fees | $293,632 | $298,052 | ($4,420) | (1.5%) | | Other Income | $7,713 | $6,266 | $1,447 | 23.1% | | Total Operating Expenses | $241,260 | $215,260 | $26,000 | 12.1% | | Operating Income | $60,085 | $89,058 | ($28,973) | (32.5%) | | Net Income | $50,684 | $49,797 | $887 | 1.8% | Introduction WisdomTree is a global financial innovator offering ETPs, models, and solutions, actively developing next-generation digital products and blockchain-enabled financial services like WisdomTree Prime™ - WisdomTree is a global financial innovator offering ETPs, models, and solutions, with approximately $82.0 billion in AUM as of December 31, 2022[243][244] - The company is developing next-generation digital products and structures, including Digital Funds and tokenized assets, as well as its blockchain-native digital wallet, WisdomTree Prime™[243][245] Executive Summary WisdomTree achieved its tenth consecutive quarter of net inflows in 2022, driven by U.S. Floating Rate Treasury Fund and U.S. Equity, while advancing its models strategy and achieving key milestones in digital assets, including the upcoming nationwide rollout of WisdomTree Prime™ - WisdomTree is experiencing its 10th consecutive quarter of net inflows, with over $12 billion in net flows in 2022, representing 16% organic growth, driven by success in U.S. Floating Rate Treasury Fund (USFR) and U.S. Equity[247] - The company's models strategy is expanding, focusing on partner platforms and outsourced solutions for financial advisors, aiming for recurring model flows[248] - Key digital asset milestones include the beta testing of WisdomTree Prime™ (nationwide rollout targeted in 2023), tokenization of physical gold and U.S. dollars, SEC-effective registration of 10 Digital Funds, and FINRA approval for WT Securities to facilitate Digital Fund transactions[250] Market Environment In 2022, both U.S. and European listed ETPs experienced significant net inflows, primarily driven by U.S. equity and fixed income products - U.S. listed ETF net flows for 2022 were $567.2 billion, with U.S. equity and fixed income gathering the majority of these flows[253] - European listed ETP net flows for 2022 were $74.2 billion, also primarily driven by equities and fixed income[254] Industry Developments The asset management industry is undergoing accelerated consolidation due to fee compression and increased regulations, creating opportunities for WisdomTree in ETPs, models, and as an early mover in digital assets - The asset management industry is experiencing accelerated consolidation due to fee compression, cost pressures, and increased regulations, emphasizing the importance of scale and operating efficiency[256] - WisdomTree sees significant opportunities in both its ETPs, models, and Advisor Solutions business, and as an early mover in digital assets and blockchain-enabled financial services[256] Components of Operating Revenue WisdomTree's revenues are primarily derived from advisory fees on ETPs, calculated as a percentage of average daily net assets, supplemented by other income from swap rebates and licensing fees - Substantially all of WisdomTree's revenues are derived from advisory fees earned from ETPs, calculated as a percentage of average daily net assets[257][258] Weighted Average Advisory Fee Rates by Product Category | Product Category | Fee Rate | | :--------------- | :------- | | Commodity & Currency | 37bps | | International Developed Market Equity | 50bps | | U.S. Equity | 31bps | | Emerging Market Equity | 51bps | | Leveraged & Inverse | 87bps | | Fixed Income | 16bps | | Alternatives | 58bps | | Cryptocurrency | 96bps | - Other income includes rebates from swap providers, creation/redemption fees on European non-UCITS products, and fees from licensing indexes to third parties[259] Components of Operating Expenses WisdomTree's operating expenses primarily consist of compensation, fund management, marketing, sales, contractual gold payments, professional fees, and occupancy costs - Operating expenses primarily consist of compensation and benefits (salaries, incentive compensation, equity awards), fund management and administration (sub-advisory, accounting, custody, market making), and marketing and advertising[260][261][262][263][268] - Other significant expenses include sales and business development, contractual gold payments (9,500 ounces annually), professional fees (including for activist campaigns and digital assets), occupancy, depreciation, and third-party distribution fees[269][270][271][272][273][274] Components of Other Income/(Expenses) of a Recurring Nature Recurring other income and expenses include interest expense, revaluation gains/losses on deferred gold payments, interest income, and net gains/losses from financial instruments, foreign exchange, and tax-related indemnification assets - Recurring other income/expenses include interest expense (using effective interest method), revaluation of deferred consideration–gold payments (measured using forward-looking gold prices and discount rates), and interest income from corporate cash investments[277][278][279] - Other losses and gains, net, encompass gains/losses from financial instruments owned, sale of gold from advisory fees, foreign exchange fluctuations, and tax-related indemnification asset releases[280] Income Taxes Income tax expense comprises taxes due to federal, various state and local, and certain foreign authorities - Income tax expense comprises taxes due to federal, various state and local, and certain foreign authorities[281] Expense Guidance for the Year Ending December 31, 2023 WisdomTree projects 2023 expenses, including compensation, discretionary spending, and contractual gold payments, with an estimated gross margin of 78% and an effective tax rate of approximately 23% due to a U.K. corporate tax increase 2023 Expense Guidance | Expense Category | Estimated Range (Million USD) | | :--------------- | :---------------------------- | | Compensation Expense | $96.0 - $106.0 | | Discretionary Spending | $56.0 - $59.0 | | Contractual Gold Payments | ~$18.0 | | Third-Party Distribution Expense | $8.0 - $9.0 | | Consolidated Normalized Effective Tax Rate | ~23% | - Estimated gross margin percentage for 2023 is 78% at current AUM and revenue levels, with anticipated expansion assuming continued organic flow growth[285] - The estimated effective tax rate increase to 23% is primarily due to the U.K. corporate taxation rate rising from 19% to 25% effective April 1, 2023[288] Factors that May Impact our Future Financial Results WisdomTree's future financial results are highly dependent on investor sentiment towards its product strategies and its ability to maintain AUM, with changes in product mix directly impacting average advisory fee rates - WisdomTree's operating results are highly exposed to investor sentiment towards its product strategies and the ability to maintain AUM, particularly across commodity, U.S. equity, international developed markets, and emerging markets sectors[290] - Revenues are highly correlated to the level and mix of AUM and the associated fee rate, with changes in product mix leading to a decline in the average advisory fee from 0.41% in 2021 to 0.38% in 2022[291] Key Operating Statistics This section presents key operating statistics for WisdomTree's global, U.S. listed, and European listed ETPs, detailing AUM, inflows/outflows, market appreciation/depreciation, average advisory fees, and the number of ETPs for the years ended December 31, 2020, 2021, and 2022 Global ETPs Key Operating Statistics (Years Ended December 31) | Metric | 2022 (Millions USD) | 2021 (Millions USD) | 2020 (Millions USD) | | :-------------------------- | :-------------- | :-------------- | :-------------- | | Beginning of period assets | $77,479 | $67,392 | $63,525 | | Inflows/(outflows) | $12,182 | $4,660 | ($18) | | Market (depreciation)/appreciation | ($7,671) | $5,446 | $4,663 | | End of period assets | $81,986 | $77,479 | $67,392 | | Average assets during the period | $76,974 | $73,441 | $61,166 | | Average advisory fee during the period | 0.38% | 0.41% | 0.40% | | Number of ETPs—end of period | 348 | 329 | 309 | U.S. Listed ETFs Key Operating Statistics (Years Ended December 31) | Metric | 2022 (Millions USD) | 2021 (Millions USD) | 2020 (Millions USD) | | :-------------------------- | :-------------- | :-------------- | :-------------- | | Beginning of period assets | $48,210 | $38,517 | $40,600 | | Inflows/(outflows) | $14,572 | $4,950 | ($1,253) | | Market (depreciation)/appreciation | ($6,807) | $4,758 | ($830) | | End of period assets | $55,975 | $48,210 | $38,517 | | Average assets during the period | $49,727 | $44,335 | $34,224 | | Number of ETPs—end of period | 79 | 75 | 67 | European Listed ETPs Key Operating Statistics (Years Ended December 31) | Metric | 2022 (Millions USD) | 2021 (Millions USD) | 2020 (Millions USD) | | :-------------------------- | :-------------- | :-------------- | :-------------- | | Beginning of period assets | $29,269 | $28,875 | $22,925 | | (Outflows)/inflows | ($2,390) | ($290) | $1,235 | | Market (depreciation)/appreciation | ($864) | $688 | $5,493 | | End of period assets | $26,011 | $29,269 | $28,875 | | Average assets during the period | $27,247 | $29,106 | $26,942 | | Number of ETPs—end of period | 269 | 254 | 242 | Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 In 2022, WisdomTree's total revenues slightly decreased by 1.0% to $301.3 million, while total operating expenses increased by 12.1% to $241.3 million, driven by higher professional fees and compensation, with a significant gain on revaluation of deferred consideration and a negative effective income tax rate Operating Revenues (2022 vs. 2021) | Metric | 2022 (Thousands USD) | 2021 (Thousands USD) | Change (Thousands USD) | % Change | | :------------- | :--------------- | :--------------- | :----------------- | :------- | | Advisory fees | $293,632 | $298,052 | ($4,420) | (1.5%) | | Other income | $7,713 | $6,266 | $1,447 | 23.1% | | Total revenues | $301,345 | $304,318 | ($2,973) | (1.0%) | - Advisory fee revenues decreased by 1.5% due to a decline in the average advisory fee from 0.41% to 0.38%, despite higher average AUM, reflecting an AUM mix shift[296] Operating Expenses (2022 vs. 2021) | Expense Category | 2022 (Thousands USD) | 2021 (Thousands USD) | Change (Thousands USD) | % Change | | :----------------------------- | :--------------- | :--------------- | :----------------- | :------- | | Compensation and benefits | $97,897 | $88,163 | $9,734 | 11.0% | | Fund management and administration | $64,761 | $58,912 | $5,849 | 9.9% | | Marketing and advertising | $15,302 | $14,090 | $1,212 | 8.6% | | Sales and business development | $11,871 | $9,907 | $1,964 | 19.8% | | Contractual gold payments | $17,108 | $17,096 | $12 | 0.1% | | Professional fees | $13,800 | $7,616 | $6,184 | 81.2% | | Occupancy, communications and equipment | $3,898 | $4,629 | ($731) | (15.8%) | | Depreciation and amortization | $262 | $738 | ($476) | (64.5%) | | Third-party distribution fees | $7,656 | $7,176 | $480 | 6.7% | | Other | $8,705 | $6,933 | $1,772 | 25.6% | | Total operating expenses | $241,260 | $215,260 | $26,000 | 12.1% | - Professional fees surged by 81.2% to $13.8 million, primarily due to $4.5 million incurred in response to an activist campaign and increased spending on the digital assets business[305] - A significant gain on revaluation of deferred consideration of $27.8 million was recognized in 2022 (vs. $2.0 million in 2021), mainly due to an increase in the discount rate and a steepening of the forward-looking gold curve[313] - The effective income tax rate was negative 26.9% in 2022, resulting in a $10.7 million benefit, primarily due to a $19.9 million reduction in unrecognized tax benefits and a reduction in the valuation allowance on foreign net operating losses[318] Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 In 2021, WisdomTree's total revenues increased by 21.8% to $304.3 million, driven by higher advisory fees from increased AUM, while total operating expenses rose by 10.5% to $215.3 million, including significant impairment charges Operating Revenues (2021 vs. 2020) | Metric | 2021 (Thousands USD) | 2020 (Thousands USD) | Change (Thousands USD) | % Change | | :------------- | :--------------- | :--------------- | :----------------- | :------- | | Advisory fees | $298,052 | $246,395 | $51,657 | 21.0% | | Other income | $6,266 | $3,517 | $2,749 | 78.2% | | Total revenues | $304,318 | $249,912 | $54,406 | 21.8% | - Average AUM increased by 20.1% from $61.2 billion in 2020 to $73.4 billion in 2021, driven by market appreciation and net inflows[322] Operating Expenses (2021 vs. 2020) | Expense Category | 2021 (Thousands USD) | 2020 (Thousands USD) | Change (Thousands USD) | % Change | | :----------------------------- | :--------------- | :--------------- | :----------------- | :------- | | Compensation and benefits | $88,163 | $74,675 | $13,488 | 18.1% | | Fund management and administration | $58,912 | $56,728 | $2,184 | 3.8% | | Marketing and advertising | $14,090 | $11,128 | $2,962 | 26.6% | | Sales and business development | $9,907 | $10,579 | ($672) | (6.4%) | | Contractual gold payments | $17,096 | $16,811 | $285 | 1.7% | | Professional fees | $7,616 | $4,902 | $2,714 | 55.4% | | Occupancy, communications and equipment | $4,629 | $6,427 | ($1,798) | (28.0%) | | Depreciation and amortization | $738 | $1,021 | ($283) | (27.7%) | | Third-party distribution fees | $7,176 | $5,219 | $1,957 | 37.5% | | Acquisition and disposition-related costs | $0 | $416 | ($416) | n/a | | Other | $6,933 | $6,924 | $9 | 0.1% | | Total operating expenses | $215,260 | $194,830 | $20,430 | 10.5% | - Impairment charges totaled $16.2 million in 2021, including $9.3 million from the termination of the former New York office lease and $6.6 million for related asset write-offs[342] - The effective income tax rate for 2021 was 12.1%, resulting in $6.9 million expense, primarily due to a $5.2 million reduction in unrecognized tax benefits and a lower tax rate on foreign earnings[319][348] Quarterly Results This section provides unaudited consolidated quarterly statements of operations data and global ETPs operating statistics from Q1 2021 to Q4 2022, detailing revenues, expenses, net income, EPS, dividends, AUM, inflows, and average advisory fees Unaudited Consolidated Quarterly Statement of Operations Data (Q4 2022 - Q1 2021) | (in thousands USD, except per share amounts) | Q4/22 | Q3/22 | Q2/22 | Q1/22 | Q4/21 | Q3/21 | Q2/21 | Q1/21 | | :-------------------------------------- | :---- | :---- | :---- | :---- | :---- | :---- | :---- | :---- | | Total Revenues | $73,310 | $72,414 | $77,253 | $78,368 | $79,175 | $78,112 | $75,775 | $71,256 | | Total Operating Expenses | $61,591 | $57,541 | $61,449 | $60,679 | $56,612 | $53,909 | $52,090 | $52,649 | | Operating Income | $11,719 | $14,873 | $15,804 | $17,689 | $22,563 | $24,203 | $23,685 | $18,607 | | Net (loss)/income | $(28,289) | $81,229 | $8,005 | $(10,261) | $11,187 | $5,833 | $17,630 | $15,147 | | (Loss)/earnings per share—basic | $(0.20) | $0.50 | $0.05 | $(0.08) | $0.07 | $0.04 | $0.11 | $0.09 | | Dividends per common share | $0.03 | $0.03 | $0.03 | $0.03 | $0.03 | $0.03 | $0.03 | $0.03 | Global ETPs Operating Statistics (Quarterly) | Metric (in millions USD) | Q4/22 | Q3/22 | Q2/22 | Q1/22 | Q4/21 | Q3/21 | Q2/21 | Q1/21 | | :------------------- | :---- | :---- | :---- | :---- | :---- | :---- | :---- | :---- | | End of period assets | $81,986 | $70,878 | $74,302 | $79,407 | $77,479 | $72,783 | $73,948 | $69,537 | | Inflows/(outflows) | $5,264 | $1,747 | $3,852 | $1,319 | $1,902 | $548 | $931 | $1,279 | | Average advisory fee | 0.36% | 0.38% | 0.39% | 0.40% | 0.40% | 0.41% | 0.40% | 0.41% | Non-GAAP Financial Measurements WisdomTree provides Adjusted Net Income and Diluted Earnings per Share as non-GAAP measures to offer a consistent analysis of performance by excluding non-recurring or non-core items - WisdomTree discloses Adjusted Net Income and Diluted Earnings per Share as non-GAAP measures to provide a consistent analysis of performance, excluding non-recurring or non-core items[356][357] - Exclusions from non-GAAP measures include unrealized gains/losses on revaluation of deferred consideration, gains/losses on financial instruments owned, tax shortfalls/windfalls from stock-based compensation, and other non-recurring items like activist campaign expenses and impairments[357] Adjusted Net Income and Diluted EPS (Years Ended December 31) | Metric | 2022 (Thousands USD) | 2021 (Thousands USD) | 2020 (Thousands USD) | | :-------------------------------------- | :--------------- | :--------------- | :--------------- | | Net income/(loss), as reported | $50,684 | $49,797 | $(35,655) | | Adjusted net income | $41,669 | $61,352 | $40,205 | | Adjusted earnings per share—diluted | $0.26 | $0.38 | $0.24 | Liquidity and Capital Resources WisdomTree's available liquidity decreased to $112.9 million in 2022, with operating cash flows of $55.1 million, and the company recently issued $130.0 million in 5.75% Convertible Senior Notes due 2028 Available Liquidity (December 31) | Metric (in thousands USD) | 2022 | 2021 | | :-------------------- | :--- | :--- | | Cash and cash equivalents | $132,101 | $140,709 | | Financial instruments owned, at fair value | $126,239 | $127,166 | | Accounts receivable | $30,549 | $31,864 | | Securities held-to-maturity | $259 | $308 | | Total: Liquid assets | $289,148 | $300,047 | | Less: Total current liabilities | ($148,434) | ($83,667) | | Less: Other assets—seed capital | ($1,765) | $0 | | Less: Regulatory capital requirements | ($25,988) | ($12,320) | | Total: Available liquidity | $112,961 | $204,060 | Cash Flow Data (Years Ended December 31) | Metric (in thousands USD) | 2022 | 2021 | 2020 | | :-------------------- | :--- | :--- | :--- | | Operating cash flows | $55,087 | $75,318 | $47,136 | | Investing cash flows | ($37,657) | ($99,632) | $10,641 | | Financing cash flows | ($22,780) | $92,553 | ($60,179) | | (Decrease)/increase in cash and cash equivalents | ($8,608) | $67,284 | ($1,547) | - WisdomTree issued $130.0 million of 5.75% Convertible Senior Notes due 2028 in February 2023, and repurchased $115.0 million of 2020 Notes, resulting in $340.0 million aggregate principal amount of Convertible Notes outstanding[365][368][369] Contractual Obligations WisdomTree's contractual obligations include $340.0 million in Convertible Notes maturing through 2028, a deferred consideration obligation for annual gold payments with a present value of $200.3 million, and $1.5 million in future minimum operating lease payments - WisdomTree has $340.0 million aggregate principal amount of Convertible Notes outstanding, maturing between June 2023 and August 2028, with conditional conversions or fundamental change repurchases potentially accelerating payment[369][376] - The company has a deferred consideration obligation from the ETFS Acquisition to pay 9,500 ounces of physical gold annually through March 31, 2058, then 6,333 ounces perpetually, with a present value of $200.3 million at December 31, 2022[378] - Total future minimum operating lease payments were $1.5 million at December 31, 2022, which the company expects to satisfy with operating cash flows and existing cash balances[380] Critical Accounting Policies and Estimates WisdomTree's critical accounting policies involve annual impairment testing of goodwill and indefinite-lived intangible assets, accounting for equity investments, and fair value measurement of deferred consideration for gold payments using forward-looking prices and discount rates - Goodwill and indefinite-lived intangible assets are tested for impairment annually (November 30th) using qualitative and quantitative assessments (market approach, discounted cash flow analysis), with no impairment recognized in 2022[383][385][386] - Equity investments without readily determinable fair value are accounted for under the measurement alternative (cost less impairment, plus/minus observable price changes), while debt instruments are at fair value[387][388] - Deferred consideration for gold payments is measured at present value using forward-looking gold prices, a discount rate (11.0% at Dec 31, 2022), and a perpetual growth rate (1.3% at Dec 31, 2022), with changes reported as gain/loss on revaluation[389][390] Recently Adopted Accounting Pronouncements WisdomTree early adopted ASU 2020-06 on January 1, 2021, simplifying accounting for convertible instruments and reducing interest expense, while also adopting ASU 2019-12 with no material impact - On January 1, 2021, WisdomTree early adopted ASU 2020-06 (Debt – Debt with Conversion and Other Options) under the modified retrospective approach, simplifying accounting for convertible instruments by reporting them as a single liability or equity[393] - The adoption of ASU 2020-06 resulted in reclassifications on the balance sheet and reduced interest expense on Convertible Notes by approximately $0.4 million per quarter[393] - On January 1, 2021, the company also adopted ASU 2019-12 (Income Taxes – Simplifying the Accounting for Income Taxes), which did not have a material impact on its financial statements[394] ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk WisdomTree is exposed to market risk primarily through fluctuations in ETP values driven by securities/commodity prices, foreign currency exchange rates, and interest rates, which directly impact advisory fees and AUM - WisdomTree's market risk stems from changes in ETP values due to fluctuations in securities/commodity prices, foreign currency exchange rates, and interest rates, directly affecting advisory fees and AUM[396][397] - Corporate cash is invested in short-term interest-earning assets (federal agency debt, WisdomTree fixed income ETFs, U.S. treasuries, corporate bonds, money market instruments), totaling $127.4 million as of December 31, 2022, with recognized losses of $16.5 million in 2022[398] - The company is subject to currency translation exposure on non-U.S. operations (U.K., Europe), where expenses are in British pounds, but advisory fees are predominantly in U.S. dollars or gold ounces. It does not currently hedge against commodity or cryptocurrency price fluctuations[400][402] Market Risk Market risk for WisdomTree involves changes in ETP values due to fluctuations in securities, commodity prices, foreign currency exchange rates, and interest rates, directly impacting advisory fees and AUM - Market risk for WisdomTree is the risk of changes in ETP values resulting from fluctuations in securities or commodity prices, foreign currency exchange rates, and interest rates, which directly impacts advisory fees earned on AUM[396] - Fluctuations in ETP values are driven by market volatility, global economy, inflation, investor sentiment, and regulations, potentially reducing AUM and revenues[397] Interest Rate Risk WisdomTree invests corporate cash in short-term interest-earning assets, recognizing losses in 2022, but does not anticipate a material impact from interest rate changes on its fixed-rate Convertible Notes - WisdomTree invests corporate cash in short-term interest-earning assets, recognizing losses of $16.5 million in 2022, but does not anticipate a material impact on financial condition or cash flows from interest rate changes[398] - The company's Convertible Notes bear fixed interest rates (5.75%, 3.25%, 4.25%), so there is no direct financial statement risk from interest rate changes, though fair value of notes can fluctuate with market interest rates[399] Exchange Rate Risk WisdomTree is exposed to currency translation risk from its non-U.S. operations, primarily in the U.K. and Europe, where corporate overhead expenses in British pounds create an exposure against advisory fees mostly denominated in U.S. dollars or gold - WisdomTree is exposed to currency translation risk from its non-U.S. operations (primarily U.K. and Europe), where foreign entities' financial statements are translated to U.S. dollars[400] - While European ETP advisory fees are mostly in U.S. dollars or gold, corporate overhead expenses are in British pounds, creating an exposure. The company does not currently use derivative financial instruments for hedging[400] Commodity and Cryptocurrency Price Risk Fluctuations in commodity and cryptocurrency prices can materially impact WisdomTree's AUM and revenues, as a portion of advisory fees from related ETPs are paid in the underlying assets, and the company does not currently hedge these price risks - Fluctuations in commodity and cryptocurrency prices linked to certain ETPs could materially impact AUM and revenues[402] - A portion of advisory fees from gold, precious metals, and cryptocurrency-backed ETPs are paid in the underlying asset, and while readily sold, the company may maintain positions and does not currently hedge against these price fluctuations[402] [ITEM 8. Financial State