See accompanying notes to unaudited interim combined
financial statements.
Notes
to Interim Financial Statements
March
31, 2022 (unaudited)
(1)
Organization
ETF
Managers Group Commodity Trust I (the “Trust”) was organized as a Delaware statutory trust on July 23, 2014. The Trust is
a series trust formed pursuant to the Delaware Statutory Trust Act and currently consists of one separate series. BREAKWAVE DRY BULK
SHIPPING ETF (“BDRY,” the “Fund”), is a commodity pool that continuously issues shares of beneficial interest
that may be purchased and sold on NYSE Arca. As described below, SIT RISING RATE ETF (“RISE”) also operated as a series of
the Trust, but was closed and liquidated prior to March 31, 2021. The Fund is managed and controlled by ETF Managers Capital LLC (the
“Sponsor”), a Delaware limited liability company. The Sponsor is registered with the Commodity Futures Trading Commission
(“CFTC”) as a “commodity pool operator” (“CPO”) and is a member of the National Futures Trading Association
(“NFA”). Breakwave Advisors, LLC (“Breakwave”) is registered as a “commodity trading advisor” (“CTA”)
with the CFTC and serves as BDRY’s commodity trading advisor.
RISE
Closure and Liquidation
On
October 16, 2020, the Sponsor announced that it would close and liquidate the RISE because of the then current market conditions and
the Fund’s asset size. The last day the liquidated fund accepted creation orders was on October 30, 2020. Trading in RISE was suspended
after the close of the NYSE Arca on October 30, 2020. Proceeds of the liquidation were sent to shareholders on November 18, 2020 (the
“Distribution Date”). From October 30, 2020 through the distribution date, shares of RISE did not trade on the NYSE Arca
nor was there a secondary market for the shares. Any shareholders that remained in RISE on the Distribution Date automatically had their
shares redeemed for cash at the current net asset value on November 18, 2020.
BDRY
commenced investment operations on March 22, 2018. BDRY commenced trading on NYSE Arca on March 22, 2018 and trades under the symbol
“BDRY.”
BDRY’s
investment objective is to provide investors with exposure to the daily change in the price of dry bulk freight futures, before expenses
and liabilities of BDRY, by tracking the performance of a portfolio (the “BDRY Benchmark Portfolio”) consisting of a three-month
strip of the nearest calendar quarter of futures contracts on specified indexes (each a “Reference Index”) that measure rates
for shipping dry bulk freight (“Freight Futures”). Each Reference Index is published each United Kingdom business day by
the London-based Baltic Exchange Ltd. (the “Baltic Exchange”) and measures the charter rate for shipping dry bulk freight
in a specific size category of cargo ship – Capesize, Panamax or Supramax. The three Reference Indexes are as follows:
|
● |
Capesize: the Capesize
5TC Index; |
|
● |
Panamax: the Panamax
4TC Index; and |
|
● |
Supramax: the Supramax
6TC Index. |
The
value of the Capesize 5TC Index is disseminated at 11:00 a.m., London Time and the value of the Panamax 4TC Index and the Supramax 6TC
Index each is disseminated at 1:00 p.m., London Time. The Reference Index information disseminated by the Baltic Exchange also includes
the components and value of each component in each Reference Index. Such Reference Index information also is widely disseminated by Reuters
and/or other major market data vendors.
BDRY
seeks to achieve its investment objective by investing substantially all of its assets in the Freight Futures currently constituting
the BDRY Benchmark Portfolio. The BDRY Benchmark Portfolio includes all existing positions to maturity and settles them in cash. During
any given calendar quarter, the BDRY Benchmark Portfolio progressively increases its positions to the next calendar quarter three-month
strip, thus maintaining constant exposure to the Freight Futures market as positions mature.
The
BDRY Benchmark Portfolio maintains long-only positions in Freight Futures. The BDRY Benchmark Portfolio includes a combination of Capesize,
Panamax and Supramax Freight Futures. More specifically, the BDRY Benchmark Portfolio includes 50% exposure in Capesize Freight Futures
contracts, 40% exposure in Panamax Freight Futures contracts and 10% exposure in Supramax Freight Futures contracts. The BDRY Benchmark
Portfolio does not include and BDRY does not invest in swaps, non-cleared dry bulk freight forwards or other over-the-counter derivative
instruments that are not cleared through exchanges or clearing houses. BDRY may hold exchange-traded options on Freight Futures. The
BDRY Benchmark Portfolio is maintained by Breakwave and will be rebalanced annually. The Freight Futures currently constituting the BDRY
Benchmark Portfolio, as well as the daily holdings of BDRY are available on BDRY’s website at www.drybulketf.com.
When
establishing positions in Freight Futures, BDRY will be required to deposit initial margin with a value of approximately 10% to 40% of
the notional value of each Freight Futures position at the time it is established. These margin requirements are established and subject
to change from time to time by the relevant exchanges, clearing houses or BDRY’s Futures Commission Merchant (“FCM”),
ED&F Man Capital Markets, Inc. On a daily basis, BDRY is obligated to pay, or entitled to receive, variation margin in an amount
equal to the change in the daily settlement level of its Freight Futures positions. Any assets not required to be posted as margin with
the FCM may be held at BDRY’s custodian or remain with the FCM in cash or cash equivalents, as discussed below.
BDRY
was created to provide investors with a cost-effective and convenient way to gain exposure to daily changes in the price of Freight Futures.
BDRY is intended to be used as a diversification opportunity as part of a complete portfolio, not a complete investment program.
The
Fund will incur certain expenses in connection with its operations. The Fund will hold cash or cash equivalents such as U.S. Treasuries
or other high credit quality, short-term fixed-income or similar securities for direct investment or as collateral for the Freight futures
and for other liquidity purposes and to meet redemptions that may be necessary on an ongoing basis. These expenses and income from the
cash and cash equivalent holdings may cause imperfect correlation between changes in the Fund’s net asset value (“NAV”)
and changes in the Benchmark Portfolio, because the Benchmark Portfolio does not reflect expenses or income.
The
Fund seeks to trade its positions prior to maturity; accordingly, natural market forces may cost the Fund while rebalancing. Each time
the Fund seeks to reconstitute its positions, barring movement in the underlying securities, the futures and option prices may be higher
or lower. Such differences in price, barring a movement in the price of the underlying security, will constitute “roll yield”
and may inhibit the Fund’s ability to achieve its respective investment objective.
Several
factors determine the total return from investing in a futures contract position. One factor that impacts the total return that will
result from investing in near month futures contracts and “rolling” those contracts forward each month is the price relationship
between the current near month contract and the next month contract.
The
CTA will close existing positions when it determines it would be appropriate to do so and reinvest the proceeds in other positions. Positions
may also be closed out to meet orders for redemption baskets.
(2)
Summary of Significant Accounting Policies
(a)
Basis of Accounting
The
accompanying interim combined financial statements of the Fund have been prepared in conformity with U.S. generally accepted accounting
principles (“U.S. GAAP”). The Fund qualifies as an investment company for financial reporting purposes under Topic 946 of
the Accounting Standard Codification of U.S. GAAP.
The
accompanying interim combined financial statements are unaudited, but in the opinion of management, contain all adjustments (which include
normal recurring adjustments) considered necessary to present fairly the interim financial statements. These interim financial statements
should be read in conjunction with BDRY’s annual report on Form 10-K for the year ended June 30, 2021 and BDRY’s prospectus
dated March 24, 2022 (the “BDRY Prospectus,”). Interim period results are not necessarily indicative of results for a full-year
period.
(b)
Use of Estimates
The
preparation of the interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim
financial statements and accompanying notes. Actual results could differ from those estimates.
(c)
Cash
Cash,
when shown in the Statements of Assets and Liabilities, represents non-segregated cash with the custodian and does not include short-term
investments.
(d)
Cash Held by Broker
Breakwave
is registered as a “commodity trading advisor” and acts as such for BDRY. The Fund’s arrangement with its FCM requires
the Fund to meet its variation margin requirement related to the price movements, both positive and negative, on futures contracts held
by the Fund by keeping cash on deposit with the Commodity Broker (as defined below). These amounts are shown as Segregated cash held
by broker in the Statements of Assets and Liabilities. The Fund deposits cash or United States Treasury Obligations, as applicable, with
its FCM subject to the CFTC regulations and various exchange and broker requirements. The combination of the Fund’s deposits with
its FCM of cash and United States Treasury Obligations, as applicable, and the unrealized gain or loss on open futures contracts (variation
margin) represents the Fund’s overall equity in its brokerage trading account. The Fund uses its cash held by its FCM to satisfy
variation margin requirements. The Fund earns interest on its cash deposited with its FCM and interest income is recorded on the accrual
basis.
(e)
Final Net Asset Value for Fiscal Period
The
calculation time of the Fund’s final net asset value for creation and redemption of Fund shares for the three and nine months ended
March 31, 2022 and 2021 was at 4:00 p.m. Eastern Time on March 31, 2022 and 2021, respectively. RISE was liquidated on November 18, 2020
at its final net asset value as of that date.
Although
the Fund’s shares may continue to trade on secondary markets subsequent to the calculation of the final NAV, the 4:00 p.m. Eastern
Time represented the final opportunity to transact in creation or redemption baskets for the three and nine months ended March 31, 2022
and 2021.
Fair
value per share is determined at the close of the NYSE Arca.
For
financial reporting purposes, the Fund values its investment positions based upon the final closing price in their primary markets. Accordingly,
the investment valuations in these interim financial statements differ from those used in the calculations of the Fund’s final
creation/redemption NAVs at March 31, 2022 and 2021.
(f)
Investment Valuation
Short-term
investments, excluding U.S. Treasury Bills, are carried at amortized cost, which approximates fair value. U.S. Treasury Bills are valued
as determined by an independent pricing service based on methods which include consideration of: yields or prices of securities of comparable
quality, coupon, maturity and type; indications as to values from dealers; and general market conditions.
Futures
and options contracts are valued at the last settled price on the applicable exchange on which that futures and/or options contract trades.
(g)
Financial Instruments and Fair Value
The
Fund discloses the fair value of its investments in accordance with the Financial Accounting Standards Board (“FASB”) fair
value measurement and disclosure guidance which requires a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The disclosure requirements establish a fair value hierarchy that distinguishes between: (1) market participant
assumptions developed based on market data obtained from sources independent to the Fund (observable inputs); and (2) the Fund’s
own assumptions about market participant assumptions developed based on the best information available under the circumstances (unobservable
inputs). The three levels defined by the disclosure requirements hierarchy are as follows:
Level I: |
Quoted prices (unadjusted)
in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. |
Level II: |
Inputs other than quoted
prices included within Level I that are observable for the asset or liability, either directly or indirectly. Level II inputs include
the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs
that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). |
Level III: |
Unobservable pricing input
at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable
inputs are not available. |
In
some instances, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The level in the fair
value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest input level that
is significant to the fair value measurement in its entirety.
Fair
value measurements also require additional disclosure when the volume and level of activity for the asset or liability have significantly
decreased, as well as when circumstances indicate that a transaction is not orderly.
The
following table summarizes BDRY’s valuation of investments at March 31, 2022 and at June 30, 2021 using the fair value hierarchy:
| |
March 31, 2022 (unaudited) | |
| |
Short-Term
Investments |
| |
Futures
Contracts |
| |
Total | |
Level I – Quoted Prices | |
$ | 17,462,227a |
| |
$ | 3,348,980b |
| |
$ | 20,811,207 | |
a
– Included in Investments in securities in the Statements of Assets and Liabilities.
b
– Included in Receivable on open futures contracts in the Statements of Assets and Liabilities.
| |
June 30, 2021 (audited) | |
| |
Short-Term Investments |
| |
Futures Contracts |
| |
Total | |
Level I – Quoted Prices | |
$ | 42,654,058a |
| |
$ | 21,723,570b |
| |
$ | 64,377,628 | |
a
– Included in Investments in securities in the Statements of Assets and Liabilities.
b
– Included in Receivable on open futures contracts in the Statements of Assets and Liabilities.
Transfers
between levels are recognized at the end of the reporting period. During the nine months ended March 31, 2022 and the year ended June
30, 2021, BDRY recognized no transfers from Level 1, Level 2 or Level 3.
(h)
Investment Transactions and Related Income
Investment
transactions are recorded on the trade date. All such transactions are recorded on the identified cost basis, and marked to market daily.
Unrealized gain/loss on open futures contracts is reflected in Receivable/Payable on open futures contracts in the Statements of Assets
and Liabilities and the change in the unrealized gain/loss between periods is reflected in the Statements of Operations. BDRY’s
interest earned on short-term securities and on cash deposited with ED & F Man Capital Markets Inc. is accrued daily and reflected
as Interest Income, when applicable, in the Statements of Operations.
(i)
Federal Income Taxes
The
Fund is registered as a Delaware statutory trust and is treated as a partnership for U.S. federal income tax purposes. Accordingly, the
Fund does not expect to incur U.S. federal income tax liability; rather, each beneficial owner is required to take into account their
allocable share of the Fund’s income, gain, loss, deductions and other items for the Fund’s taxable year ending with or within
the beneficial owner’s taxable year.
Management
of the Fund has reviewed the open tax years and major jurisdictions and concluded that there is no tax liability resulting from unrecognized
tax benefits relating to uncertain income tax positions taken or expected to be taken in future tax returns at March 31, 2022 and June
30, 2021. The Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized
tax benefits will significantly change in the next twelve months. On an ongoing basis, management will monitor its tax positions taken
to determine if adjustments to its conclusions are necessary based on factors including, but not limited to, further implementation of
guidance expected from the FASB and on-going analysis of tax law, regulation, and interpretations thereof. The Fund’s federal tax
returns are subject to examination by the Internal Revenue Service for a period of three years after they are filed.
(3)
Investments
(a)
Short-Term Investments
The
Fund may purchase U.S. Treasury Bills, agency securities, and other high-credit quality short-term fixed income or similar securities
with original maturities of one year or less. A portion of these investments may be used as margin for the Fund’s trading in futures
contracts.
(b)
Accounting for Derivative Instruments
In
seeking to achieve the Fund’s investment objective, the commodity trading advisor uses a mathematical approach to investing. Using
this approach, the commodity trading advisor determines the type, quantity and mix of investment positions that it believes in combination
should produce returns consistent with the Fund’s objective.
All
open derivative positions at March 31, 2022 and at June 30, 2021, as applicable, are disclosed in the Schedules of Investments and the
notional value of these open positions relative to the shareholders’ capital of the Fund is generally representative of the notional
value of open positions to shareholders’ capital throughout the reporting periods for the Fund. The volume associated with derivative
positions varies on a daily basis as the Fund transacts in derivative contracts in order to achieve the appropriate exposure, as expressed
in notional value, in comparison to shareholders’ capital consistent with the Fund’s investment objective.
Following
is a description of the derivative instruments used by the Fund during the reporting period, including the primary underlying risk exposures.
(c)
Futures Contracts
The
Fund enters into futures contracts to gain exposure to changes in the value of the Benchmark Portfolio. A futures contract obligates
the seller to deliver (and the purchaser to accept) the future cash settlement of a specified quantity and type of a treasury futures
contract at a specified time and place. The contractual obligations of a buyer or seller of a treasury futures contract may generally
be satisfied by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated
date of delivery.
Upon
entering into a futures contract, the Fund is required to deposit and maintain as collateral at least such initial margin as required
by the exchange on which the transaction is affected. The initial margin is segregated as Cash held by broker, as disclosed in the Statements
of Assets and Liabilities, and is restricted as to its use. Pursuant to the futures contract, the Fund agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in value of the futures contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses. The Fund will realize a gain or loss upon closing a futures
transaction.
Futures
contracts involve, to varying degrees, elements of market risk (specifically freight shipping price risk) and exposure to loss in excess
of the amount of variation margin. The face or contract amounts reflect the extent of the total exposure the Fund has in the particular
classes of instruments. Additional risks associated with the use of futures contracts include imperfect correlation between movements
in the price of the futures contracts and the market value of the underlying securities and the possibility of an illiquid market for
a futures contract. With futures contracts, there is minimal counterparty risk to the Fund since futures contracts are exchange-traded
and the exchange’s clearinghouse, as counterparty to all exchange-traded futures contracts, guarantees the futures contracts against
default.
BREAKWAVE
DRY BULK SHIPPING ETF
Fair
Value of Derivative Instruments, as of March 31, 2022
| |
Asset Derivatives | | |
Liability Derivatives | |
Derivatives | |
Statements of Assets and Liabilities | |
| Fair
Value | | |
Statements of Assets and Liabilities | |
| Fair Value | |
Interest Rate Risk | |
Receivable on open futures contracts | |
$ | 3,348,980* | | |
— | |
| — | |
* | Represents
cumulative appreciation of futures contracts as reported in the Statements of Assets and Liabilities. |
BREAKWAVE
DRY BULK SHIPPING ETF
Fair
Value of Derivative Instruments, as of June 30, 2021
| |
Asset Derivatives | | |
Liability Derivatives | |
Derivatives | |
Combined Statements of
Assets and Liabilities | |
| Fair Value | | |
Combined Statements of Assets and Liabilities | |
| Fair Value | |
Interest Rate Risk | |
Receivable on open futures contracts | |
$ | 21,723,570* | | |
— | |
| — | |
| * | Represents
cumulative appreciation of futures contracts as reported in the Statements of Assets and Liabilities. |
BREAKWAVE
DRY BULK SHIPPING ETF
The
Effect of Derivative Instruments on the Statements of Operations
For
the Three Months Ended March 31, 2022
Derivatives | |
Location of Gain (Loss) on Derivatives | |
Realized Loss on Derivatives Recognized in Income | | |
Change in Unrealized Gain (Loss) on Derivatives Recognized in Income | |
Interest Rate Risk | |
Net realized loss on investments and futures and/or Change in unrealized gain (loss) on investments and futures contracts | |
$ | (10,253,439 | ) | |
$ | (11,194,715 | ) |
The
futures contracts open at March 31, 2022 are indicative of the activity for the three months ended March 31, 2022.
BREAKWAVE
DRY BULK SHIPPING ETF
The
Effect of Derivative Instruments on the Statements of Operations
For
the Three Months Ended March 31, 2021
Derivatives | |
Location of Gain (Loss) on Derivatives | |
Realized Gain on Derivatives Recognized in Income | | |
Change in Unrealized Gain (Loss) on Derivatives Recognized in Income | |
Interest Rate Risk | |
Net realized gain on investments and futures and/or Change in unrealized gain (loss) on investments and futures contracts | |
$ | 24,152,831 | | |
$ | (1,727,485 | ) |
The
futures contracts open at March 31, 2021 are indicative of the activity for the three months ended March 31, 2021.
BREAKWAVE
DRY BULK SHIPPING ETF
The
Effect of Derivative Instruments on the Statements of Operations
For
the Nine Months Ended March 31, 2022
Derivatives | |
Location of Gain (Loss) on Derivatives | |
Realized Gain on Derivatives Recognized in Income | | |
Change in Unrealized Gain (Loss) on Derivatives Recognized in Income | |
Interest Rate Risk | |
Net realized gain on investments and futures and/or Change in unrealized gain (loss) on investments and futures contracts | |
$ | 8,210,021 | | |
$ | (29,790,605 | ) |
The
futures contracts open at March 31, 2022 are indicative of the activity for the nine months ended March 31, 2022.
BREAKWAVE
DRY BULK SHIPPING ETF
The
Effect of Derivative Instruments on the Statements of Operations
For
the Nine Months Ended March 31, 2021
Derivatives | |
Location of Gain (Loss) on Derivatives | |
Realized Gain on Derivatives Recognized in Income | | |
Change in Unrealized Gain (Loss) on Derivatives Recognized in Income | |
Interest Rate Risk | |
Net realized gain on investments and futures and/or Change in unrealized gain (loss) on investments and futures contracts | |
$ | 30,666,327 | | |
$ | (6,055,445 | ) |
The
futures contracts open at March 31, 2021 are indicative of the activity for the nine months ended March 31, 2021.
SIT RISING RATE ETF
The Effect of Derivative Instruments on the Statements
of Operations
For the Nine Months Ended March 31, 2021
Derivatives | |
Location of Gain (Loss) on Derivatives | |
Realized Loss on Derivatives Recognized in Income | | |
Change in Unrealized Gain (Loss) on Derivatives Recognized in Income | |
Interest Rate Risk | |
Net realized loss on investments, futures and options contracts and/or Change in unrealized gain (loss) on investments, futures and options contracts | |
$ | (29,138 | ) | |
$ | 10,459 | |
The operations include the activity of Sit Rising
Rate ETF through November 18, 2020, the date of liquidation.
(4) Agreements
(a) Management Fee
The Fund pays the Sponsor a sponsor fee (the “Sponsor
Fee”) in consideration of the Sponsor’s advisory services to the Fund. Additionally, the Fund pays its commodity trading advisor
a license and service fee (the “CTA fee”).
BDRY pays the Sponsor an annual Sponsor Fee, monthly
in arrears, in an amount calculated as the greater of 0.15% of its average daily net assets, or $125,000. BDRY also paid an annual fee
to Breakwave, monthly in arrears, in an amount equal to 1.45% of BDRY’s average daily net assets. Breakwave has agreed to waive
its CTA fee to the extent necessary, and the Sponsor has voluntarily agreed to correspondingly assume the remaining expenses of BDRY such
that Fund expenses do not exceed an annual rate of 3.50%, excluding brokerage commissions and interest expense, of the value of BDRY’s
average daily net assets through September 30, 2023 (the “BDRY Expense Cap,”). The assumption of expenses by the Sponsor and
waiver of BDRY’s CTA fee are contractual on the part of the Sponsor and Breakwave, respectively.
The waiver of BDRY’s CTA fees, pursuant
to the undertaking, amounted to $-0- and $20,752, for the three months ended March 31, 2022 and 2021, respectively, and $-0- and $39,184
for the nine months ended March 31, 2022 and 2021, respectively, as disclosed in the Statements of Operations.
The Fund currently accrues its daily expenses
up to the Expense Cap, or if less, at accrual estimates established by the Sponsor. At the end of each month, the accrued amount is remitted
to the Sponsor as the Sponsor has assumed, and is responsible for the payment of the routine operational, administrative and other ordinary
expenses of the Fund in excess of the Fund’s Expense Cap, which in the case of RISE, aggregated $136,902 for the nine months ended
March 31, 2021, as disclosed in the Statements of Operations. In the case of BDRY, expenses absorbed by the sponsor aggregated $-0- and
$-0- for the three months ended March 31, 2022 and 2021, respectively, and $-0- and $-0- for the nine months ended March 31, 2022 and
2021, respectively, as disclosed in the Statements of Operations.
(b) The Administrator, Custodian, Fund Accountant
and Transfer Agent
The Fund has appointed U.S. Bank, a national banking
association, with its principal office in Milwaukee, Wisconsin, as the custodian (the “Custodian”). Its affiliate, U.S. Bancorp
Fund Services, is the Fund accountant (“the Fund accountant”) of the Fund, transfer agent (the “Transfer Agent”)
for Fund shares and administrator for the Fund (the “Administrator”). It performs certain administrative and accounting services
for the Fund and prepares certain SEC, NFA and CFTC reports on behalf of the Fund. (U.S. Bank and U.S. Bancorp Fund Services are referred
to collectively hereinafter as “U.S. Bank”).
BDRY has agreed to pay U.S. Bank 0.05% of AUM,
with a $45,000 minimum annual fee payable for its administrative, accounting and transfer agent services and 0.01% of AUM, with an annual
minimum of $4,800 for custody services. BDRY paid U.S. Bank $15,930 and $15,930 for the three months ended March 31, 2022 and 2021, respectively,
and $48,511 and $48,498 for the nine months ended March 31, 2022 and 2021, respectively, as disclosed in the Statements of Operations.
Prior to its liquidation RISE paid U.S. Bank $19,486
for the nine months ended March 31, 2021, as disclosed in the Statements of Operations.
(c) The Distributor
The Fund pays ETFMG Financial LLC. (the “Distributor”),
an affiliate of the Sponsor, an annual fee for statutory and wholesaling distribution services and related administrative services equal
to the greater of $15,000 or 0.02% of the Fund’s average daily net assets, payable monthly. Pursuant to the Marketing Agent Agreement
between the Sponsor, the Fund and the Distributor, the Distributor assists the Sponsor and the Fund with certain functions and duties
relating to distribution and marketing services to the Fund, including reviewing and approving marketing materials and certain regulatory
compliance matters. The Distributor also assists with the processing of creation and redemption orders.
BDRY incurred $3,873 and $3,873 for the three
months ended March 31, 2022 and 2021, respectively, and $11,791 and $11,791 for the nine months ended March 31, 2022 and 2021, respectively,
as disclosed in the Statements of Operations.
Prior to its liquidation, RISE incurred
$5,116 in distribution and related administrative services for the nine months ended March 31, 2021, as disclosed in the Statements of
Operations.
BDRY pays the Sponsor an annual fee for wholesale
support services of $25,000 plus 0.12% of BDRY’s average daily net assets, payable monthly.
BDRY incurred $24,195 and $16,042 in wholesale
support fees for the three months ended March 31, 2022 and 2021, respectively, and $88,296 and $46,437 for the nine months ended March
31, 2022 and 2021, respectively, as disclosed in the Statements of Operations.
Prior to its liquidation, RISE also paid the Sponsor
an annual fee for wholesale support services equal to 0.1% of RISE’s average daily net assets, payable monthly. Prior to its liquidation,
RISE incurred $1,522 for the nine months ended March 31, 2021, as disclosed in the Statements of Operations.
(d) The Commodity Broker
ED&F Man Capital Inc., a Delaware limited
liability company, serves as BDRY’s clearing broker (the “Commodity Broker”). In its capacity as clearing broker, the
Commodity Broker executes and clears the Funds’ futures transactions and performs certain administrative services for the Fund.
The Fund pays respective brokerage commissions,
including applicable exchange fees, National Futures Association (“NFA”) fees, give–up fees, pit brokerage fees and
other transaction related fees and expenses charged in connection with trading activities in CFTC regulated investments. Brokerage commissions
on futures contracts are recognized on a half-turn basis.
The Sponsor does not expect brokerage commissions
and fees to exceed 0.40% (excluding the impact on the Fund of creation and/or redemption activity) of the net asset value of the Fund
for execution and clearing services on behalf of the Fund, although the actual amount of brokerage commissions and fees in any year or
any part of any year may be greater. The effects of trading spreads, financing costs associated with financial instruments, and costs
relating to the purchase of U.S. Treasury Securities or similar high credit quality short-term fixed-income or similar securities are
not included in the foregoing analysis. BDRY incurred $140,833 and $115,803 in brokerage commissions and fees for the three months ended
March 31, 2022 and 2021, respectively, and $517,171 and $274,845 for the nine months ended March 31, 2022 and 2021, respectively, as disclosed
in the Statements of Operations.
Prior to its liquidation, RISE incurred $1,424
in brokerage commissions and fees for the nine months ended March 31, 2021, as disclosed in the Statements of Operations.
(e) The Trustee
Under the Amended and Restated Declaration of
Trust and Trust Agreement (the “Trust Agreement”) for the Fund, Wilmington Trust Company, the Trustee of the Fund (the “Trustee”)
serves as the sole trustee of the Fund in the State of Delaware. The Trustee will accept service of legal process on the Fund in the
State of Delaware and will make certain filings under the Delaware Statutory Trust Act. Under the Trust Agreement for the Fund, the Sponsor
has the exclusive management and control of all aspects of the business of the Fund. The Trustee does not owe any other duties to the
Fund, the Sponsor or the Shareholders of the Fund. The Trustee has no duty or liability to supervise or monitor the performance of the
Sponsor, nor does the Trustee have any liability for the acts or omissions of the Sponsor. BDRY incurred $617 and $617 in trustee fees
for the three months ended March 31, 2022 and 2021, respectively, and $1,877 and $1,877 for the nine months ended March 31, 2022 and
2021, respectively, which is included in Other Expenses in the Statements of Operations.
Prior to its liquidation, RISE incurred $843 in
trustee fees for the nine months ended March 31, 2021, which is included in Other Expenses in the Statements of Operations.
(f) Routine Offering, Operational, Administrative
and Other Ordinary Expenses
The Sponsor, in accordance with the BDRY Expense
Cap limitation paid, after the waiver of the CTA fee for BDRY by Breakwave, all of the routine offering, operational, administrative and
other ordinary expenses of BDRY in excess of 3.50% (excluding brokerage commissions and interest expense) of BDRY’s average daily
net assets, including, but not limited to, accounting and computer services, the fees and expenses of the Trustee, Administrator, Custodian,
Transfer Agent and Distributor, legal and accounting fees and expenses, tax return preparation expenses, filing fees, and printing, mailing
and duplication costs. BDRY incurred $745,149 and $424,697 for the three months ended March 31, 2022 and 2021, respectively, and $2,496,315
and $1,082,512 for the nine months ended March 31, 2022 and 2021, respectively, in routine offering, operational, administrative or other
ordinary expenses.
The CTA fee waiver for BDRY by Breakwave was $-0-
and $20,752 for the three months ended March 31, 2022 and 2021, respectively, and $-0- and $39,184 for the nine months ended March 31,
2022 and 2021, respectively.
In addition, the assumption of Fund expenses above
the BDRY Expense Cap by the Sponsor, pursuant to the undertaking (as discussed in Note 4a), amounted to $-0- and $-0- for the three months
ended March 31, 2022 and 2021, respectively, and $-0- and $-0- for the nine months ended March 31, 2022 and 2021, respectively.
Prior to its liquidation, RISE incurred $193,779
for the nine months ended March 31, 2021, in routine offering, operational, administrative or other ordinary expenses.
Prior to its liquidation, the assumption of Fund
expenses above the RISE Expense Cap by the Sponsor, pursuant to the undertaking (as discussed in Note 4a), amounted to $136,902 for the
nine months ended March 31, 2021.
(g) Organizational and Offering Costs
Expenses incurred in connection with organizing
BDRY and up to the offering of its Shares upon commencement of its investment operations on March 22, 2018, were paid by the Sponsor and
Breakwave without reimbursement.
Accordingly, all such expenses are not reflected
in the Statements of Operations. The Fund will bear the costs of its continuous offering of Shares and ongoing offering expenses. Such
ongoing offering costs will be included as a portion of the Routine Offering, Operational, Administrative and Other Ordinary Expenses.
These costs will include registration fees for regulatory agencies and all legal, accounting, printing and other expenses associated therewith.
These costs will be accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis
or a shorter period if warranted. For the three and nine months ended March 31, 2022, BDRY incurred no such expenses.
During the year ended June 30, 2021 the Sponsor,
in order to maintain the continuous offering of Shares, undertook to register additional Shares of the Fund, the costs of which were
borne by the Fund and aggregated $28,997, of which $26,612 was amortized to expense at March 31, 2022. Amortization of offering costs
amounted to $7,150 and $21,768, respectively, for the three and nine months ended March 31, 2022.
(h) Extraordinary Fees and Expenses
The Fund will pay all extraordinary fees and expenses,
if any. Extraordinary fees and expenses are fees and expenses which are nonrecurring and unusual in nature, such as legal claims and liabilities,
litigation costs or indemnification or other unanticipated expenses. Such extraordinary fees and expenses, by their nature, are unpredictable
in terms of timing and amount. For the three and nine months ended March 31, 2022 and 2021, respectively, BDRY incurred no such expenses.
(5) Creations and Redemptions
The Fund issues and redeems Shares from time to
time, but only in one or more Creation Baskets. A Creation Basket is a block of 25,000 Shares of each Fund. Baskets may be created or
redeemed only by Authorized Participants.
Except when aggregated in Creation Baskets, the
Shares are not redeemable securities. Retail investors, therefore, generally will not be able to purchase or redeem Shares directly from
or with the Fund. Rather, most retail investors will purchase or sell Shares in the secondary market with the assistance of a broker.
Thus, some of the information contained in these Notes to Interim Combined Financial Statements – such as references to the Transaction
Fee imposed on creations and redemptions – is not relevant to retail investors.
(a) Transaction Fees on Creation and Redemption
Transactions
In connection with orders to create and redeem
one or more Creation Baskets, an Authorized Participant is required to pay a transaction fee, or AP Transaction Fee, of $250 per order,
which goes directly to the Custodian. The AP Transaction Fees are paid by the Authorized Participants and not by the Fund.
(b) Share Transactions
BREAKWAVE DRY BULK SHIPPING ETF
Summary of Share Transactions for the Three Months Ended March 31, 2022 |
| |
Shares | | |
Net Assets Increase | |
Shares Sold | |
| 1,875,000 | | |
$ | 55,053,580 | |
Shares Redeemed | |
| (1,000,000 | ) | |
| (25,311,110 | ) |
Net Increase | |
| 875,000 | | |
$ | 29,742,470 | |
Summary of Share Transactions for the Three Months Ended March 31, 2021 |
| |
Shares | | |
Net Assets Decrease | |
Shares Sold | |
| 1,250,000 | | |
$ | 21,230,015 | |
Shares Redeemed | |
| (1,725,000 | ) | |
| (23,034,021 | ) |
Net Decrease | |
| (475,000 | ) | |
$ | (1,804,006 | ) |
Summary of Share Transactions for the Nine Months Ended March 31, 2022 |
| |
Shares | | |
Net Assets Decrease | |
Shares Sold | |
| 3,850,000 | | |
$ | 115,135,238 | |
Shares Redeemed | |
| (4,525,000 | ) | |
| (126,425,873 | ) |
Net Decrease | |
| (675,000 | ) | |
$ | (11,290,635 | ) |
Summary of Share Transactions for the Nine Months Ended March 31, 2021 |
| |
Shares | | |
Net Assets Decrease | |
Shares Sold | |
| 1,525,000 | | |
$ | 23,331,316 | |
Shares Redeemed | |
| (4,575,000 | ) | |
| (45,827,844 | ) |
Net Increase | |
| (3,050,000 | ) | |
$ | (22,496,528 | ) |
SIT RISING RATE ETF (PRIOR TO LIQUIDATION ON
NOVEMBER 18, 2020)
Summary of Share Transactions for the Nine Months Ended March 31, 2021 |
| |
Shares | | |
Net Assets Decrease | |
Shares Sold | |
— | | |
$— | |
Shares Redeemed (Including in Liquidation) | |
| (250,040 | ) | |
| (4,998,233 | ) |
Net Decrease | |
| (250,040 | ) | |
$ | (4,998,233 | ) |
(6) Risk
(a) Investment Related Risk
The NAV of BDRY’s shares relates directly
to the value of the futures portfolio, cash and cash equivalents held by BDRY. Fluctuations in the prices of these assets could materially
adversely affect the value and performance of an investment in BDRY’s shares. Past performance is not necessarily indicative of
future results; all or substantially all of an investment in BDRY could be lost.
The NAV of BDRY’s shares relates directly
to the value of futures investments held by BDRY which are materially impacted by fluctuations in changes in spot charter rates. Charter
rates for dry bulk vessels are volatile and have declined significantly since their historic highs and may remain at low levels or decrease
further in the future.
Futures and options contracts have expiration
dates. Before or upon the expiration of a contract, BDRY may be required to enter into a replacement contract that is priced higher or
that has less favorable terms than the contract being replaced (see “Negative Roll Risk,” below). The Freight Futures market
settles in cash against published indices, so there is no physical delivery against the futures contracts.
Similar to other futures contracts, the Freight
Futures curve shape could be either in “contango” (where the futures curve is upward sloping with the next futures price higher
than the current one) or “backwardation” (where the next futures price is lower than the current one). Contango curves are
generally characterized by negative roll cost, as the expiring contract value is lower that the next prompt contract value, assuming the
same lot size. That means there could be losses incurred when the contracts are rolled each period and such losses are independent of
the Freight Futures price level.
As of late February, the ongoing conflict between Russia in Ukraine has developed into a war, posing an increasing risk for global economic
growth. Major economic sanctions against Russia are having a considerable impact on oil and gas prices, given the dependence of the EU
on oil and gas exports out of Russia combined with limited spare capacity of such commodities globally. Energy prices have increased significantly,
leading to major inflationary pressures in the major developed countries that rely heavily on oil and gas exports out of Russia. In addition,
the combined Russia/Ukraine region account for approximately one quarter of global grain production, one of the main cargoes transported
by dry bulk vessels, while coal and iron ore exports out of the region have also been reduced. The above factors can have a material negative
impact on demand for dry bulk transportation, while slower economic growth could also negatively affect demand for dry bulk commodities
in the rest of the world, leading to lower dry bulk freight rates.
The recent conflict between Russia and Ukraine is having a profound
impact on global commodities prices including grain and coal, two of the most important commodities for dry bulk shipping. Given the importance
of the region in export volumes for both grains and coal, a prolong stoppage could lead to significantly lower freight rates and thus
a decline in freight futures prices and a decline in the value of the Fund. Although coal supplies could potentially be sourced from elsewhere
partly mitigating the negative impact of the lost volumes, global grain production capacity is limited, and thus the impact of the lost
volumes could not be easily mitigated. In addition, the recent geopolitical turmoil has led to an increase in government protectionism
when it comes to commodities, and if such a trend continues, it could lead to lower bulk commodities trading globally over the long term.
The impact of such a scenario on dry bulk shipping will be negative, leading to lower spot rates and as a result lower freight futures
prices and a decline in the value of the Fund.
(b) Liquidity Risk
In certain circumstances, such as the disruption
of the orderly markets for the futures contracts or Financial Instruments in which the Fund invests, the Fund might not be able to dispose
of certain holdings quickly or at prices that represent what the market value may have been in an orderly market. Futures and option positions
cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small
volume of buy and sell orders in a market. A market disruption can also make it difficult to liquidate a position. The large size of the
positions that the Fund may acquire increases the risk of illiquidity both by making its positions more difficult to liquidate and by
potentially increasing losses while trying to do so. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving
a high correlation with the Benchmark Portfolio.
(c) Natural Disaster/Epidemic Risk
Natural or environmental disasters, such as earthquakes,
fires, floods, hurricanes, tsunamis and other severe weather-related phenomena generally, and widespread disease, including pandemics
and epidemics (for example, the novel coronavirus COVID-19), have been and can be highly disruptive to economies and markets and have
recently led, and may continue to lead, to increased market volatility and significant market losses. Such natural disaster and health
crises could exacerbate political, social, and economic risks, and result in significant breakdowns, delays, shutdowns, social isolation,
and other disruptions to important global, local and regional supply chains affected, with potential corresponding results on the operating
performance of the Fund and its investments. A climate of uncertainty and panic, including the contagion of infectious viruses or diseases,
may adversely affect global, regional, and local economies and reduce the availability of potential investment opportunities, and increases
the difficulty of performing due diligence and modeling market conditions, potentially reducing the accuracy of financial projections.
Under these circumstances, the Fund may have difficulty achieving its investment objective which may adversely impact performance. Further,
such events can be highly disruptive to economies and markets, significantly disrupt the operations of individual companies (including,
but not limited to, the Fund’s Sponsor and third party service providers), sectors, industries, markets, securities and commodity
exchanges, currencies, interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the value of the
Fund’s investments. These factors can cause substantial market volatility, exchange trading suspensions and closures and can impact
the ability of the Fund to complete redemptions and otherwise affect Fund performance and Fund trading in the secondary market. A widespread
crisis may also affect the global economy in ways that cannot necessarily be foreseen at the present time. How long such events will last
and whether they will continue or recur cannot be predicted. Impacts from these events could have significant impact on the Fund’s
performance, resulting in losses to the Fund.
(d) Risk that Current Assumptions and Expectations
Could Become Outdated as a result of Global Economic Shocks
The onset of the novel coronavirus (COVID-19)
has caused significant shocks to global financial markets and economies, with many governments taking extreme actions to slow and contain
the spread of COVID-19. These actions have had, and may continue to have, a severe economic impact on global economies as economic activity
in some instances has essentially ceased at times. Financial markets across the globe have experienced, and may continue to experience,
severe distress at least equal to what was experienced during the global financial crisis in 2008.
The global economic shocks recently experienced
and which may continue to be experienced may cause the underlying assumptions and expectations of the Fund to become outdated quickly
or inaccurate, resulting in significant losses.
(7) Profit and Loss Allocations and Distributions
Pursuant to the Trust Agreement, income and expenses
are allocated pro rata among the Shareholders monthly based on their respective percentage interests as of the close of the last
trading day of the preceding month. Any losses allocated to the Sponsor which are in excess of the Sponsor’s capital balance are
allocated to the Shareholders in accordance with their respective interest in the Fund as a percentage of total Shareholders’ capital.
Distributions (other than redemption of units) may be made at the sole discretion of the Sponsor on a pro rata basis in accordance
with the respective interests of the Shareholders.
(8) Indemnifications
The Sponsor, either in its own capacity or in
its capacity as the Sponsor and on behalf of the Fund, has entered into various service agreements that contain a variety of representations,
or provide indemnification provisions related to certain risks service providers undertake in performing services which are in the best
interests of the Fund. As of March 31, 2022, the Fund had not received any claims or incurred any losses pursuant to these agreements
and expects the risk of such losses to be remote.
(9) Termination
The term of the Fund is perpetual unless terminated
earlier in certain circumstances as described in the Prospectus.
On October 16, 2020, the Sponsor announced that
it would close and liquidate the SIT RISING RATE ETF (“RISE”) because of current market conditions and the Fund’s asset
size. The last day the liquidated fund accepted creation orders was on October 30, 2020. Trading in RISE was suspended after the close
of the NYSE Arca on October 30, 2020. Proceeds of the liquidation were sent to shareholders on November 18, 2020 (the “Distribution
Date”). From October 30, 2020 through the distribution date, shares of RISE did not trade on the NYSE Arca nor was there a secondary
market for the shares. Any shareholders that remained in RISE on the Distribution Date automatically had their shares redeemed for cash
at the current net asset value on November 18, 2020.
(10) Net Asset Value and Financial Highlights
The Funds are presenting, as applicable, the
following net asset value and financial highlights related to investment performance for a Share outstanding throughout the three month
and nine months ended March 31, 2022 and March 31, 2021, respectively. The net investment income and total expense ratios are calculated
using average net assets. The net asset value presentation is calculated by dividing each Fund’s net assets by the average daily
number of Shares outstanding. The net investment income (loss) and expense ratios have been annualized. The total return is based on
the change in net asset value and market value of the Shares during the period. An individual investor’s return and ratios may
vary based on the timing of their transactions in Fund Shares.
| |
BREAKWAVE DRY BULK SHIPPING ETF | |
| |
THREE MONTHS ENDED | |
| |
MARCH 31,
2022 | | |
MARCH 31,
2021 | |
| |
| | |
| |
Net Asset Value | |
| | |
| |
Net asset value per Share, beginning of period | |
$ | 29.65 | | |
$ | 7.93 | |
Net investment income (loss) | |
| (0.29 | ) | |
| (0.16 | ) |
Net realized and unrealized gain (loss) | |
| (5.32 | ) | |
| 9.04 | |
Net Income (Loss) | |
| (5.62 | ) | |
| 8.88 | |
Net Asset Value per Share, end of period | |
| 24.03 | | |
$ | 16.81 | |
Market Value per Share, end of period | |
$ | 24.18 | | |
$ | 16.92 | |
Ratios to Average Net Assets* | |
| | | |
| | |
Expense Ratio*** | |
| 4.96 | % | |
| 4.91 | % |
Expense Ratio*** before Waiver/Assumption | |
| 4.96 | % | |
| 5.16 | % |
Net Investment Income (Loss) | |
| (4.95 | )% | |
| (4.90 | )% |
Total Return, at Net Asset Value** | |
| (18.94 | )% | |
| 111.98 | % |
Total Return, at Market Value** | |
| (18.01 | )% | |
| 119.74 | % |
| * | Percentages are annualized |
| ** | Percentages are not annualized |
| *** | Since inception (March 22, 2018), Fund expenses have been capped
at 3.50% of average daily net assets, plus brokerage commissions, interest expense, and extraordinary expenses. |
| |
BREAKWAVE DRY BULK SHIPPING ETF | |
| |
NINE MONTHS ENDED | |
| |
MARCH 31,
2022 | | |
MARCH 31,
2021 | |
| |
| | |
| |
Net Asset Value | |
| | |
| |
Net asset value per Share, beginning of period | |
$ | 28.88 | | |
$ | 7.70 | |
Net investment income (loss) | |
| (0.88 | ) | |
| (0.31 | ) |
Net realized and unrealized gain (loss) | |
| (3.97 | ) | |
| 9.42 | |
Net Income (Loss) | |
| (4.85 | ) | |
| 9.11 | |
Net Asset Value per Share, end of period | |
| 24.03 | | |
| 16.81 | |
Market Value per Share, end of period | |
$ | 24.18 | | |
$ | 16.92 | |
Ratios to Average Net Assets* | |
| | | |
| | |
Expense Ratio*** | |
| 4.31 | % | |
| 4.52 | % |
Expense Ratio*** before Waiver/Assumption | |
| 4.31 | % | |
| 4.69 | % |
Net Investment Income (Loss) | |
| (4.30 | )% | |
| (4.52 | )% |
Total Return, at Net Asset Value** | |
| (16.79 | )% | |
| 118.31 | % |
Total Return, at Market Value** | |
| (17.61 | )% | |
| 128.96 | % |
| * | Percentages are annualized |
| ** | Percentages are not annualized |
| *** | For Breakwave Dry Bulk Shipping ETF, as of inception (March
22, 2018), Fund expenses have been capped at 3.50% of average daily net assets, plus brokerage commissions, interest expense,
and extraordinary expenses. |
(11) Subsequent Events
In preparing these financial statements, the Fund
has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued. This
evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments to the financial statements.