tw_Current_Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

or

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-38860

 

Tradeweb Markets Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

83-2456358

(State of other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

 

 

 

1177 Avenue of the Americas

New York, New York

 

10036

(Address of principal executive offices)

 

(Zip Code)

 

(646) 430-6000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Class A common stock, par value $0.00001

 

TW

 

Nasdaq Global Select Market

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒ No

 

 

 

 

 

 

 

Class of Stock

 

 

Shares Outstanding as of May 1, 2020

Class A Common Stock, par value $0.00001 per share

 

 

83,945,458

Class B Common Stock, par value $0.00001 per share

 

 

96,933,192

Class C Common Stock, par value $0.00001 per share

 

 

8,079,983

Class D Common Stock, par value $0.00001 per share

 

 

36,931,823

 

 

 

 

 

 

Table of Contents

TRADEWEB MARKETS INC.

 

TABLE OF CONTENTS

 

 

 

 

 

Page

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 

4

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements

7

 

 

 

Consolidated Statements of Financial Condition 

7

 

 

Consolidated Statements of Income 

8

 

 

Consolidated Statements of Comprehensive Income 

9

 

 

Consolidated Statements of Changes in Equity 

10

 

 

Consolidated Statements of Cash Flows 

12

 

 

Notes to Consolidated Financial Statements 

13

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

65

 

 

 

Item 4. 

Controls and Procedures

67

 

 

 

PART II — OTHER INFORMATION 

68

 

 

 

Item 1. 

Legal Proceedings

68

 

 

 

Item 1A. 

Risk Factors

68

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

68

 

 

 

Item 3. 

Defaults Upon Senior Securities

68

 

 

 

Item 4. 

Mine Safety Disclosures

68

 

 

 

Item 5. 

Other Information

68

 

 

 

Item 6. 

Exhibits

69

 

 

 

 

Signatures

70

 

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INTRODUCTORY NOTE

 

The financial statements and other disclosures contained in this report include those of Tradeweb Markets Inc., which is the registrant, and those of its consolidating subsidiaries, including Tradeweb Markets LLC, which became the principal operating subsidiary of Tradeweb Markets Inc. on April 4, 2019 in a series of reorganization transactions (the “Reorganization Transactions”) that were completed in connection with Tradeweb Markets Inc.’s initial public offering (the “IPO”), which closed on April 8, 2019. For more information regarding the transactions described above, see Note 1 – Organization to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

The financial statements and other disclosures contained in this Quarterly Report on Form 10-Q relate to periods that ended both prior to and after the completion of the Reorganization Transactions and the IPO. As a result of the Reorganization Transactions completed in connection with the IPO, Tradeweb Markets Inc. became a holding company whose only material assets consist of its equity interest in Tradeweb Markets LLC and related deferred tax assets. As the sole manager of Tradeweb Markets LLC, Tradeweb Markets Inc. operates and controls all of the business and affairs of Tradeweb Markets LLC and, through Tradeweb Markets LLC and its subsidiaries, conducts its business. As a result of this control, and because Tradeweb Markets Inc. has a substantial financial interest in Tradeweb Markets LLC, Tradeweb Markets Inc. consolidates the financial results of Tradeweb Markets LLC and its subsidiaries.

 

The unaudited consolidated financial statements and other financial disclosures included elsewhere in this Quarterly Report on Form 10-Q relating to periods prior to and including March 31, 2019, which we sometimes refer to as the “pre-IPO period,” reflect the results of operations, financial position and cash flows of Tradeweb Markets LLC, the predecessor of Tradeweb Markets Inc. for financial reporting purposes, and its subsidiaries. The unaudited consolidated financial statements and other financial disclosures included elsewhere in this Quarterly Report on Form 10-Q relating to periods beginning on April 1, 2019, and through and including March 31, 2020, which we sometimes refer to as the “post-IPO period,” reflect the results of operations, financial position and cash flows of Tradeweb Markets Inc. and its subsidiaries, including the consolidation of its investment in Tradeweb Markets LLC. As a result, for financial reporting purposes, the pre-IPO period excludes, and the post-IPO period includes, our financial results from April 1, 2019 through April 3, 2019, which are not material. The unaudited consolidated financial statements and other financial disclosures included elsewhere in this Quarterly Report on Form 10-Q do not reflect what the results of operations, financial position or cash flows would have been had the Reorganization Transactions and the IPO taken place at the beginning of the periods presented.

 

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:

 

                  “We,” “us,” “our,” the “Company,” “Tradeweb” and similar references refer: (i) on or prior to the completion of the Reorganization Transactions to Tradeweb Markets LLC, which we refer to as “TWM LLC,” and, unless otherwise stated or the context otherwise requires, all of its subsidiaries and any predecessor entities, and (ii) following the completion of the Reorganization Transactions to Tradeweb Markets Inc., and, unless otherwise stated or the context otherwise requires, TWM LLC and all of its subsidiaries and any predecessor entities.

 

·

“Bank Stockholders” refer collectively to entities affiliated with the following clients: Barclays Capital Inc., BofA Securities Inc. (a subsidiary of Bank of America Corporation), Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, RBS Securities Inc., UBS Securities LLC and Wells Fargo Securities, LLC. Following the IPO and the application of the net proceeds therefrom, entities affiliated with BofA Securities, Inc., RBS Securities Inc. and UBS Securities LLC no longer hold LLC Interests and, except as otherwise indicated, are not considered Bank Stockholders for post-IPO periods.

 

                  “Continuing LLC Owners” refer collectively to (i) those Original LLC Owners, including an indirect subsidiary of Refinitiv (as defined below), certain of the Bank Stockholders and members of management, that continue to own LLC Interests after the completion of the IPO and Reorganization Transactions, that received shares of our Class C common stock, shares of our Class D common stock or a combination of both, as the case may be, in

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connection with the completion of the Reorganization Transactions, and that may redeem or exchange their LLC Interests for shares of our Class A common stock or Class B common stock and (ii) solely with respect to the Tax Receivable Agreement (as defined below), also includes those Original LLC Owners, including certain Bank Stockholders, that disposed of all of their LLC Interests for cash in connection with the IPO.

 

                  “Investor Group” refer to certain investment funds affiliated with The Blackstone Group Inc. (f/k/a The Blackstone Group L.P.), an affiliate of Canada Pension Plan Investment Board, an affiliate of GIC Special Investments Pte. Ltd. and certain co-investors, which collectively hold indirectly a 55% ownership interest in Refinitiv (as defined below).

 

                  “LLC Interests” refer to the single class of common membership interests of TWM LLC issued in connection with the Reorganization Transactions.

 

                  “LSEG Transaction” refer to the acquisition of the Refinitiv business by London Stock Exchange Group plc in an all share transaction for a total enterprise value of approximately $27 billion.

 

                  “Original LLC Owners” refer to the owners of TWM LLC prior to the Reorganization Transactions.

 

                  “Refinitiv” refer to Refinitiv Holdings Limited, and unless otherwise stated or the context otherwise requires, all of its subsidiaries, which owns substantially all of the former financial and risk business of Thomson Reuters (as defined below), including, prior to and following the completion of the Reorganization Transactions, an indirect majority ownership interest in Tradeweb, and is controlled by the Investor Group.

 

                  “Refinitiv Transaction” refer to the transaction pursuant to which Refinitiv indirectly acquired on October 1, 2018 substantially all of the financial and risk business of Thomson Reuters and Thomson Reuters indirectly acquired a 45% ownership interest in Refinitiv.

 

                  “Thomson Reuters” refer to Thomson Reuters Corporation, which indirectly holds a 45% ownership interest in Refinitiv.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “will” or “would,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, including our expectations about market trends, our market opportunity and the growth of our various markets, our expansion into new markets, any potential tax savings we may realize as a result of our organizational structure, our dividend policy and our expectations, beliefs, plans, strategies, objectives, prospects or assumptions regarding future events, including the pending LSEG Transaction, our performance or otherwise, contained in this Quarterly Report on Form 10-Q are forward-looking statements. In addition, statements contained in this Quarterly Report on Form 10-Q relating to the COVID-19 pandemic, the potential impacts of which are inherently uncertain, are forward-looking statements.

 

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements, or could affect our share price.

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Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

                    changes in economic, political, social and market conditions and the impact of these changes on trading volumes;

 

                    our failure to compete successfully;

 

                    our failure to adapt our business effectively to keep pace with industry changes;

 

                    consolidation and concentration in the financial services industry;

 

                    our dependence on dealer clients that are also stockholders;

 

                    our inability to maintain and grow the capacity of our trading platforms, systems and infrastructure;

 

                    design defects, errors, failures or delays with our platforms or solutions;

 

                    systems failures, interruptions, delays in services, cybersecurity incidents, catastrophic events and any resulting interruptions;

 

                    our dependence on third parties for certain market data and certain key functions;

 

                    our ability to implement our business strategies profitably;

 

                    our ability to successfully integrate any acquisition or to realize benefits from any strategic alliances, partnerships or joint ventures;

 

                    our ability to retain the services of certain members of our management;

 

                    inadequate protection of our intellectual property;

 

                    extensive regulation of our industry;

 

                    limitations on operating our business and incurring additional indebtedness as a result of covenant restrictions under our $500.0 million senior secured revolving credit facility (the “Revolving Credit Facility”) with Citibank, N.A., as administrative agent and collateral agent, and the other lenders party thereto, and certain Refinitiv indebtedness;

 

                    our dependence on distributions from TWM LLC to fund our expected dividend payments and to pay our taxes and expenses, including payments under the tax receivable agreement (the “Tax Receivable Agreement”) entered into in connection with the IPO;

 

                    our ability to realize any benefit from our organizational structure;

 

                    Refinitiv’s control of us and our status as a controlled company; and

 

·

other risks and uncertainties, including those listed under “Item 1A. Risk Factors” of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2019 (the “2019 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”), “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q, and in other filings we may make from time to time with the SEC.

 

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Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance and our actual results of operations, financial condition or liquidity, and the development of the industry and markets in which we operate, may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition or liquidity, and events in the industry and markets in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.

 

Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

 

Investors and others should note that we announce material financial and operational information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. Information about Tradeweb, our business and our results of operations may also be announced by posts on Tradeweb’s accounts on the following social media channels: Instagram, LinkedIn and Twitter. The information that we post through these social media channels may be deemed material. As a result, we encourage investors, the media and others interested in Tradeweb to monitor these social media channels in addition to following our press releases, SEC filings and public conference calls and webcasts. These social media channels may be updated from time to time on our investor relations website.

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PART I — FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

 

Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Financial Condition

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

2020

 

2019

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

424,357

 

$

460,711

Restricted cash

 

 

1,000

 

 

1,000

Receivable from brokers and dealers and clearing organizations

 

 

95,908

 

 

30,641

Deposits with clearing organizations

 

 

11,307

 

 

9,724

Accounts receivable, net of allowance for credit losses of $150 and $195 at March 31, 2020 and December 31, 2019, respectively

 

 

133,468

 

 

92,814

Furniture, equipment, purchased software and leasehold improvements, net of accumulated depreciation and amortization

 

 

37,061

 

 

40,405

Right-of-use assets

 

 

27,281

 

 

24,504

Software development costs, net of accumulated amortization

 

 

172,100

 

 

173,086

Goodwill

 

 

2,694,797

 

 

2,694,797

Intangible assets, net of accumulated amortization

 

 

1,256,589

 

 

1,281,441

Receivable from affiliates

 

 

1,506

 

 

2,525

Deferred tax asset

 

 

291,920

 

 

256,450

Other assets

 

 

37,422

 

 

27,236

Total assets

 

$

5,184,716

 

$

5,095,334

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Payable to brokers and dealers and clearing organizations

 

$

55,157

 

$

30,452

Accrued compensation

 

 

58,016

 

 

119,415

Deferred revenue

 

 

26,269

 

 

23,990

Accounts payable, accrued expenses and other liabilities

 

 

46,134

 

 

32,834

Employee equity compensation payable

 

 

1,037

 

 

1,048

Lease liability

 

 

33,366

 

 

30,955

Payable to affiliates

 

 

2,288

 

 

1,506

Deferred tax liability

 

 

21,572

 

 

21,572

Tax receivable agreement liability

 

 

252,029

 

 

240,817

Total liabilities

 

 

495,868

 

 

502,589

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

  

 

 

  

 

 

 

 

 

 

 

Stockholders' Equity

 

 

  

 

 

  

Preferred stock, $.00001 par value; 250,000,000 shares authorized; none issued or outstanding

 

 

 —

 

 

 —

Class A common stock, $.00001 par value; 1,000,000,000 shares authorized; 70,670,440 shares issued and outstanding as of March 31, 2020

 

 

 1

 

 

 1

Class B common stock, $.00001 par value; 450,000,000 shares authorized; 96,933,192 shares issued and outstanding as of March 31, 2020

 

 

 1

 

 

 1

Class C common stock, $.00001 par value; 350,000,000 shares authorized; 7,389,983 shares issued and outstanding as of March 31, 2020

 

 

 —

 

 

 —

Class D common stock, $.00001 par value; 300,000,000 shares authorized; 49,871,231 shares issued and outstanding as of March 31, 2020

 

 

 —

 

 

 1

Additional paid-in capital

 

 

3,426,625

 

 

3,329,386

Accumulated other comprehensive income (loss)

 

 

(2,179)

 

 

1,366

Retained earnings

 

 

78,361

 

 

47,833

Total stockholders' equity attributable to Tradeweb Markets Inc.

 

 

3,502,809

 

 

3,378,588

Non-controlling interests

 

 

1,186,039

 

 

1,214,157

Total equity

 

 

4,688,848

 

 

4,592,745

Total liabilities and stockholders' equity

 

$

5,184,716

 

$

5,095,334

 

The accompanying notes are an integral part of these consolidated financial statements.

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Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Income

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31, 2020

 

March 31, 2019

Revenues

 

 

 

 

 

 

Transaction fees

 

$

140,824

 

$

102,640

Subscription fees

 

 

34,483

 

 

34,445

Commissions

 

 

42,493

 

 

34,197

Refinitiv market data fees

 

 

14,628

 

 

13,616

Other

 

 

2,178

 

 

1,894

Gross revenue

 

 

234,606

 

 

186,792

 

 

 

 

 

 

 

Expenses

 

 

  

 

 

  

Employee compensation and benefits

 

 

90,520

 

 

77,273

Depreciation and amortization

 

 

37,176

 

 

33,503

Technology and communications

 

 

10,318

 

 

10,040

General and administrative

 

 

8,340

 

 

9,089

Professional fees

 

 

6,911

 

 

6,971

Occupancy

 

 

3,726

 

 

3,639

Total expenses

 

 

156,991

 

 

140,515

Operating income

 

 

77,615

 

 

46,277

Net interest income

 

 

699

 

 

858

Income before taxes

 

 

78,314

 

 

47,135

Provision for income taxes

 

 

(15,829)

 

 

(4,783)

Net income

 

 

62,485

 

$

42,352

Less: Net income attributable to non-controlling interests

 

 

18,557

 

 

 

Net income attributable to Tradeweb Markets Inc.

 

$

43,928

 

 

 

 

 

 

 

 

 

 

EPS calculations for post-IPO and pre-IPO periods (1)

 

 

 

 

 

 

Earnings per share

 

 

  

 

 

 

Basic

 

$

0.26 (a)

 

$

0.19 (b) 

Diluted

 

$

0.25 (a)

 

$

0.19 (b)

Weighted average shares outstanding

 

 

  

 

 

 

Basic

 

 

166,234,749 (a)

 

 

222,222,197 (b)

Diluted

 

 

174,517,244 (a)

 

 

223,320,457 (b)

 

(1)

In April 2019, the Company completed the Reorganization Transactions and the IPO, which, among other things, resulted in Tradeweb Markets Inc. becoming the successor of Tradeweb Markets LLC for financial reporting purposes. As a result, earnings per share information for the pre-IPO period is not comparable to the earnings per share information for the post-IPO period. Therefore, earnings per share information is being presented separately for the pre-IPO and post-IPO periods. See Note 15 – Earnings Per Share for additional information.

a)

Presents information for Tradeweb Markets Inc. (post-IPO period).

b)

Presents information for Tradeweb Markets LLC (pre-IPO period).

 

The accompanying notes are an integral part of these consolidated financial statements.

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Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31, 2020

 

March 31, 2019

Comprehensive income - Pre-IPO attributable to Tradeweb Markets LLC

 

 

 

 

 

 

Pre-IPO net income attributable to Tradeweb Markets LLC

 

$

 —

 

$

42,352

Other comprehensive income:

 

 

 

 

 

 

Foreign currency translation adjustments attributable to Tradeweb Markets LLC

 

 

 —

 

 

988

Pre-IPO comprehensive income attributable to Tradeweb Markets LLC

 

$

 —

 

$

43,340

 

 

 

 

 

 

 

Comprehensive income - Tradeweb Markets Inc.

 

 

 

 

 

 

Net income attributable to Tradeweb Markets Inc.

 

$

43,928

 

 

 

Other comprehensive income:

 

 

 

 

 

 

Foreign currency translation adjustments attributable to Tradeweb Markets Inc.

 

 

(3,552)

 

 

 

Comprehensive income attributable to Tradeweb Markets Inc.

 

$

40,376

 

 

 

 

 

 

 

 

 

 

Comprehensive income - Non-controlling interests

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

$

18,557

 

 

 

Other comprehensive income:

 

 

 

 

 

 

Foreign currency translation adjustments attributable to non-controlling interests

 

 

(1,232)

 

 

 

Comprehensive income attributable to non-controlling interests

 

$

17,325

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Class A
Common Stock

    

Class B
Common Stock

    

Class C
Common Stock

    

Class D
Common Stock

    

Additional
Paid-In
Capital

    

Accumulated
Other
Comprehensive
Income (Loss)

    

Retained
Earnings

    

Non-Controlling
Interests

    

Total
Stockholders'
Equity

 

 

Shares

   

 

Amount

 

Shares

   

 

Amount

 

Shares

   

 

Amount

 

Shares

   

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

66,408,328

 

$

 1

 

96,933,192

 

$

 1

 

8,328,983

 

$

 —

 

50,853,172

 

$

 1

 

$

3,329,386

 

$

1,366

 

$

47,833

 

$

1,214,157

 

$

4,592,745

Activities related to exchanges of LLC Interests, net of offering costs and cancellations

 

1,920,941

 

 

 —

 

 —

 

 

 —

 

(939,000)

 

 

 —

 

(981,941)

 

 

(1)

 

 

(335)

 

 

 —

 

 

 —

 

 

 —

 

 

(336)

Issuance of common stock from equity incentive plans

 

2,341,171

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

35,422

 

 

 —

 

 

 —

 

 

 —

 

 

35,422

Tax receivable agreement liability and deferred taxes arising from LLC Interest ownership exchanges

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

32,736

 

 

 —

 

 

 —

 

 

 —

 

 

32,736

Adjustments to non-controlling interests

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

45,436

 

 

 7

 

 

 —

 

 

(45,443)

 

 

 —

Dividends ($0.08 per share)

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,400)

 

 

 —

 

 

(13,400)

Stock-based compensation expense under the PRSU Plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

5,407

 

 

 —

 

 

 —

 

 

 —

 

 

5,407

Stock-based compensation expense under the RSU Plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

315

 

 

 —

 

 

 —

 

 

 —

 

 

315

Stock-based compensation expense under the Option Plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,249

 

 

 —

 

 

 —

 

 

 —

 

 

2,249

Payroll taxes paid for stock-based compensation exercises

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(23,991)

 

 

 —

 

 

 —

 

 

 —

 

 

(23,991)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

43,928

 

 

18,557

 

 

62,485

Foreign currency translation adjustments

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,552)

 

 

 —

 

 

(1,232)

 

 

(4,784)

Balance at March 31, 2020

 

70,670,440

 

$

 1

 

96,933,192

 

$

 1

 

7,389,983

 

$

 —

 

49,871,231

 

$

 —

 

$

3,426,625

 

$

(2,179)

 

$

78,361

 

$

1,186,039

 

$

4,688,848

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Changes in Equity – (Continued)

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Accumulated

    

 

 

 

 

 

 

 

Other

 

Total

 

 

Members'

 

Comprehensive

 

Members'

 

 

Capital

 

Income (Loss)

 

Capital

Members' capital at December 31, 2018

 

$

4,573,200

 

$

(866)

 

$

4,572,334

Comprehensive income:

 

 

  

 

 

  

 

 

  

Net income

 

 

42,352

 

 

 —

 

 

42,352

Foreign currency translation adjustments

 

 

 —

 

 

988

 

 

988

Adjustment to Class C Shares and Class P(C) Shares in mezzanine capital

 

 

(2,369)

 

 

 —

 

 

(2,369)

Stock-based compensation

 

 

4,674

 

 

 —

 

 

4,674

Capital distributions

 

 

(20,000)

 

 

 —

 

 

(20,000)

Members' capital at March 31, 2019

 

$

4,597,857

 

$

122

 

$

4,597,979

 

The accompanying notes are an integral part of these consolidated financial statements.

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Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

    

 

  

 

 

 

Three Months

 

Three Months

 

 

Ended

 

Ended

 

 

March 31, 

 

March 31, 

 

 

2020

 

2019

Cash flows from operating activities

 

 

  

 

 

  

Net income

 

$

62,485

 

$

42,352

Adjustments to reconcile net income to net cash used in operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

37,176

 

 

33,503

Stock-based compensation expense

 

 

7,971

 

 

4,674

Deferred taxes

 

 

7,227

 

 

(39)

(Increase) decrease in operating assets:

 

 

 

 

 

 

Receivable from/payable to brokers and dealers and clearing organizations, net

 

 

(40,563)

 

 

(3,831)

Deposits with clearing organizations

 

 

(1,668)

 

 

2,570

Accounts receivable

 

 

(43,453)

 

 

(6,406)

Receivable from/payable to affiliates, net

 

 

2,452

 

 

1,167

Other assets

 

 

(9,837)

 

 

(7,152)

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

Accrued compensation

 

 

(59,910)

 

 

(66,447)

Deferred revenue

 

 

2,306

 

 

602

Accounts payable, accrued expenses and other liabilities

 

 

14,067

 

 

(4,911)

Employee equity compensation payable

 

 

(11)

 

 

(17,161)

Net cash used in operating activities

 

 

(21,758)

 

 

(21,079)

Cash flows from investing activities

 

 

  

 

 

  

Purchase of furniture, equipment, software and leasehold improvements

 

 

(1,298)

 

 

(1,516)

Capitalized software development costs

 

 

(7,063)

 

 

(6,767)

Net cash used in investing activities

 

 

(8,361)

 

 

(8,283)

Cash flows from financing activities

 

 

  

 

 

  

Proceeds from stock-based compensation exercises

 

 

35,422

 

 

 —

Offering costs from follow-on offering

 

 

(308)

 

 

 —

Dividends

 

 

(13,400)

 

 

 —

Capital distributions to non-controlling interests

 

 

 —

 

 

(20,000)

Payroll taxes paid for stock-based compensation exercises

 

 

(23,991)

 

 

 —

Net cash used in financing activities

 

 

(2,277)

 

 

(20,000)

Effect of exchange rate changes on cash and cash equivalents

 

 

(3,958)

 

 

866

Net decrease in cash and cash equivalents

 

 

(36,354)

 

 

(48,496)

Cash and cash equivalents and restricted cash

 

 

  

 

 

 

Beginning of period

 

 

461,711

 

 

411,304

End of period

 

$

425,357

 

$

362,808

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Interest paid

 

$

 —

 

$

 —

Income taxes paid

 

$

2,867

 

$

7,301

 

 

 

 

 

 

 

Non-cash financing activities

 

 

 

 

 

 

Items arising from LLC Interest ownership changes

 

 

 

 

 

 

Establishment of liabilities under tax receivable agreement

 

$

11,212

 

$

 —

Deferred tax asset

 

$

43,948

 

$

 —

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash as shown on the statements of financial condition:

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2020

 

2019

Cash and cash equivalents

 

 

424,357

 

 

460,711

Restricted cash

 

 

1,000

 

 

1,000

Cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

425,357

 

$

461,711

 

The accompanying notes are an integral part of these consolidated financial statements.

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Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

    

Page

Note 1 

Organization

 

14

Note 2 

Significant Accounting Policies

 

16

Note 3 

Restricted Cash

 

22

Note 4 

Goodwill and Intangible Assets

 

22

Note 5 

Revenue

 

23

Note 6 

Income Taxes

 

24

Note 7 

Tax Receivable Agreement

 

25

Note 8 

Stockholders’ Equity

 

25

Note 9 

Non-Controlling Interests

 

29

Note 10 

Stock-Based Compensation Plans

 

29

Note 11 

Related Party Transactions

 

31

Note 12 

Fair Value of Financial Instruments

 

32

Note 13 

Credit Risk

 

33

Note 14 

Commitments and Contingencies

 

34

Note 15 

Earnings Per Share

 

35

Note 16 

Regulatory Capital Requirements

 

36

Note 17 

Business Segment and Geographic Information

 

37

Note 18 

Subsequent Events

 

38

 

 

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Tradeweb Markets Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

1.          Organization

Tradeweb Markets Inc. (the “Corporation”) was incorporated as a Delaware corporation on November 7, 2018 for the purpose of completing certain reorganization transactions in order to carry on the business of Tradeweb Markets LLC (“TWM LLC”) and conducting an initial public offering (“IPO”) as described below under “—Initial Public Offering” and “—Reorganization Transactions.”

 

The Corporation is a consolidating subsidiary of BCP York Holdings, (“BCP”) a company owned by certain investment funds affiliated with The Blackstone Group Inc. (f/k/a The Blackstone Group L.P.) (“Blackstone”), through BCP’s majority ownership interest in Refinitiv Holdings Limited (the “Parent” and, unless otherwise stated or the context otherwise requires, together with all of its subsidiaries, “Refinitiv”). As of March 31, 2020, Refinitiv owns a majority ownership interest in the Company (as defined below).  

 

The Corporation is a holding company whose principal asset is LLC Interests (as defined below) of TWM LLC. As the sole manager of TWM LLC, the Corporation operates and controls all of the business and affairs of TWM LLC and, through TWM LLC and its subsidiaries, conducts the Corporation’s business. As a result of this control, and because the Corporation has a substantial financial interest in TWM LLC, the Corporation consolidates the financial results of TWM LLC and reports a non-controlling interest in the Corporation’s consolidated financial statements.  As of March 31, 2020, Tradeweb Markets Inc. owns 74.5% of TWM LLC and the Continuing LLC Owners (defined below) own the remaining 25.5% of TWM LLC.

 

Unless the context otherwise requires, references to the “Company” refer to Tradeweb Markets Inc. and its consolidated subsidiaries, including TWM LLC, following the completion of the Reorganization Transactions (as defined below), and TWM LLC and its consolidated subsidiaries prior to the completion of the Reorganization Transactions.

 

The Company is a leader in building and operating electronic marketplaces for a global network of clients across the institutional, wholesale and retail client sectors. The Company’s principal subsidiaries include:

 

·

Tradeweb LLC (“TWL”), a registered broker-dealer under the Securities Exchange Act of 1934, a member of the Financial Industry Regulatory Authority (“FINRA”), a registered independent introducing broker with the Commodities Future Trading Commission (“CFTC”) and a member of the National Futures Association (“NFA”).

 

·

Dealerweb Inc. (“DW”) (formerly known as Hilliard Farber & Co., Inc.), a registered broker-dealer under the Securities Exchange Act of 1934 and a member of FINRA. DW is also registered as an introducing broker with the CFTC and NFA.

 

·

Tradeweb Direct LLC (“TWD”) (formerly known as BondDesk Trading LLC), a registered broker-dealer under the Securities Exchange Act of 1934 and a member of FINRA.

 

·

Tradeweb Europe Limited (“TEL”), a Multilateral Trading Facility regulated by the Financial Conduct Authority (the “FCA”) in the UK, which maintains branches in Asia which are regulated by certain Asian securities regulators.

 

·

TW SEF LLC (“TW SEF”), a Swap Execution Facility (“SEF”) regulated by the CFTC.

 

·

DW SEF LLC (“DW SEF”), a SEF regulated by the CFTC.

 

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·

Tradeweb Japan K.K. (“TWJ”), a security house regulated by the Japanese Financial Services Agency (“JFSA”) and the Japan Securities Dealers Association (“JSDA”).

 

·

Tradeweb EU B.V. (“TWEU”), a Trading Venue and Approved Publication Arrangement regulated by the Netherlands Authority for the Financial Markets (“AFM”).

 

Initial Public Offering

 

On April 8, 2019, the Corporation completed its IPO of 46,000,000 shares of Class A common stock, par value $0.00001 per share, of the Corporation (the “Class A common stock”) at a public offering price of $27.00, which included 6,000,000 shares of Class A common stock issued pursuant to the underwriters’ option to purchase additional shares of Class A common stock.  The Corporation received $1.2 billion in net proceeds, after deducting underwriting discounts and commissions but before deducting offering expenses, which were used to purchase membership interests of TWM LLC from certain existing equity holders of TWM LLC (and the corresponding shares of common stock were cancelled as described below), at a purchase price per interest equal to the public offering price of $27.00, less the underwriting discounts and commissions payable thereon. See Note 8 – Stockholders’ Equity.

 

Reorganization Transactions

 

Prior to the closing of the IPO, a series of reorganization transactions (the “Reorganization Transactions”) was completed among the Corporation, TWM LLC and the owners of TWM LLC prior to the Reorganization Transactions (collectively, the “Original LLC Owners”), including the following parties:

 

·

certain investment and commercial banks (collectively, the “Bank Stockholders”);

 

·

members of management;

 

·

the Refinitiv Direct Owner, (i) prior to June 28, 2019, a direct subsidiary of Refinitiv that owned interests in an entity that held membership interests of TWM LLC prior to the Reorganization Transactions and contributed such entity to the Corporation (the “Refinitiv Contribution”) in exchange for shares of Class B common stock, par value $0.00001 per share, of the Corporation (the “Class B common stock”) in connection with the completion of the Reorganization Transactions and (ii) on and after June 28, 2019, an indirect subsidiary of Refinitiv that owns shares of Class B common stock which shares were contributed by the direct subsidiary of Refinitiv referred to in the foregoing clause (i); and

 

·

an indirect subsidiary (the “Refinitiv LLC Owner” and, together with the Refinitiv Direct Owner, the “Refinitiv Owners”) of Refinitiv.

 

As used herein, references to “Continuing LLC Owners” refer collectively to (i) those Original LLC Owners, including the Refinitiv LLC Owner, certain Bank Stockholders and members of management, that continue to own LLC Interests (as defined below) after the completion of the IPO and Reorganization Transactions, that received shares of Class C common stock, par value $0.00001 per share, of the Corporation (the “Class C common stock”), shares of Class D common stock, par value $0.00001 per share, of the Corporation (the “Class D common stock”) or a combination of both, as the case may be, in connection with the completion of the Reorganization Transactions, and that may redeem or exchange their LLC Interests for shares of Class A common stock or Class B common stock and (ii) solely with respect to the Tax Receivable Agreement (as defined below), also includes those Original LLC Owners, including certain Bank Stockholders, that disposed of all of their LLC Interests for cash in connection with the IPO.

 

The following Reorganization Transactions occurred:

 

TWM LLC’s limited liability company agreement (the “TWM LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class of common membership interests in TWM LLC (“LLC Interests”), (ii) exchange all of the then existing membership interests in TWM LLC for LLC Interests and (iii) appoint the Corporation as the sole manager of TWM LLC. See Note 8 – Stockholders’ Equity.

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The Corporation’s certificate of incorporation was amended and restated to, among other things, provide for Class A common stock, Class B common stock, Class C common stock and Class D common stock. See Note 8 – Stockholders’ Equity.

 

·

The Corporation issued 20,000,000 shares of Class C common stock and 105,289,005 shares of Class D common stock to the  Original LLC Owners that received LLC Interests on a one-to-one basis with the number of LLC Interests they owned immediately following the amendment and restatement of the TWM LLC Agreement for nominal consideration (and the Corporation subsequently cancelled 9,993,731 shares of such Class C common stock and 36,006,269 shares of such Class D common stock in connection with the Corporation’s purchase of LLC Interests from certain of the Bank Stockholders using the net proceeds of the IPO).

 

·

As a result of the Refinitiv Contribution (described above), the Corporation received 96,933,192 LLC Interests and the Refinitiv Direct Owner received 96,933,192 shares of Class B common stock. See Note 8 – Stockholders’ Equity.

 

The Corporation’s board of directors adopted a new omnibus equity incentive plan, (the “Omnibus Equity Plan”), under which equity awards may be made in respect of shares of the Corporation’s Class A common stock. It also assumed sponsorship of an option plan and PRSU plan formerly sponsored by TWM LLC. See Note 10 – Stock-Based Compensation Plans.

 

The Corporation entered into a tax receivable agreement (the “Tax Receivable Agreement”) with TWM LLC and the Continuing LLC Owners. See Note 7 – Tax Receivable Agreement.

 

LSEG Transaction

 

On August 1, 2019, London Stock Exchange Group plc announced that it has agreed to definitive terms with a consortium including certain investment funds affiliated with Blackstone as well as TR to acquire the Refinitiv business in an all share transaction (the “LSEG Transaction”). The LSEG Transaction is subject to customary regulatory approvals and closing conditions, and is expected to close during the second half of 2020. There can be no assurance that the LSEG transaction will be consummated on the expected timing or at all.

 

 

2.          Significant Accounting Policies

The following is a summary of significant accounting policies:

Basis of Accounting

The consolidated financial statements have been presented in conformity with accounting principles generally accepted in the United States of America. All adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented, are normal and recurring in nature. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the difference may be material to the consolidated financial statements.

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Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

As discussed in Note 1—Organization, as a result of the Reorganization Transactions, Tradeweb Markets Inc. consolidates TWM LLC and TWM LLC is considered to be the predecessor to Tradeweb Markets Inc. for financial reporting purposes. As a result, the consolidated financial statements for periods prior to the Reorganization Transactions have been adjusted to combine the previously separate entities for presentation purposes. However, Tradeweb Markets Inc. had no business transactions or activities and no substantial assets or liabilities prior to the Reorganization Transactions. As such, for periods prior to the completion of the Reorganization Transactions, the consolidated financial statements represent the historical financial condition and results of operations of TWM LLC and its subsidiaries. For periods after the completion of the Reorganization Transactions, the consolidated financial statements represent the financial condition and results of operations of the Company and report a non-controlling interest related to the LLC Interests held by the Continuing LLC Owners.

Pushdown Accounting

A majority interest of Refinitiv (formerly the Thomson Reuters Financial & Risk Business) was acquired by BCP on October 1, 2018 (the “Refinitiv Transaction”) from Thomson Reuters Corporation (“TR”). The Refinitiv Transaction was accounted for by Refinitiv in accordance with the acquisition method of accounting pursuant to Accounting Standards Codification (“ASC”) 805, Business Combinations, and pushdown accounting was applied to Refinitiv to record the fair value of the assets and liabilities of Refinitiv as of October 1, 2018, the date of the Refinitiv Transaction. The Company, as a consolidating subsidiary of Refinitiv, also accounted for the Refinitiv Transaction using pushdown accounting. Under pushdown accounting, the excess of the fair value of the Company above the fair value accounting basis of the net assets and liabilities of the Company is recorded as goodwill. The fair value of assets acquired and liabilities assumed was determined based on assumptions that reasonable market participants would use in the principal (or most advantageous) market for the asset or liability. The adjusted valuations primarily affected the values of our long-lived and indefinite-lived intangible assets, including software development costs.

Cash and Cash Equivalents

Cash and cash equivalents consists of cash and highly liquid investments (such as short-term money market instruments) with original maturities of less than three months.

Allowance for Credit Losses

The Company continually monitors collections and payments from its clients and maintains an allowance for credit losses. The allowance for credit losses is based on an estimate of the amount of potential credit losses in existing accounts receivable, as determined from a review of aging schedules, past due balances, historical collection experience and other specific account data. Careful analysis of the financial condition of our counterparties is also performed. Account balances aged greater than 360 days are reserved to the allowance for credit losses. Once determined uncollectable, aged balances are written off as credit loss expense, which is included in general and administrative expenses on the consolidated statements of income. See Note 13 – Credit Risk for additional information.

Receivable from and Payable to Brokers and Dealers and Clearing Organizations

Receivable from and payable to brokers and dealers and clearing organizations consists of proceeds from transactions which failed to settle due to the inability of a transaction party to deliver or receive the transacted security. These securities transactions are generally collateralized by those securities.

At times, transactions executed on the Company’s wholesale platform fail to settle due to the inability of a transaction party to deliver or receive the transacted security. Until the failed transaction settles, a receivable from (and a matching payable to) brokers and dealers and clearing organizations is recognized for the proceeds from the unsettled transaction.

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Table of Contents

Deposits with Clearing Organizations

Deposits with clearing organizations are comprised of cash deposits. Due to the short-term nature of these deposits, the recorded value has been determined to approximate fair value.

Furniture, Equipment, Purchased Software and Leasehold Improvements

Furniture, equipment, purchased software and leasehold improvements are carried at cost less accumulated depreciation. Depreciation for furniture, equipment and purchased software is computed on a straight-line basis over the estimated useful lives of the related assets, ranging from three to seven years. Leasehold improvements are amortized over the lesser of the estimated useful lives of the leasehold improvements or the remaining term of the lease for office space.

Furniture, equipment, purchased software and leasehold improvements are tested for impairment whenever events or changes in circumstances suggest that an asset’s carrying value may not be fully recoverable in accordance with ASC 360, Property, Plant and Equipment.

Software Development Costs

The Company capitalizes costs associated with the development of internal use software at the point at which the conceptual formulation, design and testing of possible software project alternatives have been completed, in accordance with ASC 350, Intangibles – Goodwill and Other. The Company capitalizes employee compensation and related benefits and third party consulting costs incurred during the application development stage which directly contribute to such development. Such costs are amortized on a straight-line basis over three years. Costs capitalized as part of the pushdown accounting allocation are amortized over nine years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable, or that their useful lives are shorter than originally expected. Non-capitalized software costs and routine maintenance costs are expensed as incurred.

Goodwill

Goodwill is the excess of the fair value of the Company above the fair value accounting basis of the net assets and liabilities of the Company under pushdown accounting. Goodwill is also the cost of acquired companies in excess of the fair value of identifiable net assets at the acquisition date. Goodwill is not amortized, but in accordance with ASC 350, goodwill is tested for impairment annually and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. An impairment loss is recognized if the estimated fair value of a reporting unit is less than its net book value. Such loss is calculated as the difference between the estimated fair value of goodwill and its carrying value.

In 2019, the Company changed the annual date on which goodwill is tested for impairment from July 1st to October 1st to align with the annual impairment testing date of the Company’s Parent. This change did not accelerate, delay, avoid or cause an impairment charge, nor did this change result in adjustments to any previously issued financial statements. Goodwill was last assessed on October 1, 2019.

Intangible Assets

Intangible assets with a finite life are amortized over the estimated lives, ranging from seven to sixteen years, in accordance with ASC 350. Intangible assets subject to amortization are tested for impairment whenever events or changes in circumstances suggest that an asset's or asset group's carrying value may not be fully recoverable in accordance with ASC 360. Intangible assets with an indefinite useful life are tested for impairment at least annually. An impairment loss is recognized if the sum of the estimated discounted cash flows relating to the asset or asset group is less than the corresponding book value.

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Deferred IPO and Follow-On Offering Costs

The Company began incurring costs in connection with the filing of a Registration Statement on Form S-1 for an IPO in 2018 and Registration Statements on Form S-1 for follow-on offerings in 2019 and the first quarter of 2020. IPO and follow-on offering costs consist of legal, accounting, and other costs directly related to the Company’s efforts to raise capital. In accordance with ASC 505-10-25, Equity, these costs are recognized in additional paid-in capital within the consolidated statements of financial condition when the offering is effective. At March 31, 2020, $15.9 million of deferred costs related to the IPO and $3.0 million of deferred costs related to the follow-on offerings were recognized within additional paid-in capital on the consolidated statements of financial condition.  See Note 8 – Stockholders’ Equity and Note 18 – Subsequent Events.

Translation of Foreign Currency

Revenues and expenses denominated in foreign currencies are translated at the rate of exchange prevailing at the transaction date. Assets and liabilities denominated in foreign currencies are translated at the rate prevailing at the consolidated statements of financial condition date. Foreign currency re-measurement gains or losses on transactions in nonfunctional currencies are recognized in the consolidated statements of income. Gains or losses on translation in the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included as a component of comprehensive income.

Income Tax

The Corporation is subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and is taxed at prevailing corporate tax rates. TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly any taxable income generated by TWM LLC is passed through to and included in the taxable income of its members, including the Corporation. Income taxes also include unincorporated business taxes on income earned or losses incurred for conducting business in certain state and local jurisdictions, income taxes on income earned or losses incurred in foreign jurisdictions on certain operations and federal and state income taxes on income earned or losses incurred, both current and deferred, on subsidiaries that are taxed as corporations for U.S. tax purposes.

The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company measures deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse. Based on the weight of the positive and negative evidence considered, management believes that it is more likely than not that the Company will be able to realize its deferred tax assets in the future, therefore, no valuation allowance is necessary.

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (i) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to income taxes within the provision for income taxes in the consolidated statements of income. Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in the consolidated statements of financial condition.

The Company has elected to treat taxes due on future U.S. inclusions in taxable income under the global intangible low-taxed income (“GILTI”) provision of the Tax Cuts and Jobs Act as a current period expense when incurred.

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Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 focuses primarily on accounting for a transaction in which an entity obtains employee services in exchange for stock-based payments. Under ASC 718, the stock-based payments received by the employees of the Company are accounted for either as equity awards or as liability awards.

As an equity award, the Company measures and recognizes the cost of employee services received in exchange for awards of equity instruments based on their estimated fair values measured as of the grant date. These costs are recognized as an expense over the requisite service period, with an offsetting increase to additional paid-in capital.

As a liability award, the cost of employee services received in exchange for an award of equity instruments is generally measured based on the grant-date fair value of the award. The fair value of that award is remeasured subsequently at each reporting date through the settlement in accordance with ASC 505. Changes in the equity instrument's fair value during the requisite service period are recognized as compensation cost over that period.

For periods following the Reorganization Transactions and the IPO, the fair value of new equity instrument grants is determined based on the price of the Company’s Class A common stock on the grant date.

Under ASC 718, the grant-date fair value of stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. The grant-date fair value of stock-based awards that require future service, and are graded-vesting awards, are amortized over the relevant service period on a straight-line basis, with each tranche separately measured. The grant-date fair value of stock-based awards that require both future service and the achievement of Company performance-based conditions, are amortized over the relevant service period for the performance-based condition. If in a reporting period it is determined that the achievement of a performance target for a performance-based tranche is not probable, then no expense is recognized for that tranche and any expenses already recognized relating to that tranche in prior reporting periods are reversed in the current reporting period.

Prior to the IPO, the Company awarded options to management and other employees (collectively, the “Special Option Award”) under the Amended and Restated Tradeweb Markets Inc. Option Plan (the “Option Plan”). In accounting for the options issued under the Option Plan, compensation expense is measured and recognized for all awards based on their estimated fair values measured as of the grant date. Costs related to these options are recognized as an expense in the consolidated statements of income over the requisite service period, with an offsetting increase to additional paid-in capital. The non-cash stock-based compensation expense associated with the Special Option Award began being expensed in the second quarter of 2019 and will continue to be expensed over the following three years.

Determining the appropriate fair value model and calculating the fair value of the stock-based awards requires the input of highly subjective assumptions, including the expected life of the stock-based awards and the stock price volatility. The Company uses the Black-Scholes pricing model to value some of its stock-based awards.

Earnings Per Share

Basic earnings per share is computed by dividing the net income attributable to the Company's shares by the weighted-average number of the Company's shares outstanding during the period. For purposes of computing diluted earnings per share, the weighted-average number of the Company’s shares reflects the dilutive effect that could occur if securities that qualify as participating securities were converted into or exchanged or exercised for TWM LLC’s shares, in the pre-IPO period, and the Corporation’s Class A or Class B common stock, in the post-IPO period, using the treasury stock method, as applicable.

Shares of Class C and Class D common stock do not have economic rights in Tradeweb Markets Inc. and, therefore, are not participating securities for purposes of the computation of earnings per share.

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Fair Value Measurement

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Instruments that the Company owns (long positions) are marked to bid prices, and instruments that the Company has sold, but not yet purchased (short positions) are marked to offer prices. Fair value measurements do not include transaction costs.

The fair value hierarchy under ASC 820, Fair Value Measurement, prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Basis of Fair Value Measurement

A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

·

Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

·

Level 2: Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;

·

Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Recent Accounting Pronouncements – Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016‑13, Financial Instruments – Credit Losses. The ASU provides new guidance for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. ASU 2016-13 was adopted on January 1, 2020 using the modified retrospective method of adoption. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements. See to Note 13 – Credit Risk for additional information.

In January 2017, the FASB issued ASU 2017‑04, Intangibles – Goodwill and Other. The ASU simplifies the quantitative goodwill impairment test by eliminating the second step of the test. Under this ASU, impairment will be measured by comparing the estimated fair value of the reporting unit with its carrying value. The new guidance does not amend the optional qualitative assessment of goodwill impairment.  ASU 2017-04 was adopted on January 1, 2020. The adoption of this ASU did not impact the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations and include additional guidance in order to reduce complexity in accounting for income taxes. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 was early adopted on January 1, 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for all leases with an initial term in excess of twelve months. The asset reflects the present value of unpaid lease payments coupled with initial direct costs, prepaid lease payments and lease incentives. The

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amount of the lease liability is calculated as the present value of unpaid lease payments. ASU 2016-02 was adopted on January 1, 2019 using the modified retrospective method of adoption. Upon adoption, the Company:

·

Recorded right-of-use assets of $31.8 million,

·

Recorded a lease liability of $39.6 million,

·

Eliminated deferred rent of $4.9 million,

·

Eliminated leasehold interests of $2.9 million, and

·

Elected to take the optional package of practical expedients, which allows for no reassessment of

i.

whether any expired or existing contracts are or contain leases,

ii.

the lease classification for any expired or existing leases, and

iii.

initial direct costs for any existing leases.

 

 

3.          Restricted Cash

Cash has been segregated in a special reserve bank account for the benefit of brokers and dealers under SEC Rule 15c3-3. The Company computes the proprietary accounts of other broker-dealers (“PAB”) reserve, which requires the Company to maintain minimum segregated cash in the amount of total credits per the reserve computation. As of March 31, 2020 and December 31, 2019, cash in the amount of $1.0 million has been segregated in the PAB reserve account exceeding the requirements pursuant to SEC Rule 15c3-3. 

4.          Goodwill and Intangible Assets

Goodwill

The carrying amount of goodwill at March 31, 2020 and December 31, 2019 was $2.7 billion.

Intangible Assets

Intangible assets with an indefinite useful life consisted of the following at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

 

 

    

Amount

Licenses

 

$

168,800

Tradename

 

 

154,300

Total

 

$

323,100

 

Intangible assets that are subject to amortization consisted of the following at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

 

Amortization

 

 

 

 

Accumulated

 

Net Carrying

 

 

 

 

Accumulated

 

Net Carrying

 

    

Period

    

Cost

    

Amortization

    

Amount

    

Cost

    

Amortization

    

Amount

Customer relationships

 

12 Years

 

$

928,200

 

$

(116,025)

 

$

812,175

 

$

928,200

 

$

(96,687)

 

$

831,513

Content and data

 

7 Years

 

 

154,400

 

 

(33,086)

 

 

121,314

 

 

154,400

 

 

(27,572)

 

 

126,828

 

 

 

 

$

1,082,600

 

$

(149,111)

 

$

933,489

 

$

1,082,600

 

$

(124,259)

 

$

958,341

 

Amortization expense for definite-lived intangible assets was $24.9 million for each of the three months ended March 31, 2020 and 2019.

 

 

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5.          Revenue

Revenue Recognition

The Company earns transaction fees from transactions executed on the Company’s trading platforms through various fee plans. Transaction fees are generated both on a variable and fixed price basis and vary by geographic region, product type and trade size. For variable transaction fees, the Company charges clients fees based on the mix of products traded and the volume of transactions executed. Transaction fee revenue is recorded at a point in time when the trade occurs and is generally billed monthly.

The Company earns subscription fees from granting access to institutional investors to the Company's electronic marketplaces. Subscription fees are recognized into income in the period that access is provided on a monthly basis. Also included in subscription fees are viewer fees earned monthly from institutional investors accessing fixed income market data. The frequency of subscription fee billings varies from monthly to annually, depending on contract terms. Fees received by the Company which are not yet earned are included in deferred revenue on the consolidated statements of financial condition until the revenue recognition criteria has been met.

The Company earns commission revenue from its electronic and voice brokerage services on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy and sell price of the transacted product. Securities transactions and related commission income for brokerage transactions are recognized and recorded on a trade-date basis. Commission revenue is collected by the Company when the trade settles or is billed monthly.

The Company earns fees from Refinitiv relating to the sale of market data to Refinitiv, which redistributes that data. Included in these fees, which are billed quarterly, are real-time market data fees which are recognized in the period that the data is provided, generally on a monthly basis, and historical data sets which are recognized when the historical data set is provided to Refinitiv. Significant judgements used in accounting for this contract include:

·

The provision of real-time market data feeds and annual historical data sets are distinct performance obligations.

·

The performance obligations under this contract are recognized over time from the initial delivery of the data feeds or each historical data set until the end of the contract term.

·

Determining the transaction price for the performance obligations by using a market assessment analysis. Inputs in this analysis include a consultant study which determined the overall value of the Company's market data and pricing information for historical data sets provided by other companies.

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Some revenues earned by the Company have fixed fee components, such as monthly minimums or fixed monthly fees, and variable components, such as transaction based fees. The breakdown of revenues between fixed and variable revenues, in thousands, for the three months ended March 31, 2020 and 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31, 2020

 

March 31, 2019

 

 

(in thousands)

 

(in thousands)

 

    

Variable

    

Fixed

   

Variable

    

Fixed

Revenues