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Tradeweb Markets Inc. - Quarter Report: 2020 March (Form 10-Q)

Table of Contents

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

115,337

 

$

25,487

 

$

78,915

 

$

23,725

Subscription Fees including Refinitiv market data fees

 

 

465

 

 

48,646

 

 

455

 

 

47,606

Commissions

 

 

32,441

 

 

10,052

 

 

24,310

 

 

9,887

Other

 

 

110

 

 

2,068

 

 

303

 

 

1,591

Gross revenue

 

$

148,353

 

$

86,253

 

$

103,983

 

$

82,809

 

Deferred Revenue

The Company records deferred revenue when cash payments are received or due in advance of services to be performed. The recognized revenue and remaining balance is shown below (in thousands):

 

 

 

 

 

    

Amount

Deferred revenue balance - December 31, 2019

    

$

23,990

New billings

 

 

29,273

Revenue recognized

 

 

(26,994)

Deferred revenue balance - March 31, 2020

 

$

26,269

 

 

6.          Income Taxes

The Company’s provision for income taxes includes U.S. federal, state, local and foreign taxes. The Company’s effective tax rate for the three months ended March 31, 2020 and 2019 was approximately 20.2% and 10.1%, respectively.

 

The effective tax rate for the three months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to the effect of non-controlling interests partially offset by state, local and foreign taxes. The effective tax rate for the three months ended March 31, 2019 differed from the U.S. federal statutory rate of 21.0% primarily due to the fact that, prior to the Reorganization Transactions, income taxes consisted only of business taxes incurred by TWM LLC and certain subsidiaries for business conducted in certain state, local and foreign jurisdictions as well as federal, state and local taxes for certain subsidiaries that are taxed as corporations for U.S. tax purposes.

 

As a result of the Reorganization Transactions, 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. The Company’s actual effective tax rate will be impacted by the Corporation’s ownership share of TWM LLC, which will increase over time as the Continuing LLC Owners redeem or exchange their LLC Interests for shares of Class A common stock or Class B common stock, as applicable, or the Corporation purchases LLC Interests from the Continuing LLC Owners.

 

The Company's consolidated effective tax rate will vary from period to period depending on redemptions, exchanges or purchases of LLC Interests as described above, changes in the geographic mix of its earnings and changes in tax legislation and tax rates.

The Company expects to obtain an increase in its share of the tax basis of the assets of TWM LLC when LLC Interests are redeemed or exchanged by the Continuing LLC Owners and in connection with certain other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that the Corporation would otherwise pay in the

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future to various tax authorities. Pursuant to the Tax Receivable Agreement, the Corporation is required to make cash payments to the Continuing LLC Owners equal to 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that the Corporation actually realizes (or in some circumstances are deemed to realize) as a result of certain future tax benefits to which we may become entitled. The Corporation expects to benefit from the remaining 50% of tax benefits, if any, that the Corporation may actually realize. See Note 7 – Tax Receivable Agreement. The tax benefit has been recognized in deferred tax asset on the March 31, 2020 consolidated statement of financial condition.

As a result of the Refinitiv Contribution, the Company assumed the tax liabilities of the contributed entity. The contributed entity is under audit by the State of New Jersey for the tax years 2012 – 2015 and is appealing a tax assessment from an audit by the State of New Jersey for the tax years 2008 – 2011. At March 31, 2020, the tax liability related to the Refinitiv Contribution is $2.7 million and is included within accounts payable, accrued expenses and other liabilities on the consolidated statement of financial condition.  The Company is indemnified by Refinitiv for tax liabilities that were assumed by the Company as a result of the Refinitiv Contribution. See Note 11 – Related Party Transactions.

 

7.          Tax Receivable Agreement

In connection with the Reorganization Transactions, the Corporation entered into the Tax Receivable Agreement with TWM LLC and the Continuing LLC Owners, which provides for the payment by the Corporation to a Continuing LLC Owner of 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that the Corporation actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of TWM LLC’s assets resulting from (a) the purchase of LLC Interests from such Continuing LLC Owner, including with the net proceeds from the IPO, the October 2019 follow-on offering and any future offering or (b) redemptions or exchanges by such Continuing LLC Owner of LLC Interests for shares of Class A common stock or Class B common stock or for cash, as applicable, and (ii) certain other tax benefits related to the Corporation making payments under the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are made annually based on the actual tax savings realized by the Corporation in its previous tax year.

As of December 31, 2019, the liability was $240.8 million, primarily due to the purchase of LLC Interests by the Corporation using the net proceeds of the IPO and October 2019 follow-on offering as well as additional exchanges of LLC Interests by Continuing LLC Owners. During the first quarter of 2020, the liability increased to $252.0 million, primarily due to additional exchanges of LLC Interests by Continuing LLC Owners. Substantially all payments due under the tax receivable agreement are payable over the fifteen years following the purchase of LLC Interests from Continuing LLC Owners or redemption or exchanges by Continuing LLC Owners of LLC Interests.

The Corporation accounts for the income tax effects resulting from taxable redemptions or exchanges of LLC Interests by the Continuing LLC Owners for shares of Class A common stock or Class B common stock or cash, as the case may be, and purchases by the Corporation of LLC Interests from the Continuing LLC Owners by recognizing an increase in deferred tax assets, based on enacted tax rates at the date of each redemption or exchange, as the case may be. Further, the Corporation evaluates the likelihood that it will realize the benefit represented by the deferred tax asset, and, to the extent that the Corporation estimates that it is more likely than not that it will not realize the benefit, it reduces the carrying amount of the deferred tax asset with a valuation allowance.

The impact of any changes in the projected obligations under the Tax Receivable Agreement as a result of changes in the geographic mix of the Company’s earnings, changes in tax legislation and tax rates or other factors that may impact the Corporation’s tax savings will be reflected in income before taxes on the consolidated statement of income in the period in which the change occurs.

 

8.          Stockholders’ Equity

Initial Public Offering and Reorganization Transactions

 

As described in Note 1 – Organization, in April 2019, the Corporation completed its IPO of 46,000,000 shares of Class A common stock at a public offering price of $27.00, which included 6,000,000 shares of Class A common stock issued

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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 LLC Interests from certain of the Bank Stockholders (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.

 

In connection with the IPO, the Reorganization Transactions described below were completed.

 

Amendment and Restatement of Certificate of Incorporation

 

On April 3, 2019, the certificate of incorporation of Tradeweb Markets Inc. was amended and restated to, among other things, provide for the authorization of (i) 250,000,000 shares of preferred stock with a par value of $0.00001 per share (ii) 1,000,000,000 shares of Class A common stock with a par value of $0.00001 per share; (iii) 450,000,000 shares of Class B common stock with a par value of $0.00001 per share; (iv) 350,000,000 shares of Class C common stock with a par value of $0.00001 per share; and (v) 300,000,000 shares of Class D common stock with a par value of $0.00001 per share.

 

Each share of Class A common stock and Class C common stock entitles its holder to one vote on all matters presented to the Corporation’s stockholders generally. Each share of Class B common stock and Class D common stock entitles its holder to ten votes on all matters presented to the Corporation’s stockholders generally. The holders of Class C common stock and Class D common stock have no economic interests in the Corporation (where “economic interests” means the right to receive any dividends or distributions, whether cash or stock, in connection with common stock). These attributes are summarized in the following table:

 

 

 

 

 

 

 

 

 

Class of
Common Stock

    

Par
Value

    

Votes

    

Economic
Rights

Class A common stock

 

$

0.00001

 

1

 

Yes

Class B common stock

 

$

0.00001

 

10

 

Yes

Class C common stock

 

$

0.00001

 

1

 

No

Class D common stock

 

$

0.00001

 

10

 

No

 

Holders of outstanding shares of Class A common stock, Class B common stock, Class C common stock and Class D common stock will vote together as a single class on all matters presented to the Corporation’s stockholders for their vote or approval, except as otherwise required by applicable law.

 

Holders of Class B common stock may from time to time exchange all or a portion of their shares of Class B common stock for newly issued shares of Class A common stock on a one-for-one basis (in which case their shares of Class B common stock will be cancelled on a one-for-one basis upon any such issuance). Continuing LLC Owners that hold shares of Class D common stock may from time to time exchange all or a portion of their shares of Class D common stock for newly issued shares of Class C common stock on a one-for-one basis (in which case their shares of Class D common stock will be cancelled on a one-for-one basis upon such issuance). In addition, with respect to each Bank Stockholder that holds shares of Class D common stock, immediately prior to the occurrence of any event that would cause the combined voting power held by such Bank Stockholder to exceed 4.9%, the minimum number of shares of Class D common stock of such Bank Stockholder that would need to convert into shares of Class C common stock such that the combined voting power held by such Bank Stockholder would not exceed 4.9% will automatically convert into shares of Class C common stock.

 

Each share of Class B common stock will automatically convert into one share of Class A common stock and each share of Class D common stock will automatically convert into one share of Class C common stock (i) immediately prior to any sale or other transfer of such share by a holder or its permitted transferees to a non-permitted transferee or (ii) once the Refinitiv Owners and their affiliates together no longer beneficially own a number of shares of common stock and LLC Interests that together entitle them to at least 10% of TWM LLC’s economic interest. Holders of LLC Interests that receive shares of Class C common stock upon any such conversion may continue to elect to have their LLC Interests redeemed for newly issued shares of Class A common stock as described below (in which case their shares of Class C common stock will be cancelled on a one-for-one basis upon such issuance).

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In addition, the Corporation’s board of directors adopted the Omnibus Equity Plan, under which equity awards may be made in respect of shares of Class A common stock. It also assumed sponsorship of the Option Plan and a PRSU plan formerly sponsored by TWM LLC. See Note 10 – Stock-Based Compensation Plans.

 

Recapitalization of Tradeweb Markets LLC

 

On April 4, 2019, the TWM LLC Agreement was amended and restated to, among other things, (i) provide for the 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.

 

All of the shares of TWM LLC outstanding prior to the Reorganization Transactions were exchanged for 222,222,197 LLC Interests. TWM LLC’s outstanding shares prior to the Reorganization Transactions consisted of the following classes of shares:

 

 

 

 

 

    

Shares

Class A

 

146,333

Class C

 

447

Class P (A)

 

6,887

Class P (C)

 

 2

Class P-1 (A)

 

6,094

Class P-1 (C)

 

232

 

The TWM LLC Agreement requires that TWM LLC at all times maintain (i) a one-to-one ratio between the number of shares of Class A common stock and Class B common stock issued by the Corporation and the number of LLC Interests owned by the Corporation and (ii) a one-to-one ratio between the number of shares of Class C common stock and Class D common stock issued by the Corporation and the number of LLC Interests owned by the holders of such Class C common stock and Class D common stock.

 

LLC Interests held by Continuing LLC Owners are redeemable in accordance with the TWM LLC Agreement, at the election of such holders, for newly issued shares of Class A common stock or Class B common stock, as the case may be, on a one-for-one basis (and such holders’ shares of Class C common stock or Class D common stock, as the case may be, will be cancelled on a one-for-one basis upon any such issuance). In the event of such election by a Continuing LLC Owner, the Corporation may, at its option, effect a direct exchange of Class A common stock or Class B common stock for such LLC Interests of such Continuing LLC Owner in lieu of such redemption. In addition, the Corporation’s board of directors may, at its option, instead of the foregoing redemptions or exchanges of LLC Interests, cause the Corporation to make a cash payment equal to the volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed or exchanged (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the TWM LLC Agreement.

 

Issuance and Cancellation of Common Stock

 

·

As a result of the Refinitiv Contribution, the Corporation received 96,933,192 LLC Interests and the Refinitiv Direct Owner received 96,933,192 shares of Class B common stock.

 

·

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 (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).

 

Following the completion of the Reorganization Transactions, including the IPO and the application of the proceeds therefrom as described above, (i) the investors in the IPO collectively owned 46,000,000 shares of Class A common

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stock, representing 2.7% of the combined voting power of all of the Corporation’s common stock and, through the Corporation’s ownership of LLC Interests, 20.7% of the economic interest in TWM LLC; (ii) the Refinitiv Direct Owner owned 96,933,192 shares of Class B common stock, representing 56.4% of the combined voting power of all of the Corporation’s common stock and, through the Corporation’s ownership of LLC Interests, 43.6% of the economic interest in TWM LLC; (iii) the Refinitiv LLC Owner owned 22,988,329 shares of Class D common stock, representing 13.4% of the combined voting power of all of the Corporation’s common stock, and 22,988,329 LLC Interests, representing 10.3% of the economic interest in TWM LLC, (iv) the Continuing LLC Owners (other than the Refinitiv LLC Owner) collectively owned 10,006,269 shares of Class C common stock and 46,294,407 shares of Class D common stock, representing 27.5% of the combined voting power of all of the Corporation’s common stock, and 56,300,676 LLC Interests, representing 25.3% of the economic interest in TWM LLC; and (v) the Corporation owned 142,933,192 LLC Interests, representing 64.3% of the economic interest in TWM LLC.

 

October 2019 Follow-On Offering

 

In the fourth quarter of 2019, Tradeweb Markets Inc. completed an underwritten follow-on offering of 19,881,059 shares of Class A Common stock at a public offering price of $42.00 per share, which included 2,593,181 shares of Class A common stock issued pursuant to the underwriters’ option to purchase additional shares of Class A common stock. Tradeweb Markets Inc. received net proceeds of $810.0 million, after deducting underwriting discounts and commissions but before deducting estimated offering expenses, which were used to purchase (i) 19,835,666 issued and outstanding LLC Interests from certain of the Bank Stockholders and certain of our executive officers (and the corresponding shares of Class C common stock and/or Class D common stock held by such holders were cancelled) and (ii) 45,393 issued and outstanding shares of Class A common stock from certain of our executive officers (which shares of Class A common stock were cancelled), at a purchase price per interest and share equal to the public offering price of $42.00, less the underwriting discounts and commissions payable thereon.

 

Redemptions and Exchanges of LLC Interests

 

In addition to the IPO and the October 2019 follow-on offering transactions described above, during the three months ended March 31, 2020, certain Continuing LLC Owners exercised their redemption rights under the TWM LLC Agreement, pursuant to which 1,920,941 LLC Interests were exchanged for 1,920,941 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 939,000 shares of Class C common stock and 981,941 shares of Class D common stock were surrendered by these Continuing LLC Owners and cancelled. Additionally, in connection with these exchanges, Tradeweb Markets Inc. received 1,920,941 LLC Interests, increasing its total ownership interest in TWM LLC.

 

As a result of the Reorganization Transactions, the IPO, the October 2019 follow-on offering and other exchanges and equity activity, as of March 31, 2020:

 

·

The public investors collectively owned 70,670,440 shares of our Class A common stock, representing 4.6% of the combined voting power of Tradeweb Markets Inc.’s issued and outstanding common stock and indirectly, through Tradeweb Markets Inc., owned 31.4% of the economic interest in TWM LLC;

 

·

Refinitiv collectively owned 96,933,192 shares of our Class B common stock and 22,988,329 shares of our Class D common stock, representing 77.6% of the combined voting power of Tradeweb Markets Inc.’s issued and outstanding common stock and directly and indirectly, through Tradeweb Markets Inc., owned 53.3% of the economic interest in TWM LLC; and

 

 

·

The Bank Stockholders that continue to own LLC Interests collectively owned 7,389,983 shares of our Class C common stock and 26,730,623 shares of our Class D common stock, representing 17.8% of the combined voting power of Tradeweb Markets Inc.’s issued and outstanding common stock and directly and indirectly, through Tradeweb Markets Inc., owned 15.2% of the economic interest in TWM LLC.

 

 

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9.          Non-Controlling Interests

In connection with the Reorganization Transactions, Tradeweb Markets Inc. became the sole manager of TWM LLC and, as a result of this control, and because Tradeweb Markets Inc. has a substantial financial interest in TWM LLC, consolidates the financial results of TWM LLC into its consolidated financial statements. The non-controlling interests balance reported on the consolidated statements of financial condition represents the economic interests of TWM LLC held by the holders of LLC Interests other than Tradeweb Markets Inc. Income or loss is attributed to the non-controlling interests based on the relative ownership percentages of LLC Interests held during the period by Tradeweb Markets Inc. and the other holders of LLC Interests.

 

The following table summarizes the ownership interest in Tradeweb Markets LLC:

 

 

 

 

 

 

 

 

March 31, 2020

 

 

LLC

 

Ownership

 

    

Interests

    

%

Number of LLC Interests held by Tradeweb Markets Inc.

 

167,603,632

 

74.5%

Number of LLC Interests held by non-controlling interests

 

57,261,214

 

25.5%

Total LLC Interests outstanding

 

224,864,846

 

100.0%

 

LLC Interests held by the Continuing LLC Owners are redeemable in accordance with the TWM LLC Agreement at the election of the members for shares of Class A common stock or Class B common stock, on a one-for-one basis or, at the Company's option, a cash payment in accordance with the terms of the TWM LLC Agreement. See Note 8 – Stockholders’ Equity.

 

The following table summarizes the impact on equity due to changes in the Corporation’s ownership interest in Tradeweb Markets LLC (in thousands):

 

 

 

 

 

 

 

Three Months Ended

Net Income Attributable to Tradeweb Markets Inc. and Transfers (to) from the Non-Controlling Interests

 

March 31, 2020

Net income attributable to Tradeweb Markets Inc.

 

$

43,928

Transfers (to) from non-controlling interests:

 

 

 

Change in non-controlling interests as a result of ownership changes

 

 

45,443

Net transfers (to) from non-controlling interests

 

 

45,443

Change from net income attributable to Tradeweb Markets Inc. and transfers (to) from non-controlling interests

 

$

89,371

 

 

 

 

 

 

 

 

 

10.          Stock-Based Compensation Plans

Under the Omnibus Equity Plan, the Company is authorized to issue up to 8,841,864 new shares of Class A common stock to employees, officers and non-employee directors. Under this plan, the Company may grant awards in respect of shares of Class A common stock, including performance-based restricted share units (“PRSUs”), stock options, restricted stock units (“RSUs”) and dividend equivalent rights. The awards may have performance-based and time-based vesting conditions. Stock options have a maximum contractual term of 10 years.

PRSUs (Equity-Settled)

 

Equity-settled PRSUs are promises to issue shares of Class A common stock at the end of a three-year cliff vesting period. The fair value of the equity-settled PRSUs is calculated on the grant date using the stock price of the Class A common stock. The number of shares a participant will receive upon vesting is determined in part based on a performance modifier, which is adjusted in accordance with the financial performance of the Company in the grant year. The performance modifier may vary between 0% (minimum) and 200% (maximum) of the target (100%) award amount.

 

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The following table summarizes information for equity-settled PRSUs of the Company:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

PRSUs (Equity-Settled)

    

March 31, 2020

    

March 31, 2019

PRSUs (equity-settled) granted

 

 

360,609

 

 

554

Weighted-average grant-date fair value

 

$

38.87

 

$

31,563

PRSUs (equity-settled) compensation expense (in thousands)

 

$

5,407

 

$

4,674

Income tax expense (benefit)  (in thousands)

 

$

(5,492)

 

$

(276)

Unrecognized compensation expense  (in thousands)

 

$

53,508

 

$

N/A

Weighted-average recognition period for unrecognized compensation expense

 

 

2.14 years

 

 

N/A

 

PRSUs (Cash-Settled)

 

The Company previously granted cash-settled PRSUs, some of which are still outstanding and are accounted for as liability awards. The Company measures the cost of employee services received in exchange for the award based on the fair value of the Company and the value of accumulated dividend rights associated with each award. The fair value of that award is remeasured subsequently at each reporting date through to settlement. Changes in the award's fair value during the requisite service period is recognized as compensation cost over that period.

The following table summarizes information for cash-settled PRSUs:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

PRSUs (Cash-Settled)

    

March 31, 2020

  

March 31, 2019

 

PRSUs (cash-settled) granted

 

 

 —

 

 

 —

 

Weighted-average grant-date fair value

 

$

 —

 

$

 —

 

PRSUs (cash-settled) compensation expense  (in thousands)

 

$

10

 

$

100

 

Income tax expense (benefit)  (in thousands)

 

$

 3

 

$

(14)

 

Unrecognized compensation expense  (in thousands)

 

$

228

 

$

N/A

 

Weighted-average recognition period for unrecognized compensation expense

 

 

0.75 years

 

 

N/A

 

 

Options

 

Prior to the IPO, the Company awarded options to management and other employees under the Option Plan. Each option award vests one half based solely on the passage of time and one half only if the Company achieves certain performance targets. The time vesting portion of the options has a four-year graded vesting schedule, with accelerated vesting for time-based options granted prior to the IPO with vesting dates of January 1, 2021 and 2022 upon the completion of the IPO.  In the post-IPO period, the Company awarded options under the Option Plan with a four year-graded vesting schedule.  One half of these awards vest solely based on the passage of time, without accelerated vesting, and one half vest only if the Company achieves certain performance targets. The Company may elect to net-settle exercised options by reducing the shares of Class A common stock to be issued upon such exercise by the number of shares of Class A common stock having a fair market value on the date of exercise equal to the aggregate option price. The Company can also elect, upon exercise, to reduce the shares to be issued by the number of shares having a fair market value on the date of exercise equal to employee payroll taxes. The Company may then pay these employee payroll taxes from the Company’s cash.

 

In accounting for the options issued under the Option Plan, the Company measures and recognizes compensation expense for all awards based on their estimated fair values measured as of the grant date. These options are exercisable only any time following the closing of an initial public offering or during a 15‑day period following a change in control of the Company (and certain other sales of equity by the Company’s shareholders). As a result, expense recognition commenced upon the completion of the IPO in April 2019.

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The following table summarizes information for options:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

Options

    

March 31, 2020

  

March 31, 2019

Options granted

 

 

 —

 

 

130

Weighted-average grant-date fair value

 

$

 —

 

$

4,132

Option compensation expense  (in thousands)

 

$

2,249

 

$

 —

Income tax expense (benefit) (in thousands)

 

$

(10,515)

 

$

 —

Unrecognized compensation expense  (in thousands)

 

$

7,021

 

$

N/A

Weighted-average recognition period for unrecognized compensation expense

 

 

1.97 years

 

 

N/A

 

RSUs

 

In 2020, the Company expanded its restricted stock unit (“RSU”) grants under the Omnibus Equity Plan to employees. Previously, RSU grants were limited to non-employee directors. RSUs are promises to issue shares of Class A common stock at the end of a vesting period. RSUs granted to employees vest one-third each year over a three-year period. RSUs granted to non-employee directors vest after one year. The fair value of the RSUs is calculated on the grant date using the stock price of the Class A common stock.

 

The following table summarizes information for RSUs:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

RSUs

    

March 31, 2020

    

March 31, 2019

RSUs granted

 

 

465,222

 

 

 —

Weighted-average grant-date fair value

 

$

38.87

 

$

 —

RSUs compensation expense  (in thousands)

 

$

315

 

$

 —

Income tax expense (benefit)  (in thousands)

 

$

(71)

 

$

 —

Unrecognized compensation expense  (in thousands)

 

$

17,836

 

$

N/A

Weighted-average recognition period for unrecognized compensation expense

 

 

2.96 years

 

 

N/A

 

 

 

 

 

11.          Related Party Transactions

The Company enters into transactions with Refinitiv and its affiliates which are considered to be related party transactions. The Company also enters into transactions with the Bank Stockholders and their respective affiliates. Prior to the Reorganization Transactions, the Bank Stockholders were collectively considered to be related parties of the Company. As a result of the Reorganization Transactions, they are no longer considered to be related parties. As a result, the related party transactions listed below include transactions with affiliates of Refinitiv for all periods presented and only includes transactions with affiliates of the Bank Stockholders for pre-IPO periods.

At March 31, 2020 and December 31, 2019, the following balances with such affiliates were included in the consolidated statements of financial condition in the following line items (in thousands):

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

Accounts receivable

 

$

2,293

 

$

 —

Receivable from affiliates

 

 

1,506

 

 

2,525

Other assets

 

 

552

 

 

 —

Deferred revenue

 

 

4,459

 

 

4,733

Payable to affiliates

 

 

2,288

 

 

1,506

 

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The following balances with such affiliates were included in the consolidated statements of income in the following line items (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2020

    

March 31, 2019

Revenue:

 

 

 

 

 

 

Transaction fees (1)

 

$

 —

 

$

59,643

Subscription fees (1)

 

 

 —

 

 

5,670

Commissions (1)

 

 

 —

 

 

16,186

Refinitiv market data fees (2)

 

 

14,628

 

 

13,616

Operating Income:(3)

 

 

 

 

 

 

Interest income

 

 

 —

 

 

208

 

 

 

 

 

 

 

Shared Services Fees (4) :

 

 

 

 

 

 

Technology and communications

 

 

740

 

 

740

General and administrative

 

 

24

 

 

180

Occupancy

 

 

46

 

 

155

 

(1)

For pre-IPO periods, represents fees and commissions from affiliates of the Bank Stockholders.

(2)

The Company maintains a market data license agreement with Refinitiv. Under the agreement, the Company delivers to Refinitiv certain market data feeds which Refinitiv redistributes to its customers. The Company earns license fees and royalties for these feeds.

(3)

For pre-IPO periods, represents interest income from money market funds invested with and savings accounts deposited with affiliates of the Bank Stockholders.

(4)

The Company maintains a shared services agreement with Refinitiv. Under the terms of the agreement, Refinitiv provides the Company with certain real estate, payroll, benefits administration, insurance, content, financial reporting and tax support.

The Company reimburses affiliates of Refinitiv for expenses paid on behalf of the Company for various services including salaries and bonuses, marketing, professional fees, communications, data costs and certain other administrative services. For the three months ended March 31, 2020 and 2019, the Company reimbursed such affiliates approximately $0.3 million and $1.0 million, respectively, for these expenses.

The Company is indemnified by Refinitiv for any tax liabilities that existed in the entity contributed by Refinitiv as a result of the Refinitiv Contribution.  At March 31, 2020, $2.7 million is included in other assets on the consolidated statement of financial condition related to this indemnification.

The Company engaged Blackstone Advisory Partners L.P., an affiliate of Blackstone, to provide certain financial consulting services in connection with the IPO and the October 2019 follow-on offering for a fee of $1.0 million and $0.5 million, respectively, which fee, with respect to the October 2019 follow-on offering, was reimbursed by the underwriters. $1.5 million is included in additional paid-in capital on the March 31, 2020 consolidated statement of financial condition related to these offering costs.

 

12.          Fair Value of Financial Instruments

Certain financial instruments that are carried on the consolidated statements of financial condition are carried at amounts that approximate fair value. These instruments include receivables from/payables to brokers and dealers and clearing organizations, deposits with clearing organizations and accounts receivable.

The Company's money market funds are classified within level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

The Company has no instruments that are classified within level 2 or level 3 of the fair value hierarchy.

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The fair value measurements are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

active Markets

 

Significant

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

    

Assets

    

Inputs

    

Inputs

    

 

 

Successor

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

255,265

 

$

 —

 

$

 —

 

$

255,265

 

 

$

255,265

 

$

 —

 

$

 —

 

$

255,265

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

219,158

 

$

 —

 

$

 —

 

$

219,158

 

 

$

219,158

 

$

 —

 

$

 —

 

$

219,158

 

 

13.          Credit Risk

In the normal course of business the Company, as agent, executes transactions with, and on behalf of, other brokers and dealers. If the agency transactions do not settle because of failure to perform by either counterparty, the Company may be obligated to discharge the obligation of the non-performing party and, as a result, may incur a loss if the market value of the security is different from the contract amount of the transaction.

A substantial number of the Company's transactions are collateralized and executed with, and on behalf of, a limited number of broker-dealers. The Company's exposure to credit risk associated with the nonperformance of these clients in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the clients' ability to satisfy their obligations to the Company.

From time to time, the Company enters into agreements to repurchase to facilitate the clearance of securities.  Credit exposure related to these agreements to repurchase, including the risk related to a decline in market value of collateral (pledged or received), is managed by entering into agreements to repurchase with overnight or short-term maturity dates and only entering into repurchase transactions with netting members of the Fixed Income Clearing Corporation (“FICC”). The FICC requires dealer netting members to maintain a minimum of $25 million in equity capital and $10 million in excess net capital. The FICC operates a continuous net settlement system, whereby as trades are submitted and compared the FICC becomes the counterparty. The FICC also marks to market collateral on a daily basis, requiring member firms to pay or receive margin amounts as part of their daily funds settlement.

The Company does not expect nonperformance by counterparties in the above situations. However, the Company's policy is to monitor its market exposure and counterparty risk. In addition, the Company has a policy of reviewing, as considered necessary, the credit standing of each counterparty with which it conducts business.

Allowance for Credit Losses

The Company may be exposed to credit risk regarding its receivables, which are primarily receivables from financial institutions, including investment managers and broker-dealers. At March 31, 2020, the Company maintained an allowance for credit losses of $0.2 million with regard to these receivables. At December 31, 2019, the allowance for doubtful accounts was $0.2 million.

The Company maintains an allowance for credit losses based upon 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. The Company has evaluated its loss assumptions as a result of the COVID-19 pandemic and determined the current estimate of expected credit losses remains reasonable due to continued strong collections and no deterioration in our accounts receivable aging.

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Account balances are pooled based on the following risk characteristics:

1.

Geographic location

2.

Transaction fee type (billing type)

3.

Legal entity

 

Write-Offs

 

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. This determination is based on careful analysis of individual receivables and aging schedules, which are disaggregated based on the risk characteristics described above. Based on current policy, this generally occurs when the receivable hits 360 days past due.

 

The following table presents the activity in the allowance for credit losses for accounts receivable for the period ended March 31, 2020 (in thousands):

 

 

 

 

Amount

Beginning balance, prior to adoption of ASC 326 - December 31, 2019

$

195

Current-period provision for expected credit losses

 

62

Write-offs charged against the allowance

 

(33)

Recoveries collected

 

(74)

Ending balance - March 31, 2020

$

150

 

 

 

14.          Commitments and Contingencies

In the normal course of business, the Company enters into user agreements with its dealers which provide the dealers with indemnification from third parties in the event that the electronic marketplaces of the Company infringe upon the intellectual property or other proprietary right of a third party. The Company's exposure under these user agreements is unknown as this would involve estimating future claims against the Company which have not yet occurred. However, based on its experience, the Company expects the risk of a material loss to be remote.

The Company has been named as a defendant, along with other financial institutions, in antitrust class actions (consolidated into two actions) relating to trading practices in United States Treasury securities auctions. The Company has filed a motion to dismiss the actions, belie