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 |
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
oTRANSITION 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)
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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. o☒ Yes x☐ 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). x☒ Yes o☐ 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 |
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Smaller reporting company |
| Emerging growth company |
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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. x☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o☐ Yes x☒ No No
Securities registered pursuant to Section 12(b) of the Act:
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Class of Stock |
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|
| Shares Outstanding as of | ||
Class A Common Stock, par value $0.00001 per share |
|
| 63,674,649 |
Class B Common Stock, par value $0.00001 per share |
|
| 96,933,192 |
Class C Common Stock, par value $0.00001 per share |
|
| 8,881,156 |
Class D Common Stock, par value $0.00001 per share |
|
| 52,947,070 |
TRADEWEB MARKETS INC.
|
TRADEWEB MARKETS INC.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
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 that were completed subsequent to March 31, 2019 (the “Reorganization Transactions”) that were completed in connection with Tradeweb Markets Inc.’s initial public offering (“IPO”(the “IPO”), which was completedclosed on April 8, 2019. Accordingly, because Tradeweb Markets Inc. had no business transactions or activities and no substantial assets or liabilities during the periods presented in this Quarterly Report on Form 10-Q and because the Reorganization Transactions had not been completed as of such date, we believe that it is informative to provide the financial statements and various other disclosures of TWM LLC as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018. For more information regarding the transactions described above, see Note 41—Organization to the unaudited financial statements of Tradeweb Markets Inc. and Note 18 to theour unaudited consolidated financial statements of Tradeweb Markets LLC, each containedincluded 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 September 30, 2019, 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,“We,” “us,” “our,” the “Company,” “Tradeweb” and similar references refer: (i) on or prior to the completion of the Reorganization Transactions including the IPO, 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 including the IPO, 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. |
· “Bank Stockholders” refer collectively to entities affiliated with the following clients: Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated (a subsidiary of Bank of America Corporation), Morgan Stanley & Co. LLC, RBS Securities Inc., UBS Securities LLC and Wells Fargo Securities, LLC.
· “Continuing“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 continuedcontinue to own LLC Interests immediately prior toafter the closingcompletion of the IPO whoand 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
3
connection with the completion of the Reorganization Transactions.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“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“LLC Interests” refer to the single class of newly issued common membership interests of TWM LLC.LLC issued in connection with the Reorganization Transactions.
· “Original“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”“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“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“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 expected dividend policy and our expectations, beliefs, plans, strategies, objectives, prospects or assumptions orregarding future events, including the pending LSEG Transaction, our performance or performance,otherwise, contained in this Quarterly Report on Form 10-Q 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. 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;
4
· 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 dependence on third parties for certain market data and certain key functions;
·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 theour $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 policypayments 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 “Risk Factors” in our final prospectus, dated April 3, 2019 (the “IPO Prospectus”), filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule
424(b) under the Securities Act, relating to our IPO,
· | other risks and uncertainties, including those listed under “Risk Factors” in our final prospectus, dated October 17, 2019 (the “October Prospectus”), filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act, relating to our follow-on offering, and in other filings we may make from time to time with the SEC. |
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 andor 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 andor liquidity, and events
5
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.
6
PART I — FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
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Tradeweb Markets Inc. and Subsidiaries
Consolidated Statements of Financial Condition
(in thousands, except share and per share data)
(Unaudited)
|
| March 31, 2019 |
| December 31, 2018 |
| ||
Assets |
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Cash |
| $ | 100 |
| $ | 100 |
|
Total assets |
| $ | 100 |
| $ | 100 |
|
Stockholder’s Equity |
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|
|
|
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Common Stock, par value $0.01 per share, 1,000 shares authorized, 100 issued and outstanding |
| $ | 1 |
| $ | 1 |
|
Additional paid-in capital (see note 4) |
| 99 |
| 99 |
| ||
Total stockholder’s equity |
| $ | 100 |
| $ | 100 |
|
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| Successor |
| Successor | ||
|
| September 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Assets |
|
|
|
|
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|
Cash and cash equivalents |
| $ | 389,930 |
| $ | 410,104 |
Restricted cash |
|
| 1,200 |
|
| 1,200 |
Receivable from brokers and dealers and clearing organizations |
|
| 747,660 |
|
| 174,591 |
Deposits with clearing organizations |
|
| 12,101 |
|
| 11,427 |
Accounts receivable, net of allowance |
|
| 95,398 |
|
| 87,192 |
Furniture, equipment, purchased software and leasehold improvements, net of accumulated depreciation and amortization |
|
| 36,879 |
|
| 38,128 |
Right-of-use assets |
|
| 29,038 |
|
| — |
Software development costs, net of accumulated amortization |
|
| 173,066 |
|
| 170,582 |
Intangible assets, net of accumulated amortization |
|
| 1,306,293 |
|
| 1,380,848 |
Goodwill |
|
| 2,694,797 |
|
| 2,694,797 |
Receivable from affiliates |
|
| 3,515 |
|
| 3,243 |
Deferred tax asset |
|
| 103,153 |
|
| — |
Other assets |
|
| 29,650 |
|
| 25,027 |
Total assets |
| $ | 5,622,680 |
| $ | 4,997,139 |
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Liabilities and Stockholders' Equity/Members' Capital |
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Liabilities |
|
|
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|
Securities sold under agreements to repurchase |
| $ | 24,938 |
| $ | — |
Payable to brokers and dealers and clearing organizations |
|
| 713,020 |
|
| 171,214 |
Accrued compensation |
|
| 94,652 |
|
| 120,158 |
Deferred revenue |
|
| 28,557 |
|
| 27,883 |
Accounts payable, accrued expenses and other liabilities |
|
| 44,650 |
|
| 42,548 |
Employee equity compensation payable |
|
| 714 |
|
| 24,187 |
Lease liability |
|
| 33,130 |
|
| — |
Payable to affiliates |
|
| 3,737 |
|
| 5,009 |
Deferred tax liability |
|
| 20,620 |
|
| 19,627 |
Tax receivable agreement liability |
|
| 171,426 |
|
| — |
Total liabilities |
|
| 1,135,444 |
|
| 410,626 |
|
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Commitments and contingencies (Note 17) |
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Mezzanine Capital |
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Class C Shares and Class P(C) Shares |
|
| — |
|
| 14,179 |
|
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|
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Stockholders' Equity/Members' Capital |
|
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Members' capital |
|
| — |
|
| 4,573,200 |
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; 46,009,753 shares issued and outstanding as of September 30, 2019 |
|
| — |
|
| — |
Class B common stock, $.00001 par value; 450,000,000 shares authorized; 96,933,192 shares issued and outstanding as of September 30, 2019 |
|
| 1 |
|
| — |
Class C common stock, $.00001 par value; 350,000,000 shares authorized; 10,006,269 shares issued and outstanding as of September 30, 2019 |
|
| — |
|
| — |
Class D common stock, $.00001 par value; 300,000,000 shares authorized; 69,282,736 shares issued and outstanding as of September 30, 2019 |
|
| 1 |
|
| — |
Additional paid-in capital |
|
| 2,855,885 |
|
| — |
Accumulated other comprehensive income (loss) |
|
| (1,854) |
|
| (866) |
Retained earnings |
|
| 19,570 |
|
| — |
Total stockholders' equity attributable to Tradeweb Markets Inc./members' capital |
|
| 2,873,603 |
|
| 4,572,334 |
Non-controlling interests |
|
| 1,613,633 |
|
| — |
Total equity |
|
| 4,487,236 |
|
| 4,572,334 |
Total liabilities and stockholders' equity/members' capital |
| $ | 5,622,680 |
| $ | 4,997,139 |
The accompanying notes are an integral part of these consolidated financial statements.
7
Tradeweb Markets Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except share and per share data)
(Unaudited)
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| Successor |
| Successor |
|
| Predecessor |
| Predecessor | ||||
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| Three Months |
| Nine Months |
|
| Three Months |
| Nine Months | ||||
|
| Ended |
| Ended |
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| Ended |
| Ended | ||||
|
| September 30, |
| September 30, |
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| September 30, |
| September 30, | ||||
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| 2019 |
| 2019 |
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| 2018 |
| 2018 | ||||
Revenues |
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Transaction fees |
| $ | 112,746 |
| $ | 319,338 |
|
| $ | 92,582 |
| $ | 273,751 |
Subscription fees |
|
| 35,387 |
|
| 104,398 |
|
|
| 33,157 |
|
| 107,130 |
Commissions |
|
| 37,590 |
|
| 108,200 |
|
|
| 24,394 |
|
| 79,830 |
Refinitiv market data fees |
|
| 13,251 |
|
| 40,252 |
|
|
| 12,533 |
|
| 36,851 |
Other |
|
| 2,007 |
|
| 6,070 |
|
|
| 2,587 |
|
| 8,209 |
Gross revenue |
|
| 200,981 |
|
| 578,258 |
|
|
| 165,253 |
|
| 505,771 |
Contingent consideration |
|
| — |
|
| — |
|
|
| 2,537 |
|
| (26,830) |
Net revenue |
|
| 200,981 |
|
| 578,258 |
|
|
| 167,790 |
|
| 478,941 |
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Expenses |
|
|
|
|
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|
|
|
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Employee compensation and benefits |
|
| 79,644 |
|
| 252,912 |
|
|
| 69,076 |
|
| 209,053 |
Depreciation and amortization |
|
| 35,133 |
|
| 102,928 |
|
|
| 16,362 |
|
| 48,808 |
Technology and communications |
|
| 9,527 |
|
| 29,086 |
|
|
| 9,112 |
|
| 26,598 |
General and administrative |
|
| 7,507 |
|
| 25,961 |
|
|
| 9,386 |
|
| 23,056 |
Professional fees |
|
| 7,272 |
|
| 20,981 |
|
|
| 7,546 |
|
| 20,360 |
Occupancy |
|
| 3,640 |
|
| 10,900 |
|
|
| 3,491 |
|
| 10,732 |
Total expenses |
|
| 142,723 |
|
| 442,768 |
|
|
| 114,973 |
|
| 338,607 |
Operating income |
|
| 58,258 |
|
| 135,490 |
|
|
| 52,817 |
|
| 140,334 |
Net interest income |
|
| 636 |
|
| 1,669 |
|
|
| 673 |
|
| 1,726 |
Income before taxes |
|
| 58,894 |
|
| 137,159 |
|
|
| 53,490 |
|
| 142,060 |
Provision for income taxes |
|
| (10,316) |
|
| (21,413) |
|
|
| (7,535) |
|
| (11,900) |
Net income |
| $ | 48,578 |
| $ | 115,746 |
|
| $ | 45,955 |
| $ | 130,160 |
Less: Pre-IPO net income attributable to Tradeweb Markets LLC |
|
| — |
|
| 42,352 |
|
|
|
|
|
|
|
Net income attributable to Tradeweb Markets Inc. and non-controlling interests |
|
| 48,578 |
|
| 73,394 |
|
|
|
|
|
|
|
Less: Net income attributable to non-controlling interests |
|
| 18,966 |
|
| 30,954 |
|
|
|
|
|
|
|
Net income attributable to Tradeweb Markets Inc. |
| $ | 29,612 |
| $ | 42,440 |
|
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EPS calculations for pre-IPO and post-IPO periods (1) |
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Earnings per share |
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Basic |
| $ | 0.21 (b) |
| $ | 0.19 (a) / |
|
| $ | 0.21 (a) |
| $ | 0.60 (a) |
Diluted |
| $ | 0.20 (b) |
| $ | 0.19 (a) / |
|
| $ | 0.21 (a) |
| $ | 0.60 (a) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
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Basic |
|
| 142,935,206 (b) |
|
| 222,222,197 (a) / |
|
|
| 219,165,997 (a) |
|
| 215,365,920 (a) |
Diluted |
|
| 151,362,643 (b) |
|
| 223,320,457 (a) / |
|
|
| 219,165,997 (a) |
|
| 215,365,920 (a) |
(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 18 – Earnings Per Share for additional information. |
a) | Presents information for Tradeweb Markets LLC (pre-IPO period). |
b) | Presents information for Tradeweb Markets Inc. (post-IPO period). |
The accompanying notes are an integral part of these consolidated financial statements.
8
Tradeweb Markets Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Successor |
| Successor |
|
| Predecessor |
| Predecessor | ||||
|
| Three Months |
| Nine Months |
|
| Three Months |
| Nine Months | ||||
|
| Ended |
| Ended |
|
| Ended |
| Ended | ||||
|
| September 30, |
| September 30, |
|
| September 30, |
| September 30, | ||||
|
| 2019 |
| 2019 |
|
| 2018 |
| 2018 | ||||
Comprehensive income - Pre-IPO attributable to Tradeweb Markets LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-IPO net income attributable to Tradeweb Markets LLC |
| $ | — |
| $ | 42,352 |
|
| $ | 45,955 |
| $ | 130,160 |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments attributable to Tradeweb Markets LLC |
|
| — |
|
| 988 |
|
|
| (1,006) |
|
| (3,064) |
Pre-IPO comprehensive income attributable to Tradeweb Markets LLC |
| $ | — |
| $ | 43,340 |
|
| $ | 44,949 |
| $ | 127,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income - Tradeweb Markets Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Tradeweb Markets Inc. |
| $ | 29,612 |
| $ | 42,440 |
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments attributable to Tradeweb Markets Inc. |
|
| (1,329) |
|
| (1,976) |
|
|
|
|
|
|
|
Comprehensive income attributable to Tradeweb Markets Inc. |
| $ | 28,283 |
| $ | 40,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income - Non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interests |
| $ | 18,966 |
| $ | 30,954 |
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments attributable to non-controlling interests |
|
| (737) |
|
| (1,096) |
|
|
|
|
|
|
|
Comprehensive income attributable to non-controlling interests |
| $ | 18,229 |
| $ | 29,858 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
9
Tradeweb Markets Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(in thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Members' |
| Class A |
| Class B |
| Class C |
| Class D |
| Additional |
| Accumulated |
| Retained |
| Non-Controlling |
| Total | ||||||||||||||
Successor |
|
|
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
| $ | 4,573,200 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| $ | — |
| $ | (866) |
| $ | — |
| $ | — |
| $ | 4,572,334 |
Adjustment to Class C Shares and Class P(C) shares in mezzanine capital |
|
| (2,369) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (2,369) |
Capital distributions |
|
| (20,000) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (20,000) |
Stock-based compensation |
|
| 4,674 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,674 |
Net income |
|
| 42,352 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 42,352 |
Foreign currency translation adjustments |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| 988 |
|
| — |
|
| — |
|
| 988 |
Balance at March 31, 2019 |
| $ | 4,597,857 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| $ | — |
| $ | 122 |
| $ | — |
| $ | — |
| $ | 4,597,979 |
Capital distributions |
|
| (100,000) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (100,000) |
Effect of the reorganization transactions |
|
| (4,497,857) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 4,521,132 |
|
| — |
|
| — |
|
| — |
|
| 23,275 |
Issuance of common stock, net of offering costs and cancellations |
|
| — |
| 46,000,000 |
| — |
| 96,933,192 |
| 1 |
| 10,006,269 |
| — |
| 69,282,736 |
| 1 |
|
| (15,856) |
|
| — |
|
| — |
|
| — |
|
| (15,854) |
Tax receivable agreement liability and deferred taxes arising from the reorganization transactions and IPO |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| (78,232) |
|
| — |
|
| — |
|
| — |
|
| (78,232) |
Allocation of equity to non-controlling interests |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| (1,607,529) |
|
| — |
|
| — |
|
| 1,607,529 |
|
| — |
Adjustments to non-controlling interests |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Distributions to non-controlling interests |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (11,909) |
|
| (11,909) |
Dividends ($0.08 per share) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| (11,435) |
|
| — |
|
| (11,435) |
Stock-based compensation expense under the PRSU Plan |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 6,763 |
|
| — |
|
| — |
|
| — |
|
| 6,763 |
Stock-based compensation expense under the Option Plan |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 20,403 |
|
| — |
|
| — |
|
| — |
|
| 20,403 |
Net income |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| 12,828 |
|
| 11,988 |
|
| 24,816 |
Foreign currency translation adjustments |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| (647) |
|
| — |
|
| (359) |
|
| (1,006) |
Balance at June 30, 2019 |
| $ | — |
| 46,000,000 |
| — |
| 96,933,192 |
| 1 |
| 10,006,269 |
| — |
| 69,282,736 |
| 1 |
| $ | 2,846,681 |
| $ | (525) |
| $ | 1,393 |
| $ | 1,607,249 |
| $ | 4,454,800 |
Issuance of common stock from equity incentive plans |
|
| — |
| 9,753 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Adjustments to non-controlling interests |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 73 |
|
| — |
|
| — |
|
| (73) |
|
| — |
Distributions to non-controlling interests |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (11,772) |
|
| (11,772) |
Dividends ($0.08 per share) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| (11,435) |
|
| — |
|
| (11,435) |
Stock-based compensation expense under the PRSU Plan |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 7,136 |
|
| — |
|
| — |
|
| — |
|
| 7,136 |
Stock-based compensation expense under the Option Plan |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 1,995 |
|
| — |
|
| — |
|
| — |
|
| 1,995 |
Net income |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| — |
|
| 29,612 |
|
| 18,966 |
|
| 48,578 |
Foreign currency translation adjustments |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| (1,329) |
|
| — |
|
| (737) |
|
| (2,066) |
Balance at September 30, 2019 |
| $ | — |
| 46,009,753 |
| — |
| 96,933,192 |
| 1 |
| 10,006,269 |
| — |
| 69,282,736 |
| 1 |
| $ | 2,855,885 |
| $ | (1,854) |
| $ | 19,570 |
| $ | 1,613,633 |
| $ | 4,487,236 |
The accompanying notes are an integral part of these consolidated financial statements.
10
Tradeweb Markets Inc. and Subsidiaries
Consolidated Statements of Changes in Equity – (Continued)
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |
|
|
|
|
| Other |
| Total | ||
|
| Members' |
| Comprehensive |
| Members' | |||
|
| Capital |
| Loss |
| Capital | |||
Predecessor |
|
|
|
|
|
|
|
|
|
Members' capital at December 31, 2017 |
| $ | 999,735 |
| $ | (13,267) |
| $ | 986,468 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
Net income |
|
| 45,308 |
|
| — |
|
| 45,308 |
Foreign currency translation adjustments |
|
|
|
|
| 1,928 |
|
| 1,928 |
Capital distributions |
|
| (25,000) |
|
|
|
|
| (25,000) |
Members' capital at March 31, 2018 |
| $ | 1,020,043 |
| $ | (11,339) |
| $ | 1,008,704 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
Net income |
|
| 38,897 |
|
| — |
|
| 38,897 |
Foreign currency translation adjustments |
|
| — |
|
| (3,986) |
|
| (3,986) |
Capital distributions |
|
| (55,000) |
|
| — |
|
| (55,000) |
Members' capital at June 30, 2018 |
| $ | 1,003,940 |
| $ | (15,325) |
| $ | 988,615 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
Net income |
|
| 45,955 |
|
|
|
|
| 45,955 |
Foreign currency translation adjustments |
|
| — |
|
| (1,006) |
|
| (1,006) |
Total comprehensive income |
|
| 45,955 |
|
| (1,006) |
|
| 44,949 |
Adjustment to Class C Shares and Class P(C) Shares in mezzanine capital |
|
| 456 |
|
| — |
|
| 456 |
Vesting of contingent consideration |
|
| 150,495 |
|
| — |
|
| 150,495 |
Capital distributions |
|
| (59,350) |
|
| — |
|
| (59,350) |
Members' capital at September 30, 2018 |
| $ | 1,141,496 |
| $ | (16,331) |
| $ | 1,125,165 |
The accompanying notes are an integral part of these consolidated financial statements.
11
Tradeweb Markets Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
| Successor |
|
| Predecessor | ||
|
| Nine Months |
|
| Nine Months | ||
|
| Ended |
|
| Ended | ||
|
| September 30, |
|
| September 30, | ||
|
| 2019 |
|
| 2018 | ||
Cash flows from operating activities |
|
|
|
|
|
|
|
Net income |
| $ | 115,746 |
|
| $ | 130,160 |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 102,928 |
|
|
| 48,808 |
Contingent consideration |
|
| — |
|
|
| 26,830 |
Vesting of P-1 (C) Shares |
|
| — |
|
|
| (5,728) |
Stock-based compensation expense |
|
| 41,092 |
|
|
| — |
Deferred taxes |
|
| (9,018) |
|
|
| 2,602 |
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
Receivable from brokers and dealers and clearing organizations |
|
| (573,069) |
|
|
| (318) |
Deposits with clearing organizations |
|
| (679) |
|
|
| 726 |
Accounts receivable |
|
| (9,421) |
|
|
| (28,434) |
Receivable from affiliates |
|
| (271) |
|
|
| (2,534) |
Other assets |
|
| (8,241) |
|
|
| (6,371) |
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
Securities sold under agreements to repurchase |
|
| 24,938 |
|
|
| — |
Payable to brokers and dealers and clearing organizations |
|
| 541,806 |
|
|
| (4,322) |
Accrued compensation |
|
| (25,142) |
|
|
| (7,568) |
Deferred revenue |
|
| 682 |
|
|
| (1,396) |
Accounts payable, accrued expenses and other liabilities |
|
| 6,609 |
|
|
| 8,793 |
Employee equity compensation payable |
|
| (16,746) |
|
|
| 2,896 |
Payable to affiliates |
|
| (749) |
|
|
| 684 |
Net cash provided by operating activities |
|
| 190,465 |
|
|
| 164,828 |
Cash flows from investing activities |
|
|
|
|
|
|
|
Purchase of furniture, equipment, software and leasehold improvements |
|
| (8,567) |
|
|
| (6,327) |
Capitalized software development costs |
|
| (21,200) |
|
|
| (19,523) |
Net cash (used in) investing activities |
|
| (29,767) |
|
|
| (25,850) |
Cash flows from financing activities |
|
|
|
|
|
|
|
Pre-IPO capital distributions |
|
| (120,000) |
|
|
| (139,350) |
Proceeds from issuance of Class A common stock in the IPO, net of underwriting discounts |
|
| 1,161,270 |
|
|
| — |
Purchase of LLC Interests |
|
| (1,161,270) |
|
|
| — |
Offering costs from issuance of Class A common stock in the IPO |
|
| (12,306) |
|
|
| — |
Dividends |
|
| (22,869) |
|
|
| — |
Capital distributions to non-controlling interests |
|
| (23,681) |
|
|
| — |
Net cash (used in) financing activities |
|
| (178,856) |
|
|
| (139,350) |
Effect of exchange rate changes on cash and cash equivalents |
|
| (2,016) |
|
|
| (2,043) |
Net decrease in cash and cash equivalents |
|
| (20,174) |
|
|
| (2,415) |
Cash and cash equivalents and restricted cash |
|
|
|
|
|
|
|
Beginning of period |
|
| 411,304 |
|
|
| 353,798 |
End of period |
| $ | 391,130 |
|
| $ | 351,383 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
Interest paid |
| $ | — |
|
| $ | — |
Income taxes paid |
| $ | 30,287 |
|
| $ | 5,500 |
|
|
|
|
|
|
|
|
Non-cash financing activities |
|
|
|
|
|
|
|
Items arising from the reorganization transactions and IPO: |
|
|
|
|
|
|
|
Establishment of liabilities under tax receivable agreement |
| $ | 171,426 |
|
| $ | — |
Deferred tax asset |
| $ | 93,194 |
|
| $ | — |
Vesting of contingent consideration |
| $ | — |
|
| $ | 150,495 |
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash as shown on the statements of financial condition: |
| September 30, |
|
| December 31, | ||
Cash and cash equivalents |
|
| 389,930 |
|
|
| 410,104 |
Restricted cash |
|
| 1,200 |
|
|
| 1,200 |
Cash, cash equivalents and restricted cash shown in the statement of cash flows |
| $ | 391,130 |
|
| $ | 411,304 |
The accompanying notes are an integral part of these consolidated financial statements.
12
Notes to Statements ofConsolidated Financial ConditionStatements
(Unaudited)
Page | |||
14 | |||
17 | |||
22 | |||
Receivable from and Payable to Brokers and Dealers and Clearing Organizations | 22 | ||
23 | |||
23 | |||
24 | |||
25 | |||
25 | |||
26 | |||
27 | |||
29 | |||
30 | |||
32 | |||
33 | |||
34 | |||
34 | |||
35 | |||
36 | |||
37 | |||
38 |
13
Tradeweb Markets Inc. and Subsidiaries
1.Notes to Consolidated Financial StatementsOrganization
(Unaudited)
Tradeweb Markets Inc. (the “Corporation”) was formedincorporated as a Delaware corporation on November 7, 2018. The Corporation was formed2018 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.”
On April 8, 2019, the Corporation closed an IPO of 46,000,000 shares of Class A common stock at a public offering price of $27.00, which includes 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 $1,161,270,000is 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 net proceeds, after deducting underwriting discountsRefinitiv Holdings Limited (the “Parent” and, commissions but before deducting offering expenses, which were used to purchase membership interestsunless otherwise stated or the context otherwise requires, together with all of TWM LLC from certain existing equityholdersits subsidiaries, “Refinitiv”). As of TWM LLC (and cancelledSeptember 30, 2019, Refinitiv owns a majority ownership interest in the corresponding shares of common stock 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. Subsequent to the Reorganization TransactionsCompany (as defined in note 4) that occurred after March 31, 2019, thebelow).
The Corporation is the sole managera 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 will consolidateconsolidates the financial results of TWM LLC and reportreports a non-controlling interest in the Corporation’s consolidated financial statements. As of September 30, 2019, Tradeweb Markets Inc. owns 64.3% of TWM LLC and the Continuing LLC Owners (defined below) own the remaining 35.7% of TWM LLC.
2.SummaryUnless the context otherwise requires, references to the “Company” refer to Tradeweb Markets Inc. and its consolidated subsidiaries, including TWM LLC, following the completion of Significant Accounting Policiesthe Reorganization Transactions (as defined below), and TWM LLC and its consolidated subsidiaries prior to the completion of the Reorganization Transactions.
BasisThe Company is a leader in building and operating electronic marketplaces for a global network of Accountingclients 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”). |
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.
The statements of financial condition are presented in accordance with accounting principles generally accepted inTW SEF LLC (“TW SEF”), a Swap Execution Facility (“SEF”) regulated by the United States of America. Separate statements of operations, comprehensive income, changes in stockholder’s equity and cash flows have not been presented in the financial statements because, as of March 31, 2019, there have been no activities in this entity other than the initial capitalization.
3.CFTC.Stockholder’s Equity
As of March 31, 2019, the Corporation was authorized to issue 1,000 shares of Common Stock, par value $0.01 per share. The Chief Executive Officer of TWM LLC was the sole shareholder of the Corporation and contributed $100 to the Corporation on November 7, 2018 to purchase 100 shares of common stock. Holders of common stock were entitled to one vote for each share of common stock held on all matters submitted to shareholders for vote, consent or approval.
4.Subsequent Events
As noted above, onDW SEF LLC (“DW SEF”), a SEF regulated by the CFTC.
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”).
14
The Company, through its subsidiary Tradeweb IDB Markets Inc. (“TWIDB”) (formerly known as Hydrogen Holdings Corporation), owns Dealerweb Inc. (“DW”) (formerly known as Hilliard Farber & Co., Inc.). DW is 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.
The Company, through its subsidiary BondDesk Group LLC, owns 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.
Initial Public Offering
On April 8, 2019, the Corporation closed ancompleted its IPO of 46,000,000 shares of Class A common stock at a public offering price of $27.00, which includesincluded 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 $1,161,270,000$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 equityholders of the Bank Stockholders (as defined below)TWM LLC (and cancel the corresponding shares of common stock)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.
Tradeweb Markets Inc.
Notes to Statements of Financial Condition
(Unaudited)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 following parties:
· The Ownersowners of TWM LLC prior to the Reorganization Transactions including an indirect subsidiary (the “Refinitiv(collectively, the “Original LLC Owner”) of Refinitiv Holdings Limited (“Refinitiv”Owners”), including the following parties:
certain investment and commercial banks (collectively, the “Bank Stockholders”) and members of management, that continued to own LLC Interests (as defined below) immediately prior to the closing of the IPO and who received shares of the Corporation’s Class C common stock, shares of the Corporation’s Class D common stock or a combination of both, as the case may be (collectively, the “Continuing LLC Owners”); and
· An indirect subsidiary (the “Refinitiv Direct Owner” and, together with members of management;
the Refinitiv LLCDirect Owner, the “Refinitiv Owners”)(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 the Corporation’s 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 the Corporation’s 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 the Corporation’s Class C common stock, shares of the Corporation’s 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 the Corporation’s 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
15
LLC Interests and (iii) appoint the Corporation as the sole manager of TWM LLC.
The TWM LLC Agreement also 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; See Note 11 – Stockholders’ Equity.
·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. 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:See Note 11 – Stockholders’ Equity.
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 |
· | 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). |
· The Corporation assumed sponsorship of an option plan and PRSU plan formerly sponsored by TWM LLC. Accordingly, all options and PRSUs granted under such plans were converted into economically equivalent awards of the Corporation with respect to shares of the Corporation’s Class A common stock;
·The Corporation’s board of directors adopted a new omnibus equity incentive plan, under which equity awards may be made in respect of shares of the Corporation’s Class A common stock;stock. It also assumed sponsorship of an option plan and PRSU plan formerly sponsored by TWM LLC. See Note 13 – Stock-Based Compensation Plans.
· The Corporation issued 20,000,000 shares of Class C common stock and 105,289,005 shares of Class D common stock to the Continuing LLC Owners, 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 canceled 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).
LLC Interests are redeemable, 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). The Corporation’s board of directors, which includes directors who hold LLC Interests or are affiliated with holders of LLC Interests and may include such directors in the future, may, at its option, instead of the foregoing redemptions 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 (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the TWM LLC Agreement. Holders of Class D common stock may also 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;
· 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 Refinitiv Direct Owner and other future holders of Class B common stock may from time to time exchange all or a portion of their shares of the Corporation’s 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); and
Tradeweb Markets Inc.
Notes to Statements of Financial Condition
(Unaudited)
·The Corporation entered into a Taxtax receivable agreement (the “Tax Receivable AgreementAgreement”) with TWM LLC and the Continuing LLC Owners that 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 using the net proceeds of the IPO or 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 theOwners. See Note 10 – Tax Receivable Agreement.
Following the completionAcquisition of the Reorganization Transactions, including the IPOParent Company and the applicationPresentation of the proceeds therefrom as described above, the Corporation owns 64.3% of TWM LLC. The Continuing LLC Owners that continue to own LLC Interests own the remaining 35.7% of TWM LLC.Financial Statements
On May 8, 2019, the Corporation’s board of directors declared a cash dividend of $0.08 per share of Class A common stock and Class B common stock for the second quarter of 2019. This dividend will be payable on June 15, 2019 to stockholders of record as of June 1, 2019.
There were no other subsequent events requiring adjustment to the financial statements or disclosure.
Tradeweb Markets LLC and Subsidiaries
Consolidated Statements of Financial Condition
(in thousands)
(Unaudited)
|
| Successor |
| Successor |
| ||
|
| March 31, |
| December 31, |
| ||
Assets |
|
|
|
|
| ||
Cash and cash equivalents including cash deposited with related parties of $246,416 and $283,790 at March 31, 2019 and December 31, 2018, respectively |
| $ | 361,608 |
| $ | 410,104 |
|
Restricted cash |
| 1,200 |
| 1,200 |
| ||
Receivable from brokers and dealers and clearing organizations including receivables from related parties of $199 and $3,332 at March 31, 2019 and December 31, 2018, respectively |
| 88,422 |
| 174,591 |
| ||
Deposits with clearing organizations including deposits from related parties of $500 at both March 31, 2019 and December 31, 2018 |
| 8,872 |
| 11,427 |
| ||
Accounts receivable, net of allowance including receivables from related parties of $46,947 and $40,730 at March 31, 2019 and December 31, 2018, respectively |
| 94,284 |
| 87,192 |
| ||
Furniture, equipment, purchased software and leasehold improvements, net of accumulated depreciation and amortization |
| 36,790 |
| 38,128 |
| ||
Right-of-use assets |
| 32,647 |
| — |
| ||
Software development costs, net of accumulated amortization |
| 171,705 |
| 170,582 |
| ||
Intangible assets, net of accumulated amortization |
| 1,355,996 |
| 1,380,848 |
| ||
Goodwill |
| 2,694,797 |
| 2,694,797 |
| ||
Receivable from affiliates |
| 3,026 |
| 3,243 |
| ||
Other assets including other assets from related parties of $0 and $9 at March 31, 2019 and December 31, 2018, respectively |
| 32,238 |
| 25,027 |
| ||
Total assets |
| $ | 4,881,585 |
| $ | 4,997,139 |
|
Liabilities and Members’ Capital |
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Payable to brokers and dealers and clearing organizations including payables to related parties of $0 and $2,404 at March 31, 2019 and December 31, 2018, respectively |
| $ | 81,214 |
| $ | 171,214 |
|
Accrued compensation |
| 54,087 |
| 120,158 |
| ||
Deferred revenue including deferred revenue from related parties of $8,556 and $9,151 at March 31, 2019 and December 31, 2018, respectively |
| 28,487 |
| 27,883 |
| ||
Accounts payable, accrued expenses and other liabilities including payables to related parties of $387 and $0 at March 31, 2019 and December 31, 2018, respectively |
| 33,295 |
| 42,548 |
| ||
Employee equity compensation payable |
| 299 |
| 24,187 |
| ||
Lease liability |
| 37,310 |
| — |
| ||
Payable to affiliates |
| 6,050 |
| 5,009 |
| ||
Deferred tax liability |
| 19,589 |
| 19,627 |
| ||
Total liabilities |
| 260,331 |
| 410,626 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (note 13) |
|
|
|
|
| ||
Mezzanine Capital Class C Shares and Class P(C) Shares |
| 23,275 |
| 14,179 |
| ||
Members’ capital |
|
|
|
|
| ||
Members’ capital |
| 4,597,857 |
| 4,573,200 |
| ||
Accumulated other comprehensive income |
| 122 |
| (866 | ) | ||
Total members’ capital |
| 4,597,979 |
| 4,572,334 |
| ||
Total liabilities and members’ capital |
| $ | 4,881,585 |
| $ | 4,997,139 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Tradeweb Markets LLC and Subsidiaries
Consolidated Statements of Income
(in thousands, except share and per share data)
(Unaudited)
|
| Successor |
|
| Predecessor |
| ||
|
| Three Months |
|
| Three Months |
| ||
Revenues |
|
|
|
|
|
| ||
Transaction fees including from related parties of $59,643 and $52,918 in the three months ended March 31, 2019 and 2018, respectively |
| $ | 102,640 |
|
| $ | 90,139 |
|
Subscription fees including from related parties of $5,670 and $5,220 in the three months ended March 31, 2019 and 2018, respectively |
| 34,445 |
|
| 36,326 |
| ||
Commissions including from related parties of $16,186 and $11,631 in the three months ended March 31, 2019 and 2018, respectively |
| 34,197 |
|
| 27,883 |
| ||
Refinitiv market data fees |
| 13,616 |
|
| 12,237 |
| ||
Other |
| 1,894 |
|
| 2,918 |
| ||
Gross revenue |
| 186,792 |
|
| 169,503 |
| ||
Contingent consideration |
| — |
|
| (10,070 | ) | ||
Net revenue |
| 186,792 |
|
| 159,433 |
| ||
|
|
|
|
|
|
| ||
Expenses |
|
|
|
|
|
| ||
Employee compensation and benefits |
| 77,273 |
|
| 71,570 |
| ||
Depreciation and amortization |
| 33,503 |
|
| 16,268 |
| ||
Technology and communications including from related parties of $740 in both the three months ended March 31, 2019 and 2018 |
| 10,040 |
|
| 8,463 |
| ||
General and administrative including from related parties of $180 in both the three months ended March 31, 2019 and 2018 |
| 9,089 |
|
| 6,517 |
| ||
Professional fees |
| 6,971 |
|
| 5,538 |
| ||
Occupancy including from related parties of $155 in both the three months ended March 31, 2019 and 2018 |
| 3,639 |
|
| 3,722 |
| ||
Total expenses |
| 140,515 |
|
| 112,078 |
| ||
Operating income |
| 46,277 |
|
| 47,355 |
| ||
Interest income including from related parties of $208 and $21 in the three months ended March 31, 2019 and 2018, respectively |
| 858 |
|
| 471 |
| ||
Income before taxes |
| 47,135 |
|
| 47,826 |
| ||
Provision for income taxes |
| (4,783 | ) |
| (2,518 | ) | ||
Net income |
| $ | 42,352 |
|
| $ | 45,308 |
|
Net income per share |
|
|
|
|
|
| ||
Basic |
| $ | 0.19 |
|
| $ | 0.21 |
|
Diluted |
| $ | 0.19 |
|
| $ | 0.21 |
|
Weighted average number of shares outstanding (note 14) |
|
|
|
|
|
| ||
Basic |
| 222,222,197 |
|
| 213,435,321 |
| ||
Diluted |
| 223,320,457 |
|
| 213,435,321 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Tradeweb Markets LLC and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
|
| Successor |
|
| Predecessor |
| ||
|
| Three Months |
|
| Three Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| March 31, |
|
| March 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
|
| ||
Net income |
| $ | 42,352 |
|
| $ | 45,308 |
|
Foreign currency translation adjustments |
| 988 |
|
| 1,928 |
| ||
Comprehensive income |
| $ | 43,340 |
|
| $ | 47,236 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Tradeweb Markets LLC and Subsidiaries
Consolidated Statements of Changes in Members’ Capital and Accumulated Other Comprehensive Income
(in thousands)
(Unaudited)
|
| Members’ |
| Accumulated |
| Total |
| |||
Predecessor |
|
|
|
|
|
|
| |||
Members’ capital at December 31, 2017 |
| $ | 999,735 |
| $ | (13,267 | ) | $ | 986,468 |
|
Comprehensive income: |
|
|
|
|
|
|
| |||
Net income |
| 45,308 |
|
|
| 45,308 |
| |||
Foreign currency translation adjustments |
|
|
| 1,928 |
| 1,928 |
| |||
Capital distributions |
| (25,000 | ) |
|
| (25,000 | ) | |||
Members’ capital at March 31, 2018 |
| $ | 1 ,020,043 |
| $ | (11,339 | ) | $ | 1 ,008,704 |
|
|
| Members’ |
| Accumulated |
| Total |
| |||
Successor |
|
|
|
|
|
|
| |||
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 | ) | |||
Share-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.
Tradeweb Markets LLC and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
| Successor |
|
| Predecessor |
| ||
|
| Three Months |
|
| Three Months |
| ||
Cash flows from operating activities |
|
|
|
|
|
| ||
Net income |
| $ | 42,352 |
|
| $ | 45,308 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
| 33,503 |
|
| 16,268 |
| ||
Contingent consideration |
| — |
|
| 10,070 |
| ||
Share-based compensation expense |
| 4,674 |
|
| — |
| ||
Deferred taxes |
| (39 | ) |
| 452 |
| ||
(Increase) decrease in operating assets: |
|
|
|
|
|
| ||
Receivable from brokers and dealers and clearing organizations |
| 86,169 |
|
| 4,324 |
| ||
Deposits with clearing organizations |
| 2,570 |
|
| (950 | ) | ||
Accounts receivable |
| (6,406 | ) |
| (29,762 | ) | ||
Receivable from affiliates |
| 217 |
|
| (119 | ) | ||
Other assets |
| (7,152 | ) |
| 903 |
| ||
Increase (decrease) in operating liabilities: |
|
|
|
|
|
| ||
Payable to brokers and dealers and clearing organizations |
| (90,000 | ) |
| (4,322 | ) | ||
Accrued compensation |
| (66,447 | ) |
| (59,693 | ) | ||
Deferred revenue |
| 602 |
|
| 1 ,479 |
| ||
Accounts payable, accrued expenses and other liabilities |
| (4,911 | ) |
| 4 ,201 |
| ||
Employee equity compensation payable |
| (17,161 | ) |
| (11,797 | ) | ||
Payable to affiliates |
| 950 |
|
| 9 ,412 |
| ||
Net cash used in operating activities |
| (21,079 | ) |
| (14,226 | ) | ||
Cash flows from investing activities |
|
|
|
|
|
| ||
Purchase of furniture, equipment, software and leasehold improvements |
| (1,516 | ) |
| (1,244 | ) | ||
Capitalized software development costs |
| (6,767 | ) |
| (6,198 | ) | ||
Net cash used in investing activities |
| (8,283 | ) |
| (7,442 | ) | ||
Cash flows from financing activities |
|
|
|
|
|
| ||
Capital distributions |
| (20,000 | ) |
| (25,000 | ) | ||
Net cash used in financing activities |
| (20,000 | ) |
| (25,000 | ) | ||
Effect of exchange rate changes on cash and cash equivalents |
| 866 |
|
| 1 ,813 |
| ||
Net decrease in cash and cash equivalents |
| (48,496 | ) |
| (44,855 | ) | ||
Cash and cash equivalents and restricted cash |
|
|
|
|
|
| ||
Beginning of period |
| 411,304 |
|
| 353,798 |
| ||
End of period |
| $ | 362,808 |
|
| $ | 308,943 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Tradeweb Markets LLC and Subsidiaries
Consolidated Statements of Cash Flows — (Continued)
(in thousands)
(Unaudited)
|
| Successor |
|
| Predecessor |
| ||
|
| Three Months |
|
| Three Months |
| ||
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||
Supplemental disclosure of cash flow information |
|
|
|
|
|
| ||
Interest paid |
| $ | — |
|
| $ | — |
|
Income taxes paid |
| $ | 7,301 |
|
| $ | 1,784 |
|
The following table provides a reconciliation of cash and cash equivalents and restricted cash that sum to the amounts shown in the consolidated statements of cash flows:
|
| Successor |
|
| Predecessor |
| ||
|
| Three Months |
|
| Three Months |
| ||
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||
Cash and cash equivalents |
| $ | 361,608 |
|
| $ | 307,743 |
|
Restricted cash |
| 1,200 |
|
| 1 ,200 |
| ||
Cash and cash equivalents and restricted cash |
| $ | 362,808 |
|
| $ | 308,943 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Tradeweb Markets LLC and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1.Organization
Tradeweb Markets LLC (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, a Delaware limited liability company, is a consolidating subsidiary of BCP York Holdings (“BCP”), a company owned by certain investment funds affiliated with The Blackstone Group L.P., through BCP’s majority ownership interest in Refinitiv Holdings Limited (“Refinitiv” or the “Parent”). As of March 31, 2019, Refinitiv owned a majority ownership interest in the Company and a minority ownership interest of the Company was owned by a group of investment and commercial banks (the “Banks”).
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 accompanying consolidated financial statements are presented for two periods: predecessor and successor, which relate to the periods preceding and succeeding the Refinitiv Transaction, respectively. The Refinitiv Transaction results in a new basis of accounting beginning on October 1, 2018 and the financial reporting periods are presented as follows:
· | The successor period of the Company, reflecting the Refinitiv Transaction, as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019. |
· | The predecessor period of the Company for the three and nine months ended September 30, 2018. |
· The successor period of the Company, reflecting the Refinitiv Transaction, as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019.See Note 3 – Pushdown Accounting.
· The predecessor period of the Company for the three months ended March 31, 2018.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 for a total enterprise value of approximately $27 billion (the “LSEG Transaction”). The Company, through its subsidiary Tradeweb Global LLC (“TWG”), owns: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.
· Tradeweb LLC (“TWL”), a registered broker-dealer under the Securities Exchange Act
16
· 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.
· 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”).
The Company, through its subsidiary Tradeweb IDB Markets Inc. (“TWIDB”) (formerly known as Hydrogen Holdings Corporation), owns Dealerweb Inc. (“DW”) (formerly known as Hilliard Farber & Co., Inc.). DW is 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 Markets LLC and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The Company, through its subsidiary BondDesk Group LLC, owns 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.
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.
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.
Recapitalization
As discussed in note 18, on April 4, 2019, the Company’s limited liability company agreement (“LLC Agreement”) was amended and restated to, among other things, (i) provide forNote 1—Organization, as a new single class of common membership interests in the Company (“LLC Interests”) and (ii) exchange allresult of the existing membership interests ofReorganization Transactions, Tradeweb Markets Inc. consolidates TWM LLC and TWM LLC is considered to be the Company’s existing equityholderspredecessor to Tradeweb Markets Inc. for LLC Interests. For purposes of calculating net income per share on the consolidated statements of income, the number of outstanding shares have been adjusted retroactively for all periods to reflect the above-mentioned amendment and resulting recapitalization. Other share amounts and related disclosures in the notes tofinancial reporting purposes. As a result, the consolidated financial statements reflect the share classes and amountsfor periods prior to the recapitalization unless otherwise indicated.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.
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 Doubtful Accounts
The Company continually monitors collections and payments from its clients and maintains an allowance for doubtful accounts. The allowance for doubtful accounts is based upon the historical collection experience and specific collection issues that have been identified. Additions, if any, to the allowance for doubtful accounts are charged to bad debt expense, which is included in general and administrative expenses on the consolidated statements of income.
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, including the allocated fair value of assets as a result of pushdown accounting (see note 3)Note 3 – Pushdown Accounting), 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.
17
Tradeweb Markets LLC
Furniture, equipment, purchased software and Subsidiariesleasehold 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 Accounting Standards Codification (“ASC”) 360.
Notes to Consolidated Financial Statements
(Unaudited)
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 Accounting Standards Codification (“ASC”)ASC 350. 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. Once the product is ready for its intended use, suchSuch costs are amortized on a straight-line basis over three years. Costs capitalized as part of the pushdown accounting allocation (see note 3)Note 3 – Pushdown Accounting) 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.
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’sasset's or asset group’sgroup'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 undiscounteddiscounted cash flows relating to the asset or asset group is less than the corresponding fairbook value. Intangible assets are amortized over their estimated useful lives of seven to sixteen years.
Goodwill
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. 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 does this change result in adjustments to the Company’s previously issued financial statements. 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, 2018 in connection with the Refinitiv Transaction and the application of pushdown accounting. See Note 3 – Pushdown Accounting.
Deferred IPO and Follow-On Offering Costs
In 2018 and the third quarter of 2019, the Company began incurring costs in connection with the filing of a Registration Statement on Form S-1 for an IPO and a Registration Statement on Form S-1 for a follow-on offering, respectively, which are deferred in other assets in accordance with ASC 505-10-25 in the consolidated statements of financial condition. Initial publicIPO and follow-on offering (“IPO”) costs consist of legal, accounting, and other costs directly related to the Company’s efforts to raise capital through an IPO. Thesecapital. As of September 30, 2019, $15.9 million of deferred costs related to the IPO were offset against proceeds receivedreclassified from the offering which closed on April 8, 2019 and will be reclassifiedother assets to additional paid-in capital and $0.7 million of deferred costs related to the follow-on offering were included in other assets, in each case on the consolidated statements of financial condition. See note 18.Note 11 – Stockholders’ Equity and Note 21 – Subsequent Events.
18
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 CompanyCorporation 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 which is taxed as a partnership. No federal income tax provision is required on the earnings of the Company as it is a partnership and thereforeaccordingly any taxable income generated by TWM LLC is passed through to and included in the tax effectstaxable income of its activities accrue directly to its partners. Asmembers, including the Corporation, on a partnership, the Company and certain subsidiaries are subject topro rata basis. Income taxes also include unincorporated business taxes on income earned or losses incurred byfor conducting business in
Tradeweb Markets LLC and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
certain state and local jurisdictions, and income taxes on income earned or losses incurred in foreign jurisdictions on certain of their operations. Additionally, TWIDBoperations and its subsidiary DWfederal and state income taxes on income earned or losses incurred, both current and deferred, on subsidiaries that are C Corporations and therefore incur corporate federal, state and local incometaxed as corporations for U.S. tax expense. Income taxes are accounted for in accordance with ASC 740. purposes.
The Company recordedrecords 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 (1)(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 (2)(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 GILTIglobal intangible low-taxed income (“GILTI”) provision of the Tax Cuts and Jobs Act as a current period expense when incurred.
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’sCompany'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 on the consolidated statements of income are viewer fees earned monthly from institutional investors accessing fixed income market data. The frequency of subscription fee billings varies from monthly untilto 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.
19
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. This incomeCommission revenue is receivedcollected by the Company when the transactions settletrade settles or is billed monthly.
The Company earns fees from Refinitiv, formerly TR in the predecessor periods, 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.
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the measurement or recognition of revenue in any prior reporting periods. However, subsequent to the adoption,
Tradeweb Markets LLC and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
the Company was required to make significant judgements for the Refinitiv market data fees. 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. |
Some commission and transaction feesrevenues 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 and nine months ended March 31,September 30, 2019 and 2018 is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| Successor |
| Successor |
|
| Predecessor |
| Predecessor | ||||||||||||||||||||||||||||||
|
| Successor |
|
| Predecessor |
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||||||||||
|
| Three Months Ended |
|
| Three Months Ended |
|
| September 30, 2019 |
| September 30, 2019 |
|
| September 30, 2018 |
| September 30, 2018 | ||||||||||||||||||||||||
|
| (in thousands) |
|
| (in thousands) |
|
| (in thousands) |
|
| (in thousands) | ||||||||||||||||||||||||||||
|
| Variable |
| Fixed |
|
| Variable |
| Fixed |
|
| Variable |
| Fixed |
| Variable |
| Fixed |
|
| Variable |
| Fixed |
| Variable |
| Fixed | ||||||||||||
Revenues |
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|
|
|
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|
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|
| ||||
Transaction fees |
| $ | 78,915 |
| $ | 23,725 |
|
| $ | 69,637 |
| $ | 20,502 |
|
| $ | 87,574 |
| $ | 25,172 |
| $ | 246,066 |
| $ | 73,272 |
|
| $ | 68,855 |
| $ | 23,727 |
| $ | 208,049 |
| $ | 65,702 |
Subscription Fees including Refinitiv market data fees |
| 455 |
| 47,606 |
|
| 475 |
| 48,088 |
|
|
| 440 |
|
| 48,198 |
|
| 1,330 |
|
| 143,320 |
|
|
| 405 |
|
| 45,285 |
|
| 1,305 |
|
| 142,676 | ||||
Commissions |
| 24,310 |
| 9,887 |
|
| 17,780 |
| 10,103 |
|
|
| 27,840 |
|
| 9,750 |
|
| 78,785 |
|
| 29,415 |
|
|
| 14,241 |
|
| 10,153 |
|
| 49,367 |
|
| 30,463 | ||||
Other |
| 303 |
| 1,591 |
|
| 12 |
| 2,906 |
|
|
| 87 |
|
| 1,920 |
|
| 692 |
|
| 5,378 |
|
|
| 14 |
|
| 2,573 |
|
| 40 |
|
| 8,169 | ||||
Gross revenues |
| $ | 103,983 |
| $ | 82,809 |
|
| $ | 87,904 |
| $ | 81,599 |
| |||||||||||||||||||||||||
Gross revenue |
| $ | 115,941 |
| $ | 85,040 |
| $ | 326,873 |
| $ | 251,385 |
|
| $ | 83,515 |
| $ | 81,738 |
| $ | 258,761 |
| $ | 247,010 |
Share-BasedStock-Based Compensation
The Company accounts for share-basedstock-based compensation in accordance with ASC 718. ASC 718 focuses primarily on accounting for a transaction in which an entity obtains employee services in exchange for share-basedstock-based payments. Under ASC 718, the share-basedstock-based payments received by the employees of the Company are accounted for either as equity awards or as liability awards.
20
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 members’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’sinstrument'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 share-basedstock-based awards that do not require future service (i.e., vested awards) are expensed immediately. The grant-date fair value of share-based employeestock-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 share-based employeestock-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
Tradeweb Markets LLC and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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 share-based paymentstock-based awards requires the input of highly subjective assumptions, including the expected life of the share-based paymentstock-based awards and the stock price volatility. The Company uses the Black-Scholes pricing model to value some of its share-basedstock-based awards. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the Company’s consolidated statements of income.
Net IncomeEarnings Per Share
Basic net incomeearnings per share is computed by dividing the net income attributable to the Company’sCompany's shares by the weighted-average number of the Company’sCompany's shares outstanding during the period. For purposes of computing diluted net incomeearnings per share, the weighted-average number of the Company’s shares reflects the dilutive effect that could occur if convertiblesecurities that qualify as participating securities were converted into or exchanged or exercised for TWM LLC’s shares, in the Company’s sharespre-IPO period, and the Corporation’s Class A or Class B common stock, in the post-IPO period, using the treasury stock method.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.
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.
21
The fair value hierarchy under ASC 820 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
Level 11:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 22: 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 33: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’sinstrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Recent Accounting Pronouncements – Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, 2016‑13, Financial Instruments —– Credit Losses.Losses. The ASU provides new guidance for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. This ASU is effectiveapplicable for the Company in the fiscal year beginning January 1, 2020.2020 and requires a modified retrospective method of adoption. The Company is currently evaluatingin the impactplanning and analysis phase, which involves documenting in-scope financial assets and understanding and leveraging existing credit loss estimation processes.
The Company does not anticipate the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, 2017‑04, Intangibles —– Goodwill and Other.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 ASU is applicable for the Company in the fiscal year beginning January 1, 2021.2020. The Company
Tradeweb Markets LLC and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
does not anticipate the adoption of this ASU to have a material impact on the Company’sCompany's consolidated financial statements.
3.Pushdown Accounting
The Refinitiv Transaction was accounted for by Refinitiv in accordance with the acquisition method of accounting pursuant to ASC 805, and pushdown accounting was applied to Refinitiv to record the fair value of the assets and liabilities of Refinitiv on 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 was recorded as goodwill. The Company has one year from the date of the Refinitiv TransactionAt September 30, 2019 and December 31, 2018, goodwill amounted to finalize these amounts.
$2.7 billion.
The adjusted valuations resulted in an increase in depreciation and amortization expense, due to the increased carrying value of the Company’s assets and the related increase in depreciation of tangible assets and amortization of intangible assets, and a decrease in occupancy expense as a result of the recognition of a leasehold interest liability.
4. Receivable from and Payable to Brokers and Dealers and Clearing Organizations
4.LeasesReceivables from and payables to brokers and dealers and clearing organizations consist 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.
22
On October 1, 2019, approximately $698.8 million and $664.3 million, respectively, of the receivable from and payable to balances outstanding at September 30, 2019 were settled.
5. Securities Sold Under Agreements to Repurchase
The Company enters into agreements to repurchase from time to time to facilitate the clearance of securities.
At September 30, 2019, securities sold from agreements to repurchase amounted to $24.9 million and related to an overnight repurchase agreement with a maturity date of October 1, 2019.
The following table provides additional information regarding this agreement to repurchase (in thousands):
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| September 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Agreements to repurchase: |
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|
U.S. Treasury Note |
| $ | 24,938 |
| $ | — |
Total agreements to repurchase |
| $ | 24,938 |
| $ | — |
Gross amount of recognized liabilities for agreements to repurchase |
| $ | 24,938 |
| $ | — |
Securities sold under agreements to repurchase are treated as collateralized financings and are presented on the consolidated statement of financial condition at the amounts of cash received, which approximates fair value. Receivables and payables arising from these agreements are not offset on the statement of financial condition.
Effective January 1, 2019, the Company adopted ASC 842.842, Leases. This standard requires the Company to recognize a right-of-use asset and a lease liability for all leases with an initial term in excess of twelve months. The Company accounts for an option to extend a lease when the option is reasonably certain to be exercised. The asset reflects the present value of unpaid lease payments coupled with initial direct costs, prepaid lease payments and lease incentives. The amount of the lease liability is calculated as the present value of unpaid lease payments. The Company adopted ASC 842 using a modified retrospective approach and did not restate comparative periods. The Company elected to take the package of practical expedients allowing the Company to not reassess (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. The Company has elected to account for nonlease components in a contract as part of the single lease component to which they are related.
Significant assumptions and judgements in calculating the right-of-use assets and lease liability include the determination of the applicable borrowing rate for each lease.
On January 1, 2019, upon the adoption of ASC 842, the Company recorded, for office space and data center leases in the USU.S. and UK,U.K., right-of-use assets of $34,760,000,$34.8 million, lease liabilities of $39,635,000$39.6 million and eliminated deferred rent of $4,875,000.$4.9 million. The leases have initial lease terms ranging from 3three to 11 years.
Activity related to the Company’sCompany's leases for the three and nine months ended March 31,September 30, 2019 is as follows (in thousands):
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| Nine Months | ||
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| Ended | ||
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| September 30, |
| September 30, | ||
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| 2019 |
| 2019 | ||
Operating lease expense |
| $ | 2,580 |
| $ | 7,727 |
Cash for amounts included in the measurement of operating liability |
| $ | 2,823 |
| $ | 8,460 |
Right-of-use assets obtained in exchange for operating liabilities |
| $ | — |
| $ | — |
23
At March 31,September 30, 2019, the weighted average borrowing rate and weighted average lease term are as follows:
The following table presents the maturity of lease liabilities as of
At
One
Intangible assets and goodwill relate to the allocation of purchase price associated with the Refinitiv Transaction (see The following is a summary of intangible assets which have an indefinite useful life at both
24 Intangible assets that are subject to amortization, including the related accumulated amortization, are comprised as follows (in thousands):
nine months ended September 30, 2019, and $6.5 million and $19.6 million, respectively, for the three and nine months ended September 30, 2018. The estimated annual future amortization for existing intangibles assets through December 31, 2023 is as follows (in thousands):
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):
The 25 The Company's consolidated effective tax rate 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 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 10 – Tax Receivable Agreement. As a result of the IPO, the Company assumed a tax benefit of $93.2 million, primarily due to an increase in amortizable tax basis that will be amortized primarily over 15 years pursuant to Section 197 of the Internal Revenue Code of 1986, as amended, offset by other factors. The tax benefit has been recognized in deferred tax asset on the September 30, 2019 consolidated statement of financial condition.
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 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. In connection with the IPO, the Company recorded an initial liability of $171.4 million related to its projected obligations under the Tax Receivable Agreement with respect to LLC Interests that were purchased by the Corporation using the net proceeds of the IPO. 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 26
Initial Public Offering 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 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. Reorganization Transactions 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:
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). The Continuing LLC Owners that hold shares of Class D common stock may also 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 27 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). 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:
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
Issuance and Cancellation of Common Stock
28
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, representing 2.7% of the combined voting power of all of the 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.
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 29 The following table summarizes the impact on equity due to changes in the
PRSUs generally vest in the third plan year following the year of The following table
30
The following table
2022, with accelerated vesting for time-based options with vesting dates of January 1, 2021 and 2022 upon the completion of an initial public offering. 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
The following table
As of
31
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 At
The
32
The Company reimburses affiliates of
this indemnification. During 2014, the Company issued Class A Shares and unvested Class P-1(A) Shares to some of the
Certain financial instruments that are not carried at fair value on the consolidated statements of financial condition are carried at amounts that approximate fair value. These instruments include deposits with clearing organizations and accounts receivable.
The The Company has no instruments that are classified within level 2 or level 3 of the fair value hierarchy. The fair value measurements are as follows (in thousands):
33
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 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 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
policy of reviewing, as considered necessary, the credit standing of each counterparty with which it conducts business.
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 The Company has been named as a defendant, along with Additionally, the Company was dismissed from a class action relating to an interest rate swaps matter in 2017, but that matter continues against the remaining defendant financial institutions. The Company is a co-defendant in a matter relating to the distribution of financial strength ratings over the The Company records its best estimate of a loss, including estimated defense costs, when the loss is considered probable and the amount of such loss can be reasonably estimated. Based on its experience, the Company believes that the amount 34 of damages claimed in a legal proceeding is not a meaningful indicator of the potential liability. At this time, the Company cannot reasonably predict the timing or outcomes of, or estimate the amount of loss, or range of loss, if any, related to its pending legal proceedings, including the matters described above, and therefore does not have any contingency reserves established for any of these matters. Revolving Credit Facility On April 8, 2019, the Company entered into a five year, $500 million senior secured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility provides additional borrowing capacity to be used to fund ongoing working capital needs, letters of credit and for general corporate purposes, including potential future acquisitions and expansions. Under the terms of the credit agreement that governs the Credit Facility, borrowings under the Credit Facility bear interest at a rate equal to, at the Company’s option, either (a) a base rate equal to the greatest of (i) the administrative agent’s prime rate, (ii) the federal funds effective rate plus ½ of 1.0% and (iii) one month LIBOR plus 1.0%, in each case plus 0.75%, or (b) LIBOR plus 1.75%, subject to a 0.00% floor. The credit agreement also includes a commitment fee of 0.25% for available but unborrowed amounts and other administrative fees that are payable quarterly. The Credit Facility is available until April 2024, provided the Company is in compliance with all covenants. Financial covenant requirements include maintaining minimum ratios related to interest coverage and leverage. As of September 30, 2019, there were no amounts outstanding under the Credit Facility. In April 2019, the Company completed the Reorganization Transactions and the IPO, which, among other things, resulted in the Corporation becoming the successor of TWM LLC for financial reporting purposes. As a result, earnings per share information for the pre-IPO period is not comparable to earnings per share information for the post-IPO period. Thus, earnings per share information is being presented separately for the pre-IPO and post-IPO periods. The following table summarizes the basic and diluted earnings per share calculations for Tradeweb Markets LLC
35
For the three and nine months ended September 30, 2019, there were approximately 247,491 and 126,667 shares, respectively, underlying equity-settled PRSUs and options that were anti-dilutive and thus excluded from the computation of
LLC Interests held by the Continuing LLC Owners are redeemable in accordance with the TWM LLC Agreement, at the election of such holders, for Shares of Class C and Class D common stock do not have
TWL, DW and TWD are subject to the Uniform Net Capital Rule 36 At
As SEFs, TW SEF and DW SEF are required to maintain adequate financial resources and liquid financial assets in accordance with CFTC regulations. The required and maintained financial resources and liquid financial assets at
The Company operates electronic marketplaces for the trading of products across the rates, credit, equities and money markets asset classes and provides related pre-trade pricing and post-trade processing services. The Company’s operations constitute a single business segment because of the integrated nature of these marketplaces and services. Information regarding revenue by client sector is as follows (in thousands):
The Company operates in the U.S. and internationally, primarily in the Europe and 37 region are not meaningful in understanding the The following table provides a breakdown of revenue by geographic area for the three and nine months ended
The following table provides information on the attribution of long-lived assets by geographic area as of
On
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. As of November 1, 2019, Tradeweb Markets Inc. owns 72.2% of TWM LLC and the Continuing LLC Owners own the remaining 27.8% of TWM LLC. On
On November 5, 2019, Tradeweb Markets Inc., as the 38
ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Overview We are a leader in building and operating electronic marketplaces for our global network of clients across the financial ecosystem. Our network is comprised of clients across the institutional, wholesale and retail client sectors, including many of the largest global asset managers, hedge funds, insurance companies, central banks, banks and dealers, proprietary trading firms and retail brokerage and financial advisory firms as well as regional dealers. Our marketplaces facilitate trading across a range of asset classes, including rates, credit, equities and money Our institutional client sector serves institutional investors in In our wholesale client sector, we provide a broad range of electronic, voice and hybrid platforms to more than 300 dealers and financial institutions with more than 90 actively trading on our electronic or hybrid markets with our Dealerweb platform. This platform was launched in 2008 following the acquisition of inter-dealer broker Hilliard Farber & Co., Inc. In 2011, we acquired the brokerage assets of Rafferty Capital Markets. Today, Dealerweb actively competes across a range of rates, credit, derivatives and equity markets. In our retail client sector, we provide advanced trading solutions for financial advisory firms and traders with our Tradeweb Direct platform. We entered the retail sector in 2006 and launched our Tradeweb Direct platform following the 2013 acquisition of BondDesk Group LLC, which was built to bring innovation and efficiency to the wealth management community. Tradeweb Direct has provided financial advisory firms access to live offerings, accurate pricing in the marketplace and fast execution. Our markets are large and growing. Electronic trading continues to increase across the markets in which we operate as a result of market demand for greater transparency, higher execution quality, operational efficiency and lower costs, as well as regulatory changes. We believe our deep client relationships, asset class breadth, geographic reach, regulatory knowledge and scalable technology position us to continue to be at the forefront of the evolution of electronic trading. Our platforms provide transparent, efficient, cost-effective and compliant trading solutions across multiple products, regions and regulatory regimes. As market participants seek to trade across multiple asset classes, reduce their costs of trading and increase the effectiveness of their trading, including through the use of data and analytics, we believe the demand for our platforms and electronic trading solutions will continue to grow. 39 Trends and Other Factors Impacting Our Performance Economic Environment Our business is impacted by the overall market activity and, in particular, trading volumes and market volatility. Lower volatility is correlated to lower liquidity, which may result in lower trading volume for our clients and may negatively impact our operating performance. As a result, our business is sensitive to slow trading environments and the continuity of conservative monetary policies of central banks internationally, which tend to lessen volatility. While our business is impacted by the overall activity of the market and market volatility, our revenues consist of a mix of fixed and variable fees that partially mitigates this impact. More importantly, we are actively engaged in the further electronification of trading activities, which will help mitigate this impact as we believe secular growth trends can partially offset market volatility risk. Regulatory Environment Our business is subject to extensive regulations in the United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in enforcement of new laws and regulations that apply to our business. The current regulatory environment in the United States may be subject to future legislative changes driven by the current presidential administration. The impact of any reform efforts on us and our operations remains uncertain. In addition, as a result of the referendum in favor of the United Kingdom’s withdrawal from the European Union (“Brexit”) in June 2016, which is currently scheduled to occur on Competitive Environment We and our competitors compete to introduce innovations in market structure and new electronic trading capabilities. While we endeavor to be a leader in innovation, new trading capabilities of our competitors are also adopted by market participants. On the one hand, this increases liquidity and electronification for all participants, but it also puts pressure on us to further invest in our technology and to innovate to ensure the continued growth of our network of clients and continued improvement of liquidity, electronic processing and pricing on our platforms. Our ability to compete is influenced by key factors such as (i) developments in trading platforms and solutions, (ii) the liquidity we provide on transactions, (iii) the transaction costs we incur in providing our solutions, (iv) the efficiency in execution of transactions on our platforms, (v) our ability to hire and retain talent and (vi) our ability to maintain the security of our platforms and solutions. Our competitive position is also influenced by the familiarity and integration of our clients with our electronic, voice and hybrid systems. When either a client wants to trade in a new product or we want to introduce a new product, trading protocol or other solution, we believe we benefit from our clients’ familiarity with our offerings as well as our integration into their order management systems and back offices. Technology and Cybersecurity Environment Our business and its success are largely impacted by the introduction of increasingly complex and sophisticated technology 40 through the development of new and enhanced platforms is essential to maintaining our level of competitiveness in the market and attracting new clients seeking platforms that provide advanced automation and better liquidity. We believe we will continue to increase demand for our platforms and solutions and the volume of transactions on our platforms, and thereby enhance our client relationships, by responding to new trading and information requirements by utilizing technological advances and emerging industry standards and practices in an effective and efficient way. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms and solutions to further enhance our market position. We experience cyber-threats and attempted security breaches. If these were successful, these cyber security incidents could impact revenue and operating income and increase costs. We therefore continue to make investments, which may result in increased costs, to strengthen our cybersecurity measures. Foreign Currency Exchange Rate Environment We earn revenues, pay expenses, hold assets and incur liabilities in currencies other than the U.S. dollar. Effect of Pushdown Accounting on our Financial Statements As a result of the Refinitiv Transaction, and the application of pushdown accounting, our assets and liabilities were adjusted to their estimated fair values as of October 1, 2018, the closing date of the Refinitiv Transaction. These adjusted valuations resulted in an increase in depreciation and amortization expense, due to the increased carrying value of our assets and the related increase in depreciation of tangible assets and amortization of our intangible assets, and a decrease in occupancy expense as a result of the recognition of a leasehold interest liability. Additionally, the excess of the portion of the total purchase price of the Refinitiv Transaction attributable to the purchase of our assets and liabilities over their estimated fair value as of the closing date of the Refinitiv Transaction was allocated to goodwill. Goodwill is subject to annual impairment testing. Amounts allocated to intangible assets with definite lives are subject to amortization over the estimated useful life of the asset. See Due to the change in the basis of accounting resulting from the application of pushdown accounting, the financial information for the period beginning on October 1, 2018, and through and including Taxation and Public Company Expenses
41 applicable, or we purchase LLC Interests from the Continuing LLC Owners. In addition to tax expenses, we also incur expenses related to our operations. Furthermore, in connection with the IPO, we entered into the Tax Receivable Agreement pursuant to which we will be required to make payments that we expect to be significant. We intend to cause TWM LLC to make distributions in an amount sufficient to allow us to pay our tax obligations,
board of directors. In addition, as a public company, we have started to implement additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In particular, we expect our accounting, legal and personnel-related expenses and directors’ and officers’ insurance costs to continue to increase as we establish more comprehensive compliance and governance functions, establish, maintain and review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act and prepare and distribute periodic reports in accordance with SEC rules. Components of our Results of Operations Revenues Our gross revenue is derived primarily from transaction fees, subscription fees, commissions and market data fees. For the three and nine months ended Transaction Fees We earn transaction fees from transactions executed on our trading platforms through various fee plans. Transaction fees are generated on both a variable and fixed price basis and vary by geographic region, product type and trade size. For most of our products, clients pay both fixed minimum monthly transaction fees and variable transaction fees on a per transaction basis in excess of the monthly minimum. For certain of our products, clients also pay a subscription fee in addition to the minimum monthly transaction fee. For other products, instead of a minimum monthly transaction fee, clients pay a subscription fee and variable or fixed transaction fees on a per transaction basis. For variable transaction fees, we charge clients fees based on the mix of products traded and the volume of transactions executed. Transaction volume is determined by using either a measure of the notional volume of the products traded or a count of the number of trades. We typically charge higher fees for products that are less actively traded. In addition, because transaction fees are sometimes subject to fee plans with tiered pricing based on product mix, volume, monthly minimums and monthly maximum fee caps, average transaction fees per million generated for a client may vary each month depending on the mix of products and volume traded. Furthermore, because transaction fees vary by geographic region, product type and trade size, our revenues may not correlate with volume growth. Subscription Fees We earn subscription fees primarily for granting clients access to our markets for trading and market data. For a limited number of products, we only charge subscription fees and no transaction fees. Subscription fees are generally generated on a fixed price basis. For purposes of our discussion of our results of operations, we include Refinitiv (formerly Thomson Reuters) market data fees in subscription fees. We earn fixed license fees from our market data license agreement with Refinitiv. We also earn royalties from Refinitiv for referrals of new Eikon (a Refinitiv data platform) customers based on customer conversion rates. Royalties may fluctuate from period to period depending on the numbers of customer conversions achieved by Refinitiv during the applicable royalty fee earning period, which is typically 42 Commissions We earn commission revenue from our 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. For TBA-MBS, U.S. Contingent Consideration In 2014, we issued Class A Shares and unvested Class Operating Expenses Employee Compensation and Benefits Employee compensation and benefits expense consists of wages, employee benefits, bonuses, commissions, Depreciation and Amortization Depreciation and amortization expense consists of costs relating to the depreciation and amortization of other intangible assets, acquired and internally developed software, leasehold improvements, furniture and equipment. As discussed in “— Effect of Pushdown Accounting on our Financial Statements,” we applied pushdown accounting as a result of the Refinitiv Transaction and therefore depreciation and amortization expense in Successor reporting periods will differ from amounts reported in Predecessor periods. General and Administrative General and administrative expense consists of travel and entertainment, marketing, value-added taxes, state use taxes, foreign currency transaction gains and losses, charitable contributions, other administrative expenses and bad debt expense. We expect general and administrative expense to increase as we expand the number of our employees and product offerings and grow our operations. Technology and Communications Technology and communications expense consists of costs relating to software and hardware maintenance, our internal network connections, data center costs, clearance costs and data feeds provided by third-party service providers, 43 including Refinitiv pursuant to a shared services agreement. Factors that influence technology and communications expense include the growth of our client base and product offerings. Professional Fees Professional fees consist primarily of accounting, tax and legal fees and fees paid to technology and software consultants to maintain our trading platforms and infrastructure. Accounting, tax and legal fees are expected to grow as a result of the changes in our structure and operations that we will continue to implement as a public company. Factors that influence technology and software consulting expense include the growth of our client base and product offerings. Occupancy Occupancy expense consists of operating lease rent and related costs for office space and data centers leased in Net Interest Income (Expense) Interest income consists of interest earned from our cash deposited with large commercial banks and money market funds. Beginning with the second quarter of 2019, interest expense Income Taxes Beginning with the second quarter of 2019, we became subject to U.S. federal, state and local income taxes with respect to our taxable income, including our allocable share of any taxable income of TWM LLC, and are 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 44 Results of Operations For the Three Months Ended The following table sets forth a summary of our statements of income for the three months ended
Overview During the three months ended Our expenses were impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting and non-cash stock-based compensation expense related to options. Gross revenue increased by revenue increased by 2018, and the related reduction in the actual consideration versus the estimated consideration. Total expenses for the three months ended accounting, and higher employee compensation and benefits expense, including the impact of non-cash stock-based compensation expense related to options. Total expenses for the three months ended September 30, 2019 were partially offset by lower general and administrative costs, specifically foreign exchange gains. Income before taxes for the three months ended 45 months ended September 30, 2019 were Revenues Our revenues for the three months ended
Our variable and fixed revenues by fee type for the three months ended
46 Transaction fees. Transaction fees increased by Subscription fees. Subscription fees
Commissions. Commission revenue increased by $13.2 million or 54.1% to $37.6 million for the three months ended Other. Other revenue decreased by Contingent Our gross revenue by client sector for the three months ended
Institutional. Revenues from our Institutional client sector increased by Wholesale. Revenues from our Wholesale client sector increased by
Retail. Revenues from our Retail client sector increased by $2.4 million or 13.2% to $20.2 million for the three months ended September 30, 2019 from $17.8 million for the three months ended September 30, 2018. The increase was primarily due to higher trading volumes for certificates of deposit partially offset by lower revenues for software development and implementation. Market 47 Our gross revenue by asset class for the three months ended
Our variable and fixed revenues by asset class for the three months ended
Rates. Revenues from our Rates asset class increased by
Equities. Revenues from our Equities asset class increased by Money Markets. Revenues from our Money Markets asset class increased by Market 48 Other Fees. Revenues from Other Fees Canada. A significant percentage of our revenues are tied directly to overall trading volumes in the rates, credit, equities and money markets asset classes. The average daily volumes and total volumes on our trading platforms by asset class for the three months ended
We believe the increases in average daily volumes in the three months ended increased volatility. Trading activity in both long and short-tenor interest rate swaps and swaptions, repurchase agreements and mortgages were the leading drivers of our overall volume growth year-over-year. Rates ADV increased mainly due to higher trading activity in both long and short-tenor interest rate swaps and swaptions, as well as mortgages and U.S. treasuries. Credit ADV increased due mainly to higher trading activity in credit derivatives, U.S. high-grade and high-yield credit as well as Chinese bonds. Equities ADV increased due mainly to higher trading activity in institutional ETFs. Money Markets ADV increased due to the continued growth of bilateral electronic trading in repurchase agreements. The average variable fees per million dollars of volume traded on our trading platforms by asset class for the three months ended
Rates average variable fees per million was impacted by the growth of short tenor swap volumes, a product which has a lower variable fee capture as compared to other rates products. Credit average variable fees per million was impacted by a mix shift due to higher growth in credit derivatives volumes, products which have a lower variable fee capture as compared to cash credit products, and a decline in municipals volumes. Equities average variable fees per 49 million was impacted by a mix shift towards Institutional European ETFs and away from Wholesale products. Money Markets average variable fees per million was impacted by a mix shift within repurchase agreements volumes from Wholesale to Institutional. Our gross revenue by geography (based on client location) for the three months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:
U.S. Revenues from U.S. clients increased by $19.6 million or 18.3% to $126.6 million for the three months ended September 30, 2019 from $107.0 million for the three months ended September 30, 2018 primarily due to higher trading volumes for mortgages products, U.S. credit products, U.S. treasuries, U.S. dollar-denominated swaps and U.S. ETFs. International. Revenues from International clients increased by $16.1 million or 27.6% to $74.4 million for the three months ended September 30, 2019 from $58.3 million for the three months ended September 30, 2018 primarily due to higher trading volumes for European interest rate swaps, European ETFs, U.S. dollar-denominated swaps and European repurchase agreements. Fluctuations in foreign currency rates decreased our International gross revenue by $3.6 million. Operating Expenses Our expenses for the three months ended September 30, 2019 and 2018 were as follows:
Employee Compensation and Benefits. Employee compensation and benefits expense increased by $10.6 million or 15.3% to $79.6 million for the three months ended September 30, 2019 from $69.1 million for the three months ended September 30, 2018. The increase was primarily due to a $3.7 million increase in salaries and benefits, due to an increase in employee headcount, a $3.0 million increase in commission related expenses due to higher Wholesale revenues, $2.6 million increase in annual incentive compensation expenses tied to operating performance, and a $2.0 million increase in non-cash stock-based compensation expense related to options. Total employee headcount increased to 926 as of September 30, 2019 from 896 as of September 30, 2018. Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2019 was $35.1 million. Depreciation and amortization expense for the three months ended September 30, 2018 was 50 $16.4 million. As a result of the Refinitiv Transaction and the application of pushdown accounting, we adjusted our assets and liabilities to their estimated fair values as of October 1, 2018, which resulted in an increase in depreciation of tangible assets and amortization of our intangible assets. The impact of such adjustments increased depreciation and amortization expense during the three months ended September 30, 2019 by $18.3 million. Technology and Communications. Technology and communications expense increased by $0.4 million or 4.6% to $9.5 million for the three months ended September 30, 2019 from $9.1 million for the three months ended September 30, 2018. The increase was primarily due to increased clearance fees as a result of higher trading volumes. General and Administrative. General and administrative expense decreased by $1.9 million or (20.0)% to $7.5 million for the three months ended September 30, 2019 from $9.4 million for the three months ended September 30, 2018. The decrease was primarily a result of an increase in foreign exchange gains of $1.5 million. Professional Fees. Professional fees decreased by $0.3 million or (3.6)% to $7.3 million for the three months ended September 30, 2019 from $7.6 million for the three months ended September 30, 2018. The decrease was primarily due to fees incurred in 2018 associated with preliminary work related to our IPO. Occupancy. Occupancy expense for the three months ended September 30, 2019 was $3.6 million. Occupancy expense for the three months ended September 30, 2018 was $3.5 million. As a result of the Refinitiv Transaction and the application of pushdown accounting, at October 1, 2018, we established a leasehold interest liability, which resulted in a $0.1 million increase in occupancy expense during the three months ended September 30, 2019. Net Interest Income (Expense) Net interest income (expense) decreased by $0.1 million to net interest income of $0.6 million for the three months ended September 30, 2019 from net interest income of $0.7 million for the three months ended September 30, 2018 due to higher interest income offset by credit facility fees related to the Revolving Credit Facility. Income Taxes Provision for income taxes for the three months ended September 30, 2019 was $10.3 million. Provision for income taxes for the three months ended September 30, 2018 was $7.5 million. The provision for income taxes for the three months ended September 30, 2019 was impacted by the Reorganization Transactions and the IPO, which resulted in Tradeweb Markets Inc. becoming 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 being taxed at prevailing corporate tax rates. 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. 51 For the Nine Months Ended September 30, 2019 (Successor) and Nine Months Ended September 30, 2018 (Predecessor) The following table sets forth a summary of our statements of income for the nine months ended September 30, 2019 and 2018:
Overview During the nine months ended September 30, 2019, our business was impacted by a number of factors, including higher client trading activity, driving revenue increases in rates, credit, equities and money markets trading. Our market data business also grew due to the expansion of our market data license agreement with Refinitiv. Our expenses were impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting and non-cash stock-based compensation expense related to the Special Option Award (as defined below) as a result of the completion of the IPO during the second quarter of 2019, and post-IPO options awarded in the third quarter of 2019. Gross revenue increased by $72.5 million or 14.3% to $578.3 million for the nine months ended September 30, 2019 from $505.8 million for the nine months ended September 30, 2018. This increase in gross revenue was mainly due to higher trading volumes resulting in a $45.6 million increase in transaction fees and a $28.4 million increase in commissions. Net revenue increased by $99.3 million or 20.7% to $578.3 million for the nine months ended September 30, 2019 from $478.9 million for the nine months ended September 30, 2018. Non-cash contingent consideration decreased by $26.8 million for the nine months ended September 30, 2019 as a result of the vesting of the Credit Initiative Earnout at July 31, 2018. Total expenses for the nine months ended September 30, 2019 and 2018 were $442.8 million, and $338.6 million, respectively. Total expenses for the nine months ended September 30, 2019 were impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting and higher employee compensation and benefits expense, including the impact of non-cash stock-based compensation expense related to the Special Option Award, which, as a result of the completion of the IPO, we began to expense during the second quarter of 2019, and post-IPO options awarded in the third quarter of 2019. Income before taxes for the nine months ended September 30, 2019 and 2018 was $137.2 million and $142.1 million, respectively. Net income for the nine months ended September 30, 2019 and 2018 was $115.8 million and $130.2 million, respectively. Net income attributable to Tradeweb Markets Inc. for the nine months ended September 30, 52 2019 was $42.4 million. Income before taxes, net income and net income attributable to Tradeweb Markets Inc. for the nine months ended September 30, 2019 were negatively impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting, resulting in a $52.5 million increase in depreciation and amortization expense and $22.4 million of stock-based compensation expense related to the Special Option Award and post-IPO options awarded in 2019, partially offset by higher revenues. Revenues Our revenues for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:
Our variable and fixed revenues by fee type for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:
53 Transaction fees. Transaction fees increased by $45.6 million or 16.7% to $319.3 million for the nine months ended September 30, 2019 from $273.8 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for rates derivatives products and ETFs. Subscription fees. Subscription fees increased by $0.7 million or 0.5% to $144.7 million for the nine months ended September 30, 2019 from $144.0 million for the nine months ended September 30, 2018 primarily due to higher market data and Institutional MBS fees, partially offset by lower Retail fees. Commissions. Commission revenue increased by $28.4 million or 35.5% to $108.2 million for the nine months ended September 30, 2019 from $79.8 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for U.S. corporate bonds and U.S. treasuries. Other. Other revenue decreased by $2.1 million or (26.1)% to $6.1 million for the nine months ended September 30, 2019 from $8.2 million for the nine months ended September 30, 2018 primarily as a result of lower fees from a third party for certain licensing and development in Canada. Contingent consideration. There was no contingent consideration for the nine months ended September 30, 2019 due to the vesting of the Credit Initiative Earnout at July 31, 2018. Contingent consideration for the nine months ended September 30, 2018 was $26.8 million. Our gross revenue by client sector for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:
Institutional. Revenues from our Institutional client sector increased by $39.2 million or 13.0% to $341.2 million for the nine months ended September 30, 2019 from $301.9 million for the nine months ended September 30, 2018. The increase was derived primarily from higher trading volumes for rates derivatives products, ETFs and mortgages products, partially offset by the impact of foreign exchange, mainly the weakening of the euro. Wholesale. Revenues from our Wholesale client sector increased by $25.4 million or 25.6% to $124.4 million for the nine months ended September 30, 2019 from $99.0 million for the nine months ended September 30, 2018. The increase was derived primarily from higher trading volumes for U.S. session-based trading and U.S. treasuries. Retail. Revenues from our Retail client sector increased by $3.5 million or 6.1% to $61.3 million for the nine months ended September 30, 2019 from $57.8 million for the nine months ended September 30, 2018. The increase was derived primarily from higher trading volumes for certificates of deposit, municipal bonds and U.S. treasuries partially offset by lower revenues for software development and implementation. Market Data. Revenues from our Market Data client sector increased by $4.3 million or 9.1% to $51.4 million for the nine months ended September 30, 2019 from $47.1 million for the nine months ended September 30, 2018 primarily as a result of increased Refinitiv (formerly Thomson Reuters) license fees due to an increase in the number of market data feeds provided to Refinitiv. 54 Our gross revenue by asset class for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:
Our variable and fixed revenues by asset class for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:
Rates. Revenues from our Rates asset class increased by $45.0 million or 16.0% to $326.7 million for the nine months ended September 30, 2019 from $281.6 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for derivatives products, U.S. treasuries and mortgages products. Credit. Revenues from our Credit asset class increased by $16.2 million or 15.8% to $118.6 million for the nine months ended September 30, 2019 from $102.5 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for U.S. corporate bonds . Equities. Revenues from our Equities asset class increased by $6.9 million or 24.3% to $35.2 million for the nine months ended September 30, 2019 from $28.3 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for ETFs. Money Markets. Revenues from our Money Markets asset class increased by $5.1 million or 20.3% to $30.4 million for the nine months ended September 30, 2019 from $25.3 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for repurchase agreements and certificates of deposit. Market Data. Revenues from Market Data increased by $4.3 million or 9.1% to $51.4 million for the nine months ended September 30, 2019 from $47.1 million for the nine months ended September 30, 2018 primarily as a result of 55 increased Refinitiv (formerly Thomson Reuters) license fees due to an increase in the number of market data feeds provided to Refinitiv. Other Fees. Revenues from Other Fees decreased by $5.0 million or (23.8)% to $16.0 million for the nine months ended September 30, 2019 from $21.0 million for the nine months ended September 30, 2018 primarily due lower fees from a third party for certain licensing and development in Canada and lower Retail revenues for software development and implementation. A significant percentage of our revenues are tied directly to overall trading volumes in the rates, credit, equities and money markets asset classes. The average daily volumes and total volumes on our trading platforms by asset class for the nine months ended September 30, 2019 and 2018 were as follows:
We believe the increases in average daily volumes in nine months ended September 30, 2019 for most asset classes can be attributed to various factors, including further electronification of trading activities across our asset classes, increase in market share, new products, new clients and increased volatility. Trading activity in both long and short-tenor interest rate swaps and swaptions, mortgages and repurchase agreements were the leading drivers of our overall volume growth year-over-year. Rates ADV increased due mainly to higher trading activity in long and short-tenor interest rate swaps and swaptions, mortgages and U.S. treasuries. Credit ADV increased due mainly to higher trading activity in credit derivatives, U.S. high-grade and high-yield credit as well as Chinese bonds. Equities ADV decreased due mainly to lower trading activity in U.S. ETFs. Money Markets ADV increased due to the continued growth of bilateral electronic trading in repurchase agreements. The average variable fees per million dollars of volume traded on our trading platforms by asset class for the nine months ended September 30, 2019 and 2018 are summarized below. There are four potential drivers of quarterly fluctuations in our average variable fees per million: (1) volume discounts, (2) the mix of cash and derivatives products traded, (3) the mix of protocols underpinning cash and derivatives products and (4) pricing. Average variable fees per million should be reviewed in conjunction with our trading volumes and gross revenue by asset class. Since variable fees are sometimes subject to fee plans with tiered pricing based on product mix and volume, average variable fees per million for a specific asset class may not correlate with volumes or revenue growth. For example, average variable fees per million dollars of volume for our Rates asset class decreased
56 Rates average variable fees per million was impacted by Our gross revenue by geography (based on client location) for the
U.S. Revenues from U.S. clients increased by International. Revenues from International clients increased by Operating Expenses Our expenses for the
Employee Compensation and Benefits. Employee compensation and benefits expense increased by 57 upon the completion of the IPO), and post-IPO options awarded in the third quarter of 2019, an $11.7 million increase in salaries and benefits due to an increase in employee headcount and an increase in Depreciation and Amortization. Depreciation and amortization expense for the Technology and Communications. Technology and communications expense increased by $2.5 million or 9.4% to $29.1 million for the nine months ended September 30, 2019 from $26.6 million for the nine months ended September 30, 2018. The increase was primarily due to increased clearance fees as a result of higher trading volumes. General and Administrative. General and administrative expense increased by
Professional Fees. Professional fees increased by Occupancy. Occupancy expense for the Net Interest Income (Expense) Net interest income (expense) Income Taxes Provision for income taxes for the Liquidity and Capital Resources Overview Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs to meet operating expenses, debt service, acquisitions, other 58 commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and availability under the Revolving Credit Facility and their sufficiency to fund our operating and investing activities. Historically, we have generated significant cash flows from operations and have funded our business operations through cash on hand and cash flows from operations. Our primary cash needs are for day to day operations, working capital requirements, capital expenditures, primarily for software and equipment, and our expected dividend payments. In addition, we are obligated to make payments under the Tax Receivable Agreement. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments that we will be required to make under the Tax Receivable Agreement will be significant. Any payments made by us under the Tax Receivable Agreement will generally reduce the amount of overall cash flows that might have otherwise been available to us or to TWM LLC. These payments will offset some of the tax benefits that we expect to realize as a result of the ownership structure of TWM LLC. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us. We expect to fund our liquidity requirements through cash and cash equivalents and cash flows from operations. While historically we have generated significant and adequate cash flows from operations, in the event of an unexpected event in the future or otherwise, we may fund our liquidity requirements through borrowings under the Revolving Credit Facility. We believe that our projected cash position, cash flows from operations and, if necessary, borrowings under the Revolving Credit Facility, will be sufficient to fund our liquidity requirements for at least the next 12 months. However, our future liquidity requirements could be higher than we currently expect as a result of various factors. For example, any future investments, acquisitions, joint ventures or other similar transactions may require additional capital. In addition, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, it will take the form of equity or debt financing, or both, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all. As of Factors Influencing Our Liquidity and Capital Resources Dividend Policy
Dividends declared and paid to Class A and B common stockholders during the nine months ended September 30, 2019 amounted to $22.9 million. The declaration, amount and payment of any dividends will be at the sole discretion of our board of directors and will depend on our and our subsidiaries’ results of operations, capital requirements, financial condition, business prospects, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors deem relevant. Because we are a holding company and all of our business is conducted through our subsidiaries, we expect to pay dividends, if any, only from funds we receive from our subsidiaries. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. As the sole 59 distributions to us, the Our board of directors will periodically review the cash generated from our business and the capital expenditures required to finance our growth plans and determine whether to modify the amount of regular dividends and/or declare any periodic special dividends. We currently intend to increase the amount of our expected quarterly dividends in line with free cash flow growth, if any, after giving effect to required tax distributions to be paid by TWM Cash Distributions
On November 5, 2019, Tradeweb Markets Inc., as the sole manager, approved a cash distribution by TWM LLC to its equityholders, including Tradeweb Markets Inc., in an aggregate amount of Cash Dividends
On November 6, 2019, our board of directors Indebtedness As of Historically, the Company has only issued debt in connection with significant investment transactions and all debt issued by the Company has been issued to subsidiaries of Thomson Reuters.
TWM LLC is the borrower under the Revolving Credit Facility. The Revolving Credit Facility permits borrowings of up to $500.0 million by TWM LLC. Subject to the satisfaction of certain conditions, we will be able to increase the Revolving Credit Facility by $250.0 million with the consent of lenders participating in the increase. The Revolving Credit Facility provides for the issuance of up to $5.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $30.0 million. The Revolving Credit Facility will mature on April 8, 2024. As of September 30, 2019, there were no amounts outstanding under the Revolving Credit Facility and we had availability of $500.0 million. 60 Under the terms of the credit agreement that governs the Revolving Credit Facility, borrowings under the Revolving Credit Facility bear interest at a rate equal to, at our option, either (a) a base rate equal to the greatest of (i) the administrative agent’s prime rate, (ii) the federal funds effective rate plus ½ of 1.0% and (iii) one month LIBOR plus 1.0%, in each case plus 0.75%, or (b) LIBOR plus 1.75%, subject to a 0.00% floor. The credit agreement also requires that we pay a commitment fee of 0.25% for available but unborrowed amounts. We are also required to pay customary letter of credit fees and agency fees. We have the option to voluntarily repay outstanding loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans. There will be no scheduled amortization under the Revolving Credit Facility. The principal amount outstanding will be due and payable in full at maturity. Obligations under the Revolving Credit Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The Revolving Credit Facility is secured by a first-priority security interest in substantially all of the assets of TWM LLC and the guarantors under the facility, subject to certain exceptions. The credit agreement that governs the Revolving Credit Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict the ability of TWM LLC and the ability of its restricted subsidiaries to:
The Revolving Credit Facility contains a financial covenant requiring compliance with a (i) maximum total net leverage ratio tested on the last day of each fiscal quarter not to exceed 3.5 to 1.0 (increasing to 4.0 to 1.0 for the four-quarter period following a material acquisition and the fiscal quarter in which such material acquisition is consummated) and (ii) minimum cash interest coverage ratio tested on the last day of each fiscal quarter not less than 3.0 to 1.0. The credit agreement that governs the Revolving Credit Facility also contains certain affirmative covenants and events of default customary for facilities of this type, including relating to a change of control. See Item 5, “Other Information” elsewhere in this Quarterly Report on Form 10 Q. If an event of default occurs, the lenders under the Revolving Credit Facility will be entitled to take various actions, including the acceleration of amounts due under the Revolving Credit Facility and all actions permitted to be taken by secured creditors under applicable law. As of September 30, 2019, we were in compliance with all the covenants set forth in the Revolving Credit Facility. Capital Requirements Certain of our U.S. subsidiaries are registered as broker-dealers, SEFs or introducing brokers and are subject to the applicable rules and regulations of the SEC and CFTC. These rules contain minimum net capital or other financial resource requirements, as defined in the applicable regulations. These rules may also require a significant part of the registrants’ assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by the Financial Conduct Authority in the U.K., the Nederlandsche Bank in the Netherlands, the Japanese Financial Services Agency, the Japanese Securities Dealers Association and other foreign regulators, and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of 61 maintain capital balances in these subsidiaries in excess of our minimum requirements in order to satisfy working capital needs and to ensure that we have enough cash on hand to satisfy margin requirements and credit risk, including the excess capital expectations of our clients. Fails to Deliver/Fails to Receive At times, transactions executed on our 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, we will recognize a receivable from (and a matching payable to) brokers and dealers and clearing organizations for the proceeds from the unsettled transaction. The impact on our liquidity and capital resources is minimal as receivables and payables for failed transactions are usually recognized simultaneously and predominantly offset. See Note 4 – Receivable to and Payable from Brokers and Dealers and Clearing Organizations to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Working Capital Working capital is defined as current assets minus current liabilities. Current assets consist of cash and cash equivalents, restricted cash, receivable from brokers and dealers and clearing organizations, deposits with clearing organizations, accounts receivable and receivable from affiliates. Current liabilities consist of securities sold under agreements to repurchase, payable to brokers and dealers and clearing organizations, accrued compensation, deferred revenue, accounts payable, accrued expenses and other liabilities, employee equity compensation payable,
Current assets Current assets increased to 62 Current liabilities Current liabilities See Note 4 – Receivable to and Payable from Brokers and Dealers and Clearing Organizations to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for more information regarding the fails to deliver/receive and the subsequent settlement. See “—Liquidity and Capital Resources—Factors Influencing Our Liquidity and Capital Resources—Capital Requirements.” Cash Flows Our cash flows for the
Operating Activities Operating activities consist primarily of net income adjusted for noncash items that include depreciation and amortization, stock-based compensation expense and contingent Net cash Investing Activities Investing activities consist of software development costs, investments in technology hardware, purchases of equipment and other tangible assets, business acquisitions and investments. Net cash used in investing activities was 63 Financing Activities Financing activities primarily consist of cash dividends to our Class A and Class B common stockholders and cash distributions from TWM LLC to the Original LLC Owners during the pre-IPO period. Net cash used in financing activities for the Non-GAAP Financial Measures Free Cash Flow In addition to cash flow from operating activities presented in accordance with GAAP, we use Free Cash Flow to measure liquidity. Free Cash Flow is defined as cash flow from operating activities less expenditures for capitalized software development costs and furniture, equipment and leasehold improvements. We present Free Cash Flow because we believe it is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations after expenditures for capitalized software development costs and furniture, equipment and leasehold improvements. Free Cash Flow has limitations as an analytical tool, and you should not consider Free Cash Flow in isolation or as an alternative to cash flow from operating activities or any other liquidity measure determined in accordance with GAAP. You are encouraged to evaluate each adjustment. In addition, in evaluating Free Cash Flow, you should be aware that in the future, we may incur expenditures similar to the adjustments in the presentation of Free Cash Flow. In addition, Free Cash Flow may not be comparable to similarly titled measures used by other companies in our industry or across different industries. The table set forth below presents a reconciliation of our cash flow from operating activities to Free Cash Flow for the
Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS In addition to net income and net income attributable to Tradeweb Markets Inc., each presented in accordance with GAAP, we present Adjusted EBITDA, 64 Adjusted EBITDA, Adjusted EBIT and Adjusted EBIT margin Adjusted EBITDA is defined as net income before contingent consideration, net interest income, this stock-based compensation expense because the amount of expense associated with the Special Option Award and the post-IPO option awards in 2019 may not directly correlate to the underlying performance of our business and will vary across periods. We do not expect to exclude any non-cash stock-based compensation expense associated with options that may be awarded to management and other employees during 2020. With respect to Adjusted EBIT and Adjusted EBIT margin, we believe it is useful to exclude the depreciation and amortization of acquisition related tangible and intangible assets resulting from certain acquisitions, the Refinitiv Transaction and the application of pushdown accounting in order to facilitate a period-over-period comparison of our financial performance. Management and our board of directors use Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted Adjusted Net Income and Adjusted Diluted EPS We present Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. for post-IPO periods and Tradeweb Markets LLC for pre-IPO periods. As discussed below, because Adjusted Net Income and Adjusted Diluted EPS give effect to certain tax related adjustments to reflect an assumed effective tax rate for all periods presented and, for post-IPO periods, assumes all LLC Interests held by non-controlling interests are exchanged for shares of Class A or Class B common stock, we believe that Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. and Tradeweb Markets LLC are comparable. Adjusted Net Income is defined as net income 65 for the pre-IPO periods and post-IPO periods give effect to potentially dilutive securities using the treasury stock method. We use Adjusted Net Income and Adjusted Diluted EPS as supplemental metrics to evaluate our business performance in a way that also considers our ability to generate profit without the impact of certain items. In addition to excluding items that are non-recurring or may not be indicative of our ongoing operating performance, by assuming the full exchange of all outstanding LLC Interests held by non-controlling interests, we believe that Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period, because it eliminates the effect of any changes in net income attributable to Tradeweb Markets Inc. driven by increases in our ownership of TWM LLC, which are unrelated to our operating performance. Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS have limitations as analytical tools, and you should not consider these non-GAAP financial measures in isolation or as alternatives to net income attributable to Tradeweb Markets Inc., net income, operating income, gross margin, 66 The table set forth below presents a reconciliation of net income to Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted
67
The table
68 The following table summarizes the
Off-Balance Sheet Arrangements As of Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with U.S. GAAP which requires us to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following policies are most critical to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective or complex judgments in estimating the effect of inherent uncertainties. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in our consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Management bases its estimates on historical experience, observance of trends in particular areas, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Information from these sources form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Therefore, actual results could differ materially from those estimates. Such estimates include pushdown accounting, intangible assets, goodwill, software development costs, stock based compensation, contingent consideration payable and current and deferred income taxes. Pushdown Accounting The Refinitiv Transaction was accounted for by Refinitiv in accordance with the acquisition method of accounting pursuant to ASC 805 “Business Combinations” and pushdown accounting was applied to Refinitiv to record the fair value of the assets and liabilities of Refinitiv on the date of the Refinitiv Transaction. We, as a consolidating subsidiary of Refinitiv, also accounted for the Refinitiv Transaction using pushdown accounting. Under pushdown accounting, the 69 excess of our fair value above the fair value accounting basis of our net assets and liabilities 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. In determining the fair value of the assets acquired and the liabilities assumed, we considered a report of a third-party valuation expert. Management is responsible for these internal and third-party valuations and Intangible Assets We amortize our intangible assets over the estimated useful lives and test for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. We test our intangible assets with an indefinite useful life for impairment at least annually. An impairment loss is recognized if the sum of the estimated Goodwill Goodwill arises out of pushdown accounting and business combinations and is the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date. We test our goodwill at least annually for impairment and recognize an impairment loss if the estimated fair value of a reporting unit is less than its net book value. The Company is one reporting unit for goodwill impairment testing purposes. The fair value of a reporting unit is calculated estimated fair value of goodwill and its carrying value. If future events or results differ adversely from the estimates and assumptions made at acquisition or as part of subsequent impairment tests, we may record increased amortization or impairment charges in the future. Software Development Costs We capitalize certain 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, including among other items, employee compensation and related benefits and third-party consulting costs incurred during the application development stage which directly contribute to such development. Revenue Recognition
We earn fees from Refinitiv relating to the sale of market data to Refinitiv, which redistributes that data. Included in these fees are real-time market data fees which are recognized in the period that the data is provided, generally on a monthly basis, and fees for historical data sets which are recognized when the historical data set is provided to Refinitiv.
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Stock-Based Compensation The stock-based compensation that our employees receive As a stock-based liability award, the cost of the 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 to settlement. Changes in the fair value of the equity instrument are recognized as compensation cost over that period in our consolidated statements of income.
Prior to the IPO, we We use the Black-Scholes pricing model to value some of our Income Taxes Tradeweb Markets Inc. 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 We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes in our consolidated statements of income. Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in our consolidated statements of financial condition. 71 We have elected to treat taxes due on future U.S. inclusions in taxable income under the GILTI provision of the Tax Cuts and Jobs Act as a current period expense when incurred. Tax Receivable Agreement Tradeweb Markets Inc. entered into a Tax Receivable Agreement with TWM LLC and the Continuing LLC Owners which provides for the payment by Tradeweb Markets Inc. 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 Tradeweb Markets Inc. 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 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 Tradeweb Markets Inc. making payments under the Tax Receivable Agreement. We recorded an initial liability of $171.4 million related to our projected obligations under the Tax Receivable Agreement with respect to LLC Interests that were purchased by us using the net proceeds from the IPO. 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 our earnings, changes in tax legislation and tax rates or other factors that may impact our tax savings will be reflected in income before taxes in the period in which the change occurs. Contingent Consideration In 2014, we issued Class A Shares and unvested Class Prior to the July 2018 vesting, we recognized contingent consideration with respect to the potential vesting of Class 48-month period of the agreement, adjusting at each reporting period for any changes in the final value estimate. The revenue milestones provided that shares would vest only if certain credit revenue milestones would be achieved in the twelve months ended July 2016, 2017 and 2018. As a result of achieving these milestones, the final earnout amount was calculated based on the credit revenues during the twelve months ended July 31, 2018. On July 31, 2018, members’ capital increased by $150.5 million as a result of the vesting of the Class 72 Recent Accounting Pronouncements – Recently Adopted Effective January 1, 2019, we adopted ASC 842, Leases. This standard requires us 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 amount of the lease liability is calculated as the present value of unpaid lease payments. We adopted ASC 842 prospectively and elected to take the package of practical expedients allowing us not to reassess (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. On January 1, 2019, upon the adoption of ASC 842, See Effects of Inflation While inflation may impact our revenues and operating expenses, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future. Jumpstart Our Business Startups Act of 2012 The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Foreign Currency and Derivative Risk We have global operations and substantial portions of our revenues, expenses, assets and liabilities are generated and denominated in non-U.S. dollar currencies. The following table shows the
Since our consolidated financial statements are presented in U.S. dollars, we must translate revenues and expenses, as well as assets and liabilities, into U.S. dollars. Accordingly, increases or decreases in the value of the U.S. dollar 73 against the other currencies will affect our net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies. Revenues and expenses denominated in currencies other than the U.S. dollar 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 end of the reporting period. Any gain or loss resulting from the translation of assets and liabilities is included as a component of comprehensive income.
�� The following table shows the
We have derivative risk relating to our foreign currency forward contracts. We enter into foreign currency forward contracts to mitigate our U.S. dollar and British pound sterling versus Euro exposure, generally with a duration of less than By using derivative instruments to hedge exposures to foreign currency fluctuations, we are exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we are not exposed to the counterparty’s credit risk in those circumstances. We attempt to minimize counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is at least upper-medium investment grade. Credit Risk We have credit risk relating to our receivables, which are primarily receivables from financial institutions, including investment managers and brokers and dealers. At In the normal course of our business we, as an agent, execute transactions with, and on behalf of, other brokers and dealers. If these transactions do not settle because of failure to perform by either counterparty, we 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 instrument is different than the contractual amount. This credit risk exposure, can be directly impacted by volatile trading markets, as our clients may be unable to satisfy their contractual obligations during volatile trading markets. 74 Our policy is to monitor our market exposure and counterparty risk. Counterparties are evaluated for creditworthiness and risk assessment prior to our initiating contract activities. The counterparties’ creditworthiness is then monitored on an ongoing basis, and credit levels are reviewed to ensure that there is not an inappropriate concentration of credit outstanding to any particular counterparty. For additional information, see Note 16 – Credit Risk to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a) Changes in Internal Control over Financial Reporting There were no changes to our internal control over financial reporting during the quarter ended 75
There have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in the
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4. MINE SAFETY DISCLOSURES None.
We are providing the following disclosure in lieu of filing a Current Report on Form 8-K relating to Item 1.01—Entry into a Material Definitive Agreement of Form 8-K.
On November 7, 2019, TWM LLC entered into that certain First Amendment to Credit Agreement (the “First Amendment”) among TWM LLC and the lenders party thereto, which First Amendment amends that certain Credit Agreement (the “Credit Agreement”), dated as of April 8, 2019, among TWM LLC, the lenders party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank and swing line lender. The First Amendment revises the Credit Agreement to permit the LSEG Transaction. The First Amendment does not otherwise impact the terms of the Credit Agreement and does not impact the amount of borrowings available to TWM LLC under the Credit Agreement.
The foregoing description of the First Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the First Amendment, a copy of which is filed herewith as Exhibit 10.1 and is incorporated herein by reference.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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