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EX-32.1 - EX-32.1 - Virtu Financial, Inc.virt-20150930ex32158de3e.htm
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EX-32.2 - EX-32.2 - Virtu Financial, Inc.virt-20150930ex3225ffcf5.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

For the quarterly period ended September 30, 2015

or

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

For the transition period from     to     

Commission file number:  001-37352

 

Virtu Financial, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

32-0420206

(State or other jurisdiction of incorporation or
organization)

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

 

 

900 Third Avenue, 29th Floor
New York, New York 10022-0100

10022

(Address of principal executive offices)

(Zip Code)

 

(212) 418-0100

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes     No 

 

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

 

Large accelerated filer  Accelerated filer  Non-accelerated filer    Smaller reporting company

 

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

 

Class of Stock

    

Shares Outstanding
as of November 13, 2015

 

Class A common stock, par value $0.00001 per share

 

34,305,052

 

Class C common stock, par value $0.00001 per share

 

24,531,817

 

Class D common stock, par value $0.00001 per share

 

79,610,490

 

 

 

 

 


 

VIRTU FINANCIAL, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED September 30, 2015

 

 

    

 

    

PAGE
NUMBER

 

 

 

 

 

PART I - 

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Financial Condition

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Equity

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

Item 2. 

 

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

 

34 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

60 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

61 

 

 

 

 

 

PART II - 

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

62 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

63 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

63 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

64 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

64 

 

 

 

 

 

Item 5. 

 

Other Information

 

64 

 

 

 

 

 

Item 6. 

 

Exhibits

 

65 

 

 

 

 

 

 

 

SIGNATURES

 

66 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Financial Statements Introductory Note

 

The unaudited condensed consolidated financial statements and other disclosures contained in this report include those of Virtu Financial, Inc. (“we”, the “Company” or the “Registrant”), which is the registrant, and those of Virtu Financial LLC (“Virtu Financial”), in which the registrant became the managing member and the owner of approximately 24.8% of the outstanding membership interests through a series of reorganization transactions that were completed on April 15, 2015 (the “Reorganization Transactions”) in connection with our initial public offering (“IPO”), which was completed on April 21, 2015. For more information regarding the transactions described above, see Note 13, “Capital Structure,” to our unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q.

 

The unaudited condensed consolidated financial statements reflect the historical results of operations and financial position of the Company, including consolidation of its investment in Virtu Financial, since April 16, 2015.  Prior to April 16, 2015, the date of the IPO, the unaudited condensed consolidated financial statements included herein represent the financial statements of Virtu Financial and subsidiaries (the “Group”). The historical unaudited condensed consolidated financial statements do not reflect what the financial position, results of operations or cash flows of the Company or the Group would have been had these companies been stand-alone public companies for the periods presented. Specifically, the historical financial statements of the Group do not give effect to the following matters:

 

·

Reorganization Transactions;

·

U.S. corporate federal income taxes; and

·

Noncontrolling interest held by other members of Virtu Financial.

 

As a consequence, earnings per share information reported in the unaudited condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2015 reflect only the net income available for common stockholders for the period from April 16, 2015 through September 30, 2015, as detailed in Note 3, “Earnings per share”, to our unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q.

 

 

1


 

Virtu Financial, Inc. and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 30, 

 

December 31, 

 

(in thousands, except share and interest data)

  

2015

    

2014

  

 

 

 

 

 

 

 

 

Assets

 

 

    

 

 

    

 

Cash and cash equivalents

 

$

161,538

 

$

75,864

 

Securities borrowed

 

 

510,600

 

 

484,934

 

Securities purchased under agreements to resell

 

 

 —

 

 

31,463

 

Receivables from broker dealers and clearing organizations

 

 

560,716

 

 

387,652

 

Trading assets, at fair value:

 

 

 

 

 

 

 

Financial instruments owned

 

 

1,152,821

 

 

1,307,933

 

Financial instruments owned and pledged

 

 

301,737

 

 

236,375

 

Property, equipment and capitalized software (net of accumulated depreciation of $92,174 and $84,579 as of September 30, 2015 and December 31, 2014, respectively)

 

 

42,442

 

 

44,644

 

Goodwill

 

 

715,379

 

 

715,379

 

Intangibles (net of accumulated amortization)

 

 

1,255

 

 

1,414

 

Deferred tax asset

 

 

160,782

 

 

977

 

Other assets ($9,210 and $8,205, at fair value, as of September 30, 2015 and December 31, 2014, respectively)

 

 

34,676

 

 

32,823

 

Total assets

 

$

3,641,946

 

$

3,319,458

 

 

 

 

 

 

 

 

 

Liabilities, redeemable membership interest and equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Short term borrowings

 

$

28,000

 

$

 —

 

Securities loaned

 

 

741,728

 

 

497,862

 

Securities sold under agreements to repurchase

 

 

9,000

 

 

2,006

 

Payables to broker dealers and clearing organizations

 

 

328,054

 

 

686,203

 

Trading liabilities, at fair value:

 

 

 

 

 

 

 

Financial instruments sold, not yet purchased

 

 

1,198,881

 

 

1,037,634

 

Tax receivable agreement obligations

 

 

184,679

 

 

 —

 

Accounts payable and accrued expenses and other liabilities

 

 

128,278

 

 

93,331

 

Senior secured credit facility

 

 

494,498

 

 

495,724

 

Total liabilities

 

$

3,113,118

 

$

2,812,760

 

 

 

 

 

 

 

 

 

Class A-1 redeemable membership interest

 

 

 —

 

 

294,433

 

 

 

 

 

 

 

 

 

Stockholders' / Members' equity

 

 

 

 

 

 

 

Class A-1 — Authorized and Issued — 0 and 1,964,826 interests, Outstanding — 0 and 1,964,826 interests, at September 30, 2015 and December 31, 2014, respectively

 

 

 —

 

 

19,648

 

Class A-2 — Authorized and Issued — 0 and 101,381,332 interests, Outstanding — 0 and 99,855,666 interests, at September 30, 2015 and December 31, 2014, respectively

 

 

 —

 

 

287,705

 

Class A common stock (par value $0.00001), Authorized — 1,000,000,000 and 0 shares, Issued and Outstanding — 34,305,052 and 0 shares at September 30, 2015 and December 31, 2014, respectively

 

 

 —

 

 

 —

 

Class B common stock (par value $0.00001), Authorized — 175,000,000 and 0 shares, Issued and Outstanding — 0 and 0 shares at September 30, 2015 and December 31, 2014, respectively

 

 

 —

 

 

 —

 

Class C common stock (par value $0.00001), Authorized — 90,000,000 and 0 shares, Issued and Outstanding — 24,531,817 and 0 shares at September 30, 2015 and December 31, 2014, respectively

 

 

 —

 

 

 —

 

Class D common stock (par value $0.00001), Authorized — 175,000,000 and 0 shares, Issued  and Outstanding — 79,610,490 and 0 shares at September 30, 2015 and December 31, 2014, respectively

 

 

1

 

 

 —

 

Additional paid-in capital

 

 

118,303

 

 

 —

 

Retained Earnings (Accumulated deficit)

 

 

12,780

 

 

(91,383)

 

Accumulated other comprehensive income (loss)

 

 

1,310

 

 

(3,705)

 

Total stockholders' / members' equity

 

$

132,394

 

$

212,265

 

Non-controlling interest

 

 

396,434

 

 

 —

 

Total equity

 

$

528,828

 

$

212,265

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable membership interest and equity

 

$

3,641,946

 

$

3,319,458

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

2


 

Virtu Financial Inc and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 For the Three Months Ended

 

 For the Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands, except share and per share data)

  

2015

    

2014

    

2015

    

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

206,832

 

$

162,260

 

$

590,554

 

$

480,799

 

Interest and dividends income

 

 

6,425

 

 

8,518

 

 

21,022

 

 

21,287

 

Technology services

 

 

2,545

 

 

2,456

 

 

7,733

 

 

7,419

 

Total revenue

 

 

215,802

 

 

173,234

 

 

619,309

 

 

509,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokerage, exchange and clearance fees, net

 

 

61,814

 

 

55,861

 

 

179,453

 

 

164,132

 

Communication and data processing

 

 

16,110

 

 

17,256

 

 

51,602

 

 

50,568

 

Employee compensation and payroll taxes

 

 

24,736

 

 

24,768

 

 

66,801

 

 

63,636

 

Interest and dividends expense

 

 

12,827

 

 

11,728

 

 

39,234

 

 

34,438

 

Operations and administrative

 

 

4,857

 

 

4,392

 

 

17,288

 

 

16,517

 

Depreciation and amortization

 

 

8,176

 

 

8,552

 

 

26,025

 

 

22,514

 

Amortization of purchased intangibles and acquired capitalized software

 

 

53

 

 

53

 

 

159

 

 

159

 

Acquisition related retention bonus

 

 

 —

 

 

152

 

 

 —

 

 

2,639

 

Termination of office leases

 

 

 —

 

 

 —

 

 

2,729

 

 

849

 

Initial public offering fees and expenses

 

 

 —

 

 

60

 

 

 —

 

 

8,961

 

Charges related to share-based compensation at IPO

 

 

1,107

 

 

 —

 

 

45,301

 

 

 —

 

Financing interest expense on senior secured credit facility

 

 

7,205

 

 

7,815

 

 

22,066

 

 

23,114

 

Total operating expenses

 

 

136,885

 

 

130,637

 

 

450,658

 

 

387,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and noncontrolling interest

 

 

78,917

 

 

42,597

 

 

168,651

 

 

121,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

9,378

 

 

1,179

 

 

14,103

 

 

829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

69,539

 

$

41,418

 

 

154,548

 

$

121,149

 

Noncontrolling interest

 

 

(57,233)

 

 

 

 

 

(141,768)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common stockholders

 

$

12,306

 

 

 

 

$

12,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

 

 

$

0.37

 

 

 

 

Diluted

 

$

0.35

 

 

 

 

$

0.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34,305,052

 

 

 

 

 

34,305,052

 

 

 

 

Diluted

 

 

34,738,733

 

 

 

 

 

34,641,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

69,539

 

$

41,418

 

$

154,548

 

$

121,149

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment, net of taxes

 

 

3,596

 

 

(3,520)

 

 

595

 

 

(3,683)

 

Comprehensive income

 

 

73,135

 

$

37,898

 

 

155,143

 

$

117,466

 

Less: Comprehensive income attributable to non-controlling interests

 

 

(59,931)

 

 

 

 

 

(141,053)

 

 

 

 

Comprehensive income attributable to common stockholders

 

$

13,204

 

 

 

 

$

14,090

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

3


 

Virtu Financial Inc and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
for the Nine Months Ended September 30, 2015
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Stockholders'

 

Non-

 

 

 

Class A-1

 

 

 

Class A Common Stock

 

Class C Common Stock

 

Class D Common Stock

 

Capital

 

Class A-1 

 

Class A-2 

 

(Accumulated

 

Comprehensive

 

/ Members'

 

Controlling

 

Total

 

Redeemable

 

(in thousands, except share and interest data)

  

Shares

  

Amounts

  

Shares

  

Amounts

  

Shares

  

Amounts

  

Amounts

  

Interests

  

Amounts

  

Interests

  

Amounts

  

Deficit)

  

Income (Loss)

  

Equity

  

Interest

  

Equity

  

Interest

 

Balance at December 31, 2014

 

 —

 

$

 —

 

 —

 

$

 —

 

 —

 

$

 —

 

$

 —

 

1,964,826

 

$

19,648

 

99,855,666

 

$

287,705

 

$

(91,383)

 

$

(3,705)

 

$

212,265

 

$

 —

 

$

212,265

 

$

294,433

 

Share based compensation through April 15, 2015

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

6,418

 

 

438

 

 

 —

 

 

 —

 

 

438

 

 

 —

 

 

438

 

 

 —

 

Repurchase of Class A-2 interests

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

(13,495)

 

 

(97)

 

 

 —

 

 

 —

 

 

(97)

 

 

 —

 

 

(97)

 

 

 —

 

Distribution to members through April 15, 2015

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(130,000)

 

 

 —

 

 

(130,000)

 

 

 —

 

 

(130,000)

 

 

 —

 

Comprehensive income through April 15, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

83,147

 

 

 —

 

 

83,147

 

 

 —

 

 

83,147

 

 

 —

 

Foreign exchange translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(4,633)

 

 

(4,633)

 

 

 —

 

 

(4,633)

 

 

 —

 

Reorganization of equity structure

 

18,763,664

 

 

 —

 

36,746,041

 

 

 —

 

79,610,490

 

 

1

 

 

63,261

 

(1,964,826)

 

 

(19,648)

 

(99,848,589)

 

 

(288,046)

 

 

138,236

 

 

8,338

 

 

(97,858)

 

 

392,291

 

 

294,433

 

 

(294,433)

 

Balance post-reorganization

 

18,763,664

 

 

 —

 

36,746,041

 

 

 —

 

79,610,490

 

 

1

 

 

63,261

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

63,262

 

 

392,291

 

 

455,553

 

 

 —

 

Issuance of Common Stock, net of offering costs

 

19,012,112

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

327,366

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

327,366

 

 

 —

 

 

327,366

 

 

 —

 

Repurchase of Virtu Financial Units and Corresponding number of Class A and C Common Stock

 

(3,470,724)

 

 

 —

 

(12,214,224)

 

 

 —

 

 —

 

 

 —

 

 

(277,153)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(277,153)

 

 

 —

 

 

(277,153)

 

 

 —

 

Share based compensation vested upon the IPO

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

45,677

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

45,677

 

 

 —

 

 

45,677

 

 

 —

 

Adjustments for changes in proportionate ownership in Virtu Financial

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(22,513)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,513)

 

 

22,513

 

 

 —

 

 

 —

 

Issuance of tax receivable agreements

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(23,041)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(23,041)

 

 

 —

 

 

(23,041)

 

 

 —

 

Share based compensation after April 15, 2015

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,706

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,706

 

 

 —

 

 

4,706

 

 

 —

 

Comprehensive income, after April 15, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

12,780

 

 

 —

 

 

12,780

 

 

58,621

 

 

71,401

 

 

 —

 

Foreign exchange translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,310

 

 

1,310

 

 

3,918

 

 

5,228

 

 

 —

 

Distribution from Virtu Financial to non-controlling interest, after April 15, 2015

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(80,909)

 

 

(80,909)

 

 

 —

 

Balance at September 30, 2015

 

34,305,052

 

$

 —

 

24,531,817

 

$

 —

 

79,610,490

 

$

1

 

$

118,303

 

 —

 

$

 —

 

 —

 

$

 —

 

$

12,780

 

$

1,310

 

$

132,394

 

$

396,434

 

$

528,828

 

$

 —

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

4


 

Virtu Financial Inc and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

(in thousands)

    

2015

    

2014

 

Cash flows from operating activities

    

 

    

    

 

    

 

Net Income

 

$

154,548

 

$

121,149

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26,025

 

 

22,514

 

Amortization of purchased intangibles and acquired capitalized software

 

 

159

 

 

159

 

Amortization of debt issuance costs and deferred financing fees

 

 

1,287

 

 

1,062

 

Termination of office leases

 

 

2,729

 

 

849

 

Share based compensation

 

 

59,237

 

 

11,047

 

Other

 

 

1,224

 

 

(1,817)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Securities borrowed

 

 

(25,666)

 

 

200,462

 

Securities purchased under agreements to resell

 

 

31,463

 

 

22,585

 

Receivables from broker dealers and clearing organizations

 

 

(173,064)

 

 

(186,477)

 

Trading assets, at fair value

 

 

89,750

 

 

(181,623)

 

Other assets ($9,210 and $8,205, at fair value, as of September 30, 2015 and December 31, 2014, respectively)

 

 

(1,109)

 

 

4,619

 

Securities loaned

 

 

243,866

 

 

(300,713)

 

Securities sold under agreements to repurchase

 

 

6,994

 

 

1,040

 

Payables to broker dealers and clearing organizations

 

 

(358,149)

 

 

48,931

 

Trading liabilities, at fair value

 

 

161,247

 

 

365,646

 

Accounts payable and accrued expenses and other liabilities

 

 

21,452

 

 

24,988

 

Net cash provided by operating activities

 

 

241,993

 

 

154,421

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Development of capitalized software

 

 

(6,190)

 

 

(5,882)

 

Acquisition of property and equipment

 

 

(14,418)

 

 

(21,780)

 

Net cash used in investing activities

 

 

(20,608)

 

 

(27,662)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Distribution to members through April 15, 2015

 

 

(130,000)

 

 

(125,652)

 

Distribution from Virtu Financial to non-controlling interest, after April 15, 2015

 

 

(80,909)

 

 

 —

 

Repurchase of Class A-2 interests

 

 

(1,097)

 

 

(682)

 

Proceeds from (repayments of) short term borrowings

 

 

28,000

 

 

(20,800)

 

Repayment of senior secured credit facility

 

 

(1,639)

 

 

(3,825)

 

Debt issuance costs

 

 

(874)

 

 

 —

 

Issuance of Common Stock, net of offering costs

 

 

327,366

 

 

 —

 

Repurchase of Virtu Financial Units and corresponding number of Class A and C Common Stock

 

 

(277,153)

 

 

 —

 

Net cash used in financing activities

 

 

(136,306)

 

 

(150,959)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on Cash and cash equivalents

 

 

595

 

 

(3,683)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in Cash and cash equivalents

 

 

85,674

 

 

(27,883)

 

Cash and cash equivalents, beginning of period

 

 

75,864

 

 

66,010

 

Cash and cash equivalents, end of period

 

$

161,538

 

$

38,127

 

 

 

 

 

 

 

 

 

Supplementary disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

47,642

 

$

46,084

 

Cash paid for taxes

 

$

7,366

 

$

3,819

 

 

 

 

 

 

 

 

 

Non-cash investing activities

 

 

 

 

 

 

 

Compensation to developers subject to capitalization of software (of which $11,240 and $1,311 were capitalized for nine months ended September 30, 2015 and 2014, respectively)

 

$

25,420

 

$

3,823

 

 

 

 

 

 

 

 

 

Non-cash financing activities

 

 

 

 

 

 

 

Tax receivable agreement (Note 4)

 

 

 —

 

 

 —

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

5


 

Virtu Financial, Inc. and Subsidiaries

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Basis of Presentation

 

Organization

 

Virtu Financial, Inc. (“VFI” or, collectively with its wholly owned subsidiaries, the ‘‘Company’’) is a Delaware holding company whose primary asset is its ownership of approximately 24.8% of the membership interests of Virtu Financial LLC (“Virtu Financial”).  The Company was formed on October 16, 2013 for the purpose of completing certain reorganization transactions (the “Reorganization Transactions”), in order to carry on the business of Virtu Financial LLC (“Virtu Financial”) and to conduct a public offering. The Company is the sole managing member of Virtu Financial and operates and controls all of the businesses and affairs of Virtu Financial and, through Virtu Financial and its subsidiaries (the “Group”), continues to conduct the business now conducted by such subsidiaries. Virtu Financial was formed as a Delaware limited liability company on April 8, 2011 in connection with a corporate reorganization and acquisition of the outstanding equity interests of Madison Tyler Holdings, LLC (“MTH”), an electronic trading firm and market maker. In connection with the reorganization, the members of Virtu Financial’s predecessor entity, Virtu Financial Operating LLC (“VFO”), a Delaware limited liability company formed on March 19, 2008, exchanged their interests in VFO for interests in Virtu Financial and the members of MTH exchanged their interests in MTH for cash and/or interests in Virtu Financial. Virtu Financial’s principal subsidiaries include Virtu Financial BD LLC (“VFBD”), a self-clearing U.S. broker-dealer, Virtu Financial Capital Markets LLC (“VFCM”), a self-clearing U.S. broker-dealer and designated market maker on the New York Stock Exchange (“NYSE”) and the NYSE MKT (formerly NYSE Amex), Virtu Financial Global Markets LLC (“VFGM”), a U.S. trading entity focused on futures and currencies, Virtu Financial Ireland Limited (“VFIL”), formed in Ireland, Virtu Financial Asia Pty Ltd (“VFAP”), formed in Australia, and Virtu Financial Singapore Pte. Ltd. (“VFSing”), formed in Singapore.

 

The Company is a technology-enabled market maker and liquidity provider. The Company has developed a single, proprietary, multi-asset, multi-currency technology platform through which it provides quotations to buyers and sellers in equities, commodities, currencies, options, fixed income and other securities on numerous exchanges, markets and liquidity pools in numerous countries around the world.

 

The Company is managed and operated as one business. Accordingly, the Company operates under one reportable segment.

 

Basis of Presentation

 

These condensed consolidated financial statements are presented in U.S. dollars and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q and accounting standards generally accepted in the United States of America (“U.S. GAAP”) promulgated in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or the “Codification”). These condensed consolidated financial statements are unaudited and include all adjustments of a normal, recurring nature necessary to present fairly the financial condition as of September 30, 2015 and December 31, 2014, the results of operations and comprehensive income for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 30, 2015 and 2014. The condensed consolidated financial statement information as of December 31, 2014 has been derived from the 2014 audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of results for the entire year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s final prospectus filed with the SEC on April 16, 2015 (the “Prospectus”) for the offering of Class A common stock, par value $0.00001  per share (the “Class A common stock”). See Note 13 to the condensed consolidated financial statements for information regarding the Reorganization Transactions (as defined in Note 13) and the Company’s IPO.

 

6


 

Principles of Consolidation, including Noncontrolling Interests

 

The unaudited condensed consolidated financial statements include the accounts of VFI and its majority and wholly owned subsidiaries. As sole managing member of Virtu Financial, VFI exerts control over the Group’s operations. In accordance with ASC 810, Consolidation, the Company consolidates Virtu Financial and its subsidiaries’ consolidated financial statements and records the interests in Virtu Financial that VFI does not own as noncontrolling interests. All intercompany accounts and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The Company's condensed consolidated financial statements are prepared in conformity with US GAAP, which require management to make estimates and assumptions regarding fair value measurements including trading assets and liabilities, goodwill and intangibles, compensation accruals, capitalized software, and other matters that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ materially from those estimates.

 

Earnings Per Share

 

Earnings per share (“EPS”) is computed in accordance with ASC 260, Earnings per Share. Basic EPS is computed by dividing the net income available for common stockholders by the weighted average number of shares outstanding for that period. Diluted EPS is calculated by dividing the net income available for common stockholders by the diluted weighted average shares outstanding for that period. Diluted EPS includes the determinants of the basic EPS and, in addition, reflects the dilutive effect of shares of common stock estimated to be distributed in the future under the Company’s share based compensation plans, with no adjustments to net income available for common stockholders for dilutive potential common shares.

 

Cash and Cash Equivalents

 

The Company considers cash equivalents as highly liquid investments with original maturities of less than three months when acquired. The Company maintains cash in bank deposit accounts that, at times, may exceed federally insured limits.

 

Securities Borrowed and Securities Loaned

 

The Company conducts securities borrowing and lending activities with external counterparties. In connection with these transactions, the Company receives or posts collateral. These transactions are collateralized by cash or securities. In accordance with substantially all of its stock borrow agreements, the Company is permitted to sell or repledge the securities received. Securities borrowed or loaned are recorded based on the amount of cash collateral advanced or received. The initial collateral advanced or received generally approximates or is greater than 102% of the fair value of the underlying securities borrowed or loaned. The Company monitors the fair value of securities borrowed and loaned, and delivers or obtains additional collateral as appropriate. Receivables and payables with the same counterparty are not offset in the condensed consolidated statements of financial condition. For these transactions, the interest received or paid by the Company is recorded gross on an accrual basis under interest and dividends income or interest and dividends expense in the condensed consolidated statements of comprehensive income.

 

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

 

In a repurchase agreement, securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at contract value, plus accrued interest, which approximates fair value. It is the Company's policy that its custodian takes possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest. For reverse repurchase agreements, the

7


 

Company typically requires delivery of collateral with a fair value approximately equal to the carrying value of the relevant assets in the condensed consolidated statements of financial condition. To ensure that the fair value of the underlying collateral remains sufficient, the collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions.

 

The Company does not net securities purchased under agreements to resell transactions with securities sold under agreements to repurchase transactions entered into with the same counterparty.

 

Receivables from/Payables to Broker-dealers and Clearing Organizations

 

Amounts receivable from broker-dealers and clearing organizations may be restricted to the extent that they serve as deposits for securities sold, not yet purchased. At September 30, 2015 and December 31, 2014, receivables from and payables to broker-dealers and clearing organizations primarily represent amounts due for unsettled trades, open equity in futures transactions, securities failed to deliver or failed to receive, deposits with clearing organizations or exchanges and balances due from or due to prime brokers in relation to the Company’s trading. The Company also offsets the outstanding principal balances on all short term credit facilities against amounts receivable from and payable to broker-dealers and clearing organizations when the criteria for offsetting are met.

 

In the normal course of business, substantially all of the Company’s securities transactions, money balances, and security positions are transacted with several brokers. The Company is subject to credit risk to the extent any broker with whom it conducts business is unable to fulfill contractual obligations on its behalf. The Company’s management monitors the financial condition of such brokers and does not anticipate any losses from these counterparties.

 

Financial Instruments Owned Including Those Pledged as Collateral and Financial Instruments Sold, Not Yet Purchased

 

The Company carries financial instruments owned, including those pledged as collateral, and financial instruments sold, not yet purchased at fair value. Gains and losses arising from financial instrument transactions are recorded net on a trade-date basis in trading income, net, on the condensed consolidated statements of comprehensive income.

 

Fair Value Measurements

 

At September 30, 2015 and December 31, 2014, substantially all of Company’s financial assets and liabilities, except for long-term borrowings and certain exchange memberships, were carried at fair value based on published market prices and are marked to market daily or were short-term in nature and were carried at amounts that approximate fair value.

 

The Company’s assets and liabilities have been categorized based upon a fair value hierarchy in accordance with ASC 820-10, Fair Value Measurements and Disclosures. ASC 820-10 defines fair value as the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. The recognition of ‘‘block discounts’’ for large holdings of unrestricted financial instruments where quoted prices are readily and regularly available in an active market is prohibited. ASC 820-10 requires a three level hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy level assigned to each financial instrument is based on the assessment of the transparency and reliability of the inputs used in the valuation of such financial instruments at the measurement date based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements).

 

Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:

 

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,

8


 

unrestricted assets or liabilities;

 

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

 

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

 

Transfers in or out are recognized based on the beginning fair value of the period in which they occurred. There were no transfers of financial instruments between levels during the three and nine months ended September 30, 2015 and 2014.

 

Derivative Instruments

 

Derivative instruments used for trading purposes, including economic hedges of trading instruments, are carried at fair value. Fair values for exchange-traded derivatives, principally futures, are based on quoted market prices. Fair values for over-the-counter derivative instruments, principally forward contracts, are based on the values of the underlying financial instruments within the contract. The underlying derivative instruments are currencies which are actively traded.

 

Derivative instruments used for economic hedging purposes include futures, forward contracts, and options. Unrealized gains or losses on these derivative instruments are recognized currently in the condensed consolidated statements of comprehensive income as trading income, net. The Company does not apply hedge accounting as defined in ASC 815, Derivatives and Hedging, and accordingly unrealized gains or losses on these derivative instruments are recognized currently in the condensed consolidated statement of comprehensive income as trading income, net.

 

Property and Equipment

 

Property and equipment are carried at cost, less accumulated depreciation, except for the assets acquired in connection with the acquisition of MTH which were recorded at fair value on the date of acquisition. Depreciation is provided using the straight-line method over estimated useful lives of the underlying asset. Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that appreciably extend the useful life of the assets are capitalized. When property and equipment are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable.

 

The useful lives of furniture and fixtures are as follows:

 

 

 

 

 

 

 

 

Furniture, fixtures and equipment

    

3

to

years

 

Leasehold improvements

 

7

 years or length of lease term, whichever is shorter

 

 

Capitalized Software

 

The Company accounts for the costs of computer software developed or obtained for internal use in accordance with ASC 350-40, Internal-Use Software. The Company capitalizes costs of materials, consultants, and payroll and payroll related costs for employees incurred in developing internal-use software. Costs incurred during the preliminary project and post-implementation stages are charged to expense.

 

Management’s judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized.

 

The Company’s capitalized software development costs were approximately $2.6 million and $2.2 million for

9


 

the three months ended September 30, 2015 and 2014, respectively, and $8.1 million and $7.3 million for the nine months ended September 30, 2015 and 2014, respectively. The related amortization expense was approximately $2.4 million and $2.8 million for the three months ended September 30, 2015 and 2014, respectively, and $7.6 million and $7.8 million for the nine months ended September 30, 2015 and 2014, respectively. Additionally, in connection with charges related to share based compensation recognized upon the IPO (Note 13), the Company capitalized and amortized costs for employees in developing internal-use software, which were included within charges related to share based compensation at IPO in the condensed consolidated statements of comprehensive income. The Company capitalized charges related to share based compensation at IPO of approximately $0.1 million and $9.6 million for the three months ended and nine months ended September 30, 2015, respectively. The related amortization expense was approximately $0.5 million and $8.5 million for the three months ended and nine months ended September 30, 2015, respectively. Capitalized software development costs and related accumulated amortization are included in property, equipment and capitalized software on the accompanying condensed consolidated statements of financial condition and are amortized over a period of 1.4 to 2.5 years, which represents the estimated useful lives of the underlying software.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the underlying net tangible and intangible assets of our acquisitions. Goodwill is not amortized but is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. The Company operates as one operating segment, which is our only reporting unit.

 

The goodwill impairment test is a two-step process. The first step is used to identify potential impairment and compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed. The second step is used to measure the amount of impairment loss, if any, and compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess.

 

The Company tests goodwill for impairment on an annual basis on July 1 and on an interim basis when certain events or circumstances exist. In the impairment test as of July 1, 2015, the primary valuation method used to estimate the fair value of the Company’s reporting unit was the market capitalization approach based on the market price of its Class A Common Stock, which the management believes to be an appropriate indicator of its fair value. In the impairment test as of July 1, 2014, the primary valuation methods used to estimate the fair value of the Company’s reporting unit were the income and market approaches. In applying the income approach, projected available cash flows and the terminal value were discounted to present value to derive an indication of fair value of the business enterprise. The market approach compared the reporting unit to selected reasonably similar publicly-traded companies.

 

Based on the results of the annual impairment tests performed, no goodwill impairment was recognized during the three and nine months ended September 30, 2015 and 2014, respectively.

 

Intangible Assets

 

The Company amortizes finite-lived intangible assets over their estimated useful lives. Finite-lived intangible assets are tested for impairment annually or when impairment indicators are present, and if impaired, written down to fair value.

 

Exchange Memberships and Stock

 

Exchange memberships are recorded at cost or, if any other than temporary impairment in value has occurred, at a value that reflects management’s estimate of fair value, in accordance with ASC 940-340, Financial Services — Broker and Dealers. Exchange stock includes shares that entitles the Company to certain trading privileges. The shares are marked to market with the corresponding gain or loss recorded in the condensed consolidated statements of comprehensive income. The Company’s exchange memberships and stock are included in other assets on the condensed

10


 

consolidated statements of financial condition.

 

Trading Income

 

Trading income is comprised of changes in the fair value of trading assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses on trading assets and liabilities. Trading gains and losses on financial instruments owned and financial instruments sold, not yet purchased are recorded on the trade date and reported on a net basis in the condensed consolidated statements of comprehensive income.

 

Interest and Dividends Income/Interest and Dividends Expense

 

Interest income and interest expense are accrued in accordance with contractual rates. Interest income consists of interest earned on collateralized financing arrangements and on cash held by brokers. Interest expense includes interest expense from collateralized transactions, margin and related lines of credit. Dividends on financial instruments owned including those pledged as collateral and financial instruments sold, not yet purchased are recorded on the ex-dividend date and interest is recognized on the accrual basis.

 

Technology Services

 

Technology services revenues consist of fees paid by third parties for licensing of our proprietary risk management and trading infrastructure technology and provision of associated management and hosting services. These fees include both upfront and annual recurring fees. Revenue from technology services is recognized once persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Revenue is recognized ratably over the contractual service period.

 

Rebates

 

Rebates consist of volume discounts, credits or payments received from exchanges or other market places related to the placement and/or removal of liquidity from the order flow in the marketplace. Rebates are recorded on an accrual basis and included net within brokerage, exchange and clearance fees in the accompanying condensed consolidated statements of comprehensive income.

 

Income Taxes

 

Virtu Financial is a limited liability company and is treated as a pass-through entity for United States federal, state, and local income tax purposes. Accordingly, no provis