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EX-10.1 - EX-10.1 - Virtu Financial, Inc.virt-20160930ex1019d24f8.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, 2016

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 10
th, 2016

 

Class A common stock, par value $0.00001 per share

 

39,354,983

 

Class C common stock, par value $0.00001 per share

 

19,810,707

 

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, 2016

 

 

    

 

    

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

 

35 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

58 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

58 

 

 

 

 

 

PART II - 

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

58 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

59 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

59 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

59 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

59 

 

 

 

 

 

Item 5. 

 

Other Information

 

59 

 

 

 

 

 

Item 6. 

 

Exhibits

 

60 

 

 

 

 

 

 

 

SIGNATURES

 

61 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Financial Statements Introductory Note

 

Prior to our initial public offering (“IPO”), which was completed on April 21, 2015, our business was conducted through Virtu Financial LLC (“Virtu Financial”). The unaudited condensed consolidated financial statements and other disclosures contained in this report include those of Virtu Financial, Inc. (“we”, “us”, or the “Company”), which is the registrant, and those of Virtu Financial, in which the registrant became the managing member. Following a series of reorganization transactions that were completed on April 15, 2015 in connection with the IPO (the “Reorganization Transactions”), the IPO and a series of transactions undertaken in connection with secondary offerings completed in November 2015 and September 2016 (collectively, “Secondary Offerings”), the Company has become the owner of approximately 28.9% of the outstanding membership interests of Virtu Financial. For more information regarding the transactions described above, see Note 13, “Capital Structure,” to our audited consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2015 (the “2015 10-K”).

 

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 unaudited condensed consolidated financial statements included herein represent the financial statements of Virtu Financial and subsidiaries (the “Group”). The historical unaudited condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2015, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2015, do not reflect what the results of operations or cash flows of the Company or the Group would have been had the Reorganization Transactions, the IPO and the Secondary Offerings occurred in the beginning of such period. Accordingly, they do not give effect to the following matters:

 

·

Reorganization Transactions and the IPO;

·

U.S. corporate federal income taxes;

·

Noncontrolling interest held by other members of Virtu Financial; and

·

The Secondary Offerings.

 

 

 

 

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)

  

2016

    

2015

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,999

 

$

163,235

 

Securities borrowed

 

 

394,812

 

 

453,296

 

Securities purchased under agreements to resell

 

 

 —

 

 

14,981

 

Receivables from broker dealers and clearing organizations

 

 

513,292

 

 

476,536

 

Trading assets, at fair value:

 

 

 

 

 

 

 

Financial instruments owned

 

 

1,155,074

 

 

1,038,039

 

Financial instruments owned and pledged

 

 

284,894

 

 

259,175

 

Property, equipment and capitalized software (net of accumulated depreciation of $105,011 and $98,595 as of September 30, 2016 and December 31, 2015, respectively)

 

 

30,697

 

 

37,501

 

Goodwill

 

 

715,379

 

 

715,379

 

Intangibles (net of accumulated amortization)

 

 

1,044

 

 

1,203

 

Deferred tax asset

 

 

193,721

 

 

193,740

 

Other assets ($46,124 and $5,984, at fair value, as of September 30, 2016 and December 31, 2015, respectively)

 

 

78,509

 

 

38,845

 

Total assets

 

$

3,513,421

 

$

3,391,930

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Short term borrowings

 

$

17,600

 

$

45,000

 

Securities loaned

 

 

481,947

 

 

524,603

 

Payables to broker dealers and clearing organizations

 

 

305,256

 

 

486,604

 

Trading liabilities, at fair value:

 

 

 

 

 

 

 

Financial instruments sold, not yet purchased

 

 

1,318,559

 

 

979,090

 

Tax receivable agreement obligations

 

 

226,048

 

 

218,399

 

Accounts payable and accrued expenses and other liabilities

 

 

94,857

 

 

86,775

 

Long term borrowings

 

 

526,077

 

 

493,589

 

Total liabilities

 

$

2,970,344

 

$

2,834,060

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Class A common stock (par value $0.00001), Authorized — 1,000,000,000 and 1,000,000,000 shares, Issued  — 39,532,614 and 38,379,858 shares, Outstanding — 39,354,983 and 38,210,209 shares at September 30, 2016 and December 31, 2015, respectively

 

 

 —

 

 

 —

 

Class B common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares, Issued and Outstanding — 0 and 0 shares at September 30, 2016 and December 31, 2015, respectively

 

 

 —

 

 

 —

 

Class C common stock (par value $0.00001), Authorized — 90,000,000 and 90,000,000 shares, Issued — 20,976,598 and 20,976,598 shares, Outstanding — 19,810,707 and 20,976,598, at September 30, 2016 and December 31, 2015, respectively

 

 

 —

 

 

 —

 

Class D common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares, Issued  and Outstanding — 79,610,490 and 79,610,490 shares at September 30, 2016 and December 31, 2015, respectively

 

 

1

 

 

1

 

Treasury stock, at cost, 177,631 and 169,649 shares at September 30, 2016 and December 31, 2015, respectively

 

 

(3,819)

 

 

(3,819)

 

Additional paid-in capital

 

 

142,645

 

 

130,902

 

Retained Earnings

 

 

1,160

 

 

3,525

 

Accumulated other comprehensive income

 

 

600

 

 

99

 

Total stockholders' equity

 

$

140,587

 

$

130,708

 

Noncontrolling interest

 

 

402,490

 

 

427,162

 

Total equity

 

$

543,077

 

$

557,870

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

3,513,421

 

$

3,391,930

 

 

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)

  

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading income, net

 

$

156,706

 

$

206,832

 

$

509,542

 

$

590,554

 

Interest and dividends income

 

 

5,271

 

 

6,425

 

 

14,961

 

 

21,022

 

Technology services

 

 

2,931

 

 

2,545

 

 

7,224

 

 

7,733

 

Other revenues (losses)

 

 

(102)

 

 

 —

 

 

(102)

 

 

 —

 

Total revenue

 

 

164,806

 

 

215,802

 

 

531,625

 

 

619,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokerage, exchange and clearance fees, net

 

 

52,118

 

 

61,814

 

 

167,416

 

 

179,453

 

Communication and data processing

 

 

17,903

 

 

16,110

 

 

53,578

 

 

51,602

 

Employee compensation and payroll taxes

 

 

20,816

 

 

24,736

 

 

64,182

 

 

66,801

 

Interest and dividends expense

 

 

15,615

 

 

12,827

 

 

43,249

 

 

39,234

 

Operations and administrative

 

 

5,543

 

 

4,857

 

 

16,353

 

 

20,017

 

Depreciation and amortization

 

 

7,158

 

 

8,176

 

 

22,685

 

 

26,025

 

Amortization of purchased intangibles and acquired capitalized software

 

 

53

 

 

53

 

 

159

 

 

159

 

Charges related to share based compensation at IPO

 

 

333

 

 

1,107

 

 

1,444

 

 

45,301

 

Financing interest expense on long term borrowings

 

 

7,393

 

 

7,205

 

 

21,569

 

 

22,066

 

Total operating expenses

 

 

126,932

 

 

136,885

 

 

390,635

 

 

450,658

 

Income before income taxes and noncontrolling interest

 

 

37,874

 

 

78,917

 

 

140,990

 

 

168,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

4,851

 

 

9,378

 

 

17,325

 

 

14,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

33,023

 

 

69,539

 

 

123,665

 

 

154,548

 

Noncontrolling interest

 

 

(25,997)

 

 

(57,233)

 

 

(97,913)

 

 

(141,768)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common stockholders

 

$

7,026

 

$

12,306

 

$

25,752

 

$

12,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

0.36

 

$

0.66

 

 

0.37

 

Diluted

 

$

0.18

 

 

0.35

 

$

0.66

 

 

0.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

38,351,465

 

 

34,305,052

 

 

38,264,139

 

 

34,305,052

 

Diluted

 

 

38,351,465

 

 

34,738,733

 

 

38,264,139

 

 

34,641,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share of common stock

 

$

 —

 

 

 —

 

$

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

33,023

 

$

69,539

 

$

123,665

 

$

154,548

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

  Foreign exchange translation adjustment, net of taxes

 

 

519

 

 

3,596

 

 

1,783

 

 

595

 

Comprehensive income

 

 

33,542

 

 

73,135

 

 

125,448

 

 

155,143

 

Less: Comprehensive income attributable to noncontrolling interest

 

 

(26,370)

 

 

(59,931)

 

 

(99,195)

 

 

(141,053)

 

Comprehensive income attributable to common stockholders

 

$

7,172

 

$

13,204

 

$

26,253

 

$

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, 2016(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

Class A 

 

Class C 

 

Class D 

 

 

 

 

 

 

Paid-in

 

Earnings

 

Other

 

Total

 

Non-

 

 

 

(in thousands, except 

 

Common Stock

 

Common Stock

 

Common Stock

 

Treasury Stock

 

Capital

 

(Accumulated

 

Comprehensive

 

Stockholders'

 

Controlling

 

Total

 

share and interest data)

  

Shares

  

Amounts

  

Shares

  

Amounts

  

Shares

  

Amounts

  

Shares

  

Amounts

  

Amounts

  

Deficit)

  

Income (Loss)

  

Equity

  

Interest

  

Equity

  

Balance at December 31, 2015

 

38,379,858

 

$

 —

 

20,976,598

 

$

 —

 

79,610,490

 

$

1

 

(169,649)

 

$

(3,819)

 

$

130,902

 

$

3,525

 

$

99

 

$

130,708

 

$

427,162

 

$

557,870

 

Share based compensation

 

49,088

 

 

 —

 

(62,223)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

10,772

 

 

 —

 

 

 —

 

 

10,772

 

 

 —

 

 

10,772

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

25,752

 

 

 —

 

 

25,752

 

 

97,913

 

 

123,665

 

Foreign exchange translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

501

 

 

501

 

 

1,282

 

 

1,783

 

Distribution from Virtu Financial to non-controlling interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(123,867)

 

 

(123,867)

 

Dividends

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(28,117)

 

 

 —

 

 

(28,117)

 

 

 —

 

 

(28,117)

 

Issuance of common stock in connection with secondary offering, net of offering costs

 

1,103,668

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

16,677

 

 

 —

 

 

 —

 

 

16,677

 

 

 —

 

 

16,677

 

Repurchase of Virtu Financial Units and corresponding number of Class A and C common stock in connection with secondary offering

 

 —

 

 

 —

 

(1,103,668)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(17,383)

 

 

 —

 

 

 —

 

 

(17,383)

 

 

 —

 

 

(17,383)

 

Issuance of tax receivable agreements in connection with secondary offering

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,677

 

 

 —

 

 

 —

 

 

1,677

 

 

 —

 

 

1,677

 

Balance at September 30, 2016

 

39,532,614

 

$

 —

 

19,810,707

 

$

 —

 

79,610,490

 

$

1

 

(169,649)

 

$

(3,819)

 

$

142,645

 

$

1,160

 

$

600

 

$

140,587

 

$

402,490

 

$

543,077

 

 

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)

    

2016

    

2015

 

Cash flows from operating activities

    

 

    

    

 

    

 

Net Income

 

$

123,665

 

$

154,548

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

22,685

 

 

26,025

 

Amortization of purchased intangibles and acquired capitalized software

 

 

159

 

 

159

 

Amortization of debt issuance costs and deferred financing fees

 

 

1,396

 

 

1,287

 

Termination of office leases

 

 

 —

 

 

2,729

 

Share based compensation

 

 

9,440

 

 

59,237

 

Equipment writeoff

 

 

428

 

 

 —

 

Deferred taxes

 

 

9,345

 

 

 —

 

Other

 

 

(1,267)

 

 

1,224

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Securities borrowed

 

 

58,484

 

 

(25,666)

 

Securities purchased under agreements to resell

 

 

14,981

 

 

31,463

 

Receivables from broker dealers and clearing organizations

 

 

(36,756)

 

 

(173,064)

 

Trading assets, at fair value

 

 

(142,754)

 

 

89,750

 

Other Assets

 

 

1,705

 

 

(1,109)

 

Securities loaned

 

 

(42,656)

 

 

243,866

 

Securities sold under agreements to repurchase

 

 

 —

 

 

6,994

 

Payables to broker dealers and clearing organizations

 

 

(181,348)

 

 

(358,149)

 

Trading liabilities, at fair value

 

 

339,469

 

 

161,247

 

Accounts payable and accrued expenses and other liabilities

 

 

10,166

 

 

21,452

 

Net cash provided by operating activities

 

 

187,142

 

 

241,993

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Development of capitalized software

 

 

(6,044)

 

 

(6,190)

 

Acquisition of property and equipment

 

 

(8,933)

 

 

(14,418)

 

Investment in SBI Japannext described in Note 9

 

 

(38,754)

 

 

 —

 

Net cash used in investing activities

 

 

(53,731)

 

 

(20,608)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Distribution to members

 

 

 —

 

 

(130,000)

 

Distribution from Virtu Financial to non-controlling interest

 

 

(123,867)

 

 

(80,909)

 

Dividends

 

 

(28,117)

 

 

 —

 

Short-term borrowing, net

 

 

(27,400)

 

 

28,000

 

Payments on repurchase of non-voting common interest

 

 

(1,500)

 

 

(1,097)

 

Proceeds from long-term borrowings

 

 

33,078

 

 

 —

 

Repayment of senior secured credit facility

 

 

(3,825)

 

 

(1,639)

 

Debt issuance costs

 

 

(93)

 

 

(874)

 

Issuance of common stock, net of offering costs

 

 

16,677

 

 

327,366

 

Repurchase of Virtu Financial Units and corresponding number of Class A and C common stock in connections with IPO

 

 

 —

 

 

(277,153)

 

Repurchase of Virtu Financial Units and corresponding number of Class A and C common stock in connection with secondary offering

 

 

(17,383)

 

 

 —

 

Net cash used in financing activities

 

 

(152,430)

 

 

(136,306)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on Cash and cash equivalents

 

 

1,783

 

 

595

 

 

 

 

 

 

 

 

 

Net (decrease) increase in Cash and cash equivalents

 

 

(17,236)

 

 

85,674

 

Cash and cash equivalents, beginning of period

 

 

163,235

 

 

75,864

 

Cash and cash equivalents, end of period

 

$

145,999

 

$

161,538

 

 

 

 

 

 

 

 

 

Supplementary disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

43,827

 

$

47,642

 

Cash paid for taxes

 

$

15,008

 

$

7,366

 

 

 

 

 

 

 

 

 

Non-cash investing activities

 

 

 

 

 

 

 

Compensation to developers subject to capitalization of software (of which $1,997 and $11,240 were capitalized for nine months ended September 30, 2016 and 2015, respectively)

 

$

5,187

 

$

25,420

 

 

 

 

 

 

 

 

 

Non-cash financing activities

 

 

 

 

 

 

 

Tax receivable agreement described in Note 4

 

$

1,677

 

$

23,041

 

Secondary offerings described in Note 13

 

 

 —

 

 

 —

 

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

The accompanying condensed consolidated financial statements include the accounts and operations of Virtu Financial, Inc. (“VFI”, or, collectively with its wholly owned or controlled subsidiaries, the “Company”) beginning with its initial public offering (“IPO”) in April of 2015, along with the historical accounts and operations of Virtu Financial LLC (“Virtu Financial”) prior to the Company’s IPO. VFI is a Delaware corporation whose primary asset is its ownership of approximately 28.9% of the membership interests of Virtu Financial, which it acquired pursuant to and subsequent to certain reorganization transactions (the “Reorganization Transactions”) consummated in connection with its IPO. 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 U.S. broker-dealer, which self-clears its proprietary transactions and introduces the accounts of its affiliates and non-affiliated broker-dealers on an agency basis to other clearing firms that clear and settle transactions in those accounts; and which is also a 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, each of which are trading entities focused on asset classes in their respective geographic regions.

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

The 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”). The condensed consolidated financial statements of the Company include its equity interests in Virtu Financial and its subsidiaries. The Company operates and controls all business and affairs of Virtu Financial and its operating subsidiaries indirectly through its equity interest in Virtu Financial.

The condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements and should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2015 (the “2015 10-K”), which was filed on March 25, 2016. The accompanying December 31, 2015 unaudited condensed consolidated statements of financial condition data was derived

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from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The operating results for interim periods are not necessarily indicative of the operating results for any future interim or annual period.

Principles of Consolidation, including Noncontrolling Interests

The condensed consolidated financial statements include the accounts of the Company and its majority and wholly owned subsidiaries. As sole managing member of Virtu Financial, the Company exerts control over the Group’s operations. In accordance with ASC 810, Consolidation, the Company consolidates Virtu Financial and its subsidiaries’ financial statements and records the interests in Virtu Financial that the Company 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 U.S. GAAP, which require management to make estimates and assumptions regarding measurements including the fair value of trading assets and liabilities, goodwill and intangibles, compensation accruals, capitalized software, income tax, 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 calculated on both a basic and diluted basis. Basic EPS excludes dilution and is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the 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.

The Company grants restricted stock units (“RSUs”), which entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. As a result, the unvested RSUs meet the definition of a participating security requiring the application of the two-class method. Under the two-class method, earnings available to common shareholders, including both distributed and undistributed, are allocated to each class of common stock and participating securities according to dividends declared and participating rights in undistributed earnings, which may cause diluted EPS to be more dilutive than the calculation using the treasury stock method.

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

7


 

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 with a fair value approximately equal to the principal amount of the repurchase transaction, including accrued interest. For reverse repurchase agreements, the 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. 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.

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, 2016 and December 31, 2015, 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 presents its balances, including outstanding principal balances on all credit facilities, on a net-by-counterparty basis within 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 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, in the condensed consolidated statements of comprehensive income.

Fair Value Measurements

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.

8


 

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, 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 of levels 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, 2016 and 2015.

Fair Value Option

The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are recorded in other revenues (losses) in the condensed consolidated statements of comprehensive income . The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected.

 

In July 2016, the Company made a minority investment in SBI Japannext Co., Ltd. (“SBI”), a proprietary trading system based in Tokyo. The Company elected the fair value option to account for this equity method investment because it believes that fair value is the most relevant measurement attribute for this investment, as well as to reduce operational and accounting complexity.

 

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. The Company presents its derivatives balances on a net-by-counterparty basis when the criteria for offsetting are met.

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 statements 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

9


 

equipment are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. Furniture, fixtures, and equipment are depreciated over three to seven years. Leasehold improvements are amortized over the lesser of the length of the lease term or seven years.

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 excluding the charges recognized in relation to the IPO disclosed below were approximately $2.5 million and $2.6 million for the three months ended September 30, 2016 and 2015, respectively, and $8.0 million and $8.1 million for the nine months ended September 30, 2016 and 2015, respectively. The related amortization expense was approximately $2.5 million and $2.4 million for the three months ended September 30, 2016 and 2015, respectively, and $7.4 million and $7.6 million for the nine months ended September 30, 2016 and 2015, respectively.

Additionally, in connection with the compensation charges related to non-voting interest units (formerly Class B intersts) recognized upon the IPO (Note 14), the Company capitalized approximately $0.02 million and $0.1 million for the three months ended September 30, 2016 and 2015, respectively, and $0.06 million and $9.6 million for the nine months ended September 30, 2016 and 2015, respectively. The amortization costs related to these capitalized compensation charges and previously capitalized compensation charges related to East MIP Class B interests and Class B interests were approximately $0.1 million and $0.5 million for the three months ended September 30, 2016 and 2015, respectively, and $0.7 million and $8.5 million for the nine months ended September 30, 2016 and 2015.

Capitalized software development costs and related accumulated amortization are included in property, equipment and capitalized software in 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 the Company’s 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 the Company’s 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, 2016, 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 Company’s management believes to be an appropriate indicator of its fair value.

Based on the results of the impairment tests performed, no goodwill impairment was recognized during the three and nine months ended September 30, 2016 and 2015, respectively.

10


 

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 entitle the Company to certain trading privileges. The shares are marked to market with the corresponding gain or loss recorded under operations and administrative in the condensed consolidated statements of comprehensive income. The Company’s exchange memberships and stock are included in other assets in the condensed 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 technology licensing fees and agency commission fees. Technoloy licensing fees are earned from third parties for licensing of the Company’s 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. Agency commission fees are earned from agency trades executed by the Company on behalf of third parties.

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

Subsequent to consummation of the Reorganization Transactions and the IPO, the Company is subject to U.S. federal, state and local income taxes on its taxable income. The Company's subsidiaries are subject to income taxes in the respective jurisdictions (including foreign jurisdictions) in which they operate. Prior to the consummation of the Reorganization Transactions and the IPO, no provision for United States federal, state and local income tax was required, as 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.

11


 

The provision for income tax is comprised of current tax and deferred tax. Current tax represents the tax on current year tax returns, using tax rates enacted at the balance sheet date. The deferred tax assets are recognized in full and then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be recognized.

The Company recognizes the tax benefit from an uncertain tax position, in accordance with ASC 740, Income Taxes only if it is more likely than not that the tax position will be sustained on examination by the applicable taxing authority, including resolution of the appeals or litigation processes, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such a position are measured based on the largest benefit for each such position that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Many factors are considered when evaluating and estimating the tax positions and tax benefits. Such estimates involve interpretations of regulations, rulings, case law, etc. and are inherently complex. The Company’s estimates may require periodic adjustments and may not accurately anticipate actual outcomes as resolution of income tax treatments in individual jurisdictions typically would not be known for several years after completion of any fiscal year. The Company has determined that there are no uncertain tax positions that would have a material impact on the Company’s financial position as of September 30, 2016 and December 31, 2015 or the results of operations or cash flows for the three and nine months ended September 30, 2016 and 2015.

Comprehensive Income and Foreign Currency Translation

The Company’s operating results are reported in the condensed consolidated statements of comprehensive income pursuant to ASC 220, Comprehensive Income.

Comprehensive income consists of two components: net income and other comprehensive income (“OCI”). OCI is comprised of revenues, expenses, gains and losses that are reported in the comprehensive income section of the condensed consolidated statements of comprehensive income, but are excluded from reported net income. The Company’s OCI is comprised of foreign currency translation adjustments. Assets and liabilities of operations having non-U.S. dollar functional currencies are translated at period-end exchange rates, and revenues and expenses are translated at weighted average exchange rates for the period. Gains and losses resulting from translating foreign currency financial statements, net of related tax effects, are reflected in accumulated other comprehensive income, a separate component of stockholders’ equity.

Share-Based Compensation

The Company accounts for share-based compensation transactions with employees under the provisions of ASC 718, Compensation: Stock Compensation. Share-based compensation transactions with employees are measured based on the fair value of equity instruments issued.

The fair value of awards issued for compensation prior to the Reorganization Transactions and the IPO was determined by management, with the assistance of an independent third party valuation firm, using a projected annual forfeiture rate, where applicable, on the date of grant.

Share-based awards issued for compensation in connection with or subsequent to the Reorganization Transaction and the IPO pursuant to the VFI 2015 Management Incentive Plan (the “2015 Management Incentive Plan”) were in the form of stock options, Class A common stock and restricted stock units. The fair value of the stock option grants is determined through the application of the Black-Scholes-Merton model. The fair value of the Class A common stock and restricted stock units are determined based on the volume weighted average price for the three days preceding the grant, and with respect to the restricted stock units, a projected annual forfeiture rate. The fair value of share-based awards granted to employees is expensed based on the vesting conditions and are recognized on a straight line basis over the vesting period. The Company records as treasury stock shares repurchased from its employees for the purpose of settling tax liabilities incurred upon the issuance of common stock, the vesting of restricted stock units or the exercise of stock options.

12


 

Recent Accounting Pronouncements

Revenue - In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 by one year for public companies. ASU 2015-14 applies to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the potential effects of adoption of ASU 2014-09 and ASU 2015-14 on the Company’s condensed consolidated financial statements. 

Repurchase Agreements - In June 2014, the FASB released ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  The amendment changes the accounting for repurchase financing transactions and for repurchase-to-maturity transactions to secured borrowing accounting.  The accounting changes were effective for the Company beginning in the first quarter of 2015.  The effect of the accounting changes on transactions outstanding as of the effective date is required to be presented as a cumulative effect adjustment to retained earnings as of January 1, 2015. The amendment also requires additional disclosures for repurchase agreements and securities lending transactions regarding the class of collateral pledged and the remaining contractual maturity of the agreements, as well as a discussion on the potential risks associated with the agreements and the related collateral pledged, as well as how those risks are managed.  Additional disclosures are required for repurchase agreements, securities lending transactions, sales with a total return swap, and other similar transfers of financial assets that are accounted for as a sale. The Company adopted this ASU during the year ended December 31, 2015. This ASU did not have an impact on the Company’s condensed consolidated financial statements except for the additional disclosures described in Note 9.

Going Concern — In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance will explicitly require management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The new standard will be effective in the first annual period ending after December 15, 2016 (fiscal year 2017 for the Company). Earlier adoption is permitted. The Company will implement this new standard on the required effective date. This ASU is not expected to have an impact on the Company’s condensed consolidated financial statements.

Debt Issuance Costs — In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs.  The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as a deferred charge asset. The ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015 (fiscal year 2016 for the Company), and interim periods within those fiscal years.  Early adoption of the amendment is permitted and the Company has elected to early adopt this ASU effective as of March 31, 2015. In August 2015, the FASB issued ASU 2015-15, Interest – Presentation and Subsequent Measurement of Debit Issuance Costs Associated with Line-of-Credit Arrangement. The ASU stated that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company reports debt issuance cost related to the long term borrowings as a direct deduction from the carrying amount of debt liability.

Financial Assets and Liabilities — In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update intends to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information and addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The new standard affects all entities that hold financial assets or owe financial liabilities and is effective for annual reporting periods (including interim periods) beginning after December 15, 2017. Early adoption of

13


 

the ASU is not permitted, except for the amendments relating to the presentation of the change in the instrument-specific credit risk relating to a liability that an entity has elected to measure at fair value.  The Company is currently evaluating the potential effects of the adoption of ASU 2016-01 on its condensed consolidated financial statements.

Leases — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new ASU, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. The liability will be equal to the present value of lease payments. The asset, referred to as a “right-of-use asset” will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, leases will be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. New quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater information regarding the extent of revenue and expense recognized and expected to be recognized from existing contracts.  The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the potential effects of the adoption of ASU 2016-02 on the Company’s condensed consolidated financial statements.

Compensation – Stock Compensation — In March 2016, FASB issued ASU 2016-09, Employee Share-Based Payment Accounting Improvements.  The ASU makes a number of changes to accounting for share based payment programs, including the following principal changes: providing that all excess tax benefits and tax deficiencies arising from share-based payment programs should be recognized as income tax expense or benefit in the income statement; allowing companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (as is provided under current GAAP) or account for forfeitures when they occur; and providing that partial cash settlement of an award for tax-withholding purposes would not result, by itself, in liability classification of the award provided the amount withheld does not exceed the maximum statutory tax rate (as opposed to the current requirement which specifies the minimum statutory tax rate) for an employee in the applicable jurisdictions. The ASU also provides guidance on the classification of various items related to share based payment programs in the statement of cash flows.   The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted.  An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the potential effects of adoption of ASU 2016-09 on the Company’s condensed consolidated financial statements. 

Statement of Cash Flows – In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU intended to reduce diversity in practice how certain transactions are classified in the Statement of cash flows by mandating classification of certain activities. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  Early adoption is permitted.  An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the potential effects of adoption of ASU 2016-15 on the Company’s condensed consolidated financial statements.

3. Earnings per Share

Historical earnings per share information is not applicable for reporting periods prior to the consummation of the Reorganization Transactions and the IPO because the ownership structure of the Company did not include a common unit of ownership. Net income available for common stockholders is based on the Company’s approximate 28.9% interest in Virtu Financial.

14


 

Basic earnings per share are calculated utilizing net income available for common stockholders from the three and nine months ended September 30, 2016 and 2015, respectively, divided by the weighted average number of shares of common stock outstanding during the same period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  September 30,

 

Nine Months Ended  September 30,

 

(in thousands, except for share or per share data)

    

2016

    

2015

    

2016

    

2015

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common stockholders

 

$

7,026

 

$

12,306

 

$

25,752

 

$

12,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Dividends and undistributed earnings allocated to participating securities

 

 

(191)

 

 

 —

 

 

(612)

 

 

 —

 

Net income available for common stockholders, net of dividends and undistributed earnings allocated to participating securities

 

$

6,835

 

 

12,306

 

$

25,140

 

 

12,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

38,351,465

 

 

34,305,052

 

 

38,264,139

 

 

34,305,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings per share

 

$

0.18

 

$

0.36

 

$

0.66

 

$

0.37

 

 

Diluted earnings per share are calculated utilizing net income available for common stockholders, divided by the weighted average total number of shares of common stock outstanding during the three and nine months ended September 30, 2016 and 2015 including additional shares of common stock issued and issuable pursuant to the 2015 Management Incentive Plan (Note 13).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  September 30,

 

Nine Months Ended  September 30,

 

(in thousands, except for share or per share data)

    

2016

    

2015

    

2016

    

2015

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common stockholders, net of dividends and undistributed earnings allocated to participating securities

 

$

6,835

 

$

12,306

 

$

25,140

 

$

12,780