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, 2017

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.)

300 Vesey Street New York, New York 10282	10282
(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 ☒

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. Yes ☐ No☒

Class of Stock	Shares Outstanding as of November 9th, 2017
Class A common stock, par value $0.00001 per share	89,256,963
Class C common stock, par value $0.00001 per share	18,344,223
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, 2017

		PAGE NUMBER
PART I -	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Statements of Financial Condition	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)	3
	Condensed Consolidated Statements of Changes in Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74
Item 4.	Controls and Procedures	77
PART II -	OTHER INFORMATION
Item 1.	Legal Proceedings	77
Item 1A.	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	83
Item 3.	Defaults Upon Senior Securities	83
Item 4.	Mine Safety Disclosures	83
Item 5.	Other Information	83
Item 6.	Exhibits	84
	SIGNATURES	86

PART I - FINANCIAL INFORMATION

Condensed Consolidated Financial Statements (Unaudited)

	PAGE NUMBER
Condensed Consolidated Statements of Financial Condition	2
Condensed Consolidated Statements of Comprehensive Income (Loss)	3
Condensed Consolidated Statements of Changes in Equity	4
Condensed Consolidated Statements of Cash Flows	5
Notes to Condensed Consolidated Financial Statements	6

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)	2017		2016
Assets
Cash and cash equivalents	$	557,990	$	181,415
Cash and securities segregated under federal and other regulations		3,000		—
Securities borrowed		1,525,403		220,005
Securities purchased under agreements to resell		8,249		—
Receivables from broker dealers and clearing organizations		980,518		448,728
Trading assets, at fair value:
Financial instruments owned		2,203,248		1,683,999
Financial instruments owned and pledged		699,152		143,883
Property, equipment and capitalized software (net of accumulated depreciation of $118,671 and $113,184 as of September 30, 2017 and December 31, 2016, respectively)		144,686		29,660
Goodwill		859,598		715,379
Intangibles (net of accumulated amortization)		152,748		992
Deferred tax assets		224,804		193,859
Other assets ($98,837 and $36,480, at fair value, as of September 30, 2017 and December 31, 2016, respectively)		379,949		74,470
Total assets	$	7,739,345	$	3,692,390
Liabilities and equity
Liabilities
Short term borrowings	$	15,000	$	25,000
Securities loaned		582,915		222,203
Securities sold under agreements to repurchase		620,887		—
Payables to broker dealers and clearing organizations		839,067		695,978
Payables to customers		25,550		—
Trading liabilities, at fair value:
Financial instruments sold, not yet purchased		2,535,891		1,349,155
Tax receivable agreement obligations		232,552		231,404
Accounts payable and accrued expenses and other liabilities		287,327		69,281
Long-term borrowings		1,434,629		564,957
Total liabilities	$	6,573,818	$	3,157,978
Stockholders' equity
Class A common stock (par value $0.00001), Authorized — 1,000,000,000 and 1,000,000,000 shares, Issued  — 89,718,355 and 40,436,580 shares, Outstanding — 89,256,963 and 39,983,514 shares at September 30, 2017 and December 31, 2016, respectively		1		—
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, 2017 and December 31, 2016, respectively		—		—
Class C common stock (par value $0.00001), Authorized — 90,000,000 and 90,000,000 shares, Issued — 18,344,223 and 19,810,707 shares, Outstanding — 18,344,223 and 19,810,707, at September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, respectively		1		1
Treasury stock, at cost, 461,392 and 453,066 shares at September 30, 2017 and December 31, 2016, respectively		(8,505)		(8,358)
Additional paid-in capital		900,586		155,536
Accumulated deficit		(51,304)		(1,254)
Accumulated other comprehensive income (loss)		2,596		(252)
Total stockholders' equity	$	843,375	$	145,673
Noncontrolling interest		322,152		388,739
Total equity	$	1,165,527	$	534,412
Total liabilities and equity	$	7,739,345	$	3,692,390

See accompanying notes to the unaudited condensed consolidated financial statements.

2

Virtu Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands, except share and per share data)	2017		2016		2017		2016
Revenues:
Trading income, net	$	203,907	$	156,706	$	479,644	$	509,542
Interest and dividends income		20,430		5,271		30,933		14,961
Commissions, net and technology services		43,351		2,931		49,237		7,224
Other, net		3,598		(102)		3,647		(102)
Total revenue		271,286		164,806		563,461		531,625
Operating Expenses:
Brokerage, exchange and clearance fees, net		64,584		52,118		170,253		167,416
Communication and data processing		45,998		17,903		83,190		53,578
Employee compensation and payroll taxes		72,341		20,816		111,053		64,182
Payments for order flow		12,071		—		12,071		—
Interest and dividends expense		31,242		15,615		58,456		43,249
Operations and administrative		24,183		5,543		38,107		16,198
Depreciation and amortization		15,602		7,158		29,157		22,685
Amortization of purchased intangibles and acquired capitalized software		6,440		53		6,546		159
Debt issue cost related to debt refinancing		4,869		—		9,351		—
Transaction advisory fees and expenses		15,677		—		24,188		155
Reserve for legal matter		—		—		(2,176)		—
Charges related to share based compensation at IPO		181		333		545		1,444
Financing interest expense on long-term borrowings		24,593		7,393		40,141		21,569
Total operating expenses		317,781		126,932		580,882		390,635
Income (loss) before income taxes and noncontrolling interest		(46,495)		37,874		(17,421)		140,990
Provision for (benefit from) income taxes		(6,505)		4,851		(2,918)		17,325
Net income (loss)		(39,990)		33,023		(14,503)		123,665
Noncontrolling interest		26,472		(25,997)		6,466		(97,913)
Net income (loss) available for common stockholders	$	(13,518)	$	7,026	$	(8,037)	$	25,752
Earnings (loss) per share
Basic	$	(0.17)		0.18	$	(0.17)		0.66
Diluted	$	(0.17)		0.18	$	(0.17)		0.66
Weighted average common shares outstanding
Basic		79,199,142		38,351,465		53,520,346		38,264,139
Diluted		79,199,142		38,351,465		53,520,346		38,264,139
Net income (loss)	$	(39,990)	$	33,023	$	(14,503)	$	123,665
Other comprehensive income (loss)
Foreign exchange translation adjustment, net of taxes		2,558		519		8,300		1,783
Comprehensive income (loss)		(37,432)		33,542		(6,203)		125,448
Less: Comprehensive income (loss) attributable to noncontrolling interest		25,122		(26,370)		1,014		(99,195)
Comprehensive income (loss) attributable to common stockholders	$	(12,310)	$	7,172	$	(5,189)	$	26,253

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 Year Ended December 31, 2016 and Nine Months Ended September 30, 2017

(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	953,054		—	(58,070)		—	—		—	—		—		24,893		—		—		24,893		—		24,893
Repurchase of Class C common stock	—		—	(4,153)		—	—		—	—		—		(98)		—		—		(98)		—		(98)
Treasury stock purchases	—		—	—		—	—		—	(283,417)		(4,539)		—		—		—		(4,539)		—		(4,539)
Net income	—		—	—		—	—		—	—		—		—		32,980		—		32,980		125,360		158,340
Foreign exchange translation adjustment	—		—	—		—	—		—	—		—		—		—		(351)		(351)		(814)		(1,165)
Distribution from Virtu Financial to non-controlling interest	—		—	—		—	—		—	—		—		—		—		—		—		(162,969)		(162,969)
Dividends	—		—	—		—	—		—	—		—		—		(37,759)		—		(37,759)		—		(37,759)
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 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	—		—	—		—	—		—	—		—		545		—		—		545		—		545
Balance at December 31, 2016	40,436,580	$	—	19,810,707	$	—	79,610,490	$	1	(453,066)	$	(8,358)	$	155,536	$	(1,254)	$	(252)	$	145,673	$	388,739	$	534,412
Share based compensation	58,536		—	(34,019)		—	—		—	—		—		12,314		—		—		12,314		—		12,314
Repurchase of Class C common stock	—		—	(286,150)		—	—		—	—		—		(4,592)		—		—		(4,592)		—		(4,592)
Treasury stock purchases	—		—	—		—	—		—	(8,326)		(147)		—		—		—		(147)		—		(147)
Net income (loss)	—		—	—		—	—		—	—		—		—		(8,037)		—		(8,037)		(6,466)		(14,503)
Foreign exchange translation adjustment	—		—	—		—	—		—	—		—		—		—		2,848		2,848		5,452		8,300
Distribution from Virtu Financial to non-controlling interest	—		—	—		—	—		—	—		—		—		—		—		—		(65,573)		(65,573)
Dividends	—		—	—		—	—		—	—		—		—		(42,013)		—		(42,013)		—		(42,013)
Issuance of Class A common stock	48,076,924		1	—		—	—		—	—		—		735,973		—		—		735,974		—		735,974
Issuance of common stock in connection with employee exchanges	1,146,315		—	—		—	—		—	—		—		—		—		—		—		—		—
Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with employee exchanges	—		—	(1,146,315)		—	—		—	—		—		—		—		—		—		—		—
Issuance of tax receivable agreements in connection with employee exchange	—		—	—		—	—		—	—		—		1,355		—		—		1,355		—		1,355
Balance at September 30, 2017	89,718,355		1	18,344,223		—	79,610,490		1	(461,392)		(8,505)		900,586		(51,304)		2,596		843,375		322,152		1,165,527

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)	2017		2016
Cash flows from operating activities
Net Income (loss)	$	(14,503)	$	123,665
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		29,157		22,685
Amortization of purchased intangibles and acquired capitalized software		6,546		159
Debt issue cost related to debt refinancing		9,351		—
Amortization of debt issuance costs and deferred financing fees		3,470		1,396
Share based compensation		10,924		9,440
Reserve for legal matter		(2,176)		—
Equipment writeoff		1,335		428
Deferred taxes		1,489		9,345
Other		(444)		(1,267)
Changes in operating assets and liabilities:
Securities borrowed		101,046		58,484
Securities purchased under agreements to resell		8,645		14,981
Receivables from broker dealers and clearing organizations		21,241		(36,756)
Trading assets, at fair value		1,020,821		(142,754)
Other Assets		26,248		1,705
Securities loaned		194,523		(42,656)
Securities sold under agreements to repurchase		(220,719)		—
Payables to broker dealers and clearing organizations		(393,564)		(181,348)
Payables to customers		7,967		—
Trading liabilities, at fair value		(569,911)		339,469
Accounts payable and accrued expenses and other liabilities		(25,675)		10,166
Net cash provided by operating activities		215,771		187,142
Cash flows from investing activities
Development of capitalized software		(7,929)		(6,044)
Acquisition of property and equipment		(13,932)		(8,933)
Investment in SBI Japannext		—		(38,754)
Acquisition of KCG Holdings, net of cash acquired, described in Note 3		(799,303)		—
Acquisition of Teza Technologies		(5,594)		—