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EXCEL - IDEA: XBRL DOCUMENT - GAIN Capital Holdings, Inc.Financial_Report.xls
EX-31.2 - CFO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit31_2.htm
EX-32.2 - CFO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit32_2.htm
EX-32.1 - CEO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit32_1.htm
EX-31.1 - CEO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit31_1.htm
EX-10.1 - VALAQUENTA PURCHASE AGREEMENT - GAIN Capital Holdings, Inc.valaquentaassetpurchaseagr.htm
EX-10.2 - FOREXSTER PURCHASE AGREEMENT - GAIN Capital Holdings, Inc.forexsterpurchaseagreement.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
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 001-35008
 
 GAIN CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
20-4568600
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
Bedminster One
135 Route 202/206
Bedminster, New Jersey
 
07921
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (908) 731-0700
 
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.    ý  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    ý  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
ý
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
As of November 7, 2014, the registrant had 41,351,545 shares of common stock, $0.00001 par value per share, outstanding.



GAIN Capital Holdings, Inc.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2014
 
 
 
 
 
Item 1.
 
 
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013
 
Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013
 
Consolidated Statement of Changes in Shareholders' Equity for the nine months ended September 30, 2014
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds
Item 6.
 
 
 
 
EXHIBIT INDEX
 

2


PART I – FINANCIAL INFORMATION
GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
 
 
As of September 30, 2014
 
As of December 31, 2013
ASSETS:
 
 
 
Cash and cash equivalents
$
82,172

 
$
39,871

Cash and securities held for customers
849,737

 
739,318

Short term investments, at fair value
852

 
788

Receivables from banks and brokers, ($15,734) and ($9,784), respectively, at fair value
165,327

 
227,630

Property and equipment, net of accumulated depreciation
19,732

 
17,118

Prepaid assets
4,173

 
8,790

Goodwill
30,442

 
11,668

Intangible assets, net
63,800

 
34,828

Other assets, net
43,761

 
32,549

Total assets
$
1,259,996

 
$
1,112,560

LIABILITIES AND SHAREHOLDERS’ EQUITY:

 

Liabilities


 


Payables to customers, brokers, dealers, FCMs and other regulated entities, $142,555 and $129,224, respectively, at fair value
$
849,737

 
$
739,318

Accrued compensation and benefits
10,235

 
12,985

Accrued expenses and other liabilities
63,826

 
56,693

Income tax payable
5,706

 
3,803

Convertible senior notes
67,726

 
65,360

Total liabilities
997,230

 
878,159

Commitments and contingent liabilities

 

Redeemable non-controlling interest
10,448

 

GAIN Capital Holdings, Inc. shareholders’ equity

 

Common stock ($0.00001 par value; 60 million shares authorized; 43,751,168 shares issued and 41,154,993 shares outstanding as of September 30, 2014; 41,921,609 shares issued and 39,425,434 shares outstanding as of December 31, 2013)

 

Accumulated other comprehensive income
2,307

 
2,576

Additional paid-in capital
150,778

 
138,691

Treasury stock, at cost (2,596,175 shares at September 30, 2014 and 2,496,175 at December 31, 2013, respectively)
(16,263
)
 
(15,469
)
Retained earnings
115,496

 
108,603

Total GAIN Capital Holdings, Inc. shareholders’ equity
252,318

 
234,401

Total liabilities and shareholders’ equity
$
1,259,996

 
$
1,112,560

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except share and per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014

2013
 
2014
 
2013
REVENUE:
 
 
 
 
 
 
 
Trading revenue
$
63,941

 
$
50,919

 
$
151,587

 
$
143,708

Commission revenue
34,969

 
12,662

 
97,193

 
37,749

Other revenue
4,478

 
(3,010
)
 
5,198

 
1,700

Total non-interest revenue
103,388

 
60,571

 
253,978

 
183,157

Interest revenue
359

 
207

 
1,123

 
629

Interest expense
97

 
21

 
319

 
101

Total net interest revenue
262

 
186

 
804

 
528

Total net revenue
103,650

 
60,757

 
254,782

 
183,685

EXPENSES:

 

 

 

Employee compensation and benefits
25,505

 
17,757

 
71,440

 
50,332

Selling and marketing
4,803

 
5,713

 
16,118

 
15,858

Referral fees
24,640

 
12,442

 
65,865

 
33,600

Trading expenses
6,032

 
4,049

 
20,089

 
12,171

General and administrative
9,056

 
5,710

 
28,113

 
16,669

Depreciation and amortization
1,717

 
1,852

 
5,725

 
5,234

Purchased intangible amortization
2,228

 
486

 
4,841

 
1,687

Communications and technology
3,822

 
2,249

 
11,645

 
6,503

Bad debt provision
1,528

 
807

 
2,690

 
1,193

Acquisition expense
917

 
451

 
1,545

 
1,456

Restructuring
436

 
439

 
1,007

 
439

Integration

 

 
1,719

 

Total operating expense
80,684

 
51,955

 
230,797

 
145,142

OPERATING PROFIT
22,966

 
8,802

 
23,985

 
38,543

Interest on long term borrowings
1,496

 
159

 
4,390

 
327

INCOME BEFORE INCOME TAX EXPENSE
21,470

 
8,643

 
19,595

 
38,216

Income tax expense
5,340

 
3,043

 
4,595

 
11,172

NET INCOME
16,130

 
5,600

 
15,000

 
27,044

Net income attributable to non-controlling interest
785

 

 
987

 

NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
15,345

 
5,600

 
14,013

 
27,044

Other comprehensive (loss)/income, net of tax:


 


 


 


Foreign currency translation adjustment
(2,988
)
 
3,983

 
(269
)
 
117

NET COMPREHENSIVE INCOME
APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
$
12,357

 
$
9,583

 
$
13,744

 
$
27,161

Earnings per common share:


 


 


 


Basic
$
0.35

 
$
0.16

 
$
0.32

 
$
0.76

Diluted
$
0.33

 
$
0.14

 
$
0.30

 
$
0.69

Weighted average common shares outstanding used in computing earnings per common share:


 


 


 


Basic
41,038,782

 
36,062,659

 
40,243,330

 
35,563,701

Diluted
43,523,862

 
39,730,857

 
43,054,959

 
38,722,667

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
BALANCE—December 31, 2013
39,425,434

 
$

 
$
(15,469
)
 
$
138,691

 
$
108,603

 
$
2,576

 
$
234,401

Exercise of options
391,522

 

 

 
1,204

 

 

 
1,204

Issuance of common stock
978,736

 

 

 
6,493

 

 

 
6,493

Conversion of restricted stock into common stock
397,239

 

 

 

 

 

 

Employee stock purchase plan
62,062

 

 

 
461

 

 

 
461

Repurchase of shares
(100,000
)
 

 
(794
)
 

 

 

 
(794
)
Stock compensation expense

 

 

 
2,666

 

 

 
2,666

Foreign currency translation adjustment

 

 

 

 

 
(269
)
 
(269
)
Tax benefit of stock options exercises

 

 

 
1,263

 

 

 
1,263

Dividend declared ($0.05 quarterly dividend per share)

 

 

 

 
(6,054
)
 

 
(6,054
)
Net income applicable to Gain Capital Holdings, Inc.

 

 

 

 
14,013

 

 
14,013

Adjustment to the redemption value of put options

 

 

 

 
(1,066
)
 

 
(1,066
)
BALANCE—September 30, 2014
41,154,993

 
$

 
$
(16,263
)
 
$
150,778

 
$
115,496

 
$
2,307

 
$
252,318

The accompanying notes are an integral part of these condensed consolidated financial statements.


5


Gain Capital Holdings, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
15,000

 
$
27,044

Adjustments to reconcile net income to cash provided by operating activities

 

Gain on foreign currency exchange rates
3,153

 
2,243

Depreciation and amortization
10,566

 
6,921

Deferred taxes
(2,430
)
 
2,076

Amortization of deferred financing costs
265

 

Convertible note discount amortization
1,599

 

Bad debt provision
2,690

 
1,193

Stock compensation expense
2,666

 
2,272

Changes in operating assets and liabilities:

 

Cash and securities held for customers
(122,523
)
 
(13,173
)
Receivables from banks and brokers
61,316

 
(37,952
)
Prepaid assets
365

 
(1,617
)
Other assets
(8,595
)
 
(5,494
)
Payables to customers, brokers, dealers, FCMs and other regulated entities
122,523

 
13,173

Accrued compensation and benefits
(2,745
)
 
5,130

Accrued expenses and other liabilities
(945
)
 
5,364

Income tax payable
1,393

 
3,190

Cash provided by operating activities
84,298

 
10,370

CASH FLOWS FROM INVESTING ACTIVITIES:

 

Purchases of property and equipment
(8,061
)
 
(4,351
)
Purchases of certificates of deposit
(100
)
 

Sale of treasury bills


606

Funding of acquisitions, net of cash acquired
(27,013
)
 
(4,219
)
Cash used for investing activities
(35,174
)
 
(7,964
)
CASH FLOWS FROM FINANCING ACTIVITIES:

 

Contractual payments for acquired assets

 
(2,420
)
Proceeds from exercise of stock options
1,204

 
1,524

Proceeds from employee stock purchase plan
461

 
181

Purchase of treasury stock
(794
)
 
(987
)
Tax benefit from employee stock option exercises
1,263

 
373

Dividend payment
(6,054
)
 
(5,348
)
Cash used for financing activities
(3,920
)
 
(6,677
)
Effect of exchange rate changes on cash and cash equivalents
(2,903
)
 
(4,226
)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
42,301

 
(8,497
)
CASH AND CASH EQUIVALENTS—Beginning of period
39,871

 
36,820

CASH AND CASH EQUIVALENTS—End of period
$
82,172

 
$
28,323

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:

 

Cash paid during the year for:

 

Interest
$
(1,784
)
 
$
(190
)
Taxes
$
(7,121
)
 
$
(5,540
)
Non-cash financing activities:

 

Common stock issued as consideration for asset and business acquisitions
$
(6,493
)
 
$
(35,079
)
Adjustment to redemption value of put options
$
(1,066
)
 
$


The accompanying notes are an integral part of these condensed consolidated financial statements.

6


GAIN CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
GAIN Capital Holdings, Inc., together with its subsidiaries (the “Company”), is a Delaware corporation formed and incorporated on March 24, 2006. GAIN Holdings, LLC is a wholly-owned subsidiary of GAIN Capital Holdings, Inc., and owns all outstanding membership units in GAIN Capital Group, LLC (“Group, LLC”), the primary regulated entity in the United States of America.
Group, LLC is a retail foreign exchange dealer (“RFED”) and a registered Futures Commission Merchant (“FCM”) with the Commodity Futures Trading Commission (“CFTC”). As such, it is subject to the regulations of the CFTC, an agency of the U.S. Government, and the rules of the National Futures Association (“NFA”), an industry self-regulatory organization.
The following list includes each of the Company’s significant U.S. and international regulated subsidiaries as of September 30, 2014:
GAIN Capital Group, LLC
GAIN Capital-Forex.com U.K., Ltd.
Forex.com Japan Co., Ltd.
GAIN Capital Forex.com Australia Pty. Ltd.
GAIN Capital-Forex.com Hong Kong Ltd.
GAIN Capital-Forex.com Canada, Ltd.
GAIN GTX, LLC
GAIN GTX SEF, LLC
Global Futures & Forex, Ltd.
GFT Global Markets UK Ltd.
GFT Global Markets Asia Pte., Ltd.
Global Assets Advisors, LLC
Top Third Ag Marketing LLC
Galvan Research and Trading, Ltd.
Faraday Research LLP
In July 2014, the Company acquired all of the outstanding share capital of Galvan Research and Trading, Ltd. ("Galvan"), a UK based corporation, and its subsidiaries, Faraday Research LLP and Galvan LLP.
In March 2014, the Company acquired controlling interests in Global Asset Advisors, LLC ("GAA") and Top Third Ag Marketing LLC ("TT").
In September 2013, the Company purchased all of the outstanding share capital of Global Futures & Forex, Ltd., a Michigan corporation ("GFT").
In the first quarter of 2014, the Company combined the operations of GFT's U.K.-based subsidiary with the operations of GAIN Capital-Forex.com U.K., Ltd.
See note 5 "Acquisitions" for further details related to these acquisitions.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the financial statements for the interim periods. The financial statements are presented in accordance with accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission ("SEC") for interim financial statements, and, in accordance with SEC rules, omit or condense certain information and footnote disclosures. Results for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 17, 2014 (the “2013 Form 10-K”). There have been no changes in the significant accounting policies from those included in the 2013 Form 10-K. The unaudited condensed consolidated financial

7


statements include the accounts of the Company and its wholly-owned subsidiaries, after the elimination of inter-company transactions and balances.

In an effort to align our presentation of expenses with the presentation utilized by competitors in our industry and thereby facilitate comparisons among companies, the Company has presented the interest expense incurred on borrowings and debt, previously presented under "Interest expense" as part of net revenue, under a separate income statement line item, "Interest on long term borrowings", which is shown below operating expenses. Also, commissions paid to employees, previously presented under "Trading expenses and commissions", are now presented under "Employee compensation and benefits." Additionally, the Company has presented compensation paid to its white label partners and introducing brokers, which was also previously presented under "Trading expenses and commissions", under the new caption of "Referral fees." The remaining expense items that were previously presented under "Trading expenses and commissions", including exchange fees, fees for news services and prime broker fees, are now presented under a new line item, "Trading expenses". These changes in presentation had no effect on the Company's net income.

The Company's condensed consolidated balance sheet as of December 31, 2013 has been revised to reflect the finalization of the purchase price allocations for the GFT acquisition. The resulting changes include accruals of $1.4 million and a deferred tax asset of $3.9 million, each of which is offset against goodwill.






2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition guidance that supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. The guidance requires a company to recognize revenue when it transfers promised services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those services and requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period and early application is not permitted. The Company is currently assessing the impact of adopting this guidance on its financial statements.

In August 2014, the FASB issued new guidance regarding management's evaluation of the going concern assumption. The new guidance includes specific areas to assess, while introducing documentation requirements. The Company is currently assessing the impact of adopting this guidance, which is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period.


8


3. ADDITIONAL FINANCIAL INFORMATION
Fair Value Measurement
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis during the period and the related hierarchy levels (amounts in thousands):
 
 
Fair Value Measurements on a Recurring Basis
as of September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Money market accounts
$
21,061

 
$

 
$

 
$
21,061

Open contracts and other positions

 
(15,734
)
 

 
(15,734
)
CIBC treasury bills
678

 

 

 
678

Certificates of deposit
174

 

 

 
174

Investment in gold
121

 

 

 
121

Contingent consideration




(6,484
)

(6,484
)
Customer and broker open contracts and other positions

 
142,555

 

 
142,555

Total
$
22,034

 
$
126,821

 
$
(6,484
)
 
$
142,371

 
 
Fair Value Measurements on a Recurring Basis
as of December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Money market accounts
$
21,019

 
$

 
$

 
$
21,019

Open contracts and other positions

 
(9,904
)
 

 
(9,904
)
CIBC treasury bills
706

 

 

 
706

Certificates of deposit
82

 

 

 
82

Investment in gold
120

 

 

 
120

Customer and broker open contracts and other positions

 
129,224

 

 
129,224

Total
$
21,927

 
$
119,320

 
$

 
$
141,247

The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period, nor has there been any movement between levels during the period.
Level 1 Financial Assets
The Company has money market accounts, CIBC treasury bills, certificates of deposit and an investment in gold that are Level 1 financial instruments that are recorded based upon listed or quoted market rates. The money market accounts are recorded in Cash and cash equivalents and Cash and securities held for customers, the treasury bills are recorded in Cash and cash equivalents and Short term investments, based upon their maturity, the certificates of deposit are recorded in Short term investments and the investment in gold is recorded in Other assets.
Level 2 Financial Assets and Liabilities
The Company has open contracts and other positions that are Level 2 financial instruments that are recorded in Receivables from banks and brokers.
The Company has customer and broker open contracts and other positions that are Level 2 financial instruments that are recorded in Payables to customers, brokers, dealers, FCMs and other regulated entities.
These Level 2 financial instruments are based upon directly observable values for underlying instruments.

9


Level 3 Financial Liabilities
The Company has contingent payments that are Level 3 financial liabilities recorded under Accrued expenses and other liabilities. The fair value of these payments is determined using interest rates and forecasts, the latter of which do not have any basis in quoted or observable markets.
Financial Instruments Not Measured at Fair Value
The table below presents the carrying value, fair value, and fair value hierarchy category of certain financial instruments that are not measured at fair value in the Condensed consolidated balance sheets (amounts in thousands). The carrying value of Receivables from banks and brokers not measured at fair value approximates fair value because of the relatively short period of time between their origination and expected maturity. The carrying value of Payables to customers, brokers, dealers, FCMs, and other regulated entities includes amounts deposited by these customers and financial institutions in order for the Company to act as a clearing broker. The carrying value of Payables to customers, brokers, dealers, FCMs, and other regulated entities includes cash and open positions with relatively short time periods between origination and expected maturity. The carrying value of Convertible senior notes represents the notes’ principal amounts net of unamortized discount (see note 7). We assessed the notes' fair value against prevailing interest rates as of the balance sheet date. The carrying value of Accrued expenses and other liabilities includes $20.0 million, referred to as the Holdback Amount, to be paid net of an amount required to settle certain liabilities of GFT after the closing date of the acquisition (see note 5). The carrying values of Accrued expense and other liabilities not measured at fair value approximate fair value because of the relatively short period of time between their origination and expected settlement date.
 
As of September 30, 2014
 
Fair Value Measurements using:
 
Carrying Value
 
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets:
 
 
 
 
 
 
 
 
 
Receivables from banks and brokers
$
181,061

 
$
181,061

 

 
$
181,061

 

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers, brokers, dealers, FCMs and other regulated entities
992,292

 
992,292

 

 
992,292

 

Convertible senior notes
67,726

 
66,010

 

 
66,010

 

Accrued expense and other liabilities
20,000

 
20,000

 

 
20,000

 


 
As of December 31, 2013
 
Fair Value Measurements using:
 
Carrying Value
 
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets:
 
 
 
 
 
 
 
 
 
Receivables from banks and brokers
$
237,414

 
$
237,414

 

 
$
237,414

 

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers, brokers, dealers, FCMs and other regulated entities
$
868,542

 
$
868,542

 

 
$
868,542

 

Convertible senior notes
$
65,360

 
$
64,372

 

 
64,372

 

Accrued expense and other liabilities
$
20,000

 
$
20,000

 

 
20,000

 



10


Receivables from Banks and Brokers
Amounts receivable from banks and brokers consisted of the following as of (amounts in thousands): 
 
September 30, 2014
 
December 31, 2013
Required collateral
$
158,597

 
$
148,731

Cash in excess of required collateral(1)

 
84,108

Excess from futures broker - Restricted
22,464

 
4,575

Open positions
(15,734
)
 
(9,904
)
Investment in spot gold (2)
$

 
$
120

 
$
165,327

 
$
227,630

(1)
At September 30, 2014, the Company has included the amount of cash in excess of required collateral, which was previously included in Receivables from banks and brokers, in Cash and cash equivalents on the Condensed consolidated balance sheets.
(2)
At September 30, 2014, the Company included its investment in spot gold under Other assets on the Condensed consolidated balance sheets, rather than in Receivables from banks and brokers where it had previously been recorded. The Company believes the new classification more appropriately represents the nature of the investment.
The Company has posted funds with banks and brokers as collateral required by agreements for holding trading positions. These amounts are reflected as Receivables from banks and brokers on the Condensed consolidated balance sheets. As noted above, amounts deposited with banks and brokers in excess of required collateral are reflected in Cash and cash equivalents on the Condensed consolidated balance sheet as of September 30, 2014.
Derivatives
The Company's contracts with its customers and its liquidity providers are deemed to be derivative instruments. The table below represents the fair values of the Company’s derivative instruments reported within Receivables from banks and brokers and Payables to customers, brokers, dealers, FCMs and other regulated entities on the accompanying Condensed consolidated balance sheets (amounts in thousands):
 
September 30, 2014
 
Gross amounts of
assets for
derivative open
positions at fair
value
 
Gross amount of
liabilities for
derivative open
positions at fair
value
 
Net amounts of
assets/liabilities
for derivative
open positions at
fair value
Derivative Instruments:

 

 

Foreign currency exchange contracts
$
214,778

 
$
121,504

 
$
93,274

CFD contracts
51,678

 
34,313

 
17,365

Metals contracts
23,484

 
7,302

 
16,182

Total
$
289,940

 
$
163,119

 
$
126,821

 
 
 
 
 
 
 
September 30, 2014
 
Cash Collateral

Net amounts of
assets/liabilities
for derivative
open positions at
fair value

Net amounts of
assets/liabilities
presented in the
balance sheet
Derivative Assets/Liabilities:





Receivables from bank and brokers
$
181,061

 
$
(15,734
)
 
$
165,327

Payables to customers, brokers, dealers, FCMs and other regulated entities
$
992,292

 
$
142,555

 
$
849,737


11


 
December 31, 2013
 
Gross amounts of
assets for
derivative open
positions at fair
value
 
Gross amount of
liabilities for
derivative open
positions at fair
value
 
Net amounts of
assets/liabilities
for derivative
open positions at
fair value
Derivative Instruments:
 
 
 
 
 
Foreign currency exchange contracts
$
152,326

 
$
47,631

 
$
104,695

CFD contracts
50,169

 
45,735

 
4,434

Metals contracts
16,485

 
6,294

 
10,191

Total
$
218,980

 
$
99,660

 
$
119,320

 
 
 
 
 
 
 
December 31, 2013
 
Cash Collateral
 
Net amounts of
assets/liabilities
for derivative
open positions at
fair value
 
Net amounts of
assets/liabilities
presented in the
balance sheet
Derivative Assets/Liabilities:
 
 
 
 
 
Receivables from bank and brokers1
$
237,414

 
$
(9,904
)
 
$
227,630

Payables to customers, brokers, dealers, FCMs and other regulated entities
$
868,542

 
$
129,224

 
$
739,318

(1) At December 31, 2013 the amount on the unaudited condensed consolidated balance sheets include the Company's investment in gold, which is neither a derivative nor collateral.
The Company’s derivatives include different underlyings, which vary in price. Foreign exchange contracts typically have prices less than two dollars, while certain metals contracts and contracts for difference can have considerably higher prices. The table below represents the number of contracts reported within Receivables from banks and brokers and Payables to customers, brokers, dealers, FCMs and other regulated entities on the accompanying Condensed consolidated balance sheets (amounts in thousands):
 
September 30, 2014
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,005,611

 
3,885,183

CFD contracts
754,651

 
19,558

Metals contracts
1,485

 
649

Total
3,761,747

 
3,905,390


 
December 31, 2013
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,031,742

 
4,000,937

CFD contracts
514,058

 
19,201

Metals contracts
1,069

 
680

Total
3,546,869

 
4,020,818


The Company did not designate any of its derivatives as hedging instruments at September 30, 2014 or December 31, 2013. Net gains with respect to derivative instruments reflected in Trading Revenue in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 were as follows (amounts in thousands): 


12


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014

2013
Derivative Instruments:
 
 
 
 

 

Foreign currency exchange
35,746

 
34,892

 
91,032

 
88,111

CFD contracts
12,074

 
6,894

 
29,567

 
11,324

Metals contracts
16,121

 
9,133

 
30,988

 
44,273

Total
63,941

 
50,919

 
151,587

 
143,708

Property and Equipment
Property and equipment, including leasehold improvements and capitalized software development costs, consisted of the following as of (amounts in thousands):
 
 
September 30, 2014
 
December 31, 2013
Software1
$
29,595

 
$
25,913

Computer equipment
8,148

 
6,649

Leasehold improvements
6,647

 
6,560

Telephone equipment
720

 
714

Office equipment
2,355

 
1,994

Furniture and fixtures
1,177

 
1,108

Web site development costs
646

 
626

 
49,288

 
43,564

Less: Accumulated depreciation and amortization1
(29,556
)
 
(26,446
)
Property and equipment, net
$
19,732

 
$
17,118

(1) Certain fully depreciated and amortized property and equipment has been removed from both the cost and accumulated depreciation and amortization at September 30, 2014.

As mentioned in Note 1 above, in July 2014, the Company purchased all of the outstanding share capital of Galvan; in March 2014, the Company purchased controlling interests in GAA and TT. The preliminary purchase price allocations to property and equipment for these transactions are detailed below in Note 5, “Acquisitions”. In September 2013, the Company purchased all of the outstanding share capital of GFT.
Depreciation and amortization expense for property and equipment was $1.7 million and $1.9 million for the three months ended September 30, 2014 and 2013, respectively and $5.7 million and $5.2 million for the nine months ended September 30, 2014, and 2013, respectively.
Intangible Assets
The Company's various finite-lived intangible assets consisted of the following as of (amounts in thousands): 
 
September 30, 2014
 
December 31, 2013
 
Cost
 
Accumulated
Amortization
 
Cost
 
Accumulated
Amortization
Customer list1
$
23,076

 
$
(6,009
)
 
$
21,556

 
$
(13,594
)
Technology
48,405

 
(3,392
)
 
26,930

 
(910
)
Trademark
1,794

 
(413
)
 
650

 
(173
)
Non-compete agreement1
103

 
(96
)
 
1,859

 
(1,852
)
 
$
73,378

 
$
(9,910
)
 
$
50,995

 
$
(16,529
)
(1) Certain fully amortized intangible assets have been removed from both the cost and accumulated amortization at September 30, 2014.
The preliminary purchase price allocations to intangible assets for the acquisitions of Galvan, GAA, and TT are detailed below in Note 5, “Acquisitions”, along with the final purchase price allocations for GFT.

13


On July 10, 2014, the Company entered into asset purchase agreements with Valaquenta Intellectual Property Limited ("Valaquenta") and Forexster Limited ("Forexster"), pursuant to which one of the Company's subsidiaries, GAIN GTX Bermuda, Ltd. ("GTX Bermuda") agreed to purchase from Valaquenta and Forexster, the software and other intellectual property assets utilized to operate the electronic trading platform offered to customers in the Company's GTX business. The purchase was made with a combination of $12.4 million in cash and $5.3 million in shares of the Company's unregistered common stock. Prior to the closing of the acquisitions, which took place on July 10, 2014, the Company had agreements with Valaquenta and Forexster granting it the exclusive right to use the intellectual property in the field of forex trading and non-exclusive rights to use the intellectual property for the trading of financial products in the fields of precious metals and hydrocarbons.  Following the closing of the acquisition, GTX Bermuda has full rights and title over the intellectual property for the trading of currencies, commodities and all other financial instruments of any kind whatsoever. This purchase added $21.4 million to the Company's intangible assets, $3.7 million of which were previously held as a prepayment made to Forexster under an exclusive rights agreement. The Company has assigned a 10 year useful life to this asset.
In 2003, the Company acquired the Forex.com domain name for $0.2 million, and in 2004, the foreignexchange.com domain name was purchased for $0.1 million. Because the rights to use these domain names require the payment of a nominal annual renewal fee, management determined that there was no legal, regulatory or technological limitation on their useful lives. Accordingly, these indefinite-lived assets are not amortized. In accordance with ASC 350-10, the Company tests indefinite-lived intangible assets for impairment on an annual basis in the fourth quarter and on an interim basis when conditions indicate impairment may have occurred.
Amortization expense for the purchased intangibles was $2.2 million and $0.5 million for the three months ended September 30, 2014 and 2013, respectively, and $4.8 million and $1.7 million for the nine months ended September 30, 2014 and 2013, respectively.
Goodwill
Goodwill is calculated as the difference between the cost of acquisition and the fair value     of the net identifiable assets of an acquired business. As of September 30, 2014 and December 31, 2013, the Company had recorded goodwill of approximately $30.4 million and $11.7 million, respectively. The $11.7 million of goodwill includes a $2.5 million reduction related to the finalization of the purchase price allocation for the GFT acquisition, specifically accrued expenses and other liabilities and other assets.
Goodwill increased $9.5 million as a result of the Galvan acquisition, $6.1 million as a result of the GAA acquisition, and $3.3 million as a result of the TT acquisition.
Other Assets
Other assets consisted of the following as of (amounts in thousands): 

 
September 30, 2014
 
December 31, 2013
Vendor and security deposits
$
3,931

 
$
3,344

Current tax receivable
7,766

 
4,547

Deferred tax assets
12,241

 
8,862

Indemnification asset
9,834

 
8,596

GTX Trade Receivables
3,422

 
4,704

Miscellaneous receivables and other assets
6,567

 
2,496

 
$
43,761

 
$
32,549


The Company has recorded a liability of $6.1 million in Accrued expenses and other liabilities. This represents the Company's best estimate for the settlement of certain liabilities that were incurred as a result of ordinary course of operations in GFT prior to its acquisition. Between the acquisition date and September 30, 2014, approximately $3.7 million of the initially recorded liabilities have been settled. The actual amount required to settle the remaining liabilities may vary from the accrued liability.

Under the terms of the acquisition of GFT, the selling stockholder of GFT has agreed to indemnify the Company for liabilities that are expected to be settled after September 24, 2013. Based on the Company's best estimate of the amounts necessary to settle such liabilities, the Company recorded an indemnification asset of $9.8 million at September 30, 2014. This is included within Other current assets in the preliminary purchase price allocation of GFT, refer to note 5.

4. RELATED PARTY TRANSACTIONS

14


Certain officers and directors of the Company have personal funds on deposit in separate customer accounts with the Company, which are recorded in Payables to customers, brokers, dealers, FCMs and other regulated entities on the Condensed consolidated balance sheets. The aggregate amount of these funds was $3.6 million and $3.0 million at September 30, 2014 and December 31, 2013, respectively.

15



5. ACQUISITIONS

Galvan Research and Trading, Ltd.

In July 2014, the Company acquired all the share capital of Galvan Research and Trading, Ltd. ("Galvan") and its wholly owned subsidiaries, Faraday Research LLP and Galvan LLP. The purchase price was $16.6 million. This acquisition was made to add an advisory capability to complement the Company's retail business.

The preliminary purchase price was $9.7 million in cash and a contingent payment of $6.9 million payable over a three year period subject to the achievement of specific financial and customer account targets. The preliminary purchase price was derived as follows (amounts in thousands):

Cash
9,732

Contingent payment
6,859

Total purchase price
$
16,591

The preliminary purchase price of Galvan was allocated to the fair value of various assets and liabilities as follows (amounts in thousands): 

Cash and cash equivalents acquired
$
2,193

Receivable from brokers
745

Property and equipment
12

Prepaid assets
94

Other current assets
64

Total tangible assets
3,108

Total liabilities assumed
1,026

Net assets
2,082

Identifiable intangible assets:
 
Customer list
4,203

Trade name
784

Intangible assets, net
4,987

Goodwill
$
9,522


The foregoing purchase price allocation is preliminary. The final allocation will be based on final analyses of identifiable intangible assets, property and equipment, contingent consideration, and income taxes. It will be finalized after the data necessary to complete the of fair value of assets and liabilities is obtained and analyzed.

Global Assets Advisors, LLC

In March 2014, the Company acquired a 55% interest in GAA. The purchase price was $5.5 million. This acquisition was made to strengthen the Company's futures business.

The preliminary purchase price was derived as follows (amounts in thousands):

Cash
$
4,270

Common Stock issued
1,241

Total purchase price
$
5,511

The preliminary purchase price of GAA was allocated to the fair value of various assets and liabilities as follows (amounts in thousands): 


16


Non-controlling interest
$
4,509




Cash and cash equivalents acquired
$
360

Receivable from brokers
438

Property and equipment
184

Prepaid assets
157

Other current assets
3

Total tangible assets
1,142

Total liabilities assumed
561

Net assets
581

Identifiable intangible assets:

Customer list
3,100

Trade name
270

Intangible assets, net
3,370

Goodwill
$
6,069


The foregoing purchase price allocation is preliminary. The final allocation will be based on final analyses of identifiable intangible assets, property and equipment, and income taxes. It will be finalized after the data necessary to complete the analyses of fair values of assets and liabilities is obtained and analyzed.

Top Third Ag Marketing LLC

In March, 2014, the Company acquired a 55% interest in TT. The purchase price was $3.2 million. This acquisition was made as part of the Company's strategy to diversify its revenue base.

Cash
$
3,178

Total purchase price
$
3,178


The preliminary purchase price of TT was allocated to the fair value of various assets and liabilities as follows (amounts in thousands): 

Non-controlling interest
$
3,886

 
 
Cash and cash equivalents acquired
$
13

Receivable from brokers
300

Total tangible assets
313

Total liabilities assumed
583

Net assets
(270
)
Identifiable intangible assets:
 
Customer list
3,900

Trade name
90

Intangible assets, net
3,990

Goodwill
$
3,344


The foregoing purchase price allocation is preliminary. The final allocation will be based on final analyses of identifiable intangible assets, property and equipment, and income taxes. It will be finalized after the data necessary to complete the analyses of fair values of assets and liabilities is obtained and analyzed.

Global Futures & Forex, Ltd

On September 24, 2013, GAIN Capital Holdings, Inc., entered into an Amended and Restated Stock Purchase Agreement with Gary L. Tilkin, a natural person (the “Seller”), and GFT, pursuant to which the Company purchased all of the issued and

17


outstanding share capital of GFT from the Seller. The acquisition was made as part of the Company's strategy to increase its offering of products and to expand its retail and institutional businesses into new markets and geographies.

The final purchase price of GFT has been updated since December 31, 2013 to reflect a $1.4 million increase in acquired liabilities, a $3.9 million increase in acquired other assets, and a corresponding $2.5 million decrease in goodwill. Such amounts have been retrospectively adjusted on the December 31, 2013 balance sheet. The purchase price allocation was derived as follows (amounts in thousands):
Cash
$
40,000

Payment for excess cash adjustment
2,160

Loan payable
33,200

Common Stock issued
34,771

Total purchase price
$
110,131

The purchase price was allocated to the fair value of various assets and liabilities as follows (amounts in thousands): 
Cash and cash equivalents acquired
$
15,781

Cash and cash equivalents held for customers acquired
228,419

Receivable from brokers
61,028

Property and equipment
7,515

Other current assets
18,942

Total tangible assets
331,685

Total liabilities assumed
252,258

Net assets
79,427

Consideration less net assets
30,704

Identifiable intangible assets:

  Software
25,300

  Customer relationships
3,150

Intangible assets, net
28,450

Goodwill
$
2,254


Pro Forma Information:
The following unaudited pro forma operating data is presented as if the acquisition of GFT had occurred on January 1, 2013. The unaudited pro forma data does not include the impact of forecasted operating expense synergies.
The unaudited pro forma data is provided for informational purposes only and may not necessarily be indicative of future results of operations or what the results of operations would have been had the Company and GFT operated as a combined entity for the periods presented.
Unaudited pro forma income statement line items for the three and nine months ended September 30, 2013 were as follows (amounts in thousands):

18


 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2013
REVENUE:
 
 
 
Total non-interest revenue
$
81,195

 
$
270,027

Interest revenue
215

 
735

Interest expense
685

 
432

Total net interest revenue
(470
)
 
303

Net revenue
80,725

 
270,330

EXPENSES:
 
 
 
Depreciation and amortization
2,519

 
7,536

Purchased intangible amortization
1,215

 
3,997

Other expense items
71,792

 
232,116

Total operating expense
75,526

 
243,649

OPERATING (LOSS)/PROFIT
5,199

 
26,681

Interest on long term borrowings
158

 
1,901

(LOSS)/INCOME BEFORE INCOME TAX (BENEFIT)/EXPENSE
5,041

 
24,780

Income tax (benefit)/expense
1,890

 
9,293

NET (LOSS)/INCOME
$
3,151

 
$
15,487


The following unaudited pro forma operating data is presented as if the acquisition of GAA, TT and Galvan had occurred on January 1, 2013. The unaudited pro forma data does not include the impact of forecasted operating expense synergies.
The unaudited pro forma data is provided for informational purposes only and may not necessarily be indicative of future results of operations or what the results of operations would have been had the Company and the acquired companies operated as a combined entity for the periods presented.
Unaudited pro forma income statement line items for the three and nine months ended September 30, 2013 and the nine months ended September 30, 2014 were as follows (amounts in thousands):
 
For the Three Months Ended September 30,

 
For the Nine Months Ended September 30,

 
2013
 
2014
 
2013
REVENUE:
 
 
 
 
 
Total non-interest revenue
$
67,024

 
$
262,318

 
$
202,585

Interest revenue
212

 
1,130

 
650

Interest expense
21

 
319

 
101

Total net interest revenue
191

 
811

 
549

Net revenue
67,215

 
263,129

 
203,134

EXPENSES:
 
 
 
 
 
Depreciation and amortization
1,759

 
5,741

 
5,175

Purchased intangible amortization
968

 
5,804

 
3,134

Other expense items
53,799

 
226,135

 
151,544

Total operating expense
56,526

 
237,680

 
159,853

OPERATING PROFIT
10,689

 
25,449

 
43,281

Interest on long term borrowings
158

 
4,390

 
327

INCOME BEFORE INCOME TAX EXPENSE
10,531

 
21,059

 
42,954

Income tax expense
1,196

 
4,904

 
12,668

NET INCOME
9,335

 
16,155

 
30,286

Net income attributable to non-controlling interest
$
314

 
$
861

 
$
535

Net income applicable to Gain Capital Holdings, Inc.
$
9,021

 
$
15,294

 
$
29,751


19




Restructuring

The Company incurred Restructuring expenses, which reflected the cost of reducing global headcount following the GFT acquisition. Additional headcount reductions in the third quarter of 2014 were designed to meet challenging market conditions in the first half of 2014 and to achieve greater cost efficiency in general. These expenses are recorded under Restructuring expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.
 
For the Nine Months Ended September 30,
 
2014
Restructuring liability as of January 1, 2014
$
584

2014 restructuring expenses
1,007

Payments made in 2014
1,155

Restructuring liability as of September 30, 2014
$
436



6. NON-CONTROLLING INTEREST

Non-controlling interests
In March 2014, the Company acquired controlling interests in GAA and TT. The Company purchased 55% of each entity, and the respective sellers maintained a 45% interest in each entity. The 45% interests are redeemable at prices determined by applying a contractually agreed upon formula to the respective acquired company's financial results. The Company owns immediately vested call options to purchase the remaining interests in each company. The minority owners hold put options, which vest in 2017 or upon the occurrence of certain events, to compel the Company to purchase the remaining interests.

The non-controlling interests are not classified as liabilities, because redemption is not mandatory or at fixed prices. They are not classified as equity, because their redemption is not exclusively in the Company's control. Therefore, the non-controlling interests are held in temporary equity in the Condensed consolidated balance sheets.

The non-controlling interests' carrying value is determined by the Company's purchase prices and the non-controlling interests' share of the Company's subsequent net income. This value is benchmarked against the redemption value of the sellers' put options. The carrying value is adjusted to the latter, provided that it does not fall below the initial carrying values, as determined by the Company's purchase price allocation. The Company has made a policy election to reflect any changes caused by such an adjustment in retained earnings, rather than in current earnings. The Company recorded an adjustment of $1.1 million for the nine months ended September 30, 2014.

The table below reflects the non-controlling interests effects on the Company's financial statements:


Redeemable non-controlling interests
December 31, 2013
$

Non-controlling interests related to 2014 acquisitions
8,395

Adjustment to the redemption value of put options
1,066

Net income attributable to non-controlling interests
987

September 30, 2014
$
10,448



7. CONVERTIBLE SENIOR NOTES
Convertible Senior Notes due 2018
On November 27, 2013, the Company issued $80.0 million aggregate principal amount of its 4.125% Convertible Senior Notes maturing on December 1, 2018. The Company received net proceeds of $77.9 million, after deducting the initial purchasers'

20


discount. The Convertible Notes pay interest semi-annually on June 1 and December 1 at a rate of 4.125% per year, commencing June 1, 2014.

Under ASC 470, an entity must separately account for the liability and equity components of a convertible debt instruments that
may be settled entirely or partially in cash upon conversion. The separate accounting must reflect the issuer's economic interest
cost.

The balances of the liability and equity components as of September 30, 2014, and December 31, 2013 were as follows, with amounts in thousands:
 
September 30, 2014
 
December 31, 2013
Liability component - principal
$
80,000

 
$
80,000

Deferred bond discount
(12,274
)
 
(14,640
)
Liability component - net carrying value
$
67,726

 
$
65,360

 
 
 
 
Additional paid in capital
$
12,572

 
$
12,572

Discount attributable to equity
(425
)
 
(425
)
Equity component
$
12,147

 
$
12,147


Interest expense related to the Convertible Senior Notes, included in Interest on long term borrowings in the condensed consolidated statements of operations was as follows, with amounts in thousands:

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2014
Interest expense - stated coupon rate
$
825

 
$
2,475

Interest expense - amortization of deferred bond discount and costs
671

 
1,915

Total interest expense - convertible note
$
1,496

 
$
4,390



21


8. SHARE BASED COMPENSATION
During the nine months ended September 30, 2014, 0.4 million shares of restricted stock and approximately 0.1 million options to purchase common stock, valued at $4.0 million and $0.4 million, respectively, were granted to employees and non-employee members of the Board of Directors, compared to 0.8 million shares of restricted stock and 0.5 million options to purchase common stock, valued at $3.6 million and $0.6 million, respectively during the nine months ended September 30, 2013.
The Company determines the fair value of restricted stock units and awards at the date of grant based on the value of the Company’s common stock. The Company determines the fair value of our stock option awards at the date of grant using a Black-Scholes valuation model. This model requires assumptions and judgments on the expected volatility, dividend yield, the risk-free interest rate and the expected term of the stock options. The following assumptions were used for stock options granted in the period: 
 
For the Nine Months Ended September 30,
 
2014
 
2013
Valuation Assumptions
 
 
 
Risk-free rate
1.4%
 
0.8%
Expected volatility
51.8%
 
48.8%
Expected term (years)
4.75
 
4.75
Dividend yield
2.0%
 
4.9%
9. EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that would occur if securities or other contracts to issue common stock were exercised, vested or converted into common stock, unless they are anti-dilutive. Anti-dilutive stock options of 0.4 million were excluded from the calculation for the nine months ended September 30, 2014. Anti-dilutive stock options of 0.6 million were excluded from the calculation for the nine months ended September 30, 2013.

Diluted earnings per share excludes any shares of Company common stock potentially issuable under the Company's convertible notes, which are discussed in note 7. Based upon an assumed trading price of $13 for each share of the Company's common stock, and if the relevant conditions under the indenture governing the convertible notes were satisfied, there would be an additional 0.5 million dilutive shares.
The following table sets forth the computation of earnings per share (amounts in thousands except share and per share data):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income applicable to GAIN Capital Holdings, Inc.
$
15,345

 
$
5,600

 
$
14,013

 
$
27,044

Adjustment(1)(2)
(890
)
 

 
(1,066
)
 
(154
)
Net income available to GAIN common shareholders
$
14,455

 
$
5,600

 
$
12,947

 
$
26,890

Weighted average common shares outstanding:

 

 

 

Basic weighted average common shares outstanding
41,038,782

 
36,062,659

 
40,243,330

 
35,563,701

Effect of dilutive securities:

 

 

 

Stock options
562,187

 
1,620,851

 
786,956

 
1,244,009

RSUs/RSAs
1,922,893

 
2,047,347

 
2,024,673

 
1,914,957

Diluted weighted average common shares outstanding
43,523,862

 
39,730,857

 
43,054,959

 
38,722,667

Earnings per common share

 

 

 

Basic
$
0.35

 
$
0.16

 
$
0.32

 
$
0.76

Diluted
$
0.33

 
$
0.14

 
$
0.30

 
$
0.69

 

22


(1)
During the nine months ended September 30, 2013, an adjustment to retained earnings was made, reflecting the amounts deemed uncollectible associated with previously issued preferred stock, which was converted to common stock immediately prior to the IPO.
(2)
During the three and nine months ended September 30, 2014, the Company concluded that the value of put options related to the Company's redeemable non-controlling interests was less than redemption value. The adjustment to increase carrying value reduces earnings available to the Company's shareholders.
10. LEGAL
From time to time the Company becomes involved in legal proceedings and in each case the Company assesses the likely liability and/or the amount of damages as appropriate. Where available information indicates that it is probable a liability had been incurred at the date of the condensed consolidated financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated loss by a charge to income. In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is often not possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal proceedings, the Company can estimate possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued. For certain other legal proceedings, the Company cannot reasonably estimate such losses, if any, since the Company cannot predict if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues must be developed, including the need to discover and determine important factual matters and the need to address novel or unsettled legal questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any proceeding.
Litigation
On February 16, 2012, the Company received a Letter of Claim on behalf of certain individuals who had lost money in an investment scheme operated by a third-party money management firm, incorporated in the United Kingdom, which has since been closed down by the United Kingdom’s Financial Services Authority. The investment firm, Cameron Farley Ltd, had opened a corporate account with the Company and invested the individuals’ money, representing such funds as its own, while operating a fraudulent scheme. Though a complaint has been filed and served on the Company, the claimants requested, and the Company agreed, to follow the United Kingdom’s Pre-Action Protocol, a pre-litigation process intended to resolve matters without the need to engage in formal litigation. The Company submitted a Response to the Letter before Claim on July 4, 2012. On July 5, 2012 the Company received a substantially similar Letter of Claim on behalf of further individuals. Subsequently, the parties agreed to consolidate claims by those other similarly situated individuals with the pending Pre-Action Protocol process. The parties agreed it would be more appropriate for the proceedings to be dealt with in the Commercial Court and the matters were transferred pursuant to Consent Orders dated March 14, 2013. The Company subsequently filed an application for strike out and/or summary judgment in respect of all claims on March 15, 2013. The claimants filed an answer to the Company's motion on June 2, 2013 and subsequently the Company filed a response to this answer on July 15, 2013. A hearing was held on the Company's application for strike out and/or summary judgment on September 18 and 19, 2013.  After the hearing, the judge asked the claimants to respond in writing to his additional questions from the hearing.  The complaints had until October 11, 2013 to provide answers and the Company was given until November 1, 2013 to respond.  On February 26, 2014, the judge denied the Company's motion for strike out/ summary judgment. A case management conference was held by the Court on October 17, 2014. The parties are now in discovery. The Company can provide no assurances that this matter will be successfully resolved. This matter is currently pending. As of the date of this report, a potential loss or a potential range of loss cannot be reasonably estimated.

Through the Company's acquisition of OEC, the Company became the subject of a patent infringement lawsuit originally filed against OEC on February 9, 2010 in the U.S. District Court for the Northern District of Illinois by Trading Technologies International, Inc. seeking injunctive relief and unspecified damages. As reflected in a Second Amended Complaint filed on June 15, 2011, plaintiff alleges infringement of 12 patents relating to real-time display of price quotes and market depth on OEC's electronic trading interfaces. The case was consolidated with 11 related cases in February 2011, and the parties have exchanged infringement, non-infringement and invalidity contentions for several of the disputed patents. In June 2011, the court stayed discovery to allow summary judgment briefing on the ramifications of a recent Federal Circuit decision. On February 9, 2012, the court issued an order, which granted defendants' motions for summary judgment, resulting in a substantial narrowing of the scope of plaintiff's claims. Plaintiff filed a motion for reconsideration of that ruling on March 8, 2012. Plaintiff also filed a motion for certification of judgment for interlocutory appeal. The court denied plaintiff's motion for

23


reconsideration but granted plaintiff's motion for certification of judgments of patent invalidity with respect to four of the asserted patents. On August 30, 2013, the Federal Circuit issued its opinion vacating and remanding the court's judgment of patent invalidity regarding four of the asserted patents. On remand, defendants renewed their motion for summary judgment of patent invalidity. In April 2014, the court deferred its consideration of defendants' renewed motion for summary judgment and signaled its intent to re-start the litigation by requesting that the parties submit a proposed pre-trial schedule. Soon thereafter, one of the defendants filed Certified Business Method (“CBM”) review petitions with the United States Patent and Trademark Office concerning five of the asserted patents.  The court is currently considering a request to stay the case based on the filing of those CBM petitions. Plaintiff's complaint does not specify the amount of damages sought. As of the date of this report, a potential loss or a potential range of loss cannot be reasonably estimated.

11. INCOME TAXES
The Company’s provision for income taxes was approximately $5.3 million and $4.6 million for the three months ended September 30, 2014 and the nine months ended September 30, 2014, respectively. The Company’s provision for income taxes was approximately $3.0 million and $11.2 million for the three months ended September 30, 2013, and the nine months ended September 30, 2013, respectively. These amounts reflect effective tax rates of 24.9% and 35.2% for the three months ended September 30, 2014 and the three months ended September 30, 2013, respectively. The Company's effective tax rates of 23.4% and 29.2% for the nine months ended September 30, 2014 and the nine months ended September 30, 2013, respectively, reflect the Company's estimate of the annual effective tax rate adjusted for certain discrete items. Changes in the Company's effective rate arise primarily from changes in the geographic mix of revenues and expenses.
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company’s net deferred tax assets are included in Other assets on the Condensed consolidated balance sheets.

24


12. REGULATORY REQUIREMENTS
The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of September 30, 2014 and the actual amounts of capital that were maintained (amounts in millions):
 
Entity Name
Minimum
Regulatory
Capital
Requirements
 
Capital
Levels
Maintained
 
Excess
Net
Capital
 
Percent  of
Requirement
Maintained
GFT Global Markets UK Ltd.
$
16.5

 
$
48.6

 
$
32.1

 
295
%
GAIN Capital Group, LLC
24.7

 
33.6

 
8.9

 
136
%
GAIN Capital-Forex.com U.K., Ltd.
35.3

 
47.9

 
12.6

 
136
%
Forex.com Japan Co., Ltd.
2.3

 
7.3

 
5.0

 
317
%
GAIN Capital-Forex.com Hong Kong, Ltd.
1.9

 
3.1

 
1.2

 
163
%
GFT Global Markets Asia Pte., Ltd.
1.6

 
3.6

 
2.0

 
225
%
Global Futures & Forex, Ltd.
1.0

 
4.4

 
3.4

 
440
%
GAIN Capital Forex.com Australia, Pty. Ltd.
0.9

 
2.7

 
1.8

 
300
%
Galvan Research and Trading, Ltd.
0.5

 
1.7

 
1.2

 
340
%
GAIN Capital-Forex.com Canada Ltd.
0.2

 
1.6

 
1.4

 
800
%
GAIN Capital Securities, Inc.
0.1

 
0.4

 
0.3

 
400
%
GAIN Global Markets, Inc.
0.1

 
0.3

 
0.2

 
300
%
Global Assets Advisors, LLC
0.1

 
0.5

 
0.4

 
500
%
Total
$
85.2

 
$
155.7

 
$
70.5

 
183
%

13. SEGMENT INFORMATION
ASC 280, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision making group, in deciding how to allocate resources and in assessing performance. Reportable segments are defined as an operating segment that either (a) exceeds 10% of revenue, or (b) reported profit or loss in absolute amount exceeds 10% of profit of all operating segments that did not report a loss or (c) exceeds 10% of the combined assets of all operating segments. The Company’s operations relate to global trading services and solutions. Based on the Company’s management strategies, and common production, marketing, development and client coverage teams, the Company has concluded that it operates in a single operating segment.
14. SUBSEQUENT EVENTS
In November 2014, the Company announced the payment of a $0.05 dividend per share of Common Stock payable on December 22, 2014 to stockholders of record on December 12, 2014.
On October 31, 2014, the Company announced that it had entered into an agreement to purchase City Index Group Limited for $20 million in cash, $60 million of convertible notes and the issuance of approximately 5.3 million shares of common stock. This acquisition will bolster the Company's CFD business, as well as significantly expand its customer base and geographic footprint.





25


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
In this Quarterly Report on Form 10-Q, the words “GAIN”, the “Company”, “our”, “we” and “us” refer to GAIN Capital Holdings, Inc. and, except as otherwise specified herein, to GAIN’s subsidiaries. Our fiscal quarter ended on September 30, 2014.
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and the Condensed Consolidated Financial Statements and Notes thereto contained in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains a number of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s current beliefs and assumptions. Any statements contained herein (including, without limitation, statements to the effect that we “believe”, “expect”, “anticipate”, “plan” and similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this report and the discussion below. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include those set forth in the section entitled “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, and discussed elsewhere in this Quarterly Report on Form 10-Q. The risks and uncertainties described therein and herein are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, may also impair the business. We expressly disclaim any obligation to update any forward-looking statements, except as may be required by law.

OVERVIEW

We are a global provider of trading services and solutions, specializing in over-the-counter, or OTC, and exchange-traded markets. We service retail and institutional customers in more than 180 countries worldwide and conduct business from our offices in New York, New York; Bedminster, New Jersey; Jersey City, New Jersey; Chicago, Illinois: Powell, Ohio; Grand Rapids, Michigan; London, England; Cornwall, England; Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong and Singapore.

We offer our customers access to a diverse range of over 12,500 financial products, including foreign exchange, or forex, precious metals, “contracts for difference”, or CFDs, which are investment products with returns linked to the performance of underlying commodities, indices, individual equities, bonds and interest rate products, OTC options on forex, as well as futures and options on futures on more than 30 global exchanges. In the United Kingdom, we also offer spread bets, which are investment products similar to CFDs, but that offer more favorable tax treatment to residents of that country.

We have invested considerable resources since our inception to develop our proprietary trading platforms to provide our customers with advanced price discovery, trade execution and order management functions, while improving our ability to acquire and service our customers efficiently, as well as manage market and credit risk associated with our customer’s trading activity. Today our customers can trade through web-based, downloadable and mobile trading platforms and have access to innovative trading tools to assist them with research and analysis, automated trading and account management.

Market Overview

Overall market conditions improved throughout the three months ended September 30, 2014, primarily due to improved currency and equity volatility during the period, in particular in the latter part of the period.

Galvan Acquisition

In July 2014, we closed on our acquisition of Galvan Research and Trading, Ltd. Galvan, along with its affiliates Galvan LLP and Faraday Research LLP, provides individual investors with professional advice and trading recommendations across a wide range of markets, including FX, individual equities, equity indices and other market sectors. The consideration for the acquisition consisted of a cash payment at closing of £5.0 million, as well as an earn-out arrangement under which the sellers

26


may be entitled to additional contingent consideration based upon the acquired businesses achieving certain performance targets in 2014, 2015 and 2016. We have estimated the preliminary fair value of the contingent consideration to be $6.9 million.

Acquisition of Intellectual Property Assets

On July 10, 2014, we entered into asset purchase agreements with Valaquenta Intellectual Property Limited ("Valaquenta") and Forexster Limited ("Forexster"), pursuant to which one of our subsidiaries, GAIN GTX Bermuda, Ltd. ("GTX Bermuda") agreed to purchase, from Valaquenta and Forexster, the software and other intellectual property assets utilized to operate the electronic trading platform offered to customers in our GTX business. The purchase was made with a combination of $12.4 million in cash and $5.3 million of our unregistered common stock. Prior to the closing of the acquisitions, which took place on July 10, 2014, we had agreements with Valaquenta and Forexster granting us the exclusive right to use the intellectual property in the field of forex trading and non-exclusive rights to use the intellectual property for the trading of financial products in the fields of precious metals and hydrocarbons.  Following the closing of the acquisition, GTX Bermuda has full rights and title over the intellectual property for the trading of currencies, commodities and all other financial instruments of any kind whatsoever.

GTX Bermuda paid Valaquenta $12.4 million in cash at closing and agreed to pay Valaquenta contingent consideration in the event that GTX Bermuda or any of its affiliates in the future provide customers the ability to trade new types of financial instruments using the purchased intellectual property and the trading of such new products generates "Net Revenue" (as defined in the agreement with Valaquenta) in excess of thresholds set out in the agreement. We also issued 861,935 shares of common stock to Forexster as consideration for the acquired assets.

Key Income Statement Line Items and Key Operating Metrics
The following table sets forth key financial metrics for our business for the periods indicated: 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net revenue
$
103,650

 
$
60,757

 
$
254,782

 
$
183,685

Net income applicable to GAIN Capital Holdings, Inc.
$
15,345


$
5,600


$
14,013


$
27,044

Revenue
We generate revenue from trading revenue, commission revenue, other revenue and interest income.
Trading Revenue
Trading revenue is our largest source of revenue and has traditionally been primarily generated in our retail forex business. Trading revenue represented 61.7% and 59.5% of our total net revenue for the three and nine months ended September 30, 2014 and 83.8% and 78.2% of our total net revenue for the three and nine months ended September 30, 2013, respectively.

We generate trading revenue as follows:
for trades that are naturally hedged against an offsetting trade from another customer, we receive the entire retail bid/offer spread we offer our customers on the two offsetting transactions;
for trades that are hedged with one of our wholesale trading partners, we receive the difference between the retail bid/offer spread we offer our customers and the wholesale bid/offer spread we receive from the wholesale trading partners; and
with respect to the remaining customer trades, which we refer to as our net exposure, we receive the net gains or losses generated through changes in the market value of the currencies held in our net exposure.
For the three and nine months ended September 30, 2014, approximately 95.4% and 94.4%, respectively, of our average daily retail trading volume was either naturally hedged or hedged by us with one of our wholesale forex trading partners, and the remaining 4.6% and 5.6%, respectively, of our average daily retail trading volume consisted of our net exposure, compared to average daily retail trading volume hedged of approximately 94.8% and 96.8% for the three and nine months ended September 30, 2013, respectively.

27


We manage our net exposure by applying position and exposure limits established under our risk-management policies and by continuous, active monitoring by our traders. Based on our risk management policies and procedures, over time a portion of our net exposure may be hedged with our wholesale forex trading partners. Although we do not actively initiate proprietary directional market positions in anticipation of future movements in the relative prices of the products we offer, through our net exposure we are likely to have open positions in various currencies at any given time. In the event of unfavorable market movements, we may take a loss on such positions.

Commission Revenue
Commission revenue has historically been comprised of revenue from our GTX business, revenue from our futures business, and revenue from GAIN Securities, our securities business. In October 2013, GAIN Securities transferred substantially all of its customer accounts to TradeKing, LLC.  As a result of acquiring GFT in September 2013, we have also realized commission revenue from the sales trader business acquired from GFT.  Our sales traders offer high-touch trading services to high net worth individuals and small- to medium-sized institutions. In July 2014, we acquired Galvan Research and Trading, Ltd., which, along with its affiliates, provides individual investors with professional advice and trading recommendations across a wide range of markets, including FX, individual equities, equity indices and other market sectors. Galvan and the other businesses discussed above generally generate revenue by earning a commission on each transaction, which is recorded under commission revenue.

Other Revenue
Other revenue is comprised of account management and transaction fees; inactivity and training fees charged to customer accounts; and foreign currency transaction gains and losses.

Net Interest Revenue / Expense
Net interest revenue/expense consists primarily of the revenue generated by our cash and customer cash held by us at banks and on deposit as collateral with our wholesale forex trading partners, less interest paid to our customers.
Our cash and customer cash is generally invested in money market funds, which primarily invest in short-term U.S. government securities or treasury bills. Such deposits and investments earned interest at an average effective rate of approximately 0.1% for the three months ended September 30, 2014 and 2013. Interest paid to customers varies among customer accounts primarily due to the net value of a customer account. From time to time, we also make available interest promotions pursuant to which we may pay certain customers higher levels of interest than that which is paid to other customers. Interest income and interest expense are recorded when earned and incurred, respectively. Net interest revenue was $0.3 million for the three months ended September 30, 2014. Net interest revenue was $0.2 million interest for the three months ended September 30, 2013.
Expenses
Our expenses principally comprise employee compensation and benefits, selling and marketing, referral fees, trading expenses, interest on long term borrowings, communications and technology expenses, as well as general and administrative expenses.

For the quarter ended June 30, 2014, we changed the presentation of certain expense items in an effort to make our presentation comparable with that of the competitors in our industry. These changes were also made to retrospective periods. We now present the interest expense incurred on borrowings and debt, previously presented under "Interest expense" as part of net revenue, under a separate income statement line item, "Interest on long term borrowings", which is shown below operating expenses. Also, commissions paid to employees, previously presented under "Trading expenses and commissions," are now presented under "Employee compensation and benefits." Additionally, we have presented compensation paid to our white label partners and introducing brokers, which was also previously presented under "Trading expenses and commissions," under the new caption of "Referral fees." The remaining expense items that were previously presented under "Trading expenses and commissions," including exchange fees, fees for news services and prime broker fees, are now presented under a new caption, "Trading expenses." These changes in presentation had no effect on our net income.

Employee Compensation and Benefits
Employee compensation and benefits includes salaries, commissions, bonuses, stock-based compensation, contributions to benefit programs and other related employee costs.


28


Selling and Marketing
Our marketing strategy employs a combination of direct online marketing and focused branding programs, with the goal of raising awareness and cost-effectively acquiring customers for our products and services. For the three and nine months ended September 30, 2014, selling and marketing expense was $4.8 million and $16.1 million respectively, compared to $5.7 million and $15.9 million for the three and nine months ended September 30, 2013, respectively.
Referral Fees
Referral fees consist of compensation paid to our white label partners and introducing brokers. We generally provide white label partners with the platform, systems, and back-office services necessary for them to offer trading services to their customers. Introducing brokers identify and direct trading customers to us. White label partners and introducing brokers market to and locate customers, providing us with trade flow.
Referral fees are largely variable and change principally based on the level of customer trading volume directed to us from our white label partners and introducing brokers, the specific terms of our agreements with the white label partners and introducing brokers, which vary on a partner-by-partner and regional basis, and the relative percentage of trading volume generated from particular relationships in any given period. The majority of our white label and introducing broker partners are paid based on the trading volume generated by the customers they introduce, directly or indirectly, to us, rather than on a revenue sharing basis. As such, during periods in which their customers’ trading activity is not profitable for us, if the associated trading volume remains high, we may be required to make larger payments to these partners despite the fact that we are generating lower revenue from their customers.  Our indirect business accounted for 47.9% and 48.6% of retail trading volume in the three and nine months ended September 30, 2014, and 35.5% and 34.6% for the three and nine months ended September 30, 2013, respectively. These increases were largely due to the acquisition of GFT.

Trading expenses
Trading expenses consists of exchange fees paid to stock exchanges and other third-parties for exchange market data that we provide to our customers or use to create our own derived data products, as well as fees for news services and fees paid to prime brokers in connection with our institutional GTX business and futures business.

General and Administrative
General and administrative expenses consist of bank fees, professional fees, occupancy and equipment and other miscellaneous expenses.

Depreciation and amortization
Depreciation and amortization consists of the recognition of expense for physical assets and software purchased for use over a period of several years and of the amortization for internally developed software.

Purchased Intangible Amortization
Purchased intangible amortization consists of amortization related to intangible assets we acquired in 2014, 2013, 2012 and 2011 in connection with our acquisition of customer accounts in several transactions we executed during these periods. The principal intangible assets acquired were customer assets and a non-compete agreement. These intangible assets have useful lives ranging from one year to ten years.

Communications and Technology
Communications and technology consists of communications fees, product development, software and maintenance expenses.

Bad debt provision
Bad debt provision represents the amounts estimated for the uncollectibility of certain outstanding balances during the period.

Restructuring Expenses
For the three and nine months ended September 30, 2014, we incurred restructuring expenses, which reflected costs arising from headcount reductions and other exit costs, measured and disclosed in accordance with ASC 420 and ASC 712.

Acquisition Expenses
For the three and nine months ended September 30, 2014, we incurred acquisition-related expenses, which included non-recurring costs, such as legal, accounting, valuation and other costs specified in ASC 805. These costs are expensed as incurred.

29



Integration Expenses
For the nine months ended September 30, 2014, we incurred integration expenses, which are non-recurring acquisition related costs that do not meet the definition of acquisition costs specified in ASC 805. These costs include retention bonuses paid to employees and the cost of retiring redundant assets.

Interest on long term borrowings
Interest on long term borrowings consists of interest expense on our 4.125% Convertible Senior Notes due 2018, issued in November 2013.
Operating Metrics
The following table sets forth key operating metrics for our business for the periods indicated: 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Retail
 
 
 
 
 
 
 
Funded Accounts
132,021

 
127,305

 
132,021

 
127,305

Active OTC Accounts
93,779

 
103,924

 
93,779

 
103,924

Futures Contracts
1,764,586

 
1,267,472

 
5,047,995

 
3,984,016

OTC Trading Volume (billions)
$
605.4

 
$
394.8

 
$
1,699.9

 
$
1,294.0

OTC Average Daily Volume (billions)
$
9.2

 
$
6.0

 
$
8.8

 
$
6.7

Client Assets (millions)
$
849.7

 
$
739.3

 
$
849.7

 
$
739.3

Institutional
 
 
 
 
 
 
 
Institutional Trading Volume (billions)
$
1,181.0

 
$
901.3

 
$
3,883.3

 
$
2,857.0

Institutional Average Daily Volume (billions)
$
17.9

 
$
13.7

 
$
20.0

 
$
14.7


We believe that our customer trading volumes are driven by eight main factors. Four of these factors are broad external factors outside of our control that generally impact the market for leveraged trading, as well as customer trading volumes, and include:
overall economic conditions and outlook;
volatility of financial markets;
legislative changes; and
regulatory changes.
The volatility of financial markets has generally been positively correlated with customer trading volume. Our customer trading volume is also affected by the following additional factors:
the effectiveness of our sales activities;
the competitiveness of our products and services;
the effectiveness of our customer service team; and
the effectiveness of our marketing activities.

In order to increase customer trading volume, we focus our marketing, customer service and education activities on attracting new customers and increasing overall customer trading activity.

For the three and nine months ended September 30, 2014 and September 30, 2013, no single retail customer accounted for more than 3.0% of our retail trading volume for the period.

Funded Accounts
Funded accounts represent retail customers who maintain cash balances with us. We believe the number of funded retail accounts is an important indicator of our ability to attract new retail customers that can potentially lead to trading volume and revenue in the future; however, it does not represent actual trades executed.


30


Active OTC Accounts
Active OTC accounts represent customers who executed at least one trade during the relevant period. We believe active OTC accounts is an important operating metric because it correlates to our trading volume and revenue.

Futures Contracts
Futures contracts represent the total number of contracts transacted by customers of our futures division.
OTC Trading Volume
OTC trading volume is the U.S. dollar equivalent of the aggregate notional value of OTC trades executed by our retail customers. Approximately 33.9% and 30.4% of our customer trading volume for the three and nine months ended September 30, 2014 was generated by our retail businesses, compared to 30.5% and 31.2% for the three and nine months ended September 30, 2013, respectively.

Average Daily Volume
Average daily volume is the U.S. dollar equivalent of the aggregate notional value of trades executed by our customers in a given period divided by the number of trading days in the given period.

Client Assets
Client assets represent amounts due to clients, including customer deposits and unrealized gains or losses arising from open positions.
Institutional Trading Volume
Trading volume is the U.S. dollar equivalent of the aggregate notional value of OTC trades executed by our institutional customers. Approximately 66.1% and 69.6% of our customer trading volume for the three and nine months ended September 30, 2014, respectively, was generated by our institutional trading business, compared to 69.5% and 68.8% for the three and nine months ended September 30, 2013, respectively.

31


RESULTS OF OPERATIONS
Revenue 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(amounts in thousands)
 
(amounts in thousands)