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EX-31.2 - CFO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit31_26-30x151.htm
EX-31.1 - CEO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit31_16-30x151.htm
EX-32.1 - CEO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit32_16-30x151.htm
EX-32.2 - CFO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit32_26-30x151.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, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     .
Commission File Number 001-35008
 
 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 6, 2015, the registrant had 49,009,871 shares of common stock, $0.00001 par value per share, outstanding.



GAIN Capital Holdings, Inc.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015
 
 
 
 
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014
 
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014
 
Condensed Consolidated Statement of Changes in Shareholders' Equity for the nine months ended September 30, 2015
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014
 
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, 2015
 
As of December 31, 2014
ASSETS:
 
 
 
Cash and cash equivalents
$
186,688

 
$
139,403

Cash and securities held for customers
986,376

 
759,559

Receivables from brokers, of which ($29,077) and $717, respectively, are open contracts at fair value
119,227

 
134,908

Prepaid assets
9,565

 
2,537

Property and equipment, net of accumulated depreciation of ($42,401) and ($31,544), respectively
29,215

 
18,796

Intangible assets, net of accumulated amortization of ($35,756) and ($12,670), respectively
101,461

 
60,806

Goodwill
44,817

 
34,567

Other assets, net of allowance for doubtful accounts of ($5,898) and ($4,555), respectively
38,854

 
35,311

Total assets
$
1,516,203

 
$
1,185,887

LIABILITIES AND SHAREHOLDERS’ EQUITY:

 

Liabilities


 


Payables to customers, of which ($147,645) and ($102,722), respectively, are open contracts at fair value
$
986,376

 
$
759,559

Accrued compensation and benefits
9,102

 
16,912

Accrued expenses and other liabilities
51,132

 
64,476

Income tax payable
5,186

 
1,470

Convertible senior notes
120,866

 
68,367

Total liabilities
1,172,662

 
910,784

Commitments and contingent liabilities

 

Redeemable non-controlling interests
11,660

 
10,209

Shareholders’ equity

 

Common stock ($0.00001 par value; 120 million shares and 60 million shares authorized as of September 30, 2015 and December 31, 2014, respectively; 51,860,180 shares issued and 48,997,738 shares outstanding as of September 30, 2015; 45,582,066 shares issued and 42,934,559 shares outstanding as of December 31, 2014)

 

Accumulated other comprehensive loss
(2,288
)
 
(2,054
)
Additional paid-in capital
222,467

 
152,684

Treasury stock, at cost (2,862,442 shares at September 30, 2015 and 2,647,507 shares at December 31, 2014)
(18,864
)
 
(16,720
)
Retained earnings
130,566

 
130,984

Total shareholders’ equity
331,881

 
264,894

Total liabilities and shareholders’ equity
$
1,516,203

 
$
1,185,887

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,
 
2015

2014
 
2015
 
2014
REVENUE:
 
 
 
 
 
 
 
Retail revenue
$
118,801

 
$
90,373

 
$
300,376

 
$
223,138

Institutional revenue
8,292

 
8,537

 
26,734

 
25,641

Other revenue (See Note 3)
772

 
4,478

 
5,248

 
5,199

Total non-interest revenue
127,865

 
103,388

 
332,358

 
253,978

Interest revenue
285

 
359

 
936

 
1,123

Interest expense
219

 
97

 
846

 
319

Total net interest revenue
66

 
262

 
90

 
804

Net revenue
127,931

 
103,650

 
332,448

 
254,782

OPERATING EXPENSES:

 

 

 

Employee compensation and benefits
29,088

 
25,505

 
81,700

 
71,440

Selling and marketing
7,422

 
4,803

 
20,395

 
16,118

Referral fees
28,607

 
24,640

 
84,724

 
65,865

Trading expenses
8,779

 
6,032

 
24,053

 
20,089

General and administrative
16,754

 
9,056

 
40,219

 
28,113

Depreciation and amortization
2,925

 
1,717

 
7,638

 
5,725

Purchased intangible amortization
4,280

 
2,228

 
10,688

 
4,841

Communications and technology
5,565

 
3,822

 
14,158

 
11,645

Bad debt provision
1,794

 
1,528

 
6,354

 
2,690

Acquisition expenses
232

 
917

 
2,711

 
1,545

Restructuring expenses

 
436

 
1,935

 
1,007

Integration expenses
10,700

 

 
23,073

 
1,719

Total operating expenses
116,146

 
80,684

 
317,648

 
230,797

OPERATING PROFIT
11,785

 
22,966

 
14,800

 
23,985

Interest on long term borrowings
2,570

 
1,496

 
6,626

 
4,390

INCOME BEFORE INCOME TAX EXPENSE/(BENEFIT)
9,215

 
21,470

 
8,174

 
19,595

Income tax expense/(benefit)
328

 
5,340

 
(978
)
 
4,595

NET INCOME
8,887

 
16,130

 
9,152

 
15,000

Net income attributable to non-controlling interests
583

 
785

 
1,343

 
987

NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
8,304

 
15,345

 
7,809

 
14,013

Other comprehensive loss, net of tax:


 


 


 


Foreign currency translation adjustment
(7,526
)
 
(2,988
)
 
(234
)
 
(269
)
NET COMPREHENSIVE INCOME
APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
$
778

 
$
12,357

 
$
7,575

 
$
13,744

Earnings per common share:


 


 


 


Basic
$
0.20

 
$
0.35

 
$
0.14

 
$
0.32

Diluted
$
0.20

 
$
0.33

 
$
0.14

 
$
0.30

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


 


 


 


Basic
49,147,102

 
41,038,782

 
47,163,132

 
40,243,330

Diluted
49,891,101

 
43,523,862

 
48,028,752

 
43,054,959


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
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Total
 
Shares (1)
 
Amount (2)
 
 
 
 
 
BALANCE—December 31, 2014
42,934,559

 
$

 
$
(16,720
)
 
$
152,684

 
$
130,984

 
$
(2,054
)
 
$
264,894

Exercise of options
543,341

 

 

 
2,096

 

 

 
2,096

Conversion of restricted stock into common stock
422,850

 

 

 

 

 

 

Issuance of common stock
5,319,149






48,280






48,280

Employee stock purchase plan
44,106






394






394

Repurchase of shares
(266,267
)



(2,144
)







(2,144
)
Convertible note issuance






15,348






15,348

Stock compensation expense

 

 

 
2,727

 

 

 
2,727

Foreign currency translation adjustment

 

 

 

 

 
(234
)
 
(234
)
Tax benefit of stock option exercises

 

 

 
938

 

 

 
938

Dividends declared ($0.05 quarterly dividend per share)

 

 

 

 
(7,084
)
 

 
(7,084
)
Net income applicable to Gain Capital Holdings, Inc.

 

 

 

 
7,809

 

 
7,809

Adjustment to the redemption value of put options related to non-controlling interests

 

 

 

 
(1,143
)
 

 
(1,143
)
BALANCE—September 30, 2015
48,997,738

 
$

 
$
(18,864
)
 
$
222,467

 
$
130,566

 
$
(2,288
)
 
$
331,881

(1) - The Company has 15,000,000 shares of authorized preferred stock, of which none are issued or outstanding.
(2) - The par value of the Company's Common Stock was $490 and $429 (amounts in whole dollars) as of September 30, 2015 and December 31, 2014, respectively.
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,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
9,152

 
$
15,000

Adjustments to reconcile net income to cash provided by operating activities

 

Loss on foreign currency exchange rates
2,226

 
3,153

Depreciation and amortization
18,326

 
10,566

Non-cash integration costs
18,617



Deferred taxes
(5,797
)
 
(2,430
)
Amortization of deferred financing costs
266

 
265

Convertible senior notes discount amortization
2,583

 
1,599

Bad debt provision
6,354

 
2,690

Stock compensation expense
2,727

 
2,666

Adjustment to fair value of contingent consideration
(4,466
)
 

Changes in operating assets and liabilities:
 
 
 
Cash and securities held for customers
30,064

 
(122,523
)
Receivables from brokers
51,035

 
61,316

Prepaid assets
(3,106
)
 
365

Other assets
(6,114
)
 
(8,595
)
Payables to customers
(30,064
)
 
122,523

Accrued compensation and benefits
(10,860
)
 
(2,745
)
Accrued expenses and other liabilities
(9,214
)
 
(945
)
Income tax payable
3,746

 
1,393

Cash provided by operating activities
75,475

 
84,298

CASH FLOWS FROM INVESTING ACTIVITIES:

 

Purchases of property and equipment
(13,900
)
 
(8,061
)
Purchase of certificates of deposit


(100
)
Cash received relating to acquisitions
7,611

 

Funding of acquisitions, net of cash acquired
(3,258
)
 
(27,013
)
Cash used for investing activities
(9,547
)
 
(35,174
)
CASH FLOWS FROM FINANCING ACTIVITIES:

 

Proceeds from exercise of stock options
2,096

 
1,204

Tax benefit related to stock option exercises
938

 
1,263

Proceeds from employee stock purchase plan
394


461

Purchase of treasury stock
(2,144
)

(794
)
Contractual payments for acquisitions
(13,271
)
 

Distributions to non-controlling interest holders
(1,035
)


Dividend payment
(7,084
)
 
(6,054
)
Cash used for financing activities
(20,106
)
 
(3,920
)
Effect of exchange rate changes on cash and cash equivalents
1,463

 
(2,903
)
INCREASE IN CASH AND CASH EQUIVALENTS
47,285

 
42,301

CASH AND CASH EQUIVALENTS—Beginning of period
139,403

 
39,871

CASH AND CASH EQUIVALENTS—End of period
$
186,688

 
$
82,172

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:

 

Cash paid during the year for:

 

Interest
$
(2,004
)
 
$
(1,784
)
Taxes
$
(4,641
)
 
$
(7,121
)
Non-cash financing activities:

 

Common stock issued as consideration for asset and business acquisitions
$
(48,280
)
 
$
(6,493
)
Convertible senior notes issued as consideration for business acquisitions
$
(65,000
)
 
$

Adjustment to redemption value of put options related to non-controlling interests
$
(1,143
)
 
$
(1,066
)

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

6


GAIN CAPITAL HOLDINGS, INC.
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 it owns all outstanding membership units of GAIN Capital Group, LLC (“Group, LLC”), the Company's primary regulated entity in the United States.
Group, LLC is a retail foreign exchange dealer (“RFED”) and a Futures Commission Merchant (“FCM”) registered with the Commodity Futures Trading Commission (the “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.

GAIN Capital-Forex.com U.K. Ltd. (“GCUK”) and GAIN Capital UK Ltd. are each registered in the United Kingdom ("U.K.") and regulated by the Financial Conduct Authority (“FCA”) as full scope €730k BIPRU Investment Firms.
The following list includes each of the Company’s significant U.S. and international regulated subsidiaries as of September 30, 2015:
GAIN Capital Group, LLC
GAIN Capital-Forex.com U.K., Ltd.
GAIN Capital Japan Co., Ltd.
GAIN Capital Forex.com Australia Pty. Ltd.
GAIN GTX, LLC
Global Assets Advisors, LLC
Top Third Ag Marketing LLC
Galvan Research and Trading, Ltd.
GAIN Capital UK Ltd.
GAIN Capital Australia Pty. Ltd.
GAIN Capital Singapore Pte. Ltd.
In April 2015, the Company acquired all of the outstanding share capital of City Index (Holdings) Limited ("City Index") from City Index Group Limited. GAIN Capital UK Ltd., GAIN Capital Australia Pty. Ltd., and GAIN Capital Singapore Pte. Ltd. are each subsidiaries that were acquired as part of the City Index acquisition. Each of these entities is regulated locally by the relevant regulators, including the FCA.
In July 2014, the Company acquired all of the outstanding share capital of Galvan Research and Trading, Ltd. ("Galvan"), a U.K. based corporation, and its subsidiaries, Faraday Research LLP and Galvan LLP. Galvan is regulated by the FCA.
In March 2014, the Company acquired controlling interests in Global Asset Advisors, LLC ("GAA") and Top Third Ag Marketing LLC ("Top Third").
See Note 10 for further details related to the Company's 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 condensed consolidated financial statements for the applicable interim periods. The financial statements are presented in accordance with accounting principles generally accepted in the United States. The unaudited condensed consolidated financial statements have been prepared in accordance with the Securities and Exchange Commission's ("SEC") regulations 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 a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2014 filed with the SEC on March 16, 2015 and amended on April 30, 2015 (the “2014 Form 10-K”). There have been no changes in the significant accounting policies from those included in the 2014 Form 10-K. The unaudited condensed consolidated financial statements include the accounts of GAIN Capital Holdings, Inc. and its majority owned subsidiaries after the elimination of intercompany transactions and balances.

7



For the nine months ended September 30, 2015, the Company revised its revenue captions to "Retail revenue", "Institutional revenue", and "Other revenue". Previously, certain business lines now presented in "Retail revenue" were presented in "Commission revenue". Following the City Index acquisition, the Company believes that presenting its revenues in this manner provides for a clearer presentation of the Company's major customer types and the related revenue streams. Revenues for the three and nine months ended September 30, 2014 have been reclassified to reflect this revised presentation. There were no changes to net revenue or net income in any period due to this reclassification.

For the period ended September 30, 2015, the Company revised certain captions shown in its condensed consolidated balance sheets. "Receivables from banks and brokers" has been renamed "Receivables from brokers", and "Payables to customers, brokers, dealers, FCMs and other regulated entities" has been renamed "Payables to customers". The Company believes that these captions more succinctly represent the nature of the transactions and balances contained within each line item. The composition and the amounts reported in the line items have not changed.


2. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2015, the Financial Accounting Standards Board (the "FASB") issued new guidance regarding the accounting for provisional adjustments of business combinations. The guidance states that if changes are required to be made to provisional amounts included in previously issued financial statements, such changes should be included in the period in which they are identified. These changes include adjustments to goodwill, as well as the cumulative impact of adjustments for depreciation, amortization or other income. The guidance is effective for annual periods beginning after December 15, 2015, including interim periods within that reporting period. This guidance will impact how the Company deals with provisional adjustments for business combinations following adoption.
  
In April 2015, the FASB issued new guidance regarding the accounting for debt issuance costs. The guidance requires presenting any deferred financing costs from debt issuances as a reduction in the amount of debt included on the balance sheet, which is a change from currently applicable rules requiring such costs to be classified as assets. In August 2015, the FASB issued updated guidance, which incorporated an SEC staff announcement highlighting that costs incurred for line-of-credit arrangements could be recorded as assets and amortized ratably over the term of the line-of-credit arrangement (regardless of whether there are any outstanding borrowings). The guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect this guidance to have a material impact on its financial statements.

In May 2014, the FASB issued new revenue recognition guidance that superseded the previously existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. The guidance requires recognizing revenue when transferring promised goods or services to customers. Recognition should reflect the consideration which the company expects to receive in exchange for those goods or services. The guidance requires enhanced disclosures to help financial statement users better understand the nature, amount, timing and uncertainty of the revenues that are recognized. The guidance is effective for interim reporting periods within annual reporting periods beginning after December 15, 2017, which is a one year deferral from the original guidance, approved by the FASB in July 2015. Early application is permitted for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently assessing the impact on its financial statements of adopting this guidance.


8



3. FAIR VALUE INFORMATION
Fair Value Measurements

Accounting guidance defines fair value as the price that would be received in exchange for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy that categorizes financial instruments into the following three levels based on valuation technique inputs (highest to lowest):

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

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

Level 3 - Valuations that require inputs that are both unobservable to a market participant and significant to the fair value measurement.

For assets and liabilities that are transferred between levels during the period, fair values are ascribed as if the assets or liabilities had been transferred as of the beginning of the period.

The following table presents the Company’s assets and liabilities that were measured at fair value on a recurring basis during the reporting period and the related hierarchy levels (amounts in thousands):

 
 
Fair Value Measurements on a Recurring Basis
as of September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Customer derivative positions
$

 
$
147,645

 
$

 
$
147,645

Broker derivative contracts

 
(29,077
)
 

 
(29,077
)
Money market accounts
25,158

 

 

 
25,158

Certificates of deposit
174

 

 

 
174

Investment in gold
113







113

Contingent consideration

 


 
(3,824
)
 
(3,824
)
Total
$
25,445

 
$
118,568

 
$
(3,824
)
 
$
140,189

 
 
Fair Value Measurements on a Recurring Basis
as of December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Customer derivative contracts
$

 
$
102,722

 
$

 
$
102,722

Broker derivative contracts

 
717

 

 
717

Money market accounts
20,537

 

 

 
20,537

Certificates of deposit
174

 

 

 
174

Investment in gold
118

 

 

 
118

Contingent consideration

 

 
(9,974
)
 
(9,974
)
Total
$
20,829

 
$
103,439

 
$
(9,974
)
 
$
114,294

The Company did not change its valuation techniques for measuring the fair value of any financial assets or liabilities during the nine months ended September 30, 2015, nor was there any movement between levels during this period.
Level 1 Financial Assets

9


The Company has money market accounts, 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 certificates of deposit and the investment in gold are recorded in Other Assets.
Level 2 Financial Assets and Liabilities
The Company has customer derivative contracts that are Level 2 financial instruments recorded in Payables to customers.
The Company has broker derivative contracts that are Level 2 financial instruments recorded in Receivables from brokers.
The fair values of these Level 2 financial instruments are based upon directly observable values for underlying instruments.
Level 3 Financial Liabilities
Under the agreements governing the Company's acquisition of Galvan, the Company is obligated to make contingent payments that are Level 3 financial liabilities. These contingent payments are recorded under Accrued expenses and other liabilities on the Company's condensed consolidated balance sheets. The fair value of these payments is determined using current Company-specific and risk free interest rates as of the balance sheet date and probability-weighted forecasts of the acquired company's performance and client accounts, the estimation of which does not have any basis in quoted or observable markets. Significant increases (decreases) in any of the forecast inputs in isolation would result in a significantly higher (lower) fair value measurement, while significant increases (decreases) in interest rates would result in a significantly lower (higher) fair value measurement.
The following is a rollforward of the Level 3 liabilities from January 1, 2015 to September 30, 2015 (amounts in thousands):
Liabilities
 
Contingent Consideration
Balance at January 1, 2015
 
$
9,974

Gains included in earnings - adjustment to fair value of contingent consideration
 
(4,466
)
Contingent consideration payments
 
(2,063
)
Gains included in earnings - currency revaluation
 
(113
)
Losses included in earnings - discount amortization
 
492

Balance at September 30, 2015
 
$
3,824


Gains included in earnings - adjustment to fair value of contingent consideration and Gains included in earnings - currency revaluation for Level 3 liabilities are reported in Other revenue, while losses included in earnings attributable to discount amortization are reported in Interest expense.
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).
Receivables from brokers comprise open trades, which are measured at fair value (disclosed above), and the Company's deposits, which are not measured at fair value but approximate fair value. These deposits approximate fair value because they are cash balances that the Company may withdraw at its discretion. Such settlement would occur within a relatively short period of time once a withdrawal is initiated.
Payables to customers comprise open trades, which are measured at fair value (disclosed above), and customer deposits that the Company holds for its role as clearing broker. These deposits are not measured at fair value, but approximate fair value, because they are cash balances that the Company or its customers can settle at either party's discretion. Such settlement would occur within a relatively short period of time once a withdrawal is initiated.
The carrying value of Convertible senior notes represents the notes’ principal amounts net of unamortized discount (see Note 12). The Company assessed the notes' fair value as determined by current Company-specific and risk free interest rates as of the balance sheet date.
The carrying value of Accrued expenses and other liabilities included $20.0 million as of December 31, 2014, referred to as the Holdback Amount, which is an amount relating to our acquisition of Global Futures & Forex, Ltd. ("GFT"). These liabilities were settled, and accordingly, there are no liabilities for the Holdback Amount as of September 30, 2015. The carrying values

10


of Accrued expense and other liabilities as of December 31, 2014 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, 2015
 
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 brokers
$
148,304

 
$
148,304

 
$

 
$
148,304

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
1,134,021

 
1,134,021

 

 
1,134,021

 

Convertible senior notes
120,866

 
121,103

 

 
121,103

 


 
As of December 31, 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 brokers
$
134,191

 
$
134,191

 
$

 
$
134,191

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
862,281

 
862,281

 

 
862,281

 

Convertible senior notes
68,367

 
66,440

 

 
66,440

 

Accrued expenses and other liabilities
20,000

 
20,000

 

 
20,000

 



4. DERIVATIVES
The Company's open 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 brokers and Payables to customers on the condensed consolidated balance sheets (amounts in thousands):
 
September 30, 2015
 
Derivative open positions at fair value
 
Gross 
assets
 
Gross 
liabilities
 
Net assets
Derivative Instruments:
 
 
 
 
 
Foreign currency exchange contracts
$
125,047

 
$
54,060

 
$
70,987

CFD contracts
66,759

 
28,759

 
38,000

Metals contracts
15,509

 
5,928

 
9,581

Total
$
207,315

 
$
88,747

 
$
118,568

 
 
 
 
 
 
 
September 30, 2015
 
Net assets/liabilities at fair value
 
Cash Collateral
 
Derivative
open positions 
 

Presented in the
balance sheet
Derivative Assets/Liabilities:
 
 
 
 
 
Receivables from brokers
$
148,304

 
$
(29,077
)
 
$
119,227

Payables to customers
$
1,134,021

 
$
147,645

 
$
986,376


11


 
December 31, 2014
 
Derivative open positions at fair value
 
Gross 
assets
 
Gross 
liabilities
 
Net assets
Derivative Instruments:
 
 
 
 
 
Foreign currency exchange contracts
$
168,034

 
$
93,057

 
$
74,977

CFD contracts
44,329

 
24,420

 
19,909

Metals contracts
16,146

 
7,593

 
8,553

Total
$
228,509

 
$
125,070

 
$
103,439

 
 
 
 
 
 
 
December 31, 2014
 
Net assets/liabilities at fair value
 
Cash Collateral
 
Derivative
open positions 
 

Presented in the
balance sheet
Derivative Assets/Liabilities:
 
 
 
 
 
Receivables from brokers
$
134,191

 
$
717

 
$
134,908

Payables to customers
$
862,281

 
$
102,722

 
$
759,559

The Company’s derivatives have many different underlyings, which vary in price. Foreign exchange contracts typically have prices less than two dollars, while certain metals contracts and contracts-for-difference ("CFD") can have considerably higher prices. The table below presents the number of contracts reported within Receivables from brokers and Payables to customers on the condensed consolidated balance sheets (amounts in thousands):
 
September 30, 2015
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,379,580

 
2,770,520

CFD contracts
136,600

 
285,838

Metals contracts
844

 
441

Total
3,517,024

 
3,056,799


 
December 31, 2014
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,147,518

 
2,679,041

CFD contracts
873,070

 
10,753

Metals contracts
835

 
335

Total
4,021,423

 
2,690,129


The Company did not designate any of its derivatives as hedging instruments at September 30, 2015 or December 31, 2014. Net gains/(losses) with respect to derivative instruments reflected in Retail revenue in the accompanying condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2015 and 2014 were as follows (amounts in thousands): 


12


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Derivative Instruments:
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
30,436

 
$
35,746

 
$
127,989

 
$
91,032

CFD contracts
56,071

 
12,074

 
93,936

 
29,567

Metals contracts
9,170

 
16,121

 
20,696

 
30,988

Total
$
95,677

 
$
63,941

 
$
242,621

 
$
151,587


5. RECEIVABLES FROM BROKERS
Amounts receivable from brokers consisted of the following as of (amounts in thousands): 
 
September 30, 2015
 
December 31, 2014
Required collateral
$
144,556

 
$
95,599

Futures brokers - Restricted
3,748

 
38,592

Open positions
(29,077
)
 
717

 
$
119,227

 
$
134,908


6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of (amounts in thousands):
 
 
September 30, 2015
 
December 31, 2014
Software
$
41,229

 
$
30,351

Computer equipment
13,549

 
8,516

Leasehold improvements
11,356

 
6,719

Telephone equipment
794

 
719

Office equipment
2,113

 
2,345

Furniture and fixtures
1,907

 
1,044

Web site development costs
668

 
646

 
71,616

 
50,340

Less: Accumulated depreciation and amortization
(42,401
)
 
(31,544
)
Property and equipment, net
$
29,215

 
$
18,796


As mentioned in Note 1 above, the Company purchased all of the outstanding share capital of City Index in April 2015, Galvan in July 2014 and controlling interests in GAA and Top Third in March 2014. The preliminary purchase price allocation for City Index and the final purchase price allocations for Galvan, GAA and Top Third to property and equipment are detailed below in Note 10.
Depreciation and amortization expense for property and equipment was $2.9 million and $1.7 million for the three months ended September 30, 2015 and 2014, respectively, and $7.6 million and $5.7 million for the nine months ended September 30, 2015 and 2014, respectively.
The Company adjusted the depreciation and amortization period of certain property and equipment that experienced changes in estimated useful lives as a result of the City Index acquisition. This change in useful lives resulted in an additional charge of $1.8 million and $3.7 million during the three months and nine months ended September 30, 2015, respectively. The additional charge was recorded in Integration expenses.




13


7. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The Company's various intangible assets consisted of the following as of (amounts in thousands): 
 
September 30, 2015

December 31, 2014
Intangibles
Gross

Accumulated
Amortization

Net

Gross

Accumulated
Amortization

Net
Customer lists
$
53,303


$
(11,080
)

$
42,223


$
22,945


$
(7,152
)

$
15,793

Technology
75,069


(23,291
)

51,778


48,376


(4,671
)

43,705

Trademarks
8,483


(1,385
)

7,098


1,793


(847
)

946

Total finite lived intangibles
136,855


(35,756
)

101,099


73,114


(12,670
)

60,444

Trademarks not subject to amortization (1)
362




362


362




362

Total intangibles (2)
$
137,217


$
(35,756
)

$
101,461


$
73,476


$
(12,670
)

$
60,806

(1) These indefinite-life trademarks relate to the Forex.com and foreignexchange.com domain names. Management determined there was no legal, regulatory or technological limitation on the domains' useful lives. The trademarks' values are evaluated annually in the Company's impairment test for intangible assets.
(2) The increase in total intangibles for the nine months ended September 30, 2015 was primarily due to the customer lists, technology and trademarks acquired as part of the City Index acquisition. See Note 10 for details of the intangibles acquired in the Company's City Index, GAA, Top Third and Galvan acquisitions. The technology acquired pursuant to the asset purchase agreements with Valaquenta Intellectual Property Limited ("Valaquenta") and Forexster Limited ("Forexster") is described in further detail below.
The Company has the following gross identifiable intangible assets as of September 30, 2015:
Intangible Assets
Amount (in thousands)

Weighted average amortization period
Customer lists
$
53,303


8.1 years
Technology
75,069


8.9 years
Trademarks (1)
8,845


6.7 years

$
137,217



(1) Trademarks with indefinite lives, as described above, comprise $0.4 million of the gross $8.8 million of trademarks.

The preliminary purchase price allocations to intangible assets for the acquisition of City Index are detailed below in Note 10, “Acquisitions”, along with the final purchase price allocations for the Galvan, GAA and Top Third acquisitions.
On July 10, 2014, the Company entered into asset purchase agreements with Valaquenta and Forexster, pursuant to which one of the Company's subsidiaries, 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 Gain GTX, LLC ("GTX") business. The purchase was made with a combination of $12.4 million in cash and $5.3 million in unregistered shares of the Company's 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 trading of currencies, commodities and any 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 the aforementioned exclusive rights agreement. The Company has assigned a 10 year useful life to this asset.
Amortization expense for the purchased intangibles was $4.3 million and $2.2 million for the three months ended September 30, 2015 and 2014, respectively, and $10.7 million and $4.8 million for the nine months ended September 30, 2015 and 2014, respectively.
The Company adjusted the amortization periods of certain intangible assets that experienced a change of estimated useful lives as a result of the City Index acquisition. This change resulted in an additional charge of $6.5 million and $13.0 million during the three and nine months ended September 30, 2015. The additional charge is recorded in integration expenses.

14


Future annual estimated purchased intangible amortization expense is as follows (amounts in thousands):
Years Ended December 31:

2015
$
10,761

2016
14,154

2017
12,861

2018
11,760

2019
11,179

Thereafter
40,384

Total
$
101,099

Of the total future estimated amortization expense above, $6.5 million is expected to be recorded as Integration expense for the acceleration of the amortization of technology platforms that are being discontinued as a result of the City Index acquisition, primarily in the fourth quarter of 2015.
Goodwill
Goodwill is calculated as the difference between the cost of an acquired business and the fair value of the net identifiable assets of that business. As of September 30, 2015 and December 31, 2014, the Company had recorded goodwill of approximately $44.8 million and $34.6 million, respectively. The increase of $10.2 million was primarily related to the City Index acquisition.

8. OTHER ASSETS
Other assets consisted of the following as of (amounts in thousands): 

 
September 30, 2015
 
December 31, 2014
Vendor and security deposits
$
9,414

 
$
3,373

Current tax receivable
10,187

 
5,084

Deferred tax assets
13,071

 
6,472

Indemnification asset

 
8,792

GTX trade receivables
3,675

 
4,190

Customer debit positions
6,951


6,594

Allowance for doubtful accounts
(5,898
)

(4,555
)
Miscellaneous receivables and other assets
1,454

 
5,361

 
$
38,854

 
$
35,311


Under the terms of the GFT acquisition, an initial amount of $20.0 million, referred to as the Holdback Amount, was deferred, to be paid following the settlement of certain liabilities of GFT after the closing date of the acquisition. The selling stockholder of GFT agreed to indemnify the Company for these liabilities.

At December 31, 2014, based on the Company's best estimate of the amounts necessary to settle such liabilities, the Company recorded an indemnification asset of $8.8 million. During the nine months ended September 30, 2015, the previous liabilities of GFT were settled and, therefore, the Company made payments to the selling shareholder of GFT, as required by the stock purchase agreement providing for the acquisition of GFT, which settled the liability associated with the Holdback Amount.

9. RELATED PARTY TRANSACTIONS
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 on the condensed consolidated balance sheets. The aggregate amount of these funds was $7.8 million and $3.6 million at September 30, 2015 and December 31, 2014, respectively.

IPGL Limited, the majority selling shareholder in the acquisition of City Index, has a trading account with the Company, which is recorded in Payables to customers on the condensed consolidated balance sheet. The aggregate amount of these funds was $5.4 million at September 30, 2015.

15



10. ACQUISITIONS

City Index (Holdings) Limited

On April 1, 2015, the Company acquired the entire issued and outstanding share capital of City Index. City Index is a global online trading firm specializing in offering CFDs, forex and spread betting for retail customers.

The preliminary purchase price consisted of approximately $6.1 million in cash, inclusive of working capital adjustments and $1.0 million in cash to be held in escrow, 5,319,149 shares of the Company's common stock, and 4.125% unsecured Convertible Senior Notes with an aggregate principal amount of $60.0 million and fair value of $65.0 million. In addition the Company paid approximately $22.4 million to settle certain inter-company liabilities between City Index and City Index Group Limited (its former parent company).

The difference in the preliminary purchase price from June 30 to September 30 was due to the finalization of working capital adjustments.

The preliminary purchase price was derived as follows (amounts in thousands):
Cash
$
6,102

Convertible senior notes
65,000

Common stock issued (based on the April 1, 2015 quoted price of $9.77)
48,280

Total purchase price
$
119,382

The preliminary purchase price of City Index was allocated to the fair value of various assets and liabilities as follows (amounts in thousands): 
 
 
Cash and cash equivalents
$
32,991

Cash and securities held for customers
265,012

Receivable from brokers
35,974

Property and equipment
10,411

Prepaid assets
3,972

Other current assets
541

Total tangible assets
348,901

Total liabilities assumed
303,280

Net assets acquired
45,621

Identifiable intangible assets:
 
Customer list
30,273

Trade name
6,645

Technology
26,157

Intangible assets, net
63,075

Goodwill
$
10,686


The foregoing purchase price allocation is preliminary. The final allocation will be based on final analyses of assets and liabilities. It will be finalized after the data necessary to complete the analyses of fair value of assets and liabilities is obtained and analyzed.

For the period from acquisition to September 30, 2015, revenues generated by City Index were $79.2 million, of which $15.5 million have been eliminated in consolidation, and expenses were $63.7 million, of which $1.3 million have been eliminated in consolidation. City Index generated income before taxes of $15.5 million, of which $14.2 million have been eliminated in consolidation.

The weighted average lives of City Index's intangible assets are 8.8 years for customer lists, 7.0 years for trade names, and 6.9 years for technology.



16


Galvan Research and Trading, Ltd.

In July 2014, the Company acquired all the share capital of Galvan and its subsidiaries, Faraday Research LLP and Galvan LLP. The purchase price was $20.3 million. This acquisition was made to add an advisory capability to complement the Company's retail business.

The purchase price was $9.7 million in cash and a contingent payment of $10.5 million payable over a three year period. Over the three year period, the contingent payment is subject to a fair value assessment related to achieving specific financial and customer account targets. The actual contingent payment for 2014 was $2.1 million, which was paid on September 30, 2015. For the nine months ended September 30, 2015, the Company adjusted the contingent payment's value based on forecasts of performance related to 2015 and 2016 payments (See Note 3). The purchase price was derived as follows (amounts in thousands):

Cash
$
9,732

Contingent payment
10,540

Total purchase price
$
20,272

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

Cash and cash equivalents
$
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
1,931

Net assets acquired
1,177

Identifiable intangible assets:
 
Customer list
4,203

Trade name
784

Intangible assets, net
4,987

Goodwill
$
14,108


Related goodwill decreased by $0.9 million relating to a decrease in total liabilities assumed from amounts estimated at December 31, 2014. This decrease primarily related to purchase price accounting adjustments.

Global Assets Advisors, LLC

In March 2014, the Company acquired a 55% interest in GAA. The purchase price was $5.6 million. This acquisition was made to strengthen the Company's futures business.

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

Cash
$
4,365

Common stock issued
1,241

Total purchase price
$
5,606


17


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

Non-controlling interest
$
4,509




Cash and cash equivalents
$
360

Receivable from brokers
438

Property and equipment
148

Prepaid assets
153

Other current assets
3

Total tangible assets
1,102

Total liabilities assumed
515

Net assets acquired
587

Identifiable intangible assets:

Customer list
3,100

Trade name
270

Intangible assets, net
3,370

Goodwill
$
6,158


Top Third Ag Marketing LLC

In March 2014, the Company acquired a 55% interest in Top Third. The purchase price was a $3.5 million cash payment. This acquisition was made as part of the Company's strategy to diversify its revenue base.
The purchase price of Top Third was allocated to the fair value of various assets and liabilities as follows (amounts in thousands): 

Non-controlling interest
$
3,885

 
 
Cash and cash equivalents
$
73

Receivable from brokers
663

Total tangible assets
736

Total liabilities assumed
1,103

Net assets acquired
(367
)
Identifiable intangible assets:
 
Customer list
3,900

Trade name
90

Intangible assets, net
3,990

Goodwill
$
3,806



Pro Forma Information:
The following unaudited pro forma operating data is presented as if the acquisition of GAA, Top Third and Galvan had occurred on January 1, 2014. 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 nine months ended September 30, 2014 were as follows (amounts in thousands):

18


 
 
For the Nine Months Ended September 30,
 
 
2014
REVENUE:
 
 
Total non-interest revenue
 
$
261,570

Interest revenue
 
1,130

Interest expense
 
767

Total net interest revenue
 
363

Net revenue
 
261,933

EXPENSES:
 
 
Depreciation and amortization
 
5,742

Purchased intangible amortization
 
5,421

Other expense items
 
226,973

Total operating expense
 
238,136

OPERATING PROFIT
 
23,797

Interest on long term borrowings
 
4,390

INCOME BEFORE INCOME TAX EXPENSE
 
19,407

Income tax expense
 
7,277

NET INCOME
 
12,130

Net income attributable to non-controlling interests
 
981

Net income applicable to Gain Capital Holdings, Inc.
 
$
11,149


The following unaudited pro forma operating data is presented as if the acquisition of City Index had occurred on January 1, 2014, and includes actual results for GAA and Top Third for periods after their acquisition in March 2014, as well as Galvan results after its acquisition in July 2014. This data does not include any proforma adjustments for the GAA, Top Third or Galvan acquisitions, as the Company believes it is more useful to present the pro forma effects of the City Index acquisition on their own in light of the transaction's significance. 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 City Index operated as a combined entity for the periods presented.
Unaudited pro forma income statement line items for the nine months ended September 30, 2015 and three and nine months ended September 30, 2014 were as follows (amounts in thousands):

19


 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2014
REVENUE:
 
 
 
 
 
Total non-interest revenue
$
369,142

 
$
143,830

 
$
348,636

Interest revenue
1,019

 
571

 
1,983

Interest expense
846

 
97

 
319

Total net interest revenue
173

 
474

 
1,664

Net revenue
369,315

 
144,304

 
350,300

EXPENSES:
 
 
 
 
 
Depreciation and amortization
8,280

 
6,505

 
13,209

Purchased intangible amortization
12,757

 
4,533

 
11,694

Other expense items
333,514

 
109,196

 
312,927

Total operating expense
354,551

 
120,234

 
337,830

OPERATING PROFIT
14,764

 
24,070

 
12,470

Interest on long term borrowings
7,671

 
2,541

 
7,526

INCOME BEFORE INCOME TAX BENEFIT
7,093

 
21,529

 
4,944

Income tax expense
2,661

 
8,073

 
1,854

NET INCOME
4,432

 
13,456

 
3,090

Net income attributable to non-controlling interests
1,343

 
785

 
987

Net income applicable to Gain Capital Holdings, Inc.
$
3,089

 
$
12,671

 
$
2,103


Restructuring

During the second quarter of 2015, the Company incurred restructuring expenses, which reflected the cost of reducing global headcount following the City Index acquisition. The Company previously incurred restructuring expenses in connection with headcount reductions in the third quarter of 2014 that were designed to meet challenging market conditions in the first half of 2014 and to achieve greater cost efficiency in general. The Company incurred $1.2 million of restructuring expenses for the twelve months ended December 31, 2014. These expenses are recorded in Restructuring expenses in the condensed consolidated statements of operations and comprehensive income. The restructuring liabilities are recorded in Accrued compensation and benefits in the condensed consolidated balance sheets.
 
For the Nine Months Ended September 30,
 
2015
Restructuring liability as of January 1, 2015
$
374

2015 restructuring expenses
1,935

Payments made in 2015
(1,926
)
Restructuring liability as of September 30, 2015
$
383















20


11. NON-CONTROLLING INTERESTS

In March 2014, the Company acquired controlling interests in GAA and Top Third. 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 become exercisable 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 classified as temporary equity in the condensed consolidated balance sheets.

The non-controlling interests' carrying value is determined by the initial purchase prices for the acquired interests, the non-controlling interests' share of the acquired companies' subsequent net income, the non-controlling interests' share of the acquired companies' current net assets, and distributions to non-controlling interest holders. This value is benchmarked against the redemption value of the sellers' put options. The carrying values are adjusted to the latter, provided that they do 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.

As of June 30, 2015, the Company had a $2.6 million adjustment to the carrying value of its non-controlling interests, which included an out of period adjustment of $1.3 million that reduced retained earnings and increased non-controlling interests. The out of period adjustment was recorded to correct a prior error related to the calculation of the redemption value of the non-controlling interests. The Company has determined that the out of period adjustment is immaterial both quantitatively and qualitatively to current and all impacted prior periods. For the three month period ended September 30, 2015, the Company recorded an adjustment of ($1.5) million to the carrying value of the non-controlling interests, which increased retained earnings and decreased non-controlling interests. This quarterly change brought the adjustment to the redemption value of the non-controlling interests to $1.1 million as of September 30, 2015.

The table below reflects the non-controlling interests' effects on the Company's financial statements (amounts in thousands):


Redeemable non-controlling interests
January 1, 2015
$
10,209

Adjustment to the redemption value of non-controlling interests
1,143

Net income attributable to non-controlling interests
1,343

Distributions to non-controlling interest holders
(1,035
)
September 30, 2015
$
11,660



12. CONVERTIBLE SENIOR NOTES
On April 1, 2015, as part of the City Index acquisition consideration, the Company issued to the sellers $60.0 million aggregate principal amount of 4.125% Convertible Senior Notes maturing on April 1, 2020. These Convertible Senior Notes pay interest semi-annually on April 1 and October 1 at a rate of 4.125% per year, which commenced on October 1, 2015.

On November 27, 2013, the Company issued $80.0 million aggregate principal amount of 4.125% Convertible Senior Notes maturing on December 1, 2018. The Company received net proceeds of $77.9 million, after deducting the initial purchasers' discount. These Convertible Senior Notes pay interest semi-annually on June 1 and December 1 at a rate of 4.125% per year, which commenced on June 1, 2014.

Under accounting guidance, an entity must separately account for the liability and equity components of 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, 2015 and December 31, 2014 were as follows (amounts in thousands):

21


 
September 30, 2015
 
December 31, 2014
Liability component - principal
$
140,000

 
$
80,000

Deferred bond discount
(19,134
)
 
(11,633
)
Liability component - net carrying value
$
120,866

 
$
68,367

 
 
 
 
Additional paid in capital
$
27,920

 
$
12,572

Discount attributable to equity
(412
)
 
(425
)
Equity component
$
27,508

 
$
12,147


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

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest expense - stated coupon rate
$
1,444

 
$
825

 
$
3,713

 
$
2,475

Interest expense - amortization of deferred bond discount and costs
1,126

 
671

 
2,913

 
1,915

Total interest expense - convertible senior notes
$
2,570

 
$
1,496

 
$
6,626

 
$
4,390




22


13. 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 0.5 million were excluded from the calculation for the nine months ended September 30, 2015. Anti-dilutive options of 0.4 million were excluded from the calculation for the nine months ended September 30, 2014.

Under present market conditions, diluted earnings per share excludes any shares of Company common stock potentially issuable under the Company's convertible senior notes due in 2018 and 2010, which are discussed in Note 12. Based upon an assumed trading price of $13 for each share of the Company's common stock, and if the relevant conditions under the indentures governing both 2018 and 2020 convertible senior notes were satisfied, there would be an additional 0.5 million and 1.5 million dilutive shares for the 2018 and 2020 notes, respectively.
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,
 
2015
 
2014
 
2015
 
2014
Net income applicable to GAIN Capital Holdings, Inc.
$
8,304

 
$
15,345

 
$
7,809

 
$
14,013

Adjustment to the redemption value of non-controlling interests (1)(2)
1,428

 
(890
)
 
(1,143
)
 
(1,066
)
Net income available to common shareholders
$
9,732

 
$
14,455

 
$
6,666

 
$
12,947

Weighted average common shares outstanding:

 

 

 

Basic weighted average common shares outstanding
49,147,102

 
41,038,782

 
47,163,132

 
40,243,330

Effect of dilutive securities:

 

 

 

Stock options
321,379

 
562,187

 
471,613

 
786,956

RSUs/RSAs
422,620

 
1,922,893

 
394,007

 
2,024,673

Diluted weighted average common shares outstanding
49,891,101

 
43,523,862

 
48,028,752

 
43,054,959

Net earnings per common share:

 

 

 

Basic
$
0.20

 
$
0.35

 
$
0.14

 
$
0.32

Diluted
$
0.20

 
$
0.33

 
$
0.14

 
$
0.30

 
(1)
During the nine months ended September 30, 2015 and 2014, the Company concluded that the value of the put options related to the Company's redeemable non-controlling interests in GAA and Top Third was less than redemption value. The adjustment to increase the carrying value reduces earnings available to the Company's shareholders for purposes of calculating basic and diluted earnings per common share.
(2)
The adjustments shown for the nine months ended September 30, 2015 contain out of period adjustments of ($1.3 million) or ($0.03) per diluted share (See Note 11).
14. 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. 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

23


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 claimants 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 and/or summary judgment. Case management conferences were held by the Court on October 17, 2014 and June 18, 2015. On August 3, 2015, the claimants filed an Amended Master Particulars of Claim, and on October 6, 2015, the Company filed an Amended Defense. The parties are in discovery. The Company can provide no assurances that this matter will be successfully resolved. 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 Open E Cry ("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. ("Trading Technologies") seeking injunctive relief and unspecified damages. As reflected in a Second Amended Complaint filed on June 15, 2011, plaintiff alleged 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. On May 6, 2015, the Company entered into a settlement and license agreement with Trading Technologies pursuant to which the Company made a one-time royalty payment to Trading Technologies in exchange for a volume-based license for the disputed patents. The Company was fully indemnified for the amount of the royalty payment by the former owner of OEC and therefore the Company incurred no net expense. The lawsuit was dismissed on May 6, 2015.



15. INCOME TAXES
The Company's expense/(benefit) for income taxes was approximately $0.3 million and $(1.0) million for the three and nine months ended September 30, 2015, respectively. The Company’s provision for income taxes was approximately $5.3 million and $4.6 million for the three and nine months ended September 30, 2014, respectively. These amounts reflect effective tax rates of 3.6% and 24.9%, adjusted for certain discrete items, for the three months ended September 30, 2015 and 2014, respectively. The Company's effective tax rates of (12.0)% and 23.4% for the nine months ended September 30, 2015 and 2014, respectively, reflect the Company's estimate of the annual effective tax rate adjusted for certain discrete items. The negative effective tax rate for the nine months ended September 30, 2015 was primarily due to the tax benefit resulting from the recognition of net operating losses from the Company's operations in Singapore, partially offset by charges relating to certain non-deductible compensation expenses incurred during 2014. 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 bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are

24


expected to reverse. The Company’s deferred tax assets are included in Other assets on the condensed consolidated balance sheets.

25


16. REGULATORY REQUIREMENTS
The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of September 30, 2015 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
GAIN Capital Group, LLC
$
25.3

 
$
42.3

 
$
17.0

 
167
%
GAIN Capital-Forex.com U.K., Ltd.
32.5

 
81.7

 
49.2

 
251
%
GAIN Capital Japan Co., Ltd.
1.4

 
9.5

 
8.1

 
679
%
GAIN Capital-Forex.com Hong Kong, Ltd.
1.9

 
2.7

 
0.8

 
142
%
GAIN Capital Forex.com Australia, Pty. Ltd.
0.7

 
2.2

 
1.5

 
314
%
Galvan Research and Trading, Ltd.
0.7

 
4.4

 
3.7

 
629
%
GAIN Capital-Forex.com Canada Ltd.
0.2

 
1.4

 
1.2

 
700
%
GAIN Capital Securities, Inc.
0.1

 
0.4

 
0.3

 
400
%
GAIN Global Markets, Inc.
0.1

 
0.2

 
0.1

 
200
%
GAIN Capital UK, Ltd.1
52.3


111.5


59.2


213
%
GAIN Capital Singapore Pte. Ltd.1
0.7


7.1


6.4


1,014
%
GAIN Capital Australia Pty Ltd.1
0.7


2.0


1.3


286
%
Global Assets Advisors, LLC
0.1

 
1.3

 
1.2

 
1,300
%
Total
$
116.7

 
$
266.7

 
$
150.0

 
229
%
(1)
Entity acquired as part of the City Index acquisition.
17. 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, (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 predominantly common production, marketing, development and client coverage teams, the Company has concluded that it operates in a single operating segment.
18. SUBSEQUENT EVENTS
In November 2015, the Company announced the payment of a $0.05 dividend per share of Common Stock payable on December 22, 2015 to stockholders of record on December 11, 2015.







26


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, 2015.
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, 2014, 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, 2014, 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 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 for residents of that country.

We have invested considerable resources over the past 15 years 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 customers' 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.

As a global provider of online trading services, our results of operations are impacted by a number of external market factors, including market volatility and transaction volumes, competition, the regulatory environment in the various jurisdictions and markets in which we operate and the financial condition of the retail and institutional customers to whom we provide our services. These factors are not the only factors that impacted our results of operations for the most recent fiscal period, and additional or other factors may impact, or have different degrees of impact, on our results of operations in future periods.

Market Environment
Overall market conditions broadly improved in the three months ended September 30, 2015, with higher volatility in indices and commodities. This resulted in revenue capture generally in line with our trailing twelve-month average.



27


Competition
The products we offer have generally been accessible to retail investors for a significantly shorter period than many other securities products, such as equities, and our industry is rapidly evolving and characterized by intense competition. Entering new markets often requires us to lower our pricing in order to attract customers and compete with other companies who have already established customer bases in such markets. In addition, in existing markets, on occasion we make short-term decisions to be more aggressive regarding the pricing we offer our customers, or we may decide to offer additional services at reduced rates, or free of charge, in order to attract customers and take market share from our competitors.

Regulatory Environment
In recent years, the financial markets have experienced a major global regulatory overhaul, as regulators and legislators in the United States and abroad have proposed and, in some instances, adopted, a wide range of regulatory changes that have had a significant effect on the manner in which we operate our business. For example, as a result of the Dodd-Frank Act’s requirement that essentially all transactions in commodities be executed on an exchange, after July 15, 2011, we were no longer permitted to offer leveraged spot metal transactions in the United States.

In addition, U.S. and foreign regulators have adopted regulatory changes, or expressed their intention to review existing regulation, in a number of areas as a result of the highly publicized market disruption that occurred on January 15, 2015, when the Swiss National Bank, or SNB, announced that it would move interest rates to -0.75% and abandon the 1.20 floor for EUR/CHF that it had previously maintained. For example, following the SNB market event, the National Futures Association, or NFA, increased margin requirements on certain currency pairs, including those involving the Swiss franc, Swedish krona and Norwegian krone, and regulators in other jurisdictions may follow suit.

Part of our growth strategy is to enter new markets, and as we do so we will become subject to regulation in those markets. Complying with different regulatory regimes in multiple markets is expensive, and in many markets the regulatory environment is unclear and evolving. Changes in regulatory requirements or changes in the interpretation of existing regulatory requirements may force us to alter our business practices.

City Index Acquisition

On April 1, 2015, we completed the acquisition of the entire issued and outstanding share capital of City Index (Holdings) Limited, or City Index, a global online trading firm specializing in CFDs, forex and spread betting from City Index Group Limited. The preliminary purchase price consisted of approximately (i) $6.1 million in cash, inclusive of working capital adjustments and $1.0 million in cash to be held in escrow; (ii) 5,319,149 shares of our common stock, including 4,787,234 shares to be held in escrow; and (iii) 4.125% unsecured Convertible Senior Notes with an aggregate principal amount of $60.0 million, including convertible senior notes with an aggregate principal amount of $54.0 million to be held in escrow. In addition, we paid approximately $22.4 million to settle certain inter-company liabilities between City Index and City Index Group Limited.

Global Asset Advisors, LLC and Top Third Ag Marketing LLC Acquisitions

On March 7, 2014, we entered into a Membership Interest Purchase Agreement, which we refer to as the GAA Agreement, with Global Asset Advisors, LLC, or GAA, Lucky Good Dog, L.L.C., or LGD, Glenn A. Swanson and Andrew W. Daniels (as sellers' representative). On March 21, 2014, pursuant to the terms and subject to the conditions set forth in the GAA Agreement, we purchased 55% of the outstanding membership interests in GAA from LGD and Mr. Swanson, whom we collectively refer to as the GAA Sellers, for an aggregate purchase price consisting of (i) $4,420,240 in cash and (ii) 116,801 shares of the Company's common stock. Under the terms of the GAA Agreement, LGD and Mr. Swanson are also entitled to receive, for a period of seven years after the closing of the acquisition, annual payments of a portion of the net interest earned on the assets of clients of GAA at the time of the closing. Under the terms of the Amended and Restated Operating Agreement of GAA, which was executed at the closing of the acquisition, we have, for a period of six years after the closing, a call right to purchase the remaining membership interests in GAA for a price primarily based on a multiple of GAA's trailing twelve month EBITDA. From the third anniversary through the sixth anniversary of the closing date, the GAA Sellers may put their remaining interests in GAA to us on the same terms.

Also on March 7, 2014, we entered into a Membership Interest Purchase Agreement, which we refer to as the Top Third Agreement, with Top Third Ag Marketing LLC, or Top Third, LGD, Mark Gold and Glenn A. Swanson. On March 21, 2014, pursuant to the terms and subject to the conditions set forth in the Top Third Agreement, we purchased 55% of the outstanding membership interests in Top Third from LGD and Messrs. Gold and Swanson, whom we collectively refer to as the Top Third Sellers, for an aggregate purchase price consisting of $4,749,289, a portion of which will be payable to Mr. Gold contingent

28


upon satisfying certain requirements over the three year period following the closing date of the acquisition. Under the terms of the Amended and Restated Operating Agreement of Top Third, which was executed on the closing of the acquisition, we have, for a period of six years after the closing, a call right to purchase the remaining membership interests in Top Third for a price primarily based on a multiple of Top Third's trailing twelve month EBITDA. From the third anniversary through the sixth anniversary of the closing date, the Top Third Sellers may put their remaining interests in Top Third to us on the same terms.

Galvan Acquisition

In July 2014, we closed on our acquisition of Galvan Research and Trading, Ltd., or Galvan. Galvan, along with its subsidiaries, 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 $9.7 million, as well as an earn-out arrangement under which the sellers may be entitled to additional contingent consideration based upon the acquired businesses achieving certain performance targets in 2014, 2015 and 2016. At the time the acquisition closed, we estimated the acquisition date fair value of the contingent consideration to be $10.5 million. During the nine months ended September 30, 2015, we adjusted the contingent consideration for these acquisitions by ($4.5) million (See Note 3 to our condensed consolidated financial statements included in this Quarterly Report). The actual contingent payment for 2014 was $2.1 million, which was paid on September 30, 2015.

Acquisition of Intellectual Property Assets

On July 10, 2014, we entered into asset purchase agreements with Valaquenta Intellectual Property Limited, or Valaquenta, and Forexster Limited, or Forexster, pursuant to which one of our subsidiaries, GAIN GTX Bermuda, Ltd., or 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. Prior to the closing of the acquisition, 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.

The purchase was made with a combination of $12.4 million in cash and $5.3 million of our unregistered common stock. In addition, GTX Bermuda 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.

In light of the changes to our business and operations resulting from the items discussed above, our past results may not be indicative of our future performance.

Key Income Statement Line Items
The following section briefly describes the key components of our revenue and expenses:
 
Revenue

Revenue from our business consists of retail revenue, institutional revenue, other revenue and interest revenue.

Retail Revenue

Retail revenue is our largest source of revenue. Retail revenue is comprised of trading revenue from our retail OTC business, as well as commission revenue from our futures, sales trader and advisory businesses.

Prior to our acquisitions of Global Futures and Forex, Ltd., or GFT, and City Index, trading revenue from our retail OTC business had been generated primarily by forex products. As a result of the GFT and City Index acquisitions, trading revenue generated by non-forex products, particularly CFDs relating to equity indices, single stock equities and commodities, has increased both in magnitude and as a percentage of total retail OTC revenue.


29


Trading revenue for our retail OTC business is generated as follows:
for our customers' trades, we hedge our customers' positions, leaving a bid/offer spread without exposure to changes in market value; 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 or other products held in our net exposure.
For the three and nine months ended September 30, 2015, approximately 98% and 97%, respectively, of our average daily retail OTC trading volume was either naturally hedged or hedged by us with our liquidity providers, and the remaining 2% and 3%, respectively, of our average daily retail trading volume consisted of our net exposure, compared to average retail trading volume hedged of approximately 94% for the three and nine months ended September 30, 2014. Trade flow that is naturally hedged allows us to keep the entire bid/ask spread on the two transactions, which offset each other in market risk terms. In contrast, when we hedge trade flow with our liquidity providers, we keep the difference between the retail bid/ask spread we offer our customers and the wholesale bid/ask spread that we pay to our liquidity providers.
We manage our net exposure by applying position and exposure limits established under our risk-management policies and by continuous, active monitoring by our trading and risk teams. Based on our risk management policies and procedures, over time a portion of our net exposure may be hedged with our liquidity providers. Although we do not actively initiate proprietary 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 experience losses on such positions.

In our retail futures business, we provide our customers with access to futures markets, while our retail advisory business provides customers with advice, primarily related to the CFD markets. These businesses generally generate revenue from commissions on each transaction. We are not exposed to market risk in connection with these businesses.

Our retail sales trader business has historically provided high-touch trading services and execution to high net worth customers. We primarily earn commissions on this trade flow, which we typically hedge fully. In future periods, we expect to further integrate our sales trader business within our traditional retail business.

Retail revenue comprised 92.9% and 87.2% of our total net revenue for the three months ended September 30, 2015 and September 30, 2014, respectively and 90.4% and 87.6% for the nine months ended September 30, 2015 and September 30, 2014, respectively.

Institutional Revenue

Institutional revenue consists of revenue from our GTX business, which provides a proprietary trading platform and voice-broker services to institutions. Revenue for our GTX business is generated primarily through commissions on trades executed on the GTX platform. We act as an agent for the trades executed on the GTX platform and, therefore, do not assume any market or credit risk in connection with those transactions.

Other Revenue

Other revenue primarily comprises account management and transaction fees; inactivity and training fees charged to customer accounts; and foreign currency transaction gains and losses. During the nine months ended September 30, 2015, we recorded a $4.5 million adjustment to the contingent payment related to the acquisition of Galvan, which was included in other revenue.

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, as well as funds on deposit as collateral with our liquidity providers, less interest paid to our customers.
Our cash and customer cash is generally held 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, 2015. Interest paid to customers varies primarily due to the net value of customer accounts. A customer's net account value equals cash on deposit plus the mark to market of open positions as of the measurement date. Interest income and interest expense are recorded when earned and incurred, respectively. Net interest

30


revenue was $0.1 million for the three months ended September 30, 2015, compared to $0.3 million for the three months ended September 30, 2014.
Expenses

Our expenses principally comprise employee compensation and benefits, selling and marketing expenses, referral fees, trading expenses, general and administrative expenses, depreciation and amortization, purchased intangible amortization, communications and technology expenses, bad debt provision and interest on long term borrowings, as well as expenses related to acquisitions and integration activities.

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

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.
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.
Referral fees are largely variable and change principally based on the level of customer trading volume directed to us by our white label partners and introducing brokers. The specific terms of our agreements with the white label partners and introducing brokers vary on a partner-by-partner and regional basis. The majority of our white label partners and introducing brokers 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 and brokers, while we are generating lower revenue from their customers. Our indirect business accounted for 49% and 48% of retail trading volume in the three and nine months ended September 30, 2015 and September 30, 2014, respectively.

Trading expenses
Trading expenses consist 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, clearing firms and fees paid to prime brokers in connection with our institutional GTX and futures businesses.

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 the amortization for internally developed software.

Purchased Intangible Amortization
Purchased intangible amortization consists of amortization related to intangible assets we acquired in 2015, 2014, 2013 and 2012 in connection with our acquisitions. The principal intangible assets acquired were technology, customer assets and trademarks. These intangible assets have initial estimated useful lives ranging from one year to ten years.

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


31


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

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, and our 4.125% Convertible Senior Notes due 2020, issued in April 2015 in connection with the City Index acquisition.

Restructuring Expenses
For the nine months ended September 30, 2015 and 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 accounting guidance.

Acquisition Expenses
For the three and nine months ended September 30, 2015 and September 30, 2014, we incurred acquisition-related expenses, which included legal, accounting, valuation and other costs specified in accounting guidance. These costs are expensed as incurred.

Integration Expenses
For the three and nine months ended September 30, 2015 and for the nine months ended September 30, 2014, we incurred integration expenses, which are acquisition-related costs that do not meet the definition of acquisition expenses specified in accounting guidance. These costs include retention bonuses paid to employees and the cost of retiring physical and intangible assets made redundant by acquisitions, including the amortization of technology platforms that are being discontinued as a result of the City Index acquisition.

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,
 
2015
 
2014
 
2015
 
2014
Retail
 
 
 
 
 
 
 
OTC Trading Volume (billions)
$
1,029.8

 
$
605.4

 
$
2,893.6

 
$
1,699.9

Average Daily OTC Trading Volume (billions)
$
15.6

 
$
9.2