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EX-31.1 - EXHIBIT 31.1 - GAIN Capital Holdings, Inc.exhibit31_13-31x16.htm
EX-32.1 - EXHIBIT 32.1 - GAIN Capital Holdings, Inc.exhibit32_13-31x16.htm
EX-32.2 - EXHIBIT 32.2 - GAIN Capital Holdings, Inc.exhibit32_23-31x16.htm
EX-31.2 - EXHIBIT 31.2 - GAIN Capital Holdings, Inc.exhibit31_23-31x16.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 March 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     .
Commission File Number 001-35008
 
 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 May 4, 2016, the registrant had 48,450,924 shares of common stock, $0.00001 par value per share, outstanding.



GAIN Capital Holdings, Inc.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016
 
 
 
 
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2016 and 2015
 
Condensed Consolidated Statement of Changes in Shareholders' Equity for the three months ended March 31, 2016
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015
 
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 Sheet
(Unaudited)
(in thousands, except share data)
 
 
As of March 31, 2016
 
As of December 31, 2015
ASSETS:
 
 
 
Cash and cash equivalents
$
189,729

 
$
171,888

Cash and securities held for customers
875,962

 
920,621

Receivables from brokers, of which ($11,128) and ($12,568), respectively, are open contracts at fair value
119,952

 
121,153

Prepaid assets
6,122

 
7,835

Property and equipment, net of accumulated depreciation of ($48,104) and ($44,750), respectively
32,275

 
30,367

Intangible assets, net of accumulated amortization of ($51,598) and ($47,906), respectively
86,007

 
91,512

Goodwill
33,718

 
34,017

Other assets, net of allowance for doubtful accounts of ($7,646) and ($6,832), respectively
53,142

 
47,166

Total assets
$
1,396,907

 
$
1,424,559

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities
 
 
 
Payables to customers, of which ($145,115) and ($143,918) respectively, are open contracts at fair value
$
875,962

 
$
920,621

Accrued compensation and benefits
8,904

 
12,362

Accrued expenses and other liabilities
66,241

 
51,638

Income tax payable
5,819

 
1,068

Convertible senior notes
121,189

 
121,740

Total liabilities
$
1,078,115

 
$
1,107,429

Commitments and contingent liabilities

 

Redeemable non-controlling interests
$
11,296

 
$
11,046

Shareholders’ equity
 
 
 
Common stock ($0.00001 par value; 120 million shares authorized, 52,529,627 shares issued and 48,718,428 shares outstanding as of March 31, 2016; 120 million shares authorized, 52,072,884 shares issued and 48,771,015 shares outstanding as of December 31, 2015)
$

 
$

Accumulated other comprehensive loss
(8,610
)
 
(5,865
)
Additional paid-in capital
214,696

 
212,981

Treasury stock, at cost (3,811,199 shares at March 31, 2016 and 3,301,869 at December 31, 2015)
(25,409
)
 
(21,808
)
Retained earnings
126,819

 
120,776

Total shareholders’ equity
307,496

 
306,084

Total liabilities and shareholders’ equity
$
1,396,907

 
$
1,424,559

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

3


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(in thousands, except share and per share data)
 
Three Months Ended March 31,
 
2016

2015
REVENUE:
 
 
 
Retail revenue
$
95,042

 
$
72,942

Institutional revenue
6,707

 
9,871

Futures revenue
12,018

 
11,520

Other revenue
1,573

 
(1,366
)
Total non-interest revenue
115,340

 
92,967

Interest revenue
318

 
337

Interest expense
104

 
318

Total net interest revenue
214

 
19

Net revenue
$
115,554

 
$
92,986

EXPENSES:
 
 
 
Employee compensation and benefits
$
26,393

 
$
22,139

Selling and marketing
6,439

 
4,558

Referral fees
20,663

 
26,578

Trading expenses
8,433

 
6,975

General and administrative
16,038

 
9,371

Depreciation and amortization
3,153

 
1,975

Purchased intangible amortization
3,922

 
2,151

Communications and technology
5,279

 
2,758

Bad debt provision
572

 
3,324

Acquisition expenses

 
37

Restructuring expenses
781

 

Integration expenses
813

 
64

Legal settlement
9,412

 

Total operating expense
101,898

 
79,930

OPERATING PROFIT
13,656

 
13,056

Interest expense on long term borrowings
2,592

 
1,502

INCOME BEFORE INCOME TAX EXPENSE
11,064

 
11,554

Income tax expense
2,347

 
5,745

Equity in net loss of affiliate
(16
)
 

NET INCOME
8,701

 
5,809

Net income attributable to non-controlling interests
349

 
344

NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
8,352

 
5,465

Other comprehensive loss:


 


Foreign currency translation adjustment
(2,745
)
 
(2,248
)
NET COMPREHENSIVE INCOME
APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
$
5,607

 
$
3,217

Earnings per common share:


 


Basic
$
0.17

 
$
0.11

Diluted
$
0.17

 
$
0.11

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


 



4


Basic
48,622,816

 
43,206,628

Diluted
48,983,880

 
44,150,505


5


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
Loss
 
Total
 
Shares
 
Amount
 
 
 
 
 
BALANCE—December 31, 2015
48,771,015

 
$

 
$
(21,808
)
 
$
212,981

 
$
120,776

 
$
(5,865
)
 
$
306,084

Exercise of options
150,566

 

 

 
577

 

 

 
577

Conversion of restricted stock into common stock
306,177

 

 

 

 

 

 

Repurchase of shares
(509,330
)
 

 
(3,601
)
 

 

 

 
(3,601
)
Stock compensation expense

 

 

 
1,067

 

 

 
1,067

Tax benefit of stock options exercises

 

 

 
176

 

 

 
176

Convertible note buyback

 

 

 
(105
)
 

 

 
(105
)
Adjustment to the redemption value of put options related to non-controlling interests

 

 

 

 
99

 

 
99

Dividend declared ($0.05 quarterly dividend per share)

 

 

 

 
(2,408
)
 

 
(2,408
)
Foreign currency translation adjustment

 

 

 

 

 
(2,745
)
 
(2,745
)
Net income applicable to Gain Capital Holdings, Inc.

 

 

 

 
8,352

 

 
8,352

BALANCE—March 31, 2016
48,718,428

 
$

 
$
(25,409
)
 
$
214,696

 
$
126,819

 
$
(8,610
)
 
$
307,496

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


6


Gain Capital Holdings, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
8,701

 
$
5,809

Adjustments to reconcile net income to cash provided by/(used for) operating activities
 
 
 
Loss on foreign currency exchange rates
162

 
2,028

Depreciation and amortization
7,075

 
4,126

Non-cash integration costs
173

 

Deferred taxes
(169
)
 
201

Amortization of deferred financing costs
110

 
89

Bad debt provision
572

 
3,324

Convertible senior notes discount amortization
1,057

 
566

Stock compensation expense
1,067

 
1,204

Gain on extinguishment of debt
(89
)
 

Loss of equity method investment
16

 

Changes in operating assets and liabilities:
 
 
 
Cash and securities held for customers
45,873

 
(78,066
)
Receivables from brokers
4,159

 
(44,916
)
Prepaid assets
1,640

 
(495
)
Other assets
(6,416
)
 
2,265

Payables to customers
(45,873
)
 
78,066

Accrued compensation and benefits
(3,373
)
 
(11,096
)
Accrued expenses and other liabilities
15,071

 
(1
)
Income tax payable
4,353

 
814

Cash provided by/(used for) operating activities
34,109

 
(36,082
)
CASH FLOWS FROM INVESTING ACTIVITIES:

 

Purchases of property and equipment
(5,922
)
 
(1,214
)
Funding of acquisitions, net of cash acquired

 
(89
)
Cash used for investing activities
(5,922
)
 
(1,303
)
CASH FLOWS FROM FINANCING ACTIVITIES:

 

Contractual payments for acquisitions

 
(9,800
)
Proceeds from exercise of stock options
577

 
1,584

Purchase of treasury stock
(3,601
)
 

Tax benefit from employee stock option exercises
238

 
704

Dividend payments
(2,408
)
 
(2,170
)
Distributions to non-controlling interest holders

 
(410
)
Repurchase of convertible notes
(1,735
)
 

Cash used for financing activities
(6,929
)
 
(10,092
)
Effect of exchange rate changes on cash and cash equivalents
(3,417
)
 
(1,815
)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
17,841

 
(49,292
)
CASH AND CASH EQUIVALENTS—Beginning of period
171,888

 
139,351

CASH AND CASH EQUIVALENTS—End of period
$
189,729

 
$
90,059

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:

 

Cash (paid)/received during the year for:

 

Interest
$
(104
)
 
$
(34
)
Taxes
$
688

 
$
(1,923
)
Non-cash financing activities:
 
 
 
Adjustment to redemption value of non-controlling interests
99

 
(524
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

7


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. City Index (Holdings) Ltd (“City Index”) is the holding company of the Company's primary regulated entity outside of 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. (“GCUK1”) and GAIN Capital UK Limited ("GCUK2") are each registered in the United
Kingdom ("U.K.") and regulated by the Financial Conduct Authority (“FCA”) as full scope €730k IFPRU Investment Firms.
The following list includes each of the Company’s significant U.S. and international regulated subsidiaries as of March 31, 2016:

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 Limited
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 from City Index Group Limited.
GCUK2, GAIN Capital Australia Pty. Ltd. (“GCAU2”) , and GAIN Capital Singapore Pte. Ltd. ("GCS") 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.
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 financial statements for the interim periods. The financial statements are presented in accordance with accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements have been prepared in accordance with the 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 the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2015, as amended on May 2, 2016. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, after the elimination of inter-company transactions and balances.

In April 2015, the Financial Accounting Standards Board ("FASB") issued new guidance regarding the accounting for debt issuance costs. The guidance requires a company to present any deferred financing costs from debt issuance as a reduction of debt. The Company has adopted this guidance in the first quarter of 2016. The table below shows the impact of this adoption on the Company's reported consolidated balance sheet.

8



 
As of
December 31, 2015 (As Reported)
Adjustment
As of
 December 31, 2015 (Adjusted)
Assets:
 
 
 
Other assets
47,422

(256
)
47,166

Liabilities:
 
 
 
Convertible senior notes
121,996

(256
)
121,740




2. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2015, 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.  The Company adopted this guidance in the first quarter of 2016; however, the accounting for all acquisitions was finalized prior to January 1, 2016 and, therefore, there was no impact on the Company following adoption of this new guidance.

In March 2016, FASB issued new guidance regarding the accounting for investments - equity method and joint ventures. The FASB issued this update to eliminate the requirement to retroactively adopt the equity method of accounting. The guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently assessing the impact of adopting this guidance on its financial statements.

In March 2016, the FASB issued new guidance regarding the accounting for stock compensation. The FASB issued this update to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, classification of employee taxes paid on the Statement of Cash Flows when an employer withholds shares for tax-withholding purposes, expected term, intrinsic value, and eliminating the indefinite deferral. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact of adopting this guidance on its financial statements.

In March and April 2016, the FASB issued new guidance regarding the accounting for revenue from contracts with customers. The FASB issued this update to improve the operability and understandability of the implementation guidance on principal versus agent considerations, and to provide clarification on identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The guidance affects the revenue recognition guidance issued in May 2014, which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of the revenue recognition guidance issued in May 2014. The Company is currently assessing the impact of adopting this guidance on its financial statements.

In February 2016, the FASB issued new guidance regarding the accounting for leases. The FASB issued this update to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements. The guidance is effective for fiscal years beginning after December 15,
2018, including interim periods within that fiscal year. The Company is currently assessing the impact on its consolidated
financial statements of adopting this guidance.

In May 2014, the FASB issued new revenue recognition guidance that supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. The guidance requires a company to recognize revenue when it transfers promised goods or services to customers. Recognition should be in an amount that reflects the consideration to which the company expects to be entitled in exchange for those services. The guidance requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenues recognized. The guidance is effective for annual periods beginning after December 15, 2016. On April 1, 2015, the FASB voted to propose a deferral of the effective date of this accounting guidance by a year to annual periods beginning after December 15, 2017. As

9


part of the proposal, early application would be permitted in annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently assessing the impact of adopting this guidance on its financial statements.

3. FAIR VALUE INFORMATION

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 three level hierarchy
that ranks the quality and reliability of information used in developing fair value estimates for financial instruments. The
hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. In cases
where two or more levels of inputs are used to determine fair value, a financial instrument's level is determined based on the
lowest level input that is considered significant to the fair value measurement in its entirety. The three levels of fair value
hierarchy are summarized below:

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 March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Customer derivative positions
$

 
$
145,115

 
$

 
$
145,115

Broker derivative contracts

 
(11,128
)
 

 
(11,128
)
Money market accounts
26,056

 

 

 
26,056

Certificates of deposit
174

 

 

 
174

Investment in gold
123

 

 

 
123

Total
$
26,353

 
$
133,987

 
$

 
$
160,340

 
 
Fair Value Measurements on a Recurring Basis
as of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Customer derivative positions
$

 
$
143,918

 
$

 
$
143,918

Broker derivative contracts

 
(12,568
)
 

 
(12,568
)
Money market accounts
25,167

 

 

 
25,167

Certificates of deposit
174

 

 

 
174

Investment in gold
107

 

 

 
107

Total
$
25,448

 
$
131,350

 
$

 
$
156,798

The Company has not changed its valuation techniques for measuring the fair value of any financial assets and liabilities during the three months ended March 31, 2016, nor has there been any movement between levels during this period.

10


Level 1 Financial Assets

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 are recorded in Other Assets and the
investment in gold is 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

The Company does not have any level 3 Financial Assets or Liabilities on March 31, 2016 or December 31, 2015.

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 sheet (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. 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.



11



 
As of March 31, 2016
 
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
$
131,080

 
$
131,080

 
$

 
$
131,080

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
$
1,021,077

 
$
1,021,077

 
$

 
$
1,021,077

 
$

Convertible senior notes
$
121,189

 
$
118,470

 
$

 
$
118,470

 
$


 
As of December 31, 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
$
133,721

 
$
133,721

 
$

 
$
133,721

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
$
1,064,539

 
$
1,064,539

 
$

 
$
1,064,539

 
$

Convertible senior notes
$
121,740

 
$
122,264

 
$

 
$
122,264

 
$



4. DERIVATIVES
The Company's contracts with its customers and its liquidity providers are deemed to be derivative instruments. The table below represents the fair values of the Company’s derivative instruments reported within Receivables from brokers and Payables to customers on the accompanying condensed Consolidated Balance Sheet (amounts in thousands):
 
March 31, 2016
 
Gross amounts of
assets for
derivative open
positions at fair
value
 
Gross amount of
(liabilities) for
derivative open
positions at fair
value
 
Net amounts of
assets/(liabilities)
for derivative
open positions at
fair value
Derivative Instruments:

 

 

Foreign currency exchange contracts
$
133,525

 
$
(52,545
)
 
$
80,980

CFD contracts
91,195

 
(46,248
)
 
44,947

Metals contracts
12,227

 
(4,167
)
 
8,060

Total
$
236,947

 
$
(102,960
)
 
$
133,987

 
 
 
 
 
 
 
March 31, 2016
 
Cash Collateral

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

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





Receivables from brokers
$
131,080

 
$
(11,128
)
 
$
119,952

Payables to customers
$
(1,021,077
)
 
$
145,115

 
$
(875,962
)

12


 
December 31, 2015
 
Gross amounts of
assets for
derivative open
positions at fair
value
 
Gross amount of
(liabilities) for
derivative open
positions at fair
value
 
Net amounts of
assets/(liabilities)
for derivative
open positions at
fair value
Derivative Instruments:
 
 
 
 
 
Foreign currency exchange contracts
$
138,140

 
$
(59,468
)
 
$
78,672

CFD contracts
111,844

 
(70,429
)
 
41,415

Metals contracts
18,866

 
(7,603
)
 
11,263

Total
$
268,850

 
$
(137,500
)
 
$
131,350

 
 
 
 
 
 
 
December 31, 2015
 
Cash Collateral
 
Net amounts of
assets/liabilities
for derivative
open positions at
fair value
 
Net amounts of
assets/liabilities
presented in the
balance sheet
Derivative Assets/Liabilities:
 
 
 
 
 
Receivables from brokers
$
133,721

 
$
(12,568
)
 
$
121,153

Payables to customers
$
(1,064,539
)
 
$
143,918

 
$
(920,621
)
The Company’s derivatives include different underlyings, which vary in price. Foreign exchange contracts typically have prices less than two dollars, while certain metals contracts and CFDs can be considerably higher priced. The table below presents the number of contracts reported within Receivables from brokers and Payables to customers on the consolidated balance sheet (amounts in thousands):
 
March 31, 2016
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
2,277,094

 
2,744,129

CFD contracts
132,514

 
236,429

Metals contracts
894

 
336

Total
2,410,502

 
2,980,894


 
December 31, 2015
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,106,885

 
2,931,109

CFD contracts
139,465

 
285,640

Metals contracts
1,278

 
308

Total
3,247,628

 
3,217,057


The Company did not designate any of its derivatives as hedging instruments at March 31, 2016 or December 31, 2015. 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 months ended March 31, 2016 and 2015 were as follows (amounts in thousands): 

13



 
Three Months Ended March 31,
 
2016
 
2015
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
$
54,297

 
$
36,660

CFD contracts
35,222

 
29,064

Metals contracts
4,960

 
5,988

Total
$
94,479

 
$
71,712


5. RECEIVABLES FROM BROKERS
Amounts receivable from brokers consisted of the following as of (amounts in thousands): 
 
March 31, 2016
 
December 31, 2015
Required collateral
$
127,326

 
$
129,042

Excess from futures broker - Restricted
3,754

 
4,679

Open foreign exchange positions
(11,128
)
 
(12,568
)
Total
$
119,952

 
$
121,153


The Company has posted funds with brokers as collateral required by agreements for holding trading positions. These amounts are reflected as Receivables from brokers on the Condensed Consolidated Balance Sheet.

6. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements and capitalized software development costs, consisted of the following as of (amounts in thousands):

 
March 31, 2016
 
December 31, 2015
Software
$
47,736

 
$
44,194

Computer equipment
16,061

 
14,300

Leasehold improvements
11,105

 
11,200

Telephone equipment
815

 
881

Office equipment
2,114

 
2,113

Furniture and fixtures
1,881

 
1,761

Web site development costs
667

 
668

Gross property and equipment
80,379

 
75,117

Less: Accumulated depreciation and amortization
(48,104
)
 
(44,750
)
Property and equipment, net
$
32,275

 
$
30,367

Depreciation and amortization expense for property and equipment was $3.2 million and $2.0 million for the three months ended March 31, 2016 and 2015, 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 $0.2 million for the three months ended March 31, 2016.


7. INTANGIBLE ASSETS
The Company's various finite-lived intangible assets consisted of the following as of (amounts in thousands): 

14


 
 
March 31, 2016
 
December 31, 2015
Intangibles
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Customer list
$
55,425

 
$
(16,054
)
 
$
39,371

 
$
56,388

 
$
(14,111
)
 
$
42,277

Technology
73,714

 
(33,608
)
 
40,106

 
74,378

 
(32,117
)
 
42,261

Trademark
8,103

 
(1,936
)
 
6,167

 
8,289

 
(1,678
)
 
6,611

Total finite lived intangibles
137,242

 
(51,598
)
 
85,644

 
139,055

 
(47,906
)
 
91,149

Trademark not subject to amortization (1)
363

 

 
363

 
363

 

 
363

Total intangibles
$
137,605

 
$
(51,598
)
 
$
86,007

 
$
139,418

 
$
(47,906
)
 
$
91,512


(1) These indefinite-life trademarks relate to the Forex.com and foreignexchange.com domain names where management determined there was no legal, regulatory or technological limitation on their useful lives. These trademarks are also supported annually in the Company's impairment test for intangible assets.

The Company has the following identifiable intangible assets as of March 31, 2016:
Intangible Asset
Amount (in thousands)
 
Weighted average amortization period
Customer list
$
55,425

 
7.6 years
Technology
73,714

 
8.9 years
Trademark (1)
8,466

 
6.7 years

$
137,605

 

(1) Trademarks with indefinite lives, as described above, comprise $0.4 million of the $8.5 million total trademark value.
Amortization expense for the purchased intangibles was $3.9 million and $2.2 million for the three months ended March 31, 2016 and 2015, respectively.

Goodwill
Goodwill is calculated as the difference between the cost of acquisition of an acquired business and the fair value of the net identifiable assets of that business. As of March 31, 2016 and December 31, 2015, the Company had recorded goodwill of approximately $33.7 million and $34.0 million, respectively. The decrease of $0.3 million was related to foreign currency translation adjustments.
The following represents the carrying amount of goodwill by segment (amounts in thousands):

 
Retail
Institutional
Futures
Total
Carrying amount of goodwill as of December 31, 2015
$
26,722

$
4,788

$
2,507

$
34,017

Foreign currency translation adjustments
$
(235
)
$
(42
)
$
(22
)
$
(299
)
Carrying amount of goodwill as of March 31, 2016
$
26,487

$
4,746

$
2,485

$
33,718




15


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

 
March 31, 2016
 
December 31, 2015
Vendor and security deposits
$
12,855

 
$
11,486

Income tax receivable
11,073

 
9,482

Deferred tax assets, net
18,235

 
17,827

GTX trade receivables
5,036

 
4,881

Customer debit positions
7,995


7,340

Allowance on customer debit positions
(7,646
)

(6,832
)
Miscellaneous receivables
4,749

 
2,160

Equity method investment
845

 
822

 
$
53,142

 
$
47,166



9. RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company have personal funds on deposit in separate customer accounts with the Company. These accounts are recorded in Payables to customers on the condensed consolidated balance sheet. The aggregate amount of these funds was $0.3 million and $0.3 million at March 31, 2016 and December 31, 2015, 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 $10.5 million and $21.7 million at March 31, 2016 and December 31, 2015, respectively.

16



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. This acquisition was made to strengthen and diversify the Company's existing global footprint in the retail business.

The 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, inclusive of 4,787,234 shares to be held in escrow, and 4.125% unsecured Convertible Senior Notes with an aggregate principal amount of $60.0 million and fair value of $65.0 million, inclusive of an aggregate principal amount of $54.0 million to be held in escrow. In addition, the Company paid City Index approximately $22.4 million, which was used to settle certain inter-company liabilities between City Index and City Index Group Limited (its former parent company).


The purchase price was derived as follows (amounts in thousands):
Cash
$
6,103

Convertible senior notes
65,000

Common stock issued
45,100

Total purchase price
$
116,203

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

Cash
$
10,546

Cash and securities held for customers
281,576

Receivable from brokers
35,974

Property and equipment
10,466

Prepaid assets
4,038

Other assets
5,119

Total tangible assets
347,719

Total liabilities assumed
299,000

Net assets acquired
48,719

Identifiable intangible assets:
 
Customer list
34,277

Trade name
6,645

Technology
26,157

Intangible assets, net
67,079

Goodwill
$
405



Pro Forma Information:
The following unaudited pro forma data is presented as if the acquisition of City Index had occurred on January 1, 2015. 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 three months ended March 31, 2015 were as follows (amounts in thousands):

17



 
For the Three Months Ended December 31,
 
2015
REVENUE:
 
Total non-interest revenue
$
129,820

Interest revenue
420

Interest expense
864

Total net interest revenue
(444
)
Net revenue
129,376

EXPENSES:
 
Depreciation and amortization
2,619

Purchased intangible amortization
3,319

Other expense items
109,423

Total operating expense
115,361

OPERATING PROFIT
14,015

Interest on long term borrowings
2,513

INCOME BEFORE INCOME TAX EXPENSE
11,502

Income tax expense
7,219

NET INCOME
4,283

Net income attributable to non-controlling interests
344

Net income applicable to Gain Capital Holdings, Inc.
$
3,939

Restructuring

During the first quarter of 2016, the Company incurred restructuring expenses related to the global headcount reductions following the City Index acquisition. The Company incurred $0.8 million of restructuring expenses for the three months ended March 31, 2016. 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 sheet.
 
For the Three Months Ended March 31,
 
2016
Restructuring liability as of January 1, 2016
$
499

2016 restructuring expenses
781

Payments made in 2016
(567
)
Restructuring liability as of March 31, 2016
$
713



11. NON-CONTROLLING INTEREST

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 exercisable 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 Sheet.

18



The non-controlling interests' carrying value is determined by the Company's purchase prices and the non-controlling interests' share of the Company's subsequent net income. This value is benchmarked against the redemption value of the sellers' put options. The carrying value is adjusted to the latter, provided that it does not fall below the initial carrying values, as determined by the Company's purchase price allocation. The Company has made a policy election to reflect any changes caused by such an adjustment in retained earnings, rather than in current earnings. The Company recorded an adjustment of $(0.1) million for the three months ended March 31, 2016.

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


Redeemable non-controlling interests
January 1, 2016
$
11,046

Adjustment to the redemption value of non-controlling interests
(99
)
Net income attributable to non-controlling interests
349

Distributions to non-controlling interest holders

March 31, 2016
$
11,296



12. CONVERTIBLE SENIOR NOTES

Convertible Senior Notes due 2020

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.

Convertible Senior Notes due 2018
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, commenced on June 1, 2014. During the quarter ending March 31, 2016, the Company repurchased $1.9 million in principal amount of the convertible senior notes due in 2018, for an aggregate purchase price of $1.7 million.

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 of the Convertible Senior Notes as of March 31, 2016, and December 31, 2015 were as follows (amounts in thousands):
 
March 31, 2016
 
December 31, 2015
Liability component - principal
$
138,150

 
$
140,000

Deferred bond discount
16,728

 
18,004

Deferred financing cost
233

 
256

Liability component - net carrying value
$
121,189

 
$
121,740

 
 
 
 
Additional paid in capital
$
27,822

 
$
27,920

Discount attributable to equity
(419
)
 
(412
)
Equity component
$
27,403

 
$
27,508



19


In April 2015, the FASB issued new guidance regarding the accounting for debt issuance costs. The guidance requires a company to present any deferred financing costs from debt issuance as a reduction of debt, which is a change from current presentation in assets. The Company has adopted this guidance in the first quarter of 2016.

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):

 
Three Months Ended
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
Interest expense - stated coupon rate
$
1,444

 
$
825

Interest expense - amortization of deferred bond discount and costs
1,079

 
588

Total interest expense - convertible senior notes
$
2,523

 
$
1,413



20


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. Diluted weighted average common shares include vested and unvested stock options, vested restricted stock units and vested restricted stock awards which are to be delivered as soon as administratively practicable on or after December 31, 2016, unvested restricted stock units and unvested restricted stock awards. Approximately 0.4 million and 0.1 million stock options were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2016, and three months ended March 31, 2015, respectively, as they were anti-dilutive.

Diluted earnings per share excludes any shares of Company common stock potentially issuable under the Company's convertible senior notes, 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 indenture 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 March 31,
 
2016
 
2015
Net income applicable to GAIN Capital Holdings, Inc.
$
8,352

 
$
5,465

Adjustment to the redemption value of non-controlling interests (1)
99

 
(524
)
Net income available to GAIN common shareholders
$
8,451

 
$
4,941

Weighted average common shares outstanding:

 

Basic weighted average common shares outstanding
48,622,816

 
43,206,628

Effect of dilutive securities:

 

Stock options
172,193

 
581,086

RSUs/RSAs
188,871

 
362,791

Diluted weighted average common shares outstanding
48,983,880

 
44,150,505

Earnings per common share

 

Basic
$
0.17

 
$
0.11

Diluted
$
0.17

 
$
0.11

 
(1)
During the three months ended March 31, 2016, the Company recorded an adjustment of $0.1 million to the carrying value of the put options related to the Company's redeemable non-controlling interests, which increased retained earnings and decreased non-controlling interests. During the three months ended March 31, 2015, an adjustment of $(0.5) million was recorded to the carrying value of the put options related to the Company's redeemable non-controlling interests, which decreased retained earnings and increased non-controlling interests. The adjustment to the carrying value increased earnings available to the Company's shareholders for purposes of calculating basic and diluted earnings per common share for the three months ended March 31, 2016 and decreased earnings available to the Company's shareholders for purposes of calculating basic and diluted earnings per common share for the three months ended March 31, 2015
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.

21


For certain legal proceedings, the Company can estimate possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued. For certain other legal proceedings, the Company cannot reasonably estimate such losses, if any, since the Company cannot predict if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues must be developed, including the need to discover and determine important factual matters and the need to address novel or unsettled legal questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any proceeding.
Litigation

On February 16, 2012, the Company received a Letter of Claim on behalf of certain individuals who had lost money in an investment scheme operated by a third-party money management firm, incorporated in the United Kingdom, which has since been closed down by the United Kingdom’s Financial Services Authority. The investment firm, Cameron Farley Ltd, had opened a corporate account with the Company and invested the individuals’ money, representing such funds as its own, while operating a fraudulent scheme. Though a complaint had 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 completed discovery and provided disclosure on October 30, 2015. On April 28, 2016, the parties entered into a Settlement Agreement in which the Company agreed to make a one-time settlement payment in exchange for a full and final settlement of all claims. The settlement amount, net of anticipated insurance recoveries, totaled approximately $9.4 million.


15. INCOME TAXES
The Company’s provision for income taxes was approximately $2.3 million and $5.7 million for the three months ended March 31, 2016 and the three months ended March 31, 2015, respectively. These amounts reflect effective tax rates of 21.2% and 49.7% for the three months ended March 31, 2016 and the three months ended March 31, 2015, respectively, and reflect the Company's estimate of the annual effective tax rate adjusted for certain discrete items. Changes in the Company's effective rate arise primarily from changes in the geographic mix of revenues and expenses.
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company’s net deferred tax assets are included in Other assets on the condensed consolidated balance sheet.

22


16. REGULATORY REQUIREMENTS
The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of March 31, 2016 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
$
29.1

 
$
44.5

 
$
15.4

 
153
%
GAIN Capital-Forex.com U.K., Ltd.
25.1

 
60.3

 
35.2

 
240
%
GAIN Capital Japan Co., Ltd.
1.4

 
9.7

 
8.3

 
693
%
GAIN Capital-Forex.com Hong Kong, Ltd.
1.9

 
3.6

 
1.7

 
189
%
GAIN Capital Forex.com Australia, Pty. Ltd.
0.8

 
2.9

 
2.1

 
363
%
Galvan Research and Trading, Ltd.
0.7

 
4.2

 
3.5

 
600
%
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.
0.2

 
0.3

 
0.1

 
150
%
Gain Capital UK, Ltd.
60.4

 
129.9

 
69.5

 
215
%
Gain Capital Singapore Pte, Ltd.
0.6

 
7.8

 
7.2

 
1,300
%
Gain Capital Australia Pty Ltd.
0.8

 
3.0

 
2.2

 
375
%
Global Assets Advisors, LLC
0.1

 
1.6

 
1.5

 
1,600
%
Total
$
121.4

 
$
269.6

 
$
148.2

 
222
%

17. SEGMENT INFORMATION
The Company's segment reporting structure includes three operating segments, retail, institutional and futures. These operating segments are discussed in more detail below. The Company also reports information relating to general corporate services in a fourth component, corporate and other. Information in these condensed consolidated financial statements reflects the information presented to the chief operating decision maker, and prior periods have been retrospectively adjusted to reflect the current segment structure. The chief operating decision maker does not review total assets by operating segment.

Retail Segment

Business in the retail segment is conducted primarily through the Company's FOREX.com and City Index brands. The Company provides its retail customers around the world with access to a diverse range of 12,500 global financial markets, including spot forex, precious metals and CFDs on commodities, indices, individual equities and interest rate products, as well as OTC options on forex. In the United Kingdom, the Company also offer spread bets, which are investment products similar to CFDs, but that offer more favorable tax treatment to residents of that country.

Institutional Segment

The institutional segment provides agency execution services and offers access to markets and self-directed trading in foreign exchange, commodities, equities, options and futures via an electronic communications network, or ECN, through the Company's GTX platform. The Company also offers high touch sales and trading aided by a team of sales employees.

Futures Segment

The futures segment offers execution and related services for exchange-traded futures and futures options on major U.S. and European exchanges. The Company offers futures services through its subsidiary, Group, LLC, under the GAIN Capital Futures brand. In addition, in 2014, the Company expanded its futures business by acquiring majority interests in GAA and TT.

Corporate and other


23


Corporate and other provides general corporate services to the Company's segments and also includes eliminations between operating segments which were $(0.4) million, $0.0 million for the three months ended March 31, 2016 and 2015. Corporate and other revenue primarily comprises foreign currency transaction gains and losses.
Selected financial information by segment is presented in the following tables (amounts in thousands):
Retail
 
Three Months Ended March 31,
 
2016
 
2015
Net revenue
$
96,705

 
$
73,342

 
 
 
 
Employee compensation and benefits
16,702

 
12,157

Selling and marketing
6,213

 
4,207

Referral fees
16,602

 
22,674

Other operating expenses
20,881

 
11,286

Segment profit
$
36,307

 
$
23,018

 
Institutional
 
Three Months Ended March 31,
 
2016
 
2015
Net revenue
$
7,119

 
$
10,074

 
 
 
 
Employee compensation and benefits
3,202

 
3,960

Selling and marketing
6

 
71

Other operating expenses
2,440

 
2,512

Segment profit
$
1,471

 
$
3,531

 
Futures
 
Three Months Ended March 31,
 
2016
 
2015
Net revenue
$
12,204

 
11,536

 
 
 
 
Employee compensation and benefits
2,986

 
2,519

Selling and marketing
220

 
280

Referral fees
4,061

 
3,904

Other operating expenses
3,983

 
3,611

Segment profit
$
954

 
$
1,222

 
 
 
 
Corporate and Other
 
Three Months Ended March 31,
 
2016
 
2015
Other revenue
$
(474
)
 
$
(1,966
)
 
 
 
 
Employee compensation and benefits
3,503

 
3,503

Other operating expenses
3,018

 
2,519

Loss
$
(6,995
)
 
$
(7,988
)

24



Reconciliation of operating segment profit to Income before income tax expense
 
Three Months Ended March 31,
 
2016
 
2015
Retail segment
$
36,307

 
$
23,018

Institutional segment
1,471

 
3,531

Futures segment
954

 
1,222

Corporate and other
(6,995
)
 
(7,988
)
SEGMENT PROFIT
31,737

 
19,783

Depreciation and amortization
3,153

 
1,975

Purchased intangible amortization
3,922

 
2,151

Acquisition expenses

 
37

Restructuring expenses
781

 

Integration expenses
813

 
64

Legal settlement
9,412

 

SNB bad debt provision

 
2,500

OPERATING PROFIT
13,656

 
13,056

Interest expense on long term borrowings
2,592

 
1,502

INCOME BEFORE INCOME TAX EXPENSE
$
11,064

 
$
11,554



18. SUBSEQUENT EVENTS

On April 28, 2016, the Company entered into a Settlement Agreement with the claimants in the Cameron Farley Ltd. matter discussed in Note 14. Pursuant to the terms of the Settlement Agreement, the Company agreed to make a one-time settlement payment in exchange for a full and final settlement of all claims. The settlement amount, net of anticipated insurance recoveries, totaled approximately $9.4 million.

In May 2015, the Company announced the payment of a $0.05 dividend per share of Common Stock payable on June 20, 2016 to stockholders of record on June 13, 2016.








25


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
In this Quarterly Report on Form 10-Q, the words “GAIN”, the “Company”, “our”, “we” and “us” refer to GAIN Capital Holdings, Inc. and, except as otherwise specified herein, to GAIN’s subsidiaries. Our fiscal quarter ended on March 31, 2016.
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, 2015, as amended on May 2, 2016, 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, 2015, as amended on May 2, 2016, 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. Our retail, institutional and futures segments service customers in more than 180 countries worldwide, and we conduct business from our offices in Bedminster, New Jersey; Jersey City, New Jersey; London, England; Cornwall, England; Chicago, Illinois; Powell, Ohio; Grand Rapids, Michigan; Tokyo, Japan; Sydney, Australia; Beijing, China; Shanghai, China; Pembroke, Bermuda; Hong Kong and Singapore.
We offer our customers access to a diverse range of over 12,500 financial products, including spot foreign exchange, or forex, and precious metals trading, as well as “contracts for difference”, or CFDs, which are investment products with returns linked to the performance of underlying asset. We offer CFDs on currencies, commodities, indices, individual equities, bonds and interest rate products. We also support trading of exchange-traded futures and options on futures on more than 30 global exchanges. In the United Kingdom, we 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 16 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 customer’s trading activity. Today our customers can trade through web-based, downloadable and mobile trading platforms and have access to innovative trading tools to assist them with research and analysis, automated trading and account management.

We operate our business in three segments. Through our retail segment, we provide our retail customers around the world with access to a diverse range of global financial markets, including spot forex, precious metals, spread bets and CFDs on commodities, indices, individual equities and interest rate products, as well OTC options on forex. Our institutional segment provides agency execution services and offers access to markets and self-directed trading in foreign exchange, commodities, equities, options and futures via our GTX platform. Our futures segment offers execution and risk management services for exchange-traded futures and futures options on major U.S. and European futures and options exchanges. Each of our operating segments is discussed in more detail below.

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

26


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 and Trading Volatility
Our revenue and operating results may vary significantly from period to period due primarily to movements and trends in the world’s financial markets and to fluctuations in market volatility. As a general rule, our businesses typically benefit from volatility in the markets that we serve, as periods of increased volatility often coincide with higher levels of trading by our clients and a higher volume of transactions. However, periods of extreme volatility may result in significant market dislocations that can also lead clients to reduce their trading activity. In addition, volatility that results in trading within a relatively narrow band of prices may lead to less profitable trading activity. Also, low or extremely high market volatility can adversely affect our ability to profitably manage our net exposure, which represents the unhedged portion of the trading positions we enter into with customers in our retail segment.

Overall market conditions in the three months ended March 31, 2016 reflected increased volatility, and as a result, we experienced a level of revenue capture in our retail segment which was higher than our trailing twelve- and twenty-four month averages.

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.

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. New regulatory requirements and 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 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 and fair value of $65.0 million, including convertible senior notes with an aggregate principal amount of $54.0 million to be held in escrow. In addition, we paid City Index approximately $22.4 million, which was used to settle certain inter-company liabilities between City Index and City Index Group Limited.

Key Income Statement Line Items and Key Operating Metrics
The following table sets forth key financial metrics for our business for the periods indicated: 
 
For the Three Months Ended March 31,
 
2016
 
2015
Net revenue
$
115,554

 
$
92,986

Net income applicable to GAIN Capital Holdings, Inc.
$
8,352


$
5,465



27


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

Retail Segment Revenue

Retail segment revenue is our largest source of revenue. Retail segment revenue is comprised of trading revenue from our retail segment, commission revenue from our sales trader and advisory businesses, as well as inactivity fees and interest revenue.

Prior to our acquisitions of Global Futures and Forex, Ltd., or GFT, and City Index, trading revenue in our retail segment 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 revenue in our retail segment.

We generate revenue in our retail segment in two ways: (1) trading revenue from our market making activities for OTC products, earned principally from the bid/offer spread we offer our customers and any net gains and losses generated through changes in the market value of the currencies and other products held in our net exposure and (2) fees, including financing charges for positions held overnight, commissions on equity CFD trades and advisory services, and other account related fees.

For the three months ended March 31, 2016 and March 31, 2015, retail segment revenue represented 83.7% and 78.9% of our total net revenue, respectively.
For the three months ended March 31, 2016 and March 31, 2015, approximately 96% and 94%, respectively, of our average daily retail trading volume was either naturally hedged or hedged by us with one of our liquidity providers, and the remaining 4% and 6%, respectively, of our average daily retail trading volume consisted of our net exposure. 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 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.

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 the latter part of 2015, our sales trader business was fully integrated into the rest of the retail segment.

Institutional Segment Revenue

Institutional segment revenue consists primarily of revenue from our GTX business, which provides a proprietary trading platform and sales and trading services to institutions as well as interest revenue and expense. 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.
Our institutional segment revenue includes revenue generated by intercompany transactions with other segments/affiliates that
are eliminated when calculating our consolidated net revenue. This intercompany revenue totaled approximately $0.4 million
for the three months ended March 31, 2016.

Futures Segment Revenue

Futures revenue is comprised primarily of commissions earned on futures and futures options trades, as well as interest
revenue. We are not exposed to market risk in connection with customer trades in our futures segment.

Corporate and Other Revenue
Corporate and other revenue primarily comprises foreign currency transaction gains and losses.


28


Net Interest Revenue / Expense
Net interest revenue/expense consists primarily of the revenue generated by our cash and customer cash held by us at banks and on deposit as collateral with our liquidity providers, less interest paid to our customers.
Our cash and customer cash is generally invested in money market funds, which primarily invest in short-term U.S. government securities or treasury bills. Interest paid to customers varies primarily due to the net value of a customer account. 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 revenue was $0.2 million for the three months ended March 31, 2016. Net interest revenue was negligible for the three months ended March 31, 2015.
Expenses
Our expenses principally comprise employee compensation and benefits, selling and marketing, referral fees, trading expenses, general and administrative expenses, communications and technology expenses, 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 from our white label partners and introducing brokers, the specific terms of our agreements with the white label partners and introducing brokers, which vary on a partner-by-partner and regional basis, and the relative percentage of trading volume generated from particular relationships in any given period. The majority of our white label and introducing broker partners are paid based on the trading volume generated by the customers they introduce, directly or indirectly, to us, rather than on a revenue sharing basis. As such, during periods in which their customers’ trading activity is not profitable for us, if the associated trading volume remains high, we may be required to make larger payments to these partners despite the fact that we are generating lower revenue from their customers.  Our indirect business accounted for 46.1% and 47.9% of retail trading volume in the three months ended March 31, 2016 and March 31, 2015, 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.


29


Purchased Intangible Amortization
Purchased intangible amortization consists of amortization related to intangible assets we acquired since 2012 in connection with our acquisitions. The principal intangible assets acquired were technology, customer assets and trademarks. These intangible assets have 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.

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

Restructuring Expenses
For the three months ended March 31, 2016, 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 months ended March 31, 2015, we incurred acquisition-related expenses, which included costs, such as legal, accounting, valuation and other costs specified in accounting guidance. These costs are expensed as incurred.

Integration Expenses
For the three months ended March 31, 2016 and March 31, 2015, we incurred integration expenses, which are acquisition related costs that do not meet the definition of acquisition costs specified in accounting guidance. These costs include retention bonuses paid to employees and the cost of retiring redundant assets.

Legal Settlement
On April 28, 2016, we entered into a settlement agreement with the claimants in the Cameron Farley Ltd. matter discussed below in "Part II - Other Information - Item 1. Legal Proceedings". Pursuant to the terms of the settlement agreement, we agreed to make a one-time settlement payment in exchange for a full and final settlement of all claims. The settlement amount, net of anticipated insurance recoveries, totaled approximately $9.4 million.

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.
Operating Metrics
The following table sets forth key operating metrics for our business for the periods indicated: 
 
For the Three Months Ended March 31,
 
2016
 
2015
Retail Segment
 
 
 
OTC Trading Volume (billions)
$
861.7

 
$
894.6

OTC Average Daily Volume (billions)
$
13.5

 
$
14.2

Active OTC Accounts
136,559

 
99,017

Client Assets (millions)
$
639.4

 
$
675.6

 
 
 
 
Institutional Segment
 
 
 
ECN Volume (billions)
$
531.6

 
$
495.7

ECN Average Daily Volume (billions)
$
8.3

 
$
7.9

Swap Dealer Volume (billions)
$
186.6

 
$
240.8

Swap Dealer Average Daily Volume (billions)
$
2.9

 
$
3.8


30


 
 
 
 
Futures Segment
 
 
 
Futures Contracts
2,334,308

 
2,381,073

Futures Average Daily Contracts
38,267

 
39,034

Active Futures Accounts
8,890

 
8,562

Client Assets (millions)
$
236.6

 
$
245.0

OTC Trading Volume
OTC trading volume is the U.S. dollar equivalent of the aggregate notional value of OTC trades executed by our retail customers. Approximately 54.5% of our customer trading volume for the three months ended March 31, 2016 was generated by our retail businesses, compared to 54.8% for the three months ended March 31, 2015.

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

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

Client Assets
Client assets represent amounts due to clients, including customer deposits and unrealized gains or losses arising from open positions.
ECN Volume
ECN volume is the U.S. dollar equivalent of the aggregate notional value of trades executed on our GTX platform.
ECN Average Daily Volume
ECN average daily volume is the U.S. dollar equivalent of the aggregate notional value of trades executed on our GTX platform in a given period divided by the number of trading days in the given period.
Swap Dealer Volume
Swap dealer volume is the U.S. dollar equivalent of the aggregate notional value of trades executed through our non-platform institutional trading services.
Swap Dealer Average Daily Volume
Swap dealer average daily volume is the U.S. dollar equivalent of the aggregate notional value of trades executed through our non-platform institutional trading services in a given period divided by the number of trading days in the given period.

Futures Contracts
Futures contracts represent the total number of contracts transacted by customers of our futures segment.

Futures Average Daily Contracts
Average daily futures contracts is the number of futures contracts transacted by our futures customers in a given period divided by the number of trading days in the given period.

Active Futures Accounts
Active futures accounts represent customers who executed at least one futures trade during the relevant period.

We believe that our customer trading volumes are driven by eight main factors. Four of these factors are broad external factors outside of our control that generally impact the market for leveraged trading, as well as customer trading volumes, and include:
overall economic conditions and outlook;

31


volatility of financial markets;
legislative changes; and
regulatory changes.
The volatility of financial markets has generally been positively correlated with customer trading volume. Our customer trading volume is also affected by the following additional factors:
the effectiveness of our sales activities;
the competitiveness of our products and services;
the effectiveness of our customer service team; and
the effectiveness of our marketing activities.

In order to increase customer trading volume, we focus our marketing, customer service and education activities on attracting new customers and extending the duration and scope of the relationship our customers have with us.

For the three months ended March 31, 2016 and March 31, 2015, no single retail or institutional customer accounted for more than 2.5% of our revenue for the period.





32


RESULTS OF OPERATIONS
Revenue
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
REVENUE:
 
 
 
Retail revenue
$
95,042

 
$
72,942

Institutional revenue
6,707

 
9,871

Futures revenue
12,018

 
11,520

Other revenue
1,573

 
(1,366
)
Total non-interest revenue
115,340

 
92,967

Interest revenue
318

 
337

Interest expense
104

 
318

Total net interest revenue
214

 
19

Net revenue
$
115,554

 
$
92,986

Our total net revenue increased $22.6 million, or 24.3%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015.
Retail revenue for the three months ended March 31, 2016 increased $22.1 million, or 30.3%, compared to the three months ended March 31, 2015. The increase was primarily a result of the City Index acquisition on April 1, 2015.

Institutional revenue decreased $3.2 million, or 32.1%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The decrease primarily resulted from a decrease in volume in our non-platform institutional trading services business and shifts in trading volume on our GTX platform towards lower margin transactions, partially offset by an increase in ECN trading volume.
Futures revenue increased $0.5 million, or 4.3%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily due to an increase in revenues per traded contract during the three month period ended March 31, 2016 as compared to the same period in 2015.
Other revenue increased $2.9 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase was primarily due to the impact of foreign currency revaluation.

Expenses
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Total operating expenses (amounts in thousands)
$
101,898

 
$
79,930

As a percentage of net revenue
88.2
%
 
86.0
%
Our total operating expenses for the three months ended March 31, 2016 increased $22.0 million, or 27.5%, compared to the three months ended March 31, 2015.
The increase in operating expenses consisted primarily of an increase of $4.3 million in employee compensation and benefits, an increase of $1.5 million in trading expenses, an increase of $6.7 million in general and administrative, an increase of $2.5 million in communications and technology, an increase of $1.9 million in selling and marketing expense and an increase of $1.8 million in purchased intangible amortization, as well as net expense of approximately $9.4 million relating to the settlement of an outstanding legal claim. These increases were partially offset by a decrease of $5.9 million in referral fees, a decrease of $1.2 million in depreciation and amortization, and a decrease of $2.8 million in bad debt provision. The causes of these changes in expenses are discussed in more detail below.

33


Employee Compensation and Benefits 
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Employee compensation and benefits
$
26,393

 
$
22,139

As a percentage of net revenue
22.8
%
 
23.8
%
Employee compensation and benefits for the three months ended March 31, 2016 increased $4.3 million, or 19.2%, compared to the three months ended March 31, 2015. The increase was primarily due to the compensation and benefits for the additional employees acquired in the acquisition of City Index, partially offset by the headcount reductions effected in the third and fourth quarters of 2015.
Referral fees
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Referral fees
$
20,663

 
$
26,578

As a percentage of net revenue
17.9
%
 
28.6
%
Referral fees for the three months ended March 31, 2016 decreased $5.9 million, or 22.3%, compared to the three months ended March 31, 2015. This decrease was primarily a result of lower average referral fees per million paid to introducing brokers and white label partners.
Trading expenses
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Trading expenses
$
8,433

 
$
6,975

As a percentage of net revenue
7.3
%
 
7.5
%
Trading expenses for the three months ended March 31, 2016 increased $1.5 million, or 20.9%, compared to the three months ended March 31, 2015. The increase was primarily due to increased trading expenses resulting from the expansion of our business following the acquisition of City Index. Retail trading expenses relate to 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.
General and administrative
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
General and administrative
$
16,038

 
$
9,371

As a percentage of net revenue
13.9
%
 
10.1
%
General and administrative expenses for the three months ended March 31, 2016 increased $6.7 million, or 71.1%, compared to the three months ended March 31, 2015. The increase was primarily due to the acquisition of City Index.

34


Communications and technology
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Communications and technology
$
5,279

 
$
2,758

As a percentage of net revenue
4.6
%
 
3.0
%
Communications and technology expenses for the three months ended March 31, 2016 increased $2.5 million, or 91.4%, compared to the three months ended March 31, 2015. The increase was primarily due to the acquisition of City Index.

Selling and Marketing Expense 
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Selling and marketing
$
6,439

 
$
4,558

As a percentage of net revenue
5.6
%
 
4.9
%
Selling and marketing expense for the three months ended March 31, 2016 increased $1.9 million, or 41.3%, compared to the three months ended March 31, 2015. The increase was primarily due to supporting additional brands following the acquisition of City Index.
Purchased Intangible Amortization 
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Purchased intangible amortization
$
3,922

 
$
2,151

As a percentage of net revenue
3.4
%
 
2.3
%
Purchased intangible amortization for the three months ended March 31, 2016 increased $1.8 million compared to the three months ended March 31, 2015. The increase was primarily from the amortization of intangible assets acquired as part of the City Index transaction.
Depreciation and Amortization
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Depreciation and amortization
$
3,153

 
$
1,975

As a percentage of net revenue
2.7
%
 
2.1
%
Depreciation and amortization increased $1.2 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase resulted principally from the depreciation of property and equipment acquired in the City Index transaction.

35


Bad Debt Provision
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Bad debt provision
$
572

 
$
3,324

As a percentage of net revenue
0.5
%
 
3.6
%
Bad debt provision decreased $2.8 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The decrease resulted primarily from $2.5 million in negative balances experienced by certain of our customers following actions taken by the Swiss National Bank in January 2015.
Acquisition Expenses
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Acquisition expenses
$

 
$
37

As a percentage of net revenue
%
 
%
Acquisition expenses are costs directly attributable to the acquisitions in 2015, primarily consisting of legal, accounting and other professional advisory fees.
Restructuring Expenses
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Restructuring expenses
$
781

 
$

As a percentage of net revenue
0.7
%
 
%
Restructuring expenses include severance payments and related expenses that arose in connection with headcount reductions relating to our ongoing integration of City Index.
Integration Expenses
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Integration expenses
$
813

 
$
64

As a percentage of net revenue
0.7
%
 
0.1
%
Integration expenses relate to acquisition-related activity; primarily employee relocation costs, retention payments to employees and accelerated amortization of assets.
Legal Settlement
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Legal settlement
9,412

 


36


As a percentage of net revenue
8.1
%
 
%

On April 28, 2016, we entered into a settlement agreement with the claimants in the Cameron Farley Ltd. matter discussed below in "Part II - Other Information - Item 1. Legal Proceedings". Pursuant to the terms of the settlement agreement, we agreed to make a one-time settlement payment in exchange for a full and final settlement of all claims. The settlement amount, net of anticipated insurance recoveries, totaled approximately $9.4 million.
Interest on long term borrowings
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Interest on long term borrowings
2,592

 
1,502

As a percentage of net revenue
2.2
%
 
1.6
%

Interest paid on long term borrowings were $2.6 million and $1.5 million for the three months ended March 31, 2016 and three months ended March 31, 2015, respectively. 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.

Income Taxes
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Income tax expense
2,347

 
5,745

Effective tax rate
21.2
%
 
49.7
%

Income tax expense decreased by $3.4 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Our effective tax rate for the three months ended March 31, 2016 was 21.2% compared to 49.7% for the three months ended March 31, 2015. The decrease in effective tax was due to changes in the jurisdictions in which profits were recognized during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015.

Segment Results - Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

Retail Segment

 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Net revenue
$
96,705

 
$
73,342

 
 
 
 
Employee compensation and benefits
16,702

 
12,157

Selling and marketing
6,213

 
4,207

Referral fees
16,602

 
22,674

Other operating expenses
20,881

 
11,286

Segment profit
$
36,307

 
$
23,018


Retail segment net revenue increased $23.4 million, or 31.9%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily the result of the City Index acquisition in April 2015.


37


Employee compensation and benefits expenses for the retail segment increased $4.5 million, or 37.4%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily due to the compensation and benefits for the additional employees employed following the acquisition of City Index, partially offset by the headcount reductions effected in the third and fourth quarters of 2015.

Selling and marketing expense for the retail segment increased $2.0 million, or 47.7%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily due to costs incurred to support additional brands following the acquisition of City Index.

Referral fees for the retail segment decreased $6.1 million, or 26.8%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. This decrease was primarily a result of lower average referral fees per million paid to introducing brokers and white label partners.

Other operating expenses for the retail segment increased $9.6 million, or 85.0%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily due to the acquisition of City Index. Other operating expenses for the retail segment include general and administrative expenses, communication and technology expenses and trading expenses.

Institutional Segment

 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Net revenue
$
7,119

 
$
10,074

 
 
 
 
Employee compensation and benefits
3,202

 
3,960

Selling and marketing
6

 
71

Other operating expenses
2,440

 
2,512

Segment profit
$
1,471

 
$
3,531


Institutional segment net revenue decreased $3.0 million, or 29.3%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The decrease primarily resulted from a decrease in volume in our non-platform institutional trading services business and shifts in trading volume on our GTX platform towards lower margin transactions, partially offset by an increase in ECN trading volume.

Employee compensation and benefits expenses for the institutional segment decreased $0.8 million, or 19.1%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The decrease was primarily due to a decrease in commissions paid to employees as a result of the decrease in revenue.

Selling and marketing expenses for the institutional segment decreased $0.1 million, or 91.5%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015.

Other operating expenses for the institutional segment decreased $0.1 million, or 2.9%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. Other operating expenses from the institutional segment include general and administrative expenses, communication and technology expenses and trading expenses.

Futures Segment
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2016
 
2015
Net revenue
$
12,204

 
11,536

 
 
 
 
Employee compensation and benefits
2,986

 
2,519


38


Selling and marketing
220

 
280

Referral fees
4,061

 
3,904

Other operating expenses
3,983

 
3,611

Segment profit
$
954

 
$
1,222


Futures segment net revenue increased $0.7 million, or 5.8%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily due to an increase in revenues per traded contract during the three-month period ended March 31, 2016 as compared to the same period in 2015.

Employee compensation and benefits expenses for the futures segment increased $0.5 million, or 18.5%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily due to additional commissions paid to employees as a result of the increase in revenue.

Selling and marketing expenses for the futures segment decreased $0.1 million, or 21.4%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015.

Referral fees for the futures segment increased $0.2 million, or 4.0%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily due to an increase in indirect futures business.

Other operating expenses for the futures segment increased $0.4 million, or 10.3%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. Other operating expenses from the futures segment include general and administrative expenses, communication and technology expenses and trading expenses.

Corporate and Other
 
Three Months Ended March 31,
 
(amount in thousands)
 
2016
 
2015
Other revenue
$
(474
)
 
$
(1,966
)
 
 
 
 
Employee compensation and benefits
3,503

 
3,503

Other operating expenses
3,018

 
2,519

Loss
$
(6,995
)
 
$
(7,988
)

Corporate and other revenue increased $1.5 million for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was largely due changes in foreign currency revaluations.

Employee compensation and benefits expenses for employees not attributed to any of our operating segments, such as our executive officers, did not change for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015.

Other operating expenses not attributed to any of our operating segments increased $0.5 million, or 19.8%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. The increase was primarily due to an increase in professional fees.

Liquidity and Capital Resources

We have historically financed our liquidity and capital needs primarily through the use of funds generated from operations, the issuance of debt and equity securities, including the Convertible Senior Notes due 2018 and Convertible Senior Notes due 2020 that we issued in the fourth quarter of 2013 and second quarter of 2015, respectively, and access to secured lines of credit. We plan to finance our future operating liquidity and regulatory capital needs in a manner consistent with our past practice. We expect that our capital expenditures for the next 12 months will be consistent with our historical annual spend.
We primarily hold and invest our cash at various financial institutions and in various investments, including cash held at banks, deposits at our liquidity providers and money market funds which invest in short-term U.S. government securities. In general,

39


we believe all of our investments and deposits are of high credit quality and we have adequate liquidity to conduct our businesses.
As a holding company, nearly all of our funds from operations are generated by our operating subsidiaries. Historically, we have accessed these funds through receipt of dividends from these subsidiaries. The following table shows the amount of cash held by our operating subsidiaries outside the United States and the amount of undistributed earnings (amounts in millions) at March 31, 2016: 
Entity Name
Cash
 
Undistributed
Earnings
GAIN Capital-Forex.com U.K., Ltd.
$
220.6

 
$
83.0

Gain Capital UK, Ltd.
313.7

 
20.9

GAIN Capital Japan Co., Ltd.
49.4

 

Gain Capital Singapore Pte, Ltd.
27.3

 
1.3

Gain Capital Australia Pty Ltd.
19.0

 
1.7

GAIN Capital-Forex.com Hong Kong, Ltd.
3.8

 

GAIN Capital Forex.com Australia, Pty. Ltd.
9.9

 

GAIN Capital-Forex.com Canada Ltd.
8.2

 

Galvan Research and Trading Ltd.
0.3

 
4.2

Faraday Research LLP
0.4

 
0.6

GAIN Global Markets, Inc.
0.3

 

GTX Bermuda Ltd.
7.2

 
9.4

Gain Global Markets Bermuda, Ltd.
5.0

 

Total
$
665.1

 
$
121.1

At March 31, 2016, we had approximately $121.1 million of undistributed earnings of our foreign subsidiaries indefinitely invested outside the United States. In connection with the previously announced restatement of our financial statements for the years ended December 31, 2014 and 2013 and certain quarters of 2015, we took a charge for U.S. taxes that would arise on distribution if $48.3 million of these earnings were repatriated to the United States. The remaining earnings are indefinitely invested outside the United States and are expected to be reinvested in the working capital and other business needs of the foreign subsidiaries. If the remaining earnings had been repatriated into the United States as of March 31, 2016, in the form of dividends or otherwise, the Company would have been subject to additional income taxes of approximately $12.7 million.
Some of our operating subsidiaries are subject to requirements of various regulatory bodies, including the CFTC and NFA in the United States, the FCA in the United Kingdom, the FSA, METI and MAFF in Japan, the SFC in Hong Kong, IIROC and the OSC in Canada and the CIMA in the Cayman Islands, relating to liquidity and capital standards, which limit funds available for the payment of dividends to GAIN Capital Holdings, Inc. As a result, we may be unable to access funds which are generated by our operating subsidiaries when we need them.

The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of March 31, 2016 and the actual amounts of capital that were maintained on that date (amounts in millions): 
 
Minimum Regulatory
 
Capital Levels
 
Excess Net
Entity Name
Capital Requirements
 
Maintained
 
Capital
GAIN Capital Group, LLC
$
29.1

 
$
44.5

 
$
15.4

GAIN Capital-Forex.com U.K., Ltd.
25.1

 
60.3

 
35.2

GAIN Capital Japan Co., Ltd.
1.4

 
9.7

 
8.3

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

 
3.6

 
1.7

GAIN Capital Forex.com Australia, Pty. Ltd.
0.8

 
2.9

 
2.1

Galvan Research and Trading, Ltd.
0.7

 
4.2

 
3.5

GAIN Capital-Forex.com Canada Ltd.
0.2

 
1.4

 
1.2

GAIN Capital Securities, Inc.
0.1

 
0.4

 
0.3

GAIN Global Markets, Inc.
0.2

 
0.3

 
0.1

Gain Capital UK, Ltd.
60.4

 
129.9

 
69.5


40


Gain Capital Singapore Pte, Ltd.
0.6

 
7.8

 
7.2

Gain Capital Australia Pty Ltd.
0.8

 
3.0

 
2.2

Global Assets Advisors, LLC
0.1

 
1.6

 
1.5

Total
$
121.4

 
$
269.6

 
$
148.2


Our futures commission merchant and forex dealer subsidiary, GAIN Capital Group, LLC, is subject to CFTC Net Capital Rule (Rule 1.17) and NFA Financial Requirement Sections 11 and 12. Under applicable provisions of these regulations, GAIN Capital Group, LLC is required to maintain adjusted net capital of the greater of $1.0 million or 8% of Customer and Non-Customer Maintenance Margin, or $20 million, plus 5% of all liabilities owed to customers and to eligible contract participant counterparties that are not an affiliate of the Forex Dealer Member and are not acting as a dealer exceeding $10 million, plus 10% of all liabilities the Forex Dealer Member owes to eligible contract participant counterparties acting as a dealer that are not an affiliate of the Forex Dealer Member. Net capital represents current assets less total liabilities as defined by CFTC Rule 1.17. Our current assets primarily consist of cash and cash equivalents reported on our balance sheet as cash, receivables from brokers and trading securities, which are generally short-term U.S. government securities. Our total liabilities include payables to customers, accrued expenses, accounts payable, sales and marketing expense payable, introducing broker fees payable and other liabilities. From net capital we take certain percentage deductions against net assets held based on factors required by the Commodity Exchange Act to calculate adjusted net capital. Our net capital and adjusted net capital changes from day to day. As of March 31, 2016, GAIN Capital Group, LLC had net capital of approximately $44.5 million and net capital requirements of $29.1 million. As of March 31, 2016, the excess net capital of GAIN Capital Group, LLC was $15.4 million. We believe that we currently have sufficient capital to satisfy these on-going minimum net capital requirements. In accordance with CFTC regulation 1.12 and NFA Financial Requirements Section 1, a 20.0% decrease in GAIN Capital Group, LLC's net capital and a 30.0% decrease in excess net capital due to a planned equity withdrawal requires regulatory notification and/or approval.

GAIN Capital Forex.com U.K. Ltd., or GCUK1, GAIN Capital UK Limited, or GCUK2, and Galvan Research and Trading, Ltd., or Galvan, all three together the U.K. Entities, are all registered in the U.K. and are regulated by the Financial Conduct Authority in respect of their trading activity. The U.K. Entities are required to comply with relevant U.K. and E.U. legislation. In addition they must comply with the rules and guidance contained in the FCA Handbook of rules and guidance, or FCA Handbook.
GCUK1 is regulated by the FCA, as a full scope €730k IFPRU Investment Firm. GCUK1 is required to maintain the greater of $1.0 million (€730,000) or the Financial Resources Requirement, which is calculated as the sum of the firm’s operational, credit, counterparty, concentration, market and forex risk. At March 31, 2016, GCUK1 maintained $35.2 million more than the minimum required regulatory capital for a total of 1.4 times the required capital and at all times maintained compliance with all applicable regulations.
GCUK2 is regulated by the FCA as a full scope €730k IFPRU Investment Firm. GCUK2 is required to maintain the greater of $1.0 million (€730,000) or the Financial Resources Requirement, which is calculated as the sum of the firm’s operational, credit, counterparty, concentration, market and forex risk. At March 31, 2016, GCUK2 maintained $69.5 million more than the minimum required regulatory capital for a total of 1.2 times the required capital and at all times maintained compliance with all applicable regulations.
Effective from January 1, 2016, the FCA has introduced the addition of a capital conservation buffer and a countercyclical capital buffer in line with the requirements set out in Capital Requirements Directive, or CRD IV, Article 160 Transitional Provisions for Capital Buffers. This will require all firms to maintain an additional buffer on top of the minimum capital requirements. The amount of buffer, which is a percentage of the firm’s common equity tier 1 capital against the total risk exposure amount, will be based on a transitional period from January 1, 2016 to December 31, 2018. During that period, the minimum common equity tier 1 capital ratio requirement will increase from 5.125% to 8%.
Galvan, is regulated by the FCA as a BIPRU Limited License Firm. Galvan is required to maintain a base financial resources requirement of $0.1 million (€0.05 million) and a capital requirement of the higher of either credit risk plus market risk or fixed overhead requirement. At March 31, 2016, Galvan maintained $3.5 million more than the minimum required regulatory capital for a total of 5.0 times the required capital and at all times maintained compliance with all applicable regulations.
In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. A number of significant provisions contained in the law affect, or will affect once implementing regulations are adopted by the appropriate federal agencies, our business.  Among other things, the Dodd-Frank Act provides for additional regulation of swaps and security-based swaps, including some types of foreign exchange and metals derivatives in which we engage. The Dodd-Frank Act requires the registration of swap dealers and swap execution facilities with the CFTC and imposes significant regulatory requirements on swap dealers and swap execution facilities. Effective February 27, 2013, GAIN GTX, LLC, became

41


provisionally registered with the CFTC and NFA as a swap dealer. Effective April 17, 2014, GTX SEF, LLC became temporarily registered with the CFTC as a swap execution facility. Certain of our other subsidiaries may be required to register, or may register voluntarily, as swap dealers and/or swap execution facilities. Swap dealers and swap execution facilities are subject to a comprehensive regulatory regime with new obligations for the swaps activities for which they are registered, including adherence to risk management policies, supervisory procedures, trade record and real time reporting requirements as well as proposed rules for new minimum capital requirements. The specific parameters of these swap dealer and swap execution facility requirements are being developed by the CFTC and other regulators. The full impact of the regulation on GAIN GTX, LLC, GTX SEF, LLC and any other of our subsidiaries that register as a swap dealer and/or swap execution facility remains unclear. It is likely, however, that these entities will face increased costs due to the registration and regulatory requirements listed above. Complying with the proposed regulation of swap dealers and swap execution facilities could require us to restructure our businesses, require extensive systems changes, require personnel changes or raise additional potential liabilities and regulatory oversight. Compliance with swap-related regulatory capital requirements may require us to devote more capital to our GTX business. The increased costs associated with compliance, and the changes that will be required in our OTC and clearing businesses, may adversely impact our results of operations, cash flows, or financial condition.
We are required to maintain cash on deposit with our liquidity providers in order to conduct our hedging activities. As of March 31, 2016, we had posted $120.0 million with liquidity providers compared to $121.2 million million as of December 31, 2015, a decrease of $1.2 million. As of March 31, 2016, total client assets were $876.0 million compared to $920.6 million as of December 31, 2015, an decrease of $44.6 million. Total client assets represent amounts due to clients, including deposits and unrealized gains or losses arising from our clients’ open positions.
The table set forth below provides information regarding our total available liquidity as of March 31, 2016 and as of December 31, 2015. We use this non-GAAP measure to evaluate our business operations and our ability to continue to grow through acquisitions (amounts in millions): 
 
As of March 31, 2016
 
As of December 31, 2015
Cash and cash equivalents
$
189.7

 
$
171.9

Receivable from brokers
120.0

 
121.2

Net operating cash
309.7

 
293.1

Less: Minimum regulatory requirements
(121.4
)
 
(114.5
)
Free Cash Available(1)
$
188.3

 
$
178.6

 
(1)
Our Convertible Senior Notes due 2018 and 2020 are not factored into our assessment of current liquidity due to their long maturity dates.

Convertible Senior Notes

On November 27, 2013, we issued $80 million aggregate principal amount of our 4.125% Convertible Senior Notes due 2018 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the note offering were approximately $77.2 million, after deducting discounts and commissions to the initial purchasers and offering expenses payable by the company.
The notes bear interest at a fixed rate of 4.125% per year, payable semiannually in arrears on June 1 and December 1 of each year, commenced on June 1, 2014. The semi-annual interest payment on the notes will equal approximately $1.7 million, payable in June and December. The notes are convertible into cash, shares of our common stock, or a combination thereof, at our election, subject to certain limitations. The notes will mature on December 1, 2018, unless earlier converted, redeemed or repurchased. We may not redeem the notes prior to December 1, 2016. During the quarter ending March 31, 2016, the Company repurchased $1.9 million in principal amount of the convertible senior notes due in 2018, for an aggregate purchase price of $1.7 million.
As part of the consideration for our acquisition of City Index, we have issued 4.125% unsecured convertible senior notes with an aggregate principal amount of $60,000,000. These notes bear interest at a fixed rate of 4.125% per year, payable semiannually in arrears on April 1 and October 1 of each year. The notes are convertible into cash, shares of our common stock, or a combination thereof, at our election, subject to certain limitations. The notes will mature on April 1, 2020, unless earlier converted, redeemed or repurchased. We may not redeem the notes until the two year period prior to the maturity date of the notes.
In May 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC

42


470-20. ASC 470-20 requires an entity to separately account for the liability and equity components of convertible debt instruments whose conversion may be settled entirely or partially in cash (such as our 4.125% Convertible Senior Notes and the convertible senior notes issued in connection with our acquisition of City Index) in a manner that reflects the issuer’s economic interest cost for non-convertible debt. The liability component of the notes is initially valued at the fair value of a similar debt instrument that does not have an associated equity component and was reflected as a liability in our condensed consolidated balance sheet in an amount equal to the fair value, which, as of March 31, 2016 and December 31, 2015, was $121.2 million and $121.7 million, respectively. The equity component of the notes is included in the additional paid-in capital section of our stockholders’ equity on our condensed consolidated balance sheet, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component. The equity component, as of March 31, 2016 and December 31, 2015, was $27.4 million and $27.5 million, respectively. This original issue discount is amortized to non-cash interest expense over the term of the notes, and, as a result, we record a greater amount of interest expense in current periods. Accordingly, we will report lower net income in our financial results than would have been recorded had we reflected only cash interest expense in our consolidated income statement because ASC 470-20 will require the interest expense associated with the notes to include both the current period’s amortization of the debt discount and the notes’ coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the notes.
In addition, under certain circumstances, convertible debt instruments whose conversion may be settled entirely or partly in cash (such as our 4.125% Convertible Senior Notes and the convertible senior notes issued in connection with our acquisition of City Index) are currently accounted for using the treasury stock method. Under this method, the shares issuable upon conversion of the notes are not included in the calculation of diluted earnings per share unless the conversion value of the notes exceeds their principal amount at the end of the relevant reporting period. If the conversion value exceeds their principal amount, then, for diluted earnings per share purposes, the notes are accounted for as if the number of shares of common stock that would be necessary to settle the excess, if we elected to settle the excess in shares, were issued. The accounting standards in the future may not continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares, if any, issuable upon conversion of the notes, then our diluted earnings per share could be adversely affected.
Cash Flow
The following table sets forth a summary of our cash flow for the three months ended March 31, 2016 and the three months ended March 31, 2015 (amounts in thousands): 
 
For the Three Months Ended March 31,
 
2016
 
2015
Cash provided by/ (used for) operating activities
$
34,109

 
$
(36,082
)
Cash used for investing activities
(5,922
)
 
(1,303
)
Cash used for financing activities
(6,929
)
 
(10,092
)
Effect of exchange rate changes on cash and cash equivalents
(3,417
)
 
(1,815
)
Increase/(Decrease) in cash and cash equivalents
$
17,841

 
$
(49,292
)
Cash provided by operating activities was $34.1 million for the three months ended March 31, 2016, compared to cash used for operating activities of $(36.1) million for the three months ended March 31, 2015.
For the three months ended March 31, 2016 receivables from brokers contributed operating cash of $4.1 million as opposed to a reduction in operating cash of $44.9 million in the three months ended March 31, 2015. In addition, net income contributed $8.7 million for the three months ended March 31, 2016, compared to $5.8 million for the three months ended March 31, 2015. Finally, cash outflows for accrued compensation were $3.4 million for the three months ended March 31, 2016, as compared to $11.1 million for the three months ended March 31, 2015.
Cash used for investing activities was $5.9 million for the three months ended March 31, 2016, compared to $1.3 million for the three months ended March 31, 2015. The increase was primarily due to increased purchases of property and equipment.
Cash used for financing activities was $6.9 million for the three months ended March 31, 2016, compared to cash used for financing activities of $10.1 million for the three months ended March 31, 2015. The reduction in cash used was primarily due to a deferred payment for the acquisition of GFT in 2015, with no similar expenditures in 2016, partially offset by the purchase of treasury shares and the repurchase of convertible notes in 2016, with no similar expenditures in 2015.
Capital Expenditures

43


Capital expenditures were $5.9 million for the three months ended March 31, 2016, compared to $1.2 million for the three months ended March 31, 2015. Capital expenditures for both periods primarily related to the development of our trading platforms and websites.
Contractual Obligations
For the three months ended March 31, 2016, there were no significant changes to our vendor or operating lease obligations from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2015, as amended on May 2, 2016.
Off-Balance-Sheet Arrangements
At March 31, 2016 and December 31, 2015, we did not have any off-balance-sheet arrangements.

44


Critical Accounting Policies and Estimates
Our Unaudited Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. We evaluate these estimates and assumptions on an ongoing basis. We base our estimates on the information currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur periodically could materially impact the financial statements. While our significant accounting policies are described in more detail in the notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, as amended on May 2, 2016, we believe the following accounting policies to be critical to the estimates and assumptions used in the preparation of our Unaudited Condensed Consolidated Financial Statements.
Revenue Recognition

Retail revenue comprises trading and commission revenue from our retail segment. OTC trading includes forex trading, or forex, metals trading, contracts-for-difference, or CFDs, and spread-betting (in markets which do not prohibit such transactions), as well as other financial products.

Gains or losses are realized when customer transactions are liquidated. Unrealized gains or losses on trading positions are revalued at prevailing foreign currency exchange rates (the difference between contract price and market price) at the date of the balance sheet and are included in Receivables brokers as well as Payables to customers on the Consolidated Balance Sheet. Changes in net unrealized gains or losses are recorded in Retail revenue on the Consolidated Statements of Income and Comprehensive Income. Retail revenue is recorded on a trade date basis.

Institutional revenue consists of revenue from our institutional segment, which provides a proprietary trading platform and sales and trading services to institutions. Revenue from the institutional segment is generated primarily through commissions or spreads on trades executed on the GTX platform or by voice-brokers. 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. Revenues are booked on a trade date basis.

Futures revenue consists of revenue from our futures segment, which offers exchange-based trading execution services, focusing on the indices, agricultural hedging, and commodities sectors. Revenues in this business are generated through commissions, which are earned for executing our customers' trades. These revenues are booked on a trade date basis. We act in an agency capacity with respect to the clearing of trades, but as a principal with respect to fees paid to introducing brokers in the futures business. Therefore, we take no market risk in this business.

Income Taxes

Current income tax is calculated on the basis of the tax laws enacted or substantially enacted at the balance sheet date in the countries where we operate and generate taxable income.

Deferred income tax expenses are determined using the asset and liability method, under which deferred tax assets and liabilities are determined based upon the temporary differences between the consolidated financial statements and the income tax basis, using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our condensed consolidated statements of operations and comprehensive income in the period of enactment. We routinely evaluate all deferred tax assets to determine the likelihood of their realization.

We use estimates in determining income tax positions under ASC 740-10-25, Income Taxes. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment and is subject to audit by tax authorities in the ordinary course of business.


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To the extent we are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement could require use of our cash and result in an increase in our effective income tax rate in the period of resolution.

In accordance with ASC 740, we evaluate a tax position to determine whether it is more likely than not that the tax position will be sustained upon examination, based on the technical merits of the position. If the position does not meet a more likely than not threshold, a tax reserve is established and no income tax benefit is recognized. We are audited by U.S. federal and state, as well as foreign, tax authorities. In some cases, many years may elapse before a tax return containing tax positions for which an ASC 740 reserve has been established is examined and an audit is completed. As audit settlements are reached, we adjust the corresponding reserves, if required, in the period in which the final determination is made. While it is difficult to predict the final outcome or timing of a particular tax matter, we believe that our reserves for uncertain tax positions are recorded pursuant to the provisions of ASC 740.

We operate a permanent reinvestment strategy, under which earnings derived from foreign business remain invested in the Company’s foreign subsidiaries. We have no plans to repatriate these earnings.
Impairment of Long-Lived Assets

In accordance with ASC 360-10, Property, Plant and Equipment, we periodically evaluate the carrying value of long-lived assets when events and circumstances warrant such review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such an asset is separately identifiable and is less than the carrying value. In that event, a loss is recognized in the amount by which the carrying value exceeds the fair market value of the long-lived asset.

Convertible Senior Notes

In November 2013, we issued $80 million aggregate principal amount of our 4.125% Convertible Senior Notes due 2018. In April 2015, we issued $60 million aggregate principal amount of our 4.125% Unsecured Convertible Senior Notes due 2020. These notes are hybrid instruments, having both a debt and an equity component, and we accounted for them in accordance with relevant guidance for such instruments. The debt component includes an initial discount determined by the notes' coupon rate and prevailing market interest rates. The equity component equals is included in Additional Paid in Capital. The discount will amortize over the life of the notes, as we record interest expense.The notes will mature on December 1, 2018 and April 1, 2020, respectively, unless earlier converted, redeemed or repurchased. We may not redeem the notes prior to December 1, 2016 and April 1, 2018, respectively. During the quarter ending March 31, 2016, we repurchased $1.9 million in principal amount of the convertible senior notes due in 2018, which had an aggregate fair value of $1.6 million, for an aggregate purchase price of $1.7 million.

Business Combinations

In April 2015, we completed our acquisition of City Index. We accounted for City Index in accordance with accounting guidance for business combinations, which required identifying the acquirer, determining the acquisition date, determining the purchase price and determining fair values for assets and liabilities assumed, as well as calculating goodwill.


Goodwill and Intangible Assets

Relevant accounting guidance requires purchased intangible assets other than goodwill to be amortized over their useful life unless the useful life is determined to be indefinite. If the asset is determined to have a finite life in the future, we will amortize the carrying value over the remaining useful life at that time. Our URLs (foreignexchange.com and forex.com) are indefinite life intangible assets and are, therefore, not amortized. We compare the recorded value of the indefinite life intangible assets and goodwill to their fair value on an annual basis and whenever circumstances arise that indicate that impairment may have occurred.

Accrued Compensation

We make estimates in determining our quarterly and annual accrued non-share-based compensation. A significant portion of our employee incentive compensation programs are discretionary. Each quarter and year-end we determine the amount of discretionary cash bonus pools. We also review compensation throughout the year to determine how overall performance

46


compares to management’s expectations. We take these and other factors, including historical performance and our performance relative to budget, into account in reviewing accrued discretionary cash compensation estimates quarterly and adjusting accrual rates as appropriate. Changes to these factors could cause a material increase or decrease in the amount of compensation expense that we report in a particular period.

Derivatives

Forex, metals and CFDs allow for the exchange of the difference in value of a particular asset such as a stock index, energy product, or gold contracts, between the time at which a contract is opened and the time at which it is closed. Our open positions and those of our retail customers are considered derivatives under FASB ASC 815. Therefore, they are accounted for at fair value and are included in Receivables from brokers and Payables to customers in the condensed consolidated balance sheet.

Share Based Payments

ASC 718-10, Compensation – Stock Compensation, requires measurement of share based payment arrangements at fair value and recognition of compensation cost over the service period, net of estimated forfeitures. The fair value of restricted stock units is determined based on the number of units granted and the grant date fair value of GAIN Capital Holding, Inc.’s common stock.

We measure the fair value of stock options on the date of grant using the Black-Scholes option pricing model which requires the use of several estimates, including:
The volatility of our stock price;
The expected life of the option;
Risk free interest rates; and
Expected dividend yield.

The use of different assumptions in the Black-Scholes pricing model would result in different amounts of stock-based compensation expense. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.

The expected volatility was calculated based upon the volatility of public financial services companies, or companies in similar industries. The average risk free rate is based upon the five year bond rate converted to a continuously compounded interest rate.

Contingent Consideration

Under the agreements governing certain of our business combinations, we are obligated to make contingent payments that are Level 3 financial liabilities.  These contingent payments are recorded under Accrued expenses and other liabilities on our condensed consolidated balance sheet. The fair value of these payments is determined using prevailing interest rates as of the balance sheet date and forecasts of the acquired company's performance, estimation of which does not have any basis in quoted or observable markets. Interest expense associated with our contingent consideration is included in earnings in 2015. In December 2015, we entered into an agreement with the former owners of Galvan to satisfy all remaining obligations under the contingent earn-out arrangement we entered into in connection with the Galvan acquisition for a one-time payment of $1.5 million, which was paid in early 2016.


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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will impact our consolidated financial statements. Our net interest revenue is directly affected by the short-term interest rates we earn from re-investing our cash and our customers' cash. As a result, a portion of our interest income will decline if interest rates fall. Short-term interest rates are highly sensitive to factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. Our cash and cash equivalents and customer cash and cash equivalents are held in cash and cash equivalents including cash at banks, deposits at liquidity providers, in money market funds that invest in short-term U.S. government securities and in United States and Canadian Imperial Bank of Commerce treasury bills. The interest rates earned on these deposits and investments affect our interest revenue. Based on the prevailing interest rates at March 31, 2016, an immediate 100 basis point increase in short-term interest rates would result in approximately $9.9 million more in annual pretax income.
Foreign Currency Exposures
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of our earnings and assets. Entities that have assets and liabilities denominated in currencies other than the primary economic environment in which the entity operates are subject to re-translation.
We monitor our exchange rate exposure and may make settlements to reduce our exposure. We do not currently take proprietary directional market positions.
Historically we have experienced relatively small impacts due to the composition of our balance sheet and the lack of volatility between exchanges rates in the jurisdictions in which we operate. Our exposure to foreign currency exchange rates may increase in the future and we may consider entering into hedging transactions to mitigate our exposure to foreign currency exchange rates. These hedging transactions may not be successful.
Credit Risk

Our trading operations require a commitment of our capital and involve risk of loss because of the potential that a customer’s losses may exceed the amount of cash in their account. While we are able to closely monitor each customer’s exposure, it does not guarantee our ability to eliminate negative customer account balances prior to an adverse currency price change or other market events, such as the extreme volatility in the Swiss franc following the SNB market event in January 2015. Changes in market conditions or unforeseen extreme market events could result in our customers experiencing losses in excess of the funds they have deposited with us.  In such an event, we may not be able to recover the negative client equity from our customers, which could materially adversely affect our results of operations.  In addition, if we cannot recover funds from our customers, we may nonetheless be required to fund positions we hold with our liquidity providers or other third parties and, in such an event, our available funds may not be sufficient to meet our obligations to these third parties, which could materially adversely affect our business, financial condition, results of operations and cash flows.  

In order to help mitigate this risk, we require that each trade must be collateralized in accordance with our margin policies described below. Each customer is required to have minimum funds in their account for opening positions, which we refer to as the initial margin, and for maintaining positions, which we refer to as maintenance margin, depending on the product being traded. Margin requirements are expressed as a percentage of the customer’s total position in that product, and the customer’s total margin requirement is based on the aggregate margin requirement across all of the positions that a customer holds at any one moment in time. Each net position in a particular product is margined separately. Accordingly, we do not net across different positions, thereby following a more conservative margin policy. Our systems automatically monitor each customer’s margin requirements in real time, and we confirm that each of our customers has sufficient cash collateral in his or her account before we execute their trades. We may also adjust required customer margins (both initial and maintenance) from time to time based on our monitoring of various factors, including volatility and liquidity. If at any point in time a customer's trading position does not comply with the applicable margin requirement, the position may be automatically liquidated, partially or entirely, in accordance with our margin policies and procedures. This policy protects both us and the customer. Our margin and liquidation policies are set forth in our customer agreements.

We are also exposed to potential credit risk relating to the counterparties with which we hedge our trades and the financial institutions with which we deposit cash. We mitigate these risks by transacting with several of the largest financial institutions in the world. In the event that our access to one or more financial institutions becomes limited, our ability to hedge may be impaired.

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Market Risk
We are exposed to market risk in connection with our retail trading activities. Because we act as counterparty to our retail customers’ transactions, we are exposed to risk on each trade that the market price of our position will decline. Accordingly, accurate and efficient management of our net exposure is a high priority, and as such we have developed both automated and manual policies and procedures to manage our exposure. These risk-management policies and procedures are established and reviewed regularly by the Risk Committee of our Board of Directors. Our risk-management policies require quantitative analyses by currency pair, as well as assessment of a range of market inputs, including trade size, dealing rate, customer margin and market liquidity. Our risk-management procedures require our team of senior traders to monitor risk exposure on a continuous basis and update senior management both informally over the course of the trading day and formally through intraday and end of day reporting. A key component of our approach to managing market risk is that we do not initiate market positions for our own account in anticipation of future movements in the relative prices of products we offer. To facilitate our risk-management activities, we maintain levels of capital in excess of those currently required under applicable regulations. As of March 31, 2016, we maintained capital levels of $269.6 million, which represented approximately 2.2 times the capital we were required to hold under applicable regulations.
Cash Liquidity Risk
In normal conditions, our market making business of providing online forex trading and related services is self financing as we generate sufficient cash flows to pay our expenses as they become due. As a result, we generally do not face the risk that we will be unable to raise cash quickly enough to meet our payment obligations as they arise. Our cash flows, however, are influenced by customer trading volume, currency volatility and liquidity in foreign currency pairs in which we have positions. These factors are directly impacted by domestic and international market and economic conditions that are beyond our control. In an effort to manage this risk, we have secured a substantial liquidity pool by establishing trading relationships with several financial institutions offering prime brokerage services across a variety of products, some on exchanges and some OTC. We believe that these relationships provide us with sufficient access to liquidity to allow us to consistently execute significant trade volumes when needed in varying market conditions. We generally maintain collateral on deposit, which includes our funds and our customers’ funds. Collateral on deposit was $131.1 million and $133.7 million at March 31, 2016 and December 31, 2015, respectively.
In addition, our trading operations involve the risk of losses due to the potential failure of our customers to perform their obligations under the transactions we enter into with them, which increases our exposure to cash liquidity risk. To reduce this risk, our margin policy requires that we mark our customers’ accounts to market each time the market price of a position in their portfolio changes and provides for automatic liquidation of positions, as described above.

Operational Risk
Our operations are subject to broad and various risks resulting from technological interruptions, failures or capacity constraints in addition to risks involving human error or misconduct. Regarding technological risks, we are heavily dependent on the capacity and reliability of the computer and communications systems supporting our operations. We have established a program to monitor our computer systems, platforms and related technologies and to promptly address issues that arise. We have also established disaster recovery facilities in strategic locations to ensure that we can continue to operate with limited interruptions in the event that our primary systems are damaged. As with our technological systems, we have established policies and procedures designed to monitor and prevent both human errors, such as clerical mistakes or incorrectly placed trades, as well as human misconduct, such as unauthorized trading, fraud or negligence. In addition, we seek to mitigate the impact of any operational issues by maintaining insurance coverage for various contingencies.
Regulatory Capital Risk
Various domestic and foreign government bodies and self-regulatory organizations responsible for overseeing our business activities require that we maintain specified minimum levels of regulatory capital in our operating subsidiaries. If not properly monitored or adjusted, our regulatory capital levels could fall below the required minimum amounts set by our regulators, which could expose us to various sanctions ranging from fines and censure to imposing partial or complete restrictions on our ability to conduct business. To mitigate this risk, we continuously evaluate the levels of regulatory capital at each of our operating subsidiaries and adjust the amounts of regulatory capital in each operating subsidiary as necessary to ensure compliance with all regulatory capital requirements. These requirements may increase or decrease from time to time as required by regulatory authorities. We also maintain excess regulatory capital to provide liquidity during periods of unusual or unforeseen market volatility, and we intend to continue to follow this policy. In addition, we monitor regulatory developments

49


regarding capital requirements so that we may be prepared for increases in the required minimum levels of regulatory capital that may occur from time to time in the future.
Regulatory Risk
We operate in a highly regulated industry and are subject to the risk of sanctions from U.S., federal and state, and international authorities if we fail to comply adequately with regulatory requirements. Failure to comply with applicable regulations could result in financial, operational and other penalties. Our authority to conduct business could be suspended or revoked. In addition, efforts to comply with applicable regulations may increase our costs or limit our ability to pursue certain business opportunities. Federal, state, and international regulations significantly limit the types of activities in which we may engage.


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ITEM 4.
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure.

On May 2, 2016, the Company filed an amended Annual Report on Form 10-K/A in which the management of the Company concluded that a material weakness in internal control over financial reporting existed at December 31, 2015, resulting from the manner in which the Company accounted for income taxes for the years ended December 31, 2013 and 2014 and for certain quarters of 2015 under ASC 740, “Income Taxes”. These errors related primarily to the manner in which certain intercompany payables and receivables between domestic and overseas subsidiaries of the Company were treated for accounting and tax purposes during the impacted periods. Although the Company continues its remediation efforts, as described below under "- Remediation Plan", the management of the Company has concluded that the material weakness identified in the Form 10-K/A continues to exist as of the date of this report.
In light of this material weakness in internal control over financial reporting, the CEO and CFO have concluded that, as of March 31, 2016, the Company’s disclosure controls and procedures were not effective to ensure that information the Company is required to disclose in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, or reported, within the time periods specified in rules and forms of the SEC, and is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
Remediation Plan
Since identifying the material weakness in our internal control over financial reporting discussed above, the Company’s management has implemented formal preventive and detective controls requiring the enhanced review of the accounting for and tax treatment of intercompany payables and receivables, particularly those between domestic and overseas subsidiaries. The Company continues to review resource requirements and capabilities in its finance and tax teams to determine whether roles and responsibilities need to be realigned and/or new personnel added. The management of the Company is continuing to review these matters to ensure that similar failures of internal control over financial reporting do not recur.

PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
For the three months ended March 31, 2016, we incorporate herein by reference the discussions set forth under “Legal Proceedings” in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2015, as amended on May 2, 2016. The following supplements and amends those discussions.

As previously disclosed, on February 16, 2012, we 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 us 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 us, the claimants requested, and we 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. We submitted a Response to the Letter before Claim on July 4, 2012. On July 5, 2012, we 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. We 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 our motion on June 2, 2013 and subsequently we filed a response to this answer on July 15, 2013. A hearing was held on our 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 we were given until November 1, 2013 to respond.  On February 26, 2014, the judge denied our motion for strike out/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, we filed an Amended Defense. The parties completed discovery and provided

51


disclosure on October 30, 2015. On April 28, 2016, the parties entered into a Settlement Agreement in which we agreed to make a one-time settlement payment in exchange for a full and final settlement of all claims.
As previously disclosed, through our acquisition of OEC, we 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 alleges infringement of 12 patents relating to real-time display of price quotes and market depth on OEC's electronic trading interfaces. The case was consolidated with 11 related cases in February 2011, and the parties have exchanged infringement, non-infringement and invalidity contentions for several of the disputed patents. On May 6, 2015, we entered into a settlement and license agreement with Trading Technologies pursuant to which we made a one-time royalty payment to Trading Technologies in exchange for a volume-based license for the disputed patents. We were fully indemnified for the amount of the royalty payment by the former owner of OEC. The lawsuit was dismissed on May 6, 2015.
ITEM 1A.
RISK FACTORS
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as amended on May 2, 2016, describes the various important risk factors facing our business in Part I, Item 1A under the heading “Risk Factors.” There have been no material changes from the risk factors disclosed in that section of our Annual Report on Form 10-K, as amended, which is incorporated herein by reference.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Unregistered Sales of Equity Securities

None.
(b) Purchase of Equity Securities by the Issuer

The following table presents information regarding our purchases of common stock in the three months ended March 31, 2016:

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Period(1)
 
Total Number of Shares Purchased(1)
 
Average Price Paid per Share(1)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)(2)
January 1, 2016-January 31, 2016
 
190,000

 
7.00

 
190,000

 
$
2,106,089

February 1, 2016-February 29, 2016
 
200,000

 
6.94

 
200,000

 
$
714,921

March 1, 2016-March 31, 2016
 
110,000

 
7.36

 
96,735

 
$

(1) On May 16, 2011, the Company announced that its Board of Directors approved a share repurchase plan, which authorized the expenditure of up to $10.0 million for the purchase of the Company’s common stock. On May 6, 2013, the Company announced that the Board of Directors approved to increase the total amount available for the purchase of the Company's common stock by $15.0 million.
(2) Transaction fees related to the share purchases are deducted from the total remaining allowable expenditure amount.



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ITEM 6.
EXHIBITS

Exhibit No.
Description
31.1
Certification of Chief Executive Officer pursuant to rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.*
31.2
Certification of Chief Financial Officer pursuant to rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.*
32.1
Certification of Chief Executive Officer as required by section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certification of Chief Financial Officer as required by section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation

*
Filed herewith.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
Date: May 9, 2016
 
/s/ Glenn H. Stevens
 
 
Glenn H. Stevens
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
Date: May 9, 2016
 
/s/ Nigel Rose
 
 
Nigel Rose
 
 
Chief Financial Officer (Principal Financial and Accounting Officer)

55


EXHIBIT INDEX
Exhibit No.
Description
31.1
Certification of Chief Executive Officer pursuant to rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.*
31.2
Certification of Chief Financial Officer pursuant to rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.*
32.1
Certification of Chief Executive Officer as required by section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certification of Chief Financial Officer as required by section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation

*
Filed herewith.


56