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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
%