GAIN Capital Holdings, Inc. - FORM 10-Q - August 8, 2016

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EX-32.2 - EXHIBIT 32.2 - GAIN Capital Holdings, Inc.exhibit32_210q6-30x16.htm
EX-32.1 - EXHIBIT 32.1 - GAIN Capital Holdings, Inc.exhibit32_110q6-30x16.htm
EX-31.2 - EXHIBIT 31.2 - GAIN Capital Holdings, Inc.exhibit31_210q6-30x16.htm
EX-31.1 - EXHIBIT 31.1 - GAIN Capital Holdings, Inc.exhibit31_110q6-30x16.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 June 30, 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 August 3, 2016, the registrant had 48,639,059 shares of common stock, $0.00001 par value per share, outstanding.


GAIN Capital Holdings, Inc.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2016
 
 
 
 
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2016 and 2015
 
Condensed Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 2016
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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
Item 1 - Condensed Consolidated Financial Statements
GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
 
 
As of June 30, 2016
 
As of December 31, 2015
ASSETS:
 
 
 
Cash and cash equivalents
$
89,447

 
$
171,888

Cash and securities held for customers
1,060,813

 
920,621

Receivables from brokers, of which ($14,681) and ($12,568), respectively, are open contracts at fair value
218,116

 
121,153

Prepaid assets
7,414

 
7,835

Property and equipment, net of accumulated depreciation of ($48,681) and ($44,750), respectively
33,458

 
30,367

Intangible assets, net of accumulated amortization of ($54,393) and ($47,906), respectively
78,139

 
91,512

Goodwill
32,878

 
34,017

Other assets, net of allowance for doubtful accounts of ($8,398) and ($6,832), respectively
51,300

 
47,166

Total assets
$
1,571,565

 
$
1,424,559

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities
 
 
 
Payables to customers, of which ($126,663) and ($143,918), respectively, are open contracts at fair value
$
1,060,813

 
$
920,621

Payables to brokers, of which ($61) and $0, respectively, are open contracts at fair value
4,783

 
—

Accrued compensation and benefits
8,946

 
12,362

Accrued expenses and other liabilities
50,949

 
51,638

Income tax payable
6,973

 
1,068

Convertible senior notes
122,349

 
121,740

Total liabilities
$
1,254,813

 
$
1,107,429

Commitments and contingent liabilities

 

Redeemable non-controlling interests
$
13,206

 
$
11,046

Shareholders’ equity
 
 
 
Common stock ($0.00001 par value; 120 million shares authorized, 52,658,149 shares issued and 48,634,364 shares outstanding as of June 30, 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
(18,858
)
 
(5,865
)
Additional paid-in capital
216,120

 
212,981

Treasury stock, at cost (4,087,123 shares at June 30, 2016 and 3,301,869 at December 31, 2015)
(27,257
)
 
(21,808
)
Retained earnings
133,541

 
120,776

Total shareholders’ equity
303,546

 
306,084

Total liabilities and shareholders’ equity
$
1,571,565

 
$
1,424,559

The accompanying notes are an integral part of these unaudited 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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
REVENUE:
 
 
 
 
 
 
 
Retail revenue
$
88,083

 
$
86,422

 
$
183,125

 
$
159,364

Institutional revenue
7,209

 
8,383

 
13,916

 
18,254

Futures revenue
12,743

 
10,806

 
24,761

 
22,326

Other revenue
(60
)
 
5,841

 
1,513

 
4,474

Total non-interest revenue
107,975

 
111,452

 
223,315

 
204,418

Interest revenue
443

 
314

 
761

 
651

Interest expense
128

 
309

 
232

 
627

Total net interest revenue
315

 
5

 
529

 
24

Net revenue
108,290

 
111,457

 
223,844

 
204,442

EXPENSES:

 

 

 

Employee compensation and benefits
26,615

 
30,676

 
53,008

 
52,815

Selling and marketing
6,805

 
8,415

 
13,244

 
12,973

Referral fees
17,553

 
29,539

 
38,216

 
56,117

Trading expenses
7,761

 
8,119

 
16,194

 
15,094

General and administrative
15,027

 
14,143

 
31,065

 
23,514

Depreciation and amortization
3,559

 
2,738

 
6,712

 
4,713

Purchased intangible amortization
3,843

 
4,257

 
7,765

 
6,408

Communications and technology
5,684

 
5,835

 
10,963

 
8,593

Bad debt provision
1,189

 
1,236

 
1,761

 
4,560

Acquisition expenses
—

 
2,442

 
—

 
2,479

Restructuring expenses
22

 
1,935

 
803

 
1,935

Integration expenses
1,043

 
12,309

 
1,856

 
12,373

Legal settlement
—

 
—

 
9,412

 
—

Total operating expense
89,101

 
121,644

 
190,999

 
201,574

OPERATING PROFIT/(LOSS)
19,189

 
(10,187
)
 
32,845

 
2,868

Interest expense on long term borrowings
2,560

 
2,554

 
5,152

 
4,056

INCOME/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)
16,629

 
(12,741
)
 
27,693

 
(1,188
)
Income tax expense/(benefit)
5,025

 
(6,039
)
 
7,372

 
(294
)
Equity in net loss of affiliate
(18
)
 
—

 
(34
)
 
—

NET INCOME/(LOSS)
$
11,586

 
$
(6,702
)
 
$
20,287

 
$
(894
)
Net income attributable to non-controlling interests
745

 
416

 
1,094

 
760

NET INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
$
10,841

 
$
(7,118
)
 
$
19,193

 
$
(1,654
)
Other comprehensive income:


 


 


 


Foreign currency translation adjustment
(10,249
)
 
9,540

 
(12,993
)
 
7,291

NET COMPREHENSIVE INCOME
APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
$
592

 
$
2,422

 
$
6,200

 
$
5,637

Earnings/(loss) per common share:


 


 


 


Basic
$
0.19

 
$
(0.16
)
 
$
0.36

 
$
(0.07
)
Diluted
$
0.19

 
$
(0.16
)
 
$
0.36

 
$
(0.07
)
Weighted average common shares outstanding used in computing earnings per common share:


 


 


 


Basic
48,546,253

 
49,070,387

 
48,584,534

 
46,154,717


4

Diluted
48,737,188

 
49,070,387

 
48,860,533

 
46,154,717

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

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
434,699

 
—

 
—

 
—

 
—

 
—

 
—

Employee stock purchase plan
63,338

 
—

 
—

 
400

 
—

 
—

 
400

Repurchase of shares
(785,254
)
 
—

 
(5,449
)
 
—

 
—

 
—

 
(5,449
)
Stock compensation expense
—

 
—

 
—

 
2,148

 
—

 
—

 
2,148

Tax benefit of stock options exercises
—

 
—

 
—

 
119

 
—

 
—

 
119

Convertible note buyback
—

 
—

 
—

 
(105
)
 
—

 
—

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

 
—

 
—

 
—

 
(1,591
)
 
—

 
(1,591
)
Dividend declared ($0.05 quarterly dividend per share)
—

 
—

 
—

 
—

 
(4,837
)
 
—

 
(4,837
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
—

 
(12,993
)
 
(12,993
)
Net income applicable to Gain Capital Holdings, Inc.
—

 
—

 
—

 
—

 
19,193

 
—

 
19,193

BALANCE—June 30, 2016
48,634,364

 
$
—

 
$
(27,257
)
 
$
216,120

 
$
133,541

 
$
(18,858
)
 
$
303,546

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


6

Gain Capital Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income/(loss)
$
20,287

 
$
(894
)
Adjustments to reconcile net income/(loss) to cash provided by/(used for) operating activities

 

Loss on foreign currency exchange rates
1,357

 
3,103

Depreciation and amortization
14,477

 
11,121

Non-cash integration costs
366

 
10,249

Deferred taxes
(1,416
)
 
(2,460
)
Amortization of deferred financing costs
221

 
177

Bad debt provision
1,761

 
4,560

Convertible senior notes discount amortization
2,112

 
1,567

Stock compensation expense
2,148

 
2,019

Gain on extinguishment of debt
(89
)
 
—

Equity in net loss of affiliate
34

 
—

Adjustment to fair value of contingent consideration
—

 
(4,043
)
Changes in operating assets and liabilities:
 
 
 
Cash and securities held for customers
(161,579
)
 
(103,483
)
Receivables from brokers
(97,988
)
 
12,382

Prepaid assets
(73
)
 
(1,988
)
Other assets
(5,430
)
 
2,815

Payables to customers
161,579

 
103,483

Payables to brokers
5,205

 
—

Accrued compensation and benefits
(3,061
)
 
(11,212
)
Accrued expenses and other liabilities
1,303

 
(12,463
)
Income tax payable
5,540

 
(220
)
Cash (used for)/provided by operating activities
(53,246
)
 
14,713

CASH FLOWS FROM INVESTING ACTIVITIES:

 

Purchases of property and equipment
(12,185
)
 
(8,517
)
Sale of treasury bills
—

 
(4
)
Funding of acquisitions, net of cash acquired
—

 
(3,258
)
Cash used for investing activities
(12,185
)
 
(11,779
)
CASH FLOWS FROM FINANCING ACTIVITIES:

 

Contractual payments for acquisitions
—

 
(9,842
)
Proceeds from exercise of stock options
577

 
1,987

Proceeds from employee stock purchase plan
400

 
394

Purchase of treasury stock
(5,449
)
 
(400
)
Tax benefit from employee stock option exercises
302

 
865

Dividend payments
(4,837
)
 
(4,627
)
Distributions to non-controlling interest holders
(525
)
 
(756
)
Repurchase of convertible notes
(1,735
)
 
—

Cash used for financing activities
(11,267
)
 
(12,379
)
Effect of exchange rate changes on cash and cash equivalents
(5,743
)
 
5,116

DECREASE IN CASH AND CASH EQUIVALENTS
(82,441
)
 
(4,329
)
CASH AND CASH EQUIVALENTS—Beginning of period
171,888

 
139,351

CASH AND CASH EQUIVALENTS—End of period
$
89,447

 
$
135,022

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:

 


7

Cash (paid)/received during the year for:

 

Interest
$
(3,081
)
 
$
(2,472
)
Taxes
$
142

 
$
(1,677
)
Non-cash financing activities:

 

Common stock issued as consideration for asset and business acquisitions
$
—

 
$
(48,280
)
Convertible senior notes issued as consideration for business acquisitions
$
—

 
$
(65,000
)
Deferred taxes related to convertible senior notes
$
—

 
$
(3,827
)
Adjustment to redemption value of put options related to non-controlling interests
$
(1,591
)
 
$
(1,441
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

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 June 30, 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
Trade Facts, Ltd. (previously known as Galvan Research and Trading, Ltd.)
GAIN Capital UK Limited
GAIN Capital Australia Pty. Ltd.
GAIN Capital Singapore Pte. Ltd.
GAIN Capital Payments 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 audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 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 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.

9


 
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 May 2016, the FASB issued new guidance regarding the accounting for revenue from contracts with customers. The FASB issued this update to address certain issues related to assessing collectibility, presentation of sales taxes, non-cash consideration, completed contracts, and contract modifications at transition by reducing cost, complexity, and the potential for diversity in practice at initial application. 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, discussed below. The Company is currently assessing the impact of adopting this guidance on its financial statements.

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, discussed below. 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

10

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. In July 2015, the FASB deferred the effective date of the new revenue recognition standard by one year, and it is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted, but no earlier than the original effective date of January 1, 2017. The Company is currently assessing the impact of adopting this guidance on its financial statements.

3. FAIR VALUE

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 June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Customer derivative positions
$
—

 
$
126,663

 
$
—

 
$
126,663

Broker derivative contracts
—

 
(14,742
)
 
—

 
(14,742
)
Money market accounts
51,069

 
—

 
—

 
51,069

Certificates of deposit
174

 
—

 
—

 
174

Investment in gold
132


—





132

Total
$
51,375

 
$
111,921

 
$
—

 
$
163,296

 
 
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 six months ended June 30, 2016, nor have there been any transfers between levels during this period.
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 and Payables to brokers.

The fair values of these Level 2 financial instruments are based upon directly observable values for underlying instruments.

11

Level 3 Financial Liabilities

The Company did not have any level 3 Financial Assets or Liabilities on June 30, 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 sheets (amounts in thousands).

Receivables from brokers comprise open trades, which are measured at fair value (disclosed above), and the Company's deposits, which are not measured at fair value but approximate fair value. These deposits approximate fair value because they
are cash balances that the Company may withdraw at its discretion. 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.

Payables to brokers comprise open trades, which are measured at fair value (disclosed above) and the cash due to brokers, which are not measured at fair value but approximate fair value. This balance approximates fair value because cash is immediately payable to the brokers. Settlement would occur within a relatively short period of time after the broker initiates a margin call.

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.

 
As of June 30, 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
$
232,797

 
$
232,797

 
$
—

 
$
232,797

 
$
—

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
$
1,187,476

 
$
1,187,476

 
$
—

 
$
1,187,476

 
$
—

Payables to brokers
$
4,844

 
$
4,844

 
 
 
$
4,844

 
 
Convertible senior notes
$
122,349

 
$
121,220

 
$
—

 
$
121,220

 
$
—


 
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

12

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, Payables to customers, and Payables to brokers on the accompanying condensed Consolidated Balance Sheets (amounts in thousands):


 
June 30, 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
$
116,922

 
$
(47,011
)
 
$
69,911

CFD contracts
91,574

 
(55,223
)
 
36,351

Metals contracts
13,676

 
(8,017
)
 
5,659

Total
$
222,172

 
$
(110,251
)
 
$
111,921

 
 
 
 
 
 
 
June 30, 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
$
232,797

 
$
(14,681
)
 
$
218,116

Payables to customers
$
(1,187,476
)
 
$
126,663

 
$
(1,060,813
)
Payables to brokers
$
(4,722
)
 
$
(61
)
 
$
(4,783
)

 
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 have many different underlyings, which vary in price. Foreign exchange contracts typically have prices less than two dollars, while certain metals contracts and contracts for difference ("CFD") can have considerably higher prices. The table below represents the number of contracts underlying amounts reported within Receivables from brokers, Payables to customers, and Payables to brokers on the condensed consolidated balance sheets (amounts in thousands):

13

 
June 30, 2016
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
1,943,541

 
2,101,159

CFD contracts
119,091

 
223,330

Metals contracts
530

 
531

Total
2,063,162

 
2,325,020


 
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 June 30, 2016 or December 31, 2015. Net gains with respect to derivative instruments are reflected in Retail revenue in the accompanying condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2016 and 2015 were as follows (amounts in thousands): 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Derivative Instruments:
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
52,430

 
$
61,587

 
$
106,727

 
$
98,247

CFD contracts
29,659

 
18,317

 
64,881

 
47,381

Metals contracts
5,805

 
5,721

 
10,765

 
11,708

Total
$
87,894

 
$
85,625

 
$
182,373

 
$
157,336


5. RECEIVABLES FROM BROKERS
Amounts receivable from brokers consisted of the following as of (amounts in thousands): 
 
June 30, 2016
 
December 31, 2015
Required collateral
$
232,797

 
$
129,042

Excess from futures broker - Restricted
—

 
4,679

Open foreign exchange positions
(14,681
)
 
(12,568
)
Total
$
218,116

 
$
121,153

The Company has posted funds with brokers as collateral required by agreements for holding trading positions. The increase in required collateral resulted from trading activity by several larger futures accounts onboarded during the quarter. Amounts receivable from brokers are reflected as Receivables from brokers on the condensed consolidated balance sheets.

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


14

 
June 30, 2016
 
December 31, 2015
Software
$
49,153

 
$
44,194

Computer equipment
16,926

 
14,300

Leasehold improvements
10,683

 
11,200

Telephone equipment
790

 
881

Office equipment
2,128

 
2,113

Furniture and fixtures
1,814

 
1,761

Web site development costs
645

 
668

Gross property and equipment
82,139

 
75,117

Less: Accumulated depreciation and amortization
(48,681
)
 
(44,750
)
Property and equipment, net
$
33,458

 
$
30,367


Depreciation and amortization expense for property and equipment was $3.6 million and $2.7 million for the three months ended June 30, 2016 and 2015, respectively, and $6.7 million and $4.7 million for the six months ended June 30, 2016 and 2015, respectively.
The Company adjusted the amortization period of certain property and equipment that experienced changes in useful lives as a result of the City Index acquisition. This change in useful lives resulted in an additional charge of $0.2 million and $3.7 million during the three months ended June 30, 2016, and 2015, respectively, and $0.4 million and $3.7 million for the six months ended June 30, 2016 and 2015, respectively. The additional charge was recorded in Integration expenses.

7. INTANGIBLE ASSETS
The Company's various intangible assets consisted of the following as of (amounts in thousands): 
 
June 30, 2016
 
December 31, 2015
Intangibles
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Customer lists
$
52,731

 
$
(17,562
)
 
$
35,169

 
$
56,388

 
$
(14,111
)
 
$
42,277

Technology
71,855

 
(34,718
)
 
37,137

 
74,378

 
(32,117
)
 
42,261

Trademarks
7,583

 
(2,113
)
 
5,470

 
8,289

 
(1,678
)
 
6,611

Total finite lived intangibles
132,169

 
(54,393
)
 
77,776

 
139,055

 
(47,906
)
 
91,149

Trademark not subject to amortization (1)
363

 
—

 
363

 
363

 
—

 
363

Total intangibles
$
132,532

 
$
(54,393
)
 
$
78,139

 
$
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 June 30, 2016:
Intangible Assets
Amount (in thousands)
 
Weighted average amortization period
Customer lists
$
52,731

 
7.6 years
Technology
71,855

 
9.0 years
Trademarks (1)
7,946

 
6.7 years
 
$
132,532

 
 
(1) Trademarks with an indefinite-life, as described above, comprise $0.4 million of the $7.9 million of trademarks.
Amortization expense for the purchased intangibles was $3.8 million and $4.3 million for the three months ended June 30, 2016 and 2015, respectively, and $7.8 million and $6.4 million for the six months ended June 30, 2016 and 2015, respectively.

15

The Company adjusted the amortization period of certain intangible assets that experienced changes in useful lives as a result of the City Index acquisition. This change in useful lives resulted in no additional charge for the three and six months ended June 30, 2016, and $6.5 million and $6.5 million for the three and six months ended June 30, 2015, respectively. The additional charge is recorded in Integration expenses.

Goodwill
As of June 30, 2016 and December 31, 2015, the Company had recorded goodwill of approximately $32.9 million and $34.0 million, respectively. The decrease of $1.1 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
$
(895
)
$
(160
)
$
(84
)
$
(1,139
)
Carrying amount of goodwill as of June 30, 2016
$
25,827

$
4,628

$
2,423

$
32,878


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

 
June 30, 2016
 
December 31, 2015
Vendor and security deposits
$
12,219

 
$
11,486

Income tax receivable
8,076

 
9,482

Deferred tax assets, net
19,089

 
17,827

GTX trade receivables
5,461

 
4,881

Customer debit positions
9,104

 
7,340

Allowance on customer debit positions
(8,398
)
 
(6,832
)
Insurance receivable
3,250

 
—

Miscellaneous receivables
1,692

 
2,160

Equity method investment
807

 
822

 
$
51,300

 
$
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 sheets. The aggregate amount of these funds was $0.3 million and $0.3 million at June 30, 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 sheets. The aggregate amount of these funds was $6.5 million and $21.7 million at June 30, 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 six months ended June 30, 2015 were as follows (amounts in thousands):

17

 
For the Six Months Ended June 30,
 
2015
REVENUE:
 
Total non-interest revenue
$
241,461

Interest revenue
734

Interest expense
627

Total net interest revenue
107

Net revenue
241,568

EXPENSES:
 
Depreciation and amortization
5,360

Purchased intangible amortization
8,492

Other expense items
224,885

Total operating expense
238,737

OPERATING PROFIT
2,831

Interest on long term borrowings
5,101

INCOME BEFORE INCOME TAX EXPENSE
(2,270
)
Income tax expense
215

NET INCOME
(2,485
)
Net income attributable to non-controlling interests
760

Net income applicable to Gain Capital Holdings, Inc.
$
(3,245
)

Restructuring

During the second 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 six months ended June 30, 2016. These expenses are recorded in Restructuring expenses in the condensed consolidated statements of income and comprehensive income. The restructuring liabilities are recorded in Accrued compensation and benefits in the condensed consolidated balance sheets.
 
For the Six Months Ended June 30,
 
2016
Restructuring liability as of January 1, 2016
$
499

2016 restructuring expenses
803

Payments made in 2016
(1,302
)
Restructuring liability as of June 30, 2016
$
—



11. NON-CONTROLLING INTERESTS

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.



18

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

The non-controlling interests' carrying value is determined by the Company's purchase prices and the non-controlling interests' share of the Company's subsequent net income. This value is benchmarked against the redemption value of the sellers' put options. The carrying value is adjusted to the latter, provided that it does not fall below the initial carrying values, as determined by the Company's purchase price allocation. The Company has made a policy election to reflect any changes caused by such an adjustment in retained earnings, rather than in current earnings. The Company recorded an adjustment of $1.6 million for the six months ended June 30, 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
1,591

Net income attributable to non-controlling interests
1,094

Distributions to non-controlling interest holders
(525
)
June 30, 2016
$
13,206



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, which commenced on June 1, 2014. During the first quarter of 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 June 30, 2016 and December 31, 2015 were as follows (amounts in thousands):

19

 
June 30, 2016
 
December 31, 2015
Liability component - principal
$
138,150

 
$
140,000

Deferred bond discount
15,589

 
18,004

Deferred financing cost
$
212

 
256

Liability component - net carrying value
$
122,349

 
$
121,740

 
 
 
 
Additional paid in capital
$
27,822

 
$
27,920

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

 
$
27,508


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 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 income and comprehensive income was as follows (amounts in thousands):

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Interest expense - stated coupon rate
$
1,431

 
$
1,443

 
$
2,875

 
$
2,268

Interest expense - amortization of deferred bond discount and costs
1,091

 
1,023

 
2,156

 
1,611

Total interest expense - convertible senior notes
$
2,522

 
$
2,466

 
$
5,031

 
$
3,879




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, unvested restricted stock units and unvested restricted stock awards. Approximately 0.3 million and 0.7 million stock options were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2016, respectively, as they were anti-dilutive. Because of the loss for the three and six months ended June 30, 2015, no shares were 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 June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
$
10,841

 
$
(7,118
)
 
$
19,193

 
$
(1,654
)
Adjustment to the redemption value of put options related to non-controlling interests (1)
(1,690
)
 
(917
)
 
(1,591
)
 
(1,441
)
Income/(loss) available to common shareholders
$
9,151

 
$
(8,035
)
 
$
17,602

 
$
(3,095
)
Weighted average common shares outstanding:

 

 

 

Basic weighted average common shares outstanding
48,546,253

 
49,070,387

 
48,584,534

 
46,154,717

Effect of dilutive securities:

 

 

 

Stock options
85,115

 
—

 
128,654

 
—

RSUs/RSAs
105,820

 
—

 
147,345

 
—

Diluted weighted average common shares outstanding
48,737,188

 
49,070,387

 
48,860,533

 
46,154,717

Net earnings/(loss) per common share:

 

 

 

Basic
$
0.19

 
$
(0.16
)
 
$
0.36

 
$
(0.07
)
Diluted
$
0.19

 
$
(0.16
)
 
$
0.36

 
$
(0.07
)
 
(1)
During the three and six months ended June 30, 2016, the Company recorded an adjustment of $(1.7) million and $(1.6) million, respectively, 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. During the three and six months ended June 30, 2015, adjustments of $(0.9) million and $(1.4) million were recorded respectively 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 decreased earnings available to the Company's shareholders for purposes of calculating basic and diluted earnings per common share for the three and six months ended June 30, 2016 and June 30, 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

21

amount of that loss, the Company accrues the estimated loss by a charge to income. In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is often not possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal proceedings, the Company can estimate possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued. For certain other legal proceedings, the Company cannot reasonably estimate such losses, if any, since the Company cannot predict if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues must be developed, including the need to discover and determine important factual matters and the need to address novel or unsettled legal questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any proceeding.
Litigation

On February 16, 2012, the Company received a Letter of Claim on behalf of certain individuals who had lost money in an investment scheme operated by a third-party money management firm, incorporated in the United Kingdom, which has since been closed down by the United Kingdom’s Financial Services Authority. The investment firm, Cameron Farley Ltd, had opened a corporate account with the Company and invested the individuals’ money, representing such funds as its own, while operating a fraudulent scheme. Though a complaint 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 $5.0 million and $7.4 million for the three and six months ended June 30, 2016, respectively. The Company’s benefit for income taxes was approximately $6.0 million and $0.3 million for the three and six months ended June 30, 2015, respectively. These amounts reflect effective tax rates of 30.2% and 47.4%, adjusted for certain discrete items, for the three months ended June 30, 2016 and 2015, respectively. The Company's effective tax rates of 26.6% and 24.7% for the six months ended June 30, 2016 and 2015, respectively, reflect the Company's estimate of the annual effective tax rate adjusted for certain discrete items. Changes in the Company's effective rate arise primarily from changes in the geographic mix of revenues and expenses.
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company’s net deferred tax assets are included in Other assets on the condensed consolidated balance sheets.

22

16. REGULATORY REQUIREMENTS
The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of June 30, 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
$
28.4

 
$
43.1

 
$
14.7

 
152
%
GAIN Capital-Forex.com U.K., Ltd.
27.9

 
71.2

 
43.3

 
255
%
GAIN Capital Japan Co., Ltd.
1.4

 
10.0

 
8.6

 
714
%
GAIN Capital-Forex.com Hong Kong, Ltd.
1.9

 
4.2

 
2.3

 
221
%
GAIN Capital Forex.com Australia, Pty. Ltd.
0.7

 
2.6

 
1.9

 
371
%
Trade Facts, Ltd.
0.7

 
3.9

 
3.2

 
557
%
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.
59.9

 
127.0

 
67.1

 
212
%
Gain Capital Singapore Pte, Ltd.
0.4

 
8.5

 
8.1

 
2,125
%
Gain Capital Australia Pty Ltd.
0.7

 
3.1

 
2.4

 
443
%
Global Assets Advisors, LLC
0.1

 
1.9

 
1.8

 
1,900
%
Gain Capital Payments Ltd.
0.7

 
0.7

 
—

 
100
%
Total
$
123.3

 
$
278.3

 
$
155.0

 
226
%

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 $0.3 million, $0.6 million for the three months ended June 30, 2016 and 2015. Eliminations between operating segments which were $0.7 million, $0.6 million for the six months ended June 30, 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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net revenue
$
89,370

 
$
87,593

 
$
186,075

 
$
160,935

 
 
 
 
 
 
 
 
Employee compensation and benefits
16,897

 
20,418

 
33,599

 
32,575

Selling and marketing
6,546

 
8,118

 
12,760

 
12,326

Referral fees
13,699

 
25,942

 
30,301

 
48,615

Other operating expenses
20,749

 
20,631

 
41,628

 
31,918

Segment profit
$
31,479

 
$
12,484

 
$
67,787

 
$
35,501

 
 
 
 
 
Institutional
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net revenue
$
7,482

 
$
8,925

 
$
14,601

 
$
18,999

 
 
 
 
 
 
 
 
Employee compensation and benefits
3,462

 
4,300

 
6,664

 
8,260

Selling and marketing
35

 
38

 
41

 
109

Other operating expenses
2,518

 
2,497

 
4,959

 
5,009

Segment profit
$
1,467

 
$
2,090

 
$
2,937

 
$
5,621

 
 
 
 
 
Futures
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net revenue
$
12,857

 
10,877

 
$
25,060

 
22,413

 
 
 
 
 
 
 
 
Employee compensation and benefits
3,111

 
2,716

 
6,097

 
5,235

Selling and marketing
224

 
259

 
443

 
539

Referral fees
3,854

 
3,597

 
7,915

 
7,501

Other operating expenses
3,846

 
3,320

 
7,829

 
6,931

Segment profit
$
1,822

 
$
985

 
$
2,776

 
$
2,207

 
 
 
 
 
 
 
 
Corporate and Other
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Other revenue/(expense)
$
(1,420
)
 
$
(550
)
 
$
(1,894
)
 
$
(2,516
)
 
 
 
 
 
 
 
 
Employee compensation and benefits
3,145

 
3,242

 
6,648

 
6,745

Other operating expenses
2,547

 
2,616

 
5,565

 
5,135

Loss
$
(7,112
)
 
$
(6,408
)
 
$
(14,107
)
 
$
(14,396
)

24


Reconciliation of operating segment profit to Income/(loss) before income tax expense
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Retail segment
$
31,479

 
$
12,484

 
$
67,787

 
$
35,501

Institutional segment
1,467

 
2,090

 
2,937

 
5,621

Futures segment
1,822

 
985

 
2,776

 
2,207

Corporate and other
(7,112
)
 
(6,408
)
 
(14,107
)
 
(14,396
)
SEGMENT PROFIT
27,656

 
9,151

 
59,393

 
28,933

Depreciation and amortization
3,559

 
2,738

 
6,712

 
4,713

Purchased intangible amortization
3,843

 
4,257

 
7,765

 
6,408

Acquisition expenses
—

 
2,442

 
—

 
2,479

Restructuring expenses
22

 
1,935

 
803

 
1,935

Integration expenses
1,043

 
12,309

 
1,856

 
12,373

Legal settlement
—

 
—

 
9,412

 
—

SNB bad debt provision
—

 
—

 
—

 
2,500

Adjustment to fair value of contingent consideration
—

 
(4,343
)
 
—

 
(4,343
)
OPERATING PROFIT/(LOSS)
19,189

 
(10,187