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EX-32.2 - EXHIBIT 32.2 - GAIN Capital Holdings, Inc.exhibit32_210q3-31x17.htm
EX-32.1 - EXHIBIT 32.1 - GAIN Capital Holdings, Inc.exhibit32_110q3-31x17.htm
EX-31.2 - EXHIBIT 31.2 - GAIN Capital Holdings, Inc.exhibit31_210q3-31x17.htm
EX-31.1 - EXHIBIT 31.1 - GAIN Capital Holdings, Inc.exhibit31_110q3-31x17.htm
EX-10.1 - EXHIBIT 10.1 - GAIN Capital Holdings, Inc.fxcmusaapaexhibt10_1.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, 2017
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
¨
 
 
 
Emerging growth company
¨




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨  

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 April 30, 2017, the registrant had 47,680,122 shares of common stock, $0.00001 par value per share, outstanding.



GAIN CAPITAL HOLDINGS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017
 
 
 
 
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016
 
Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2017 and 2016
 
Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2017 and 2016
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016
 
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 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 

3


PART I – FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
 
 
March 31, 2017
 
December 31, 2016
ASSETS:
 
 
 
Cash and cash equivalents
$
183,667

 
$
234,760

Cash and securities held for customers
1,042,144

 
945,468

Receivables from brokers
75,859

 
61,096

Property and equipment
37,978

 
36,462

Intangible assets
70,498

 
67,358

Goodwill
32,274

 
32,107

Other assets
50,217

 
52,833

Total assets
$
1,492,637

 
$
1,430,084

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities
 
 
 
Payables to customers
$
1,042,144

 
$
945,468

Accrued compensation and benefits
4,885

 
13,559

Accrued expenses and other liabilities
39,631

 
41,547

Income tax payable
855

 
3,965

Convertible senior notes
126,009

 
124,769

Total liabilities
$
1,213,524

 
$
1,129,308

Commitments and contingent liabilities

 

Redeemable non-controlling interests
$
5,800

 
$
6,594

Shareholders’ equity
 
 
 
Common stock ($0.00001 par value; 120 million shares authorized, 53,031,562 shares issued and 47,767,973 shares outstanding as of March 31, 2017; 120 million shares authorized, 52,848,811 shares issued and 48,220,243 shares outstanding as of December 31, 2016)
$

 
$

Additional paid-in capital
219,505

 
218,392

Retained earnings
121,722

 
143,399

Accumulated other comprehensive loss
(32,303
)
 
(36,842
)
Treasury stock, at cost (5,263,589 shares at March 31, 2017 and 4,628,568 at December 31, 2016)
(35,611
)
 
(30,767
)
Total shareholders’ equity
273,313

 
294,182

Total liabilities and shareholders’ equity
$
1,492,637

 
$
1,430,084

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

4


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss)
(Unaudited)
(in thousands, except share and per share data)
 
 
Three Months Ended March 31,
 
2017
 
2016
REVENUE:
 
 
 
Retail revenue
$
38,931

 
$
95,042

Institutional revenue
8,367

 
6,707

Futures revenue
10,580

 
12,018

Other revenue
1,011

 
1,573

Total non-interest revenue
58,889

 
115,340

Interest revenue
841

 
318

Interest expense
163

 
104

Total net interest revenue
678

 
214

Net revenue
$
59,567

 
$
115,554

EXPENSES:

 

Employee compensation and benefits
$
24,215

 
$
26,393

Selling and marketing
9,256

 
6,439

Referral fees
16,441

 
20,663

Trading expenses
8,067

 
8,433

General and administrative
9,737

 
16,038

Depreciation and amortization
4,019

 
3,153

Purchased intangible amortization
3,602

 
3,922

Communications and technology
5,152

 
5,279

Bad debt provision
72

 
572

Restructuring expenses

 
781

Integration expenses

 
813

Legal settlement

 
9,412

Total operating expense
80,561

 
101,898

OPERATING (LOSS)/PROFIT
(20,994
)
 
13,656

Interest expense on long term borrowings
2,665

 
2,592

(LOSS)/INCOME BEFORE INCOME TAX EXPENSE
(23,659
)
 
11,064

Income tax (benefit)/expense
(4,893
)
 
2,347

Equity in net loss of affiliate
(20
)
 
(16
)
NET (LOSS)/INCOME
(18,786
)
 
8,701

Net income attributable to non-controlling interests
85

 
349

NET (LOSS)/INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
(18,871
)
 
8,352

Other comprehensive loss:


 


Foreign currency translation adjustment
4,539

 
(2,745
)
NET COMPREHENSIVE (LOSS)/INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
$
(14,332
)
 
$
5,607

(Loss)/Earnings per common share:


 


Basic
$
(0.39
)
 
$
0.17

Diluted
$
(0.39
)
 
$
0.17

Weighted average common shares outstanding used in computing (loss)/earnings per common share:


 


Basic
47,894,546

 
48,622,816

Diluted
47,894,546

 
48,983,880

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, 2016
48,220,243

 
$

 
$
(30,767
)
 
$
218,392

 
$
143,399

 
$
(36,842
)
 
$
294,182

Net loss applicable to Gain Capital Holdings, Inc.

 

 

 

 
(18,871
)
 

 
(18,871
)
Exercise of options
182,751

 

 

 

 

 

 

Purchase of treasury stock
(612,423
)
 

 
(4,662
)
 

 

 

 
(4,662
)
Shares withheld for net settlements of share-based awards
(22,598
)
 

 
(182
)
 

 

 

 
(182
)
Share-based compensation

 

 

 
1,113

 

 

 
1,113

Adjustment to fair value of redeemable non-controlling interests

 

 

 

 
68

 

 
68

Dividends declared

 

 

 

 
(2,874
)
 

 
(2,874
)
Foreign currency translation adjustment

 

 

 

 

 
4,539

 
4,539

BALANCE—March 31, 2017
47,767,973

 
$

 
$
(35,611
)
 
$
219,505

 
$
121,722

 
$
(32,303
)
 
$
273,313


 
 
 
 
 
 
 
 
 
 
 
 
 
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

Net income applicable to Gain Capital Holdings, Inc.

 

 

 

 
8,352

 

 
8,352

Exercise of options
150,566

 

 

 
577

 

 

 
577

Purchase of treasury stock
(500,000
)
 

 
(3,536
)
 

 

 

 
(3,536
)
Shares withheld for net settlements of share-based awards
(9,330
)
 

 
(65
)
 

 

 

 
(65
)
Share-based compensation

 

 

 
1,067

 

 

 
1,067

Adjustment to fair value of redeemable non-controlling interests

 

 

 

 
99

 

 
99

Dividends declared

 

 

 

 
(2,408
)
 

 
(2,408
)
Foreign currency translation adjustment

 

 

 

 

 
(2,745
)
 
(2,745
)
Conversion of restricted stock into common stock
306,177

 

 

 

 

 

 

Tax benefit of stock options exercises

 

 

 
176

 

 

 
176

Convertible note buyback

 

 

 
(105
)
 

 

 
(105
)
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 unaudited condensed consolidated financial statements.


6



GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (loss)/income
$
(18,786
)
 
$
8,701

Adjustments to reconcile net (loss)/income to cash (used in)/provided by operating activities
 
 
 
(Gain)/loss on foreign currency exchange rates
(117
)
 
162

Depreciation and amortization
7,621

 
7,075

Non-cash integration costs

 
173

Deferred tax (benefit)/expense

 
(169
)
Amortization of deferred financing costs
110

 
110

Bad debt provision
72

 
572

Convertible senior notes discount amortization
1,130

 
1,057

Share-based compensation
1,113

 
1,067

Gain on extinguishment of debt

 
(89
)
Equity in net loss of affiliate
20

 
16

Changes in operating assets and liabilities:
 
 
 
Cash and securities held for customers
(86,437
)
 
45,873

Receivables from brokers
(14,365
)
 
4,159

Other assets
2,969

 
(4,776
)
Payables to customers
86,437

 
(45,873
)
Accrued compensation and benefits
(8,720
)
 
(3,373
)
Accrued expenses and other liabilities
(3,334
)
 
15,071

Income tax payable
(2,376
)
 
4,353

Net cash (used in)/provided by operating activities
(34,663
)
 
34,109

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(5,639
)
 
(5,922
)
Acquisition of FXCM assets
(5,125
)
 

Net cash used in investing activities
(10,764
)
 
(5,922
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options

 
577

Purchase of treasury stock
(4,844
)
 
(3,601
)
Excess tax benefit from employee stock option exercises

 
238

Dividend payments
(2,874
)
 
(2,408
)
Distributions to non-controlling interest holders
(811
)
 

Repurchase of convertible notes

 
(1,735
)
Net cash used in financing activities
(8,529
)
 
(6,929
)
Effect of exchange rate changes on cash and cash equivalents
2,863

 
(3,417
)
NET(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
(51,093
)
 
17,841

CASH AND CASH EQUIVALENTS—Beginning of period
234,760

 
171,888

CASH AND CASH EQUIVALENTS—End of period
$
183,667

 
$
189,729

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash (paid)/received during the year for:
 
 
 
Interest
$
(163
)
 
$
(104
)
Income taxes
$
(403
)
 
$
688

Non-cash financing activities:
 
 
 
Adjustment to redemption value of non-controlling interests
$
68

 
$
99

The accompanying notes are an integral part of these unaudited 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 owns all outstanding membership units of GAIN Capital Group, LLC (“Group, LLC”), the Company's primary regulated entity in the United States. Gain Capital Holdings Ltd. (previously known as "City Index (Holdings) Ltd" or "City Index") is the holding company of the Company's primary regulated entity in the United Kingdom.

The Company is a global provider of trading services and solutions, specializing in over-the-counter, or OTC, and exchange-traded markets. The Company operates its business in three segments. Through its retail segment, the Company provides its retail customers around the world with access to a diverse range of global financial markets, including spot forex, precious metals, spread bets and contracts for difference, or CFDs, on commodities, indices, individual equities, options and interest rate products, as well as OTC options on forex. The Company's institutional segment provides agency execution services and electronic access to spot and forward foreign exchange and precious metals markets via the electronic communications network, or ECN, GTX. The Company's 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. For more information about the Company's segments, please see Note 17.

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.
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, 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.


2. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (Step 2) from the goodwill impairment test. Instead, an impairment charge will equal the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. The guidance will be effective prospectively for the Company for the quarter ending December 31, 2020, with early adoption permitted after January 1, 2017. The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.

In December 2016, the FASB issued technical corrections and improvements to revenue recognition guidance previously issued in May 2014 as discussed below. The FASB issued this update to address narrow aspects of 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

8


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 Condensed Consolidated Financial Statements.

In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Condensed Consolidated Statement of Cash Flows.

In August 2016, the FASB issued new guidance regarding the classification of certain cash receipts and cash payments on the Statements of Cash Flows. This new standard clarifies certain aspects of the statement of cash flows, including the classification of debt prepayment or debt extinguishment costs or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. This new standard also clarifies that an entity should determine each separately identifiable source of use within the cash receipts and payments on the basis of the nature of the underlying cash flows. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently assessing the impact of adopting this guidance on its Condensed Consolidated Financial Statements.

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 Condensed Consolidated Financial Statements.

In March and April 2016, the FASB issued new guidance regarding the accounting for revenue from contracts with customers. The FASB issued these updates 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 Condensed Consolidated 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 Condensed 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. 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 Condensed Consolidated Financial Statements.


3. FAIR VALUE MEASUREMENT


9


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, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Money market accounts
$
154,991

 
$

 
$

 
$
154,991

Cash and securities held for customers:
 
 
 
 
 
 
 
US treasury bills: U.S. government and agency securities
119,934

 

 

 
119,934

Receivable from brokers:
 
 
 
 
 
 
 
Broker derivative contracts

 
11,163

 

 
11,163

Other assets:
 
 
 
 
 
 
 
Certificates of deposit
175

 

 

 
175

Other
125

 

 

 
125

Payables to customers:
 
 
 
 
 
 
 
Customer derivative contracts

 
108,146

 

 
108,146

Total
$
275,225

 
$
119,309

 
$

 
$
394,534

 
 
Fair Value Measurements on a Recurring Basis
as of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets (Liabilities):
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Money market accounts
$
120,927

 
$

 
$

 
$
120,927

Cash and securities held for customers:
 
 
 
 
 
 
 
US treasury bills: U.S. government and agency securities
135,974

 

 

 
135,974

Receivable from brokers:
 
 
 
 
 
 
 
Broker derivative contracts

 
5,228

 

 
5,228

Other assets:
 
 
 
 
 
 
 
Certificates of deposit
175

 

 

 
175

Other
115

 

 

 
115

Payables to customers:
 
 
 
 
 
 
 
Customer derivative contracts

 
115,677

 

 
115,677

Total
$
257,191

 
$
120,905

 
$

 
$
378,096


The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the three months ended March 31, 2017, nor has there been any movement between levels during these respective periods.
Level 1 Financial Assets

The Company has U.S. Treasury bills, money market accounts and certificates of deposit that are Level 1 financial instruments that are recorded based upon listed or quoted market rates. The U.S. Treasury bills and money market accounts are recorded in Cash and cash equivalents and Cash and securities held for customers and the certificates of deposit are recorded in Other Assets.
Level 2 Financial Assets and Liabilities

The Company has customer derivative contracts that are Level 2 financial instruments recorded in Payables to customers.


10


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 did not have any Level 3 Financial Assets or Liabilities on March 31, 2017 or December 31, 2016.

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.

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 (amounts in thousands).

 
As of March 31, 2017
 
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
$
64,696

 
$
64,696

 
$

 
$
64,696

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
$
1,150,290

 
$
1,150,290

 
$

 
$
1,150,290

 
$

Convertible senior notes
$
126,009

 
$
123,898

 
$

 
$
123,898

 
$


 
As of December 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
$
55,868

 
$
55,868

 
$

 
$
55,868

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
$
1,061,146

 
$
1,061,146

 
$

 
$
1,061,146

 
$

Convertible senior notes
$
124,769

 
$
122,544

 
$

 
$
122,544

 
$


4. DERIVATIVES


11


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 Sheets (amounts in thousands):

 
March 31, 2017
 
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
$
124,428

 
$
(53,140
)
 
$
71,288

CFD contracts
74,806

 
(34,921
)
 
39,885

Metals contracts
12,081

 
(3,945
)
 
8,136

Total
$
211,315

 
$
(92,006
)
 
$
119,309

 
March 31, 2017
 
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
$
64,696

 
$
11,163

 
$
75,859

Payables to customers
$
(1,150,290
)
 
$
108,146

 
$
(1,042,144
)

 
December 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
$
130,301

 
$
(59,631
)
 
$
70,670

CFD contracts
74,443

 
(37,241
)
 
37,202

Metals contracts
18,766

 
(5,733
)
 
13,033

Total
$
223,510

 
$
(102,605
)
 
$
120,905

 
 
 
 
 
 
 
December 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
$
55,868

 
$
5,228

 
$
61,096

Payables to customers
$
(1,061,145
)
 
$
115,677

 
$
(945,468
)

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 have considerably higher prices. The amounts reported within Receivables from brokers and Payables to customers on the Consolidated Balance Sheets are derived from the number of contracts below (amounts in thousands):
 
March 31, 2017

12


 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,154,605

 
3,353,340

CFD contracts
122,907

 
169,959

Metals contracts
736

 
997

Total
3,278,248

 
3,524,296


13



 
December 31, 2016
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
2,427,066

 
2,288,386

CFD contracts
112,685

 
156,308

Metals contracts
820

 
341

Total
2,540,571

 
2,445,035


The Company did not designate any of its derivatives as hedging instruments. Net gains with respect to derivative instruments are reflected in Retail revenue in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2017 and 2016 as follows (amounts in thousands): 

 
Three Months Ended March 31,
 
2017
 
2016
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
$
17,376

 
$
54,297

CFD contracts
26,791

 
35,222

Metals contracts
(5,236
)
 
4,960

Total
$
38,931

 
$
94,479


5. RECEIVABLES FROM BROKERS
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 Sheets.
Amounts receivable from brokers consisted of the following as of (amounts in thousands): 
 
March 31, 2017
 
December 31, 2016
Required collateral
$
64,696

 
$
55,868

Open foreign exchange positions
11,163

 
5,228

Total
$
75,859

 
$
61,096


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, 2017
 
December 31, 2016
Software
$
57,815

 
$
52,891

Computer equipment
20,460

 
19,797

Leasehold improvements
11,139

 
11,055

Telephone equipment
784

 
778

Office equipment
2,139

 
2,138

Furniture and fixtures
2,320

 
2,285

Web site development costs
644

 
644

Gross property and equipment
95,301

 
89,588

Less: Accumulated depreciation and amortization
(57,323
)
 
(53,126
)

14


Property and equipment, net
$
37,978

 
$
36,462

Depreciation and amortization expense for property and equipment was $4.0 million and $3.2 million for the three months ended March 31, 2017 and 2016, 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 no additional charge during the three months ended March 31, 2017 and $0.2 million during the three months ended March 31, 2016, 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): 
 
March 31, 2017
 
December 31, 2016
Intangibles
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Customer lists
$
56,831

 
$
(23,111
)
 
$
33,720

 
$
50,253

 
$
(20,928
)
 
$
29,325

Technology
70,515

 
(38,526
)
 
31,989

 
70,145

 
(37,074
)
 
33,071

Trademarks
7,207

 
(2,781
)
 
4,426

 
7,104

 
(2,505
)
 
4,599

Total finite lived intangibles
134,553

 
(64,418
)
 
70,135

 
127,502

 
(60,507
)
 
66,995

Trademark not subject to amortization (1)
363

 

 
363

 
363

 

 
363

Total intangibles
$
134,916

 
$
(64,418
)
 
$
70,498

 
$
127,865

 
$
(60,507
)
 
$
67,358

(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. The Company compares the recorded value of the indefinite-life intangible assets to their fair value on an annual basis and whenever circumstances arise that indicate that impairment may have occurred.

The Company had the following identifiable intangible assets and weighted average amortization periods as of March 31, 2017:
Intangible Assets
Amount (in thousands)
 
Weighted average amortization period
Customer lists
$
56,831

 
7.0 years
Technology
70,515

 
9.0 years
Trademarks (1)
7,570

 
6.7 years
Total intangible assets
$
134,916

 
 
(1) Trademarks with an indefinite-life, as described above, comprise $0.4 million of the $7.6 million of trademarks.

On February 7, 2017, the Company entered into an Asset Purchase Agreement (the "Purchase Agreement") with Forex Capital Markets L.L.C. ("FXCM"). Pursuant to the terms of the Purchase Agreement, FXCM transferred substantially all of its U.S.-domiciled customer accounts to the Company effective as of February 24, 2017. In consideration of the transfer of these accounts, the Company has and will continue to pay FXCM, without duplication:

$500 per account for each transferred account that first executes a new trade with GAIN during the 76-day period immediately following the closing of the account transfer (the "Initial Period"); and

$250 per account for each transferred account that (i) did not execute a new trade with GAIN during the Initial Period and (ii) executes a new trade with GAIN during the 77-day period immediately following the last day of the Initial Period.

The Company has paid $5.1 million and accrued $0.9 million for the three months ended March 31, 2017, which was capitalized and included as an intangible asset.
Amortization expense for the purchased intangibles was $3.6 million and $3.9 million for the three months ended March 31, 2017 and 2016, respectively.

15



Goodwill

Goodwill is evaluated for impairment on an annual basis during the fourth quarter and in interim periods when events or changes indicate the carrying value may not be recoverable. The Company operates under three reporting units: retail, institutional and futures. There were no additions or impairments to the carrying value of the Company’s goodwill during the three months ended March 31, 2017.

As of March 31, 2017 and December 31, 2016, the Company had recorded goodwill of approximately $32.3 million and $32.1 million, respectively. The increase of $0.2 million was related to foreign currency translation adjustments.
The following represents the changes in the carrying amount of goodwill by segment (amounts in thousands):
 
Retail
Institutional
Futures
Total
Carrying amount of goodwill as of December 31, 2016
$
25,222

$
4,519

$
2,366

$
32,107

Foreign currency translation adjustments
132

23

12

167

Carrying amount of goodwill as of March 31, 2017
$
25,354

$
4,542

$
2,378

$
32,274


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

 
March 31, 2017
 
December 31, 2016
Vendor and security deposits
$
11,881

 
$
9,670

Income tax receivable
3,297

 
1,017

Deferred tax assets, net
14,658

 
15,071

GTX trade receivables
5,899

 
7,515

Customer debit positions
9,645

 
9,781

Allowance on customer debit positions
(9,240
)
 
(9,237
)
Insurance receivable

 
3,500

Prepaid assets
8,321

 
8,300

Miscellaneous receivables
5,165

 
6,615

Equity method investment
591

 
601

Total other assets
$
50,217

 
$
52,833


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 $0.2 million and $0.3 million at March 31, 2017 and December 31, 2016, 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 $8.6 million and $3.8 million at March 31, 2017 and December 31, 2016, respectively.


16


10. RESTRUCTURING

During 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/(Loss). The restructuring liabilities have all been paid as of March 31, 2017. The Company incurred no additional restructuring expenses for the three months ended March 31, 2017.

11. NON-CONTROLLING INTERESTS

Non-controlling interests

In March 2014, the Company acquired controlling interests in Global Asset Advisors ("GAA") and Top Third ("TT"). The Company purchased 55% of each entity, and the respective sellers maintained a 45% interest in each entity, subject to immediately exercisable call options for the Company to purchase the remaining interests, as well as put options for the sellers to sell their remaining interests in each entity to the Company that were to become exercisable in 2017. In December 2016, the Company acquired an additional 24% of each entity and, accordingly, the respective sellers now maintain a 21% interest in each entity. In connection with the purchase of these additional interests, the Company and the respective sellers agreed that neither would exercise the call options or put options with respect to the remaining interests prior to December 31, 2017.

In accordance with ASC 480-10-S99-3A, Classification and Measurement of Redeemable Securities, non-controlling interests are classified outside of permanent equity as their redemption is not (i) mandatory, (ii) at fixed prices, and (iii) exclusively within the Company's control.

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 (loss). 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 reflects any changes caused by such an adjustment in retained earnings, rather than in current earnings.

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


Redeemable non-controlling interests
January 1, 2017
$
6,594

Adjustment to the redemption value of non-controlling interests
(68
)
Net income attributable to non-controlling interests
85

Distributions to non-controlling interest holders
(811
)
March 31, 2017
$
5,800



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.

17


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, 2017 and December 31, 2016 were as follows (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
Liability component - principal
$
138,150

 
$
138,150

Deferred bond discount
(11,995
)
 
(13,213
)
Deferred financing cost
(146
)
 
(168
)
Liability component - net carrying value
$
126,009

 
$
124,769

 
 
 
 
Additional paid in capital
$
27,822

 
$
27,822

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

 
$
27,403


Interest expense related to the Convertible Senior Notes, included in Interest Expense on long term borrowings in the Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) was as follows (amounts in thousands):

 
For the Three Months Ended March 31,
 
2017
 
2016
Interest expense - stated coupon rate
$
1,425

 
$
1,444

Interest expense - amortization of deferred bond discount and costs
1,240

 
1,079

Total interest expense - convertible senior notes
$
2,665

 
$
2,523




18


13. EARNINGS/(LOSS) PER COMMON SHARE

Basic and diluted earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) 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 0.4 million stock options were excluded from the calculation of diluted earnings (loss) per share for the three months ended March 31, 2017 and 2016, respectively, as they were anti-dilutive.

Diluted earnings (loss) 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 as of March 31, 2017, for the 2018 and 2020 notes, respectively.
The following table sets forth the computation of earnings (loss) per share (amounts in thousands except share and per share data):
 
 
For the Three Months Ended March 31,
 
2017
 
2016
Net (loss)/income applicable to GAIN Capital Holdings, Inc.
$
(18,871
)
 
$
8,352

Adjustment (1)
68

 
99

Net (loss)/income available to GAIN common shareholders
$
(18,803
)
 
$
8,451

Weighted average common shares outstanding:

 

Basic weighted average common shares outstanding
47,894,546

 
48,622,816

Effect of dilutive securities:

 

Stock options
328,325

 
172,193

RSUs/RSAs
13,845

 
188,871

Diluted weighted average common shares outstanding
47,894,546

 
48,983,880

(Loss)/earnings per common share:

 

Basic
$
(0.39
)
 
$
0.17

Diluted
$
(0.39
)
 
$
0.17

 
(1)
During the three months ended March 31, 2017 and 2016, the Company concluded that the carrying value of the Company's redeemable noncontrolling interests was less than their redemption value, requiring that an adjustment to the carrying value be recorded for purposes of calculating earnings (loss) per common share. The adjustment to increase or reduce the carrying value will, respectively, reduce or increase earnings (loss) per common share by reducing or increasing net income available to common shareholders.


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 reasonably 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.


19


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 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. 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. For the year ended December 31, 2016, the settlement amount, net of insurance recoveries, totaled approximately $9.2 million following an additional recovery of $0.2 million during the period ended September 30, 2016.


15. INCOME TAXES
The Company's benefit and provision for income taxes were approximately $4.9 million and $2.3 million for the three months ended March 31, 2017 and 2016, respectively. These amounts reflect the Company's estimate of the annual effective tax rates of 20.7% and 21.2%, adjusted for certain discrete items, for the three months ended March 31, 2017 and 2016, respectively. 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. Certain net deferred tax assets of the Company are included in Other assets on the Condensed Consolidated Balance Sheets.


20


16. REGULATORY REQUIREMENTS
The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of March 31, 2017 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
$
35.8

 
$
45.3

 
$
9.5

 
127
%
GAIN Capital Forex.com Australia, Pty. Ltd.
0.8

 
2.6

 
1.8

 
325
%
GAIN Capital Securities, Inc.
0.1

 
0.4

 
0.3

 
400
%
Trade Facts, Ltd.
0.6

 
3.7

 
3.1

 
617
%
GAIN Capital-Forex.com Hong Kong, Ltd.
1.9

 
4.5

 
2.6

 
237
%
GAIN Capital Australia Pty Ltd.
0.7

 
4.6

 
3.9

 
657
%
GAIN Capital-Forex.com Canada Ltd.
0.2

 
1.5

 
1.3

 
750
%
GAIN Capital-Forex.com U.K., Ltd.
6.8

 
23.0

 
16.2

 
338
%
GAIN Capital Japan Co., Ltd.
1.3

 
9.0

 
7.7

 
692
%
GAIN Global Markets, Inc.
0.1

 
1.1

 
1.0

 
1,100
%
GAIN Capital UK, Ltd.
75.5

 
169.9

 
94.4

 
225
%
GAIN Capital Singapore Pte, Ltd.
0.6

 
9.8

 
9.2

 
1,633
%
Global Assets Advisors, LLC
0.1

 
1.2

 
1.1

 
1,200
%
GAIN Capital Payments Ltd.
0.1

 
0.5

 
0.4

 
500
%
Total
$
124.6

 
$
277.1

 
$
152.5

 
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. 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. spread bets and CFDs on commodities, indices, individual equities, options 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 in foreign exchange, commodities, equities, options and futures via an electronic communications network, or ECN, through the Company's GTX platform. We provide deep liquidity in spot and forward foreign exchange and precious metals to buy-side and sell-side firms, including banks, brokers, hedge funds, Commodity Trading Advisors and asset managers. 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, GAIN Capital Group, LLC, under the GAIN

21


Capital Futures brand. In addition, in 2014, the Company expanded its futures business by acquiring majority interests in GAA and TT.

Corporate and other

Corporate and other provides general corporate services to the Company's segments and also includes eliminations between operating segments which were $0.5 million and $0.4 million for the three months ended March 31, 2017 and 2016, respectively. 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,
 
2017
 
2016
Net revenue
$
40,086

 
$
96,705

 
 
 
 
Employee compensation and benefits
15,348

 
16,702

Selling and marketing
8,904

 
6,213

Referral fees
12,323

 
16,602

Other operating expenses
14,483

 
20,881

Segment (loss)/profit
$
(10,972
)
 
$
36,307

 
Institutional
 
Three Months Ended March 31,
 
2017
 
2016
Net revenue
$
8,621

 
$
7,119

 
 
 
 
Employee compensation and benefits
4,041

 
3,202

Selling and marketing
21

 
6

Other operating expenses
3,228

 
2,440

Segment profit
$
1,331

 
$
1,471

 
Futures
 
Three Months Ended March 31,
 
2017
 
2016
Net revenue
$
10,967

 
12,204

 
 
 
 
Employee compensation and benefits
2,551

 
2,986

Selling and marketing
265

 
220

Referral fees
4,118

 
4,061

Other operating expenses
3,742

 
3,983

Segment profit
$
291

 
$
954

 
 
 
 
Corporate and Other
 
Three Months Ended March 31,
 
2017
 
2016

22


Other revenue/(expense)
$
(108
)
 
$
(474
)
 
 
 
 
Employee compensation and benefits
2,524

 
3,503

Selling and marketing
64

 

Other operating expenses
1,327

 
3,018

Segment loss
$
(4,023
)
 
$
(6,995
)

Reconciliation of operating segment (loss)/profit to (Loss)/Income before income tax expense
 
Three Months Ended March 31,
 
2017
 
2016
Retail segment
$
(10,972
)
 
$
36,307

Institutional segment
1,331

 
1,471

Futures segment
291

 
954

Corporate and other
(4,023
)
 
(6,995
)
SEGMENT (LOSS)/PROFIT
(13,373
)
 
31,737

Depreciation and amortization
4,019

 
3,153

Purchased intangible amortization
3,602

 
3,922

Restructuring expenses

 
781

Integration expenses

 
813

Legal settlement

 
9,412

OPERATING (LOSS)/PROFIT
(20,994
)
 
13,656

Interest expense on long term borrowings
2,665

 
2,592

(LOSS)/INCOME BEFORE INCOME TAX EXPENSE
$
(23,659
)
 
$
11,064

18. SUBSEQUENT EVENTS
In April 2017, the Company announced the payment of a $0.06 dividend per share of Common Stock payable on June 20, 2017 to stockholders of record on June 13, 2017.

23


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. GAIN’s fiscal quarter ended on March 31, 2017.
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, 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 GAIN operates and management’s current beliefs and assumptions. Any statements contained herein (including, without limitation, statements to the effect that management or GAIN “believes,” “expects,” “anticipates,” “plans” 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. These factors include, without limitation, 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, 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. 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; Tokyo, Japan; Sydney, Australia; Shanghai, China; Pembroke, Bermuda; Hong Kong; Dubai, U.A.E., 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 assets. We offer CFDs on currencies, commodities, indices, individual equities, bonds, options 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 17 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 as OTC options on forex. Our institutional segment provides agency execution services and offers access to markets in foreign exchange, commodities, equities, options and futures via our GTX platform. We provide deep liquidity in spot and forward foreign exchange and precious metals to buy-side and sell-side firms, including banks, brokers, hedge funds, Commodity Trading Advisors and asset managers. 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

24


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. Please see "Item 1A. Risk Factors" for a discussion of other factors that may impact our business.

Market Environment and Trading Volatility
Our revenue and operating results may vary significantly from period to period primarily due 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.

Our results of operations for the three months ended March 31, 2017 reflected challenging market conditions, with the narrowing of average trading ranges and volatility decreasing from the levels experienced during the twelve months ended December 31, 2016. This decreased level of volatility impacted our retail segment, resulting in lower than expected average daily volumes and revenue capture during the three months ended March 31, 2017.

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 which 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 businesses. For example, as a result of the Dodd-Frank Act’s requirement that essentially all transactions in commodities be executed on an exchange, after July 15, 2011, we were no longer permitted to offer leveraged spot metal transactions in the United States. In addition, in December 2016, the FCA issued a consultation paper, referred to as CP16/40, that includes a number of proposed changes to the regulatory requirements relating to companies, such as GCUK2, that offer CFDs and spread bets. These proposed requirements include enhanced risk disclosures, a ban on offering account bonuses or similar promotional incentives to clients, mandatory margin close-out levels for retail clients and limitations on the leverage that may be offered to clients, with the limitations varying based on whether the clients are classified as experienced or inexperienced using criteria identified by the FCA. The comment period for CP16/40 expired in March 2017 and we cannot currently predict which, if any, of the proposed changes will be implemented.

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

Asset Acquisition
On February 7, 2017, the Company entered into an Asset Purchase Agreement (the "Purchase Agreement") with Forex Capital Markets L.L.C. ("FXCM"). Pursuant to the terms of the Purchase Agreement, FXCM transferred substantially all of its U.S.-domiciled customer accounts to the Company effective as of February 24, 2017. In consideration of the transfer of these accounts, the Company has and will continue to pay FXCM, without duplication:

$500 per account for each transferred account that first executes a new trade with GAIN during the 76-day period immediately following the closing of the account transfer (the "Initial Period"); and

$250 per account for each transferred account that (i) did not execute a new trade with GAIN during the Initial Period and (ii) executes a new trade with GAIN during the 77-day period immediately following the last day of the Initial Period.


25


The Company has paid $5.1 million and accrued $0.9 million for the three months ended March 31, 2017, which was capitalized and included as an intangible asset.


Key Income Statement Line Items and Key Operating Metrics
The following section briefly describes the key components of our revenues and expenses, our use of non-GAAP financial measures, and key operating metrics we use to evaluate the performance of our business.

 
Three Months Ended March 31,
 
2017
 
2016
Net revenue
$
59,567

 
$
115,554

Net (loss)/income applicable to GAIN Capital Holdings, Inc.
$
(18,871
)
 
$
8,352


Revenue

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

Retail Revenue

Retail revenue is our largest source of revenue. Retail revenue is comprised of trading revenue from our retail segment and commission revenue from our advisory business.

Trading revenue in our retail segment is generated by forex products and non-forex products, including spot forex, precious metals, spread bets and CFDs on commodities, indices, individual equities and interest rate products, as well as OTC options on forex.

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, 2017 and March 31, 2016, retail revenue represented 65.4% and 82.2% of our total net revenue, respectively.
For the three months ended March 31, 2017 and March 31, 2016, approximately 98% and 96%, respectively, of our average daily retail segment trading volume was either naturally hedged or hedged by us with one of our liquidity providers, and the remaining 2% and 4%, respectively, of our average daily retail segment trading volume consisted of our net exposure.
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 products at any given time. In the event of unfavorable market movements, we may experience losses on such positions. See “Our Retail Segment - Sophisticated Risk Management” in Item 1. Business, in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for further details regarding our risk management policies for the retail segment.

Institutional Revenue

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

26


intercompany transactions with other segments/affiliates that are eliminated when calculating our consolidated net revenue. This intercompany revenue totaled approximately $0.2 million for the three months ended March 31, 2017.

Futures Revenue

Futures revenue is comprised primarily of commissions earned on futures and futures options trades. We act as an agent for the trades executed in our futures segment and are not exposed to market risk in connection with that activity.

Other Revenue

Other revenue primarily comprises foreign currency translation gains and losses as well as inactivity fees.

Net Interest Revenue

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 United States 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 $0.7 million for the three months ended March 31, 2017, compared to net interest revenue of $0.2 million for the three months ended March 31, 2016.
Expenses

Our expenses are principally comprised of the following:

Employee Compensation and Benefits
Employee compensation and benefits includes salaries, bonuses, commissions, stock-based compensation, 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, as well as client engagement and retention.
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 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 the customers that they have introduced. Our indirect business accounted for 39.8% and 46.1% of retail trading volume in the three months ended March 31, 2017 and March 31, 2016, 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 and fees paid to prime brokers in connection with our institutional and futures segments.

27



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

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

Purchased Intangible Amortization
Purchased intangible amortization consists of amortization related to intangible assets we acquired in connection with our acquisitions. The principal intangible assets acquired were technology, customer assets and a non-compete agreement. These intangible assets have useful lives ranging from one year to ten years.

Communications and Technology
Communications and technology consists of communications fees, 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 ASC 420 Exit or Disposal Cost Obligations and ASC 712 Compensation - Nonretirement Postemployment Benefits.

Integration Expenses
For the three months ended March 31, 2016, we incurred integration expenses, which are acquisition-related costs that are incurred while integrating the acquired company into the consolidated group. 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. See note 14 for more detail. 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 insurance recoveries, totaled approximately $9.2 million following an additional recovery of $0.2 million during the period ended September 30, 2016.

Interest Expense on Long Term Borrowings
Interest expense on long term borrowings consists of interest expense on our 4.125% Convertible Senior Notes due 2018, issued in November 2013, and interest expense on our 4.125% Convertible Senior Notes due 2020, issued in April 2015 as part of the consideration for the City Index acquisition.
Operating Metrics
We review various key operating metrics, which are described below, to evaluate the performance of our businesses.

 
For the Three Months Ended March 31,
 
2017
 
2016
Retail
 
 
 
OTC Trading Volume (billions)
$
619.3

 
$
861.7

OTC Average Daily Volume (billions)
$
9.5

 
$
13.5

Active OTC Accounts(1)
136,829

 
132,452


28


Client Assets (millions)
$
754.6

 
$
639.4

 
 
 
 
Institutional
 
 
 
ECN Volume (billions)
$
759.6

 
$
531.6

ECN Average Daily Volume (billions)
$
11.7

 
$
8.3

Swap Dealer Volume (billions)
$
225.5

 
$
186.6

Swap Dealer Average Daily Volume (billions)
$
3.5

 
$
2.9

 
 
 
 
Futures
 
 
 
Number of Futures Contracts
2,060,631

 
2,334,308

Futures Average Daily Contracts
33,236

 
38,267

Active Futures Accounts
8,201

 
8,890

Client Assets (millions)
$
287.5

 
$
236.6


(1)
GAIN has updated its historical active account disclosures to reflect a change in definition for certain accounts.
OTC Trading Volume
OTC trading volume is the U.S. dollar equivalent of the aggregate notional value of OTC trades executed by customers in our retail segment. Approximately 38.6% of our overall customer trading volume for the three months ended March 31, 2017 was generated in our retail segment, compared to 54.5% for the three months ended March 31, 2016.

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

Active OTC Accounts
Active OTC accounts represents retail segment 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 trading volume and revenue in our retail segment.

Client Assets
Client assets represent amounts due to clients in our retail and futures segments, 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 in our futures segment.

Futures Average Daily Contracts

29


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

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


30


RESULTS OF OPERATIONS
Revenue 
 
Three Months Ended March 31,
 
(amounts in thousands)
 
2017
 
2016
$ Change
% Change
REVENUE:
 
 
 
 
 
Retail revenue
$
38,931

 
$
95,042

$
(56,111
)
(59.0
)%
Institutional revenue
8,367

 
6,707

1,660

24.8
 %
Futures revenue
10,580

 
12,018

(1,438
)
(12.0
)%
Other revenue
1,011

 
1,573

(562
)
(35.7
)%
Total non-interest revenue
58,889

 
115,340

(56,451
)
(48.9
)%
Interest revenue
841

 
318

523

164.5
 %
Interest expense
163

 
104

59

56.7
 %
Total net interest revenue
678

 
214

464

216.8
 %
Net revenue
$
59,567

 
$
115,554

$
(55,987
)
(48.5
)%

Our total net revenue decreased $56.0 million, or 48.5%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

Retail revenue decreased $56.1 million, or 59.0%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The decrease was primarily due to a decrease in trading volume and revenue capture.
Institutional revenue increased $1.7 million, or 24.8%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The increase primarily resulted from an increase in volume in our ECN based products, as well as volumes from our registered swap dealer. These volume increases were offset slightly by a small decline in revenue per million in each business line, which resulted from changes to the composition of our volume from a contributing customer perspective.
Futures revenue decreased $1.4 million, or 12.0%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The decrease was primarily due to a decrease in revenues per traded contract.
Other revenue decreased $0.6 million, or 35.7%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The decrease was primarily due to a decrease in customer inactivity fees collected.
Expenses
Our total operating expenses for the three months ended March 31, 2017 decreased $21.3 million, or 20.9%, compared to the three months ended March 31, 2016, the changes in expenses are discussed in more detail below.


31


 
Three Months Ended March 31,
 
(amounts in thousands)
 
2017
2016
$ Change
% Change
Employee compensation and benefits
$
24,215

$
26,393

$
(2,178
)
(8.3
)%
Selling and marketing
9,256

6,439

2,817

43.7
 %
Referral fees
16,441

20,663

(4,222
)
(20.4
)%
Trading expenses
8,067

8,433

(366
)
(4.3
)%
General and administrative
9,737

16,038

(6,301
)
(39.3
)%
Depreciation and amortization
4,019

3,153

866

27.5
 %
Purchased intangible amortization
3,602

3,922

(320
)
(8.2
)%
Communications and technology
5,152

5,279

(127