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 global provider of trading services and solutions, specializing in over-the-counter ("OTC") and exchange-traded markets. The Company operates its business in
two
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 ("CFDs") on currencies, commodities, indices, individual equities, cryptocurrencies, bonds and interest rate products, as well as OTC options. The Company’s futures segment offers execution and risk management services for exchange-traded products on major U.S. and European exchanges, including Bitcoin. For more information about the Company’s segments, please see Note
17
.
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 Condensed Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”) 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, 2018
, filed with the SEC on March 11, 2019. All significant intercompany transactions and balances have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have a material impact on the consolidated financial statements, and it is possible that such changes could occur in the near term.
Sale of GTX ECN Business
On June 29, 2018, the Company completed the sale of its GTX ECN business, which previously comprised the Company's institutional segment, to Deutsche Börse Group, via its FX unit, 360T, for a total purchase price of
$100 million
less a working capital adjustment which amounted to a
$0.2 million
reduction in the purchase price. During the quarter ended June 30, 2018, the Company determined that the institutional segment met the discontinued operations criteria set forth in Accounting Standards Codification ("ASC") Subtopic 205-20-45,
Presentation of Financial Statements
. As such, the institutional segment results have been classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Comprehensive (Loss)/Income for the
three months ended March 31, 2018
. For more information relating to the discontinued operations of the Company's GTX ECN business, please see Note
4
.
Cash and securities held for customers
Cash and securities held for customers
represent cash and highly liquid assets held to fund customer liabilities in connection with trading positions and customers' cash balances. Included in this balance are funds deposited by customers and funds accruing to customers as a result of trades or contracts. The Company records a corresponding liability in connection with this amount in
Payables to customers
on the Condensed Consolidated Balance Sheets. As of
March 31, 2019
and
December 31, 2018
,
$104.9 million
and
$104.7 million
, respectively, of total C
ash and securities held for customers
were invested in U.S. government and agency securities, of which
$94.9 million
were long-term and
$10.0 million
were short-term as of
March 31, 2019
, and all of which were long-term as of
December 31, 2018
. For more information relating to C
ash and securities held for customers
, please see Note
6
. Such securities are carried at fair value, with unrealized and realized gains and losses included in interest revenue in the Condensed Consolidated Statement of Operations and Comprehensive (Loss)/Income. In addition, the Company holds certain customer funds in segregated or secured broker accounts. Legally segregated balances are not available for general use, in accordance with certain jurisdictional regulatory requirements.
The table below further breaks out the
Cash and securities held for customers
on the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
Cash and cash equivalents held for customers
|
$
|
774,743
|
|
|
$
|
938,432
|
|
Marketable securities held for customers
|
94,945
|
|
|
24,789
|
|
Cash and securities held for customers
|
$
|
869,688
|
|
|
$
|
963,221
|
|
Long term securities held for customers reclassification
To conform with current period presentation,
Long term securities
were reclassified in the Statement of Cash Flows for the
three months ended March 31, 2018
. An amount equal to
$24.8 million
that was previously a component of the ending
Cash and cash equivalents
reconciliation is now separately shown within the operating activities section in the Statement of Cash Flows.
Non-controlling interest
In December 2018, the minority owners of Top Third Ag Marketing, LLC ("TT") notified the Company that they were exercising their put option with respect to their combined
21%
ownership of TT. The purchase of the minority ownership interest closed on February 1, 2019 for approximately
$2.4 million
.
Significant Accounting Policies - Leases
Effective January 1, 2019, the Company accounts for its leases under ASC 842,
Leases
. The Company determines if an arrangement is, or contains, a lease at the inception date. Operating leases are included in right-of-use assets, with the related liabilities included in operating lease liabilities in the Condensed Consolidated Balance Sheet.
Operating lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses the estimated incremental borrowing rate in determining the present value of lease payments. Variable components of the lease payments such as fair market value adjustments, utilities, and maintenance costs are expensed as incurred and not included in determining the present value. The lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company has lease agreements with lease and non-lease components which are accounted for as a single lease component. As an accounting policy election, the Company excludes short-term leases having initial terms of 12 months or less from the new guidance. Lease expense is recognized on a straight-line basis over the lease term. See Note
3
for additional information on leases.
The Company continues to account for leases in the prior period financial statements under ASC Topic 840.
2
. ACCOUNTING PRONOUNCEMENTS
Recently Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02,
Leases (Topic 842)
, which amended the guidance on accounting for leases. The FASB issued this update to increase transparency and comparability among organizations. This update requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. The Company adopted the ASU effective January 1, 2019 using the additional (optional) approach, in accordance with ASU 2018-11
Leases (Topic 842): Targeted Improvements
. The Company recorded a right of use asset and lease liability of
$12.6 million
and
$14.9 million
, in
Other assets
and
Accrued expenses and other liabilities
, respectively. There was no effect on opening retained earnings, and the Company continues to account for leases in the prior period financial statements under ASC Topic 840.
In adopting the new standard, the Company elected the package of practical expedients permitted under the adoption of the new standard, which allowed the Company to account for existing leases under their current classification, as well as omit any new costs classified as initial direct costs, under the new standard. This election kept the existing agreements as operating leases. The Company also elected the practical expedient allowing an accounting policy election by class of underlying asset, to account for separate lease and nonlease components as a single lease component. See Note
3
for additional information on leases.
3
. LEASES
The Company leases office space under agreements classified as operating leases that expire on various dates through 2025. Most of the Company’s lease related assets and liabilities result from the lease of its corporate headquarters in New Jersey, which expires in 2025, and its London office space, which expires in 2023. Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. The Company does not act as a lessor or have any leases classified as financing leases.
At
March 31, 2019
, the Company had operating lease liabilities of
$14.4
million and right of use assets of
$12.2
million, which were included in
Accrued expenses and other liabilities
and
Other assets
, respectively, in the Condensed Consolidated Balance Sheet.
The following summarizes quantitative information about the Company’s operating leases (amounts in thousands, except lease term and discount rate):
|
|
|
|
|
|
Three months ended March 31, 2019
|
Lease cost
|
|
Operating lease cost
|
$
|
796
|
|
Total lease cost
|
$
|
796
|
|
|
|
Other information
|
|
Operating cash flows from operating leases
|
$
|
866
|
|
Weighted-average remaining lease term - operating leases
|
3.2 years
|
|
Weighted-average discount rate - operating leases
|
7.5
|
%
|
Maturities of the Company's operating leases, excluding short-term leases, are as follows (amounts in thousands):
|
|
|
|
|
For the nine months ending at December 31, 2019
|
$
|
2,598
|
|
For the year ended December 31, 2020
|
3,370
|
|
For the year ended December 31, 2021
|
3,492
|
|
For the year ended December 31, 2022
|
3,223
|
|
For the year ended December 31, 2023
|
2,271
|
|
For the year ended December 31, 2024
|
1,215
|
|
Thereafter
|
1,114
|
|
Total
|
17,283
|
|
Less: imputed interest
|
(2,846
|
)
|
Operating lease liabilities at March 31, 2019
|
$
|
14,437
|
|
Total rent expense, which is recorded on a straight-line basis, was
$1.5
million for the three months ended
March 31, 2019
.
4
. DISCONTINUED OPERATIONS
On
June 29, 2018
, the Company completed the sale of its GTX ECN business, which previously comprised the Company's institutional segment, to Deutsche Börse via its FX unit, 360T, for a total purchase price of
$100 million
less a working capital adjustment which amounted to a
$0.2 million
reduction in purchase price.
The Company determined that the sale of the GTX business qualifies as a discontinued operation under the criteria set forth in Accounting Standards Codification 205-20-45,
Presentation of Financial Statements
and the Company does not have any significant continuing involvement in these operations.
There were no operations from the discontinued segment for the
three months ended March 31, 2019
and there were no assets held for sale as of
March 31, 2019
. The results of operations from the discontinued segment for the
three months ended March 31, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
REVENUE:
|
|
|
Institutional revenue
|
|
$
|
8,455
|
|
Total non-interest revenue
|
|
8,455
|
|
Interest revenue
|
|
48
|
|
Total net interest revenue
|
|
48
|
|
Net revenue
|
|
$
|
8,503
|
|
|
|
|
EXPENSES:
|
|
|
Employee compensation and benefits
|
|
$
|
3,413
|
|
Trading expenses
|
|
2,657
|
|
Other expenses
|
|
2,064
|
|
Total operating expense
|
|
$
|
8,134
|
|
|
|
|
OPERATING PROFIT
|
|
369
|
|
INCOME BEFORE INCOME TAX BENEFIT
|
|
369
|
|
|
|
|
Income tax benefit
|
|
(3,978
|
)
|
NET INCOME FROM DISCONTINUED OPERATIONS
|
|
$
|
4,347
|
|
5
. REVENUE RECOGNITION
Futures Revenue
Futures revenue consists primarily of commissions earned on futures and futures options trades. The Company executes trades on behalf of its futures customers, for which the Company earns commissions. The Company is not exposed to any market risk in connection with that activity. The Company’s futures revenue performance obligations also consist of trade execution and are satisfied on the trade date; accordingly, commission revenues are recorded on the trade date.
Disaggregation of Revenues
The following table presents the Company’s revenue from contracts with customers disaggregated by customer and service type for the services described above, as it relates to the futures segment for the
three months ended March 31, 2019
and
2018
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Futures
|
|
|
|
Direct Customers
(1)
|
$
|
2,556
|
|
|
$
|
2,473
|
|
Indirect Customers
(2)
|
5,434
|
|
|
7,029
|
|
Other
(3)
|
1,420
|
|
|
1,989
|
|
Total Segment Revenue
|
$
|
9,410
|
|
|
$
|
11,491
|
|
|
|
(1)
|
Direct customers are all customers not classified as indirect
|
|
|
(2)
|
Indirect customers are referred to the Company by introducing brokers
|
|
|
(3)
|
Other revenue comprises interest and fees
|
Contract Assets and Contract Liabilities
The timing of revenue recognition may differ from the timing of payment. The Company records an accrual when revenue is recognized prior to payment and when the Company has an unconditional right to payment. The Company records a contract liability when payment is received, prior to the time at which the service obligation is satisfied.
6
. FAIR VALUE INFORMATION
US GAAP defines fair value as the price that would be received in exchange for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three level hierarchy that ranks the quality and reliability of information used in developing fair value estimates for financial instruments. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. In cases where two or more levels of inputs are used to determine fair value, a financial instrument’s level is determined based on the lowest level input that is considered significant to the fair value measurement in its entirety. The three levels of fair value hierarchy are summarized below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 - Valuations that require inputs that are both unobservable to a market participant and significant to the fair value measurement.
For assets and liabilities that are transferred between levels during the period, fair values are ascribed as if the assets or liabilities had been transferred as of the beginning of the period.
The following table presents the Company’s assets and liabilities that were measured at fair value on a recurring basis during the reporting period and the related hierarchy levels (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
as of March 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial Assets/(Liabilities):
|
|
|
|
|
|
|
|
Cash and securities held for customers:
|
|
|
|
|
|
|
|
US treasury bills: U.S. government and agency securities - long term
|
$
|
94,945
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
94,945
|
|
US treasury bills: U.S. government and agency securities - short term
|
9,963
|
|
|
—
|
|
|
—
|
|
|
9,963
|
|
Receivable from brokers:
|
|
|
|
|
|
|
|
Broker derivative contracts
|
—
|
|
|
1,787
|
|
|
—
|
|
|
1,787
|
|
Other assets:
|
|
|
|
|
|
|
|
Certificates of deposit
|
177
|
|
|
—
|
|
|
—
|
|
|
177
|
|
Other
|
129
|
|
|
—
|
|
|
—
|
|
|
129
|
|
Payables to customers:
|
|
|
|
|
|
|
|
Customer derivative contracts
|
—
|
|
|
105,536
|
|
|
—
|
|
|
105,536
|
|
Total
|
$
|
105,214
|
|
|
$
|
107,323
|
|
|
$
|
—
|
|
|
$
|
212,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
as of December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial Assets/(Liabilities):
|
|
|
|
|
|
|
|
Cash and securities held for customers:
|
|
|
|
|
|
|
|
US treasury bills: U.S. government and agency securities - long term
|
$
|
104,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
104,712
|
|
Receivable from brokers:
|
|
|
|
|
|
|
|
Broker derivative contracts
|
—
|
|
|
(7,637
|
)
|
|
—
|
|
|
(7,637
|
)
|
Other assets:
|
|
|
|
|
|
|
|
Certificates of deposit
|
176
|
|
|
—
|
|
|
—
|
|
|
176
|
|
Other
|
128
|
|
|
—
|
|
|
—
|
|
|
128
|
|
Payables to customers:
|
|
|
|
|
|
|
|
Customer derivative contracts
|
—
|
|
|
144,440
|
|
|
—
|
|
|
144,440
|
|
Payables to brokers:
|
|
|
|
|
|
|
|
Broker derivative contracts
|
—
|
|
|
1,457
|
|
|
—
|
|
|
1,457
|
|
Total
|
$
|
105,016
|
|
|
$
|
138,260
|
|
|
$
|
—
|
|
|
$
|
243,276
|
|
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, 2019
, nor has there been any movement between levels during the period.
Level 1 Financial Assets
The Company has U.S. Treasury bills 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 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.
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.
Level 3 Financial Liabilities
The Company did not have any Level 3 Financial Assets or Liabilities as of
March 31, 2019
or
December 31, 2018
.
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, and the Company’s posted funds with brokers that are required as collateral for holding trading positions, 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 be expected to 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, 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 and the cash due to or from brokers. The cash within this balance is not measured at fair value but does approximate fair value, because it is immediately payable to the brokers. Settlement with brokers generally occurs as soon as a broker initiates a margin call.
The carrying value of
Convertible senior notes
represents the notes’ principal amounts net of unamortized discount (please refer to 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 March 31, 2019
|
|
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
|
$
|
96,887
|
|
|
$
|
96,887
|
|
|
$
|
—
|
|
|
$
|
96,887
|
|
|
$
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Payables to customers
|
$
|
975,224
|
|
|
$
|
975,224
|
|
|
$
|
—
|
|
|
$
|
975,224
|
|
|
$
|
—
|
|
Convertible senior notes
|
$
|
133,680
|
|
|
$
|
156,665
|
|
|
$
|
—
|
|
|
$
|
156,665
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
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
|
$
|
91,908
|
|
|
$
|
91,908
|
|
|
$
|
—
|
|
|
$
|
91,908
|
|
|
$
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Payables to customers
|
$
|
986,918
|
|
|
$
|
986,918
|
|
|
$
|
—
|
|
|
$
|
986,918
|
|
|
$
|
—
|
|
Payables to brokers
|
$
|
3,092
|
|
|
$
|
3,092
|
|
|
|
|
$
|
3,092
|
|
|
|
Convertible senior notes
|
$
|
132,109
|
|
|
$
|
158,752
|
|
|
$
|
—
|
|
|
$
|
158,752
|
|
|
$
|
—
|
|
7
. DERIVATIVES
The Company’s contracts with its customers and its liquidity providers are deemed to be derivative instruments. The table below represents the fair values of the Company’s derivative instruments reported within
Receivables from brokers, Payables to customers
and
Payables to brokers
on the accompanying Condensed Consolidated Balance Sheets (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
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
|
$
|
72,642
|
|
|
$
|
(18,234
|
)
|
|
$
|
54,408
|
|
CFD contracts
|
79,415
|
|
|
(30,699
|
)
|
|
48,716
|
|
Metals contracts
|
5,851
|
|
|
(1,652
|
)
|
|
4,199
|
|
Total
|
$
|
157,908
|
|
|
$
|
(50,585
|
)
|
|
$
|
107,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
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
|
$
|
96,887
|
|
|
$
|
1,787
|
|
|
$
|
98,674
|
|
Payables to customers
|
$
|
(975,224
|
)
|
|
$
|
105,536
|
|
|
$
|
(869,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
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
|
$
|
100,158
|
|
|
$
|
(20,382
|
)
|
|
$
|
79,776
|
|
CFD contracts
|
77,014
|
|
|
(21,220
|
)
|
|
55,794
|
|
Metals contracts
|
6,438
|
|
|
(3,748
|
)
|
|
2,690
|
|
Total
|
$
|
183,610
|
|
|
$
|
(45,350
|
)
|
|
$
|
138,260
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
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
|
$
|
91,908
|
|
|
$
|
(7,637
|
)
|
|
$
|
84,271
|
|
Payables to customers
|
$
|
(986,918
|
)
|
|
$
|
144,440
|
|
|
$
|
(842,478
|
)
|
Payables to brokers
|
$
|
(3,092
|
)
|
|
$
|
1,457
|
|
|
$
|
(1,635
|
)
|
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, Payables to customers,
and
Payables to brokers
on the Condensed Consolidated Balance Sheets are derived from the number of contracts below (amounts in thousands):
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Total contracts in long positions
|
|
Total contracts in short positions
|
Derivative Instruments:
|
|
|
|
Foreign currency exchange contracts
|
2,863,433
|
|
|
2,265,453
|
|
CFD contracts
|
138,715
|
|
|
138,062
|
|
Metals contracts
|
598
|
|
|
127
|
|
Total
|
3,002,746
|
|
|
2,403,642
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Total contracts in long positions
|
|
Total contracts in short positions
|
Derivative Instruments:
|
|
|
|
Foreign currency exchange contracts
|
3,780,488
|
|
|
3,238,781
|
|
CFD contracts
|
98,840
|
|
|
134,546
|
|
Metals contracts
|
489
|
|
|
188
|
|
Total
|
3,879,817
|
|
|
3,373,515
|
|
The Company did not designate any of its derivatives as hedging instruments. Net gains with respect to derivative instruments reflected in
Retail revenue
in the accompanying
Condensed Consolidated Statements of Operations and Comprehensive (Loss)/Income
for the
three months ended
March 31, 2019
and
2018
were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Derivative Instruments:
|
|
|
|
Foreign currency exchange contracts
|
$
|
16,137
|
|
|
$
|
41,251
|
|
CFD contracts
|
5,938
|
|
|
37,147
|
|
Metals contracts
|
2,204
|
|
|
5,722
|
|
Total
|
$
|
24,279
|
|
|
$
|
84,120
|
|
8
. 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, 2019
|
|
December 31, 2018
|
Required collateral
|
$
|
96,887
|
|
|
$
|
91,908
|
|
Open foreign exchange positions
|
1,787
|
|
|
(7,637
|
)
|
Total
|
$
|
98,674
|
|
|
$
|
84,271
|
|
9
. INTANGIBLE ASSETS
The Company’s various intangible assets consisted of the following as of (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Intangibles
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Customer lists
|
$
|
46,051
|
|
|
$
|
(29,728
|
)
|
|
$
|
16,323
|
|
|
$
|
58,494
|
|
|
$
|
(40,208
|
)
|
|
$
|
18,286
|
|
Technology
|
24,246
|
|
|
(13,997
|
)
|
|
10,249
|
|
|
49,430
|
|
|
(38,555
|
)
|
|
10,875
|
|
Trademarks
|
6,200
|
|
|
(3,697
|
)
|
|
2,503
|
|
|
7,308
|
|
|
(4,637
|
)
|
|
2,671
|
|
Total finite lived intangibles
|
76,497
|
|
|
(47,422
|
)
|
|
29,075
|
|
|
115,232
|
|
|
(83,400
|
)
|
|
31,832
|
|
Trademark not subject to amortization
(1)
|
363
|
|
|
—
|
|
|
363
|
|
|
363
|
|
|
—
|
|
|
363
|
|
Total intangibles
|
$
|
76,860
|
|
|
$
|
(47,422
|
)
|
|
$
|
29,438
|
|
|
$
|
115,595
|
|
|
$
|
(83,400
|
)
|
|
$
|
32,195
|
|
(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.
As of
March 31, 2019
, the Company wrote-off
$34.4 million
of fully amortized intangible assets, which was an equal amount for both gross and accumulated amortization and did not have any impact on the results of operations or cash flows.
The Company had the following identifiable intangible assets and weighted average amortization periods as of
March 31, 2019
:
|
|
|
|
Intangible Assets
|
|
Weighted average amortization period
|
Customer lists
|
|
8.2 years
|
Technology
|
|
7.2 years
|
Trademarks
|
|
7.0 years
|
Amortization expense for the purchased intangibles was
$3.3 million
and
$3.7 million
for the
three months ended March 31, 2019
and
2018
respectively.
Goodwill
Goodwill is evaluated for impairment on an annual basis on October 31 and in interim periods when events or changes indicate the carrying value may not be recoverable.
The Company operates under
two
reporting units: retail and futures. There were
no
additions or impairments to the carrying value of the Company’s goodwill during the
three months ended March 31, 2019
.
The following represents the changes in the carrying amount of goodwill by segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
Futures
|
Total
|
Carrying amount of goodwill as of December 31, 2018
|
$
|
25,435
|
|
$
|
2,385
|
|
$
|
27,820
|
|
Foreign currency translation adjustments
|
201
|
|
19
|
|
220
|
|
Carrying amount of goodwill as of March 31, 2019
|
$
|
25,636
|
|
$
|
2,404
|
|
$
|
28,040
|
|
10
. 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
$0.4 million
as of
March 31, 2019
and
December 31, 2018
, 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
$11.9 million
and
$11.7 million
as of
March 31, 2019
and
December 31, 2018
, respectively.
The net revenue generated by any individual related party was not deemed to be material in any period.
At
March 31, 2019
, the Company had receivables of
$0.1 million
in the aggregate due from certain officers of the Company for taxes paid on equity vestings. The Company recorded these receivables in
Other assets
, and the Company received the funds in
April 2019
. There were
no
receivables due from the Company's officers as of
December 31, 2018
.
11
. REVOLVING CREDIT ARRANGEMENT
On
August 3, 2017
, the Company entered into a Credit Agreement, dated as of
August 2, 2017
, for a
three
year
$50.0 million
senior secured first lien revolving credit facility that matures in August 2020. Upon request of the Company, the credit facility may be increased by up to
$25.0 million
, with a minimum increase of
$5.0 million
. The credit facility contains covenants that are customary for an issuer with senior debt. The commitment fees of
$0.5 million
are amortized over the life of the facility and are recorded to
Other Assets
. As of March 31, 2019, the Company was not in compliance with a covenant in the Credit Agreement relating to the Company's Consolidated Interest Coverage Ratio (as defined in the Credit Agreement). The lenders under the Credit Agreement have waived any event of default arising from this noncompliance for the quarter ended March 31, 2019. Further, the Company did not fully satisfy a covenant in the Credit Agreement relating to the Company's Consolidated Gross Leverage Ratio (as defined in the Credit Agreement) as of March 31, 2019, but was deemed to be in compliance with such covenant due to an alternative liquidity test provided in the Credit Agreement. The Company will not be able to draw funds under the Credit Agreement until it
is in full compliance with all of the financial covenants in the Credit Agreement, including the Consolidated Gross Leverage Ratio and Consolidated Interest Coverage Ratio.
As of
March 31, 2019
and
December 31, 2018
, there were
no
amounts outstanding under the revolving line of credit.
12
. CONVERTIBLE SENIOR NOTES
On August 22, 2017, the Company issued
$92.0 million
aggregate principal amount of its
5.00%
Convertible Senior Notes, due August 15, 2022, and on April 1, 2015, the Company issued
$60.0 million
aggregate principal amount of its
4.125%
Convertible Senior Notes, due April 1, 2020 (collectively the "Convertible Senior Notes"). The balances of the liability and equity components of the Convertible Senior Notes as of
March 31, 2019
and
December 31, 2018
were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Liability component - principal
|
$
|
152,000
|
|
|
$
|
152,000
|
|
Deferred bond discount
|
(17,959
|
)
|
|
(19,503
|
)
|
Deferred financing cost
|
(361
|
)
|
|
(388
|
)
|
Liability component - net carrying value
|
$
|
133,680
|
|
|
$
|
132,109
|
|
|
|
|
|
Additional paid in capital
|
$
|
39,405
|
|
|
$
|
39,405
|
|
Discount attributable to equity
|
(826
|
)
|
|
(826
|
)
|
Equity component
|
$
|
38,579
|
|
|
$
|
38,579
|
|
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 (Loss)/Income
, was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2019
|
|
2018
|
Interest expense - stated coupon rate
|
$
|
1,761
|
|
|
$
|
1,834
|
|
Interest expense - amortization of deferred bond discount and costs
|
1,571
|
|
|
1,506
|
|
Total interest expense - convertible senior notes
|
$
|
3,332
|
|
|
$
|
3,340
|
|
13
. (LOSS)/EARNINGS PER COMMON SHARE
Basic and diluted (loss)/earnings per common share are computed by dividing net (loss)/income by the weighted average number of common shares outstanding during the period. Diluted (loss)/earnings per share includes the determinants of basic net (loss)/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.
Diluted (loss)/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
$10
for each share of the Company’s common stock, and if the relevant conditions under the indenture governing the
2020
and
2022
Convertible Senior Notes were satisfied, there would be
0.2 million
and
2.0 million
dilutive shares as of
March 31, 2019
, for the
2020
and
2022
Convertible Senior Notes, respectively.
The following table sets forth the computation of (loss)/earnings per share (amounts in thousands except share and per share data):
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2019
|
|
2018
|
Net (loss)/income from continuing operations
|
$
|
(28,354
|
)
|
|
$
|
11,914
|
|
Less income attributable to non-controlling interests
|
—
|
|
|
175
|
|
Net (loss)/income from continuing operations
|
(28,354
|
)
|
|
11,739
|
|
Adjustment
(1)
|
—
|
|
|
(367
|
)
|
Net (loss)/income available to GAIN common shareholders from continuing operations
|
$
|
(28,354
|
)
|
|
$
|
11,372
|
|
|
|
|
|
Net income from discontinued operations
|
—
|
|
|
4,347
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
Basic weighted average common shares outstanding
|
37,525,073
|
|
|
45,017,716
|
|
Effect of dilutive securities:
|
|
|
|
Stock options
|
—
|
|
|
261,732
|
|
RSUs
|
—
|
|
|
244,318
|
|
Diluted weighted average common shares outstanding
|
37,525,073
|
|
|
45,523,766
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings from continuing operations
|
$
|
(0.76
|
)
|
|
$
|
0.25
|
|
Basic earnings from discontinued operations
|
$
|
—
|
|
|
$
|
0.10
|
|
|
|
|
|
Diluted (loss)/earnings from continuing operations
|
$
|
(0.76
|
)
|
|
$
|
0.25
|
|
Diluted earnings from discontinued operations
|
$
|
—
|
|
|
$
|
0.10
|
|
|
|
(1)
|
During the
three months ended March 31, 2018
, the Company concluded that the carrying values of the redeemable noncontrolling interests were less than redemption value and adjusted carrying value to equal redemption value. This adjustment was a component of the earnings per common share calculation.
|
For the
three months ended March 31, 2019
, all common stock equivalents are excluded from the computation of diluted loss per share from continuing operations, because the result would be anti-dilutive. The table below shows dilution that the Company would have experienced, under the treasury stock method, had the
three months ended March 31, 2019
resulted in net income, rather than net loss.
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2019
|
Stock options
(1)
|
169,981
|
|
RSUs
|
90,520
|
|
Total securities excluded from diluted loss per share calculation
|
260,501
|
|
|
|
(1)
|
During the
three months ended March 31, 2019
and
three months ended March 31, 2018
,
0.4 million
stock options were out of the money and excluded from the computation of diluted loss or earnings per share from continuing operations.
|
14
. COMMITMENT AND CONTINGENCIES
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.
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.
15
. INCOME TAXES
The Company's
benefit
for income taxes was approximately
$6.1 million
for
three months ended March 31, 2019
and an expense provision of approximately
$7.7 million
for the
three months ended March 31, 2018
. These amounts reflect the Company's estimate of the annual effective tax rates of
17.6%
and
39.2%
, adjusted for certain discrete items, for the
three months ended March 31, 2019
and
2018
, respectively. Changes in the Company's effective tax rate arise primarily from changes in the geographic mix of revenues and expenses, as well as changes to statutory tax rates.
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.
16
. REGULATORY REQUIREMENTS
The following table illustrates the minimum regulatory capital the Company's subsidiaries were required to maintain as of
March 31, 2019
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
|
$
|
34.7
|
|
|
$
|
56.3
|
|
|
$
|
21.6
|
|
|
162
|
%
|
GAIN Capital Securities, Inc.
|
0.1
|
|
|
0.4
|
|
|
0.3
|
|
|
400
|
%
|
GAIN Capital U.K., Ltd.
|
59.1
|
|
|
198.4
|
|
|
139.3
|
|
|
336
|
%
|
GAIN Capital Japan Co., Ltd.
|
1.2
|
|
|
11.4
|
|
|
10.2
|
|
|
950
|
%
|
GAIN Capital Australia, Pty. Ltd.
|
0.8
|
|
|
6.6
|
|
|
5.8
|
|
|
825
|
%
|
GAIN Global Markets, Inc.
|
0.2
|
|
|
1.1
|
|
|
0.9
|
|
|
550
|
%
|
GAIN Capital-Forex.com Canada, Ltd.
|
0.5
|
|
|
1.6
|
|
|
1.1
|
|
|
320
|
%
|
GAIN Capital Singapore Pte., Ltd.
|
3.7
|
|
|
9.7
|
|
|
6.0
|
|
|
262
|
%
|
Trade Facts, Ltd.
|
0.6
|
|
|
3.5
|
|
|
2.9
|
|
|
583
|
%
|
Global Asset Advisors, LLC
|
0.0
|
|
|
2.8
|
|
|
2.8
|
|
|
100
|
%
|
Total
|
$
|
100.9
|
|
|
$
|
291.8
|
|
|
$
|
190.9
|
|
|
289
|
%
|
17
. SEGMENT INFORMATION
ASC Topic 280,
Disclosures about Segments of an Enterprise and Related Information
, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise which engage in business activities from which they may earn revenues and incur expenses and about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision making group, in deciding how to allocate resources and in assessing performance. Reportable segments are defined as an operating segment that either (a) exceeds
10%
of revenue, or (b) the reported profit or loss in absolute amount of which exceeds
10%
of profit of all operating segments that did not report a loss or (c) exceeds
10%
of the combined assets of all operating segments. The Company’s operations relate to global trading services and solutions.
During the first quarter of 2018, the Company completed its implementation of global support groups in the areas of finance, legal, human resources, and treasury. These groups are now centrally managed and support all business functions. Therefore, all costs related to these groups previously recorded within the retail segment are now classified in the Company's corporate and other
segment to better align the cost reporting with the support services. The change in segment reporting had no impact on the net profit or loss of the Company. To enable comparisons with prior period performance, historical segment information for the periods included in the tables below reflect this reporting change.
On June 29, 2018, the Company completed the sale of its GTX ECN business, which previously comprised the Company's institutional segment, to Deutsche Börse Group via its FX unit, 360T, for a total purchase price of
$100 million
less a working capital adjustment which amounted to a
$0.2 million
reduction in purchase price. The Company determined that the institutional segment met the discontinued operations criteria set forth in ASC Subtopic 205-20-45,
Presentation of Financial Statements
, in the quarter ended June 30, 2018. As such, the institutional segment results have been classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Comprehensive (Loss)/Income. For more information relating to the discontinued operations of the Company's GTX ECN business, please see Note
4
.
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 over
15,000
global financial markets, including spot forex, precious metals, and CFDs on currencies, commodities, indices, individual equities, cryptocurrencies, bonds 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.
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 subsidiaries, GAIN Capital Group, LLC, Global Asset Advisors, LLC, and Top Third Ag Marketing, LLC.
Corporate and other
Corporate and other provides general corporate services to the Company’s segments. 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):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Retail reportable segment:
|
|
|
|
Net revenue
|
$
|
28,159
|
|
|
$
|
85,672
|
|
|
|
|
|
Employee compensation and benefits
|
12,992
|
|
|
15,425
|
|
Selling and marketing
|
9,953
|
|
|
5,666
|
|
Referral fees
|
4,390
|
|
|
7,685
|
|
Other operating expenses
|
18,228
|
|
|
17,730
|
|
Segment (loss)/profit
|
$
|
(17,404
|
)
|
|
$
|
39,166
|
|
|
|
Futures reportable segment:
|
|
|
|
Net revenue
|
$
|
9,410
|
|
|
$
|
11,491
|
|
|
|
|
|
Employee compensation and benefits
|
2,164
|
|
|
2,511
|
|
Selling and marketing
|
260
|
|
|
241
|
|
Referral fees
|
2,708
|
|
|
3,746
|
|
Other operating expenses
|
3,221
|
|
|
3,794
|
|
Segment profit
|
$
|
1,057
|
|
|
$
|
1,199
|
|
|
|
Corporate and other:
|
|
|
|
Other revenue
|
$
|
866
|
|
|
$
|
1,197
|
|
|
|
|
|
Employee compensation and benefits
|
5,099
|
|
|
6,402
|
|
Selling and marketing
|
11
|
|
|
64
|
|
Other operating expenses
|
2,905
|
|
|
3,260
|
|
Loss
|
$
|
(7,149
|
)
|
|
$
|
(8,529
|
)
|
TOTAL SEGMENT (LOSS)/PROFIT
|
$
|
(23,496
|
)
|
|
$
|
31,836
|
|
|
|
|
|
Depreciation and amortization
|
$
|
4,250
|
|
|
$
|
5,368
|
|
Purchased intangible amortization
|
3,329
|
|
|
3,668
|
|
Impairment of investment
|
—
|
|
|
(130
|
)
|
OPERATING (LOSS)/PROFIT
|
$
|
(31,075
|
)
|
|
$
|
22,930
|
|
Interest expense on long term borrowings
|
3,332
|
|
|
3,340
|
|
(LOSS)/INCOME BEFORE INCOME TAX EXPENSE
|
$
|
(34,407
|
)
|
|
$
|
19,590
|
|
18
. SUBSEQUENT EVENTS
On April 25,
2019
, the Company declared a
$0.06
dividend per share of Common Stock payable on
June 28, 2019
to stockholders of record on
June 24, 2019
.