Company Quick10K Filing
Gain Capital
Price5.56 EPS-1
Shares37 P/E-7
MCap208 P/FCF17
Net Debt-985 EBIT-24
TEV-777 TEV/EBIT33
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-13
10-K 2019-12-31 Filed 2020-03-16
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-11
10-Q 2018-09-30 Filed 2018-11-06
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-09
10-K 2017-12-31 Filed 2018-03-14
10-Q 2017-09-30 Filed 2017-11-08
10-Q 2017-06-30 Filed 2017-08-08
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-15
10-Q 2016-09-30 Filed 2016-11-08
10-Q 2016-06-30 Filed 2016-08-09
10-Q 2016-03-31 Filed 2016-05-09
10-K 2015-12-31 Filed 2016-03-17
10-Q 2015-09-30 Filed 2015-11-09
10-Q 2015-06-30 Filed 2015-08-10
10-Q 2015-03-31 Filed 2015-05-11
10-K 2014-12-31 Filed 2015-03-16
10-Q 2014-09-30 Filed 2014-11-10
10-Q 2014-06-30 Filed 2014-08-11
10-Q 2014-03-31 Filed 2014-05-12
10-K 2013-12-31 Filed 2014-03-17
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-08
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-03-18
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-10
10-K 2011-12-31 Filed 2012-03-15
10-Q 2011-09-30 Filed 2011-11-10
10-Q 2011-06-30 Filed 2011-08-05
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-30
8-K 2020-07-31 Enter Agreement, Off-BS Arrangement, Shareholder Rights, Control, Officers, Amend Bylaw, Other Events, Exhibits
8-K 2020-07-23 Earnings, Regulation FD, Exhibits
8-K 2020-07-09 Regulation FD, Exhibits
8-K 2020-06-09
8-K 2020-06-05
8-K 2020-05-22
8-K 2020-05-15
8-K 2020-05-14
8-K 2020-05-08
8-K 2020-05-08
8-K 2020-04-23
8-K 2020-04-10
8-K 2020-04-10
8-K 2020-03-09
8-K 2020-02-27
8-K 2020-02-27
8-K 2020-02-10
8-K 2020-01-13
8-K 2020-01-02
8-K 2019-12-10
8-K 2019-11-11
8-K 2019-10-25
8-K 2019-10-07
8-K 2019-10-07
8-K 2019-09-10
8-K 2019-08-15
8-K 2019-08-09
8-K 2019-08-08
8-K 2019-07-25
8-K 2019-07-18
8-K 2019-07-11
8-K 2019-07-09
8-K 2019-06-05
8-K 2019-06-05
8-K 2019-05-09
8-K 2019-04-25
8-K 2019-04-09
8-K 2019-04-08
8-K 2019-04-02
8-K 2019-03-11
8-K 2019-02-28
8-K 2019-02-08
8-K 2019-02-04
8-K 2019-01-08
8-K 2018-12-10
8-K 2018-11-28
8-K 2018-11-09
8-K 2018-10-25
8-K 2018-10-22
8-K 2018-10-04
8-K 2018-09-14
8-K 2018-09-11
8-K 2018-08-13
8-K 2018-07-26
8-K 2018-07-12
8-K 2018-07-09
8-K 2018-07-06
8-K 2018-06-08
8-K 2018-05-29
8-K 2018-05-09
8-K 2018-04-26
8-K 2018-04-06
8-K 2018-03-27
8-K 2018-03-12
8-K 2018-03-08
8-K 2018-02-08
8-K 2018-01-17
8-K 2018-01-10

GCAP 10Q Quarterly Report

Part I - Financial Information
Item 1 - Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 exhibit31_110q3-31x20.htm
EX-31.2 exhibit31_210q3-31x20.htm
EX-32.1 exhibit32_110q3-31x20.htm
EX-32.2 exhibit32_210q3-31x20.htm

Gain Capital Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1.71.41.00.70.30.02012201420172020
Assets, Equity
0.10.10.0-0.0-0.1-0.12018201820192020
Rev, G Profit, Net Income
0.20.10.10.0-0.0-0.12012201420172020
Ops, Inv, Fin

10-Q 1 gcap2020033110-q.htm 10-Q Document

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, 2020
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
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol
Name on each exchange on which registered
Common Stock, $0.00001 par value per share
GCAP
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 such files).   ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
Accelerated filer
ý
Non-accelerated filer
 
¨ 
Smaller reporting company
ý
 
 
 
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 May 5, 2020, the registrant had 37,803,800 shares of common stock, $0.00001 par value per share, outstanding.



GAIN CAPITAL HOLDINGS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2020
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 

2


PART I – FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements

GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data and par value)
 
March 31, 2020
 
December 31, 2019
ASSETS:
 
 
 
Cash and cash equivalents
$
293,302

 
$
190,072

Cash and securities held for customers
785,223

 
929,263

Receivables from brokers
53,053

 
112,296

Property and equipment, net
29,052

 
30,563

Intangible assets, net
21,153

 
24,163

Other assets
50,003

 
64,012

Total assets
$
1,231,786

 
$
1,350,369

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities
 
 
 
Payables to customers
$
785,223

 
$
929,263

Payables to brokers
5,895

 

Accrued compensation and benefits
6,439

 
5,462

Accrued expenses and other liabilities
44,969

 
43,129

Income tax payable
11,818

 
638

Convertible senior notes
80,334

 
137,178

Total liabilities
$
934,678

 
$
1,115,670

Commitments and contingent liabilities

 

Shareholders’ equity
 
 
 
Common stock ($0.00001 par value; 120 million shares authorized; 55.6 million shares issued and 37.8 million shares outstanding as of March 31, 2020; 55.3 million shares issued and 37.5 million shares outstanding as of December 31, 2019)
$

 
$

Additional paid-in capital
251,107

 
249,111

Retained earnings
209,825

 
134,752

Accumulated other comprehensive loss
(36,307
)
 
(21,647
)
Treasury stock, at cost (17.8 million shares at March 31, 2020 and December 31, 2019)
(127,517
)
 
(127,517
)
Total shareholders’ equity
297,108

 
234,699

Total liabilities and shareholders’ equity
$
1,231,786

 
$
1,350,369

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

3


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,
 
2020

2019
REVENUE:
 
 
 
Retail revenue
$
173,070

 
$
24,279

Futures revenue
9,386

 
7,990

Other revenue
986

 
2,485

Total non-interest revenue
183,442

 
34,754

Interest revenue
2,740

 
4,294

Interest expense
484

 
613

Total net interest revenue
2,256

 
3,681

Net revenue
$
185,698

 
$
38,435

 
 
 
 
EXPENSES:
 
 
 
Employee compensation and benefits
$
24,166

 
$
20,255

Selling and marketing
7,112

 
10,224

Referral fees
12,497

 
7,098

Trading expenses
4,928

 
5,480

General and administrative
13,846

 
12,756

Depreciation and amortization
4,304

 
4,250

Purchased intangible amortization
1,808

 
3,329

Communications and technology
4,523

 
5,691

Bad debt provision
4,213

 
427

Restructuring expenses
1,420

 

Transaction costs
1,043

 

Total operating expenses
$
79,860

 
$
69,510

OPERATING PROFIT/(LOSS)
105,838

 
(31,075
)
Interest expense on long term borrowings
3,442

 
3,332

INCOME/(LOSS) BEFORE INCOME TAX
$
102,396

 
$
(34,407
)
Income tax expense/(benefit)
25,052

 
(6,053
)
NET INCOME/(LOSS)
$
77,344

 
$
(28,354
)
 
 
 
 
Other comprehensive (loss)/income:
 
 
 
Foreign currency translation adjustment
(14,660
)
 
4,846

COMPREHENSIVE INCOME/(LOSS)
$
62,684

 
$
(23,508
)
 
 
 
 
Basic earnings/(loss) per share
$
2.06

 
$
(0.76
)
 
 
 
 
Diluted earnings/(loss) per share
$
2.06

 
$
(0.76
)
 
 
 
 
Basic weighted average common shares outstanding
37,554,579

 
37,525,073

Diluted weighted average common shares outstanding
37,585,806

 
37,525,073

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

4


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2020 and 2019
(Unaudited)
(in thousands, except share and per share data)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Loss
 
Total
 
Outstanding Shares
 
Amount
 
 
 
 
 
BALANCE—January 1, 2020
37,484,276

 
$

 
$
(127,517
)
 
$
249,111

 
$
134,752

 
$
(21,647
)
 
$
234,699

Net income applicable to Gain Capital Holdings, Inc.

 

 

 

 
77,344

 

 
77,344

Conversion of restricted stock into common stock
302,920

 

 

 

 

 

 

Share-based compensation

 

 

 
1,996

 

 

 
1,996

Dividends ($0.06 per share)

 

 

 

 
(2,271
)
 

 
(2,271
)
Foreign currency translation adjustment

 

 

 

 

 
(14,660
)
 
(14,660
)
BALANCE—March 31, 2020
37,787,196

 
$

 
$
(127,517
)
 
$
251,107

 
$
209,825

 
$
(36,307
)
 
$
297,108


 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Loss
 
Total
 
Outstanding Shares
 
Amount
 
 
 
 
 
BALANCE—January 1, 2019
37,821,686

 
$

 
$
(120,516
)
 
$
243,216

 
$
204,483

 
$
(29,410
)
 
$
297,773

Net loss applicable to Gain Capital Holdings, Inc.

 

 

 

 
(28,354
)
 

 
(28,354
)
Conversion of restricted stock into common stock
182,443

 

 

 

 

 

 

Purchase of treasury stock
(632,796
)
 

 
(4,201
)
 

 

 

 
(4,201
)
Share-based compensation

 

 

 
1,685

 

 

 
1,685

Dividends ($0.06 per share)

 

 

 

 
(2,254
)
 

 
(2,254
)
Foreign currency translation adjustment

 

 

 

 

 
4,846

 
4,846

BALANCE—March 31, 2019
37,371,333

 
$

 
$
(124,717
)
 
$
244,901

 
$
173,875

 
$
(24,564
)
 
$
269,495


The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

5


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income/(loss)
$
77,344

 
$
(28,354
)
Adjustments to reconcile net income/(loss) to cash provided by/(used in) operating activities
 
 
 
Loss/(gain) on foreign currency exchange rates
674

 
(964
)
Depreciation and amortization
6,112

 
7,579

Deferred tax expense/(benefit)
8,131

 
(6,695
)
Amortization of deferred financing costs
149

 
149

Bad debt provision
4,213

 
427

Convertible senior notes discount amortization
1,547

 
1,422

Share-based compensation
1,996

 
1,685

Interest earned on investments

 
(629
)
Amortization of right of use asset
987

 
524

Changes in operating assets and liabilities:
 
 
 
Receivables from brokers
57,655

 
(11,932
)
Other assets
(2,480
)
 
4,676

Payables to customers
(119,590
)
 
17,826

Payables to brokers
6,243

 
(1,635
)
Accrued compensation and benefits
1,188

 
(7,990
)
Accrued expenses and other liabilities
3,965

 
(4,641
)
Income tax payable
10,837

 
(4,025
)
Long term securities
1,043

 
10,363

Lease liabilities
(605
)
 
(705
)
Net cash provided by/(used in) operating activities
59,409

 
(22,919
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(4,238
)
 
(3,126
)
Purchase of minority interest

 
(2,422
)
Net cash used in investing activities
(4,238
)
 
(5,548
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Maturity and repurchase of convertible notes
(58,540
)
 

Purchase of treasury stock

 
(4,201
)
Dividend payments
(2,271
)
 
(2,254
)
Net cash used in financing activities
(60,811
)
 
(6,455
)
Effect of exchange rate changes on cash and cash equivalents
(34,127
)
 
11,068

NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(39,767
)
 
(23,854
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period
1,112,793

 
1,016,616

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period
$
1,073,026

 
$
992,762

 
 
 
 
Cash and cash equivalents
293,302

 
218,019

Cash and cash equivalents held for customers (see Note 1)
779,724

 
774,743

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period
$
1,073,026

 
$
992,762

 
 
 
 
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
 
 
 
Cash paid for:
 
 
 
Interest
$
3,913

 
$
2,856

Income taxes
$
553

 
$
5,507

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

6


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. 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: retail and futures. The retail segment provides customers around the world with access to 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 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 management's opinion, are necessary to fairly present the financial statements for the interim periods. The Condensed Consolidated Financial Statements are presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. In accordance with SEC rules, interim financial statements 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 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, 2019, filed with the SEC on March 16, 2020.

Preparing consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, as well as the reported amounts of revenue and expenses during the reporting period. Estimates, by their nature, are based on judgment and available information about current events and expectations about actions undertaken in the future. Actual results could differ materially from estimates.

Cash and Securities Held for Customers
Cash and securities held for customers represents cash and highly liquid assets held to fund customer liabilities in connection with trading positions and customer 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, 2020 and December 31, 2019, $5.5 million and $6.5 million, respectively, of total Cash and securities held for customers are invested in U.S. government and agency securities. Such securities are carried at fair value, with unrealized and realized gains and losses included in Interest revenue and Other revenue in the Condensed Consolidated Statement of Operations and Comprehensive Income/(Loss), as appropriate. 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 (amounts in thousands):
 
March 31,
 
2020
 
2019
Cash and cash equivalents held for customers
$
779,724

 
$
774,743

Marketable securities held for customers
5,499

 
94,945

Cash and securities held for customers
$
785,223

 
$
869,688




7


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.

Sale to INTL FCStone, Inc.
On February 26, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with INTL FCStone Inc., a Delaware corporation (“INTL”) and Golf Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of INTL (“Merger Sub”), pursuant to which, among other things and subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company (the "Merger"). As a result of the Merger, Merger Sub will cease to exist, and the Company will survive as a wholly owned subsidiary of INTL. Subject to the terms and conditions of the Merger Agreement at the effective time of the Merger (the "Effective Time"), each share of the Company's common stock issued and outstanding immediately prior to the Effective Time (other than dissenting shares) will be converted into the right to receive $6.00 per share in cash, without interest. During the three months ended March 31, 2020, the Company incurred $1.0 million of transaction costs associated with the Merger Agreement. They are recorded in Transaction costs in the Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss).

COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus ("COVID-19") a global pandemic. Concern over the economic impact this would cause drove volatility to extraordinary levels, resulting in significant increases to average daily retail trading volumes and retail revenue capture. These led to standout financial results during the first quarter, including record levels of both net revenue and net income. The Company does not believe that there is any significant negative impact of the COVID-19 pandemic to the Condensed Consolidated Financial Statements as of March 31, 2020. The Company is continuing to monitor developments relating to COVID-19 and is coordinating its operational response based on existing business continuity plans and on guidance from global health organizations, relevant governments, and general pandemic response best practices.

CARES Act
On March 27, 2020, President Trump signed into law P.L. 116-136, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. It also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.

2. ACCOUNTING PRONOUNCEMENTS

Recently Adopted

In August 2018, the FASB issued ASU No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The Company adopted the new standard effective January 1, 2020 with no impact on our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In February 2020, the FASB issued ASU 2020-02, Financial Instruments - Credit Losses (Topic 326), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company is currently assessing the impact of the adoption of this ASU on its financial statements.


8


In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

3. LEASES

The Company leases office space under agreements classified as operating leases, with periods expiring between 2020 and 2029. The Company's 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 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.
As of March 31, 2020, the Company had operating lease liabilities of $16.6 million and right of use assets of $13.5 million, which were included in Accrued expenses and other liabilities and Other assets, respectively, on 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,
 
2020
 
2019
Lease cost
 
 
 
Operating lease cost
$
1,302

 
$
796

Total lease cost
$
1,302

 
$
796

 
 
 
 
Other information
 
 
 
Operating cash flows from operating leases
$
909

 
$
866

Weighted-average remaining lease term - operating leases
4.3 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, 2020
$
3,316

For the year ended December 31, 2021
3,031

For the year ended December 31, 2022
2,565

For the year ended December 31, 2023
2,670

For the year ended December 31, 2024
2,064

For the year ended December 31, 2025
2,205

Thereafter
5,213

Total
21,064

Less: imputed interest
(4,507
)
Operating lease liabilities at March 31, 2020
$
16,557


4. REVENUE RECOGNITION

Futures Revenue
Futures revenue consists primarily of commissions and fees earned on futures and futures options trades that the Company executes on behalf of its customers. The Company is not exposed to any market risk from this activity. The Company’s performance obligation related to futures revenue is trade execution, which is satisfied on trade date. Accordingly, commission revenues are recorded on trade date.


9


Disaggregation of Futures Revenues
The following table presents the Company’s futures 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, 2020 and 2019 (amounts in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Futures
 
 
 
Direct Customers (1)
$
3,526

 
$
2,556

Indirect Customers (2)
5,860

 
5,434

Other (3)
764

 
1,420

Net Futures Revenue
$
10,150

 
$
9,410

(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


Futures Contract Assets and Futures 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.

5. FAIR VALUE INFORMATION

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, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Cash and securities held for customers:
 
 
 
 
 
 
 
US treasury bills
$
5,499

 
$

 
$

 
$
5,499

Receivable from brokers:
 
 
 
 
 
 
 
Broker derivative contracts

 
(9,478
)
 

 
(9,478
)
Other assets:
 
 
 
 
 
 
 
Customer derivative contracts

 
2,698

 

 
2,698


10


Certificates of deposit
178

 

 

 
178

Other
158

 

 

 
158

Payables to customers:
 
 
 
 
 
 
 
Customer derivative contracts

 
146,446

 

 
146,446

Payables to brokers:
 
 
 
 
 
 
 
     Broker derivative contracts

 
(9,561
)
 

 
(9,561
)
Total
$
5,835

 
$
130,105

 
$

 
$
135,940

 
Fair Value Measurements on a Recurring Basis
as of December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Cash and securities held for customers:
 
 
 
 
 
 
 
US treasury bills
$
6,542

 
$

 
$

 
$
6,542

Receivable from brokers:
 
 
 
 
 
 
 
Broker derivative contracts

 
(5,949
)
 

 
(5,949
)
Other assets:
 
 
 
 
 
 
 
Certificates of deposit
178

 

 

 
178

Other
152

 

 

 
152

Payables to customers:
 
 
 
 
 
 
 
Customer derivative contracts

 
116,007

 

 
116,007

Total
$
6,872

 
$
110,058

 
$

 
$
116,930


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, 2020, 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 and Other assets.

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, 2020 or December 31, 2019.

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 on 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, 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.

11


Other assets includes receivables from certain customers. Some of these customers maintain open trades, which are measured at fair value, along with accumulated losses that result in the receivable balances. These accumulated losses are not measured at fair value, but approximate fair value, because they are balances that the Company expects its customers to recover through their trading activities or by funding activities in a relatively short period of time.

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 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, 2020
 
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
$
62,531

 
$
62,531

 
$

 
$
62,531

 
$

Receivables from customers
$
703

 
$
703

 
$

 
$
703

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
$
931,669

 
$
931,669

 
$

 
$
931,669

 
$

Payables to brokers
$
(3,666
)
 
$
(3,666
)
 
$

 
$
(3,666
)
 
$

Convertible senior notes
$
80,334

 
$
89,240

 
$

 
$
89,240

 
$


 
As of December 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
$
118,245

 
$
118,245

 
$

 
$
118,245

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
$
1,045,270

 
$
1,045,270

 
$

 
$
1,045,270

 
$

Convertible senior notes
$
137,148

 
$
141,501

 
$

 
$
141,501

 
$


6. 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, Other assets, Payables to customers, and Payables to brokers on the accompanying Condensed Consolidated Balance Sheets (amounts in thousands):





12


 
March 31, 2020
 
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
$
100,068

 
$
(43,099
)
 
$
56,969

CFD contracts
119,344

 
(50,475
)
 
68,869

Metals contracts
6,483

 
(2,216
)
 
4,267

Total
$
225,895

 
$
(95,790
)
 
$
130,105

 
 
 
 
 
 
 
March 31, 2020
 
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
$
62,531

 
$
(9,478
)
 
$
53,053

Receivables from customers
$
703

 
$
2,698

 
$
3,401

Payables to customers
$
(931,669
)
 
$
146,446

 
$
(785,223
)
Payables to brokers
$
3,666

 
$
(9,561
)
 
$
(5,895
)
 
December 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
$
97,075

 
$
(40,704
)
 
$
56,371

CFD contracts
90,666

 
(43,642
)
 
47,024

Metals contracts
11,058

 
(4,395
)
 
6,663

Total
$
198,799

 
$
(88,741
)
 
$
110,058

 
 
 
 
 
 
 
December 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
$
118,245

 
$
(5,949
)
 
$
112,296

Payables to customers
$
(1,045,270
)
 
$
116,007

 
$
(929,263
)
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, Other assets, Payables to customers, and Payables to brokers on the Condensed Consolidated Balance Sheets are derived from the number of contracts below (amounts in thousands):





13


 
March 31, 2020
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,193,529

 
2,980,498

CFD contracts
75,807

 
54,415

Metals contracts
187

 
126

Total
3,269,523

 
3,035,039

 
December 31, 2019
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,418,117

 
3,342,201

CFD contracts
115,527

 
23,320

Metals contracts
471

 
233

Total
3,534,115

 
3,365,754

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 Income/(Loss) for the three months ended March 31, 2020 and 2019 were as follows (amounts in thousands):
 
Three Months Ended March 31,
 
2020

2019
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
$
76,677

 
$
16,137

CFD contracts
83,543

 
5,938

Metals contracts
12,850

 
2,204

Total
$
173,070

 
$
24,279


7. 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, 2020
 
December 31, 2019
Required collateral
$
62,531

 
$
118,245

Open foreign exchange positions
(9,478
)
 
(5,949
)
Total
$
53,053

 
$
112,296



14


8. INTANGIBLE ASSETS
The Company’s various intangible assets consisted of the following as of (amounts in thousands): 
 
March 31, 2020
 
December 31, 2019
Intangibles
Weighted average remaining useful lives
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Customer lists
4.7 years
$
44,617

 
$
(31,977
)
 
$
12,640

 
$
46,576

 
$
(32,510
)
 
$
14,066

Technology
2.0 years
23,208

 
(16,649
)
 
6,559

 
24,626

 
(16,800
)
 
7,826

Trademarks
2.0 years
5,932

 
(4,341
)
 
1,591

 
6,298

 
(4,390
)
 
1,908

Total finite lived intangibles
 
73,757

 
(52,967
)
 
20,790

 
77,500

 
(53,700
)
 
23,800

Trademark not subject to amortization (1)
 
363

 

 
363

 
363

 

 
363

Total intangibles
 
$
74,120

 
$
(52,967
)
 
$
21,153

 
$
77,863

 
$
(53,700
)
 
$
24,163


(1) These indefinite-lived trademarks relate to the forex.com and foreignexchange.com domain names, which have 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, 2020, future annual estimated amortization expense for the unamortized intangible assets is as follows (amounts in thousands):
For the nine months ending at December 31, 2020
$
5,068

For the year ended December 31, 2021
6,758

For the year ended December 31, 2022
3,774

For the year ended December 31, 2023
2,653

For the year ended December 31, 2024
2,075

For the year ended December 31, 2025
462

Total
$
20,790


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 $0.4 million and $0.4 million as of March 31, 2020 and December 31, 2019, 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 $19.9 million and $19.9 million as of March 31, 2020 and December 31, 2019, respectively.

The net revenue generated by any single individual related party was not deemed to be material in any period.

At March 31, 2020, the Company had receivables of $0.2 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 on the Condensed Consolidated Balance Sheets. There were no receivables due from the Company's officers as of December 31, 2019.

10. RESTRUCTURING

The Company incurred $1.4 million of restructuring expenses for the three months ended March 31, 2020. These expenses reflected the cost of reducing global headcount following strategic decisions in 2019. They are recorded in Restructuring expenses in the Consolidated Statements of Operations and Comprehensive Income/(Loss). All restructuring liabilities have been paid as of March 31, 2020. The Company did not incur any restructuring expenses for the three months ended March 31, 2019.



15


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 was maturing in August 2020.

On January 2, 2020, the Company delivered written notice to terminate the Credit Agreement effective as of January 13, 2020 ("termination date"). There were no amounts outstanding under the revolving line of credit as of the termination date nor as of December 31, 2019. The Company did not incur any material early termination penalties as a result of the termination.

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 (the "2022 Notes"), 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"). During the first quarter of 2020, the Company settled all remaining $58.5 million in principal amount of the convertible senior notes due in 2020, for an aggregate purchase price of $58.5 million. The balances of the liability and equity components of the Convertible Senior Notes as of March 31, 2020 and December 31, 2019 were as follows (amounts in thousands):
 
March 31, 2020
 
December 31, 2019
Liability component - principal
$
92,000

 
$
150,540

Deferred bond discount
(11,412
)
 
(13,081
)
Deferred financing cost
(254
)
 
(281
)
Liability component - net carrying value
$
80,334

 
$
137,178

 
 
 
 
Additional paid in capital
$
39,554

 
$
39,554

Discount attributable to equity
(826
)
 
(826
)
Equity component
$
38,728

 
$
38,728

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,
 
2020
 
2019
Interest expense - stated coupon rate
$
1,746

 
$
1,761

Interest expense - amortization of deferred bond discount and costs
1,696

 
1,571

Total interest expense - convertible senior notes
$
3,442

 
$
3,332


13. EARNINGS 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 and unvested restricted stock units.

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 $10 for each share of the Company’s common stock, and if the relevant conditions under the indenture governing the 2022 Notes were satisfied, there would be 2.0 million dilutive shares as of March 31, 2020, for the 2022 Notes.







16


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,
 
2020
 
2019
Net income/(loss)
$
77,344

 
$
(28,354
)
 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic weighted average common shares outstanding
37,554,579

 
37,525,073

Effect of dilutive securities:
 
 
 
Stock options
25,108

 

RSUs
6,119

 

Diluted weighted average common shares outstanding
37,585,806

 
37,525,073

 
 
 
 
 
 
 
 
Basic earnings/(loss) per share
$
2.06

 
$
(0.76
)
 
 
 
 
Diluted earnings/(loss) per share
$
2.06

 
$
(0.76
)

For the three months ended March 31, 2019, all common stock equivalents are excluded from the computation of diluted loss per share, because the Company's net loss during the period, resulting in those being anti-dilutive. The table below shows securities excluded from the dilution calculation, under the treasury stock method, during the three months ended March 31, 2019.
 
 
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, 2020 and 2019, 0.4 million stock options were out of the money and excluded from the computation of diluted loss or earnings per share.

14. COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company records accruals for loss contingencies associated with legal matters when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. If the Company determines that a loss is reasonably possible, the Company discloses the matter, and, if estimable, the amount or range of the possible loss in the Condensed Consolidated Financial Statements or notes.

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of business. Although the results of such litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of these ordinary course matters will not have a material adverse effect on the Company's business, operating results, financial condition or cash flows.

15. INCOME TAXES

The Company recorded an expense/(benefit) for income taxes of approximately $25.1 million and $(6.1) million for the three months ended March 31, 2020 and 2019. These amounts reflect the Company's estimate of the annual effective tax rates of 24.5% and 17.6%, for the three months ended March 31, 2020 and 2019, respectively, reflect the Company's estimate of the annual effective tax rate adjusted for certain discrete items, primarily the tax benefit resulting from the CARES Act in 2020. 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.


17


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, 2020 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
$
30.9

 
$
61.9

 
$
31.0

 
200
%
GAIN Capital Securities, Inc.
0.1

 
0.3

 
0.2

 
300
%
GAIN Capital U.K., Ltd.
50.4

 
167.0

 
116.6

 
331
%
GAIN Capital Japan Co., Ltd.
1.2

 
9.1

 
7.9

 
758
%
GAIN Capital Australia, Pty. Ltd.
0.9

 
5.5

 
4.6

 
611
%
GAIN Global Markets, Inc.
0.7

 
3.3

 
2.6

 
471
%
GAIN Capital-Forex.com Canada, Ltd.
0.2

 
2.0

 
1.8

 
1,000
%
GAIN Capital Singapore Pte., Ltd.
3.5

 
6.8

 
3.3

 
194
%
Trade Facts, Ltd.
0.5

 
3.6

 
3.1

 
720
%
Global Asset Advisors, LLC (1)
0.0

 
1.8

 
1.8

 
3,907
%
Total
$
88.4

 
$
261.3

 
$
172.9

 
296
%
(1)    The Global Asset Advisors, LLC minimum regulatory capital requirement is $45 thousand.

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 operating segments that either (a) exceed 10% of revenue, or (b) the reported profit or loss in absolute amount of which exceed 10% of profit of all operating segments that did not report a loss or (c) exceed 10% of the combined assets of all operating segments.

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 commodities, indices, individual equities, cryptocurrencies, bonds and interest rate products, as well as OTC options on forex. In the U.K., the Company also offers spread bets, which are investment products similar to CFDs, but with more favorable tax treatment for U.K. residents.

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 and Global Asset Advisors, LLC, under various brands.

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.

18


Selected financial information by segment is presented in the following tables (amounts in thousands):
 
Three Months Ended March 31,
 
2020

2019
Retail segment:
 
 
 
Net revenue
$
176,279

 
$
28,159

 
 
 
 
Employee compensation and benefits
14,385

 
12,992

Selling and marketing
6,876

 
9,953

Referral fees
9,450

 
4,390

Other operating expenses
22,123

 
18,228

Segment profit/(loss)
$
123,445

 
$
(17,404
)
 
 
Futures segment:
 
 
 
Net revenue
$
10,150

 
$
9,410

 
 
 
 
Employee compensation and benefits
2,864

 
2,164

Selling and marketing
236

 
260

Referral fees
3,047

 
2,708

Other operating expenses
3,149

 
3,221

Segment profit
$
854

 
$
1,057

 
 
Corporate and other:
 
 
 
Other revenue
$
(731
)
 
$
866

 
 
 
 
Employee compensation and benefits
6,917

 
5,099

Selling and marketing

 
11

Other operating expenses
2,238

 
2,905

Loss
$
(9,886
)
 
$
(7,149
)
TOTAL SEGMENT PROFIT/(LOSS)
$
114,413

 
$
(23,496
)
 
 
 
 
Depreciation and amortization
$
4,304

 
$
4,250

Purchased intangible amortization
1,808

 
3,329

Restructuring expenses
1,420

 

Transaction costs
1,043

 

OPERATING PROFIT/(LOSS)
$
105,838

 
$
(31,075
)
Interest expense on long term borrowings
3,442

 
3,332

INCOME/(LOSS) BEFORE INCOME TAX
$
102,396

 
$
(34,407
)

18. SUBSEQUENT EVENTS
On April 23, 2020, the Company declared a $0.06 dividend per share of Common Stock payable on June 26, 2020 to stockholders of record on June 23, 2020.

19


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, 2020.

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, 2019, as filed with the Securities and Exchange Commission on March 16, 2020, 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, as well as 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, 2019, and discussed elsewhere herein. 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 ("OTC") and exchange-traded markets. We serve customers in more than 180 countries worldwide, and we conduct business from our offices in Bedminster, New Jersey; New York, New York; Chicago, Illinois; Powell, Ohio; London, England; Tokyo, Japan; Sydney, Australia; Shanghai, China; Hong Kong; Dubai, U.A.E.; Krakow, Poland and Singapore. We operate our business in two segments: retail and futures. Our retail segment provides customers around the world access to over 15,000 global financial markets, including spot foreign exchange ("forex"), precious metals trading, as well as contracts for difference ("CFDs"), which are investment products with returns linked to the performance of underlying assets. We offer CFDs on currencies, commodities, indices, individual equities, cryptocurrencies, bonds, options and interest rate products. In the United Kingdom ("U.K."), we offer spread bets, which are investment products similar to CFDs, but with more favorable tax treatment for residents of the U.K.

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. For financial information regarding our segments, please refer to Note 17 to our Condensed Consolidated Financial Statements.

As a global provider of online trading services, our results are influenced 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 customers to whom we provide our services. Additional factors may impact our results of operations for the most recent fiscal period, as well as future periods. Please refer to “Part II - 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 because of movements and trends in global financial markets and fluctuations in market volatility, which are driven by external factors, some of which are market specific and some of which are correlated to general macroeconomic conditions. As a general rule, our businesses typically benefit from volatility in the prices of the products that we offer, as periods of increased volatility often coincide with higher levels of trading by our clients and higher transaction volume. Periods of extreme volatility, however, may result in significant market dislocations that can instead lead clients to reduce their trading activity. In addition, volatility that results in market prices moving within a relatively narrow band of prices may lead to less profitable trading activity. Low or extremely high market volatility can adversely affect our ability to profitably manage our net exposure, which is the unhedged portion of the trading positions we enter into with customers in our retail segment.


20


For the three months ended March 31, 2020, significantly greater volatility than that in the comparative period resulted in higher volumes, which positively impacted our financial results, relative to the comparative period. The higher volatility resulted from the various effects of the COVID-19 global pandemic.

Competition
The products we offer have generally been accessible to retail investors for a significantly shorter period than many other securities products, such as cash equities. 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 that have already established customer bases in such markets. In addition, in existing markets, we occasionally make short-term decisions to be more aggressive regarding pricing, 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 March 2018, the European Securities and Markets Authority ("ESMA") announced product intervention measures to further regulate the marketing, distribution or sale of CFDs to retail investors in the European Union ("E.U.") These measures include leverage limits which vary based on the underlying asset, a margin close out rule on a per account basis, negative balance protection on a per account basis, a restriction on incentives offered to trade CFDs and a required standardized risk warning. These measures have now been published in the Official Journal of the E.U., and became effective on August 1, 2018, and have since been extended several times. The expectation was that in time the various E.U. regulators would introduce similar, permanent measures in their own jurisdictions.  In July 2019, ESMA announced that it would cease renewal of the measures. In August 2019, the U.K.'s Financial Conduct Authority ("FCA") implemented regulations similar to ESMA’s existing temporary restrictions, but extended the restrictions to closely substitutable products, including knock-out products and turbo certificates. Since then almost all E.U. countries have introduced permanent national measures that are similar to the ESMA measures. These measures are not expected to have a material adverse impact on the Company’s results of operations or financial condition. Furthermore, the FCA released a consultation paper (CP 19/22) in early 2019 regarding a potential ban on the sale of CFDs referencing cryptocurrencies to retail consumers. The consultation period is now closed and final rules are expected to be released in the second quarter of 2020.

The Australian Securities and Investments Commission ("ASIC") recently announced proposed regulations for comment (CP322 Product Intervention measures) that may result in new regulations that restrict the available leverage that may be offered to customers and provide for margin close-out protection, additional risk warnings, prohibition on certain types of inducements, real-time disclosures and further transparency regarding the cost of trading.

As a result of historical and/or future regulatory changes, we may be required to change our business strategy, including the nature of the products that we offer, the target market for our products, or our overall strategy toward one or more geographic markets.

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.

Sale to INTL FCStone Inc.

On February 26, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with INTL FCStone Inc., a Delaware corporation (“INTL”) and Golf Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of INTL (“Merger Sub”), pursuant to which, among other things and subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company (the "Merger"). As a result of the Merger, Merger Sub will cease to exist, and we will survive as a wholly owned subsidiary of INTL. Subject to the terms and conditions of the Merger Agreement at the effective time of the Merger (the "Effective Time"), each share of the Company's common stock issued and outstanding immediately prior to the Effective Time (other than dissenting shares) will be converted into the right to receive $6.00 per share in cash, without interest.

Business Environment

In early March 2020, COVID-19, a disease caused by a novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. Since December 2019, most countries and territories worldwide have confirmed cases of COVID-19, including the U.S. and many other countries in which we operate. Authorities around the world implemented numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional and national economies. We do not believe that there is any significant negative impact of the COVID-19 pandemic to the Condensed Consolidated Financial Statements as of March 31, 2020. We are continuing to monitor

21


developments relating to COVID-19 and are coordinating our operational response based on existing business continuity plans and on guidance from global health organizations, relevant governments, and general pandemic response best practices.

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 the key operating metrics that we use to evaluate the performance of our business.

Revenue

We categorize our revenue as retail revenue, futures revenue, other revenue, and net interest revenue.

Retail Revenue
Retail revenue is our largest revenue type. It consists primarily of retail segment trading revenue, which comes from a variety of products, including spot forex, precious metals, spread bets and CFDs on currencies, commodities, indices, individual equities, cryptocurrencies, bonds, options and interest rate products, as well as OTC options on forex.

We generate retail revenue in two ways: transaction based revenue and market value based revenue. Transaction based revenue comes principally from the bid/offer spread we provide our customers, financing charges for positions held overnight, commissions on equity CFD trades, and other account related fees. Market value based revenue comes from net gains and losses generated through changes in the market value of the currencies and other products held in our net exposure or realized during the period.

For the three months ended March 31, 2020 and 2019, retail revenue represented 93.2% and 63.2% of our total net revenue, respectively.

For each of the three months ended March 31, 2020 and 2019, approximately 98% and 96% of our average daily retail trading volume was either naturally hedged or hedged by us with one of our liquidity providers, and the remaining 2% and 4% of our average daily retail 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 will 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. Please refer to “Our Retail Segment - Sophisticated risk management” in Item 1. Business, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for further details regarding our risk management policies for the retail segment.

Futures Revenue
Futures revenue consists primarily of commissions and fees earned on futures and futures options trades that we execute for our customers, who use our connections to clearers, data feeds, and trading tools. We are not exposed to any market risk in connection with this activity, though we do experience credit risk with our counterparties.

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

Net Interest Revenue
Net interest revenue consists primarily of the revenue generated by our cash and customer cash held at banks and on deposit as collateral with our liquidity providers as well as U.S. Treasury bills, less interest paid to our customers.

Our cash and customer cash is generally invested in highly liquid securities, like U.S Treasury bills, or money market instruments. Interest paid to customers is determined by a variety of factors, including net account value, which 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.


22


Expenses

Our expenses principally comprise 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, cost-effectively acquiring customers for our products and services, as well as client engagement and retention.

Referral Fees
Introducing brokers direct customers to us in return for referral fees on each referred customer’s trading volume or a share of net revenue generated by each referred customer’s trading activity. White label partners offer our trading services to their customers under their own brand. Like introducing brokers, White label partners charge referral fees for the trade flow they bring to us. Referral fees also includes payments made to affiliates for referring customer 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 terms of our specific agreements with white label partners and introducing brokers 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 for the trading volume generated by the customers they introduce, directly or indirectly, to us, rather than on a revenue sharing basis. During periods in which referred customer trading activity is not profitable for us, if the associated trading volume remains high, we may be required to make large payments despite generating lower revenue from customers introduced. Our retail indirect business accounted for 20.9% and 21.8% of retail trading volume in the three months ended March 31, 2020 and 2019, respectively.

Trading Expenses
Trading expenses consist of clearing costs, fees paid for market data that we provide to our customers or use to create our own derived data products, as well as fees for news services.

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 is expense for physical assets and software purchased for use over a period of several years, as well as amortization of internally developed software, which forms the majority of the expense.

Purchased Intangible Amortization
Purchased intangible amortization consists of amortization related to intangible assets connected with our acquisitions. The principal intangible assets acquired are technology, customer relationships, and trademarks. These intangible assets have initial useful lives ranging from one year to ten years.

Communications and Technology
Communications and technology consists of communication fees, data fees, non-capitalized product development, software and maintenance expenses. These costs serve a number of purposes, including general maintenance for our trading platforms and global communications.

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


23


Restructuring Expenses
During the three months ended March 31, 2020 we incurred restructuring expenses, which reflected costs arising from headcount reductions and other exit costs, measured and disclosed in accordance with FASB ASC 420 Exit or Disposal Cost Obligations and ASC 712 Compensation - Nonretirement Postemployment Benefits.

Transaction Costs
During the three months ended March 31, 2020 we incurred transaction related expenses with respect to the sale to INTL, which include legal, accounting and investment banking fees.

Interest Expense on Long Term Borrowings
Interest expense on long term borrowings consists of interest expense, both cash and non-cash on our 4.125% Convertible Senior Notes due 2020 and interest expense on our 5.00% Convertible Senior Notes due 2022.

Operating Metrics
We review various key operating metrics, which are described below, to evaluate our business's performance.
 
For the Three Months Ended March 31,
 
2020
 
2019
Retail
 
 
 
OTC Trading Volume (billions) (1)
$
748.7

 
$
487.3

OTC Average Daily Volume (billions)
$
11.7

 
$
7.7

12 Month Trailing Active OTC Accounts (2)
132,841

 
120,641

3 Month Trailing Active OTC Accounts (2)
87,349

 
70,051

Client Assets (millions)
$
597.1

 
$
652.6

 
 
 
 
Futures
 
 
 
Number of Futures Contracts (3)
2,042,824

 
1,755,873

Futures Average Daily Contracts
32,949

 
28,785

12 Month Trailing Active Futures Accounts (2)
7,146

 
7,387

Client Assets (millions)
$
188.1

 
$
217.1


(1)
US dollar equivalent of notional amounts traded
(2)
Accounts that executed a transaction during the relevant period
(3)
Futures contracts represent the total number of contracts transacted by customers of our futures business

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.

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 given period.

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.



24


Number of Futures Contracts
Number of futures contracts represents the total number of contracts transacted by customers in our futures segment.

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

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

We believe that our customer trading volumes are driven by eight main factors. Four of these factors are broad external factors outside of our control that generally impact 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 four 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.
RESULTS OF OPERATIONS

The following period to period comparisons of our financial results and our interim results are not necessarily indicative of future results.

Condensed Consolidated Statements of Operations
(Dollars in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
 
$ Change
 
% Change
REVENUE:
 
 
 
 
 
 
 
Retail revenue
$
173,070

 
$
24,279

 
$
148,791

 
612.8
 %
Futures revenue
9,386

 
7,990

 
1,396

 
17.5
 %
Other revenue
986

 
2,485

 
(1,499