10-Q 1 gcap2018063010-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 June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     .
Commission File Number 001-35008
 
 GAIN CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
20-4568600
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
Bedminster One
135 Route 202/206
Bedminster, New Jersey
 
07921
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (908) 731-0700
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
¨
Accelerated filer
ý
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨




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

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
As of July 27, 2018, the registrant had 44,642,233 shares of common stock, $0.00001 par value per share, outstanding.



GAIN CAPITAL HOLDINGS, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2018
 
 
 
 
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2018 and 2017
 
Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 

3


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

GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
 
 
June 30, 2018
 
December 31, 2017
ASSETS:
 
 
 
Cash and cash equivalents
$
360,312

 
$
209,688

Cash and cash equivalents held for customers
920,366

 
978,828

Receivables from brokers
52,335

 
78,503

Property and equipment, net
36,462

 
40,742

Intangible assets, net
40,117

 
61,969

Goodwill
28,182

 
33,036

Other assets
36,743

 
45,881

Total assets
$
1,474,517

 
$
1,448,647

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities
 
 
 
Payables to customers
$
920,366

 
$
978,828

Payables to brokers
2,973

 
2,789

Accrued compensation and benefits
10,623

 
10,104

Accrued expenses and other liabilities
39,749

 
33,947

Income tax payable
10,154

 
599

Convertible senior notes
135,289

 
132,221

Total liabilities
$
1,119,154

 
$
1,158,488

Commitments and contingent liabilities

 

Redeemable non-controlling interests
$
2,562

 
$
4,411

Shareholders’ equity
 
 
 
Common stock ($0.00001 par value; 120 million shares authorized, 54,323,940 shares issued and 44,755,615 shares outstanding as of June 30, 2018; 120 million shares authorized, 53,612,340 shares issued and 45,152,299 shares outstanding as of December 31, 2017)
$

 
$

Additional paid-in capital
239,745

 
235,659

Retained earnings
199,683

 
122,686

Accumulated other comprehensive loss
(21,353
)
 
(15,670
)
Treasury stock, at cost (9,568,325 shares at June 30, 2018 and 8,460,041 at December 31, 2017)
(65,274
)
 
(56,927
)
Total shareholders’ equity
352,801

 
285,748

Total liabilities and shareholders’ equity
$
1,474,517

 
$
1,448,647

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

4


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except share and per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018

2017
 
2018
 
2017
REVENUE:
 
 
 
 
 
 
 
Retail revenue
$
72,032

 
$
79,079

 
$
156,152

 
$
118,010

Futures revenue
11,129

 
9,565

 
21,774

 
20,145

Other (loss)/revenue
(1,411
)
 
822

 
484

 
1,833

Total non-interest revenue
81,750

 
89,466

 
178,410

 
139,988

Interest revenue
2,827

 
1,261

 
4,901

 
2,082

Interest expense
392

 
136

 
766

 
299

Total net interest revenue
2,435

 
1,125

 
4,135

 
1,783

Net revenue
$
84,185

 
$
90,591

 
$
182,545

 
$
141,771

EXPENSES:
 
 
 
 
 
 
 
Employee compensation and benefits
$
22,473

 
$
23,011

 
$
46,811

 
$
43,534

Selling and marketing
6,767

 
7,517

 
12,737

 
16,752

Referral fees
10,464

 
13,312

 
21,895

 
29,753

Trading expenses
5,541

 
4,863

 
11,352

 
10,334

General and administrative
14,228

 
11,835

 
26,692

 
21,064

Depreciation and amortization
5,341

 
4,121

 
10,709

 
7,949

Purchased intangible amortization
3,612

 
3,817

 
7,280

 
6,883

Communications and technology
5,495

 
4,497

 
10,886

 
9,526

Bad debt provision
282

 
(166
)
 
1,400

 
(94
)
Restructuring expenses
25

 

 
25

 

Impairment of investment

 

 
(130
)
 

Total operating expense
74,228

 
72,807

 
149,657

 
145,701

OPERATING PROFIT/(LOSS)
9,957

 
17,784

 
32,888

 
(3,930
)
Interest expense on long term borrowings
3,388

 
2,694

 
6,728

 
5,359

INCOME/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)
6,569

 
15,090

 
26,160

 
(9,289
)
Income tax (benefit)/expense
(263
)
 
1,533

 
7,413

 
(4,401
)
Equity in net loss of affiliate

 
(34
)
 

 
(54
)
Net income/(loss) from continuing operations
6,832

 
13,523

 
18,747

 
(4,942
)
Income from discontinued operations, including gain on sale of $69,581, net of income tax of $9,806
60,642

 
569

 
64,988

 
248

NET INCOME/(LOSS)
67,474

 
14,092

 
83,735

 
(4,694
)
Less income attributable to non-controlling interest
326

 
153

 
501

 
238

NET INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
67,148

 
13,939

 
83,234

 
(4,932
)
Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(15,157
)
 
7,761

 
(5,683
)
 
12,300

COMPREHENSIVE INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.
$
51,991

 
$
21,700

 
$
77,551

 
$
7,368

Earnings/(loss) per common share:
 
 
 
 
 
 
 
Basic earnings/(loss) from continuing operations
$
0.13

 
$
0.30

 
$
0.39

 
$
(0.09
)
Basic earnings from discontinued operations
$
1.36

 
$
0.01

 
$
1.45

 
$
0.01

Basic
$
1.49

 
$
0.31

 
$
1.84

 
$
(0.08
)
Diluted earnings/(loss) from continuing operations
$
0.13

 
$
0.30

 
$
0.38

 
$
(0.09
)
Diluted earnings from discontinued operations
$
1.34

 
$
0.01

 
$
1.43

 
$
0.01

Diluted
$
1.47

 
$
0.31

 
$
1.81

 
$
(0.08
)
Weighted average common shares outstanding used in computing earnings/(loss) per common share:
 
 
 
 
 
 
 

5


Basic
44,797,103

 
47,687,214

 
44,906,800

 
47,790,307

Diluted
45,309,002

 
47,894,648

 
45,415,774

 
47,790,307

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

6


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Loss
 
Total
 
Outstanding Shares
 
Amount
 
 
 
 
 
BALANCE—December 31, 2017
45,152,299

 
$

 
$
(56,927
)
 
$
235,659

 
$
122,686

 
$
(15,670
)
 
$
285,748

Net income applicable to Gain Capital Holdings, Inc.

 

 

 

 
83,234

 

 
83,234

Exercise of options
84,500

 

 

 
587

 

 

 
587

Conversion of restricted stock into common stock
585,565

 

 

 

 

 

 

Issuance of common stock for the employee stock purchase plan
41,535

 

 

 
314

 

 

 
314

Purchase of treasury stock
(1,098,880
)
 

 
(8,271
)
 

 

 

 
(8,271
)
Shares withheld for net settlements of share-based awards
(9,404
)
 

 
(76
)
 

 

 

 
(76
)
Share-based compensation

 

 

 
3,185

 

 

 
3,185

Adjustment to fair value of redeemable non-controlling interests

 

 

 

 
(890
)
 

 
(890
)
Dividends declared

 

 

 

 
(5,347
)
 

 
(5,347
)
Foreign currency translation adjustment

 

 

 

 

 
(5,683
)
 
(5,683
)
BALANCE—June 30, 2018
44,755,615

 
$

 
$
(65,274
)
 
$
239,745

 
$
199,683

 
$
(21,353
)
 
$
352,801

 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Outstanding Shares
 
Amount
 
 
 
 
 
BALANCE—December 31, 2016
48,220,243

 
$

 
$
(30,767
)
 
$
218,392

 
$
143,399

 
$
(36,842
)
 
$
294,182

Net loss applicable to Gain Capital Holdings, Inc.

 

 

 

 
(4,932
)
 

 
(4,932
)
Exercise of options
82,774

 

 

 
335

 

 

 
335

Conversion of restricted stock into common stock
510,793

 
 
 
 
 
 
 
 
 
 
 

Issuance of common stock for the employee stock purchase plan
64,546

 
 
 
 
 
402

 
 
 
 
 
402

Purchase of treasury stock
(1,373,685
)
 

 
(9,426
)
 

 

 

 
(9,426
)
Shares withheld for net settlements of share-based awards
(55,190
)
 

 
(381
)
 

 

 

 
(381
)
Share-based compensation

 

 

 
2,856

 

 

 
2,856

Adjustment to fair value of redeemable non-controlling interests

 

 

 

 
983

 

 
983

Dividends declared

 

 

 

 
(5,774
)
 

 
(5,774
)
Foreign currency translation adjustment

 

 

 

 

 
12,300

 
12,300

BALANCE—June 30, 2017
47,449,481

 
$

 
$
(40,574
)
 
$
221,985

 
$
133,676

 
$
(24,542
)
 
$
290,545

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

7


GAIN CAPITAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income/(loss)
$
83,735

 
$
(4,694
)
Adjustments to reconcile net income/(loss) to cash (used in)/provided by operating activities
 
 
 
Loss/(gain) on foreign currency exchange rates
950

 
(96
)
Depreciation and amortization
19,271

 
16,315

Deferred tax (benefit)/expense
(1,227
)
 
622

Amortization of deferred financing costs
324

 
221

Bad debt provision/(recovery)
1,400

 
(94
)
Convertible senior notes discount amortization
2,743

 
2,289

Share-based compensation
3,185

 
2,856

Equity in net loss of affiliate

 
54

Gain on sale of GTX
(69,581
)
 

Changes in operating assets and liabilities:
 
 
 
Receivables from brokers
25,687

 
(20,037
)
Other assets
3,055

 
518

Payables to customers
(67,826
)
 
(20,183
)
Payables to brokers
192

 

Accrued compensation and benefits
(2,056
)
 
(4,891
)
Accrued expenses and other liabilities
2,822

 
(6,176
)
Income tax payable
9,345

 
(2,699
)
Net cash provided by/(used in) operating activities
12,019

 
(35,995
)
Cash provided by/(used in) operating activities - continuing operations
8,233

 
(24,521
)
Cash provided by/(used in) operating activities - discontinued operations
3,786

 
(11,474
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(8,736
)
 
(10,182
)
Proceeds from sale of GTX
96,764

 

Acquisition of FXCM assets

 
(6,960
)
Net cash provided by/(used in) investing activities
88,028

 
(17,142
)
Cash used in investing activities - continuing operations
(7,891
)
 
(16,806
)
Cash provided by/(used in) investing activities - discontinued operations
95,919

 
(336
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options
587

 
335

Proceeds from employee stock purchase plan
314

 
402

Purchase of treasury stock
(8,347
)
 
(9,807
)
Dividend payments
(5,347
)
 
(5,774
)
Distributions to non-controlling interest holders
(199
)
 
(873
)
Net cash used in financing activities
(12,992
)
 
(15,717
)
Effect of exchange rate changes on cash and cash equivalents
5,107

 
29,091

NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
92,162

 
(39,763
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period
1,188,516

 
1,180,228

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period
$
1,280,678

 
$
1,140,465

 
 
 
 
Cash and cash equivalents
360,312

 
193,137

Cash and cash equivalents held for customers
920,366

 
947,328

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period
$
1,280,678

 
$
1,140,465


8


 
 
 
 
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
(4,346
)
 
$
(3,148
)
Income taxes
$
(3,040
)
 
$
(4,386
)
Non-cash financing activities:
 
 
 
Adjustment to redemption value of non-controlling interests
$
(890
)
 
$
983

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

9


GAIN CAPITAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
GAIN Capital Holdings, Inc. (together with its subsidiaries, the “Company”), is a Delaware corporation formed and incorporated on March 24, 2006. GAIN Holdings, LLC is a wholly-owned subsidiary of GAIN Capital Holdings, Inc., and owns all outstanding membership units of GAIN Capital Group, LLC (“Group, LLC”), the Company’s primary regulated entity in the United States. GAIN Capital Holdings Ltd. is the holding company of the Company’s primary regulated entity in the United Kingdom.

The Company is a global provider of trading services and solutions, specializing in over-the-counter, or OTC, and exchange-traded markets. The Company operates its business in 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, as well as spread bets and contracts for difference, or 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 19.

Group, LLC is a retail foreign exchange dealer (“RFED”) and a Futures Commission Merchant (“FCM”) registered with the Commodity Futures Trading Commission (the “CFTC”). As such, it is subject to the regulations of the CFTC, an agency of the U.S. government, and the rules of the National Futures Association (“NFA”), an industry self-regulatory organization.

GAIN Capital UK Limited ("GCUK") is registered in the United Kingdom (“U.K.”) and regulated by the Financial Conduct Authority (“FCA”) as a full scope €730k IFPRU Investment Firm.

Sale of GTX ECN Business
On June 29, 2018, the Company completed the sale of the 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 subject to a customary working capital adjustment. 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, 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 Income. For more information relating to the discontinued operations of the Company's GTX ECN business, please see Note 3.

Basis of Presentation and Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the financial statements for the interim periods. The financial statements are presented in accordance with accounting principles generally accepted in the United States of America. The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the Securities and Exchange Commission's ("SEC") regulations for interim financial statements, and, in accordance with SEC rules, omit or condense certain information and footnote disclosures. Results for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the full year. These financial statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2017. The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, after the elimination of inter-company transactions and balances.

2. ACCOUNTING PRONOUNCEMENTS

Recently Adopted

In January 2017, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (Step 2) from the goodwill impairment test. Instead, an impairment charge will equal the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the

10


amount of goodwill allocated to the reporting unit. The guidance will be effective for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted after January 1, 2017. The Company has adopted this ASU as of January 1, 2018, and will apply Step 2 going forward to the extent it is required.

In November 2016, the FASB issued ASU No. 2016-18, “Restricted Cash,” which requires that companies present cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents (restricted cash) when reconciling beginning-of-period and end-of-period totals on the Statement of Cash Flows. The Company has retrospectively adopted this ASU as of January 1, 2018 and includes cash and cash equivalents held for customers as restricted cash. As a result, Net cash used in operating activities on the Statement of Cash Flows increased by $20.2 million for the six months ended June 30, 2017.

The Company defines restricted cash to include cash and cash equivalents held for customers, which represents cash and other highly liquid assets held to fund customer liabilities in connection with trading positions. 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. 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.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which is part of ASC Topic 606. It defines how companies report revenues from contracts with customers and also requires certain enhanced disclosures. The standard’s provisions and related amendments are effective for annual reporting periods beginning after December 15, 2017. On January 1, 2018, the Company adopted this guidance, which did not have a material impact on the Company’s financial statements. A substantial portion of revenue falls under ASC Topic 825, Financial Instruments, which is excluded from the scope of the new guidance. The Company adopted ASU No. 2014-09 using the modified retrospective approach. See Note 4 Revenue Recognition for additional disclosure.

Not Yet Adopted

In February 2016, the FASB issued 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 recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently assessing the impact on its Financial Statements of adopting this guidance.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220),” to address certain income tax effects in Accumulated Other Comprehensive Income (AOCI) resulting from the tax reform enacted in 2017. The amended guidance provides an option to reclassify tax effects within AOCI to retained earnings in the period in which the effect of the tax reform is recorded. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods. Early adoption is permitted. The Company is currently assessing the impact on its Financial Statements of adopting this guidance.

3. 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, subject to a customary working capital adjustment.

The Company recorded a gain of $69.6 million on the sale of the GTX business subject to the final working capital adjustment between the parties.

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.

The results of operations from the discontinued segment for the three and six months ended June 30, 2018 are as follows (in thousands):



11


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
REVENUE:
 
 
 
 
 
 
 
Institutional revenue
$
7,923

 
$
7,435

 
$
16,379

 
$
15,802

Other revenue
(2
)
 

 
(2
)
 

Total non-interest revenue
7,921

 
7,435

 
16,377

 
15,802

Interest revenue
55

 
28

 
103

 
48

Total net interest revenue
55

 
28

 
103

 
48

Net revenue
$
7,976

 
$
7,463

 
$
16,480

 
$
15,850

EXPENSES:
 
 
 
 
 
 
 
Employee compensation and benefits
$
2,466

 
$
3,314

 
$
5,879

 
$
7,006

Trading expenses
2,782

 
2,315

 
5,439

 
4,911

Other expenses
1,861

 
1,804

 
3,924

 
3,183

Total operating expense
7,109

 
7,433

 
15,242

 
15,100

OPERATING PROFIT
867

 
30

 
1,238

 
750

Gain on sale of discontinued operations
69,581

 

 
69,581

 

INCOME BEFORE INCOME TAX EXPENSE/(BENEFIT)
70,448

 
30

 
70,819

 
750

Income tax expense/(benefit)
9,806

 
(539
)
 
5,831

 
502

NET INCOME FROM DISCONTINUED OPERATIONS
$
60,642

 
$
569

 
$
64,988

 
$
248


Since the sale of the GTX ECN business closed on June 29, 2018, there are no assets held for sale as of June 30, 2018. As of December 31, 2017, total assets of $28.5 million and total liabilities of $3.8 million were related to the discontinued segment.

4. REVENUE RECOGNITION

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which is part of ASC Topic 606. It defines how companies report revenues from contracts with customers and also requires certain enhanced disclosures. The standard’s provisions and related amendments are effective for annual reporting periods beginning after December 15, 2017. On January 1, 2018, the Company adopted this guidance, which did not have a material impact on the Company’s financial statements. A substantial portion of the Company's retail revenue as well as interest revenue falls under ASC Topic 825, “Financial Instruments”, which is excluded from the scope of Topic 606. Additionally, the Company’s futures segment revenue was not materially impacted as the satisfaction of performance obligations under the new guidance is materially consistent with the Company’s previous revenue recognition policies. Accordingly, the adoption of the new standard did not result in a transition adjustment to opening retained earnings, and as a result, revenues for contracts with customers would not have been adjusted in prior periods and are not presented herein on an adjusted basis.

Similarly, the amended guidance did not have a material impact on the recognition of costs incurred to obtain new contracts. As a result of the adoption of the new guidance, the Company recorded a gross up of $0.5 million and $1.0 million for the three and six months ended June 30, 2018, respectively, which impacted referral fee expense in the Company's discontinued operations. The Company adopted ASU No. 2014-09 using the modified retrospective approach.

Under ASC Topic 606, revenues are recognized when control of the promised goods or services is transferred to customers in exchange for an amount that reflects the consideration the Company expects to be entitled to in transferring those goods or services. The following is a description of the Company’s revenue recognition policies as they relate to revenue from contracts with customers.

Futures Revenue
Futures revenue comprises primarily commissions earned on futures and futures options trades. We act as an agent for the trades executed in our futures segment and are not exposed to market risk in connection with that activity. The Company earns commission revenue by acting as an agent on behalf of customers. 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.

12



Disaggregation of Revenues
The following table presents the Company’s revenue from contracts with customers disaggregated by the services described above for the futures segment for the three and six months ended June 30, 2018:

 
Three months ended June 30, 2018
Six months ended June 30, 2018
Futures
 
 
Direct Customers (1)
$
2,693

$
5,166

Indirect Customers (2)
$
6,555

$
13,583

Other
$
2,852

$
4,842

Total Segment Revenue
$
12,100

$
23,591


(1)
Direct customers are all customers not classified as indirect
(2)
Indirect customers are referred to the Company by introducing brokers

Contract Assets and Contract Liabilities

The timing of revenue recognition may differ from the timing of payment from customers. The Company records a receivable 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

Fair value is defined 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. U.S. Generally Accepted Accounting Principles ("US GAAP") 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):

13


 
Fair Value Measurements on a Recurring Basis
as of June 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Money market accounts
$
252,311

 
$

 
$

 
$
252,311

Cash and cash equivalents held for customers:
 
 
 
 
 
 
 
US treasury bills: U.S. government and agency securities
103,891

 

 

 
103,891

Receivable from brokers:
 
 
 
 
 
 
 
Broker derivative contracts

 
(10,391
)
 

 
(10,391
)
Other assets:
 
 
 
 
 
 
 
Certificates of deposit
176

 

 

 
176

Other
125

 

 

 
125

Payables to customers:
 
 
 
 
 
 
 
Customer derivative contracts

 
124,807

 

 
124,807

Payables to brokers:
 
 
 
 
 
 
 
Broker derivative contracts

 
2,482

 

 
2,482

Total
$
356,503

 
$
116,898

 
$

 
$
473,401

 
 
Fair Value Measurements on a Recurring Basis
as of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets/(Liabilities):
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Money market accounts
$
219,286

 
$

 
$

 
$
219,286

Cash and cash equivalents held for customers:
 
 
 
 
 
 
 
US treasury bills: U.S. government and agency securities
105,190

 

 

 
105,190

Receivable from brokers:
 
 
 
 
 
 
 
Broker derivative contracts

 
4,966

 

 
4,966

Other assets:
 
 
 
 
 
 
 
Certificates of deposit
175

 

 

 
175

Other
130

 

 

 
130

Payables to customers:
 
 
 
 
 
 
 
Customer derivative contracts

 
129,966

 

 
129,966

Payables to brokers:
 
 
 
 
 
 
 
     Broker derivative contracts
 
 
(3,170
)
 
 
 
(3,170
)
Total
$
324,781

 
$
131,762

 
$

 
$
456,543


The Company has not changed its valuation approaches or techniques in measuring the fair value of any financial assets and liabilities during the six months ended June 30, 2018, nor has there been any movement between levels during the period.

Level 1 Financial Assets

The Company has U.S. Treasury bills, money market accounts and certificates of deposit that are Level 1 financial instruments that are recorded based upon listed or quoted market rates. The U.S. Treasury bills and money market accounts are recorded in Cash and cash equivalents and Cash and cash equivalents 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.


14


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 on June 30, 2018 or December 31, 2017.

Financial Instruments Not Measured at Fair Value

The table below presents the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value in the condensed consolidated balance sheets (amounts in thousands).

Receivables from brokers comprise open trades, which are measured at fair value (disclosed above), and the Company’s 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 (disclosed above), and customer deposits that the Company holds for its role as clearing broker. These deposits are not measured at fair value, but approximate fair value, because they are cash balances that the Company or its customers can settle at either party’s discretion. Such settlement would occur within a relatively short period of time once a withdrawal is initiated.

Payables to brokers comprise open trades, which are measured at fair value (disclosed above) and 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 either on the same or next business day following a margin call.

The carrying value of Convertible senior notes represents the notes’ principal amounts net of unamortized discount (refer to Note 14). The Company assessed the notes’ fair value as determined by current Company-specific and risk free interest rates as of the balance sheet date.
 
As of June 30, 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
$
62,726

 
$
62,726

 
$

 
$
62,726

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Payables to customers
$
1,045,173

 
$
1,045,173

 
$

 
$
1,045,173

 
$

Payable to brokers
$
5,455

 
$
5,455

 
$

 
$
5,455

 
$

Convertible senior notes
$
135,289

 
$
179,847

 
$

 
$
179,847

 
$


 
As of December 31, 2017
 
Fair Value Measurements using:
 
Carrying Value
 
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets:
 
 
 
 
 
 
 
 
 
Receivables from brokers
$
73,537

 
$
73,537

 
$

 
$
73,537

 
$

Payables to brokers
$
381

 
$
381

 
$

 
$
381

 
$

Financial Liabilities:
 
 
 
 
 
 
 
 
 

15


Payables to customers
$
1,108,794

 
$
1,108,794

 
$

 
$
1,108,794

 
$

Convertible senior notes
$
132,221

 
$
205,073

 
$

 
$
205,073

 
$


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, Payables to customers and Payables to brokers on the accompanying Condensed Consolidated Balance Sheets (amounts in thousands):
 
June 30, 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
$
105,405

 
$
(23,079
)
 
$
82,326

CFD contracts
91,411

 
(60,328
)
 
31,083

Metals contracts
6,363

 
(2,874
)
 
3,489

Total
$
203,179

 
$
(86,281
)
 
$
116,898

 
 
 
 
 
 
 
June 30, 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
$
62,726

 
$
(10,391
)
 
$
52,335

Payables to customers
$
(1,045,173
)
 
$
124,807

 
$
(920,366
)
Payable to brokers
$
(5,455
)
 
$
2,482

 
$
(2,973
)

 
December 31, 2017
 
Gross amounts of
assets for
derivative open
positions at fair
value
 
Gross amount of
(liabilities) for
derivative open
positions at fair
value
 
Net amounts of
assets/(liabilities)
for derivative
open positions at
fair value
Derivative Instruments:
 
 
 
 
 
Foreign currency exchange contracts
$
121,104

 
$
(31,556
)
 
$
89,548

CFD contracts
102,659

 
(62,322
)
 
40,337

Metals contracts
4,084

 
(2,207
)
 
1,877

Total
$
227,847

 
$
(96,085
)
 
$
131,762

 
 
 
 
 
 
 
December 31, 2017
 
Cash Collateral
 
Net amounts of
assets/liabilities
for derivative
open positions at
fair value
 
Net amounts of
assets/liabilities
presented in the
balance sheet
Derivative Assets/(Liabilities):
 
 
 
 
 

16


Receivables from brokers
$
73,537

 
$
4,966

 
$
78,503

Payables to customers
$
(1,108,794
)
 
$
129,966

 
$
(978,828
)
Payables to brokers
$
381

 
$
(3,170
)
 
$
(2,789
)
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 Consolidated Balance Sheets are derived from the number of contracts below (amounts in thousands):
 
June 30, 2018
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
3,019,520

 
3,598,235

CFD contracts
115,947

 
168,033

Metals contracts
485

 
120

Total
3,135,952

 
3,766,388

 
December 31, 2017
 
Total contracts in long positions
 
Total contracts in short positions
Derivative Instruments:
 
 
 
Foreign currency exchange contracts
2,075,789

 
4,148,056

CFD contracts
126,519

 
174,835

Metals contracts
414

 
217

Total
2,202,722

 
4,323,108

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 for the three and six months ended June 30, 2018 and June 30, 2017 were as follows (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018

2017
 
2018
 
2017
Derivative Instruments:
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
51,579

 
$
43,633

 
$
92,830

 
$
61,009

CFD contracts
14,681

 
26,422

 
51,828

 
53,213

Metals contracts
5,759

 
9,018

 
11,481

 
3,782

Total
$
72,019

 
$
79,073

 
$
156,139

 
$
118,004


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): 
 
June 30, 2018
 
December 31, 2017
Required collateral
$
62,726

 
$
73,537

Open foreign exchange positions
(10,391
)
 
4,966

Total
$
52,335

 
$
78,503


8. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements and capitalized software development costs, consisted of the following as of (amounts in thousands):
 
June 30, 2018
 
December 31, 2017
Software
$
59,713

 
$
57,047

Computer equipment
18,964

 
18,390

Leasehold improvements
10,963

 
11,068

Telephone equipment
642

 
643

Office equipment
2,048

 
2,110

Furniture and fixtures
3,544

 
3,592

Web site development costs
635

 
386

Gross property and equipment
96,509

 
93,236

Less: Accumulated depreciation and amortization
(60,047
)
 
(52,494
)
Property and equipment, net
$
36,462

 
$
40,742


Depreciation and amortization expense for property and equipment was $5.3 million and $4.1 million for the three months ended June 30, 2018 and 2017, respectively, and $10.7 million and $7.9 million for the six months ended June 30, 2018 and 2017, respectively.


9. INTANGIBLE ASSETS
The Company’s various intangible assets consisted of the following as of (amounts in thousands): 
 
June 30, 2018
 
December 31, 2017
Intangibles
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Customer lists
$
59,658

 
$
(36,210
)
 
$
23,448

 
$
60,420

 
$
(31,698
)
 
$
28,722

Technology
50,233

 
(37,273
)
 
12,960

 
72,204

 
(43,270
)
 
28,934

Trademarks
7,533

 
(4,187
)
 
3,346

 
7,680

 
(3,730
)
 
3,950

Total finite lived intangibles
117,424

 
(77,670
)
 
39,754

 
140,304

 
(78,698
)
 
61,606

Trademark not subject to amortization (1)
363

 

 
363

 
363

 

 
363

Total intangibles
$
117,787

 
$
(77,670
)
 
$
40,117

 
$
140,667

 
$
(78,698
)
 
$
61,969


(1) These indefinite-life trademarks relate to the Forex.com and foreignexchange.com domain names where management determined there was no legal, regulatory or technological limitation on their useful lives. The Company compares the recorded value of the indefinite-life intangible assets to their fair value on an annual basis and whenever circumstances arise that indicate that impairment may have occurred.

The Company had the following identifiable intangible assets and weighted average amortization periods as of June 30, 2018:
Intangible Assets
Amount (in thousands)
 
Weighted average amortization period
Customer lists
$
59,658

 
6.9 years
Technology
50,233

 
8.6 years
Trademarks (1)
7,896

 
6.7 years
Total intangible assets
$
117,787

 
 
(1) Trademarks with an indefinite-life, as described above, comprise $0.4 million of the $7.9 million of trademarks.

Amortization expense for the purchased intangibles was $3.6 million and $3.8 million for the three months ended June 30, 2018 and 2017, respectively, and $7.3 million and $6.9 million for the six months ended June 30, 2018 and 2017, respectively.

On February 7, 2017, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Forex Capital Markets L.L.C. (“FXCM”). Pursuant to the terms of the Purchase Agreement, FXCM transferred substantially all of its U.S.-

17


domiciled customer accounts to the Company effective as of February 24, 2017. The Company paid $7.2 million to FXCM as consideration for the purchased accounts for the full year 2017, which was capitalized and included as an intangible asset and amortized on a straight line basis over its two year useful life.

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. As a result of the sale of the GTX ECN business, the Company tested the institutional goodwill for impairment using data as of June 30, 2018 and concluded there was no impairment. The $4.6 million of institutional goodwill was allocated to discontinued operations.

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 six months ended June 30, 2018.

For the year ended December 31, 2017, the Company performed a qualitative analysis to determine whether it was more likely than not that the fair value of its reporting units was less than their carrying value. As a result of this assessment, the Company determined that it was not necessary to perform a quantitative impairment test and concluded that goodwill assigned to each of its reporting units was not impaired at December 31, 2017.

As of June 30, 2018 and December 31, 2017, the Company had recorded goodwill of approximately $28.2 million and $33.0 million, respectively. The decrease of $4.8 million was primarily related to the discontinued operations of GTX.

The following represents the changes in the carrying amount of goodwill by segment (amounts in thousands):
 
Retail
Institutional
Futures
Total
Carrying amount of goodwill as of December 31, 2017
$
25,952

$
4,650

$
2,434

$
33,036

Foreign currency translation adjustments
(186
)
(34
)
(18
)
(238
)
Discontinued operations

(4,616
)

(4,616
)
Carrying amount of goodwill as of June 30, 2018
$
25,766

$

$
2,416

$
28,182


10. OTHER ASSETS
Other assets consisted of the following as of (amounts in thousands): 
 
June 30, 2018
 
December 31, 2017
Vendor and security deposits
$
6,932

 
$
11,923

Income tax receivable
282

 
2,132

Deferred tax assets, net
12,053

 
10,698

GTX trade receivables
616

 
5,758

Customer debit positions
4,067

 
2,384

Allowance on customer debit positions
(3,700
)
 
(1,959
)
Prepaid assets
8,801

 
9,523

Miscellaneous receivables
7,248

 
4,872

Deferred commitment fees
444

 
550

Total other assets
$
36,743

 
$
45,881

11. RELATED PARTY TRANSACTIONS


18


Certain officers and directors of the Company have personal funds on deposit in separate customer accounts with the Company. These accounts are recorded in Payables to customers on the Condensed Consolidated Balance Sheets. The aggregate amount of these funds was $0.2 million and $0.2 million at June 30, 2018 and December 31, 2017, 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 $20.2 million and $15.9 million as of June 30, 2018 and December 31, 2017, respectively. The net revenue generated by any individual related party was not deemed to be material in any period.

12. NON-CONTROLLING INTERESTS
Non-controlling interests
In March 2014, the Company acquired controlling interests in Global Asset Advisors (“GAA”) and Top Third (“TT”). The Company purchased 55% of each entity, and the respective sellers maintained a 45% interest in each entity, subject to immediately exercisable call options for the Company to purchase the remaining interests, as well as put options for the sellers to sell their remaining interests in each entity to the Company that were to become exercisable in 2017. In December 2016, the Company acquired an additional 24% of each entity and, accordingly, the respective sellers now maintain a 21% interest in each entity. In connection with the purchase of these additional interests, the Company and the respective sellers agreed that neither would exercise the call options or put options with respect to the remaining interests prior to December 31, 2017. In December 2017, the Company and the sellers of TT extended their agreement that neither would exercise the relevant call options or put options through December 31, 2018.

In February 2018, the minority owners of GAA notified the Company that they were exercising their put option with respect to their combined 21% ownership of GAA. The purchase of the ownership interests subject to the put option had not settled as of June 30, 2018. However, because of the issuance of the exercise notice, the related non-controlling interest in GAA was reclassified as a liability. The purchase of the minority ownership interests is expected to close in the third quarter of 2018.

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

The non-controlling interest related to TT is not classified as a liability, because redemption is not mandatory or at a fixed price. It is not classified as equity because the redemption is not exclusively in the Company’s control. Therefore, the non-controlling interest is held in temporary equity in the Condensed Consolidated Balance Sheets.

The non-controlling interests’ carrying value is determined by the Company’s purchase prices and the non-controlling interests’ share of the Company’s subsequent net income. This value is benchmarked against the redemption value of the sellers’ put options. The carrying value is adjusted to the latter, provided that it does not fall below the initial carrying values, as determined by the Company’s purchase price allocation. The Company reflects any changes caused by such an adjustment in retained earnings, rather than in current earnings.

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

Redeemable non-controlling interests
January 1, 2018
$
4,411

Adjustment to the redemption value of non-controlling interests
890

Net income attributable to non-controlling interests
371

Distributions to non-controlling interest holders
(199
)
Reclassification to liabilities
(2,911
)
June 30, 2018
$
2,562


13. REVOLVING CREDIT ARRANGEMENT

On August 3, 2017, the Company entered into a Credit Agreement, dated as of August 2, 2017, for a three year U.S. $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 $0.4 million is amortized over the life of the facility and is recorded to Other Assets. As of June 30, 2018, the Company was in compliance with the covenants for its credit facility.

As of June 30, 2018, there were no amounts outstanding under the revolving line of credit.
14. CONVERTIBLE SENIOR NOTES

Convertible Senior Notes due 2022

On August 22, 2017, the Company issued $92.0 million aggregate principal amount of its 5.00% Convertible Senior Notes due 2022, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes bear interest at a fixed rate of 5.00% per year, payable semi-annually in arrears on February 15 and August 15 of each year. The Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election. The Company currently intends to settle the debt in cash. The Notes will mature on August 15, 2022, unless earlier converted, redeemed or repurchased. The Company may not redeem the Notes prior to August 15, 2020. The net proceeds from the offering were approximately $89.0 million, after deducting discounts to the initial purchasers but prior to other offering expenses payable by the Company.

Convertible Senior Notes due 2020
On April 1, 2015, as part of the City Index acquisition consideration, the Company issued to the sellers $60.0 million aggregate principal amount of 4.125% Convertible Senior Notes maturing on April 1, 2020. These Convertible Senior Notes pay interest semi-annually on April 1 and October 1 at a rate of 4.125% per year, which commenced on October 1, 2015. The Company currently intends to settle the debt in cash.

Convertible Senior Notes due 2018
On November 27, 2013, the Company issued $80.0 million principal amount of 4.125% Convertible Senior Notes due December 1, 2018. The Company received net proceeds of $77.9 million, after deducting the initial purchasers' discount. These Convertible Senior Notes pay interest semi-annually on June 1 and December 1 at a rate of 4.125% per year, which commenced on June 1, 2014. During the first quarter of 2016, the Company repurchased $1.9 million in principal amount of the convertible senior notes due 2018, for an aggregate purchase price of $1.7 million. During the third quarter of 2017, the Company repurchased $71.8 million in principal amount of the convertible senior notes due 2018, for an aggregate purchase price of $73.7 million with the proceeds from the issuance of Convertible Senior Notes due 2022. As a result, the Company recognized an extinguishment loss of $4.9 million. The Company currently intends to settle the remaining outstanding debt in cash upon maturity.

Under accounting guidance, an entity must separately account for the liability and equity components of a convertible debt instrument that may be settled entirely or partially in cash upon conversion. The separate accounting must reflect the issuer’s economic interest cost.

The balances of the liability and equity components as of June 30, 2018 and December 31, 2017 were as follows (amounts in thousands):
 
June 30, 2018
 
December 31, 2017
Liability component - principal
$
158,350

 
$
158,350

Deferred bond discount
(22,615
)
 
(25,624
)
Deferred financing cost
(446
)
 
(505
)
Liability component - net carrying value
$
135,289

 
$
132,221

 
 
 
 
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 Income, was as follows (amounts in thousands):

19


 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest expense - stated coupon rate
$
1,834

 
$
1,425

 
$
3,668

 
$
2,850

Interest expense - amortization of deferred bond discount and costs
1,554

 
1,269

 
3,060

 
2,509

Total interest expense - convertible senior notes
$
3,388

 
$
2,694

 
$
6,728

 
$
5,359

15. EARNINGS/(LOSS) PER COMMON SHARE

Basic and diluted earnings/(loss) per common share are computed by dividing net income/(loss) by the weighted average number of common shares outstanding during the period. Diluted earnings/(loss) per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that would occur if securities or other contracts to issue common stock were exercised, vested or converted into common stock, unless they are anti-dilutive. Diluted weighted average common shares include vested and unvested stock options, unvested restricted stock units and unvested restricted stock awards. Approximately 0.3 million and 0.4 million stock options were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2018, respectively, as they were anti-dilutive. Approximately 0.2 million and 0.3 million stock options were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2017, respectively, as they were anti-dilutive.

Diluted earnings (loss) per share excludes any shares of Company common stock potentially issuable under the Company’s convertible senior notes, which are discussed in Note 14. Based upon an assumed trading price of $13 for each share of the Company’s common stock, and if the relevant conditions under the indenture governing the 2018, 2020, and 2022 convertible senior notes were satisfied, there would be no additional dilutive shares for the 2018 note and an additional 1.5 million and 4.2 million dilutive shares as of June 30, 2018, for the 2020 and 2022 notes, respectively.

The following table sets forth the computation of earnings/(loss) per share (amounts in thousands except share and per share data):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income/(loss) from continuing operations
$
6,506

 
$
13,370

 
$
18,246

 
$
(5,180
)
Adjustment (1)
(523
)
 
915

 
(890
)
 
983

Net income/(loss) available to GAIN common shareholders from continuing operations
$
5,983

 
$
14,285

 
$
17,356

 
$
(4,197
)
 
 
 
 
 
 
 
 
Net income from discontinued operations
60,642

 
569

 
64,988

 
248

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
44,797,103

 
47,687,214

 
44,906,800

 
47,790,307

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
276,899

 
207,434

 
269,316

 
267,880

RSUs/RSAs
235,000

 

 
239,658

 
6,923

Diluted weighted average common shares outstanding
45,309,002

 
47,894,648

 
45,415,774

 
47,790,307


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings/(loss) from continuing operations
$
0.13

 
$
0.30

 
$
0.39

 
$
(0.09
)
Basic earnings from discontinued operations
$
1.36

 
$
0.01

 
$
1.45

 
$
0.01

 
 
 
 
 
 
 
 
Diluted earnings/(loss) from continuing operations
$
0.13

 
$
0.30

 
$
0.38

 
$
(0.09
)
Diluted earnings from discontinued operations
$
1.34

 
$
0.01

 
$
1.43

 
$
0.01

 
(1)
During the three and six months ended June 30, 2018 and 2017, the Company concluded that the carrying value of the Company's redeemable noncontrolling interests was less than their redemption value, requiring that an adjustment to the

20


carrying value be recorded for purposes of calculating earnings/(loss) per common share. The adjustment to increase or reduce the carrying value will, respectively, reduce or increase earnings/(loss) per common share by reducing or increasing net income available to common shareholders.
16. 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.
17. INCOME TAXES

The Company's (benefit)/provision for income taxes was approximately $(0.3) million and $7.4 million for the three and six months ended June 30, 2018 and a provision/(benefit) of approximately $1.5 million and $(4.4) million for the three and six months ended June 30, 2017. These amounts reflect the Company's estimate of the annual effective tax rates of (4.0)% and 10.2%, adjusted for certain discrete items, for the three months ended June 30, 2018 and 2017, respectively. The Company's effective tax rates of 28.3% and 47.4% for the six months ended June 30, 2018 and 2017, respectively, reflect the Company's estimate of the annual effective tax rate adjusted for certain discrete items, primarily changes in uncertain tax positions. 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.
18. REGULATORY REQUIREMENTS
The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of June 30, 2018 and the actual amounts of capital that were maintained (amounts in millions):
Entity Name
Minimum
Regulatory
Capital
Requirements
 
Capital
Levels
Maintained
 
Excess
Net
Capital
 
Percent of
Requirement
Maintained
GAIN Capital Group, LLC
$
35.8

 
$
48.8

 
$
13.0

 
136
%
GAIN Capital Securities, Inc.
0.1

 
0.4

 
0.3

 
400
%
GAIN Capital U.K., Ltd.
66.4

 
201.2

 
134.8

 
303
%
GAIN Capital Japan Co., Ltd.
1.6

 
9.5

 
7.9

 
594
%
GAIN Capital Australia, Pty. Ltd.
0.7

 
5.4

 
4.7

 
771
%
GAIN Capital-Forex.com Hong Kong, Ltd.
1.9

 
3.4

 
1.5

 
179
%
GAIN Global Markets, Inc.
0.4

 
2.0

 
1.6

 
500
%
GAIN Capital-Forex.com Canada, Ltd.
0.2

 
1.4

 
1.2

 
700
%
GAIN Capital Singapore Pte., Ltd.
0.3

 
7.4

 
7.1

 
2,467
%

21


Trade Facts, Ltd.
0.6

 
3.5

 
2.9

 
583
%
Global Asset Advisors, LLC

 
1.4

 
1.4

 
100
%
GAIN Capital Payments Ltd.
0.1

 
0.4

 
0.3

 
400
%
GTX SEF, LLC
0.8

 
1.0

 
0.2

 
125
%
Total
$
108.9

 
$
285.8

 
$
176.9

 
262
%
19. 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 will now be classified in our corporate and other segment to better align the cost reporting with the support services. The change in segment reporting has 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 subject to a customary working capital adjustment. 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 Income. For more information relating to the discontinued operations of the Company's GTX ECN business, please see Note 3.

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 12,500 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, including futures on Bitcoin, and futures options on major U.S. and European exchanges. The Company offers futures services through its subsidiary, GAIN Capital Group, LLC, under several brands, including GAIN Capital Futures. In addition, in 2014, the Company expanded its futures business by acquiring majority interests in GAA and TT.

Corporate and other
Corporate and other provides general corporate services to the Company’s segments and also includes expense eliminations between operating segments, which were $0.4 million and $0.6 million for the three months ended June 30, 2018 and 2017, respectively, and $0.9 million and $1.1 million for the six months ended June 30, 2018 and 2017, respectively. Corporate and other revenue primarily comprises foreign currency transaction gains and losses.

Selected financial information by segment is presented in the following tables (amounts in thousands):

22


 
Retail
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018

2017
 
2018

2017
Net revenue
$
74,532

 
$
80,605

 
$
160,205

 
$
120,692

 
 
 
 
 
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