Parent Company Only Statement of Financial Condition (In U.S. dollars) OANDA CORPORATION. Year ended December 31, 2015

Transcription

1 Parent Company Only Statement of Financial Condition OANDA CORPORATION

2 KPMG LLP Telephone (416) Chartered Professional Accountants Fax (416) Bay Adelaide Centre Internet Bay Street, Suite 4600 Toronto ON M5H 2S5 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors OANDA Corporation We have audited the accompanying statement of financial condition of OANDA Corporation (Parent Company Only) as at December 31, 2015, and the related notes to the statement of financial condition that is prepared (as described in Note 2a in the related notes to the statement of financial condition) to comply with NFA rule 2-36, Requirements for Forex Transactions. This statement of financial condition is the responsibility of the Company's management. Management is responsible for the preparation and fair presentation of this financial statement in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statement that is free from material misstatement, whether due to fraud or error. Our responsibility is to express an opinion on the statement of financial condition based on our audit. We conducted our audit in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have audited, in accordance with auditing standards generally accepted in the United States of America, the Parent Company Only financial statements of OANDA Corporation, comprising the statement of financial position of OANDA Corporation (Parent Company Only) as of December 31, 2015, and the related statements of operations and comprehensive income, stockholders equity and cash flows for the year then ended as of and for the year ended December 31, 2015, and our report thereon, dated February 29, 2016, expressed an unmodified opinion on those financial statements. In our opinion, the statement of financial condition referred to above present fairly, in all material respects, the financial position of OANDA Corporation (Parent Company Only) as at December 31, 2015 in conformity with U.S. generally accepted accounting principles. Chartered Professional Accountants, Licensed Public Accountants March 2, 2016 Toronto, Canada KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG Canada provides services to KPMG LLP. Document Classification: KPMG Confidential

3 Parent Company Only Statement of Financial Condition December 31, 2015 Assets Cash and cash equivalents (note 3) $ 215,504,494 Accounts receivable, net (note 2(m)) 1,775,616 Income taxes receivable 427,288 Deferred income taxes (note 7) 1,959,274 Property and equipment (note 5) 1,928,437 Other assets 1,887,667 Investment in subsidiaries 55,632,164 Due from subsidiaries (note 9) 16,825,826 Derivative asset (note 4) 177,218 Liabilities and Stockholders' Equity 2015 $ 296,117,984 Liabilities: Amounts due to customers (note 2(o)) $ 113,175,998 Accounts payable and accrued expenses 3,855,492 Deferred revenue 2,803,289 Deferred lease inducement 23,470 Due to subsidiaries (note 9) 4,325,576 Subordinated loan from subsidiary 12,750,000 Derivative liability (note 4) 285, ,219,594 Stockholders' equity: Common stock 10 Additional paid-in capital 92,283,499 Retained earnings 66,614, ,898,390 $ 296,117,984 See accompanying notes to the Statement of Financial Condition. 2

4 1. Nature of business: OANDA Corporation (the "Company"), a Delaware corporation incorporated on November 14, 1996, is a global provider of innovative foreign exchange trading services. The Company's principal business activities are online foreign exchange trading, exchange rate subscription services, and licensing of its trading software. The Company is a registered Futures Commission Merchant with the Commodity Futures Trading Commission and a member of the National Futures Association. On October 1, 2015, the Company adopted a holding company form of organizational structure, with OANDA Global Corporation (Holdco), a Delaware corporation, serving as the new parent of OANDA Corporation. The Company, Holdco and Merger Sub entered into a Merger agreement for the purpose of effecting the holding company reorganization. Merger sub merged with and into the Company, with the Company being the surviving entity. As a result of the reorganization, each share of common stock of the Company that was issued and outstanding immediately prior to the reorganization was converted into one share of common stock of OANDA Global Corporation. (a) Foreign exchange trading: The Company provides online margin trading focused primarily on over-the-counter foreign exchange trading for speculative or investment purposes. Trading is conducted through the Company's proprietary fxtrade platform, a fully automated trading platform in which the Company plays the role of market-maker. Customers are required to post collateral to support their trading on margin. The Company economically hedges its exposure with major financial institutions, as considered appropriate, to unmatched trades in foreign exchange to ensure that it is not unacceptably exposed to material losses. The Company is not subject to the segregation requirements for customers deposits on U.S. commodity exchanges pursuant to Section 6d(a)(2) under the Commodity Exchange Act ("CEA"), or to the requirements of Regulation 30.7 under the CEA for foreign futures and foreign options customers. These products are traded online on a leveraged basis. (b) Exchange rate subscription services: The Company provides currency data feeds to companies that use them as a currency source for their back office operation and websites. 3

5 1. Nature of business (continued): (c) Hosting services: The Company licenses its trading software to certain third parties, which in turn offer currency and derivative trading to their clients. (d) License fee revenue: License fees relate to an agreement entered into by the Company with each of its wholly owned subsidiaries. This agreement is titled Trading Platform License, Support & Profit Sharing Agreement. Under this agreement, the Company agreed to license its fxtrade Platform and the OANDA trademark for the purpose of the subsidiaries offering an internetbased foreign exchange trading platform to its clients. 2. Significant accounting policies: (a) Basis of presentation: The Company's parent company only statement of financial condition is prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and are presented in U.S. dollars, except that the statement of financial condition does not consolidate the Company s subsidiaries. Investments in subsidiaries are carried at cost. This statement of financial condition was prepared to comply with NFA Rule 2-36, Requirements for Forex Transactions. The Company has also issued consolidated financial statements. The Company's parent company only statement of financial condition includes investments in the following wholly-owned subsidiaries: (1) OANDA (Canada) Corporation ULC (2) OANDA Asia Pacific Pte. Ltd. (3) OANDA Australia Pty Ltd. (4) OANDA Europe Limited (5) OANDA Hong Kong Ltd. (6) Currensee Global, Inc. (7) OANDA Japan Inc. (8) OANDA India Private Limited 4

6 2. Significant accounting policies (continued): (b) Use of estimates: The preparation of the statement of financial condition in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statement of financial condition and the reported amounts of revenue and expenses during the year. In preparing the Parent company only statement of financial condition, significant estimates management makes include the valuation of assets and liabilities requiring fair value estimates, the allowance for doubtful accounts, realization of deferred tax assets, and stock-based compensation. Actual results could differ from those estimates and could have a material impact on the Parent company only statement of financial condition. (c) Revenue recognition: The Company generates revenue from foreign exchange margin trading, hosting services, exchange rate subscription services, license fees and advertising. (i) Foreign exchange trading: Realized gains and losses from closed trades are calculated using the specific identification method. Unrealized gains and losses on open trades are calculated using the prevailing spot rate of exchange on the reporting date. Interest earned by or charged to customers is calculated on a daily basis. Net revenue from foreign exchange trading represents realized and unrealized gains and losses from the Company's closed and open positions with its liquidity providers, net of realized and unrealized gains and losses on clients' closed and open positions with the Company and interest earned by or charged to customers, net of interest earned or charged to the Company by its liquidity providers. Spot transactions with financial institutions are entered into in the normal course of business in order to hedge market exposures resulting from transactions with clients. (ii) Hosting and subscription services: Revenue on hosting and subscription services is recognized when realized or realizable on a straight-line basis over the contractual term of the agreement or the expected period during which those services will be provided. 5

7 2. Significant accounting policies (continued): Subscription services are billed in advance and the revenue is deferred until the service is provided. The Company's hosting services may require it to perform one-time set-up activities and include a one-time set-up fee. These fees are recognized ratably over the term of the contract. (iii) Advertising: Revenue on advertising is recognized when realized or realizable on a straight-line basis over the contractual term of the agreement or the expected period during which those services will be provided. (d) Interest income: Interest income consists of interest earned on cash and cash equivalents and is recognized in the period earned. (e) Stock-based compensation: Stock-based compensation is accounted for using the fair value method, which requires the measurement and recognition of compensation cost for stock options to be based on their fair values. Stock-based compensation expense recognized is based on the value of the portion of the stock-based payment awards that is ultimately expected to vest. (f) Foreign currency translation: The Company's functional and presentation currency is U.S. dollars. Foreign denominated assets and liabilities are translated into U.S. dollars at exchange rates at the date of the Parent company only statement of financial condition. Revenue and expenses are translated monthly at amounts that approximate weighted average exchange rates, with the gains or losses included in foreign exchange gains (losses). (g) Income taxes: Income taxes are accounted for using the asset and liability method, which requires recognition of deferred tax assets and liabilities based upon temporary differences between the financial statements and income tax bases of assets and liabilities using currently enacted tax rates. 6

8 2. Significant accounting policies (continued): (h) Cash and cash equivalents: Cash and cash equivalents include cash and highly liquid short-term investments with maturities of three months or less from the date of purchase. The carrying amount approximates fair value because of the short maturity of these investments. Cash balances may be in excess of insured limits. (i) Fair value measurements: The Company records certain financial assets and liabilities at fair value. Fair value is defined at the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurement establishes a three-level hierarchy that prioritizes the inputs used to measure fair value. Level 1 - Quoted market prices in active markets for identical assets or liabilities. Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 - Unobservable inputs that are supported by little or no market activity. As of December 31, 2015, the Company's derivative assets and liabilities are classified as either Level 1 or level 2. Other financial assets and liabilities including cash and cash equivalents, accounts receivable, amounts due to customers, and accounts payable and accrued expenses, are recorded at carrying amounts, which approximate fair value due to their short-term maturities. As of December 31, 2015 the Company did not have any Level 3 financial assets or liabilities. (j) Derivatives: The Company enters into futures contracts to economically hedge the open customer contracts of its foreign subsidiary s CFD business. Futures contracts are exchange traded contracts to either purchase or sell a specific asset at a specified future date for a specified price. CFDs allow for the exchange of the difference in value of a particular asset such as a stock index or commodity contracts over the life of the contract. As of December 31, 2015, the Company's CFD hedges include future contracts for commodities and stock indices. The Company's derivative contracts are accounted for at fair value. 7

9 2. Significant accounting policies (continued): The Company enters into forward contracts to reduce its exposure to fluctuations in foreign exchange rates. The Company does not use any derivative financial instrument for speculative purposes. (k) Business concentrations and credit risks: Financial instruments, which subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The carrying amounts of these financial instruments approximate fair values due to their short-term nature. The Company maintains cash with various financial institutions. The Company performs periodic evaluations of the relative credit standing of these institutions. In addition, the Company performs ongoing credit evaluations and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of its subscription customers, historical trends and other information. To date, such losses have been within management's expectations. (l) Liquidity risk: The Company's business of providing trading and related services is self-financing as we generate sufficient cash flows to pay expenses as they become due. During a time of net cash outflows, the Company has sufficient excess cash to meet obligations or expenses that arise. As a result, the Company generally does not face the risk that it will be unable to raise cash quickly enough to meet payment obligations as they arise. The Company's cash flows are influenced by customer trading volume and economic conditions that are beyond the Company's control. (m) Accounts receivable, net: Accounts receivable, net consists primarily of amounts due from customers relating to the Company's hosting and exchange rate subscription services. Accounts receivables are shown net of an allowance for doubtful accounts. The allowance for doubtful accounts is maintained at a level that management believes to be sufficient to absorb estimated losses from uncollectible amounts. The allowance is increased by the provision for bad debts which is charged against operating results and decreased by the amount of charge-offs, net of recoveries. The amount charged against operating results is based on several factors including, but not limited to, a continuous assessment of the collectability of each account, the length of time a receivable is past due and historical experience with the customer. As of December 31, 2015, an allowance for doubtful accounts of $84,336 was netted against accounts receivables in the Parent company only statement of financial condition. 8

10 2. Significant accounting policies (continued): (n) Property and equipment, net: Property and equipment are recorded at cost net of accumulated depreciation. Additions and improvements that extend the life of an asset are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Computer equipment Computer software Furniture Leasehold improvements 3 or 7 years 3 or 10 years 3 years Shorter of lease term or asset's estimate useful life The Company evaluates the potential impairment of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognizes an impairment loss by recording a reduction in the carrying value of the asset if the carrying amount of the asset exceeds its fair value based on anticipated undiscounted cash flows. (o) Amounts due to customers: Amounts due to customers include amounts received from clients as margin, net of withdrawals, interest earned net of charges, unrealized gains and losses on clients' open positions, as well as gains and losses on closed positions. The fair value of clients' open positions (unrealized gains and losses) is determined based upon financial institutions' quotations. As of December 31, 2015, amounts due to customers includes unrealized losses on clients' open positions of $9,168,381. 9

11 3. Cash and cash equivalents: As at December 31, 2015, cash and cash equivalents included the following: $43,693,292 deposited as margin by the Company to support its foreign exchange and futures positions and $19,077,855 in Nostro accounts held with various financial institutions. $113,175,998 deposited by customers and net of realized and unrealized gains or losses from customer trading activity. The Company records a liability in connection with this amount that is included in customer account liabilities in the Consolidated Statements of Financial Position. $1,555,345 in unsettled spot currency trades that the Company has open with its financial institutions. The Company has master netting agreements with its respective counterparties under which its positions are presented on a net-bycounterparty basis. 4. Derivatives: As at December 31, 2015, the Company has open futures contracts used to manage the Company s exposure to open customer contracts of its subsidiary s CFD business. The futures contracts have a notional value of $64,312,966 long and ($68,466,850) short for which the Company provided collateral of $1,898,490. The unrealized profit or loss on these contracts as at December 31, 2015 is a gain of $120,144 and a loss of ($39,257). The futures contracts are classified as level 1 instruments in the fair value hierarchy. The Company has forward foreign exchange contracts that are used to manage the Company s foreign currency exposure from the operating expenses of its foreign subsidiaries. As at December 31, 2015 the notional value of the open derivative contracts related to this hedging activity is $6,479,091. The fair value on these open positions as at December 31, 2015 is ($246,512). The Company also enters into forward contracts to reduce its foreign currency exposure from its investment in subsidiaries. As at December 31, 2015 the notional value of open derivative contracts is $45,984,208. The fair value on these open positions as at December 31, 2015 is $57,074. The forward contracts are classified as level 2 instruments in the fair value hierarchy. 10

12 5. Property and equipment, net: 2015 Computer equipment $ 5,672,626 Software 553,601 Furniture 53,362 Leasehold improvements 2,932 6,282,521 Less accumulated depreciation and impairment 4,354,084 $ 1,928, Share capital: 2015 Common stock Authorized: 1,000 shares, $0.01 par value Issued and outstanding: 1,000 shares $10 As part of the reorganization that occurred on October 1, 2015, each share of common stock of the Company issued and outstanding immediately prior to the reorganization was converted into and exchanged for one share of common stock of Holdco. All of the shares of the Company s common stock converted into Holdco common stock was cancelled. At the time of the reorganization, Merger Sub had 1,000 issued and outstanding common stock with a par value of $0.01 per share. Each share of common stock of the Merger Sub were converted into one share of the Company 7. Income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 11

13 7. Income taxes (continued): Significant components of the Company's deferred tax assets are as follows: 2015 Deferred tax assets: Stock-based compensation $ 1,146,420 Property and equipment 527,414 Other 285,440 Deferred tax assets $ 1,959,274 The Company's loss carryforward of $4,763,485 expires in The Company has excess tax benefits from options exercised of $1,774,825 that can be used to reduce taxes payable in future years. 8. Stock-based compensation The following table summarizes the Plan's position as at December 31, 2015: Weighted Weighted Average Average Remaining Number of Exercise Life Options Price (Years) Outstanding as of December 31, ,915, Exercisable as of December 31, , As of December 31, 2015, there was $4,783,606 of total unrecognized compensation cost related to non-vested options granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.42 years. 9. Due from / to subsidiaries: As at December 31, 2015 the Company has a receivable from OANDA (Canada) Corporation ULC, OANDA Europe Ltd, OANDA Japan Inc and OANDA Asia Pacific Pte Ltd for trading losses recognized on hedging with the Company. 12

14 9. Due from / to subsidiaries (continued): As at December 31, 2015 the Company has a payable to OANDA India Private Ltd for product development services provided by OANDA India Private Ltd to the Company. As at December 31, 2015 the Company has a payable to OANDA Hong Kong Ltd for the Company s initial capital investment in OANDA Hong Kong Ltd. As at December 31, 2015 the Company has a payable to OANDA Australia Pty Ltd related to the allocation of trading revenues. 10. Commitments and contingencies: The Company leases its facilities, certain computer equipment and internet service provider facilities pursuant to non-cancellable operating agreements, expiring at various dates to May 31, The future minimum payments under such commitments at December 31, 2015 are payable as follows: 2015 $ 527, , ,400 $ 893,004 In the normal course of operations, the Company provides indemnifications, which are often standard contractual terms, to counterparties in transactions, such as service agreements, software licenses, leases and purchases of goods. Under these agreements, the Company agrees to indemnify the counterparty against loss or liability arising from the acts or omissions of the Company in relation to the agreement or other costs. The nature of the indemnifications in these agreements prevents the Company from making a reasonable estimate of the maximum potential amount that the Company could be required to pay such counterparties. 11. Subsequent events: The Company has evaluated its subsequent events since December 31, 2015 to the date the financial statements were issued, which was March 2, a) On January 1, 2016, the equity interests in all OANDA Corporation subsidiaries except for OANDA (Canada) Corporation ULC, OANDA India Private Ltd., OANDA Hong Kong and Currensee Global Inc. were transferred to OANDA Global Corporation. 13

15 11. Subsequent events (continued): The transfer of these subsidiaries to OANDA Global Corporation on January 1, 2016 had the impact of reducing the investment in subsidiaries by $41,586,416 with an equivalent reduction in Stockholders equity. b) On February 3, 2016, the Company entered into a purchase agreement for the acquisition of a client portfolio from a U.S. registered foreign exchange brokerage. The closing date of the purchase is March 4, 2016 at which point the Company will pay for assets under management that are transferred. The number of client accounts, assets under management transferred and purchase price will be determined based on the rate of acceptance of the transfer of accounts by the underlying clients. 14