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GCAP > SEC Filings for GCAP > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for GAIN CAPITAL HOLDINGS, INC.

Form 10-Q for GAIN CAPITAL HOLDINGS, INC.


12-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION
In this Quarterly Report on Form 10-Q, the words "GAIN", the "Company", "our", "we" and "us" refer to GAIN Capital Holdings, Inc. and, except as otherwise specified herein, to GAIN's subsidiaries. Our fiscal quarter ended on September 30, 2013.
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and the Condensed Consolidated Financial Statements and Notes thereto contained in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains a number of forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management's current beliefs and assumptions. Any statements contained herein (including, without limitation, statements to the effect that we "believe", "expect", "anticipate", "plan" and similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this report and the discussion below. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include those set forth in the section entitled "Item 1A - Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, and discussed elsewhere in this Quarterly Report on Form 10-Q. The risks and uncertainties described therein and herein are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, may also impair the business. We expressly disclaim any obligation to update any forward-looking statements, except as may be required by law.

OVERVIEW

We are a global provider of trading services and solutions, facilitating market access across multiple asset classes to a diverse client base of retail and institutional investors. Founded in 1999, we have customers in more than 180 countries worldwide and conduct business from our offices in New York, New York; Bedminster, New Jersey; Grand Rapids, Michigan; Chicago, Illinois; Powell, Ohio; London, England; Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong and Singapore.

Through our retail trading business we offer self-directed individuals access to a wide variety of financial markets and asset classes, including spot foreign exchange, or forex, and precious metals; "contracts-for-difference", or CFDs, which are investment products with returns linked to the performance of an underlying commodity, equity index, interest rate product or individual security; options on forex, and exchange-traded products, including futures and options on futures. Our retail clients primarily access their accounts and trade online through our globally recognized FOREX.com brand using a suite of trading tools that we provide, including native applications for mobile and tablet devices. With the goal of delivering quality service, we also offer our retail customers access to market research and information, trader education and 24-hour customer support.
Our institutional trading business, GTX, launched in March 2010 to serve institutional market participants, including hedge funds and financial institutions. GTX offers electronic access to spot foreign exchange markets via a proprietary Electronic Communications Network, or ECN, and also facilitates more complex client orders in offline transactions via a team of execution consultants.
In September 2013, we completed our acquisition of Global Futures & Forex, Ltd., or GFT, a global provider of retail forex and derivatives trading. With the acquisition of GFT, we are able to offer customers an expanded product range totaling more than 12,500 financial products and have gained access to GFT's extensive network of partners, through which we intend to further expand our retail and institutional businesses into new markets and geographies. Please see "GFT Transaction" below and Note 5 "Acquisitions" to our condensed consolidated financial statements for more information about the acquisition.


Table of Contents

Market Overview
Overall market conditions improved in the nine months ended September 30, 2013, due in part to higher levels of volatility as compared to the multi-year lows experienced in 2012. While volatility levels in the quarter were still well below 2008-2011 averages, we saw increased engagement from clients in the quarter, resulting in higher trading volumes. GFT Transaction
On September 24, 2013, we entered into an Amended and Restated Stock Purchase Agreement with Gary L. Tilkin and GFT pursuant to which we agreed to purchase all of the issued and outstanding shares of common stock of GFT from Mr. Tilkin. The transaction closed on September 24, 2013.
Pursuant to the terms of the Stock Purchase Agreement, we purchased the shares of GFT for an aggregate purchase price consisting of (i) $20.0 million in cash to be paid upon the closing date of the transaction, (ii) up to $20.0 million in cash, referred to as the Holdback Amount, to be paid upon the settlement of certain liabilities of GFT after the closing date, (iii) 3,625,721 shares of our common stock and (iv) a term loan from Mr. Tilkin in an amount equal to approximately $33.2 million. Under the terms of the Stock Purchase Agreement, Mr. Tilkin has agreed to indemnify us for certain liabilities of GFT that are expected to be settled after the closing date. Mr. Tilkin's indemnification obligation for these liabilities shall first be settled out of the Holdback Amount, with any amounts in excess of the Holdback Amount being settled directly by Mr. Tilkin or by reduction of the outstanding term loan. Upon settlement of 80% of these liabilities, the remaining Holdback Amount, if any, will be paid to Mr. Tilkin, subject to certain conditions and terms.
In connection with the closing of the acquisition, on September 24, 2013 we also entered into an Amended and Restated Stockholders' Agreement with Mr. Tilkin, pursuant to which Mr. Tilkin agreed to customary restrictions on transfer of his common stock. Among other restrictions, Mr. Tilkin may not transfer his shares of common stock until the later of (i) the six month anniversary of the closing date or (ii) the settlement of 65% of the liabilities described above, after which time Mr. Tilkin may transfer up to 16.67% of his shares every three months, subject to compliance with Rule 144 in a manner that avoids directed and block sales.
On the closing date, we also entered into a Loan and Security Agreement with Mr. Tilkin providing for the term loan. The term loan will mature five years from the closing date and will bear interest at a rate of 8.0% per annum, payable quarterly. The term loan provides that we will also make quarterly payments of principal in an amount of $1.5 million per quarter, plus additional payments of principal based on (i) certain EBITDA thresholds, (ii) excess available capital due to the elimination of regulatory requirements and
(iii) availability of net cash proceeds in connection with liquidity events, subject to de minimis thresholds and certain reinvestment rights, although no payments, other than scheduled interest payments, are required to be made until 80% of the liabilities described above are settled. The Loan and Security Agreement also requires us to comply with a minimum debt service coverage ratio and a maximum total funded debt ratio, along with other customary negative covenants. Our obligations under the Loan and Security Agreement are secured by substantially all of our assets, including our ownership interests in Gain Holdings, LLC, but excluding any intellectual property. The foregoing descriptions of the Stock Purchase Agreement, the Stockholders' Agreement and the Loan and Security Agreement do not purport to be complete, and are qualified in their entirety by reference to the full text of those agreements, The Stock Purchase Agreement was filed as an exhibit to our Current Report on Form 8-K, filed with the SEC on September 25, 2013, and the Stockholders' Agreement and the Loan and Security Agreement are filed as exhibits to this Quarterly Report on Form 10-Q. The representations, warranties and covenants contained in the Stock Purchase Agreement, the Stockholders' Agreement and the Loan and Security Agreement have been made solely for purposes of those agreements and as of specific dates and are not intended as statements of fact to be relied upon by any party other than the parties to those agreements.
Key Income Statement Line Items and Key Operating Metrics The following table sets forth key financial metrics for our business for the periods indicated:

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