Retail forex broker FXCM Inc (NASDAQ:FXCM) filed early Monday some more details regarding the US clients it is offloading to rival Gain Capital Holdings Inc (NYSE:GCAP). The sale is occurring after FXCM and its CEO Drew Niv were issued a ban from the US forex market, following settlement of allegations that FXCM defrauded its customers over the course of several years as to the nature of its market making activities.
We had earlier reported that the clients FXCM is selling to Gain Capital represented about $53 billion in monthly trading volumes, roughly 18% of FXCM’s global total volumes. Gain is paying FXCM on a CPA basis, a maximum $500 per client which actually transfer to and trades with Gain Capital and its Forex.com unit.
FXCM’s latest filing indicates that the clients sold represented, for the nine months to September 30, 2016:
- Revenues of $38.8 million (or about $52 million annualized)
- EBITDA loss $9.1 million (or $12 million annualized)
- Net Loss $13.9 million (or $18 million annualized)
FXCM is not transferring any of the costs associated with its US clients to Gain Capital. As we reported earlier, FXCM is laying off about 150 employees in conjunction with the asset sale, such that it believes that it will ‘save’ the EBITDA and Net Loss going forward after jettisoning its US operations.
The US business was mainly dragged down (on a cost basis) by extremely heavy regulatory expenses associated with running a US regulated business. US regulators have added layer upon layer of reporting requirements for those who hold and transact with Retail client assets, requiring a virtual army of accountants and reporting specialists.
FXCM’s revelations beg the question: if FXCM has been mainly focused the past two years on selling assets in order to repay its high interest loan from Leucadia National Corp (NYSE:LUK), and if FXCM US was bleeding money, why didn’t FXCM sell its US clients earlier, before it was forced to do so by US regulators?
The answer, we believe, is that it wouldn’t have received much if anything for its US clients. Just like it didn’t when forced to sell.
FXCM’s full filing reads as follows:
FXCM Discusses Impact of U.S. Exit
NEW YORK, Feb. 12, 2017 (GLOBE NEWSWIRE) — FXCM Inc. (NASDAQ:FXCM) (“FXCM” or the “Company”) today provided additional information regarding the costs associated with its U.S. retail foreign exchange activities, which it has agreed to sell to GAIN Capital Holdings, Inc. (“GAIN”). None of FXCM’s costs will be transferring to GAIN and FXCM expects significant cost savings from the wind down of its U.S. retail foreign exchange operations.
The table below provides information on net revenues, net income, and Adjusted EBITDA(1) for FXCM’s U.S. subsidiary, Forex Capital Markets LLC, and the rest of its continuing operations for the nine months ended September 30, 2016 (unaudited):
| Nine Months Ended September 30, 2016 | ||||||||
| Consolidated | ||||||||
| FXCM Inc. | ||||||||
| Consolidated FXCM Inc. |
Continuing Operations |
|||||||
| (in Thousands) | Continuing Operations |
FXCM US | Excluding FXCM US |
|||||
| Net Revenues | $ | 203,463 | $ | 38,809 | $ | 164,654 | ||
| Net Income (loss) | $ | 125,967 | $ | (13,886) | $ | 139,853 | ||
| Adjusted EBITDA (1) | $ | 20,507 | $ | (9,098) | $ | 29,605 | ||
Even without its U.S. customers, FXCM remains one of the largest global retail foreign exchange brokers, and FXCM anticipates that the increased focus on serving its international global customer base will drive growth and continued profitability improvement.
(1) Adjusted EBITDA is a non-GAAP measure that is not prepared under any comprehensive set of accounting rules or principles and does not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with U.S. GAAP. The Company believes this non-GAAP measure, when presented in conjunction with the comparable U.S. GAAP measure, is useful to investors in better understanding its financial performance as seen through the eyes of management and facilitates comparisons of historical operating trends across several periods. The Company believes that investors use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies in its industry that present similar measures, although the methods used by other companies in calculating Adjusted EBITDA may differ from the Company’s method, even if similar terms are used to identify such measure. Adjusted EBITDA provides the Company with an understanding of the results from the primary operations of its business by excluding the effects of certain gains, losses or other charges that do not reflect the normal earnings of its core operations or that may not be indicative of its future outlook and prospects. Adjusted EBITDA does not represent and should not be considered as a substitute for net income or net income attributable to FXCM Inc., each as determined in accordance with U.S. GAAP. Please refer to the following table for a reconciliation of Adjusted EBITDA to net income.
| (Unaudited, in thousands) | Reconciliation of U.S. GAAP Net Income (Loss) to Adjusted EBITDA | ||||||||||||||
| Nine Months Ended September 30, 2016 | |||||||||||||||
| FXCM Inc. Consolidated |
Consolidated FXCM Inc. Continuing |
||||||||||||||
| Continuing Operations |
FXCM US | Operations Less FXCM US |
|||||||||||||
| Net income (loss) | $ | 125,967 | $ | (13,886) | $ | 139,853 | |||||||||
| Adjustments: | |||||||||||||||
| Net Revenues | 44 | (1 | ) | – | 44 | ||||||||||
| General and administrative | 12,577 | (2 | ) | 2,006 | (4 | ) | 10,571 | ||||||||
| Bad debt recovery | (141) | (3 | ) | (141) | – | ||||||||||
| Depreciation and amortization | 21,149 | 2,789 | 18,360 | ||||||||||||
| Gain on derivative liabilities – Letter & Credit Agreement | (200,375) | – | (200,375) | ||||||||||||
| Interest on borrowings | 61,228 | – | 61,228 | ||||||||||||
| Income tax provision (benefit) | 58 | 134 | (76) | ||||||||||||
| Total adjustments | (105,460) | 4,788 | (110,248) | ||||||||||||
| Adjusted EBITDA | $ | 20,507 | $ | (9,098) | $ | 29,605 | |||||||||
1) Represents a $0.1 million charge for tax receivable agreement payments.
(2) Represents the provision for debt forgiveness of $8.2 million against the notes receivable from the non-controlling members of Lucid, $5.4 million of professional fees, including fees related to the Leucadia restructuring transaction, stockholder rights plan and investigations into historical trade execution practices, partially offset by $1.0 million of insurance recoveries to reimburse for costs incurred related to the January 15, 2015 SNB event and the cybersecurity incident.
(3) Represents the net bad debt recovery related to client debit balances associated with the January 15, 2015 SNB event.
(4) Represents $2.4 million of professional fees relating to investigations into historical trade execution practices partially offset by $0.4 million of insurance recoveries to reimburse for costs incurred related to the January 15, 2015 SNB event and the cybersecurity incident.