Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________ 
FORM 10-Q
__________________________ 

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
o
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 001-34986
__________________________ 
Global Brokerage, Inc.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
 
27-3268672
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
55 Water Street, FL 50
New York, NY 10041
(Address of principal executive offices) (Zip Code)

Telephone: (212) 897-7660
(Registrant’s telephone number, including area code)
__________________________
 
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. Yes x No o

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). Yes x No o

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. (Check one):
Large accelerated filer
o 
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
x
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 10, 2017, there were 6,143,297 shares outstanding of the registrant’s Class A common stock, par value $0.01 per share, and 8 shares outstanding of the registrant’s Class B common stock, par value $0.01 per share.


Table of Contents

Global Brokerage, Inc.
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2017

Table of Contents

Item Number
Page
PART I — FINANCIAL INFORMATION
 
PART II — OTHER INFORMATION
  

i

Table of Contents

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 and as updated in this Quarterly Report. Additional risk factors may be described from time to time in our future filings with the Securities and Exchange Commission. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

ii

Table of Contents

PART I

Item 1 — Financial Statements
Global Brokerage, Inc.

Condensed Consolidated Statements of Financial Condition
(Unaudited)

 
As of
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
(In thousands, except share data)
Assets
  

 
  

Current assets
  

 
  

Cash and cash equivalents
$
121,942

 
$
200,914

Cash and cash equivalents, held for customers
331,447

 
428,542

Due from brokers
33

 
3,363

Accounts receivable, net
16,258

 
5,236

Tax receivable
263

 
199

Assets held for sale
40,649

 
330,497

Total current assets
510,592

 
968,751

Deferred tax asset
887

 
330

Office, communication and computer equipment, net
27,921

 
32,815

Goodwill

 
23,479

Other intangible assets, net
2,347

 
6,285

Other assets
14,232

 
7,364

Total assets
$
555,979

 
$
1,039,024

Liabilities, Redeemable Non-Controlling Interest and Stockholders' Deficit
  

 
  

Current liabilities
  

 
  

Customer account liabilities
$
331,447

 
$
428,542

Accounts payable and accrued expenses
31,656

 
55,491

Due to brokers
1,948

 
1,471

Convertible notes
167,055

 

Credit Agreement — Related Party
64,329

 

Other liabilities
400

 
2,629

Liabilities held for sale
2,976

 
235,719

Total current liabilities
599,811

 
723,852

Deferred tax liability
448

 
215

Convertible notes

 
161,425

Credit Agreement — Related Party

 
150,516

Other liabilities
7,034

 
7,319

Total liabilities
607,293

 
1,043,327

Commitments and Contingencies (See Notes 16 & 21)


 


Redeemable non-controlling interest
49,454

 
46,364

Stockholders’ Deficit
  

 
  

Class A common stock, par value $0.01 per share; 3,000,000,000 shares authorized, 6,143,297 shares issued and outstanding as of September 30, 2017 and December 31, 2016
61

 
61

Class B common stock, par value $0.01 per share; 1,000,000 shares authorized, 8 shares issued and outstanding as of September 30, 2017 and December 31, 2016
1

 
1

Additional paid-in capital
390,261

 
389,917

Accumulated deficit
(479,967
)
 
(460,907
)
Accumulated other comprehensive loss
(1,330
)
 
(2,312
)
Total stockholders’ deficit, Global Brokerage, Inc.
(90,974
)
 
(73,240
)
Non-controlling interests
(9,794
)
 
22,573

Total stockholders’ deficit
(100,768
)
 
(50,667
)
Total liabilities, redeemable non-controlling interest and stockholders’ deficit
$
555,979

 
$
1,039,024


See accompanying notes to the unaudited condensed consolidated financial statements.

1

Table of Contents

Global Brokerage, Inc.

Condensed Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
  
(In thousands, except per share data)
Revenues
  

 
  

 
 
 
 
Trading revenue
$
42,785


$
48,042

 
$
136,664

 
$
161,614

Interest income
567


547

 
1,456

 
1,193

Brokerage interest expense
(185
)

(228
)
 
(586
)
 
(655
)
Net interest revenue
382

 
319

 
870

 
538

Other income
804

 
1,954

 
1,682

 
4,533

Total net revenues
43,971

 
50,315

 
139,216

 
166,685

Operating Expenses
  

 
  

 


 


Compensation and benefits
16,023

 
19,236

 
43,620

 
58,248

Referring broker fees
5,443

 
8,718

 
18,710

 
26,547

Advertising and marketing
4,017

 
2,736

 
11,644

 
9,322

Communication and technology
5,494

 
6,524

 
17,027

 
19,967

Trading costs, prime brokerage and clearing fees
996

 
587

 
2,511

 
1,853

General and administrative
11,364

 
11,814

 
32,954

 
43,061

Depreciation and amortization
4,877

 
6,037

 
15,222

 
18,360

Goodwill impairment loss

 

 
23,917

 

Total operating expenses
48,214

 
55,652

 
165,605

 
177,358

Operating loss
(4,243
)
 
(5,337
)
 
(26,389
)
 
(10,673
)
Other (Income) Expense


 


 


 


(Gain) loss on derivative liabilities — Letter & Credit Agreements
(4,668
)
 
26,985

 
(6,172
)
 
(200,375
)
Loss (income) on equity method investments, net

 
140

 
(170
)
 
478

Interest on borrowings
12,045

 
19,473

 
37,521

 
61,228

(Loss) income from continuing operations before income taxes
(11,620
)
 
(51,935
)
 
(57,568
)
 
127,996

Income tax provision (benefit)
359

 
(89
)
 
1,120

 
35

(Loss) income from continuing operations
(11,979
)
 
(51,846
)
 
(58,688
)
 
127,961

Income (loss) from discontinued operations, net of tax
42,364

 
(23,501
)
 
13,613

 
(55,629
)
Net income (loss)
30,385

 
(75,347
)
 
(45,075
)
 
72,332

Net income (loss) attributable to non-controlling interest in Global Brokerage Holdings, LLC
4,920

 
(18,493
)
 
(6,425
)
 
33,411

Net income (loss) attributable to redeemable non-controlling interest in FXCM Group, LLC
22,174

 
(6,877
)
 
1,817

 
(6,877
)
Net loss attributable to other non-controlling interests
(11,028
)
 
(10,843
)
 
(21,407
)
 
(25,204
)
Net income (loss) attributable to Global Brokerage, Inc.
$
14,319

 
$
(39,134
)
 
$
(19,060
)
 
$
71,002




 


 


 


(Loss) income from continuing operations attributable to Global Brokerage, Inc.
$
(13,561
)
 
$
(34,507
)
 
$
(42,340
)
 
$
87,627

Income (loss) from discontinued operations attributable to Global Brokerage, Inc.
27,880

 
(4,627
)
 
23,280

 
(16,625
)
Net income (loss) attributable to Global Brokerage, Inc.
$
14,319

 
$
(39,134
)
 
$
(19,060
)
 
$
71,002




 


 


 


Weighted average shares of Class A common stock outstanding — Basic and Diluted
6,143

 
5,603

 
6,143

 
5,603

Net income (loss) per share attributable to stockholders of Class A common stock of Global Brokerage, Inc. — Basic and Diluted:


 


 


 


Continuing operations
$
(2.21
)
 
$
(6.15
)
 
$
(6.89
)
 
$
15.64

Discontinued operations
4.54

 
(0.83
)
 
3.79

 
(2.97
)
Net income (loss) attributable to Global Brokerage, Inc.
$
2.33

 
$
(6.98
)
 
$
(3.10
)
 
$
12.67


See accompanying notes to the unaudited condensed consolidated financial statements.

2

Table of Contents

Global Brokerage, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
  
(In thousands)
Net income (loss)
$
30,385

 
$
(75,347
)
 
$
(45,075
)
 
$
72,332

Other comprehensive income (loss)
 
 
  

 
 
 
 
Foreign currency translation income (loss)
390

 
(276
)
 
2,129

 
(2,871
)
Other comprehensive income (loss), net of tax
390

 
(276
)
 
2,129

 
(2,871
)
Comprehensive income (loss)
30,775

 
(75,623
)
 
(42,946
)
 
69,461

Comprehensive income (loss) attributable to non-controlling interest in Global Brokerage Holdings, LLC
4,972

 
(18,624
)
 
(6,090
)
 
32,447

Comprehensive income (loss) attributable to redeemable non-controlling interest in FXCM Group, LLC
22,360

 
(6,746
)
 
2,628

 
(6,746
)
Comprehensive loss attributable to other non-controlling interests
(11,029
)
 
(10,841
)
 
(21,406
)
 
(25,194
)
Comprehensive income (loss) attributable to Global Brokerage, Inc.
$
14,472

 
$
(39,412
)
 
$
(18,078
)
 
$
68,954

































See accompanying notes to the unaudited condensed consolidated financial statements.

3

Table of Contents

Global Brokerage, Inc.

Condensed Consolidated Statement of Stockholders’ Deficit
(Unaudited)
(In thousands, except share amounts)

 
 
 
Global Brokerage, Inc.
  
Non-
controlling
Interests
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Additional
Paid-in
Capital
 
Common Stock - 
Class A
 
Common Stock - 
Class B
 
Total
Stockholders’
Deficit
  
 
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Balance as of January 1, 2016
$
(15,601
)
 
$
(531,550
)
 
$
1,004

 
$
267,369

 
5,602,534

 
$
56

 
25

 
$
1

 
$
(278,721
)
Net income
8,207

 
71,002

 

 

 

 

 

 

 
79,209

Other comprehensive loss, net of tax
(954
)
 

 
(2,048
)
 

 

 

 

 

 
(3,002
)
Comprehensive income (loss)
7,253

 
71,002

 
(2,048
)
 

 

 

 

 

 
76,207

Class A common stock


 


 


 


 


 


 


 


 

Equity-based compensation
480

 

 

 
1,026

 

 

 

 

 
1,506

Distributions — non-controlling members
(1,203
)
 

 

 

 

 

 

 

 
(1,203
)
Issuance of redeemable non-controlling interest (see Note 3)
59,602

 

 

 
126,622

 

 

 

 

 
186,224

Balance as of September 30, 2016
$
50,531

 
$
(460,548
)
 
$
(1,044
)
 
$
395,017

 
5,602,534

 
$
56

 
25

 
$
1

 
$
(15,987
)


 
 
Global Brokerage, Inc.
  
Non-
controlling
Interests
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Additional
Paid-in
Capital
 
Common Stock - 
Class A
 
Common Stock - 
Class B
 
Total
Stockholders’
Deficit
  
 
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Balance as of January 1, 2017
$
22,573

 
$
(460,907
)
 
$
(2,312
)
 
$
389,917

 
6,143,297

 
$
61

 
8

 
$
1

 
$
(50,667
)
Net loss
(27,832
)
 
(19,060
)
 

 

 

 

 

 

 
(46,892
)
Other comprehensive income, net of tax
336

 

 
982

 

 

 

 

 

 
1,318

Comprehensive (loss) income
(27,496
)
 
(19,060
)
 
982

 

 

 

 

 

 
(45,574
)
Class A common stock


 


 


 


 


 


 


 


 

Equity-based compensation
119

 

 

 
344

 

 

 

 

 
463

Distributions — non-controlling members
(4,990
)
 

 

 

 

 

 

 

 
(4,990
)
Balance as of September 30, 2017
$
(9,794
)
 
$
(479,967
)
 
$
(1,330
)
 
$
390,261

 
6,143,297

 
$
61

 
8

 
$
1

 
$
(100,768
)

See accompanying notes to the unaudited condensed consolidated financial statements.

4

Table of Contents

Global Brokerage, Inc.

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
  
2017
 
2016
  
(In thousands)
Cash Flows From Operating Activities
  

 
  

Net (loss) income
$
(45,075
)
 
$
72,332

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities
  

 
  

Depreciation and amortization
15,922

 
21,149

Equity-based compensation
883

 
1,504

Deferred tax benefit
(317
)
 
(518
)
Goodwill impairment loss
23,917

 

Loss on classification as held for sale assets
34,618

 
57,092

Gain on derivative liabilities — Letter & Credit Agreements
(6,172
)
 
(200,375
)
Amortization of deferred bond discount
4,723

 
4,443

Amortization of deferred financing cost
907

 
906

Amortization of original issue discount — Credit Agreement
6,919

 
23,905

Amortization of issuance fee, deferred financing fee and acquisition costs — Credit Agreement
1,960

 
6,088

Amortization of deferred waiver fee — Second Amendment
2,908

 

Amortization of deferred waiver fee — Third Amendment
967

 

(Income) loss from equity method investments, net
(770
)
 
236

Gain on sale of equity method investment
(56,973
)
 
(679
)
Transaction costs associated with sale of equity method investment
(152
)
 

Gain on asset disposition
(300
)
 

Provision for debt forgiveness

 
8,249

Gain on sale of customer accounts
(5,338
)
 

Transaction costs associated with sale of customer accounts
(216
)
 

Due to related parties pursuant to tax receivable agreement

 
44

Changes in operating assets and liabilities:


 


Cash and cash equivalents, held for customers
330,091

 
(39,929
)
Due from brokers
16,656

 
11,463

Accounts receivable, net
4,687

 
935

Tax receivable, net
(64
)
 
1,507

Other assets
(1,004
)
 
1,364

Customer account liabilities
(330,489
)
 
40,332

Accounts payable and accrued expenses
(23,018
)
 
12,531

Other liabilities — Current
(2,229
)
 

Other liabilities — Non-current
1,201

 
(3,275
)
Payments for tax receivable agreement

 
(188
)
Due to brokers
432

 
19,365

Securities sold, not yet purchased

 
(3,624
)
Foreign currency remeasurement loss
(3,339
)
 
(1,240
)
Net cash (used in) provided by operating activities
(28,665
)
 
33,617

Cash Flows From Investing Activities
  

 
  

Purchases of office, communication and computer equipment
(8,766
)
 
(14,521
)
Purchase of intangible assets
(1,500
)
 
(1,500
)
Proceeds from sale of customer accounts
7,185

 

Proceeds from asset disposition
300

 

Proceeds from sale of equity method investment
50,598

 

Payment of earn-out from sale of equity method investment
(3,668
)
 

Net cash provided by (used in) investing activities
44,149

 
(16,021
)
Cash Flows From Financing Activities
  

 
  

Distributions to non-controlling members
(4,990
)
 
(104
)
Principal payments on borrowings under the Credit Agreement
(92,770
)
 
(141
)
Net cash used in financing activities
(97,760
)
 
(245
)

5

Table of Contents



Global Brokerage, Inc.
Condensed Consolidated Statements of Cash Flows - (continued)
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
 
(In thousands)
Effect of foreign currency exchange rate changes on cash and cash equivalents
5,296

 
1,481

Net (decrease) increase in cash and cash equivalents
(76,980
)
 
18,832

Cash and cash equivalents (1)
 
 
 
Beginning of year
210,292

 
214,640

End of period
$
133,312

 
$
233,472

Supplemental disclosures of cash flow activities
 
 
 
Cash paid for taxes
$
1,251

 
$
194

Cash paid for interest
$
20,509

 
$
27,254

Supplemental disclosure of non-cash financing activities
 
 
 
Non-cash distribution — non-controlling members
$

 
$
1,099

Exchange of Letter Agreement for Redeemable non-controlling interest
$

 
$
235,509

The following amounts reflected in the statements of cash flows are included in discontinued operations:
 
 
 
Depreciation and amortization
$
700

 
$
2,789

Equity-based compensation
$
131

 
$
426

Loss on classification as held for sale assets
$
34,618

 
$
57,092

Gain on sale of customer accounts
$
(5,338
)
 
$

Transaction costs associated with sale of customer accounts
$
(216
)
 
$

Income from equity method investments, net
$
600

 
$
242

Gain on asset disposition
$
(300
)
 
$

Purchases of office, communication and computer equipment
$
(212
)
 
$
(149
)
Gain on disposition of equity method investment
$
(56,973
)
 
$
679

Transaction costs associated with sale of equity method investment
$
(152
)
 
$


(1) Includes Cash and cash equivalents from continuing and discontinued operations






















See accompanying notes to the unaudited condensed consolidated financial statements.

6

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements





Note 1. Description of Business and Basis of Presentation

Description of Business

In February 2017, FXCM Inc. changed its name to "Global Brokerage, Inc." Global Brokerage, Inc. ("Global Brokerage" or the "Corporation"), through its managing membership interest in Global Brokerage Holdings, LLC (“Holdings”)(f/k/a "FXCM Holdings, LLC"), a majority-owned, controlled and consolidated subsidiary of the Corporation, owns a 50.1% membership interest in FXCM Group, LLC ("Group"). Group, through its operating subsidiaries, is an online provider of foreign exchange (“FX”) trading, contracts for difference ("CFD") trading, spread betting and related services to retail and institutional customers worldwide. The remaining 49.9% membership interest in Group is held by Leucadia National Corporation ("Leucadia"). Group is controlled by and consolidated with Holdings. As used in these notes, the term “Company” collectively refers to the Corporation, Holdings, Group and subsidiaries of Group.
    
On February 6, 2017, the Company announced simultaneous regulatory settlements with the National Futures Association ("NFA") and the Commodity Futures Trading Commission ("CFTC") against its U.S. subsidiary, Forex Capital Markets LLC, Holdings and certain of its principals (the “Respondents”). The NFA settlement had no monetary fine, and the CFTC settlement had a $7.0 million fine imposed jointly and severally against the Respondents, which the Company paid on February 16, 2017. Pursuant to the regulatory settlement agreements, the Company has withdrawn from business in the U.S. and terminated its registrations with the CFTC and the NFA during the first quarter of 2017. Additionally, the Company sold substantially all of its U.S.-domiciled customer accounts to Gain Capital Group, LLC in an asset sale transaction that closed on February 24, 2017 (see Note 4).

In connection with its withdrawal from business in the U.S. pursuant to the regulatory settlements described above, the Company implemented a restructuring plan during the first quarter of 2017 that included the termination of approximately 170 employees, which represents approximately 22% of its global workforce (see Note 22).

Financial Condition

On May 2, 2017, the Nasdaq Stock Market (“Nasdaq”) notified the Corporation that the market value of its publicly held shares does not meet the requirement for continued listing under The Nasdaq Global Market's listing standards. On November 6, 2017, the Corporation was notified that the market value of its publicly held shares failed to meet the listing requirement under Nasdaq Listing Rule 5450(b)(2), and that Nasdaq will remove the Corporation from The Nasdaq Global Market.

Upon the Corporation's application, Nasdaq has approved the Corporation's publicly held shares to trade on a different Nasdaq exchange tier, The Nasdaq Capital Market, effective November 13, 2017.

Although the Corporation's publicly held shares are expected to be traded on The Nasdaq Capital Market, the Corporation's failure to remain listed on the Nasdaq Global Market is a Fundamental Change, as defined under the indenture governing its 2.25% senior convertible notes maturing on June 15, 2018 (the “Convertible Notes”) (see Note 15). In the event of a Fundamental Change, each holder of the Convertible Notes has the right, at such holder’s option, to require the Corporation to purchase for cash all of such holder’s notes, in accordance with the requirements and procedures set forth in the indenture, at a purchase price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest.

Because the Corporation is primarily a holding company with limited business operations, the Corporation's only source of cash to pay interest and principal on its outstanding indebtedness, including its obligations under the Convertible Notes, are distributions relating to the Corporation's ownership interests in Group from the net earnings and cash flows generated by Group.

The Corporation has only an indirect interest in Group through its 74.5% interest in Holdings, which in turn owns 50.1% of the membership interests in Group. The Amended and Restated Limited Liability Company Agreement of FXCM Group, LLC (the "Group Agreement") provides that only a limited percentage of cash distributions by Group are allocated to Holdings (see Note 14). In addition, earnings and cash flows generated by Group are first applied by Group in conducting its

7

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation - (continued)

operations, including maintaining required regulatory capital levels, maintaining margin deposits with liquidity providers, and the service of its debt obligations, after which excess cash flow may be paid to its shareholders.

All of the Corporation's income generating assets, as well as its cash and cash equivalents, are held by Group and its subsidiaries. As of September 30, 2017, the Company's cash and cash equivalents were $133.3 million, including $11.4 million within assets held for sale.

Because (1) the Corporation does not unilaterally control the amount and timing of cash distributions by Group, (2) Group has its own debt obligations, and (3) Group has its own regulatory capital requirements to conduct its business, the Corporation believes it will be difficult to procure the requisite liquidity should the holders of the Convertible Notes exercise their rights to require the Corporation to purchase their notes upon the occurrence of a Fundamental Change. The Corporation's inability to comply with this requirement under the indenture would be an event of default, which also could lead to an event of default under the Leucadia loan agreements (see Note 14). Additionally, even if the holders of the Convertible Notes do not exercise their rights to require the Corporation to purchase the Convertible Notes as a result of the Corporation's failure to remain listed on the Nasdaq Global Market, the Convertible Notes are due to mature in June 2018. As of September 30, 2017, the Convertible Notes have a principal balance of $172.5 million and are reflected in current liabilities on the condensed consolidated statements of financial condition. Absent a restructuring of the debt or a capital infusion, the Corporation does not have the resources to pay the Convertible Notes in full at maturity. Accordingly, the Company believes that the delisting and the upcoming maturity of the Convertible Notes within less than 12 months raises substantial doubt about its ability to continue as a going concern as at November 14, 2017, the date that the financial statements included within this quarterly report were issued.

On November 10, 2017, the Corporation announced that it has entered into a restructuring support agreement to restructure the obligations under the Convertible Notes pursuant to a prepackaged plan of reorganization (the "Plan") to be filed under Chapter 11 of the United States Bankruptcy Code (see Note 23). The Convertible Notes will be exchanged for a new series of senior secured notes due five years from the effective date of the Corporation’s Chapter 11 Plan. In conjunction with the Plan, the terms of a credit agreement that Holdings and Group entered into with Leucadia on January 16, 2015, which was subsequently amended on January 24, 2015 and thereafter (the “Credit Agreement”) (see Note 14) will, upon the effective date of the Plan, also be amended to extend the maturity of the $300.0 million term loan made by Leucadia to Holdings and Group (the "Term Loan") under the Credit Agreement by an additional year to January 16, 2019 (see Note 23).

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

Discontinued Operations

As a result of the Company's withdrawal from business in the U.S. pursuant to the aforementioned regulatory settlements and the sale of substantially all of its U.S.-domiciled customer accounts during the first quarter of 2017, the results of operations of the Company's U.S. subsidiary have been reported as discontinued operations for each period presented (see Note 4).     

In the first quarter of 2015, the Company commenced the process of disposing of its interests in certain retail and institutional trading businesses. During 2015, the Company completed the sales of FXCM Japan Securities Co., Ltd., Faros Trading LLC, FXCM Asia Limited and the equity trading business of FXCM Securities Limited. In August 2017, the Company completed the sale of its equity interest in FastMatch, Inc. ("FastMatch") (see Note 4). Separately, in August 2017, V3 Markets, LLC ("V3") sold certain intellectual property and fixed assets and, in conjunction with the asset sale, V3 ceased its remaining operations (the "V3 Transaction") (see Note 4). The Company remains committed to a plan to sell the remaining institutional business, Lucid Markets Trading Limited, which it continues to actively market. As a result, this business is considered to be held for sale and its results of operations have been reported as discontinued operations (see Note 4).     


8

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation - (continued)

Basis of Presentation

Basis of Consolidation

The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company consolidates those entities in which it is the primary beneficiary of a variable interest entity ("VIE") as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic (“ASC”) 810, Consolidations (“ASC 810”), or entities where it has a controlling interest. Entities that do not qualify as VIEs are evaluated for consolidation as voting interest entities under the voting interest model. Under the voting interest model, the Company consolidates those entities where it has a controlling financial interest through a majority voting interest. Intercompany accounts and transactions are eliminated in consolidation.

At the time of Group's formation (f/k/a "FXCM Newco, LLC"), the Company determined that Group was a VIE and concluded that Holdings was the primary beneficiary of Group, which resulted in the consolidation of the financial results of Group by Holdings. The Company determined that the restructuring transaction with Leucadia effective September 1, 2016 (see Note 14) was a reconsideration event under ASC 810 and re-evaluated the previous conclusion that Group is a VIE. Upon reconsideration, the Company determined that Group remains a VIE and concluded that Holdings is the primary beneficiary of Group since Holdings has the ability to direct the activities of Group that most significantly impact Group’s economic performance and the obligation to absorb losses of Group or the right to receive benefits from Group that could be significant to Group. As a result, Holdings continues to consolidate the financial results of Group.

The Corporation records a non-controlling interest for the economic interest in Holdings not owned by the Corporation. The Corporation’s and the non-controlling unit holders’ economic interest in Holdings was 74.5% and 25.5%, respectively, as of both September 30, 2017 and December 31, 2016.

The Company’s condensed consolidated financial statements include the following significant subsidiaries of Holdings:    
FXCM Group, LLC (1)
(“Group”)
FXCM Global Services, LLC
(“Global Services”)
Forex Capital Markets, LLC
(“US”)
Forex Capital Markets Limited
(“UK LTD”)
FXCM Australia Pty. Limited
(“Australia”)
FXCM UK Merger Limited
(“Merger”)
Lucid Markets Trading Limited
(“Lucid”)
Lucid Markets LLP
(“Lucid LLP”)
V3 Markets, LLC
(“V3”)
____________________________________
(1) FXCM Newco, LLC was renamed FXCM Group, LLC effective September 1, 2016

Net income (loss) attributable to the non-controlling interest in Global Brokerage Holdings, LLC in the condensed consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in Holdings held by the non-controlling unit holders.

Net income or loss attributable to redeemable non-controlling interest in the condensed consolidated statements of operations represents the share of earnings or loss allocated to the non-controlling membership interest in Group held by Leucadia based on the hypothetical liquidation at book value ("HLBV") method (see Notes 3 and 14).

Net income or loss attributable to other non-controlling interests in the condensed consolidated statements of operations represents the portion of earnings or loss attributable to the non-controlling interests of Lucid, V3 (prior to the V3 Transaction) and other consolidated entities based on the economic interests held by the non-controlling members. The non-controlling members of Lucid and V3 each hold a 49.9% economic interest in the respective entity. The portion of the 49.9% of

9

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation - (continued)

Lucid earnings allocated among the non-controlling members of Lucid that is contingent on services being provided is reported as a component of compensation expense and is included in the determination of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations (see Note 4).

Redeemable non-controlling interest on the condensed consolidated statements of financial condition represents the non-controlling membership interest in Group held by Leucadia. Non-controlling interests on the condensed consolidated statements of financial condition represents the equity attributable to the non-controlling interests of Holdings, Lucid, V3 and other consolidated entities.

Investments where the Company is deemed to exercise significant influence, but no control, are accounted for using the equity method of accounting. The Company records its pro-rata share of earnings or losses each period and records any dividends as a reduction in the investment balance. The carrying value of these investments is included in Other assets in the condensed consolidated statements of financial condition and earnings or losses are included in Income or loss on equity method investments, net in the condensed consolidated statements of operations. The Company's equity method investment in FastMatch, which was sold in August 2017, is classified as a discontinued operation. The carrying value of the investment as of December 31, 2016 is included in assets held for sale on the condensed consolidated statements of financial condition and earnings or losses (up to the date of sale) are included in the determination of Income or loss from discontinued operations, net of tax in the condensed consolidated statements of operations (see Note 6).

Use of Estimates

The preparation of financial statements in conformity 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 condensed consolidated financial statements as well as the reported amount of revenue and expenses during the year. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.

Reclassifications

Reclassifications of prior period amounts related to discontinued operations as a result of the Company's withdrawal from business in the U.S. and the sale of substantially all of its U.S.-domiciled customer accounts have been made to conform to the current period's presentation.    

Interim Financial Statements

The Company believes that the condensed consolidated financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim 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 for the year ended December 31, 2016. As permitted under Rule 10-01 of the Securities and Exchange Commission Regulation S-X, certain notes or other financial information are condensed or omitted in the condensed consolidated financial statements.

Note 2. Significant Accounting Policies and Estimates

Our significant accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations. Management believes there have been no material changes to the significant accounting policies and estimates discussed in Note 2 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Accounting Pronouncements Adopted in 2017

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. ASU No. 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in

10

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates - (continued)


accordance with the four-step decision sequence in ASC 815-15-25-42. The Company adopted ASU No. 2016-06 on January 1, 2017 and applied it on a modified retrospective basis to its existing debt, which did not have an impact on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU No. 2016-07 eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. The guidance requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The Company adopted ASU No. 2016-07 on January 1, 2017, which did not have an impact on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 simplifies certain aspects related to the accounting for share-based payment transactions, including income tax consequences, statutory withholding requirements, forfeitures and classification on the statement of cash flows. The Company adopted ASU No. 2016-09 on January 1, 2017. The provisions of ASU No. 2016-09 related to the recognition of excess tax benefits in the statements of operations, classification of excess tax benefits in the statements of cash flows and minimum statutory withholding requirements are not applicable to the Company's existing share-based payment awards for the periods presented. With regard to forfeitures, the Company has elected to continue to estimate the number of share-based awards that are expected to vest, rather than account for forfeitures when they occur. As this approach is consistent with the methodology historically applied by the Company in accounting for forfeitures, there has not been a cumulative-effect adjustment to stockholders' deficit as of January 1, 2017 under the modified retrospective transition method. The adoption of ASU No. 2016-09 did not have a material impact on the Company's condensed consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU No. 2016-17 amends the consolidation guidance in ASU No. 2015-02 on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control when performing the primary beneficiary analysis under the VIE model. Under ASU No. 2016-17, the single decision maker will consider an indirect interest held by a related party under common control on a proportionate basis. The Company adopted ASU No. 2016-17 on January 1, 2017 on a retrospective basis, which did not have an impact on its condensed consolidated financial statements.
    
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under ASU No. 2017-04, Step 2 of the goodwill impairment test has been eliminated. Step 2 of the goodwill impairment test required companies to determine the implied fair value of the reporting unit’s goodwill. Under the new guidance, companies will perform their annual, or interim, goodwill impairment test by comparing the reporting unit’s carrying value, including goodwill, to the fair value. An impairment charge would be recorded if the carrying value exceeds the reporting unit’s fair value. ASU No. 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company early adopted ASU No. 2017-04 for its interim goodwill impairment test performed as of March 31, 2017 (see Note 7). The Company elected to early adopt ASU No. 2017-04 as the interim evaluation identified events and circumstances that indicated it was more likely than not that the fair value of the reporting unit was less than its carrying value, and that goodwill was impaired.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 replaces most existing revenue recognition guidance, and requires companies to recognize revenue based upon the transfer of promised goods and/or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and/or services. In addition, the new guidance requires enhanced disclosures,

11

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates - (continued)


including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. ASU No. 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard is applied to each prior period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard is recognized as of the adoption date. The FASB has also issued the following standards which clarify ASU No. 2014-09, and have the same effective date and transition requirements as ASU No. 2014-09:

ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers

The Company plans to adopt ASU No. 2014-09 on January 1, 2018. At this time, the Company intends to apply the standard using the full retrospective method of adoption. The Company's implementation process is currently in progress. The initial analysis documenting the considerations for each revenue stream and areas that will be impacted by the new guidance is complete. As a result of the evaluation performed, the Company does not expect there will be changes to the timing of recognition of revenue, but does anticipate certain changes to the classification of revenue in the consolidated statements of operations between revenue from contracts with customers and revenue outside the scope of Topic 606. The Company also expects additional disclosures to be provided in its consolidated financial statements after adoption of the new standard. The Company will continue to monitor additional modifications, clarifications or interpretations by the FASB that may impact its current conclusions, and will provide further updates in future periods.
    
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance in this update amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The guidance in this update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption by public entities is permitted only for certain provisions. The adoption of this standard may result in a cumulative-effect adjustment to the consolidated statement of financial condition as of the beginning of the year of adoption. The Company expects to adopt this guidance beginning January 1, 2018 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases classified as operating leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The guidance in this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard must be adopted using a modified retrospective approach, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest period presented. The Company expects to adopt this guidance beginning January 1, 2019 and plans to initiate a project team to evaluate the impact this standard will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 provides guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investments; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current U.S. GAAP does not include specific guidance on these eight cash flow classification issues. The amendments in ASU No. 2016-15 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier adoption is permitted, provided that all the amendments are adopted in the same period. The amendments in this update are to be applied on a retrospective basis. The Company expects to

12

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates - (continued)


adopt this guidance beginning January 1, 2018 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in ASU No. 2016-18 address diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. Under this guidance, companies will be required to present restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The amendments in ASU No. 2016-18 are required to be applied retrospectively and are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company expects to adopt this guidance beginning January 1, 2018 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity, reduces diversity in practice and cost and complexity when applying Topic 718 guidance to a change of terms or conditions of a share-based payment award. The amendments in this update provide guidance on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. Essentially, an entity will not have to account for the effects of a modification if: (1) the fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in ASU No. 2017-09 are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The Company expects to adopt this guidance beginning January 1, 2018 and does not currently expect it will have a material impact on its consolidated financial statements.

Note 3. Non-Controlling Interests

Redeemable Non-controlling Interest

In connection with the restructuring transaction with Leucadia completed on September 1, 2016 (the "Restructuring Transaction"), the Amended and Restated Letter Agreement dated January 24, 2015 (the "Letter Agreement") was terminated and the parties signed the Group Agreement (see Note 14). In exchange for the Letter Agreement, the Company issued a 49.9% non-controlling membership interest in Group to Leucadia. The remaining 50.1% controlling membership interest in Group is owned by Holdings and Holdings consolidates the financial results of Group, as discussed in Note 1. The non-controlling interest held by Leucadia is redeemable for cash upon a contingent event that is not solely within the control of the Company (see Note 14) and, accordingly, is classified outside of permanent equity on the condensed consolidated statements of financial condition as Redeemable non-controlling interest. As of September 30, 2017, the non-controlling interest in Group is not redeemable and is not probable of becoming redeemable and, consequently, has not been adjusted to its estimated redemption value.
    
The Company recorded the following activity related to Redeemable non-controlling interest for the nine months ended September 30, 2017, with amounts in thousands:

Balance as of January 1, 2017
$
46,364

Net income attributable to redeemable non-controlling interest
1,817

Other comprehensive income attributable to redeemable non-controlling interest
811

Equity-based compensation
462

Balance as of September 30, 2017
$
49,454


On the date of the Restructuring Transaction, in exchange for the Letter Agreement, Leucadia was issued a redeemable non-controlling interest in Group which had a fair value of $235.5 million, which was also the fair value of the derivative liability related to the Letter Agreement. As a result, the Company derecognized the derivative liability related to the Letter Agreement and recorded the Redeemable non-controlling interest at issuance on September 1, 2016 at $49.3 million, which

13

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Non-Controlling Interests - (continued)

represented the amount that Leucadia would receive assuming Group were liquidated at its recorded amount determined in accordance with U.S. GAAP and the cash distributed according to the contractual provisions in the Group Agreement which specify how certain distributions from Group are to be allocated to its members (the "Current Waterfall") at that date (see Note 14). This change was recorded as an equity transaction within Additional paid-in capital of the Corporation for the impact to the controlling and non-controlling unit holders of Holdings based on Holdings' 50.1% controlling financial interest in Group.

Non-controlling Interests

Holdings

The Corporation consolidates the financial results of Holdings and records a non-controlling interest for the economic interest in Holdings not owned by the Corporation. Pursuant to an agreement between the Corporation and Holdings, whenever the Corporation cancels, issues or repurchases shares of its Class A common stock, Holdings enters into an equivalent Holdings Unit transaction with the Corporation so that at all times the number of shares of Class A common stock is equal to the Corporation's membership units in Holdings. In addition, whenever the owners of Holdings prior to the initial public offering (other than the Corporation) exchange their Holdings Units for shares of the Corporation’s Class A common stock, Holdings is required to transfer an equal amount of Holdings Units to the Corporation.    
    
There were no changes in the non-controlling and the Corporation's interests in Holdings for the nine months ended September 30, 2017:

 
Controlling
Units
 
Non-
Controlling
Units
 
Total
Units
 
Global
Brokerage, Inc.
 
Non-
Controlling
 
Total
Balance as of January 1, 2017
6,143,297

 
2,101,097

 
8,244,394

 
74.5
%
 
25.5
%
 
100
%
Exchange of Holdings Units for Class A common stock

 

 

 
%
 
%
 
%
Balance as of September 30, 2017
6,143,297

 
2,101,097

 
8,244,394

 
74.5
%
 
25.5
%
 
100.0
%
Lucid, V3 and Other Non-Controlling Interests

The Company owns controlling interests in Lucid, V3 and other entities. The Company consolidates the financial results of these entities and records a non-controlling interest for the economic interests not owned by the Company. Lucid and V3 are classified as discontinued operations and the assets and liabilities of Lucid are classified as held for sale on the condensed consolidated statements of financial condition (see Note 4).

Note 4. Dispositions

Discontinued Operations    

Pursuant to regulatory settlements with the NFA and the CFTC dated February 6, 2017, the Company withdrew from business in the U.S. during the first quarter of 2017. Additionally, the Company sold substantially all of its U.S.-domiciled customer accounts in an asset sale transaction that was completed on February 24, 2017. The Company considered the guidance in ASC 205-20 and determined that the operations and cash flows of US are clearly distinguishable, and accordingly represent a component as defined in the guidance. Further, the Company believes the cessation of business in the U.S., including the sale of its U.S.-based customer accounts, represents a strategic shift, as described in ASC 205-20, and concluded that US qualifies for reporting as a discontinued operation. Accordingly, the results of operations of US are reported in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017, with similar reclassification of the previously reported amounts. Further, as a result of the sale of the U.S.-based accounts during the first quarter of 2017, the related cash and cash equivalents, held for customers and customer account liabilities were reclassified to Assets held for sale and Liabilities held for sale, respectively, on the condensed consolidated statements of financial condition as of December 31, 2016.


14

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)


In the first quarter of 2015, the Company committed to a plan to sell certain retail and institutional businesses in order to pay down the Term Loan with Leucadia. During 2015, the Company completed the sales of FXCM Japan Securities Co., Ltd. ("FXCMJ"), Faros Trading LLC ("Faros"), FXCM Asia Limited ("HK") and the equity trading business of FXCM Securities Limited ("FSL"). During the third quarter of 2017, the Company completed the sale of its equity interest in FastMatch, which is described further below. In addition, during the third quarter of 2017, certain assets of V3 were sold and the remaining operations of V3 ceased thereafter, which is also described further below. The Company remains committed to a plan to sell the remaining institutional business, Lucid, which it continues to actively market. Lucid continues to meet the criteria prescribed in ASC 205-20 for reporting as a discontinued operation and, accordingly, the results of operations of Lucid are reported in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016. It was further determined that Lucid continues to meet the criteria for classification as held for sale as of September 30, 2017. Accordingly, the assets and liabilities of Lucid were classified to Assets held for sale and Liabilities held for sale, respectively, on the condensed consolidated statements of financial condition as of September 30, 2017 and December 31, 2016.

Completed Dispositions

FastMatch

On August 14, 2017, the Company completed the sale of its 34.0% equity interest in FastMatch to Euronext US Inc. for a cash purchase price of $59.1 million, of which $46.7 million was paid to the Company at closing and $8.7 million is held in escrow until one year from the date of sale, subject to certain future adjustments. In addition, the Company is entitled to a share of a $10.0 million earn-out if certain performance targets of FastMatch are met. The Company entered into a separate agreement with another equity seller at the time of the closing pursuant to which the Company paid to the other equity seller its share of the future expected earn-out of $3.7 million. The Company is entitled to approximately $7.1 million for its share and the other equity seller's share of the $10.0 million earn-out if FastMatch meets the performance targets for the twelve-month period from June 1, 2017 to May 31, 2018. The earn-out is payable to the Company only if the performance targets are fully achieved. The Company recorded a $57.0 million gain on the sale of FastMatch, which is included as a component of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017. The gain on sale of FastMatch includes the fair value of the earn-out of $6.8 million, which was estimated using a Black-Scholes option pricing model (see Note 18).

V3

On August 31, 2017, V3 sold certain intellectual property and fixed assets for a cash purchase price of $0.3 million. As part of the transaction, the buyer agreed to reimburse V3 for certain liabilities and contract costs incurred by V3 for a prescribed period of time before and after closing amounting to $0.2 million.  In conjunction with the sale, V3 ceased its remaining operations. The Company recorded a gain on the sale of $0.3 million and a reversal of loss on classification as held for sale of $0.6 million, which are included as components of Income (loss) from discontinued operations, net of tax for the three and nine months ended September 30, 2017

US Operations

The Company finalized its withdrawal from business in the U.S. and terminated its registration as a futures commission merchant and retail foreign exchange dealer in the U.S. effective March 10, 2017. These actions freed approximately $33.0 million of regulatory capital previously held in US, of which $30.0 million was used to pay down the Credit Agreement with Leucadia (see Note 14). As a result of the events impacting US, the Company implemented a restructuring plan during the first quarter of 2017. During the three and nine months ended September 30, 2017, the Company incurred total restructuring charges of approximately $1.4 million and $10.0 million, respectively, including severance, contract termination costs, and facilities costs. Of these amounts, approximately $0.2 million and $8.8 million are included as components of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017, respectively (see Note 22).

In connection with its withdrawal from business in the U.S., the Company sold substantially all of its U.S.-domiciled customer accounts to Gain Capital Group, LLC (“Gain”) on February 24, 2017 (the "Transaction Closing Date"). Pursuant to the terms of the related asset purchase agreement, Gain will pay proceeds to the Company on a per account basis for each

15

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)


acquired account that opens at least one new trade during the first 153 calendar days following the Transaction Closing Date. During the three and nine months ended September 30, 2017, the Company received proceeds of $0.1 million and $7.2 million, respectively, related to the sale. After transaction costs and related write-down of intangible assets (see Note 8), the Company recognized a gain of $4.4 million on the sale in the first quarter of 2017. The gain on sale was increased in the third quarter of 2017 by $0.1 million based on additional proceeds received net of related transaction costs. For the three and nine months ended September 30, 2017, the gain on sale of $0.1 million and $5.3 million, respectively, is included as a component of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.

As disclosed in prior filings, the Company completed the sales of FXCMJ, the operations of Faros, HK, and the equity trading business of FSL separately during 2015. The combined amount of cash consideration received for these sales was $102.4 million. Consideration related to the sale of Faros' operations to Jefferies Group LLC in April 2015 is determined quarterly pursuant to an earn-out formula based on Faros' results beginning on the closing date and ending on November 30, 2017. Any consideration received will be divided among the Company and the non-controlling members of Faros based on a formula in the sales agreement. No consideration was received during the three and nine months ended September 30, 2017 or 2016.

Transitional Services Agreements

In connection with the sale of FXCMJ in April 2015, the Company provided certain transitional services to the buyer, including use of the Company’s trading platform and data services. Beginning January 1, 2016 for a period of ten months ending on October 31, 2016, the Company received a monthly fee for these services pursuant to the terms of the applicable services agreement. The Company recorded other income for these transitional services of $0.5 million and $1.7 million for the three and nine months ended September 30, 2016, respectively.
 
In connection with the sale of HK in September 2015, the Company agreed to provide certain transitional services to the buyer, including use of the Company's trading platform, data services and professional support, for no additional consideration for a period of nine months following the date of sale. The Company estimated the value of these services to be approximately $1.0 million and accordingly allocated $1.0 million of proceeds received as deferred income. The deferred income was amortized into other income over the nine-month period following the date of sale and the Company recorded nil and $0.6 million for the three and nine months ended September 30, 2016, respectively. Beginning in June 2016 for an additional period of nine months, the Company received a monthly fee for these continued transitional services pursuant to the terms of the applicable services agreement and, in March 2017, the trading platform and related support services renewed for an additional one year term. Accordingly, the Company recorded service fees to other income of $0.1 million and $0.5 million for the three and nine months ended September 30, 2017, respectively, and $0.3 million for each of the three and nine months ended September 30, 2016.

In connection with the sale of the equity trading business of FSL in December 2015, the Company agreed to provide certain transitional services to the buyer, primarily professional support, for no additional consideration for a period of twelve months following the date of sale. The Company estimated the value of these services to be approximately $0.5 million and accordingly allocated $0.5 million of proceeds received as deferred income. The deferred income was entirely amortized into other income during 2016. The Company recorded $0.1 million and $0.4 million of other income for these transitional services for the three and nine months ended September 30, 2016, respectively.     
    
    

16

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)


The following table presents the major classes of line items constituting the pretax and after-tax profit or loss of discontinued operations for the three and nine months ended September 30, 2017 and 2016, with amounts in thousands:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Trading revenue
$
4,440

 
$
18,609

 
$
22,850

 
$
57,546

Interest income
10

 
256

 
214

 
858

Other income
15

 
1,042

 
947

 
1,171

Total net revenues
4,465

 
19,907

 
24,011

 
59,575

Operating Expenses
 
 
 
 

 
 
Compensation and benefits
425

 
4,875

 
11,054

 
15,553

Allocation of net income to Lucid members for services provided
551

 
1,218

 
2,012

 
3,779

Total compensation and benefits
976

 
6,093

 
13,066

 
19,332

Referring broker fees

 
817

 
250

 
2,567

Advertising and marketing

 
2,333

 
2,097

 
6,031

Communication and technology
708

 
1,766

 
3,442

 
5,367

Trading costs, prime brokerage and clearing fees
3,003

 
3,251

 
10,830

 
10,431

General and administrative
223

 
3,279

 
8,613

 
12,634

Bad debt recovery

 

 

 
(141
)
Depreciation and amortization

 
919

 
700

 
2,789

Total operating expenses
4,910

 
18,458

 
38,998

 
59,010

Operating (loss) income
(445
)
 
1,449

 
(14,987
)
 
565

Other (Loss) Income
 
 
 
 

 
 
(Loss) income on equity method investments, net
(374
)
 
149

 
600

 
242

Gain on disposition of equity method investment (see Note 6)
56,973

 

 
56,973

 
679

Net gain on sale of customer accounts
92

 

 
5,338

 

Net gain on completed dispositions
300

 

 
300

 

Loss on classification as held for sale before income taxes
(14,178
)
 
(25,095
)
 
(34,618
)
 
(57,092
)
Total income (loss) from discontinued operations before income taxes*
42,368

 
(23,497
)
 
13,606

 
(55,606
)
Income tax provision (benefit)
4

 
4

 
(7
)
 
23

Income (loss) from discontinued operations, net of tax
$
42,364

 
$
(23,501
)
 
$
13,613

 
$
(55,629
)
* Total income (loss) from discontinued operations before income taxes attributable to Global Brokerage, Inc. was $27.9 million and $23.3 million for the three and nine months ended September 30, 2017, respectively, and $(4.6) million and $(16.6) million for the three and nine months ended September 30, 2016, respectively.

    

17

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)


The following is a summary of the carrying amounts of the assets and liabilities included as part of discontinued operations as of September 30, 2017 and December 31, 2016, with amounts in thousands:
 
As of
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and cash equivalents
$
11,370

 
$
9,378

Cash and cash equivalents, held for customers (1)

 
233,394

Due from brokers (2)
764

 
14,090

Accounts receivable, net
56

 
251

Office, communication and computer equipment, net
885

 
1,336

Goodwill
211,058

 
223,613

Other intangible assets, net
26,158

 
27,269

Other assets (3) (4)
3,802

 
14,337

Loss recognized on classification as held for sale
(213,444
)
 
(193,171
)
Total assets classified as held for sale on the condensed consolidated statements of financial condition
$
40,649

 
$
330,497

 
 
 
 
Liabilities
 
 
 
Customer account liabilities (1)
$

 
$
233,394

Accounts payable and accrued expenses (5)
2,976

 
2,266

Due to brokers (2)

 
45

Other liabilities

 
14

Total liabilities classified as held for sale on the condensed consolidated statements of financial condition
$
2,976

 
$
235,719

____________________________________
(1) Includes cash and cash equivalents, held for customers and customer account liabilities related to the U.S.-based accounts sold to Gain in February 2017, which were reclassified to Assets held for sale and Liabilities held for sale, respectively, as of December 31, 2016.
(2) Includes as of September 30, 2017 and December 31, 2016: a) derivative assets, net of $0.5 million and $1.6 million, respectively; b) unsettled spot FX, net of $0.2 million and $0.2 million, respectively; and c) excess cash collateral of nil and $12.2 million, respectively.
(3) Includes the Company's exchange memberships, which represent ownership interests and shares owned in CME Group Inc. and provide the Company with the right to conduct business on the exchange. The exchange memberships are recorded at cost or, if an other-than-temporary impairment in value has occurred, at a value that reflects management's estimate of the impairment. There were no exchange membership impairments as of September 30, 2017 or December 31, 2016. In January 2017, the Company sold certain of its ownership interests and shares in CME Group Inc. and recognized a gain of $0.8 million, which is included as a component of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the nine months ended September 30, 2017. As of September 30, 2017 and December 31, 2016, the carrying values of the ownership interests were $1.9 million and $4.6 million, respectively, and the carrying values of the shares were $1.8 million and $4.8 million, respectively.
(4) Includes the carrying value of the Company's equity interest in FastMatch of nil and $4.6 million as of September 30, 2017 and December 31, 2016, respectively.
(5) Includes as of September 30, 2017 and December 31, 2016 amounts due related to the allocation of income to Lucid non-controlling members for services provided of $1.5 million and $0.7 million, respectively.
    
Sale of Investment

The Company sold its DailyFX business to FX Publications, Inc. on October 28, 2016 (the “Closing Date”) for a cash purchase price of $40.0 million, payable in two installments. DailyFX is a leading portal for FX trading news, charts, indicators and analysis. The first installment of $36.0 million was paid to the Company on the Closing Date and the proceeds were used to

18

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)


pay down the Term Loan. The second installment of $4.0 million was received by the Company in July 2017 after the completion of certain migration requirements, and the proceeds were used to pay down the Term Loan. After transaction costs, the Company recognized a gain of $37.2 million related to the sale, which was recorded in earnings in the fourth quarter of 2016. The Company considered the guidance in ASC 205-20 and determined that since the operations and cash flows of the DailyFX business are not clearly distinguishable, it does not represent a component as defined in the guidance. Consequently, the DailyFX business does not qualify for reporting as a discontinued operation in the condensed consolidated financial statements.

In connection with the sale of the DailyFX business, the Company agreed to provide certain transitional services, including the use of facilities, website and other data services, for no additional consideration for a period of three months following the date of sale. Certain services were subsequently extended for an additional three-month period which ended in April 2017 in accordance with the terms of the applicable services agreement. The Company estimated the value of these services to be approximately $0.3 million and accordingly allocated $0.3 million of proceeds received as deferred income. The deferred income was amortized into other income over the respective three and six-month periods following the date of sale. For the three and nine months ended September 30, 2017, other income recorded for these transitional services was nil and $0.2 million, respectively.

In connection with the sale of the DailyFX business, the Company also entered into a three-year digital advertising agreement with FX Publications, Inc. The agreement provides for advertisements to be published on the DailyFX website in exchange for cash consideration payable by the Company in quarterly installments based on the number of leads (as defined in the agreement) generated by those advertisements. Until the website migration related to the sale was completed, the quarterly installment payable was approximately $0.7 million. However, as a result of withdrawing from business in the U.S. and terminating its registration as a retail foreign exchange dealer in the U.S. during the first quarter of 2017, the Company determined that it will no longer benefit from the digital advertising agreement, as it cannot advertise on the DailyFX website or benefit from leads. Consequently, the Company accounted for the remaining contract liability at the cease-use date in accordance with ASC 420, Exit or Disposal Cost Obligations ("ASC 420") (see Note 22). In July 2017, the Company negotiated a termination of the digital advertising agreement that provides for a reduction in the quarterly fee over the remaining three-year term. Beginning August 1, 2017, the fee is $0.4 million which is payable on a quarterly basis until October 28, 2019.

As a result of the reduction in the quarterly fee, the Company recorded an adjustment to the remaining contract liability in the second quarter of 2017 based on its credit-adjusted risk-free rate in accordance with ASC 420. As of September 30, 2017 and December 31, 2016, the Company recorded a liability of $2.9 million and $0.4 million, respectively, related to the digital advertising agreement. Of the $2.9 million recorded as of September 30, 2017, which is included as a component of the Company's restructuring costs (see Note 22), $1.2 million is included in Accounts payable and accrued expenses and $1.7 million is included in Other non-current liabilities on the condensed consolidated statements of financial condition. The entire amount recorded as of December 31, 2016 is included in Accounts payable and accrued expenses on the condensed consolidated statements of financial condition. The Company recognized expense of $0.1 million and $4.2 million for the three and nine months ended September 30, 2017, respectively, related to the digital advertising agreement, which is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.

Note 5. Notes Receivable

In January 2014, in connection with the formation of V3 by the Company and the non-controlling members of Lucid, the non-controlling members of Lucid borrowed approximately $7.9 million from the Company to assist with funding their portion of the capital contribution. The amount borrowed was due in 2017 and bore interest at the rate of 2% per annum. During the second quarter of 2016, management determined that the non-controlling members of Lucid would not be required to repay the notes receivable and the debt would be forgiven. Accordingly, the Company recorded a provision for the debt forgiveness in the amount of $8.2 million for the principal amount thereof plus accrued interest, which was recorded in earnings as a component of General and administrative expense for the nine months ended September 30, 2016. There was no interest income related to the notes receivable for the three and nine months ended September 30, 2017. Interest income related to the notes receivable was nil and $0.1 million for the three and nine months ended September 30, 2016, respectively.
    

19

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Note 6. Equity Method Investments

The Company had a 22.2% equity interest in a developer of FX trading software which it accounted for using the equity method. In the fourth quarter of 2016, the Company recorded an other-than-temporary impairment charge of $2.1 million related to its investment. In June 2017, the Company sold its interest in the FX trading software developer for $0.2 million and recorded a gain of $0.2 million, which is included in Loss (income) on equity method investments, net in the condensed consolidated statements of operations for the nine months ended September 30, 2017. The carrying value of the Company's equity interest in the FX trading software developer is nil as of both September 30, 2017 and December 31, 2016. The Company's share of the loss of the FX trading software developer was nil for each of the three and nine months ended September 30, 2017 and $0.2 million and $0.5 million for the three and nine months ended September 30, 2016, respectively.

In November 2016, the Company acquired a 30.0% equity interest for $0.5 million in a developer of FX analytical software which is accounted for using the equity method. In the fourth quarter of 2016, the Company recorded an other-than-temporary impairment charge of $0.5 million related to its investment. The carrying value of the Company’s equity interest in the software developer is nil as of both September 30, 2017 and December 31, 2016. The Company’s share of the loss of the FX analytical software developer was nil for each of the three and nine months ended September 30, 2017 and 2016.

The Company previously owned a 34.0% non-controlling equity interest in FastMatch, an electronic communication network for foreign exchange trading, and exerted significant influence. As discussed in Note 4, the Company's equity interest in FastMatch is classified as a discontinued operation. In August 2017, the Company completed the sale of its equity interest in FastMatch and recorded a $57.0 million gain on the sale, which is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 (see Note 4 for additional information on the sale). The carrying value of the Company's equity interest in FastMatch of nil and $4.6 million as of September 30, 2017 and December 31, 2016, respectively, is included in Assets held for sale on the condensed consolidated statements of financial condition. The Company's share of the (loss) income of FastMatch was $(0.4) million and $0.6 million for the three and nine months ended September 30, 2017, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2016, respectively, and is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.

In conjunction with the V3 acquisition in January 2014, the Company acquired a 66.3% non-controlling interest in a limited liability company ("V3-related LLC") that held a 17.26% interest in a firm that delivers investment information to investment professionals. In the first quarter of 2016, the 66.3% non-controlling interest was officially transferred to the Company and, in a related transaction, the assets held by the V3-related LLC were distributed to its members, including the Company, and the V3-related LLC was liquidated. This transaction resulted in the Company's acquisition of an equity interest in the firm described above which is accounted for using the cost method. The carrying value of the investment is $1.1 million as of both September 30, 2017 and December 31, 2016, and is included as a component of Other assets in the condensed consolidated statements of financial condition (see Note 9). As discussed in Note 4, V3, including the equity interest previously held in the V3-related LLC, is classified as a discontinued operation. Income (loss) from discontinued operations, net of tax for the nine months ended September 30, 2016 includes a gain of $0.7 million related to the disposition of the V3-related LLC.    

The Company did not receive any dividend distributions from its equity method investments during the three and nine months ended September 30, 2017 or 2016.

Note 7. Goodwill

As a result of the regulatory events that occurred in February 2017, including the Company's withdrawal from business in the U.S. (see Note 1), it was determined that a triggering event had occurred requiring an assessment of goodwill in the first quarter of 2017. As discussed in Note 2, the Company early adopted ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU No. 2017-04"), for its interim goodwill impairment test performed as of March 31, 2017 (the "Interim Assessment Date").
    
The reporting unit had negative equity at the Interim Assessment Date. As permitted by ASU No. 2017-04, the Company eliminated the qualitative assessment, and performed a comparison of the carrying value of the reporting unit, including goodwill, to its fair value at the Interim Assessment Date. The fair value of the reporting unit was calculated primarily

20

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 7. Goodwill - (continued)

using a market capitalization approach. When the regulatory settlements were announced on February 6, 2017, the share price of the Corporation declined the following day by approximately 50%. As of March 31, 2017, the share price had declined further. The market price of the Corporation’s Convertible Notes also declined the following day by approximately 42%. While the Convertible Notes price had recovered slightly as of March 31, 2017, it was still trading well below par. The Company previously used the income approach to estimate the fair value of the reporting unit. The income approach incorporated the use of a discounted cash flow ("DCF") method whereby the estimated future cash flows and terminal values for the reporting unit are discounted to a present value using a discount rate. The estimated future cash flows are based on management’s forecasts and projections for the reporting unit which are driven by key assumptions, including revenue growth, operating margins, capital expenditures, non-cash expenses and income tax rate. When applicable, various growth rates are assumed for years beyond the current business plan period. The discount rate is based on a market participant weighted-average cost of capital, calculated based on the risk-free rate of return, beta, which is a measure of the level of non-diversifiable risk associated with comparable companies, market equity risk premium and a company-specific risk factor.

As a result of the sustained decrease in the share price and decline in the market price of the Convertible Notes, the Company believes that as of the Interim Assessment Date, the common stock investors and holders of the Convertible Notes had taken into account the events precipitated by the regulatory actions, including the sale of the US accounts, termination of registration in the U.S. and the restructuring plan. At the Interim Assessment Date, the Company believed the market capitalization approach was a more appropriate method than the income approach previously used.

Under the market capitalization approach, the fair value of the reporting unit was calculated based on the implied equity value of the reporting unit (market capitalization of the Corporation adjusted for the non-controlling interest in Holdings) plus the fair value of the interest-bearing debt (including both the Credit Agreement and the Convertible Notes) and the fair value of Leucadia’s non-controlling membership units in Group. The indicated carrying value of the reporting unit, represented by the negative equity of the reporting unit adjusted for the book value of interest-bearing debt and the fair value of Leucadia’s non-controlling membership units in Group, was compared to the calculated fair value of the reporting unit. The calculated fair value of the reporting unit was less than its indicated carrying value and the Company concluded that goodwill was impaired as of the Interim Assessment Date. The Company recorded an impairment charge of $23.9 million to write down the full value of goodwill of the reporting unit, which is included in Goodwill impairment loss in the condensed consolidated statements of operations for the nine months ended September 30, 2017.

During the fourth quarter of 2016, the Company completed its annual testing for impairment of goodwill and, based on the evaluation performed, concluded that goodwill was not impaired as of October 1, 2016. Due to the nature and significance of the regulatory events that occurred in February 2017, the Company performed an interim goodwill test as of December 31, 2016 using a qualitative assessment, supported by a calculation of the fair value of the reporting unit using the DCF method described above, and determined that it was not more likely than not that goodwill was impaired as of December 31, 2016.
    
Changes in goodwill for the nine months ended September 30, 2017 are presented in the following table and reflect the Company's single operating segment, with amounts in thousands:
 
 
 
Balance as of January 1, 2017
 
$
23,479

Foreign currency translation adjustments
 
438

Impairment of goodwill
 
(23,917
)
Balance as of September 30, 2017
 
$



21

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Note 8. Other Intangible Assets, net

The Company’s intangible assets consisted of the following as of September 30, 2017 and December 31, 2016, with amounts in thousands:
 
September 30, 2017
 
December 31, 2016
  
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-lived intangible assets
 
 
 
 
 
 
 
 
  

 
  

Customer relationships
$
26,908

 
$
(23,036
)
 
$
3,872

 
$
35,460

 
$
(27,522
)
 
$
7,938

Foreign currency translation adjustment
(3,316
)
 
1,191

 
(2,125
)
 
(4,971
)
 
2,718

 
(2,253
)
Total finite-lived intangible assets
23,592

 
(21,845
)
 
1,747

 
30,489

 
(24,804
)
 
5,685

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
License
600

 

 
600

 
600

 

 
600

Total Other intangible assets, net
$
24,192

 
$
(21,845
)
 
$
2,347

 
$
31,089

 
$
(24,804
)
 
$
6,285


In the second quarter of 2015, the Company acquired certain margin FX trading accounts from Citibank, N.A. and Citibank International Limited (the "Citibank Acquisition"). The asset purchase agreement provides for cash consideration payable quarterly based on a pre-determined formula until total payments reach $6.0 million ("Threshold"). Additional cash consideration ("Contingent Consideration") is payable if total payments meet the Threshold before the expiration of an initial 30-month period. The acquired accounts represent customer relationships and are recorded as intangible assets at an initial cost of $6.0 million. Transaction costs incurred were not material. The Contingent Consideration is recognizable when it becomes payable, i.e., when it is probable and reasonably estimable, consistent with the guidance in ASC 450-20, Loss Contingencies, and, to the extent any amounts are recorded, included in the cost basis of the acquired intangible assets. There was no Contingent Consideration recorded as of September 30, 2017. The customer relationships are amortized on a straight-line basis over a weighted-average amortization period of three years.

As a result of the sale of the Company's U.S.-domiciled customer accounts in the first quarter of 2017, the Company fully wrote off its customer relationship intangible assets related to US, including accounts acquired from the Citibank Acquisition. The write-off of $1.6 million reduced the gain recognized on the sale and is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the nine months ended September 30, 2017. There was no impairment of intangible assets during the year ended December 31, 2016.

Intangible assets related to businesses to be disposed of are included as a component of assets held for sale on the condensed consolidated statements of financial condition and are not included in the table above. Amortization related to these intangible assets ceased as of the date they were determined to be held for sale.

Amortization expense from continuing operations included in the condensed consolidated statements of operations was $0.7 million and $2.0 million for the three and nine months ended September 30, 2017, respectively, and $1.2 million and $3.7 million for the three and nine months ended September 30, 2016, respectively. Amortization expense related to intangible assets to be disposed of (prior to the date they were determined to be held for sale) is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.        
    
Estimated future amortization expense for intangible assets outstanding as of September 30, 2017 is as follows, with amounts in thousands:
Year Ending December 31,
 
Remainder of 2017
$
401

2018
1,019

2019
327

Thereafter

  
$
1,747


22

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Note 9. Other Assets

Other assets comprised the following as of September 30, 2017 and December 31, 2016, with amounts in thousands:
 
As of
 
September 30, 2017
 
December 31, 2016
Prepaid expenses
$
5,699

 
$
4,229

Cost method investment
1,103

 
1,103

Deposits
7,384

 
1,871

Other
46

 
161

Total
$
14,232

 
$
7,364


Other assets related to businesses classified as discontinued operations are included as a component of Assets held for sale on the condensed consolidated statements of financial condition and are not included in the table above (see Note 4).

Note 10. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses comprised the following as of September 30, 2017 and December 31, 2016, with amounts in thousands:
 
As of
 
September 30, 2017
 
December 31, 2016
Operating expenses payable
$
17,192

 
$
24,926

Commissions payable
5,594

 
7,271

Bonus payable
6,619

 
22,210

Income tax payable
1,117

 
920

Interest due on borrowings
1,132

 
162

Other
2

 
2

Total
$
31,656

 
$
55,491


Accounts payable and accrued expenses as of September 30, 2017 and December 31, 2016 in the table above includes approximately $3.4 million and $17.2 million, respectively, related to the discontinued U.S. operation that did not meet the criteria for held for sale classification on the condensed consolidated statements of financial condition. The $3.4 million at September 30, 2017 primarily includes $1.2 million related to the digital advertising agreement (see Notes 4 and Note 16) and $0.8 million due under the terms of an asset purchase agreement for FX trading accounts acquired in prior years.  The $17.2 million at December 31, 2016 primarily includes regulatory settlements of $7.7 million, variable compensation of $3.7 million and legal and other professional fees of $2.5 million.

The table above excludes Accounts payable and accrued expenses related to other businesses classified as discontinued operations that are included as components of Liabilities held for sale on the condensed consolidated statements of financial condition (see Note 4).


23

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Note 11. Earnings per Share

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive instruments that were outstanding during the period. The Company uses the treasury stock method in accordance with ASC 260, Earnings per Share (“ASC 260”), to determine diluted EPS. Due to the Corporation's losses from continuing operations for the three and nine months ended September 30, 2017, any potential common shares were not included in the computation of diluted EPS as they would have had an antidilutive effect since the shares would decrease the loss per share. As a result, basic and diluted net loss per share of Class A common stock are equal for this period.

In accordance with ASC 260, all outstanding unvested share-based payments that contain rights to non-forfeitable dividends participate in the undistributed earnings with the common stockholders and are therefore participating securities. The Company's unvested restricted stock units ("RSUs") do not contain rights to dividends or dividend equivalents. As a result, unvested RSUs are not considered participating securities and are therefore not required to be included in computing basic EPS under the two-class method. The shares of Class B common stock do not share in the earnings of the Company and are not considered participating securities. Accordingly, basic and diluted net earnings per share of Class B common stock have not been presented.

In April 2015, the Company entered into an option agreement with a customer as part of a negative equity balance settlement and issued an immediately vested, two-year option to purchase 56,934 shares of the Corporation's Class A common stock. The option had a strike price of $22.50. The option expired unexercised in April 2017.

In computing diluted EPS, outstanding stock options and other equity awards granted to certain employees, non-employees and independent directors in the aggregate of 568,789 for each of the three and nine months ended September 30, 2017 and 734,518 for each of the three and nine months ended September 30, 2016 were excluded because they were antidilutive under the treasury method.    

As described in Note 15, in June 2013 the Corporation issued $172.5 million principal amount of the Convertible Notes. The Convertible Notes are convertible at an initial conversion rate of 5.32992 shares of the Corporation's Class A common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $187.62. In accordance with ASC 260, the shares of the Corporation's Class A common stock issuable upon conversion of the Convertible Notes are included in the calculation of diluted EPS to the extent that the conversion value of the securities exceeds the principal amount. For diluted EPS purposes, the number of shares of the Corporation's Class A common stock that is necessary to settle such excess is considered issued. For the three and nine months ended September 30, 2017 and 2016, the conversion value did not exceed the principal amount and therefore the conversion effect was not included in the computation of diluted EPS because it was antidilutive under the treasury method.

As described in Note 15, the Corporation also entered into a warrant transaction in June 2013 whereby the Corporation sold to the counterparties warrants to purchase shares of the Corporation's Class A common stock. For the three and nine months ended September 30, 2017 and 2016, the warrants were not included in the computation of diluted EPS because they were antidilutive under the treasury method.
    
Additionally, the non-controlling members of Holdings have the right to exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These shares were also excluded from the computation of diluted EPS because the shares have no impact, or would not be dilutive or antidilutive under the treasury method. There were no exchanges of Holdings Units for shares of the Corporation’s Class A common stock during the three and nine months ended September 30, 2017 or 2016.
    
    

24

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 11. Earnings per Share - (continued)


The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations, with amounts in thousands except per share data:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2017
 
2016
 
2017
 
2016
Basic and diluted net income (loss) per share of Class A common stock:
  

 
  

 
 
 
 
Numerator
  

 
  

 
 
 
 
(Loss) income from continuing operations attributable to Global Brokerage, Inc.
$
(13,561
)
 
$
(34,507
)
 
$
(42,340
)
 
$
87,627

Income (loss) from discontinued operations attributable to Global Brokerage, Inc.
27,880

 
(4,627
)
 
23,280

 
(16,625
)
Net income (loss) available to holders of Class A common stock
14,319

 
(39,134
)
 
(19,060
)
 
71,002

Earnings allocated to participating securities

 

 

 

Income (loss) available to common stockholders
$
14,319

 
$
(39,134
)
 
$
(19,060
)
 
$
71,002

Denominator
  

 
  

 
 
 
 
Weighted average shares of Class A common stock
6,143

 
5,603

 
6,143

 
5,603

Add dilutive effect of the following:
 
 
 
 
 
 
 
Stock options and RSUs(1)

 

 

 

Convertible note hedges

 

 

 

Warrants

 

 

 

Assumed conversion of Holdings Units for Class A common stock

 

 

 

Dilutive weighted average shares of Class A common stock
6,143

 
5,603

 
6,143

 
5,603

Net income (loss) per share of Class A common stock  Basic and Diluted:
 
 
 
 
 
 


Continuing operations
$
(2.21
)
 
$
(6.15
)
 
$
(6.89
)
 
$
15.64

Discontinued operations
4.54

 
(0.83
)
 
3.79

 
(2.97
)
Net income (loss) per share of Class A common stock
$
2.33

 
$
(6.98
)
 
$
(3.10
)
 
$
12.67

____________________________________
(1) No dilutive effect for any period presented, therefore zero incremental shares included.


25

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Note 12. Related Party Transactions

Amounts receivable from, and payable to, related parties are set forth below, with amounts in thousands:
 
As of
 
September 30, 2017
 
December 31, 2016
Receivables
  

 
  

Accounts receivable, net — Advances to Holdings non-controlling members
$
3

 
$
3

Accounts receivable, net — Advances to employees
46

 
55

Accounts receivable, net — Liquidity provider

 
308

Due from brokers — Due from Liquidity provider

 
128

Other assets — Prepaid to Equity method investee
45

 

Total receivables from related parties
$
94

 
$
494

 


 


Payables
  

 
  

Customer account liabilities — Employees and equity method investees
$
5

 
$
732

Accounts payable and accrued expenses — Equity method investment

 
180

Due to brokers — Due to liquidity provider
454

 

Liabilities held for sale — Due to Lucid non-controlling members in connection with the allocation of income to Lucid non-controlling members for services provided
1,487

 
741

Total payables to related parties
$
1,946

 
$
1,653


The Company has advanced funds for withholding taxes to several non-controlling members of Holdings. The outstanding balances as of September 30, 2017 and December 31, 2016, included in the table above, are included in Accounts receivable, net in the condensed consolidated statements of financial condition.

The Company has advanced funds to several employees. The outstanding balances as of September 30, 2017 and December 31, 2016, included in the table above, are included in Accounts receivable, net in the condensed consolidated statements of financial condition.    

In July 2016, UK LTD entered into a trading relationship with an affiliate of Leucadia to provide CFD pricing for the Company's clients. The Leucadia affiliate was 24.0% owned by Jefferies, LLC ("Jefferies"), a wholly-owned subsidiary of Leucadia, prior to being sold in July 2017. In June 2017, the Company discontinued trading with the Leucadia affiliate. Trading losses recorded by the Company, which are included in Trading revenue in the condensed consolidated statements of operations, were nil and $0.6 million for the three and nine months ended September 30, 2017, respectively, and $0.3 million and $0.3 million for the three and nine months ended September 30, 2016 respectively. As of September 30, 2017 and December 31, 2016, Accounts receivable, net on the condensed consolidated statements of financial condition included a receivable from the Leucadia affiliate of nil and $0.3 million, respectively, for trading profits. As of September 30, 2017 and December 31, 2016, Due from brokers on the condensed consolidated statements of financial condition included nil and $0.1 million, respectively, due from the Leucadia affiliate for open trade positions.        
    
In January 2014, in connection with the formation of V3 by the Company and the non-controlling members of Lucid, the non-controlling members of Lucid borrowed approximately $7.9 million from the Company to assist with funding their portion of the capital contribution. The amount borrowed was due in 2017 and bore interest at the rate of 2% per annum. During the second quarter of 2016, management determined that the non-controlling members of Lucid would not be required to repay the notes receivable and the debt would be forgiven. Accordingly, the Company recorded a provision for the debt forgiveness in the amount of $8.2 million for the principal amount thereof plus accrued interest, which was recorded in earnings as a component of General and administrative expense for the nine months ended September 30, 2016. There was no interest income related to the notes receivable for the three and nine months ended September 30, 2017. Interest income related to the notes receivable was nil and $0.1 million for the three and nine months ended September 30, 2016, respectively.


26

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Related Party Transactions - (continued)

During 2015, Lucid acquired ownership interests and shares in CME Group Inc. from one of the non-controlling members of Lucid in a market-based transaction. The total carrying value of the ownership interests and shares was $3.7 million as of both September 30, 2017 and December 31, 2016, and are included in Assets held for sale in the condensed consolidated statements of financial condition (see Note 4).

The Company recorded a prepaid expense to an equity method investee for software licensing. The amounts as of September 30, 2017 and December 31, 2016, included in the table above, are included in Other assets on the condensed consolidated statements of financial condition. The expense recorded by the Company was not material and $0.2 million for the three and nine months ended September 30, 2017, respectively, and nil for each of the three and nine months ended September 30, 2016 for such software licensing services, which is included in Communications and technology expense in the condensed consolidated statements of operations.

Customer account liabilities on the condensed consolidated statements of financial condition include balances for employees and equity method investees in the amounts noted in the table above.

Included in Accounts payable and accrued expenses on the condensed consolidated statements of financial condition are amounts payable to an equity method investee for platform trading services of nil and $0.2 million as of September 30, 2017 and December 31, 2016, respectively. The Company recorded nil and $0.1 million in the three and nine months ended September 30, 2017, respectively, and $0.3 million and $0.8 million in the three and nine months ended September 30, 2016, respectively, for such platform services, which is included in Communication and technology expense in the condensed consolidated statements of operations. The equity method investee was sold in June 2017 and the Company recorded a gain of $0.2 million (see Note 6).    

In connection with the sale of the U.S.-domiciled accounts to Gain, Jefferies provided transaction services. Compensation for the services is equal to 3% of the gross proceeds. Compensation for such services, which is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations, was not material and $0.2 million for the three and nine months ended September 30, 2017, respectively. As of September 30, 2017, the Company paid all amounts owed to Jefferies.

In April 2017, Australia entered into a trading relationship with Jefferies to provide FX pricing for the Company's clients. For the three and nine months ended September 30, 2017, the Company recorded trading losses of $4.3 million and $7.0 million, respectively, which are included in Trading revenue in the condensed consolidated statements of operations. Australia also paid Jefferies prime broker fees, which are not material and $0.1 million for the three and nine months ended September 30, 2017, respectively, and included in Trading costs, prime brokerage and clearing fees in the condensed consolidated statements of operations. As of September 30, 2017 and December 31, 2016, Due to brokers on the condensed consolidated statements of financial condition included $0.5 million and nil, respectively payable to Jefferies.

Jefferies held $6.9 million of the Convertible Notes as of both September 30, 2017 and December 31, 2016.

Amounts due related to the allocation of income to Lucid non-controlling members for services provided were $1.5 million and $0.7 million as of September 30, 2017 and December 31, 2016, respectively, and are included in Liabilities held for sale in the condensed consolidated statements of financial condition (see Note 4).

During the three and nine months ended September 30, 2016, the Company received nil and $0.1 million, respectively, from FastMatch, an entity in which the Company owned a 34.0% equity interest prior to its sale in August 2017 (see Note 6), for occupancy and operational costs, which is included in Other income in the condensed consolidated statements of operations. There were no such costs incurred nor any related amounts received from FastMatch during the three and nine months ended September 30, 2017.

Jefferies was engaged by FastMatch to provide financial advisory services in connection with the FastMatch sale, which was completed in August 2017. Jefferies received approximately $3.0 million in compensation from the sales proceeds.


27

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Related Party Transactions - (continued)

Exchange Agreement

The members of Holdings (other than the Corporation) entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right (subject to the terms of the exchange agreement as described therein) to exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. There was no activity under the exchange agreement during the nine months ended September 30, 2017 or 2016.

Equity Distribution Agreement

Pursuant to the terms of an equity distribution agreement (the "Equity Distribution Agreement") entered into in October 2016 (see Note 19), the Company may, from time to time, issue and sell shares of its Class A common stock, having an aggregate offering price of up to $15.0 million, through Jefferies as a sales agent. Jefferies will receive a commission of 3.0% of the gross sales price per share for any shares sold through it as the Company’s sales agent under the Equity Distribution Agreement. For the three and nine months ended September 30, 2017, no amount has been paid to Jefferies. The Company has agreed to reimburse a portion of the expenses that Jefferies incurs in connection with the offer and sale of the common stock. There were no reimbursements of such expenses recorded for the three and nine months ended September 30, 2017.

Payments under Tax Receivable Agreement

The Corporation entered into a tax receivable agreement with the members of Holdings, including former members of Holdings (other than the Corporation) that will provide for the payment by the Corporation to Holdings’ members (other than the Corporation) as defined therein. Assuming sufficient taxable income is generated such that the Corporation fully realizes the tax benefits of the amortization specified in the tax receivable agreement, the aggregate payments currently estimated that would be due are $145.6 million as of both September 30, 2017 and December 31, 2016. During the first quarter of 2015, the Corporation determined that it was not more likely than not that it would benefit from the tax deduction attributable to the tax basis step-up for which a portion of the benefit would be owed to the non-controlling members of Holdings under the tax receivable agreement and reduced the contingent liability under the tax receivable agreement to zero. As of September 30, 2017, the Corporation continues to believe it will not benefit from the tax deduction and the contingent liability remains zero. There were no payments required to be made during the nine months ended September 30, 2017 pursuant to the tax receivable agreement. During the nine months ended September 30, 2016, a payment of $0.2 million was made pursuant to the tax receivable agreement for the 2014 tax year. The Corporation does not currently expect to make a payment for the 2016 and 2017 tax years.

Leucadia Transaction

Leucadia maintains a 49.9% equity interest in Group, the Company’s operating subsidiary, and has three directors on the board of directors of Group. The Chairman of the board of directors of Group is a managing director of Leucadia. See Note 14 for amounts related to the financing transaction with Leucadia that took place in January 2015 and subsequent amendments to the Credit Agreement in February 2017 and May 2017, as well as the various aspects of the restructuring transaction effective September 1, 2016.


28

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Note 13. Net Capital Requirements
    
As described in Note 1, as a result of regulatory settlements reached with the CFTC and the NFA in February 2017, US has withdrawn from business in the U.S. and terminated its registrations with the CFTC and the NFA. Accordingly, US is no longer a regulated entity as of September 30, 2017.

The Company's regulated entities are subject to minimum capital requirements in their respective jurisdictions. The minimum capital requirements of the entities below may effectively restrict the payment of cash distributions by the subsidiaries. The tables below present the capital, as defined by the respective regulatory authority, the minimum capital requirement and the excess capital for the following regulated entities as of September 30, 2017 and December 31, 2016, with amounts in millions:

 
As of September 30, 2017
  
UK LTD
 
Australia
 
Lucid LLP
Capital
$
84.5

 
$
11.4

 
$
8.9

Minimum capital requirement
20.0

 
1.9

 
4.5

Excess capital
$
64.5

 
$
9.5

 
$
4.4


 
As of December 31, 2016
  
US
 
UK LTD
 
Australia
 
Lucid LLP
Capital
$
47.5

 
$
83.4

 
$
16.6

 
$
10.2

Minimum capital requirement
33.3

 
22.0

 
1.1

 
4.2

Excess capital
$
14.2

 
$
61.4

 
$
15.5

 
$
6.0


Effective from January 1, 2016, the Financial Conduct Authority ("FCA"), which regulates UK LTD, introduced the "Capital Conservation Buffer" (CCB) and a "Countercyclical Capital Buffer" (CcyB) in line with the requirements set out in Capital Requirements Directive Article 160 Transitional Provisions for Capital Buffers. This requires all firms to maintain additional buffers on top of the minimum capital requirements noted above, which may vary at the direction of the FCA.    

29

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Note 14. Leucadia Transaction

On January 15, 2015, the Company's customers suffered significant losses and generated negative equity balances ("debit balances") owed to it of approximately $275.1 million. This was due to the unprecedented volatility in the EUR/CHF currency pair after the Swiss National Bank (the "SNB") discontinued its currency floor of 1.2 CHF per EUR on that date. When a customer entered a EUR/CHF trade with the Company, the Company executed an identical trade with a FX market maker. During the historic move, liquidity became extremely scarce and shallow, which affected execution prices.  This liquidity issue resulted in some customers having losses in excess of their account balance. While customers could not cover their margin call with the Company, the Company still had to cover the same margin call with the FX market maker.  When a customer profits in the trade, the Company gives the profits to the customer, however, when the customer is not profitable on that trade the Company is obligated to pay the FX market maker regardless of whether the Company collects the funds from its customers. These debit balances resulted in a temporary breach of certain regulatory capital requirements.

On January 16, 2015, Holdings and Group entered into the Credit Agreement with Leucadia, as administrative agent and lender, which was subsequently amended on January 24, 2015 and thereafter. On January 16, 2015, Holdings and Group also entered into a related financing fee agreement with Leucadia (the “Fee Letter”). The financing provided to the Company pursuant to these agreements, which is described below, enabled the Company to maintain compliance with regulatory capital requirements and continue operations.  On January 16, 2015, the Corporation, Holdings, Group and Leucadia also entered into the Letter Agreement, which was subsequently amended on January 24, 2015, that set the terms and conditions upon which the Corporation, Holdings and Group would pay in cash to Leucadia and its assignees a percentage of the proceeds received in connection with certain transactions.  In connection with these financing transactions, Holdings formed Group and contributed all of the equity interests owned by Holdings in its subsidiaries to Group. On September 1, 2016, the Company completed a restructuring transaction with Leucadia that, among other changes, amended the Credit Agreement and the Letter Agreement. The principal changes resulting from the restructuring transaction with Leucadia are described below.    

Restructuring Transaction

On September 1, 2016, pursuant to the Restructuring Transaction, the Company and Leucadia agreed to amend the terms of the Credit Agreement and to terminate the Letter Agreement. The Letter Agreement was replaced with the Group Agreement. The Group Agreement replaces the existing FXCM Newco, LLC agreement and FXCM Newco, LLC was renamed FXCM Group, LLC (“Group”). Pursuant to the Group Agreement, Leucadia acquired a 49.9% membership interest in Group, with Holdings owning the remaining 50.1% membership interest in Group. Group and Holdings also entered into a management agreement pursuant to which Holdings managed the assets and day-to-day operations of Group (the "Management Agreement") until October 1, 2017, when the Management Agreement was terminated. Additionally, Group adopted the 2016 Incentive Bonus Plan for Founders and Executives (the “Management Incentive Plan”) under which participants were entitled to certain distributions made after the principal and interest under the Credit Agreement were repaid in their entirety. The Management Incentive Plan was terminated on November 8, 2017 (see Note 23). The events described herein are collectively referred to as the "Restructuring Transaction."

Principal Changes to the Credit Agreement

In connection with the Restructuring Transaction on September 1, 2016, the Company entered into a first amendment to the Credit Agreement (the “First Amendment”). The First Amendment extends the maturity date of the Credit Agreement by one year to January 16, 2018. Additionally, the First Amendment permits the Company to defer any three of the remaining interest payments by paying interest in kind. Until the Credit Agreement is fully repaid, all distributions and sales proceeds will continue to be used solely to repay the principal plus interest.

The Company concluded that the terms of the First Amendment and the original credit agreement dated January 24, 2015 were not substantially different. Accordingly, the First Amendment was accounted for as a modification on a prospective basis pursuant to ASC 470, Debt ("ASC 470"). The components of interest expense related to the Credit Agreement, which are included in Interest on borrowings in the condensed consolidated statements of operations, including contractual interest, deferred interest and previously unamortized discounts, fees and costs, are amortized as an adjustment to interest expense over the remaining term of the Credit Agreement, as amended by the First Amendment, using the effective interest method.


30

Table of Contents
Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 14. Leucadia Transaction - (continued)


As described in Note 1 under "Financial Condition," in conjunction with the Plan, the terms of the Credit Agreement will, upon the effective date of the Plan, be amended to extend the maturity of the Term Loan under the Credit Agreement by an additional year to January 16, 2019 (see Note 23).

Second Amendment to the Credit Agreement

In connection with the CFTC regulatory fine of $7.0 million described in Note 1, Leucadia consented to waive compliance with provisions of the Credit Agreement and the Group Agreement regarding restricted payments (as defined in the Credit Agreement) in order to permit the distribution of $3.5 million of funds from Group to Holdings w