10-Q 1 fxcm-20140930x10q.htm 10-Q FXCM-2014.09.30-10Q
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, 2014
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
__________________________ 
FXCM 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: (646) 432-2986
(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
x
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
(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


The number of shares of the registrant’s Class A common stock, par value $0.01 per share, outstanding was 47,160,590 as of November 6, 2014. The number of shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding as of November 6, 2014 was 34.



FXCM Inc.
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2014

Table of Contents

Item Number
Page
PART I — FINANCIAL INFORMATION
 
Condensed Consolidated Statements of Financial Condition - September 30, 2014 (Unaudited) and December 31, 2013
Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended September 30, 2014 and 2013
Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended September 30, 2014 and 2013
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended September 30, 2014
Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2014 and 2013
PART II — OTHER INFORMATION
  

i


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 Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 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


PART I

Item 1 — Financial Statements
FXCM Inc.

Condensed Consolidated Statements of Financial Condition
 
September 30, 2014 (Unaudited)
 
December 31, 2013
 
 
 
 
 
(Amounts in thousands, except share data)
Assets
  

 
  

Current assets
  

 
  

Cash and cash equivalents
$
326,730

 
$
365,245

Cash and cash equivalents, held for customers
1,332,399

 
1,190,880

Restricted time deposits
3,648



Trading securities
633

 

Due from brokers
32,960

 
5,450

Accounts receivable and other receivables, net
20,344

 
19,806

Deferred tax asset
5,215

 
11,910

Total current assets
1,721,929

 
1,593,291

Restricted time deposits
5,472



Deferred tax asset
174,309

 
166,576

Office, communication and computer equipment, net
48,438

 
49,165

Goodwill
326,100

 
307,936

Other intangible assets, net
66,224

 
76,713

Notes receivable
9,608


5,950

Other assets
32,329

 
24,316

Total assets
$
2,384,409

 
$
2,223,947

Liabilities and Equity
  

 
  

Current liabilities
  

 
  

Customer account liabilities
$
1,332,399

 
$
1,190,880

Accounts payable and accrued expenses
56,773

 
69,697

Credit agreement
30,000

 

Notes payable
7,460

 
9,800

Due to brokers
916

 
8,652

Securities sold, not yet purchased
3,815

 

Deferred tax liability
218



Due to related parties pursuant to tax receivable agreement
20,276

 
18,588

Total current liabilities
1,451,857

 
1,297,617

Deferred tax liability
3,078

 
3,687

Due to related parties pursuant to tax receivable agreement
131,562

 
131,670

Senior convertible notes
150,236

 
146,303

Other liabilities
6,052


9,289

Total liabilities
1,742,785

 
1,588,566

Commitments and Contingencies (see Note 15)


 


Stockholders’ Equity
  

 
  

Class A common stock, par value $0.01 per share; 3,000,000,000 shares authorized, 46,204,590 and 44,664,884 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
462

 
447

Class B common stock, par value $0.01 per share; 1,000,000 shares authorized, 34 and 41 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
1

 
1

Additional paid-in capital
260,231

 
245,426

Retained earnings
9,485

 
16,352

Accumulated other comprehensive loss
(7,487
)
 
(5,344
)
Total stockholders’ equity FXCM Inc.
262,692

 
256,882

Non-controlling interests
378,932

 
378,499

Total stockholders’ equity
641,624

 
635,381

Total liabilities and stockholders’ equity
$
2,384,409

 
$
2,223,947

See accompanying notes to the unaudited condensed consolidated financial statements.

1


FXCM Inc.

Condensed Consolidated Statements of Operations (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
  
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
  
(Amounts in thousands,
except per share data)
Revenues
  

 
  

 
 
 
 
 
Retail trading revenue
$
87,826

 
$
86,974

 
$
244,222

 
$
282,296

 
Institutional trading revenue
24,417

 
22,856

 
72,354

 
82,204

 
Trading revenue
112,243

 
109,830

 
316,576

 
364,500

 
Interest income
637

 
537

 
1,893

 
1,886

 
Brokerage interest expense
(199
)
 
(63
)
 
(459
)
 
(187
)
 
Net interest revenue
438

 
474

 
1,434

 
1,699

 
Other income
3,466

 
2,944

 
11,072

 
10,046

 
Total net revenues
116,147

 
113,248

 
329,082

 
376,245

 
Operating Expenses
  

 
  

 
 
 


 
Compensation and benefits
27,572

 
28,809

 
86,283

 
78,929

 
Allocation of net income to Lucid members for services provided
1,483

 
2,996

 
6,771

 
18,000

 
Total compensation and benefits
29,055

 
31,805

 
93,054

 
96,929

 
Referring broker fees
20,998

 
20,709

 
56,615

 
64,481

 
Advertising and marketing
5,071

 
6,305

 
18,652

 
19,813

 
Communication and technology
13,434

 
10,111

 
37,684

 
28,231

 
Trading costs, prime brokerage and clearing fees
8,021

 
6,809

 
24,257

 
23,708

 
General and administrative
17,219

 
27,949

 
48,898

 
53,843

 
Depreciation and amortization
15,041

 
12,849

 
40,793

 
37,304

 
Total operating expenses
108,839


116,537

 
319,953

 
324,309

 
Total operating income (loss)
7,308


(3,289
)
 
9,129

 
51,936

 
Other Expense
 
 
 
 
 
 


 
Loss on equity method investments, net
376

 
183

 
910

 
728

 
Interest on borrowings
3,028

 
2,869

 
9,121

 
4,976

 
Income (loss) before income taxes
3,904

 
(6,341
)
 
(902
)
 
46,232

 
Income tax provision
1,144

 
2,444

 
1,648

 
16,793

 
Net income (loss)
2,760

 
(8,785
)
 
(2,550
)
 
29,439

 
Net income (loss) attributable to non-controlling interest in FXCM Holdings, LLC
1,538


(3,133
)
 
1,756

 
21,190


Net loss attributable to other non-controlling interests
(1,170
)

(530
)
 
(5,697
)
 
(3,613
)

Net income (loss) attributable to FXCM Inc.
$
2,392


$
(5,122
)
 
$
1,391

 
$
11,862


 
 
 
 
 
 
 

 
Weighted average shares of Class A common stock outstanding:
 
 
 
 
 
 


 
Basic
42,963

 
33,718

 
40,108

 
30,983

 
Diluted
43,819

 
34,469

 
42,367

 
32,009

 
Net income (loss) per share attributable to stockholders of Class A common stock of FXCM Inc.:
 
 
  

 


 


 
Basic
$
0.06

 
$
(0.15
)
 
$
0.03

 
$
0.38

 
Diluted
$
0.05

 
$
(0.15
)
 
$
0.03

 
$
0.37

 
Dividends declared per common share
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18

 
       

See accompanying notes to the unaudited condensed consolidated financial statements.

2


FXCM Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
  
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
  
(Amounts in thousands)
Net income (loss)
$
2,760

 
$
(8,785
)
 
$
(2,550
)
 
$
29,439

 
Other comprehensive (loss) income
  


  

 


 


 
Foreign currency translation (loss) gain
(8,366
)
 
5,171

 
(3,643
)
 
(7,563
)
 
Income tax (benefit) expense
(58
)
 
19

 
108

 
(108
)
 
Other comprehensive (loss) income, net of tax
(8,308
)
 
5,152

 
(3,751
)
 
(7,455
)
 
Comprehensive (loss) income
(5,548
)
 
(3,633
)
 
(6,301
)
 
21,984

 
Comprehensive (loss) income attributable to non-controlling interest in FXCM Holdings, LLC
(2,085
)
 
(655
)
 
163

 
16,634

 
Comprehensive loss attributable to other non-controlling interests
(1,185
)
 
(530
)
 
(5,712
)
 
(3,613
)
 
Comprehensive (loss) income attributable to FXCM Inc.
$
(2,278
)
 
$
(2,448
)
 
$
(752
)
 
$
8,963

 


See accompanying notes to the unaudited condensed consolidated financial statements.

3


FXCM Inc.

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)
(Amounts in thousands, except share amounts)


 

FXCM Inc.
  
Non-controlling Interests

Retained Earnings

Accumulated Other Comprehensive Loss

Additional Paid-in Capital

Common Stock - 
Class B

Common Stock - 
Class A

Total Stockholders’ Equity
  








Shares

Dollars

Shares

Dollars


Balance as of January 1, 2014
$
378,499


$
16,352


$
(5,344
)

$
245,426


41


$
1


44,664,884


$
447


$
635,381

Net (loss) income
(3,941
)

1,391














(2,550
)
Other comprehensive loss, net of tax
(1,608
)



(2,143
)











(3,751
)
Comprehensive (loss) income
(5,549
)

1,391


(2,143
)











(6,301
)
Class A common stock

























Repurchase of Class A common stock
(175
)





(469
)





(45,985
)



(644
)
Equity based compensation
5,662






5,435






163,832


1


11,098

Dividends on Class A common stock


(8,258
)













(8,258
)
Exchange of Holdings units to Class A common stock (see Note 9)
(6,328
)





6,317


(6
)



1,155,359


11



Assignment of transferees








(1
)








Stock options exercised
1,080






2,525






266,500


3


3,608

Effects of Tax Receivable Agreement






997










997

Contributions - other non-controlling interests
10,819
















10,819

Distributions - non-controlling members
(5,076
)















(5,076
)
Balance as of September 30, 2014
$
378,932


$
9,485


$
(7,487
)

$
260,231


34


$
1


46,204,590


$
462


$
641,624




See accompanying notes to the unaudited condensed consolidated financial statements.











4


FXCM Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended September 30,
  
2014
 
2013
  
(Amounts in thousands)
Cash Flows From Operating Activities
  

 
  

Net (loss) income
$
(2,550
)
 
$
29,439

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

 
  

Depreciation and amortization
40,793

 
37,304

Equity-based compensation
10,238

 
9,896

Deferred tax expense
5,051

 
10,982

Gain on Follow-on Payment
(3,672
)
 

Loss on disposal of fixed assets
10

 
126

Amortization of deferred bond discount
3,933

 
1,644

Amortization of deferred financing cost
1,381

 
815

Loss on equity investment
910

 
728

Remeasurement of tax receivable agreement liability
(360
)


Changes in operating assets and liabilities
  

 
  

Cash and cash equivalents, held for customers
(140,468
)
 
(73,145
)
Restricted time deposits
(9,120
)


Trading securities
(633
)


Due from brokers
(27,510
)
 
7,135

Accounts receivable, net
(1,393
)
 
(3,570
)
Tax receivable
(5,160
)
 
2,973

Other assets
(960
)
 
2,623

Customer account liabilities
141,519

 
73,503

Accounts payable and accrued expenses
(13,829
)
 
26,607

Other liabilities
436

 
728

Payments for tax receivable agreement
(3,707
)
 
(4,079
)
Due to brokers
(7,736
)
 
18,583

Securities sold, not yet purchased
3,815

 

Foreign currency remeasurement gain (loss)
345

 
(1,513
)
Net cash (used in) provided by operating activities
(8,667
)
 
140,779

Cash Flows From Investing Activities
  

 
  

Purchases of office, communication and computer equipment
(16,320
)
 
(16,792
)
Purchase of intangible assets
(9,789
)
 
(35
)
Acquisition of business, net of cash acquired
(21,791
)
 
(26,812
)
Issuance of notes receivable
(1,500
)


Payments for equity investment

 
(3,000
)
Net cash (used) in investing activities
(49,400
)
 
(46,639
)
Cash Flows From Financing Activities
  

 
  

Distributions - non-controlling members
(4,281
)
 
(10,621
)
Contributions from other non-controlling members
2,540

 

Dividends paid
(8,258
)
 
(6,923
)
Proceeds from exercise of stock options
3,608

 
21,877

Stock repurchase
(644
)
 
(16,312
)
Proceeds from issuance of senior convertibles notes, net

 
166,467

Purchase of convertible note hedges

 
(29,101
)
Proceeds from sale of warrants

 
18,578

Borrowings under the credit agreement
60,000

 
10,000

Payments on borrowings under the credit agreement
(30,000
)
 
(95,000
)
Net cash provided by financing activities
22,965

 
58,965

Effect of foreign currency exchange rate changes on cash and cash equivalents
(3,413
)
 
(3,492
)
Net (decrease) increase in cash and cash equivalents
(38,515
)
 
149,613

Cash and Cash Equivalents
  

 
  

Beginning of year
365,245

 
272,332

End of period
$
326,730

 
$
421,945

Supplemental disclosures of cash flow activities
  

 
  

Cash paid for taxes
$
407

 
$
3,199

Cash paid for interest
$
2,762

 
$
1,207

Supplemental disclosure of non-cash investing activities
 
 
 
Notes receivable credited towards consideration for acquisition of business
$
11,942

 
$

Supplemental disclosure of non-cash financing activities
  

 
  

Exchange of Holdings Units for shares of Class A common stock
$
6,328

 
$
45,792

Non-cash distribution- non-controlling members
$
795


$

Business acquisition consideration payable
$

 
$
15,300

Notes issued for non-controlling interest
$
8,279


$

Non-controlling interest - Faros Trading LLC
$

 
$
15,569

Follow-on Payment for business acquisition
$

 
$
10,631

See accompanying notes to the unaudited condensed consolidated financial statements.

5

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 1. Description of Business and Basis of Presentation

Description of Business

FXCM Inc. (the “Corporation”), a Delaware holding company, is an online provider of foreign exchange (“FX”) trading and related services to retail and institutional customers worldwide. The Corporation operates through its managing membership interest in FXCM Holdings, LLC (“Holdings”), the Corporation’s sole operating asset. Holdings is a majority-owned, controlled and consolidated subsidiary of the Corporation. As used in these notes, the term “Company” collectively refers to the Corporation, Holdings and subsidiaries of Holdings.

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. Intercompany accounts and transactions are eliminated in consolidation.

As indicated above, the Corporation operates and controls all of the businesses and affairs of Holdings and its subsidiaries. As such, 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. The Corporation’s and the non-controlling unit holders’ economic interest in Holdings was 56.4% and 43.6%, respectively, as of September 30, 2014. The Corporation’s and the non-controlling unit holders’ economic interest in Holdings was 54.8% and 45.2%, respectively, as of December 31, 2013.

Net income attributable to the non-controlling interest in Holdings 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 attributable to other non-controlling interests in the condensed consolidated statements of operations represents the portion of net income or loss attributable to the non-controlling interests of Lucid Markets Trading Limited ("Lucid"), Faros Trading LLC ("Faros"), V3 Markets, LLC ("V3") (see Note 3) and other consolidated entities. Net income attributable to the non-controlling interest in Lucid represents the portion of earnings or loss attributable to the 49.9% economic interest held by Lucid non-controlling members whose allocation among the non-controlling members is not contingent upon services being provided. The portion of the 49.9% of Lucid earnings allocated among the non-controlling members of Lucid contingent on services provided is reported as a component of compensation expense under Allocation of net income to Lucid members for services provided in the condensed consolidated statements of operations. Net income or loss attributable to the non-controlling interests in Faros and V3 represent the portion of earnings or loss attributable to the 49.9% economic interest held by Faros and V3 non-controlling members. Net income or loss attributable to the non-controlling interests in other consolidated entities represents the portion of earnings or loss attributable to the economic interests held by the non-controlling members.

Non-controlling interests in the condensed consolidated statements of financial condition represents the portion of equity attributable to the non-controlling interests of Holdings, Lucid, Faros, V3 and other consolidated entities. The allocation of equity to non-controlling interests is based on the percentage owned by the non-controlling interest in the respective entity.

    







    

6

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

The Company’s condensed consolidated financial statements include the following significant subsidiaries of Holdings:
Forex Capital Markets L.L.C.
(“US”)
FXCM Asia Limited
(“HK”)
Forex Capital Markets Limited
(“UK LTD”)
FXCM Australia Limited
(“Australia”)
ODL Group Limited
(“ODL”)
FXCM Securities Limited
(“FSL”)
FXCM Japan Securities Co., Ltd.
(“FXCMJ”)
FXCM UK Merger Limited
(“Merger”)
Lucid Markets Trading Limited
(“Lucid”)
Lucid Markets LLP
("Lucid LLP")
Faros Trading LLC
("Faros")
V3 Markets, LLC
("V3")

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 are included in Other assets in the condensed consolidated statements of financial condition and earnings or losses are included in Loss on equity method investments, net in the condensed consolidated statements of operations.

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 consolidated financial statements.

Reclassifications

Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

Interim Financial Statements

The Company believes that the condensed consolidated interim 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, 2013. 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 interim condensed consolidated financial statements.

Accounting Pronouncement Adopted in 2014

Obligations Resulting from Joint and Several Liability Arrangements
In February 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. This standard requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the sum of (i) the amount the entity agreed to pay on the basis of its arrangement among its co-obligors and (ii) any additional amount it expect to pay on behalf of its co-obligors.

7

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

This guidance became effective for the Company on January 1, 2014 and did not have a material impact on the presentation of the Company’s unaudited condensed consolidated financial statements.
Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of an Investment within a Foreign Entity or of an Investment in a Foreign Entity
In March 2013, the FASB issued ASU No. 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in Foreign Entity. This standard addresses whether consolidation guidance or foreign currency guidance applies to the release of the cumulative translation adjustment into net income when a parent sells all or a part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or net assets that are a business (other than a sale of in-substance real estate) within a foreign entity. The standard also resolves the diversity in practice for the cumulative translation adjustment treatment in business combinations achieved in stages involving foreign entities.
Under this standard, the entire amount of the cumulative translation adjustment associated with the foreign entity should be released into earnings when there has been: (i) a sale of a subsidiary or group of net assets within a foreign entity and the sale represents a complete or substantially complete liquidation of the foreign entity in which the subsidiary or the net assets had resided; (ii) a loss of a controlling financial interest in an investment in a foreign entity; or (iii) a change in accounting method from applying the equity method to an investment in a foreign entity to consolidating the foreign entity.
This guidance became effective for the Company on January 1, 2014 and did not have a material impact on the presentation of the Company’s unaudited condensed consolidated financial statements.
Presentation of Unrecognized Tax Benefits
In July 2013, the FASB issued ASU No. 2013-11, Presentation of Unrecognized Tax Benefits When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This standard requires a liability related to unrecognized tax benefits to be presented as a reduction to the related deferred tax asset for a net operating loss carryforward or a tax credit carryforward. When the carryforwards are not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset.
This guidance became effective for the Company on January 1, 2014 and did not have a material impact on the presentation of the Company’s unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements
Reporting Discontinued Operations
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under this standard, a discontinued operation will include a disposal of a major part of an entity’s operations and financial results such as a separate major line of business or a separate major geographical area of operations. The standard also raises the threshold to be a major operation but no longer precludes discontinued operations presentation where there is significant continuing involvement or cash flows with a disposed component of an entity. The standard expands disclosures to include cash flows where there is significant continuing involvement with a discontinued operation and the pre-tax profit or loss of disposal transactions not reported as discontinued operations. The standard is effective prospectively for years beginning on or after December 15, 2014, with early application permitted. The Company plans to adopt the standard prospectively on its required effective date of January 1, 2015 and the impact, if any, on the Company’s consolidated financial condition, results of operations or cash flows will be dependent on the nature of future disposals.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard sets out the following five steps an entity should apply to achieve this core principle.
Identify the contract(s) with a customer.

8

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations in the contract.
Recognize revenue when (or as) the entity satisfies a performance obligation.
  For a public entity, the standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial condition, results of operations, cash flows and disclosures and is currently unable to estimate the impact of adopting this guidance.

Note 2. Holdings

The Corporation consolidates the financial results of Holdings whereby it 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, anytime 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, anytime Holdings unit holders (other than the Corporation) exchange their units for shares of the Corporation’s Class A common stock, Holdings is required to transfer an equal amount of units to the Corporation.

Changes in the non-controlling and the Corporation’s interests in Holdings for the nine months ended September 30, 2014 are presented in the following table:

 
Controlling Units
 
Non-Controlling Units
 
Total Units
 
FXCM Inc.
 
Non-Controlling
 
Total
Balance as of January 1, 2014
44,664,884

 
36,835,821

 
81,500,705

 
54.8
%
 
45.2
 %
 
100.0
%
Holdings units acquired by FXCM Inc. related to exchanges of Holdings units for shares of Class A common stock
1,155,359

 
(1,155,359
)
 

 
1.4
%
 
(1.4
)%
 
%
Holding units repurchased related to Class A common stock repurchased
(45,985
)
 


(45,985
)

%
 
 %

%
Exercise of stock options
266,500

 

 
266,500

 
0.1
%
 
(0.1
)%
 
%
Issuance under equity based compensation
163,832




163,832


0.1
%

(0.1
)%

%
Balance as of September 30, 2014
46,204,590

 
35,680,462

 
81,885,052

 
56.4
%
 
43.6
 %
 
100.0
%



9

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Business Acquisition

V3
    On January 21, 2014 (the "V3 Acquisition Date"), the Company, through a new entity, V3, created with the non-controlling members of Lucid, completed the acquisition of certain assets of Infinium Capital Holdings LLC ("Infinium") and certain of its affiliates. The acquisition expands the Lucid business model into a broader array of financial instruments and provides more robust connectivity to various financial exchanges. The consideration for the acquisition was approximately $32.5 million consisting of cash, assumed liabilities and the credit of $12.1 million of Infinium senior secured notes plus interest held and exchanged by a subsidiary of the Company. The Company holds a controlling 50.1% interest in V3.
The acquisition was accounted for in accordance with ASC 805, Business Combinations ("ASC 805"). The assets acquired and the non-controlling interest were recorded at their estimated fair values in accordance with ASC 820, Fair Value Measurement ("ASC 820") at the V3 Acquisition Date. Full goodwill of $20.2 million was calculated as the fair value of estimated consideration over the estimated fair value of the net assets acquired. The estimated fair value of the non-controlling interest was $16.2 million and was determined by the fair value of the consideration. Goodwill was allocated at the reporting unit level in the Institutional segment based on an analysis of the fair value of assets acquired. V3 is included in the Institutional segment for purposes of segment reporting (see Note 20).
Subsequent to the acquisition date, the purchase price was decreased by $0.9 million, due to the final determination of the assumed liabilities. In connection with this purchase price adjustment, the initial goodwill recorded was reduced by $0.8 million to $19.4 million.

V3 Purchase Price Allocation (¹)  

(Amounts in thousands)



Purchase price



$
15,825

Non-Controlling interest



15,762

Total fair value at Acquisition Date



31,587

Net assets acquired
$
10,210




Adjustments to reflect acquired assets and liabilities at fair value





Trading platform (2)
950




Processing platform (3)
150

 
 
Non-compete agreement (4)
450




Executory contract (5)
470




Fair value of net assets acquired



12,230

Goodwill resulting from the V3 acquisition



$
19,357

__________________
 
(1) 
The amounts included in the V3 Purchase Price Allocation table represent the allocation of the purchase price and includes revisions made during the 12 month remeasurement period from the V3 Acquisition Date.
 
(2) 
Consists of internally developed software platforms that support trade execution, with an amortization life of 4 years.
 
(3) 
Consists of an internally developed software platform that supports trading, with an amortization life of 5 years.
 
(4) 
Amortization life is 1 year.
 
(5) 
Consists of a service agreement relating to fiber optics, wireless and other services, with an amortization life of 3 years.

The amounts included in the V3 Purchase Price Allocation table represent the preliminary allocation of the purchase price and are subject to revision during the measurement period, a period not to exceed 12 months from the V3 Acquisition

10

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Business Acquisition (continued)

Date. Adjustments to the provisional values during the measurement period will be pushed back to the date of acquisition. Comparative information for periods after acquisition but before the period in which the adjustments were identified will be adjusted to reflect the effects of the adjustments as if they were taken into account as of the acquisition date. Changes to the amounts recorded as assets and liabilities will result in a corresponding adjustment to goodwill.

Condensed Statement of Net Assets Acquired
The following condensed statement of net assets acquired reflects the amounts of V3 net assets recognized as of the V3 Acquisition Date, with amounts in thousands:
 
As of January 21, 2014
Assets


     Office, communication and computer equipment, net
$
973

     Intangible assets
2,020

     Exchange memberships and common equity shares
6,429

     Equity method investments, net
1,523

     Other assets
1,392

          Total assets
$
12,337

Liabilities
(107
)
Fair value of net assets acquired
$
12,230


Condensed Combined Financial Information:
The following condensed financial information presents the resulting operations of V3 from the V3 Acquisition Date to September 30, 2014, with amounts in thousands:
 
For the period
January 21, 2014 to
September 30, 2014
Total revenue
$
14,384

Net loss
$
(2,052
)

Faros
On September 20, 2013 (the “Faros Acquisition Date”), the Company acquired a 50.1% controlling interest in Faros. Faros is a global leader in foreign exchange intelligence, market coverage, and execution services to the institutional foreign exchange market. The acquisition further expands the Company's presence and capabilities in the institutional marketplace. As consideration, the Company provided an initial cash payment of $5.0 million (the “Initial Payment”) and a follow-on payment (the “ Follow-on Payment”) to be made in 2015 in an amount to be determined, based on the purchase agreement (the “Faros Purchase Agreement”) estimated at $10.6 million on the Faros Acquisition Date for a total estimated purchase price of $15.6 million. Pursuant to the terms of the Faros Purchase Agreement, the Follow-on Payment is payable partly in shares of the Corporation’s Class A common stock to one of the Faros sellers if certain criteria are met. Under the terms of the Faros Purchase Agreement, any of the Corporation’s Class A common stock issued to the Faros seller will be restricted for sale until September 2021 if the Faros seller ceases to be employed by Faros as of either December 31, 2015 or December 31, 2016 for reasons other than death, disability or the sale of the majority of the Corporation’s combined voting power. This restriction ("Faros Liquidity Restriction") has an estimated fair value of $0.4 million and is accounted for as deferred compensation and recognized over the term of the restriction.
The Company has the option to buy out the remaining interest of the Faros sellers subject to the terms of the Faros Purchase Agreement. In the event the buyout is not exercised by the Company by December 31, 2017, the sellers have the right to market Faros for sale of all the membership interests of Faros.

11

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Business Acquisition (continued)

The fair value of the Follow-on Payment is included in Other liabilities in the condensed consolidated statements of financial condition. Changes in the fair value of the Follow-on Payment subsequent to the Faros Acquisition Date are recognized in earnings in the period in which the change is recorded. The Company estimated the fair value of the Follow-on Payment using both a discounted cash flow model and guideline public company model. This fair value measurement is based on significant inputs not observed in the market and thus represents Level III instruments as defined by ASC 820 (see Note 17). The discount rate considered in the assessment of the $10.6 million Follow-on Payment at the Faros Acquisition Date was 25.0%. In December 2013, the Company recorded a reduction to the Follow-on Payment of $6.9 million. In March 2014, the Company reduced the Follow-on Payment by the remaining $3.7 million. The $3.7 million decrease in the estimated fair value of the Follow-on Payment was recorded in Other income in the condensed consolidated statements of operations. The decline in the estimated fair value of the Follow-on Payment is due to lowering our Faros earnings before income taxes and depreciation ("EBITDA") estimate. The Company reassessed the Follow-on Payment liability at September 30, 2014 and determined that a fair value of zero was still appropriate.
The Acquisition was accounted for in accordance with ASC 805. The assets acquired, liabilities assumed and non-controlling interest were recorded at their estimated fair values in accordance with ASC 820 at the Acquisition Date as summarized in the table below. Full goodwill of $23.0 million was calculated as the fair value of estimated consideration over the estimated fair value of the net assets acquired. The estimated fair value of the non-controlling interest was $15.6 million, and was determined by valuing Faros using a discounted cash flow model and guideline public company model, less the Initial Payment and the Follow-on Payment. The estimate of the fair value of the non-controlling interest is based on an assumed discount rate of 25.0%, long term annual earnings growth rate of 3.0% and assumed adjustments due to the lack of control that market participants would consider when estimating the fair value of the non-controlling interest in Faros. Goodwill was allocated at the reporting unit level in the Institutional segment based on an analysis of the fair value of assets acquired and expected future benefits of synergies created from combining the Faros market making business with the Company's foreign exchange trading expertise. Faros is included in the Institutional segment for purposes of segment reporting (see Note 20).

Faros Purchase Price Allocation
(Amounts in thousands)



Purchase price



$
15,631

Non-Controlling interest



15,569

Total fair value at Acquisition Date



31,200

Net assets acquired
$
137




Adjustments to reflect acquired assets and liabilities at fair value





Customer relationships (1)
6,000




Non-compete agreement (2)
1,900




Trade name (3)
130




Fair value of net assets acquired



8,167

Goodwill resulting from the Faros acquisition



$
23,033

__________________
(1) 
Consists of institutional and bank customers, with an amortization life of 4 years.
(2) 
Amortization life is 9 years.
(3) 
Amortization life is 3 year.
The amounts included in the Faros Purchase Price Allocation table represent the preliminary allocation of the purchase price as well as revisions made during the measurement period, a period not to exceed 12 months from the Faros Acquisition Date. Adjustments to the provisional values during the measurement period were pushed back to the date of acquisition. Comparative information for periods after acquisition but before the period in which the adjustments were identified were adjusted to reflect the effects of the adjustments as if they were taken into account as of the acquisition date. Changes to the amounts recorded as assets and liabilities resulted in a corresponding adjustment to goodwill.


12

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Business Acquisition (continued)

Condensed Statement of Net Assets Acquired
The following condensed statement of net assets acquired reflects the amounts of Faros net assets recognized as of the Faros Acquisition Date, with amounts in thousands:

As of September 20, 2013
Assets


     Cash and cash equivalents
$
1,055

     Accounts receivable, net
40

     Office, communication and computer equipment, net
31

     Intangible assets
8,030

     Other assets
76

          Total assets
$
9,232

Liabilities


     Accounts payable and accrued expenses
$
1,065

          Total liabilities
$
1,065

Fair value of net assets acquired
$
8,167


Contingencies and Accounts Receivable
There were no contingent liabilities recorded in the fair value of net assets acquired as of the Faros Acquisition Date and the fair value of net assets acquired includes accounts receivables with book value that approximates fair value. There was no reserve netted against receivables as of the Faros Acquisition Date. The Company has collected all material accounts receivable amounts as of September 30, 2014.

Pro Forma Condensed Combined Financial Information
The Company's pro forma condensed combined financial information for the acquisitions completed in 2014 (i.e. V3), and 2013 (i.e., Faros) are presented as they may have appeared if all acquisitions had been completed on January 1, 2014 and 2013, with amounts in thousands:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
Total revenue
$
116,147

 
$
124,181

 
$
329,082


$
416,843


Net income (loss) before non-controlling interest
$
2,760

 
$
(9,249
)
 
$
(4,615
)

$
33,856



These pro forma results for nine months ended September 30, 2014 and 2013 primarily include the related tax impact as well as the adjustments for the intangible assets acquired.

Acquisition-related Costs
Acquisition-related transaction costs for the V3 acquisition were nil and $1.2 million for the three and nine months ended September 30, 2014, respectively. Acquisition-related transaction costs for the three and nine months ended September 30, 2013 were not material. Acquisition-related transaction costs are included in General and administrative expense in the condensed consolidated statements of operations.


13

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 4. Restricted Time Deposits

During the quarter ended September 30, 2014, FXCMJ established a $3.6 million, 0.025%, three months time deposit and a $5.5 million, 0.025%, one year time deposit with Sumitomo Mitsui Banking Corporation (“SMBC”). The time deposits secure a letter of guarantee issued by SMBC on behalf of FXCMJ and may be withdrawn under limited circumstances subject to the financial covenants of the letter of guarantee. As a result of the restriction on withdrawal, the time deposits are presented separately in the condensed consolidated statements of financial condition.


Note 5. Trading Securities

Equity securities purchased with the intent to sell in the near-term are classified as trading securities and are carried at their fair value based on the quoted market prices of the securities in active markets. As of September 30, 2014 and December 31, 2013, trading securities amounted to $0.6 million and nil, respectively.
Net realized and unrealized gains and losses on trading securities are included in Institutional trading revenue in the condensed consolidated statements of operations. For the purpose of determining realized gains and losses, the cost of securities sold is based on specific identification.
For the three and nine months ended September 30, 2014, net realized and unrealized gains or losses related to trading securities were gains of $2.3 million and $3.3 million, respectively. There were no realized or unrealized gains or losses related to trading securities for the three and nine months ended September 30, 2013.

Note 6. Accounts Receivable and Other Receivables

Accounts and other receivables consisted of the following:

 
September 30, 2014

December 31, 2013
Accounts receivable, net
11,323


9,953

Notes receivable


5,992

Tax receivable
9,021


3,861

Total accounts and other receivables
20,344


19,806




Note 7. Equity Method Investments

On December 4, 2012, the Company completed the acquisition of a non-controlling equity interest in an electronic communication network for foreign exchange trading. As the Company holds a 35.3% equity interest and exerts significant influence, the investment is accounted for using the equity method and is included in the institutional segment for purposes of segment reporting (see Note 20). The Company also has a 21.8% equity interest in a developer of FX trading software which is accounted for using the equity method and is included in the corporate segment for purposes of segment reporting.

In conjunction with the V3 acquisition on January 21, 2014, the Company acquired a 66.3% non-controlling interest in a limited liability company ("LLC") that holds a 17.26% interest in a firm that delivers investment information to investment professionals. As of September 30, 2014, the other members of the LLC had not yet consented to the transfer of the 66.3% non-controlling interest to the Company. Until such consent is received, the Company is only entitled to its share of profits, losses and distributions and the Company does not have any right to participate in the management of the business and affairs of the LLC, including participating in major decisions. Accordingly, the Company’s interest is accounted for using the equity method and is included in the institutional segment for purposes of segment reporting (see Note 20).

14

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 7. Equity Method Investments (continued)



    As of September 30, 2014 and December 31, 2013, the Company’s carrying values of equity method investments were $10.4 million and $9.8 million, respectively, and are included as a component of Other assets in the condensed consolidated statements of financial condition.

Loss on equity method investments was $0.4 million and $0.9 million for the three and nine months ended September 30, 2014, respectively, and is included in Loss on equity method investments, net in the condensed consolidated statements of operations. Loss on equity method investments was $0.2 million and $0.7 million for the three and nine months ended September 30, 2013, respectively, and is included in Loss on equity method investments, net in the condensed consolidated statements of operations.

The Company did not receive any dividend distributions from its equity method investments during the three and nine months ended September 30, 2014. Dividends received from the Company's equity method investments during the three and nine months ended September 30, 2013 were not material.

Note 8. 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.

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 shares of Class B common stock do not share in the earnings of the Company and are therefore not participating securities. Accordingly, basic and diluted net earnings per share of Class B common stock have not been presented.

During the nine months ended September 30, 2014 and 2013, stock options granted to certain employees, non-employees and independent directors in the aggregate of 1,039,490 and 7,611,390, respectively, were not included in the computation of earnings per common share because they were antidilutive under the treasury method.

The Company issued 7.2 million shares of the Corporation’s Class A common stock in connection with the Lucid acquisition subject to the achievement of certain targets related to the financial performance of Lucid (the "Profit Targets"). The Lucid sellers achieved the Profit Targets for the first anniversary shares during the quarter ended June 30, 2013 and received 1.2 million shares in June 2013. During the nine months ended September 30, 2014, the Lucid sellers achieved the Profit Targets for the 3.0 million second anniversary shares and these shares are included in the computation of basic and diluted EPS for the three and nine months ended September 30, 2014. If the third anniversary Profit Targets are achieved, the Lucid sellers are entitled to receive 3.0 million shares on the third anniversary of the acquisition date of June 18, 2012. In accordance with ASC 260, the third anniversary shares are considered contingently issuable shares. Accordingly, the third anniversary shares are considered outstanding common shares and included in basic EPS as of the date that all necessary conditions to receiving the shares have been satisfied (that is, when issuance of the shares is no longer contingent) and there is no circumstance under which those shares would not be issued. In accordance with ASC 260, shares are included in diluted EPS if all necessary conditions have been satisfied by the end of the period.

As described in Note 14, in June 2013 FXCM Inc. issued $172.5 million principal amount of 2.25% senior convertible notes maturing on June 15, 2018 (the “Convertible Notes”). The Convertible Notes will be convertible at an initial conversion rate of 53.2992 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 $18.76. 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, 2014, 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.


15

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Earnings per Share (continued)

As described in Note 14, the Company also entered into a warrant transaction whereby the Company 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, 2014, 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 dilutive EPS because they were antidilutive under the treasury method. During the three and nine months ended September 30, 2014, certain members of Holdings exchanged 0.1 million and 1.2 million, respectively, of their Holdings units, on a one-for-one basis, for shares of Class A common stock of the Corporation.

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,
 
  
2014
 
2013
 
2014
 
2013
 
Basic and diluted net income (loss) per share:
  

 
  

 
 
 
 
 
Numerator
  

 
  

 
 
 
 
 
Net income (loss) available to holders of Class A common stock
$
2,392

 
$
(5,122
)
 
$
1,391

 
$
11,862

 
Earnings allocated to participating securities

 

 

 

 
Earnings available for common stockholders
$
2,392

 
$
(5,122
)
 
$
1,391

 
$
11,862

 
Denominator for basic net income per share of Class A common stock
  

 
  

 


 


 
Weighted average shares of Class A common stock
42,963

 
33,718

 
40,108

 
30,983

 
Add dilutive effect of the following:


 


 


 


 
Weighted average of Lucid's first anniversary shares issued on June 18, 2013

 

 

 
738

 
Weighted average of Lucid's second anniversary shares issued on June 18, 2014

 

 
1,381

 

 
Stock options
856

 
751

 
878

 
288

 
Convertible note hedges



 

 

 
Warrants



 

 

 
Dilutive weighted average shares of Class A common stock
43,819

 
34,469

 
42,367

 
32,009

 
 
 
 
 
 
 
 
 
 
Basic income (loss) per share of Class A common stock
$
0.06

 
$
(0.15
)
 
$
0.03

 
$
0.38

 
Diluted income (loss) per share of Class A common stock
$
0.05

 
$
(0.15
)
 
$
0.03

 
$
0.37

 


16

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9. Related Party Transactions

Amounts receivable from, and payable to, related parties are set forth below, with amounts in thousands:
 
September 30, 2014
 
December 31, 2013
Receivables
  

 
  

Advances to Holdings non-controlling members
$
305


$
940

Accounts receivable - Lucid non-controlling members
968



Notes receivable and interest - Lucid non-controlling members
8,203

 

Advances to employees
720

 
826

 
$
10,196

 
$
1,766

Payables
  

 
  

Guarantee agreement ("Monetary Guaranty")
$
6,561


$
8,363

Employees
1,797


708

Shareholders with greater than 5% ownership in the Company


200

Due to Lucid non-controlling members in connection with the allocation of net income to Lucid non-controlling members for services provided
7,159


9,826

Due to Lucid non-controlling members in connection with trade settlements


169

Notes payable to Lucid non-controlling members in connection with the acquisition
7,460


9,800

Tax receivable agreement
151,838


150,257

Follow-on Payment

 
3,672

  
$
174,815

 
$
182,995


The Company has advanced funds for withholding taxes to several non-controlling members of Holdings. The outstanding balance as of September 30, 2014 and December 31, 2013, included in the table above, is included in Accounts receivable, net in the condensed consolidated statements of financial condition.

As described in Note 3, V3 was formed by the Company and the non-controlling members of Lucid. The Company contributed capital of approximately $16.3 million and the non-controlling members of Lucid contributed capital of approximately $16.2 million. The non-controlling members of Lucid borrowed approximately $8.1 million from the Company to assist with funding their portion of the capital contribution, which is included in Notes receivable in the condensed consolidated statements of financial condition as of September 30, 2014. The amount borrowed is due in 2017 and bears interest at the rate of 2% per annum. Interest income related to the notes receivable was not material for the three and nine months ended September 30, 2014 and nil for the three and nine months ended September 30, 2013.

Included in Accounts receivable in the condensed consolidated statements of financial condition is an additional $0.2 million for the Lucid non-controlling members’ capital contributions in connection with the V3 acquisition and $0.8 million of advances to the Lucid non-controlling members.

The Company has advanced funds to several employees. The outstanding balances as of September 30, 2014 and December 31, 2013, included in the table above, are included in Accounts receivable, net in the condensed consolidated statements of financial condition.

Customer account liabilities in the condensed consolidated statements of financial condition include balances for employees and shareholders with greater than 5% ownership in the Company.

UK LTD is party to an arrangement with Global Finance Company (Cayman) Limited (“Global Finance”) and Master Capital Group, S.A.L. (“Master Capital”). A shareholder of the Company beneficially owns more than 90% of the equity of Global Finance and Master Capital. Pursuant to such arrangement, Global Finance and Master Capital are permitted to use the brand name “FXCM” and our technology platform to act as the Company’s local presence in certain countries in the Middle East and North Africa (“MENA”). UK collects and remits to Global Finance and Master Capital fees and commissions charged

17

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9. Related Party Transactions (continued)

by Global Finance and Master Capital to customers in MENA countries. For the three and nine months ended September 30, 2014, these fees and commissions were approximately $0.3 million and $0.9 million, respectively, and are included in the condensed consolidated statements of operations in Referring broker fees. For the three and nine months ended September 30, 2013 these fees and commissions were approximately $0.4 million and$1.2 million, respectively, and are included in Referring broker fees in the condensed consolidated statements of operations. As of September 30, 2014, the shareholder described above beneficially owns less than 5% of the Corporation's Class A common stock.

In August 2012, the Company entered into a master guaranty agreement (the “Method Guaranty”) with Method Credit Fund (“Method”), a Cayman Island company, owned by certain directors and shareholders of the Company, including several of the Company’s executive officers. Pursuant to the Method Guaranty, Method unconditionally guaranteed the obligations of certain counterparties that maintained a margin account with the Company. The Method Guaranty required Method to maintain a cash collateral account held by the Company equal to the aggregate amount of margin extended to all counterparties covered by the Method Guaranty. In exchange for this unconditional guaranty, the Company remitted a fee to Method determined on a counterparty by counterparty basis which was agreed upon by the Company, Method and the respective counterparty. The agreement was terminated in November 2013 and upon termination, the aggregate amount of margin extended under the Method Guaranty was reduced to zero. As of September 30, 2014 and December 31, 2013, the aggregate amount of margin extended under the Method Guaranty was zero. During the three and nine months ended September 30, 2013, no payments were made by Method to the Company to satisfy a guaranteed counterparty obligation. For the three and nine months ended September 30, 2013, fees collected from counterparties and subsequently remitted to Method by the Company were not material and are included in Referring broker fees in the condensed consolidated statements of operations.

In November 2013, the Company entered into a master guaranty agreement (the “Monetary Guaranty”) with Monetary Credit Group LLC (“Monetary”), a newly formed Texas limited liability company, owned by certain directors and shareholders of the Company, including several of the Company’s executive officers. Pursuant to the Monetary Guaranty, Monetary unconditionally guarantees the obligations of certain counterparties that maintain a margin account with the Company. The Monetary Guaranty requires Monetary to maintain a cash collateral account held by the Company equal to the aggregate amount of margin extended to all counterparties covered by the Monetary Guaranty. In exchange for this unconditional guaranty, the Company remits a fee to Monetary determined on a counterparty by counterparty basis which is agreed upon by the Company, Monetary and the respective counterparty. The Monetary Guaranty may be terminated by either the Company or Monetary at any time provided that if Monetary elects to terminate there are no guaranteed obligations outstanding. As of September 30, 2014 and December 31, 2013, the aggregate amount of margin extended under the Monetary Guaranty was $12.9 million and $4.5 million, respectively. During the three and nine months ended September 30, 2014, no payments were made by Monetary to the Company to satisfy a guaranteed counterparty obligation. For the three and nine months ended September 30, 2014, fees collected from counterparties and subsequently remitted to Monetary by the Company under the Monetary Guaranty were $0.3 million and $0.5 million, respectively, and are included in Referring broker fees in the condensed consolidated statements of operations. As of September 30, 2014 and December 31, 2013, the Company held cash collateral related to the Monetary Guaranty in the amount of $6.6 million and $8.4 million, respectively, which is included in Cash and cash equivalents, held for customers and Customer account liabilities in the condensed consolidated statements of financial condition.

Accounts payable and accrued expenses in the condensed consolidated statements of financial condition include a balance of nil and $0.2 million of advances from certain Lucid non-controlling members as of September 30, 2014 and December 31, 2013, respectively. Accounts payable and accrued expenses also include $7.2 million and $9.8 million related to the Allocation of net income to Lucid members for services provided as of September 30, 2014 and December 31, 2013, respectively (see Note 1).

Notes payable of $7.5 million and $9.8 million, included in the condensed consolidated statements of financial condition as of September 30, 2014 and December 31, 2013, respectively, represent the amount borrowed from the Lucid non-controlling members in connection with the Lucid acquisition. Interest expense related to the unsecured promissory notes was not material for the three and nine months ended September 30, 2014 and 2013 (see Note 14).
Other liabilities in the condensed consolidated statements of financial condition include the Faros Follow-on Payment of nil and $3.7 million as of September 30, 2014 and December 31, 2013, respectively (see Note 3).


18

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9. 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. During the nine months ended September 30, 2014 and 2013, certain members of Holdings exchanged 1.2 million and 8.6 million, respectively, of their Holdings units, on a one-for-one basis, for shares of Class A common stock of the Corporation pursuant to the exchange agreement.

Payments under Tax Receivable Agreement

The Corporation entered into a tax receivable agreement with the 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. The aggregate payments due under the tax receivable agreement were $151.8 million and $150.3 million as of September 30, 2014 and December 31, 2013, respectively. During the nine months ended September 30, 2014, payments of $3.7 million were made pursuant to the tax receivable agreement.

Note 10. Stock-Based Compensation

The Company has a long term incentive plan (the “LTIP”) that provides for the grant of stock options to purchase shares of the Corporation’s Class A common stock to its employees (“Employee Stock Options”) and the independent members of the board of directors (“Independent Directors Options”) (collectively, the “Stock Options”). The Employee Stock Options have a contractual term of seven years and a four-year graded vesting schedule. The Independent Directors Options also have a seven-year contractual term but vest on the first anniversary after the grant date. Under the terms of the LTIP, the Company may issue new shares or treasury shares upon share option exercise.

During the nine months ended September 30, 2014, the Company granted 83,490 Independent Director Options and 565,000 Employee Stock Options.

The following table summarizes the Company’s stock options activity as of September 30, 2014 and changes for the nine months then ended:
Options
 
Shares
 
Weighted-
Average Exercise Price
 
Weighted-
Average Remaining Contractual Term
Outstanding at January 1, 2014
 
7,607,800

 
$
13.48

 
4.3
Granted
 
648,490

 
$
16.28

 

Exercised
 
(266,500
)
 
$
13.54

 

Forfeited or expired
 
(209,900
)
 
$
13.10

 

Outstanding as of September 30, 2014
 
7,779,890

 
$
13.72

 
3.81
Vested or expected to vest at September 30, 2014
 
7,704,862

 
$
13.73

 
3.81
Exercisable as of September 30, 2014
 
4,632,150

 
$
13.52

 
3.43

The weighted-average grant date fair value of options granted during the nine months ended September 30, 2014 and 2013 was $5.66 and $5.52, respectively.

As of September 30, 2014 the weighted average period over which compensation cost on non-vested Stock Options is expected to be recognized is 2.2 years and the unrecognized expense is $7.5 million. The fair value of the shares vested under the LTIP during the nine months ended September 30, 2014 and 2013 was $2.2 million and $1.8 million, respectively. Stock-based compensation before income taxes included in Compensation and benefits in the condensed consolidated statements of operations was $2.6 million and $7.5 million for the three and nine months ended September 30, 2014, respectively, for the Employee Stock Options. Stock-based compensation before income taxes included in compensation and benefits in the

19

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 10. Stock-Based Compensation (continued)

condensed consolidated statements of operations was $2.5 million and $7.2 million for the three and nine months ended September 30, 2013, respectively, for the Employee Stock Options. Stock-based compensation before income taxes included in Compensation and benefits in the condensed consolidated statements of operations was $0.1 million and $0.3 million for the three and nine months ended September 30, 2014, respectively, for the Independent Directors Options. Stock-based compensation before income taxes included in Compensation and benefits in the condensed consolidated statements of operations was not material and $0.3 million for the three and nine months ended September 30, 2013, respectively, for the Independent Directors Options. The total compensation cost capitalized and included in Office, communication and computer equipment, net in the condensed consolidated statements of financial condition was $0.9 million and $1.4 million as of September 30, 2014 and December 31, 2013, respectively.

In arriving at stock-based compensation expense, the Company estimates the number of stock-based awards that will be forfeited due to employee turnover. The Company’s forfeiture assumption is based primarily on its turn-over historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the Company’s financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in the Company’s financial statements. The expense the Company recognizes in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period.

Cash proceeds received from the exercise of Stock Options were $2.1 million and $3.6 million for the three and nine months ended September 30, 2014, respectively. There was no income tax benefit realized from the exercise of stock options for the three and nine months ended September 30, 2014. Cash proceeds received from the exercise of Stock Options were $19.2 million and $21.9 million for the three and nine months ended September 30, 2013, respectively. Income tax benefit realized from the exercise of stock options were not material for the three and nine months ended September 30, 2013.

Valuation Assumptions

Calculating the fair value of Employee Stock Options requires estimates and significant judgment. The Company uses the Black-Scholes option pricing model to estimate the fair value of its employee stock options, consistent with the provisions of ASC 718, Stock Compensation (“ASC 718”). The fair value of the Stock Options grant is estimated on the date of the grant using the Black-Scholes option pricing model, and is not remeasured as a result of subsequent stock price fluctuations. Options granted to the Company’s independent directors are considered options granted to employees under ASC 718 as defined therein.

Assumptions used in the Black Scholes valuation model were as follows:
 
Independent Directors Options
 
Independent Directors Options
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2014
 
2013
 
2014
 
2013
 
Expected term in years

 

 
4.00

 
4.00

 
Risk-free interest rate

 

 
1.19
%
 
0.63
%
 
Expected volatility

 

 
44.0
%
 
54.0
%
 
Dividend yield

 

 
1.43
%
 
2.05
%
 
Estimated fair value at grant date

 

 
$
5.39

 
$
4.26

 

20

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 10. Stock-Based Compensation (continued)

 
Employee Stock Options
 
Employee Stock Options
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2014
 
2013
 
2014
 
2013
 
Expected term in years

 
4.75

 
4.75

 
4.75

 
Risk-free interest rate

 
1.28
%
 
1.58
%
 
0.99
%
 
Expected volatility

 
50.0
%
 
45.0
%
 
50.0
%
 
Dividend yield

 
1.33
%
 
1.48
%
 
1.60
%
 
Estimated fair value at grant date

 
$
6.98

 
$
5.70

 
$
5.99

 

Expected term for the Employee Stock Options and Independent Directors Options is based on the simplified method outlined in ASC 718. In accordance with ASC 718, options are considered to be exercised halfway between the average vesting date and the contractual term of each option grant. The simplified method is applicable for “plain-vanilla” stock options, as defined in ASC 718, only if the Company does not have sufficient historical data upon which to estimate an expected term. Given that the Corporation’s Class A common stock has been publicly traded for less than four years, the Company believes that the simplified method is an applicable methodology to estimate the expected term of the options as of the grant date.
    
The risk free interest rates for the Employee Stock Options and Independent Directors Options are based on U.S. Treasury instruments whose terms are consistent with the expected lives of the Stock Options.

Expected volatility is based on a weighing of the historical and implied volatilities of the Company and for a set of public guideline companies deemed comparable to it. The guideline companies selected operate in a similar industry, pursue similar market opportunities, and are subject to similar risks of the Company. Changes in the subjective assumptions required in the valuation models may significantly affect the estimated value of the Company’s Stock Options, the related stock-based compensation expense and, consequently, its results of operations and comprehensive income.

The dividend yield is determined based on the Company’s expected dividend payouts.

The LTIP also provides for other stock based awards (“Other Equity Awards”) which may be granted by the Company’s Executive Compensation Committee (the “Committee”). Pursuant to the terms of the LTIP, the Committee may grant Other Equity Awards that are valued in whole or in part by reference to or that are otherwise based on the fair market value of the Corporation's Class A common stock. The Company did not grant any Other Equity Awards during the three and nine months ended September 30, 2014 or 2013.

Note 11. Stockholders’ Equity

The following table presents the changes in the corporation's Class A common stock shares outstanding during the nine months ended September 30, 2014, with amounts in thousands:

Class A Common Stock
 
As of September 30, 2014
Balance at January 1, 2014
 
44,665

Issued
 
164

Exchange of Holding Units into Class A common stock
 
1,155

Repurchased
 
(46
)
Stock options exercised
 
267

Balance at September 30, 2014
 
46,205


As of September 30, 2014 and December 31, 2013 there were 34 and 41 shares, respectively, of Class B common stock issued and held by members of Holdings.

21

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Minimum Net Capital Requirements
    
The tables below present the capital, as defined by the respective regulatory authority, the minimum capital requirement and the excess capital for the Company's regulated entities as of September 30, 2014 and December 31, 2013, with amounts in millions:

 
September 30, 2014
  
US
 
HK
 
UK LTD
 
Australia
 
ODL
 
FSL
 
FXCMJ
 
Lucid LLP
 
Faros
Capital
$
52.2

 
$
31.9

 
$
109.3

 
$
1.4

 
$
26.2

 
$
41.7

 
$
35.7

 
$
16.6

 
$

Minimum capital requirement
30.4

 
13.5

 
33.0

 
0.9

 
4.3

 
6.6

 
5.2

 
2.7

 

Excess capital
$
21.8

 
$
18.4

 
$
76.3

 
$
0.5

 
$
21.9

 
$
35.1

 
$
30.5

 
$
13.9

 
$


 
December 31, 2013
  
US
 
HK
 
UK LTD
 
Australia
 
ODL
 
FSL
 
FXCMJ
 
Lucid LLP
 
Faros
Capital
$
64.2

 
$
33.6

 
$
86.0

 
$
4.7

 
$
18.4

 
$
34.8

 
$
36.3

 
$
41.8

 
$
0.1

Minimum capital requirement
27.1

 
12.3

 
24.7

 
0.4

 
6.9

 
8.2

 
5.6

 
4.2

 

Excess capital
$
37.1

 
$
21.3

 
$
61.3

 
$
4.3

 
$
11.5

 
$
26.6

 
$
30.7

 
$
37.6

 
$
0.1


Note 13. Litigation

In the ordinary course of business, we may from time to time be involved in litigation and claims incidental to the conduct of our business, including intellectual property claims. In addition, our business is also subject to extensive regulation, which may result in regulatory proceedings against us. We have also been named in various arbitration and civil litigation cases brought by customers seeking damages for trading losses. However, the arbitrations and litigations are presently in various stages of the judicial process and no judgment can be made regarding the ultimate outcome of the arbitrators’ and/or courts' decisions.

In 2012, FXCMJ accrued $2.6 million as an estimate to settle certain trading system matters with the Japan Financials Services Agency. The Company settled this matter for $2.3 million during the first quarter of 2013.

In January 2014, the equity Receiver for a former client of US, Revelation Forex Fund (“Revelation”), its principal, Kevin G. White, and related entities RFF GP, LLC, KGM Capital Management, LLC (collectively “Fund”), filed suit against US, and certain unrelated defendants, in Texas state court. The suit alleges that US is liable under the Texas Securities Act, and the common law: (i) as a “control person;” and, (ii) as an aider and abettor of fraud and a breach of fiduciary obligations; and, (iii) for its negligence. The Receiver seeks joint and several liability for damages in excess of $3.8 million, plus exemplary damages under Texas law, interest, and attorneys’ fees. On February 7, 2014, US filed the equivalent of a motion to dismiss and to compel arbitration based on the mandatory forum selection clause and arbitration agreement in its Client Agreement with the Fund. It also filed an Answer with multiple affirmative defenses. The Trial Court heard argument on US’s motions to dismiss and entered an order denying them without findings of fact or conclusions of law. On March 18, 2014, US filed a Notice of Appeal of the Trial Court's denial of its motion to compel arbitration. On April 16, 2014, US filed a Petition for a Writ of Mandamus to appeal the denial of its motion to dismiss based on the forum selection clause and filed a brief on its appeal seeking to enforce its motion to compel arbitration. Both the Petition and Appeal are pending.

In February 2014, UK and FSL entered into a settlement with the Financial Conduct Authority ("FCA") following an investigation into trade execution practices of UK and FSL in the period from 2006 to 2010, as well as a breach of notification obligations to the FCA. UK and FSL agreed to pay (a) restitution to affected clients up to $9.9 million; and (b) a financial penalty of GBP 4.0 million (USD 6.6 million), together with any unclaimed restitution. UK and FSL accrued $15.0 million in

22

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 13. Litigation (continued)

September 2013, as an estimate to settle this matter recorded in General and administrative expense in the condensed consolidated statements of operations.

During the three and nine months ended September 30, 2014, the Company accrued an additional $0.7 million and $2.5 million, respectively, of additional restitution, recorded in General and administrative expense in the condensed consolidated statements of operations.

In April 2014, the Securities and Futures Commission ("SFC") initiated an investigation relating to HK’s past trade execution practices concerning the handling of price improvements in our trading system prior to August 2010. HK continues to comply with information requests from SFC.

In July 2014, US settled a complaint brought by the National Futures Association (“NFA”) relating to charges of doing business with an unregistered entity and for failing to submit certain trade data reports and was fined $0.2 million. The Commodity Futures Trading Commission (“CFTC”) is also investigating this matter. As of September 30, 2014, the Company accrued $1.0 million related to this matter, recorded in General and administrative expense in the condensed consolidated statements of operations. 

For the outstanding matters referenced above for which a loss is more than remote but less than likely, whether in excess of an accrued liability or where there is no accrued liability, we have estimated a range of possible loss. We believe the estimate of the aggregate range of possible loss in excess of accrued liabilities for such matters is between zero and $4.7 million as of September 30, 2014.
    
In view of the inherent difficulty of predicting the outcome of litigation and claims, we cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be. Furthermore, the above-referenced matters represented in the estimated aggregate range of possible loss will change from time to time and actual results may vary significantly from the current estimate. An adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

Note 14. Debt

Credit Agreement

On December 19, 2011, Holdings entered into a credit agreement (the “Credit Agreement”) with a syndicate of financial institutions. The Credit Agreement, which matures in 2016, is guaranteed by certain subsidiaries of Holdings and is secured by a pledge of all of the equity interests in certain of Holdings’ domestic subsidiaries and 65% of the voting equity interests in certain of its foreign subsidiaries.

As of September 30, 2014, Holdings has commitments from lenders for $150.0 million. As of September 30, 2014 and December 31, 2013, Holdings’ outstanding balance under the Credit Agreement was $30.0 million and nil, respectively.

Under the terms of the Credit Agreement, loans will bear interest at either a Eurodollar Rate or a Base rate (as defined below), at Holdings’ election, plus an applicable margin, based on Holdings’ leverage ratio. In addition, Holdings must pay an annual commitment fee based on Holdings’ leverage ratio on the undrawn commitments under the Credit Agreement. The applicable margin and commitment fees are set forth in the table below:


23

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 14. Debt (continued)


Consolidated Leverage Ratio
 
Commitment Fee
 
Applicable Margin for Eurodollar Loans
 
Applicable Margin for Base Rate Loans
Less than 0.50 to 1.00
 
0.25
%
 
1.75
%
 
0.75
%
Greater than or equal to 0.50 to 1.00 but less than 1.00 to 1.00
 
0.30
%
 
2.00
%
 
1.00
%
Greater than or equal to 1.00 to 1.00 but less than 1.50 to 1.00
 
0.35
%
 
2.25
%
 
1.25
%
Greater than or equal to 1.50 to 1.00, but less than 2.00 to 1.00
 
0.40
%
 
2.50
%
 
1.50
%
Greater than or equal to 2.00 to 1.00
 
0.45
%
 
2.75
%
 
1.75
%

The Base Rate means for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate, as defined in the Credit Agreement, plus 0.5%, (b) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent, Bank of America, N.A., as its prime rate, and (c) the Eurodollar Rate plus 1.00%. The
Eurodollar Rate means the rate per annum equal to (i) the British Bankers Association LIBOR Rate, or (ii) if such rate is not available, the rate per annum determined by the administrative agent.

Interest expense related to borrowings under the Credit Agreement, including the amortization of debt financing costs, included in Interest on borrowings in the consolidated statements of operations was $0.4 million and $1.2 million for the three and nine months ended September 30, 2014, respectively. Interest expense related to borrowings under the Credit Agreement, including the amortization of debt financing costs, included in Interest on borrowings in the consolidated statements of operations was $0.1 million and $1.3 million for the three and nine months ended September 30, 2013, respectively.

Pursuant to covenants in the Credit Agreement, Holdings is required to maintain: excess net capital amount of 125% of adjusted net capital required to be maintained as of the last day of any fiscal quarter for US and UK (see Note 12), Consolidated Interest Coverage Ratio, Consolidated Leverage Ratio and Consolidated Senior Leverage Ratio, each as defined in the Credit Agreement, of 4.00 to 1.00, 2.75 to 1.00 and 1.50 to 1.00, respectively, as of the last day of any fiscal quarter, Net Unhedged Exposure, as defined in the Credit Agreement, of less than 20% of total assets of Holdings and its subsidiaries, and Net Unhedged Non-FX Exposure, as defined in the Credit Agreement, of less than 10% of total assets of Holdings and its subsidiaries. In addition, the Credit Agreement contains certain customary covenants as well as certain customary events of default. As of September 30, 2014, Holdings was in compliance with all material covenants.

During the three and nine months ended September 30, 2014, the weighted average dollar amount of borrowings related to the Credit Agreement were $27.7 million and $37.5 million, respectively, and the weighted average interest rates were 2.90% and 2.68%, respectively. During the three and nine months ended September 30, 2013, the weighted average dollar amount of borrowings related to the Credit Agreement were nil and $46.7 million, respectively, and the weighted average interest rates were nil and 2.44%, respectively.

Senior Convertible Notes due 2018

In June 2013, the Corporation issued $172.5 million principal amount of 2.25% Convertible Notes maturing on June 15, 2018 and received net proceeds of $166.5 million, after deducting the initial purchasers' discount and offering expenses. The Convertible Notes pay interest semi-annually on June 15 and December 15 at a rate of 2.25% per year, commencing December 15, 2013. The indenture governing the Convertible Notes does not prohibit the Company from incurring additional senior debt or secured debt, nor does it prohibit any of its subsidiaries from incurring additional liabilities.

The Convertible Notes will be convertible at an initial conversion rate of 53.2992 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 $18.76. In addition, following certain corporate transactions that occur prior to the maturity date, the Corporation will, in certain circumstances, increase the conversion rate for a holder that elects to convert its Convertible Notes in connection with such corporate transaction. Upon conversion, the Corporation will deliver cash up to the principal amount. With respect to any conversion value in excess of the principal amount, the Corporation will deliver shares of its Class A common stock (unless it elects to deliver cash in lieu of all or a portion of such shares).


24

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 14. Debt (continued)


Holders may convert their notes at their option prior to the close of business on the business day immediately preceding March 15, 2018, only under the following circumstances:

during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2013 (and only during such fiscal quarter), if the last reported sale price of the Corporation's Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day;
during the five business day period immediately after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the offering circular) per $1,000 principal amount of notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the Corporation's Class A common stock and the applicable conversion rate on such trading day;
upon the occurrence of specified corporate events; or
on or after March 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time.

In addition, if the Company undergoes a fundamental change (as defined in the offering circular), holders may, subject to certain conditions, require the Corporation to repurchase their notes for cash at a price equal to 100% of the principal amount of the notes to be purchased, plus accrued and unpaid interest.

Convertible Note Hedges

In connection with the offering of the Convertible Notes, the Company entered into privately negotiated convertible note hedge transactions with certain counterparties (the “Convertible Note Hedge Transaction”). The Convertible Note Hedge Transactions will cover, subject to customary anti-dilution adjustments, the number of shares of the Corporation's Class A common stock that will initially underlie the Convertible Notes. Concurrently with entering into the Convertible Note Hedge Transaction, the Company also entered into a separate, privately negotiated warrant transaction (the “Warrant Transaction”) with the same counterparties, whereby the Company sold to the counterparties warrants to purchase, subject to customary anti-dilution adjustments, up to the same number of shares of the Corporation's Class A common stock as in the Convertible Note Hedge Transaction. The strike price of the Warrant Transaction will initially be $21.24 per share of the Corporation's Class A common stock. Subject to certain conditions, the Company may settle the warrants in cash or on a net-share basis.

The Convertible Note Hedge Transaction and the Warrant Transaction have the effect of increasing the effective conversion price of the Convertible Notes to $21.24 per share. The cost of the Convertible Note Hedge Transaction and the proceeds from the Warrant Transaction was $29.1 million and $18.6 million, respectively. In accordance with Accounting Standards Codification ("ASC") 815, Derivatives and Hedging ("ASC 815"), the Company recorded the cost of the Convertible Note Hedge Transaction and the proceeds from the Warrant Transaction to additional-paid-in-capital in the stockholders' equity in the condensed consolidated statements of financial condition and the recorded values will not be adjusted for subsequent changes in their respective fair values.

The Convertible Note Hedge Transaction and the Warrant Transaction are separate transactions, in each case, entered into by the Company with certain counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's right under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Convertible Hedge Transaction or the Warrant Transaction.

Under ASC 470, Debt ("ASC 470"), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470 on the accounting for the Convertible Notes is that the fair value of the equity component is included in the additional paid-in capital section of stockholders' equity in the Company's condensed consolidated statements of financial condition and the principal amount of the Convertible Notes is reduced by original issue discount to reflect the Convertible Notes fair value at issuance. At issuance, the equity component of the Convertible Notes was valued at $29.1 million and the Convertible Notes were valued at $144.1 million consisting of $172.5 million of principal net of original issuance discount of $29.1 million. The original issue discount will be amortized over the life of the Convertible Notes using the effective interest rate of 6.20%.

25

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 14. Debt (continued)



The balances of the liability and equity components as of September 30, 2014, were as follows, with amounts in thousands:
 
 
September 30, 2014
Liability component - principal
 
$
172,500

Deferred bond discount
 
(22,264
)
Liability component - net carrying value
 
$
150,236

Equity component
 
$
29,101


Interest expense related to the Convertible Notes, included in Interest on borrowings in the condensed consolidated statements of operations was as follows, with amounts in thousands:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest expense - stated coupon rate
$
970


$
970


$
2,911


$
1,272

Interest expense - amortization of deferred bond discount
1,335


1,254


3,932


1,644

Total interest expense - convertible notes
$
2,305


$
2,224


$
6,843


$
2,916



The Company incurred $6.0 million of Convertible Notes issuance cost. Amortization of Convertible Notes issuance costs included in Interest on borrowings in the condensed consolidated statements of operations was $0.3 million and $0.9 million for the three and nine months ended September 30, 2014, respectively. Amortization of Convertible Notes issuance costs included in Interest on borrowings in the condensed consolidated statements of operations was $0.3 million and $0.4 million for the three and nine months ended September 30, 2013. Unamortized Convertible Notes issuance cost was $4.4 million and $5.3 million at September 30, 2014 and December 31, 2013, respectively, and is included in Other assets in the condensed consolidated statements of financial condition.

Notes Payable

In connection with its Lucid acquisition, the Company issued to the Lucid sellers 3.5% unsecured promissory notes in the amounts of $71.4 million and $15.8 million maturing on December 21, 2012. On December 21, 2012, the Company repaid $64.0 million of these notes and issued a series of 2.25%, $22.9 million unsecured promissory notes for the balance. The notes were pre-paid on June 6, 2013 with a portion of the proceeds received from the Convertible Notes issued on June 3, 2013. In the second quarter of 2013, the Lucid purchase price was increased by $15.3 million due to the final determination of tax balances at the acquisition date adjusted during the measurement period. The Company issued six-month 2.25% unsecured promissory notes to the Lucid sellers for the purchase price increase which matured on December 21, 2013. In satisfaction of the matured notes, the Company repaid $5.5 million and issued a series of 2.25% unsecured promissory notes to the Lucid sellers for the balance of $9.8 million which matured on June 6, 2014. In satisfaction of the matured notes, the Company repaid $2.3 million and issued a series of 2.25% unsecured promissory notes for the balance of $7.5 million which matures on December 6, 2014.

Note 15. Commitments and Contingencies

The Company holds an interest in an inactive entity that formerly provided online FX educational services (“Online Courses”). Online Courses meets the definition of a VIE under ASC 810 and the Company was considered the primary beneficiary. The members who owned the remaining interest in Online Courses had put options to sell their interest to the Company upon a change in control of Holdings. A change in control occurs when the number of Holdings units held by unit holders as of the date of the Online Courses operating agreement, November 17, 2008, cease to make up at least 50% of the

26

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 15. Commitments and Contingencies (continued)

voting or vested economic interest securities of Holdings. The change in control occurred during the quarter ended September 30, 2013. Under U.S. GAAP, the value of the put options is recognized upon both the change in control and the exercise of the put options.

On April 2, 2014 and September 9, 2014, thirty-seven percent and sixty-three percent, respectively, of the put options were exercised and Holdings remitted payments in the amount of $1.3 million and $2.3 million, respectively. Based on the status (inactive and no assets) of Online Courses, the put option payments resulted in a charge to earnings, and General and administrative expense in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 includes a charge of $2.3 million and $3.6 million, respectively, related to the put option payments.

Note 16. Exchange Memberships
The Company’s exchange memberships, which represent ownership interests and shares owned in the Chicago Mercantile and the Intercontinental exchanges and provide the Company with the right to conduct business on the exchanges, 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, 2014. At September 30, 2014, ownership interests and shares owned with a cost of $2.8 million and $3.7 million, respectively, are included in Other assets in the condensed consolidated statement of financial condition. There were no exchange memberships held at December 31, 2013.

Note 17. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. These three levels of fair value hierarchy are defined as follows:
Level I:  Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level II:  Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level III:  Unobservable inputs for assets or liabilities.

When Level I inputs are available, those inputs are selected for determination of fair value. To value derivatives that are characterized as Level II and III, the Company uses observable inputs for similar assets and liabilities that are available from pricing services or broker quotes. These observable inputs may be supplemented with other methods, including internal models that result in the most representative prices for assets and liabilities with similar characteristics. Multiple inputs may be used to measure fair value, however, the level of fair value for each derivative and financial asset or liability is based on the highest priority level of input within this fair value hierarchy.


27

FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 17. Fair Value Measurements (continued)


The following tables present the Company's assets and liabilities that are measured at fair value on a recurring basis and the related hierarchy levels, with amounts in thousands:
 
Fair Value Measurements on a Recurring Basis
 
As of September 30, 2014

Quoted Prices in Active Markets for Identical Assets (Level I)

Significant Observable Inputs (Level II)

Significant Unobservable Inputs (Level III)

Counterparty and Cash Collateral Netting
 
Total
Financial Assets:






 
 

Cash and cash equivalents
$
326,730

 
$

 
$

 
$

 
$
326,730

Cash and cash equivalents, held for customers
1,332,399

 

 

 

 
1,332,399

Restricted time deposits


9,120






9,120

Trading securities
633








633

Due from brokers:
 
 
 
 
 
 


 
 
    Exchange traded options
4,049

 

 

 

 
4,049

    Futures contracts
54,369

 

 

 

 
54,369

Netting





 
(54,614
)
 
(54,614
)
Total due from brokers
58,418

 

 

 
(54,614
)
 
3,804

Total assets
$
1,718,180