10-Q 1 glbr-20170331x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________ 
FORM 10-Q
__________________________ 

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number 001-34986
__________________________ 
Global Brokerage, Inc.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
 
27-3268672
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
55 Water Street, FL 50
New York, NY 10041
(Address of principal executive offices) (Zip Code)

Telephone: (212) 897-7660
(Registrant’s telephone number, including area code)
__________________________
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o 
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
x
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 

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

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



Global Brokerage, Inc.
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 31, 2017

Table of Contents

Item Number
Page
PART I — FINANCIAL INFORMATION
 
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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 and as updated in this Quarterly Report. Additional risk factors may be described from time to time in our future filings with the Securities and Exchange Commission. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

ii


PART I

Item 1 — Financial Statements
Global Brokerage, Inc.

Condensed Consolidated Statements of Financial Condition
(Unaudited)

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

 
  

Current assets
  

 
  

Cash and cash equivalents
$
144,100

 
$
200,914

Cash and cash equivalents, held for customers
380,250

 
428,542

Due from brokers
1,716

 
3,363

Accounts receivable, net
6,469

 
5,236

Tax receivable
353

 
199

Assets held for sale
64,607

 
330,497

Total current assets
597,495

 
968,751

Deferred tax asset
429

 
330

Office, communication and computer equipment, net
31,743

 
32,815

Goodwill

 
23,479

Other intangible assets, net
3,583

 
6,285

Other assets
10,300

 
7,364

Total assets
$
643,550

 
$
1,039,024

Liabilities, Redeemable Non-Controlling Interest and Stockholders' Deficit
  

 
  

Current liabilities
  

 
  

Customer account liabilities
$
380,250

 
$
428,542

Accounts payable and accrued expenses
39,223

 
55,491

Due to brokers
2,327

 
1,471

Credit Agreement — Related Party
121,120

 

Other liabilities
1,645

 
2,629

Liabilities held for sale
2,984

 
235,719

Total current liabilities
547,549

 
723,852

Deferred tax liability
283

 
215

Senior convertible notes
163,283

 
161,425

Credit Agreement — Related Party

 
150,516

Other liabilities
6,562

 
7,319

Total liabilities
717,677

 
1,043,327

Commitments and Contingencies (See Notes 14 & 19)


 


Redeemable non-controlling interest
30,313

 
46,364

Stockholders’ Deficit
  

 
  

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

 
61

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

 
1

Additional paid-in capital
390,054

 
389,917

Accumulated deficit
(490,835
)
 
(460,907
)
Accumulated other comprehensive loss
(1,573
)
 
(2,312
)
Total stockholders’ deficit, Global Brokerage, Inc.
(102,292
)
 
(73,240
)
Non-controlling interests
(2,148
)
 
22,573

Total stockholders’ deficit
(104,440
)
 
(50,667
)
Total liabilities, redeemable non-controlling interest and stockholders’ deficit
$
643,550

 
$
1,039,024


See accompanying notes to the unaudited condensed consolidated financial statements.

1


Global Brokerage, Inc.

Condensed Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended March 31,
  
2017
 
2016
 
 
 
 
  
(In thousands, except per share data)
Revenues
 
 
 
Trading revenue
$
45,145

 
$
58,874

Interest income
386

 
335

Brokerage interest expense
(217
)
 
(198
)
Net interest revenue
169

 
137

Other income
550

 
1,383

Total net revenues
45,864

 
60,394

Operating Expenses
 
 
 
Compensation and benefits
13,321

 
19,605

Referring broker fees
7,361

 
9,750

Advertising and marketing
3,643

 
3,530

Communication and technology
5,974

 
7,235

Trading costs, prime brokerage and clearing fees
661

 
641

General and administrative
9,966

 
11,708

Depreciation and amortization
5,218

 
6,297

Goodwill impairment loss
23,917

 

Total operating expenses
70,061

 
58,766

Operating (loss) income
(24,197
)
 
1,628

Other Expense (Income)
 
 
 
Loss (gain) on derivative liabilities — Letter & Credit Agreements
550

 
(110,831
)
Loss on equity method investments, net

 
189

Interest on borrowings
14,361

 
20,553

(Loss) income from continuing operations before income taxes
(39,108
)
 
91,717

Income tax (benefit) provision
(83
)
 
567

(Loss) income from continuing operations
(39,025
)
 
91,150

Loss from discontinued operations, net of tax
(27,699
)
 
(31,974
)
Net (loss) income
(66,724
)
 
59,176

Net (loss) income attributable to non-controlling interest in Global Brokerage Holdings, LLC
(10,184
)
 
23,452

Net loss attributable to redeemable non-controlling interest in FXCM Group, LLC
(16,771
)
 

Net loss attributable to other non-controlling interests
(9,841
)
 
(14,011
)
Net (loss) income attributable to Global Brokerage, Inc.
$
(29,928
)
 
$
49,735

 
 
 
 
(Loss) income from continuing operations attributable to Global Brokerage, Inc.
$
(24,524
)
 
$
61,887

Loss from discontinued operations attributable to Global Brokerage, Inc.
(5,404
)
 
(12,152
)
Net (loss) income attributable to Global Brokerage, Inc.
$
(29,928
)
 
$
49,735

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

 
5,603

Net (loss) income per share attributable to stockholders of Class A common stock of Global Brokerage, Inc. — Basic and Diluted:
 
 
 
Continuing operations
$
(3.99
)
 
$
11.05

Discontinued operations
(0.88
)
 
(2.17
)
Net (loss) income attributable to Global Brokerage, Inc.
$
(4.87
)
 
$
8.88


See accompanying notes to the unaudited condensed consolidated financial statements.

2


Global Brokerage, Inc.

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

 
Three Months Ended March 31,
  
2017
 
2016
 
 
 
 
  
(In thousands)
Net (loss) income
$
(66,724
)
 
$
59,176

Other comprehensive income (loss)
 
 
 
Foreign currency translation income (loss)
1,529

 
(53
)
Other comprehensive income (loss), net of tax
1,529

 
(53
)
Comprehensive (loss) income
(65,195
)
 
59,123

Comprehensive (loss) income attributable to non-controlling interest in Global Brokerage Holdings, LLC
(9,931
)
 
23,431

Comprehensive loss attributable to redeemable non-controlling interest in FXCM Group, LLC
(16,235
)
 

Comprehensive loss attributable to other non-controlling interests
(9,840
)
 
(13,999
)
Comprehensive (loss) income attributable to Global Brokerage, Inc.
$
(29,189
)
 
$
49,691

































See accompanying notes to the unaudited condensed consolidated financial statements.

3


Global Brokerage, Inc.

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


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

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

 
6,143,297

 
$
61

 
8

 
$
1

 
$
(50,667
)
Net loss
(20,025
)
 
(29,928
)
 

 

 

 

 

 

 
(49,953
)
Other comprehensive income, net of tax
254

 

 
739

 

 

 

 

 

 
993

Comprehensive (loss) income
(19,771
)
 
(29,928
)
 
739

 

 

 

 

 

 
(48,960
)
Class A common stock


 


 


 


 


 


 


 


 

Equity-based compensation
45

 

 

 
137

 

 

 

 

 
182

Distributions — non-controlling members
(4,995
)
 

 

 

 

 

 

 

 
(4,995
)
Balance as of March 31, 2017
$
(2,148
)
 
$
(490,835
)
 
$
(1,573
)
 
$
390,054

 
6,143,297

 
$
61

 
8

 
$
1

 
$
(104,440
)
















See accompanying notes to the unaudited condensed consolidated financial statements.


4


Global Brokerage, Inc.

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended March 31,
  
2017
 
2016
  
(In thousands)
Cash Flows From Operating Activities
  

 
  

Net (loss) income
$
(66,724
)
 
$
59,176

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

 
  

Depreciation and amortization
5,918

 
7,244

Equity-based compensation
351

 
522

Deferred tax benefit
(18
)
 
(193
)
Goodwill impairment loss
23,917

 

Loss on classification as held for sale assets
20,440

 
31,511

Loss (gain) on derivative liabilities — Letter & Credit Agreements
550

 
(110,831
)
Amortization of deferred bond discount
1,556

 
1,463

Amortization of deferred financing cost
302

 
302

Amortization of original issue discount — Credit Agreement
3,177

 
8,307

Amortization of issuance fee, deferred financing fee and acquisition costs — Credit Agreement
844

 
2,066

Amortization of deferred waiver fee — Credit Agreement
1,004

 

(Income) loss from equity method investments, net
(478
)
 
36

Gain on disposition of equity method investment

 
(679
)
Gain on sale of customer accounts
(4,414
)
 

Transaction costs associated with sale of customer accounts
(187
)
 

Due to related parties pursuant to tax receivable agreement

 
44

Changes in operating assets and liabilities


 


Cash and cash equivalents, held for customers
281,682

 
52,004

Due from brokers
9,905

 
3,697

Accounts receivable, net
27

 
234

Tax receivable, net
(154
)
 
1,704

Other assets
2,710

 
1,516

Customer account liabilities
(281,686
)
 
(51,892
)
Accounts payable and accrued expenses
(15,608
)
 
(558
)
Other liabilities — Current
(984
)
 

Other liabilities — Non-current
(267
)
 
(430
)
Payments for tax receivable agreement

 
(188
)
Due to brokers
865

 
4,475

Securities sold, not yet purchased

 
218

Foreign currency remeasurement loss
(2,223
)
 
(1,348
)
Net cash (used in) provided by operating activities
(19,495
)
 
8,400

Cash Flows From Investing Activities
  

 
  

Purchases of office, communication and computer equipment, net
(3,827
)
 
(5,558
)
Purchase of intangible assets
(500
)
 
(500
)
Proceeds from sale of customer accounts
5,126

 

Net cash provided by (used in) investing activities
799

 
(6,058
)
Cash Flows From Financing Activities
  

 
  

Distributions to non-controlling members
(4,995
)
 

Principal payments on borrowings under the Credit Agreement
(34,972
)
 

Net cash used in financing activities
(39,967
)
 

Effect of foreign currency exchange rate changes on cash and cash equivalents
3,244

 
1,899

Net (decrease) increase in cash and cash equivalents
(55,419
)
 
4,241

Cash and cash equivalents (1)
  

 
  

Beginning of year
210,292

 
214,640

End of period
$
154,873

 
$
218,881



5



Global Brokerage, Inc.

Condensed Consolidated Statements of Cash Flows - (continued)
(Unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
 
(In thousands)
Supplemental disclosures of cash flow activities
 
 
 
Cash paid (received) for taxes
$
558

 
$
(248
)
Cash paid for interest
$
7,607

 
$
7,686

Supplemental disclosure of non-cash investing activities
 
 
 
Proceeds receivable from sale of customer accounts
$
1,108

 
$

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

 
$
947

Equity-based compensation
$
89

 
$
146

Loss on classification as held for sale assets
$
20,440

 
$
31,511

Gain on sale of customer accounts
$
(4,414
)
 
$

Transaction costs associated with sale of customer accounts
$
(187
)
 
$

Income from equity method investments, net
$
478

 
$
153

Purchases of office, communication and computer equipment, net
$
(127
)
 
$
(47
)
Gain on disposition of equity method investment
$

 
$
679


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



























See accompanying notes to the unaudited condensed consolidated financial statements.


6

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Note 1. Description of Business and Basis of Presentation

Description of Business

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

In connection with its withdrawal from business in the U.S. pursuant to the regulatory settlements described above, the Company implemented a restructuring plan during the first quarter of 2017 that includes the termination of approximately 170 employees, which represents approximately 22% of its global workforce (see Note 20).

Financial Condition

On May 2, 2017, the Nasdaq Stock Market (“Nasdaq”) notified the Corporation that, for the prior 30 consecutive business days, the market value of the Corporation's publicly held shares was less than $15 million, which does not meet the requirement for continued listing under the Nasdaq Global Select Market listing rules. Although this notification has no immediate effect on the Corporation's listing on the Nasdaq Stock Market or on the trading of the Corporation's common stock, the market value of the Corporation's publicly held shares must exceed $15 million for ten consecutive business days between May 2, 2017 and October 30, 2017, to avoid delisting.

If that market-value requirement is not satisfied, Nasdaq will provide written notice that the Corporation's common stock is subject to delisting from the Nasdaq Global Select Market. In that event, the Corporation will either appeal such determination to a hearings panel or submit an application to transfer its securities to the Nasdaq Capital Market. There can be no assurance that the Corporation will remain listed on the Nasdaq Global Select Market after October 31, 2017.

The Corporation's failure to remain listed on the Nasdaq Global Select Market is a Fundamental Change, as defined under the indenture governing its Convertible Notes due 2018 (see Note 13). In the event of a Fundamental Change, each holder of the Convertible Notes has the right, at such holder’s option, to require the Corporation to purchase for cash all of such holder’s notes, in accordance with the requirements and procedures set forth in the indenture, at a purchase price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest.

As of March 31, 2017, the Company's cash and cash equivalents were $154.9 million, including $10.8 million within assets held for sale. However, the Corporation is primarily a holding company with limited business operations, and substantially all of its income generating assets, as well as its cash and cash equivalents, are held by Group and its subsidiaries. Accordingly, the Corporation's only source of cash to pay interest and principal on its outstanding indebtedness, including its obligations under the Convertible Notes, are distributions relating to the Corporation's ownership interests in Group from the net earnings and cash flows generated by Group. The Corporation has only an indirect interest in Group through its 74.5% interest in Holdings, which in turn owns 50.1% of Group. The Amended and Restated Limited Liability Company Agreement of FXCM Group, LLC provides that only a limited percentage of cash distributions by Group are allocated to Holdings (see Note

7

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

12). In addition, earnings and cash flows generated by Group are first applied by Group in conducting its operations, including the service of its debt obligations, after which excess cash flow may be paid to its shareholders.

Because (1) the Corporation does not unilaterally control the amount and timing of cash distributions by Group, (2) Group has its own debt obligations, and (3) Group has its own regulatory capital requirements to conduct its business, the Corporation believes it could be difficult to procure the requisite liquidity should the holders of the Convertible Notes exercise their rights to require the Corporation to purchase their notes. The Corporation's inability to comply with this requirement under the indenture would be an event of default, which also could lead to an event of default under the Leucadia loan agreements (see Note 12). Accordingly, the Company believes that the potential delisting raises substantial doubt about its ability to continue as a going concern as at May 15, 2017, the date that these financial statements were issued. The Corporation is working with financial and legal advisers to explore refinancing alternatives for the Convertible Notes.

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

Discontinued Operations

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

In the first quarter of 2015, the Company commenced the process of disposing of its interests in certain retail and institutional trading businesses. During 2015, the Company completed the sales of FXCM Japan Securities Co., Ltd., Faros Trading LLC, FXCM Asia Limited and the equity trading business of FXCM Securities Limited. The Company remains committed to a plan to sell the remaining institutional businesses, which include Lucid Markets Trading Limited, V3 Markets, LLC and its equity interest in FastMatch, Inc., and continues to actively market these businesses. As a result, the remaining businesses are considered to be held for sale and their results of operations have been reported as discontinued operations (see Note 4).     

Basis of Presentation

Basis of Consolidation

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

At the time of Group's formation (f/k/a "FXCM Newco, LLC"), the Company determined that Group was a VIE and concluded that Holdings was the primary beneficiary of Group, which resulted in the consolidation of the financial results of Group by Holdings. The Company determined that the restructuring transaction with Leucadia effective September 1, 2016 (see Note 12) was a reconsideration event under ASC 810 and re-evaluated the previous conclusion that Group is a VIE. Upon reconsideration, the Company determined that Group remains a VIE and concluded that Holdings is the primary beneficiary of Group since Holdings has the ability to direct the activities of Group that most significantly impact Group’s economic performance and the obligation to absorb losses of Group or the right to receive benefits from Group that could be significant to Group. As a result, Holdings continues to consolidate the financial results of Group.


8

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

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

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

Net income or loss attributable to other non-controlling interests in the condensed consolidated statements of operations represents the portion of earnings or loss attributable to the non-controlling interests of Lucid, V3 and other consolidated entities based on the economic interests held by the non-controlling members. The non-controlling members of Lucid and V3 each hold a 49.9% economic interest in the respective entity. The portion of the 49.9% of Lucid earnings allocated among the non-controlling members of Lucid that is contingent on services being provided is reported as a component of compensation expense and is included in the determination of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations (see Note 4).

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

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


9

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements as well as the reported amount of revenue and expenses during the year. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.

Reclassifications

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

Interim Financial Statements

The Company believes that the condensed consolidated 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, 2016. As permitted under Rule 10-01 of the Securities and Exchange Commission Regulation S-X, certain notes or other financial information are condensed or omitted in the condensed consolidated interim financial statements.

Note 2. Significant Accounting Policies and Estimates

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

Accounting Pronouncements Adopted in 2017

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. ASU No. 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence in ASC 815-15-25-42. The Company adopted ASU No. 2016-06 on January 1, 2017 and applied it on a modified retrospective basis to its existing debt, which did not have an impact on its condensed consolidated financial statements.

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

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 simplifies certain aspects related to the accounting for share-based payment transactions, including income tax consequences, statutory withholding requirements, forfeitures and classification on the statement of cash flows. The Company adopted ASU No. 2016-09 on January 1, 2017. The provisions of ASU No. 2016-09 related to the recognition of excess tax benefits in the statements of operations, classification of excess tax benefits in the statements of cash flows and minimum statutory withholding requirements are not applicable to the Company's existing share-based payment awards for the periods presented. With regard to forfeitures, the Company has elected to continue

10

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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


to estimate the number of share-based awards that are expected to vest, rather than account for forfeitures when they occur. As this approach is consistent with the methodology historically applied by the Company in accounting for forfeitures, there has not been a cumulative-effect adjustment to stockholders' deficit as of January 1, 2017 under the modified retrospective transition method. The adoption of ASU No. 2016-09 did not have a material impact on the Company's condensed consolidated financial statements.

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

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 replaces most existing revenue recognition guidance, and requires companies to recognize revenue based upon the transfer of promised goods and/or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and/or services. In addition, the new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. ASU No. 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard is applied to each prior period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard is recognized as of the adoption date. The FASB has also issued the following standards which clarify ASU No. 2014-09, and have the same effective date and transition requirements as ASU No. 2014-09:

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

The Company plans to adopt ASU No. 2014-09 on January 1, 2018. At this time, the Company has not yet selected a transition method; however, it is in the process of completing its analysis and expects to decide on a transition method in the first half of 2017. The Company initiated a project team to evaluate the impact of this standard, document the considerations for each revenue stream and begin the implementation process. The initial analysis identifying areas that will be impacted by the

11

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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


new guidance is substantially complete. As a result of the initial evaluation performed, the Company does not expect that there will be changes to the timing of recognition of revenue, but does anticipate certain changes to the classification of revenue in the consolidated statements of operations. The Company also expects additional disclosures to be provided in its consolidated financial statements after adoption of the new standard. The Company will continue to monitor additional modifications, clarifications or interpretations by the FASB that may impact its current conclusions, and will provide further updates in future periods.
    
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance in this update amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The guidance in this update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption by public entities is permitted only for certain provisions. The adoption of this standard may result in a cumulative-effect adjustment to the consolidated statement of financial condition as of the beginning of the year of adoption. The Company expects to adopt this guidance beginning January 1, 2018 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 provides guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investments; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current U.S. GAAP does not include specific guidance on these eight cash flow classification issues. The amendments in ASU No. 2016-15 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier adoption is permitted, provided that all the amendments are adopted in the same period. The amendments in this update are to be applied on a retrospective basis. The Company expects to adopt this guidance beginning January 1, 2018 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.

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


12

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 3. Non-Controlling Interests

Redeemable Non-controlling Interest

In connection with the restructuring transaction with Leucadia completed on September 1, 2016 (the "Restructuring Transaction"), the Amended and Restated Letter Agreement dated January 24, 2015 (the "Letter Agreement") was terminated and the parties signed the Amended and Restated Limited Liability Company Agreement of FXCM Group, LLC (see Note 12). In exchange for the Letter Agreement, the Company issued a 49.9% non-controlling membership interest in Group to Leucadia. The remaining 50.1% controlling membership interest in Group is owned by Holdings and Holdings consolidates the financial results of Group, as discussed in Note 1. The non-controlling interest held by Leucadia is redeemable for cash upon a contingent event that is not solely within the control of the Company and, accordingly, is classified outside of permanent equity on the condensed consolidated statements of financial condition as Redeemable non-controlling interest. As of March 31, 2017, the non-controlling interest in Group is not redeemable and is not probable of becoming redeemable and, consequently, has not been adjusted to its estimated redemption value.
    
The Company recorded the following activity related to Redeemable non-controlling interest for the three months ended March 31, 2017, with amounts in thousands:

Balance as of January 1, 2017
$
46,364

Net loss attributable to redeemable non-controlling interest
(16,771
)
Other comprehensive income attributable to redeemable non-controlling interest
536

Equity-based compensation
184

Balance as of March 31, 2017
$
30,313


On the date of the Restructuring Transaction, in exchange for the Letter Agreement Leucadia was issued a redeemable non-controlling interest in Group which had a fair value of $235.5 million, which was also the fair value of the derivative liability related to the Letter Agreement. As a result, the Company derecognized the derivative liability related to the Letter Agreement and recorded the Redeemable non-controlling interest at issuance on September 1, 2016 at $49.3 million, which represented the amount that Leucadia would receive assuming Group were liquidated at its recorded amount determined in accordance with U.S. GAAP and the cash distributed according to the Revised Waterfall at that date (see Note 12). This change was recorded as an equity transaction within Additional paid-in capital of the Corporation for the impact to the controlling and non-controlling unit holders of Holdings based on Holdings' 50.1% controlling financial interest in Group.

Non-controlling Interests

Holdings

The Corporation consolidates the financial results of Holdings and records a non-controlling interest for the economic interest in Holdings not owned by the Corporation. Pursuant to an agreement between the Corporation and Holdings, whenever the Corporation cancels, issues or repurchases shares of its Class A common stock, Holdings enters into an equivalent Holdings Unit transaction with the Corporation so that at all times the number of shares of Class A common stock is equal to the Corporation's membership units in Holdings. In addition, whenever the owners of Holdings prior to the initial public offering ("Existing Unit Holders") (other than the Corporation) exchange their Holdings Units for shares of the Corporation’s Class A common stock, Holdings is required to transfer an equal amount of Holdings Units to the Corporation.
    
    

13

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Non-Controlling Interests - (continued)

There were no changes in the non-controlling and the Corporation's interests in Holdings for the three months ended March 31, 2017:

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

 
2,101,097

 
8,244,394

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

 

 

 
%
 
%
 
%
Balance as of March 31, 2017
6,143,297

 
2,101,097

 
8,244,394

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

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

Note 4. Dispositions

Discontinued Operations    

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

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

Completed Dispositions

The Company finalized its withdrawal from business in the U.S. and terminated its registration as a futures commission merchant and retail foreign exchange dealer in the U.S. effective March 10, 2017. These actions freed approximately $33.0 million of regulatory capital previously held in US, of which $30.0 million was used to pay down the term loan with Leucadia. As a result of the events impacting US, the Company implemented a restructuring plan during the first

14

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)


quarter of 2017. Restructuring charges of approximately $8.4 million, including severance and contract costs, are included as a component of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three months ended March 31, 2017 (see Note 20).

In connection with its withdrawal from business in the U.S., the Company sold substantially all of its U.S.-domiciled customer accounts to Gain Capital Group, LLC (“Gain”) on February 24, 2017 (the "Transaction Closing Date"). Pursuant to the terms of the related asset purchase agreement, Gain will pay proceeds to the Company on a per account basis for each acquired account that opens at least one new trade during the first 153 calendar days following the Transaction Closing Date. During the three months ended March 31, 2017, the Company received or accrued proceeds of $6.2 million related to the sale. After transaction costs and related write-down of intangible assets (see Note 8), the Company recognized a gain of approximately $4.4 million on the sale, which is included as a component of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three months ended March 31, 2017.

As disclosed in prior filings, the Company completed the sales of FXCMJ, the operations of Faros, HK, and the equity trading business of FSL separately during 2015. The combined amount of cash consideration received for these sales was $102.4 million. Consideration related to the sale of Faros' operations to Jefferies Group LLC in April 2015 is determined quarterly pursuant to an earn-out formula based on Faros' results beginning on the closing date and ending on November 30, 2017. Any consideration received will be divided among the Company and the non-controlling members of Faros based on a formula in the sales agreement. No consideration was received during the three months ended March 31, 2017 or 2016.

Transitional Services Agreements

In connection with the sale of FXCMJ in April 2015, the Company provided certain transitional services to the buyer, including use of the Company’s trading platform and data services. Beginning January 1, 2016 for a period of ten months ending on October 31, 2016, the Company received a monthly fee for these services pursuant to the terms of the services agreement. The Company recorded other income for these transitional services of $0.7 million for the three months ended March 31, 2016.
 
In connection with the sale of HK in September 2015, the Company agreed to provide certain transitional services to the buyer, including use of the Company's trading platform, data services and professional support, for no additional consideration for a period of nine months following the date of sale. The Company estimated the value of these services to be approximately $1.0 million and accordingly allocated $1.0 million of proceeds received as deferred income. The deferred income was amortized into other income over the nine-month period following the date of sale.  The Company recorded nil and $0.3 million of other income for these transitional services for the three months ended March 31, 2017 and 2016, respectively. Beginning in June 2016 for a period of nine months ending in March 2017, the Company received a monthly fee for these services pursuant to the terms of the services agreement. The Company recorded other income of $0.3 million related to these service fees for the three months ended March 31, 2017. In March 2017, the trading platform and related support services renewed for an additional one year term.

In connection with the sale of the equity trading business of FSL in December 2015, the Company agreed to provide certain transitional services to the buyer, primarily professional support, for no additional consideration for a period of twelve months following the date of sale. The Company estimated the value of these services to be approximately $0.5 million and accordingly allocated $0.5 million of proceeds received as deferred income. The deferred income was entirely amortized into other income during 2016. The Company recorded $0.2 million of other income for these transitional services for the three months ended March 31, 2016.
    
    

15

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)


The following table presents the major classes of line items constituting the pretax and after-tax profit or loss of discontinued operations for the three months ended March 31, 2017 and 2016, with amounts in thousands:

 
Three Months Ended March 31,
 
2017
 
2016
Revenues
 
 
 
Trading revenue
$
12,635

 
$
17,209

Interest income
196

 
322

Other income
899

 
55

Total net revenues
13,730

 
17,586

Operating Expenses

 
 
Compensation and benefits
9,203

 
5,262

Allocation of net income to Lucid members for services provided
774

 
1,201

Total compensation and benefits
9,977

 
6,463

Referring broker fees
250

 
896

Advertising and marketing
2,097

 
1,938

Communication and technology
1,560

 
1,867

Trading costs, prime brokerage and clearing fees
4,400

 
3,856

General and administrative
6,904

 
2,899

Depreciation and amortization
700

 
947

Total operating expenses
25,888

 
18,866

Operating loss
(12,158
)
 
(1,280
)
Other Income

 
 
Income on equity method investments, net
478

 
153

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

 
679

Loss from discontinued operations before income taxes
(11,680
)
 
(448
)
Net gain on sale of customer accounts
4,414

 

Loss on classification as held for sale before income taxes
(20,440
)
 
(31,511
)
Total loss from discontinued operations before income taxes*
(27,706
)
 
(31,959
)
Income tax (benefit) provision
(7
)
 
15

Loss from discontinued operations, net of tax
$
(27,699
)
 
$
(31,974
)
* Total loss from discontinued operations before income taxes attributable to Global Brokerage, Inc. was $5.4 million and $12.1 million for the three months ended March 31, 2017 and 2016, respectively.

    

16

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)


The following is a summary of the carrying amounts of the assets and liabilities included as part of discontinued operations as of March 31, 2017 and December 31, 2016, with amounts in thousands:
 
As of
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Cash and cash equivalents
$
10,773

 
$
9,378

Cash and cash equivalents, held for customers (1)

 
233,394

Due from brokers (2)
5,832

 
14,090

Accounts receivable, net
99

 
251

Office, communication and computer equipment, net
1,463

 
1,336

Goodwill
223,613

 
223,613

Other intangible assets, net
27,269

 
27,269

Other assets (3) (4)
9,169

 
14,337

Loss recognized on classification as held for sale
(213,611
)
 
(193,171
)
Total assets classified as held for sale on the condensed consolidated statements of financial condition
$
64,607

 
$
330,497

 
 
 
 
 
 
 
 
Liabilities
 
 
 
Customer account liabilities (1)
$

 
$
233,394

Accounts payable and accrued expenses (5)
2,926

 
2,266

Due to brokers (2)
54

 
45

Other liabilities
4

 
14

Total liabilities classified as held for sale on the condensed consolidated statements of financial condition
$
2,984

 
$
235,719

____________________________________
(1) Includes cash and cash equivalents, held for customers and customer account liabilities related to the U.S.-based accounts sold to Gain in February 2017, which were reclassified to assets and liabilities held for sale as of December 31, 2016.
(2) Includes as of March 31, 2017 and December 31, 2016: a) derivative (liabilities)/assets, net of $(0.1) million and $1.6 million, respectively; b) Unsettled spot FX, net of $0.3 million and $0.2 million, respectively; and c) Excess cash collateral of $5.5 million and $12.2 million, respectively.
(3) Includes the Company's exchange memberships, which represent ownership interests and shares owned in CME Group Inc. and provide the Company with the right to conduct business on the exchange. The exchange memberships are recorded at cost or, if an other-than-temporary impairment in value has occurred, at a value that reflects management's estimate of the impairment. There were no exchange membership impairments as of March 31, 2017 or December 31, 2016. In January 2017, the Company sold certain of its ownership interests and shares in CME Group Inc. and recognized a gain of $0.8 million, which is included as a component of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three months ended March 31, 2017. As of March 31, 2017 and December 31, 2016, the carrying values of the ownership interests were $1.9 million and $4.6 million, respectively, and the carrying values of the shares were $1.8 million and $4.8 million, respectively.
(4) Includes the carrying value of the Company's equity interest in FastMatch of $5.1 million and $4.6 million as of March 31, 2017 and December 31, 2016, respectively.
(5) Includes as of March 31, 2017 and December 31, 2016 amounts due related to the allocation of income to Lucid non-controlling members for services provided of $0.9 million and $0.7 million, respectively.

Accounts payable and accrued expenses on the condensed consolidated statements of financial condition as of March 31, 2017 and December 31, 2016 includes approximately $13.7 million and $17.2 million, respectively, related to the U.S. operation that is included in discontinued operations.  The amount at March 31, 2017 primarily includes severance of $3.9 million (see Note 20), $4.2 million related to the digital advertising agreement (see "Sale of Investment" below and Note 14) and legal and other professional fees of $3.1 million.  The amount at December 31 2016 primarily includes regulatory settlements of $7.7 million, variable compensation of $3.7 million and legal and other professional fees of $2.5 million.

17

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Dispositions - (continued)



Sale of Investment

The Company sold its DailyFX business to FX Publications, Inc. on October 28, 2016 (the “Closing Date”) for a cash purchase price of $40.0 million, payable in two installments. DailyFX is the leading portal for FX trading news, charts, indicators and analysis. The first installment of $36.0 million was paid to the Company on the Closing Date and the proceeds were used to pay down the term loan. The second installment of $4.0 million will be paid to the Company on the completion of certain migration requirements. The migration was completed on February 24, 2017 and the final payment is expected in the second quarter of 2017. After transaction costs, the Company recognized a gain of $37.2 million related to the sale which was recorded in earnings in the fourth quarter of 2016. The Company considered the guidance in ASC 205-20 and determined that since the operations and cash flows of the DailyFX business are not clearly distinguishable, it does not represent a component as defined in the guidance. Consequently, the DailyFX business does not qualify for reporting as a discontinued operation in the condensed consolidated financial statements.

In connection with the sale of the DailyFX business, the Company agreed to provide certain transitional services, including the use of facilities, website and other data services, for no additional consideration for a period of three months following the date of sale. Certain services were subsequently extended for an additional three-month period which ended in April 2017 in accordance with the terms of the services agreement. The Company estimated the value of these services to be approximately $0.3 million and accordingly allocated $0.3 million of proceeds received as deferred income, which is included in Accounts payable and accrued expenses on the condensed consolidated statements of financial condition. The deferred income is amortized into other income over the respective three and six-month periods following the date of sale.  The Company recorded $0.1 million of other income for these transitional services for the three months ended March 31, 2017.

In connection with the sale of the DailyFX business, the Company also entered into a three-year digital advertising agreement with FX Publications, Inc. The agreement provides for advertisements to be published on the DailyFX website in exchange for cash consideration payable by the Company in quarterly installments based on the number of leads (as defined in the agreement) generated by those advertisements. Until the website migration related to the sale is completed, the quarterly installment payable is approximately $0.7 million. However, as a result of withdrawing from business in the U.S. and terminating its registration as a retail foreign exchange dealer in the U.S. during the first quarter of 2017, the Company determined that it will no longer benefit from the digital advertising agreement, as it cannot advertise on the DailyFX website or benefit from leads. Consequently, the Company accounted for the remaining contract liability in accordance with ASC 420, Exit or Disposal Cost Obligations ("ASC 420") (see Note 20).

As of March 31, 2017 and December 31, 2016, the Company recorded a liability of $4.2 million and $0.4 million, respectively, related to the digital advertising agreement, which is included in Accounts payable and accrued expenses on the condensed consolidated statements of financial condition. A portion of the amount recorded as of March 31, 2017 ($4.0 million) is included as a component of the Company's restructuring costs (see Note 20). The Company recognized total expense of $4.2 million related to the digital advertising agreement for the three months ended March 31, 2017, which is included in Income (loss) from discontinued operations, net in the condensed consolidated statements of operations.

Note 5. Notes Receivable

In January 2014, in connection with the formation of V3 by the Company and the non-controlling members of Lucid, the non-controlling members of Lucid borrowed approximately $7.9 million from the Company to assist with funding their portion of the capital contribution. The amount borrowed was due in 2017 and bore interest at the rate of 2% per annum. During the second quarter of 2016, management determined that the non-controlling members of Lucid would not be required to repay the notes receivable and the debt would be forgiven. Accordingly, the Company recorded a provision for the debt forgiveness in the amount of $8.2 million for the principal amount thereof plus accrued interest, which was recorded in earnings as a component of General and administrative expense in the second quarter of 2016. Interest income related to the notes receivable was nil and not material for the three months ended March 31, 2017 and 2016, respectively.
    

18

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 6. Equity Method Investments

The Company has a 22.2% equity interest in a developer of FX trading software which is accounted for using the equity method. In the fourth quarter of 2016, the Company recorded an other-than-temporary impairment charge of $2.1 million related to its investment. The carrying value of the Company's equity interest in the FX trading software developer is nil as of both March 31, 2017 and December 31, 2016. The Company's share of the loss of the FX trading software developer was nil and $0.2 million for the three months ended March 31, 2017 and 2016, respectively.

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

The Company has a 34.5% non-controlling equity interest in FastMatch, an electronic communication network for foreign exchange trading, and exerts significant influence. The investment is accounted for using the equity method. As discussed in Note 4, the Company's equity interest in FastMatch is classified as a discontinued operation. The carrying value of the Company's equity interest in FastMatch of $5.1 million and $4.6 million as of March 31, 2017 and December 31, 2016, respectively, is included in assets held for sale on the condensed consolidated statements of financial condition. The Company's share of the income of FastMatch was $0.5 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively, and is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.

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

The Company did not receive any dividend distributions from its equity method investments during the three months ended March 31, 2017 or 2016.

Note 7. Goodwill

As a result of the regulatory events that occurred in February 2017, including the Company's withdrawal from business in the U.S. (see Note 1), it was determined that a triggering event had occurred requiring an assessment of goodwill in the first quarter of 2017. As discussed in Note 2, the Company early adopted ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU No. 2017-04"), for its interim goodwill impairment test performed as of March 31, 2017 (the "Interim Assessment Date").
    
The reporting unit has negative equity at the Interim Assessment Date. As permitted by ASU No. 2017-04, the Company eliminated the qualitative assessment, and performed a comparison of the carrying value of the reporting unit, including goodwill, to its fair value at the Interim Assessment Date. The fair value of the reporting unit was calculated primarily using a market capitalization approach. When the regulatory settlements were announced on February 6, 2017, the share price of the Corporation declined the following day by approximately 50%. As of March 31, 2017, the share price has declined further. The market price of the Corporation’s Convertible Notes also declined the following day by approximately 42%. While the Convertible Notes price has recovered slightly as of March 31, 2017, it is still trading well below par. The Company previously used the income approach to estimate the fair value of the reporting unit. The income approach incorporated the use of a discounted cash flow ("DCF") method whereby the estimated future cash flows and terminal values for the reporting unit

19

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 7. Goodwill - (continued)

are discounted to a present value using a discount rate. The estimated future cash flows are based on management’s forecasts and projections for the reporting unit which are driven by key assumptions, including revenue growth, operating margins, capital expenditures, non-cash expenses and income tax rate. When applicable, various growth rates are assumed for years beyond the current business plan period. The discount rate is based on a market participant weighted-average cost of capital, calculated based on the risk-free rate of return, beta, which is a measure of the level of non-diversifiable risk associated with comparable companies, market equity risk premium and a company-specific risk factor.

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

Under the market capitalization approach, the fair value of the reporting unit was calculated based on the implied equity value of the reporting unit (market capitalization of the Corporation adjusted for the non-controlling interest in Holdings) plus the fair value of the interest-bearing debt (including both the Leucadia Credit Agreement and the Senior convertible notes) and the fair value of Leucadia’s non-controlling membership units in Group. The indicated carrying value of the reporting unit, represented by the negative equity of the reporting unit adjusted for the book value of interest-bearing debt and the fair value of Leucadia’s non-controlling membership units in Group, was compared to the calculated fair value of the reporting unit. The calculated fair value of the reporting unit was less than its indicated carrying value and the Company concluded that goodwill was impaired as of the Interim Assessment Date. The Company recorded an impairment charge of $23.9 million to write down the full value of goodwill of the reporting unit, which is included in Goodwill impairment loss in the condensed consolidated statements of operations for the three months ended March 31, 2017.

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

Foreign currency translation adjustments
 
438

Impairment of goodwill
 
(23,917
)
Balance as of March 31, 2017
 
$



20

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 8. Other Intangible Assets, net

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

 
  

Customer relationships
$
26,908

 
$
(21,732
)
 
$
5,176

 
$
35,460

 
$
(27,522
)
 
$
7,938

Foreign currency translation adjustment
(4,508
)
 
2,315

 
(2,193
)
 
(4,971
)
 
2,718

 
(2,253
)
Total finite-lived intangible assets
22,400

 
(19,417
)
 
2,983

 
30,489

 
(24,804
)
 
5,685

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
License
600

 

 
600

 
600

 

 
600

Total Other intangible assets, net
$
23,000

 
$
(19,417
)
 
$
3,583

 
$
31,089

 
$
(24,804
)
 
$
6,285


In the second quarter of 2015, the Company acquired certain margin FX trading accounts from Citibank, N.A. and Citibank International Limited (the "Citibank Acquisition"). The asset purchase agreement provides for cash consideration payable quarterly based on a pre-determined formula until total payments reach $6.0 million ("Threshold"). Additional cash consideration ("Contingent Consideration") is payable if total payments meet the Threshold before the expiration of an initial 30-month period. The acquired accounts represent customer relationships and are recorded as intangible assets at an initial cost of $6.0 million. Transaction costs incurred were not material. The Contingent Consideration is recognizable when it becomes payable, i.e., when it is probable and reasonably estimable, consistent with the guidance in ASC 450-20, Loss Contingencies, and, to the extent any amounts are recorded, included in the cost basis of the acquired intangible assets. There was no Contingent Consideration recorded as of March 31, 2017. The customer relationships are amortized on a straight-line basis over a weighted-average amortization period of three years.

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

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

Amortization expense from continuing operations included in the condensed consolidated statements of operations was $0.7 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively. Amortization expense related to intangible assets to be disposed of (prior to the date they were determined to be held for sale) is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.        
    
Estimated future amortization expense for intangible assets outstanding as of March 31, 2017 is as follows, with amounts in thousands:
Year Ending December 31,
 
Remainder of 2017
$
1,685

2018
992

2019
306

Thereafter

  
$
2,983



21

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 9. Earnings per Share

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive instruments that were outstanding during the period. The Company uses the treasury stock method in accordance with ASC 260, Earnings per Share (“ASC 260”), to determine diluted EPS. Due to the Corporation's loss from continuing operations for the three months ended March 31, 2017, any potential common shares were not included in the computation of diluted EPS as they would have had an antidilutive effect since the shares would decrease the loss per share. As a result, basic and diluted net loss per share of Class A common stock are equal for this period.

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

In April 2015, the Company entered into an option agreement with a customer as part of a negative equity balance settlement and issued an immediately vested, two-year option to purchase 56,934 shares of the Corporation's Class A common stock. The option had a strike price of $22.50. For the three months ended March 31, 2017 and 2016, the stock option was not included in the computation of diluted EPS because it was antidilutive under the treasury method. The option expired unexercised in April 2017.

In computing diluted EPS, outstanding stock options and other equity awards granted to certain employees, non-employees and independent directors in the aggregate of 707,472 and 747,791 for the three months ended March 31, 2017 and 2016, respectively, were excluded because they were antidilutive under the treasury method.    

As described in Note 13, in June 2013 the Corporation 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 5.32992 shares of the Corporation's Class A common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $187.62. In accordance with ASC 260, the shares of the Corporation's Class A common stock issuable upon conversion of the Convertible Notes are included in the calculation of diluted EPS to the extent that the conversion value of the securities exceeds the principal amount. For diluted EPS purposes, the number of shares of the Corporation's Class A common stock that is necessary to settle such excess is considered issued. For the three months ended March 31, 2017 and 2016, the conversion value did not exceed the principal amount and therefore the conversion effect was not included in the computation of diluted EPS because it was antidilutive under the treasury method.

As described in Note 13, the Corporation also entered into a warrant transaction in June 2013 whereby the Corporation sold to the counterparties warrants to purchase shares of the Corporation's Class A common stock. For the three months ended March 31, 2017 and 2016, the warrants were not included in the computation of diluted EPS because they were antidilutive under the treasury method.
    
Additionally, the non-controlling members of Holdings have the right to exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These shares were also excluded from the computation of diluted EPS because the shares have no impact, or would not be dilutive or antidilutive under the treasury method. There were no exchanges of Holdings Units for shares of the Corporation’s Class A common stock during the three months ended March 31, 2017 or 2016.
    
    

22

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9. Earnings per Share - (continued)


The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations, with amounts in thousands except per share data:
 
Three Months Ended March 31,
  
2017
 
2016
Basic and diluted net (loss) income per share of Class A common stock:
 
 
 
Numerator
 
 
 
(Loss) income from continuing operations attributable to Global Brokerage, Inc.
$
(24,524
)
 
$
61,887

Loss from discontinued operations attributable to Global Brokerage, Inc.
(5,404
)
 
(12,152
)
Net (loss) income available to holders of Class A common stock
(29,928
)
 
49,735

Earnings allocated to participating securities

 

(Loss) income available to common stockholders
$
(29,928
)
 
$
49,735

Denominator
 
 
 
Weighted average shares of Class A common stock
6,143

 
5,603

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

 

Convertible note hedges

 

Warrants

 

Assumed conversion of Holdings Units for Class A common stock

 

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

 
5,603

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


Continuing operations
$
(3.99
)
 
$
11.05

Discontinued operations
(0.88
)
 
(2.17
)
Net (loss) income per share of Class A common stock
$
(4.87
)
 
$
8.88

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


23

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 10. Related Party Transactions

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

 
  

Advances to Holdings non-controlling members
$
3

 
$
3

Advances to employees
55

 
55

Accounts receivable — Liquidity provider
428

 
308

Due from Liquidity provider

 
128

Total receivables from related parties
$
486

 
$
494

 


 


Payables
  

 
  

Employees and equity method investments
$
5

 
$
732

Accounts payable — Equity method investment
15

 
180

Due to liquidity provider
87

 

Accounts payable — Transaction services
187

 

Due to Lucid non-controlling members in connection with the allocation of income to Lucid non-controlling members for services provided
945

 
741

Total payables to related parties
$
1,239

 
$
1,653


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

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

In July 2016, UK LTD entered into a trading relationship with an affiliate of Leucadia to provide CFD pricing for the Company's clients. The Leucadia affiliate is 24.0% owned by Jefferies, LLC ("Jefferies"), a wholly-owned subsidiary of Leucadia. For the three months ended March 31, 2017, the Company recorded trading losses of $0.6 million which is included in Trading revenue in the condensed consolidated statements of operations. As of March 31, 2017 and December 31, 2016, Accounts receivable, net on the condensed consolidated statements of financial condition included a receivable from the Leucadia affiliate of $0.4 million and $0.3 million, respectively, for trading profits. As of March 31, 2017, Due to brokers on the condensed consolidated statements of financial condition includes $0.1 million due to the Leucadia affiliate for open trade positions. As of December 31, 2016, Due from brokers on the condensed consolidated statements of financial condition includes $0.1 million due from the Leucadia affiliate for open trade positions.            
    
In January 2014, in connection with the formation of V3 by the Company and the non-controlling members of Lucid, the non-controlling members of Lucid borrowed approximately $7.9 million from the Company to assist with funding their portion of the capital contribution. The amount borrowed was due in 2017 and bore interest at the rate of 2% per annum. During the second quarter of 2016, management determined that the non-controlling members of Lucid would not be required to repay the notes receivable and the debt would be forgiven. Accordingly, the Company recorded a provision for the debt forgiveness in the amount of $8.2 million for the principal amount thereof plus accrued interest, which was recorded in earnings as a component of General and administrative expense in the second quarter of 2016. Interest income related to the notes receivable was nil and not material for the three months ended March 31, 2017 and 2016, respectively.

During 2015, Lucid acquired ownership interests and shares in CME Group Inc. from one of the non-controlling members of Lucid in a market-based transaction. The total carrying value of the ownership interests and shares was $3.7

24

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 10. Related Party Transactions - (continued)

million as of both March 31, 2017 and December 31, 2016, and are included in Assets held for sale in the condensed consolidated statements of financial condition (see Note 4).

Customer account liabilities in the condensed consolidated statements of financial condition include balances for employees and equity method investments.

Included in Accounts payable and accrued expenses on the condensed consolidated statements of financial condition are amounts payable to an equity method investee for software licensing of $15 thousand and nil as of March 31, 2017 and December 31, 2016, respectively. The Company recorded $0.1 million and nil in the three months ended March 31, 2017 and 2016, respectively, for such software licensing services, which is included in Communications and technology in the condensed consolidated statements of operations.

Also included in Accounts payable and accrued expenses on the condensed consolidated statements of financial condition are amounts payable to an equity method investee for platform trading services of nil and $0.2 million as of March 31, 2017 and December 31, 2016, respectively. The Company recorded $0.1 million and $0.3 million in the three months ended March 31, 2017 and 2016, respectively, for such platform services, which is included in Communication and technology in the condensed consolidated statements of operations.    

In connection with the sale of the U.S.-domiciled accounts to Gain, Jefferies provided transaction services. Compensation for the services is equal to 3% of the gross proceeds. The Company recorded $0.2 million of compensation for such services, which is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three months ended March 31, 2017. Included in Accounts payable and accrued expenses on the condensed consolidated statements of financial condition is $0.2 million payable to Jefferies as of March 31, 2017.

Amounts due related to the allocation of income to Lucid non-controlling members for services provided were $0.9 million and $0.7 million as of March 31, 2017 and December 31, 2016, respectively, and are included in Liabilities held for sale in the condensed consolidated statements of financial condition (see Note 4).

During the three months ended March 31, 2017 and 2016, the Company received nil and $0.1 million, respectively, from FastMatch, an entity in which the Company owns a 34.5% equity interest (see Note 6), for occupancy and operational costs, which is included in Other income in the condensed consolidated statements of operations.

Exchange Agreement

The members of Holdings (other than the Corporation) entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right (subject to the terms of the exchange agreement as described therein) to exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. There was no activity under the exchange agreement during the three months ended March 31, 2017 or 2016.

Equity Distribution Agreement

Pursuant to the terms of the Equity Distribution Agreement (see Note 17), the Company may, from time to time, issue and sell shares of its Class A common stock, having an aggregate offering price of up to $15.0 million, through Jefferies as a sales agent. Jefferies will receive a commission of 3.0% of the gross sales price per share for any shares sold through it as the Company’s sales agent under the Equity Distribution Agreement. For the three months ended March 31, 2017, no amount has been paid to Jefferies. The Company has agreed to reimburse a portion of the expenses that Jefferies incurs in connection with the offer and sale of the common stock. There were no reimbursements of such expenses recorded for the three months ended March 31, 2017.

Payments under Tax Receivable Agreement

The Corporation entered into a tax receivable agreement with the members of Holdings, including former members of Holdings (other than the Corporation) that will provide for the payment by the Corporation to Holdings’ members (other than the Corporation) as defined therein. Assuming sufficient taxable income is generated such that the Corporation fully realizes the

25

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 10. Related Party Transactions - (continued)

tax benefits of the amortization specified in the tax receivable agreement, the aggregate payments currently estimated that would be due are $145.6 million as of both March 31, 2017 and December 31, 2016. During the first quarter of 2015, the Corporation determined that it was not more likely than not that it would benefit from the tax deduction attributable to the tax basis step-up for which a portion of the benefit would be owed to the non-controlling members of Holdings under the tax receivable agreement and reduced the contingent liability under the tax receivable agreement to zero. As of March 31, 2017, the Corporation continues to believe it will not benefit from the tax deduction and the contingent liability remains zero. There were no payments required to be made during the three months ended March 31, 2017 pursuant to the tax receivable agreement. During the three months ended March 31, 2016, a payment of $0.2 million was made pursuant to the tax receivable agreement for the 2014 tax year. The Corporation does not currently expect to make a payment for the 2016 and 2017 tax years.

Leucadia Transaction

Leucadia maintains a 49.9% equity interest in Group, the Company’s operating subsidiary, and has three directors on the board of directors of Group. The Chairman of the board of directors of Group is a managing director of Leucadia. See Note 12 for amounts related to the financing transaction with Leucadia that took place in January 2015 and the various aspects of the restructuring transaction effective September 1, 2016.

Note 11. Net Capital Requirements
    
As described in Note 1, as a result of regulatory settlements reached with the CFTC and the NFA in February 2017, US has withdrawn from business in the U.S. and terminated its registrations with the CFTC and the NFA. Accordingly, US is no longer a regulated entity as of March 31, 2017.

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

 
As of March 31, 2017
  
UK LTD
 
Australia
 
Lucid LLP
Capital
$
81.1

 
$
15.8

 
$
10.1

Minimum capital requirement
20.8

 
1.9

 
5.2

Excess capital
$
60.3

 
$
13.9

 
$
4.9


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

 
$
83.4

 
$
16.6

 
$
10.2

Minimum capital requirement
33.3

 
22.0

 
1.1

 
4.2

Excess capital
$
14.2

 
$
61.4

 
$
15.5

 
$
6.0


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


26

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 12. Leucadia Transaction

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

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

Restructuring Transaction

On September 1, 2016, pursuant to the Restructuring Transaction, the Company and Leucadia agreed to amend the terms of the Credit Agreement and to terminate the Letter Agreement. The Letter Agreement was replaced with an Amended and Restated Limited Liability Company Agreement of FXCM Group, LLC (the “Group Agreement”). The Group Agreement replaces the existing FXCM Newco, LLC agreement and FXCM Newco, LLC was renamed FXCM Group, LLC (“Group”). Pursuant to the Group Agreement, Leucadia acquired a 49.9% membership interest in Group, with Holdings owning the remaining 50.1% membership interest in Group. Group and Holdings also entered into a Management Agreement pursuant to which Holdings manages the assets and day-to-day operations of Group. Additionally, Group adopted the 2016 Incentive Bonus Plan for Founders and Executives (the “Management Incentive Plan”) under which participants are entitled to certain distributions made after the principal and interest under the amended Credit Agreement are repaid. The events described herein are collectively referred to as the "Restructuring Transaction."

Principal Changes to the Credit Agreement

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

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


27

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


Second Amendment to Amended and Restated Credit Agreement

In connection with the CFTC regulatory fine of $7.0 million described in Note 1, Leucadia consented to waive compliance with provisions of the Credit Agreement and the Group Agreement regarding restricted payments (as defined in the Credit Agreement) in order to permit the distribution of $3.5 million of funds from Group to Holdings with respect to the payment of the fine (the “Payment”). Furthermore, the members of Group consented to waive compliance with provisions of the Group Agreement regarding distributions (as defined in the Group Agreement) with respect to the Payment. In consideration for entering into the waiver, the Company agreed to pay a fee to Leucadia in the amount of $3.5 million. On February 22, 2017, Group, Holdings and Leucadia entered into a Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”), which amended the Amended and Restated Credit Agreement dated January 24, 2015. Pursuant to the Second Amendment, the aggregate principal outstanding balance of the Credit Agreement was increased by $3.5 million.

The Company concluded that the terms of the Credit Agreement, as amended by the Second Amendment, and the Credit Agreement dated January 24, 2015 are not substantially different. Accordingly, the Second Amendment is accounted for as a modification on a prospective basis pursuant to ASC 470. The $3.5 million waiver fee is reflected as additional debt discount and is amortized as an adjustment to interest expense over the remaining term of the Credit Agreement, as amended, using the effective interest method.    

Principal Changes to the Letter Agreement

Pursuant to the Restructuring Transaction, the Letter Agreement was terminated effective September 1, 2016 and the parties signed the Group Agreement. The Group Agreement provides that Group will be governed by a six-member board of directors, comprising three directors appointed by Leucadia and three directors appointed by the Company. The Group Agreement specifies the terms according to which the cash distributions and earnings or loss of Group are to be allocated to its members (the “Revised Waterfall”), which is described below. Distributions from Group, other than certain permitted payments, cannot be made under the Group Agreement until the principal and interest due under the amended Credit Agreement are repaid. Pursuant to the Group Agreement, Leucadia and the Company will each have the right to request the sale of Group after January 16, 2018, subject to both Leucadia and the Company accepting the highest reasonable sales price.

Management Agreement

Leucadia has agreed to the Management Agreement with Holdings with an initial term through January 15, 2018, renewable automatically for successive one-year periods, unless terminated by the board of directors (discussed below) or by the manager. In the Management Agreement, a number of rights are granted unilaterally to Holdings as the manager, including the right to create and implement a detailed budget, appoint and terminate the executive officers of Group and make day-to-day decisions in the ordinary course. The rights retained by the board of directors of Group are described below under "Leucadia's membership interest in Group."

On February 2, 2017, Group, Holdings and Leucadia entered into Amendment No. 1 to the Management Agreement (the “Management Agreement Amendment”), which amended the Management Agreement dated September 1, 2016 to provide that the Management Agreement may be terminated by a vote of at least three members of the board of directors of Group after the occurrence of an event for cause or a change of control (as defined). The Management Agreement Amendment did not change the Company's conclusion that Holdings is the primary beneficiary of Group and therefore Holdings continues to consolidate the financial results of Group.


28

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


Management Incentive Plan
    
In connection with the Restructuring Transaction, the Company adopted the 2016 Incentive Bonus Plan for Founders and Executives (the "Management Incentive Plan") effective September 1, 2016 (“Effective Date”) in order to retain and incentivize senior management to maximize cash flow generation and grow the business. The Management Incentive Plan is a long-term incentive program with a five-year vesting period, with 25% vesting on the second anniversary of the Effective Date (the “First Vesting Date”) and an additional 25% vesting on each of the next three anniversaries of the First Vesting Date. Distributions under the plan will be made only after the principal and interest under the amended Credit Agreement are repaid and will equal the following:

10.0% of all distributions or sales proceeds from Group up to $350 million;

12.0% of all distributions or sales proceeds from Group from $350 million to $850 million; and

14.0% of all distributions or sales proceeds from Group above $850 million.

Long-term incentive plan participants will receive their share of any distributions or sales proceeds while unvested. In the event that a participant’s employment is terminated other than for cause or due to a material breach of a restrictive covenant, that participant will receive either a non-voting membership interest in Group that entitles the participant to the same share of distributions that would have otherwise been received under the incentive program, or a lump-sum cash payment, at the Company's discretion. In the event that a participant’s employment is terminated for cause or due to a material breach of a restrictive covenant, that participant will not be entitled to distributions following such termination and will forfeit all interests under the Management Incentive Plan. A termination payment will also be paid upon any change of control of Group. For this purpose, a change of control is defined as an event or series of events by which a person or group acquires 50% or more of the voting interests of Group or if, and at the time that, Leucadia’s percentage of ownership of the value of the equity interests of Group becomes less than 16.67%.

On February 2, 2017, Group and Leucadia entered into an acknowledgment that Leucadia may terminate the Management Incentive Plan on behalf of Group at any time and for any reason in its sole discretion.

The Company determined that the Management Incentive Plan is a share-based payment arrangement that will be accounted for as a liability award under ASC 718. As of the Effective Date, the Company estimated the fair value of the Management Incentive Plan at $53.5 million. The Management Incentive Plan includes a performance condition whereby it only becomes an obligation after the principal and interest under the amended Credit Agreement are fully repaid. Accordingly, the Company will begin recognizing compensation expense for the award over the requisite service period when it becomes probable that the performance condition would be satisfied pursuant to ASC 718. At each reporting date, the Company will estimate the fair value of the Management Incentive Plan and assess the probability of repaying the amended Credit Agreement, and therefore of achieving the performance condition. Once the amended Credit Agreement has been repaid, or it is probable that it would be repaid, compensation expense will be recorded for the estimated fair value of the award, recognized using the accelerated attribution method over the five-year requisite service period.

As of March 31, 2017, the fair value of the Management Incentive Plan was estimated at $26.2 million. As of March 31, 2017, the Company determined that it is not probable that the performance condition would be satisfied and, accordingly, has not recognized compensation expense related to the award for the three months ended March 31, 2017.


29

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


Allocations of Group Distributions (Revised Waterfall)

The contractual provisions in the Group Agreement specify how certain distributions from Group are to be allocated among Leucadia, the Company and the Company’s senior management members participating in the Management Incentive Plan (the “Revised Waterfall”). The distributions include net proceeds received in connection with certain transactions, including sales of assets, dividends or other capital distributions, the sale of Group (whether by merger, stock purchase, sale of all or substantially all of Group’s assets or otherwise), the issuance of any debt or equity securities, and other specified non-ordinary course events, such as certain tax refunds and litigation proceeds. The Revised Waterfall will result in the following distributions from Group:
    
Distributable Amount
Revised Waterfall
Amounts due under the amended Credit Agreement
100% Leucadia
Next $350 million
45% Leucadia / 45% Holdings / 10.0% Management
Next $500 million
79.2% Leucadia / 8.8% Holdings / 12.0% Management
All aggregate amounts thereafter
51.6% Leucadia / 34.4% Holdings / 14.0% Management

Leucadia’s Membership Interest in Group

As indicated above, in exchange for the Letter Agreement, the Company issued a 49.9% non-controlling membership interest in Group to Leucadia. The remaining 50.1% controlling membership interest in Group is owned by Holdings and Holdings consolidates the financial results of Group, as discussed in Note 1.

Leucadia has designated three directors to the board of directors of Group. The Chairman of the board of directors of Group is a managing director of Leucadia. As such, Leucadia participates in certain management, operational and investment decisions of Group, including, but not limited to, issuance of additional membership units or additional ownership interests in Group’s subsidiaries, issuance of debt (subject to certain limited exceptions), sales of assets (subject to certain limited exceptions), merger or consolidation with respect to Group or its subsidiaries, review and approval of the annual summary budget, administration of the Management Incentive Plan, and entry into or exit from a material line of business.

In addition to the allocations of cash distributions and the net profit and net loss of Group described above, Leucadia and its assignees are entitled to tax distributions under the Group Agreement. If any such tax distributions are made, the amounts of such distributions reduce the payments to be made to Leucadia and its assignees pursuant to the Revised Waterfall (other than with respect to the repayment of the loan).

The Group Agreement provides that following January 16, 2018, or, if earlier, at any time following a change of control (defined below), Leucadia and the Company will each have the right to cause the sale of Holdings, Group, and/or any of their respective subsidiaries for cash at the highest reasonably available price, subject to both Leucadia and the Company reasonably accepting such sales price. Upon the occurrence of such event, Group will distribute the cash to Leucadia and the Company in accordance with the Revised Waterfall described above.

In the event of a change of control, at the election of Leucadia or its assignees, Holdings and Group will be required to pay Leucadia and its assignees in cash a one-time payment equal to the fair market value of their economic rights under the Group Agreement. For this purpose, change of control is generally defined as an event or series or events by which (i) a person or group acquires 40% or more of the voting interests of the Corporation, (ii) the Corporation and the existing members of Holdings cease to own 90% of the equity interests of Holdings, (iii) the Corporation ceases to be the sole managing member of Holdings or (iv) subject to certain exceptions, a majority of the members of the board of directors of the Corporation, Holdings or Group cease to be directors during a 12-month period.

The Company evaluated the rights that Leucadia has related to its membership interest in Group under the Group Agreement, including board seats, voting rights and participation in key decisions that affect Group, as described above. The Company concluded that the legal form of the membership interest held by Leucadia is equity. The Company then considered the guidance under ASC 815, Derivatives and Hedging ("ASC 815"), and concluded that none of the features of the Group Agreement are required to be bifurcated and accounted for separately as a derivative.

30

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)



As the economic substance of the instrument significantly changed when Leucadia received non-controlling membership units in Group, the Company concluded that the exchange of the Letter Agreement for the membership interest was an extinguishment of the Letter Agreement. Accordingly, the derivative liability resulting from the Letter Agreement was derecognized as of the date of the Restructuring Transaction. As of the date of the Restructuring Transaction, the estimated fair value of the derivative liability was $235.5 million, which was also the fair value of the non-controlling membership units in Group, resulting in no gain or loss recognized on the exchange. There is no Letter Agreement as of March 31, 2017 or December 31, 2016. The change in the estimated fair value value of the derivative liability for the three months ended March 31, 2016 resulted in a gain of $110.8 million, which was recorded in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the condensed consolidated statements of operations.

The Company considered the guidance in ASC 480 and determined that the non-controlling interest held by Leucadia falls within the scope of ASC 480 because it is redeemable for cash upon a contingent event that is not solely within the control of the Company and, accordingly, is classified outside of permanent equity on the condensed consolidated statements of financial condition as Redeemable non-controlling interest. The Company evaluates the probability of redemption at each reporting date. As of March 31, 2017, the Company concluded that the non-controlling interest in Group is not currently redeemable and it is not probable that it will become redeemable as the likelihood that the redemption feature will be triggered is not considered probable. Accordingly, subsequent adjustment of the Redeemable non-controlling interest to its estimated redemption value is not required pursuant to ASC 480. If the non-controlling interest in Group becomes redeemable, or if redemption becomes probable, an adjustment will be made to adjust the Redeemable non-controlling interest to its estimated redemption value.

The allocation of the cash distributions and earnings or loss from Group based on the Revised Waterfall differs from the controlling and non-controlling members' stated ownership percentages. The Company determined that the Revised Waterfall represents a substantive profit sharing arrangement and concluded that the appropriate methodology for calculating the Redeemable non-controlling interest at each reporting date is the HLBV method. The Company applies the HLBV method using a balance sheet approach. Under the HLBV method, a calculation is performed at each balance sheet date to determine the amount the controlling and non-controlling member would each hypothetically receive assuming Group were liquidated at its recorded amount determined in accordance with U.S. GAAP and the cash distributed according to the Revised Waterfall. The difference between the liquidating distribution amounts calculated at the beginning and end of each period, after adjusting for capital contributions and distributions, is the controlling and non-controlling member's share of the earnings or loss from Group. The non-controlling member's share is reported in Net income (loss) attributable to redeemable non-controlling interest in FXCM Group, LLC in the condensed consolidated statements of operations.

At the date of the Restructuring Transaction, the Redeemable non-controlling interest was initially recorded at its fair value of $235.5 million, and subsequently adjusted for the allocation of the net assets of Group among the controlling and non-controlling members according to the terms of the Revised Waterfall to establish a carrying amount for the non-controlling interest at issuance on September 1, 2016 of $49.3 million (see Note 3). The share of the income or loss and other comprehensive income or loss of Group is allocated to the non-controlling member each reporting period based on the HLBV method. As of March 31, 2017 and December 31, 2016, the carrying amount of the Redeemable non-controlling interest on the condensed consolidated statements of financial condition was $30.3 million and $46.4 million, respectively.
     
Amended and Restated Credit Agreement

Other than the changes described above, the principal terms of the Amended and Restated Credit Agreement (“Credit Agreement”), dated January 24, 2015 remain unchanged. The Credit Agreement provides for a $300.0 million term loan made by Leucadia to Holdings and Group.  The net proceeds of the loan ($279.0 million) were used to replace capital in the Company’s regulated entities to cover negative client balances and pay down outstanding revolving debt. 

The loan matures on January 16, 2018.  The obligations under the Credit Agreement are guaranteed by certain wholly-owned unregulated domestic subsidiaries of the Company and are secured by substantially all of the assets of Holdings and certain subsidiaries of the Corporation, including 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.


31

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


The loan has an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter for so long as it is outstanding, but in no event exceeding 20.5% per annum (before giving effect to any applicable default rate). Beginning with the fourth quarter of 2016, the interest rate on the loan is 20.5%, which is fixed until maturity. Under certain circumstances, a default interest rate will apply on all obligations during the event of default at a per annum rate equal to 2% above the applicable interest rate. The Company has the right to defer any three of the remaining interest payments by paying interest in kind. The Company has not deferred any interest payments during the three months ended March 31, 2017.

The Credit Agreement required the payment of a deferred financing fee in an amount equal to $10.0 million, with an additional fee of up to $30.0 million payable in the event the aggregate principal amount of the term loan outstanding on April 16, 2015 was greater than $250.0 million or the deferred financing fee of $10.0 million (plus interest) had not been paid on or before such date. Prior to April 16, 2015, the Company repaid approximately $56.5 million which reduced the aggregate principal to $243.5 million on April 16, 2015. Additionally, the Company paid the $10.0 million deferred financing fee prior to April 16, 2015. Accordingly, the Company was not obligated to pay the additional $30.0 million fee. As of March 31, 2017, the Company has paid $190.5 million of principal, of which $10.0 million was applied to the deferred financing fee.

The Credit Agreement is subject to various conditions and terms such as requiring mandatory prepayments, including from proceeds of dispositions, condemnation and insurance proceeds, debt issuances, equity issuances, and capital contributions. The Credit Agreement requires monthly payments of the term loan from proceeds received during the immediately preceding calendar month from accounts receivable related to customer debit balances. The loan may be voluntarily prepaid without penalty.    

The Credit Agreement includes a variety of restrictive covenants, including, but not limited to: limitations on the ability to merge, dissolve, liquidate, consolidate or sell, lease or otherwise transfer all or substantially all assets; limitations on the incurrence of liens; limitations on the incurrence of debt by subsidiaries; limitations on the ability of Group to make distributions in respect of its equity interests including distributions to pay interest due on the Company’s convertible notes and limitations on transactions with affiliates, without the prior consent of the lender.  The Credit Agreement also provides for events of default, including, among others: non-payments of principal and interest; breach of representations and warranties; failure to maintain compliance with the other covenants contained in the Credit Agreement; default under other material debt; the existence of bankruptcy or insolvency proceedings; insolvency; and a change of control.

The Company initially allocated the net proceeds of $279.0 million between the Credit Agreement and the Letter Agreement based on their relative fair values. The estimated fair values of the Letter Agreement and the Credit Agreement were determined using an option pricing model based on significant inputs such as volatility and assumptions on public market pricing inputs. The initially recorded amounts for the Letter Agreement and the Credit Agreement were approximately $94.4 million and $184.6 million, respectively, net of an issuance fee of $21.0 million. The effective interest method is used to accrete the initial carrying value of the Credit Agreement liability to the par amount of the debt plus the $10.0 million deferred financing fee using an effective interest rate of 8.0% post-Second Amendment. The fair value of the Letter Agreement’s embedded derivatives that were required to be bifurcated totaled $124.8 million, which is in excess of the amount of proceeds initially allocated to the Letter Agreement, resulting in a charge to earnings of $30.4 million which was recorded in the first quarter of 2015.

The Credit Agreement contains mandatory prepayment provisions in the event of certain events described above. The mandatory prepayments may be triggered by events or circumstances that are not considered clearly and closely related to the Credit Agreement, and, as such, represent embedded derivatives in accordance with ASC 815. Beginning with the second quarter of 2016, a decline in the fair value of the Credit Agreement below par resulted in value attributable to the embedded derivatives. The Company assessed the fair value of the embedded derivatives and bifurcated their value from the fair value of the Credit Agreement.

The fair value of the derivative liability related to the embedded derivatives bifurcated from the Credit Agreement is estimated using the "with" and "without" method. Using this methodology, the Credit Agreement is first valued with the mandatory prepayment provision (the "with" scenario) and subsequently valued without the mandatory prepayment provision (the "without" scenario). The fair value of the derivative liability resulting from the mandatory prepayment provision is estimated as the difference between the fair values of the Credit Agreement in the "with" and "without" scenarios. The fair

32

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


value of the Credit Agreement in the "with" and "without" scenarios was estimated using a risk-neutral valuation model which models expected cash flows over the life of the debt.

As of March 31, 2017 and December 31, 2016, the fair value of the derivative liability resulting from the Credit Agreement was estimated at $6.7 million and $6.2 million, respectively, and is included in Credit Agreement — Related Party on the condensed consolidated statements of financial condition. The change in the estimated fair value of the derivative liability at each reporting date is recorded in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the condensed consolidated statements of operations.
    
The balance of the Credit Agreement, as amended, as of March 31, 2017 and December 31, 2016, was as follows, with amounts in thousands:
 
As of
 
March 31, 2017
 
December 31, 2016
Debt principal
$
123,038

 
$
154,509

Original issue discount
(4,680
)
 
(7,857
)
Deferred waiver fee
(2,496
)
 

Discount — issuance fee
(809
)
 
(1,276
)
Deferred financing fee
(583
)
 
(918
)
Debt issuance costs
(72
)
 
(114
)
Embedded derivative — Mandatory prepayment provision
6,722

 
6,172

Debt — net carrying value
$
121,120

 
$
150,516

    
As of March 31, 2017, the Credit Agreement, as amended, is reflected in current liabilities on the condensed consolidated statements of financial condition based on its maturity date. As of December 31, 2016, the Credit Agreement, as amended, was included in non-current liabilities on the condensed consolidated statements of financial condition.     
    
Interest expense related to the Credit Agreement, as amended, included in Interest on borrowings in the condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016, consists of the following, with amounts in thousands:

 
Three Months Ended March 31,
 
2017
 
2016
Contractual interest
$
7,607

 
$
7,686

Deferred interest
(1,099
)
 
(243
)
Amortization of original issue discount
3,177

 
8,308

Amortization of deferred waiver fee
1,004

 

Amortization of issuance fee discount
467

 
1,142

Amortization of deferred financing fee
335

 
822

Amortization of debt issuance costs
42

 
102

Total interest expense — Credit Agreement
$
11,533

 
$
17,817


The Company records deferred interest for the difference between the current period's contractual rate based on the loan terms and the amortization of the incremental step-up in the contractual rate over the life of the loan.

The Company paid an issuance fee of $21.0 million to Jefferies LLC, an affiliate of Leucadia, at the inception of the loan. The issuance fee was allocated to the Credit Agreement and the Letter Agreement based on the initial fair value of the Credit Agreement and the Letter Agreement. The portion of the issuance fee allocated to the Credit Agreement was $13.9 million and the portion allocated to the Letter Agreement was $7.1 million. The portion allocated to the Credit Agreement is

33

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


reflected as a discount to the Credit Agreement loan balance on the condensed consolidated statements of financial condition, and is recorded to Interest on borrowings using the effective interest method. Subsequent to the date of the Restructuring Transaction, the discount is amortized over the remaining term of the amended Credit Agreement. Amortization of the issuance fee included in Interest on borrowings was $0.5 million and $1.1 million for the three months ended March 31, 2017 and 2016, respectively. The portion allocated to the Letter Agreement was recorded as a charge to earnings in the first quarter of 2015.

The deferred waiver fee of $3.5 million incurred on February 22, 2017 is amortized using the effective interest method over the remaining term of the Credit Agreement, as amended. Amortization of the deferred waiver fee included in Interest on borrowings was $1.0 million for the three months ended March 31, 2017.     

The Company incurred $1.8 million of issuance costs related to both the Credit Agreement and Letter Agreement. The issuance costs were allocated to the Credit Agreement and Letter Agreement based on the initial fair value of the Credit Agreement and Letter Agreement. The issuance costs allocated to the Credit Agreement and Letter Agreement were $1.2 million and $0.6 million, respectively. Issuance costs allocated to the Credit Agreement were recorded as deferred issuance costs and are amortized using the effective interest method. Subsequent to the date of the Restructuring Transaction, the deferred issuance costs are amortized over the remaining term of the Credit Agreement, as amended. Amortization of Credit Agreement issuance costs included in Interest on borrowings was $42.0 thousand and $0.1 million for the three months ended March 31, 2017 and 2016, respectively. The portion allocated to the Letter Agreement was recorded as a charge to earnings in the first quarter of 2015.

The deferred financing fee of $10.0 million is amortized using the effective interest method. Subsequent to the date of the Restructuring Transaction, the deferred financing fee is amortized over the remaining term of the Credit Agreement, as amended. Amortization of the deferred financing fee included in Interest on borrowings was $0.3 million and $0.8 million for the three months ended March 31, 2017 and 2016, respectively. The deferred financing fee was paid on April 1, 2015.          

Note 13. Debt

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 5.32992 shares of the Corporation's Class A common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $187.62. In 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).     

As described in Note 1 under "Financial Condition" the Corporation was notified by Nasdaq that it does not meet the requirements for continued listing under the Nasdaq Global Select Market. If the Corporation fails to satisfy the market listing requirements by October 31, 2017, the Corporation's common stock can be delisted, which constitutes a Fundamental Change as defined in the indenture governing the Convertible Notes. In the event of a Fundamental Change, each holder of the Convertible Notes has the right, at such holder’s option, to require the Corporation to purchase for cash all of such holder’s notes, in accordance with the requirements and procedures set forth in the indenture, at a purchase price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest.


34

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 13. Debt - (continued)

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 $212.40 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 $212.40 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 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 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 Note Hedge Transaction or the Warrant Transaction.

Under 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 additional paid-in capital in the stockholders' equity section of 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%.

The Company incurred $6.0 million of Convertible Notes issuance costs. The debt issuance costs are amortized to interest expense over the life of the Convertible Notes.        
    
The balances of the liability and equity components as of March 31, 2017 and December 31, 2016, were as follows, with amounts in thousands:
 
As of
 
March 31, 2017
 
December 31, 2016
Liability component — principal
$
172,500

 
$
172,500

Deferred bond discount
(7,799
)
 
(9,355
)
Deferred debt issuance costs
(1,418
)
 
(1,720
)
Liability component — net carrying value
$
163,283

 
$
161,425

Equity component
$
29,101

 
$
29,101

    
    

35

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 13. Debt - (continued)

Interest expense related to the Convertible Notes, included in Interest on borrowings in the condensed consolidated statements of operations, consists of the following, with amounts in thousands:

 
Three Months Ended March 31,
 
2017
 
2016
Stated coupon rate
$
970

 
$
970

Amortization of deferred bond discount
1,556

 
1,464

Amortization of debt issuance cost
302

 
302

Total interest expense — Convertible Notes
$
2,828

 
$
2,736


Note 14. Commitments

Digital Advertising Agreement

In connection with the sale of the DailyFX business in October 2016, the Company entered into a three-year digital advertising agreement with FX Publications, Inc. The agreement provides for advertisements to be published on the DailyFX website in exchange for cash consideration payable by the Company in quarterly installments based on the number of leads (as defined in the agreement) generated by those advertisements (see Note 4). Until the website migration related to the sale is completed, the quarterly installment payable is approximately $0.7 million. However, as a result of withdrawing from business in the U.S. and terminating its registration as a retail foreign exchange dealer in the U.S. during the first quarter of 2017, the Company determined that it will no longer benefit from the digital advertising agreement, as it cannot advertise on the DailyFX website or benefit from leads. Consequently, the Company accounted for the remaining contract liability in accordance with ASC 420 (see Note 20).
As of March 31, 2017 and December 31, 2016, the Company recorded a liability of $4.2 million and $0.4 million, respectively, related to the digital advertising agreement, which is included in Accounts payable and accrued expenses on the condensed consolidated statements of financial condition. A portion of the amount recorded as of March 31, 2017 ($4.0 million) is included as a component of the Company's restructuring costs (see Note 20). The Company recognized total expense of $4.2 million related to the digital advertising agreement for the three months ended March 31, 2017, which is included in Income (loss) from discontinued operations, net in the condensed consolidated statements of operations.
Note 15. Derivative Financial Instruments

Derivative financial instruments are accounted for in accordance with ASC 815 and are recognized as either assets or liabilities at fair value on the condensed consolidated statements of financial condition. The Company has master netting agreements with its respective counterparties under which derivative financial instruments are presented on a net-by-counterparty basis in accordance with ASC 210 and ASC 815. The Company enters into futures contracts or CFD contracts to economically hedge the open customer contracts and positions on its CFD business. Futures contracts are exchange traded contracts to either purchase or sell a specific asset at a specified future date for a specified price. CFD contracts are non-exchange traded contracts between a buyer and seller to exchange the difference in the value of an underlying asset at the beginning and end of a stated period. The Company's derivative assets and liabilities associated with futures contracts and CFD contracts on its CFD business are recorded within Due from brokers and Due to brokers, respectively, on the condensed consolidated statements of financial condition and gains or losses on these transactions are included in Trading revenue in the condensed consolidated statements of operations.

Through its subsidiaries Lucid and V3, the Company also engages in hedge trading in its electronic market making and institutional foreign exchange spot and futures markets. As discussed in Note 4, Lucid and V3 are reported as discontinued operations for all periods presented. Accordingly, the gains or losses on hedge trading in the Company's electronic market making and institutional foreign exchange spot and futures markets are included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.

The Company also enters into options, futures, forward foreign currency contracts and commodity contracts through Lucid and V3. Options grant the purchaser, for the payment of a premium, the right to either purchase from or sell to the writer

36

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 15. Derivative Financial Instruments - (continued)

a specified instrument under agreed terms. A forward contract is a commitment to purchase or sell an asset at a future date at a negotiated rate. The Company's derivative assets and liabilities held for trading purposes in connection with Lucid and V3 are recorded in Assets held for sale and Liabilities held for sale, respectively, on the condensed consolidated statements of financial condition. Gains or losses on options, futures and forward contracts held for trading purposes in connection with Lucid and V3 are included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.

The Company is exposed to risks relating to its derivatives trading positions from the potential inability of counterparties to perform under the terms of the contracts (credit risk) and from changes in the value of the underlying financial instruments (market risk). The Company is subject to credit risk to the extent that any counterparty with which it conducts business is unable to fulfill its contractual obligations. The Company manages its trading positions by monitoring its positions with and the credit quality of the financial institutions that are party to its derivative trading transactions. Additionally, the Company's netting agreements provide the Company with the right, in the event of a default of the counterparty (such as bankruptcy or a failure to perform), to net a counterparty’s rights and obligations under the agreement and to liquidate and set off collateral against any net amount owed by the counterparty.         
    
The following tables present the gross and net fair values of the Company's derivative transactions and the related offsetting amount permitted under ASC 210 and ASC 815 as of March 31, 2017 and December 31, 2016. Derivative assets and liabilities are net of counterparty and collateral offsets. Collateral offsets include cash margin amounts posted with brokers. Under ASC 210, gross positive fair values are offset against gross negative fair values by counterparty pursuant to enforceable master netting agreements, with amounts in thousands:

 
 
 
As of March 31, 2017

 
 
Derivative Assets
 
Derivative Liabilities
 
Statement of Financial Condition Location
 
Fair Value
 
Notional
 
Fair Value
 
 Notional
CFD contracts
Due from/Due to brokers(2)
 
$
55

 
$
24,573

 
$
185

 
$
25,531

Futures contracts
Due from/Due to brokers and Assets/liabilities held for sale(1), (2)
 
850

 
175,048

 
3,041

 
309,776

OTC options
Assets/liabilities held for sale(1)
 
457

 
98,514

 
511

 
124,837

Total derivatives, gross
 
 
$
1,362

 
$
298,135

 
$
3,737

 
$
460,144

Netting agreements and cash collateral netting
 
 
(1,362
)
 
 
 
(1,362
)
 
 
Total derivatives, net
 
 
$

 
 
 
$
2,375

 
 
____________________________________
(1) As of March 31, 2017, the aggregate fair values of derivative assets and liabilities, gross attributable to discontinued operations were $0.5 million and $0.5 million, respectively. These amounts are offset by netting agreements of $0.5 million and $0.5 million, respectively.
(2) As of March 31, 2017, the aggregate fair values of derivative assets and liabilities, gross attributable to continuing operations were $0.9 million and $3.2 million, respectively. These amounts are offset by netting agreements of $0.9 million and $0.9 million, respectively.


37

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 15. Derivative Financial Instruments - (continued)


 
 
As of December 31, 2016

 
 
Derivative Assets

Derivative Liabilities

Statement of Financial Condition Location
 
Fair Value
 
Notional
 
Fair Value
 
Notional
Exchange traded options
Assets held for sale(3)
 
$
3,209

 
$
10,562

 
$

 
$

CFD contracts
Due from brokers(4)
 
131

 
24,286

 

 

Futures contracts
Due from/Due to brokers and Assets/liabilities held for sale(3), (4)
 
4,868

 
839,975

 
5,720

 
763,605

OTC options
Assets/liabilities held for sale(3)
 
270

 
24,595

 
225

 
33,249

Total derivatives, gross
 
 
$
8,478

 
$
899,418

 
$
5,945

 
$
796,854

Netting agreements and cash collateral netting
 
 
(4,854
)
 

 
(4,854
)
 

Total derivatives, net
 
 
$
3,624

 


 
$
1,091

 


____________________________________
(3) As of December 31, 2016, the aggregate fair values of derivative assets and liabilities, gross attributable to discontinued operations were $4.3 million and $2.7 million, respectively. These amounts are offset by netting agreements and cash collateral netting of $2.7 million and $2.7 million, respectively.
(4) As of December 31, 2016, the aggregate fair values of derivative assets and liabilities, gross attributable to continuing operations were $4.2 million and $3.3 million, respectively. These amounts are offset by netting agreements and cash collateral netting of $2.2 million and $2.2 million, respectively.

Gains (losses) on the Company's derivative instruments are recorded on a trade date basis. The following table presents the gains (losses) on derivative instruments recognized in the condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016, with amounts in thousands:

 
Three Months Ended March 31,
 
2017
 
2016
Exchange traded options(5)
$
579

 
$
10,354

CFD contracts(6)
(592
)
 
(140
)
Futures contracts(7)
(54,414
)
 
(15,120
)
OTC options(5)
55

 
12

Total
$
(54,372
)
 
$
(4,894
)
____________________________________
(5) Included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.
(6) Included in Trading revenue in the condensed consolidated statements of operations.
(7) The portion included in Income (loss) from continuing operations in the condensed consolidated statements of operations is $(56.1) million and $(7.6) million for the three months ended March 31, 2017 and 2016, respectively.


38

Global Brokerage, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 16. 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. The three levels of fair value hierarchy are defined as follows:

Level 1:  Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2:  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 3:  Unobservable inputs for assets or liabilities.

When Level 1 inputs are available, those inputs are selected for determination of fair value. To value financial assets or liabilities that are characterized as Level 2 and 3, 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 fair value measurement for each financial asset or liability is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.     
    
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 March 31, 2017

Level 1
 
Level 2
 
Level 3
 
Counterparty and Cash
Collateral Netting
 
Total
Financial Assets:
 
 
 
 
 
 
 
 
 
U.S. Treasury bills
$
2,198

 
$

 
$

 
$

 
$
2,198

Derivative assets:
 
 
 
 
 
 
 
 
 
CFD contracts

 
55

 

 

 
55

Futures contracts
850

 

 

 

 
850

OTC options

 
457

 

 

 
457

Netting

 

 

 
(1,362
)
 
(1,362
)
Total derivative assets(1)
850

 
512

 

 
(1,362
)
 

Total assets
$
3,048

 
$
512

 
$

 
$
(1,362
)
 
$
2,198

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Customer account liabilities
$

 
$
380,250

 
$

 
$

 
$
380,250

Derivative liabilities:
 
 
 
 
 
 
 
 
 
CFD contracts

 
185

 

 

 
185

Futures contracts
3,041

 

 

 

 
3,041

OTC options

 
511

 

 

 
511

Netting

 

 

 
(1,362
)
 
(1,362
)
Total derivative liabilities(1)
3,041

 
696

 

 
(1,362
)
 
2,375

Mandatory Prepayment Provision — Credit Agreement

 

 
6,722

 

 
6,722

Total liabilities
$
3,041

 
$
380,946