Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Global Brokerage, Inc.
We have audited Global Brokerage, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Global Brokerage, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Global Brokerage, Inc.
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Global Brokerage, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2016 and our report dated March 17, 2017 expressed an unqualified opinion thereon.
New York, New York
March 17, 2017
Consolidated Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(In thousands, except share data)
|
Assets
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
200,914
|
|
|
$
|
203,854
|
|
Cash and cash equivalents, held for customers
|
661,936
|
|
|
685,043
|
|
Due from brokers
|
3,363
|
|
|
3,781
|
|
Accounts receivable, net
|
5,236
|
|
|
1,636
|
|
Tax receivable
|
199
|
|
|
1,766
|
|
Assets held for sale
|
97,103
|
|
|
233,937
|
|
Total current assets
|
968,751
|
|
|
1,130,017
|
|
Deferred tax asset
|
330
|
|
|
14
|
|
Office, communication and computer equipment, net
|
32,815
|
|
|
35,891
|
|
Goodwill
|
23,479
|
|
|
28,080
|
|
Other intangible assets, net
|
6,285
|
|
|
13,782
|
|
Notes receivable
|
—
|
|
|
7,881
|
|
Other assets
|
7,364
|
|
|
11,421
|
|
Total assets
|
$
|
1,039,024
|
|
|
$
|
1,227,086
|
|
Liabilities, Redeemable Non-Controlling Interest and Stockholders' Deficit
|
|
|
|
Current liabilities
|
|
|
|
Customer account liabilities
|
$
|
661,936
|
|
|
$
|
685,043
|
|
Accounts payable and accrued expenses
|
55,491
|
|
|
38,298
|
|
Due to brokers
|
1,471
|
|
|
1,073
|
|
Other liabilities
|
2,629
|
|
|
—
|
|
Due to related parties pursuant to tax receivable agreement
|
—
|
|
|
145
|
|
Liabilities held for sale
|
2,325
|
|
|
14,510
|
|
Total current liabilities
|
723,852
|
|
|
739,069
|
|
Deferred tax liability
|
215
|
|
|
719
|
|
Senior convertible notes
|
161,425
|
|
|
154,255
|
|
Credit Agreement — Related Party
|
150,516
|
|
|
147,262
|
|
Derivative liability — Letter Agreement
|
—
|
|
|
448,458
|
|
Other liabilities
|
7,319
|
|
|
16,044
|
|
Total liabilities
|
1,043,327
|
|
|
1,505,807
|
|
Commitments and Contingencies (see Notes 21 & 27)
|
|
|
|
|
|
Redeemable non-controlling interest (see Note 3)
|
46,364
|
|
|
—
|
|
Stockholders’ Deficit
|
|
|
|
Class A common stock, par value $0.01 per share; 3,000,000,000 shares authorized, 6,143,297 and 5,602,534 shares issued and outstanding as of December 31, 2016 and 2015, respectively
|
61
|
|
|
56
|
|
Class B common stock, par value $0.01 per share; 1,000,000 shares authorized, 8 and 25 shares issued and outstanding as of December 31, 2016 and 2015, respectively
|
1
|
|
|
1
|
|
Additional paid-in-capital
|
389,917
|
|
|
267,369
|
|
Accumulated deficit
|
(460,907
|
)
|
|
(531,550
|
)
|
Accumulated other comprehensive (loss) income
|
(2,312
|
)
|
|
1,004
|
|
Total stockholders’ deficit Global Brokerage, Inc.
|
(73,240
|
)
|
|
(263,120
|
)
|
Non-controlling interests
|
22,573
|
|
|
(15,601
|
)
|
Total stockholders’ deficit
|
(50,667
|
)
|
|
(278,721
|
)
|
Total liabilities, Redeemable non-controlling interest and stockholders’ deficit
|
$
|
1,039,024
|
|
|
$
|
1,227,086
|
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands, except per share data)
|
Revenues
|
|
|
|
Trading revenue
|
$
|
276,000
|
|
|
$
|
250,042
|
|
Interest income
|
2,517
|
|
|
1,827
|
|
Brokerage interest expense
|
(888
|
)
|
|
(818
|
)
|
Net interest revenue
|
1,629
|
|
|
1,009
|
|
Other income
|
6,427
|
|
|
151,227
|
|
Total net revenues
|
284,056
|
|
|
402,278
|
|
Operating Expenses
|
|
|
|
Compensation and benefits
|
91,377
|
|
|
93,413
|
|
Referring broker fees
|
38,213
|
|
|
54,827
|
|
Advertising and marketing
|
20,849
|
|
|
14,932
|
|
Communication and technology
|
28,262
|
|
|
33,545
|
|
Trading costs, prime brokerage and clearing fees
|
3,585
|
|
|
3,952
|
|
General and administrative
|
75,790
|
|
|
58,436
|
|
Bad debt (recovery) expense
|
(141
|
)
|
|
256,950
|
|
Depreciation and amortization
|
27,289
|
|
|
28,331
|
|
Goodwill impairment loss
|
—
|
|
|
9,513
|
|
Total operating expenses
|
285,224
|
|
|
553,899
|
|
Operating loss
|
(1,168
|
)
|
|
(151,621
|
)
|
Other (Income) Expense
|
|
|
|
(Gain) loss on derivative liabilities — Letter & Credit Agreements
|
(206,777
|
)
|
|
354,657
|
|
Loss on equity method investments, net
|
3,053
|
|
|
467
|
|
Gain on sale of investment
|
(37,157
|
)
|
|
—
|
|
Interest on borrowings
|
77,143
|
|
|
126,560
|
|
Income (loss) from continuing operations before income taxes
|
162,570
|
|
|
(633,305
|
)
|
Income tax provision
|
777
|
|
|
181,198
|
|
Income (loss) from continuing operations
|
161,793
|
|
|
(814,503
|
)
|
Loss from discontinued operations, net of tax
|
(117,860
|
)
|
|
(118,294
|
)
|
Net income (loss)
|
43,933
|
|
|
(932,797
|
)
|
Net income (loss) attributable to non-controlling interest in Global Brokerage Holdings, LLC
|
33,408
|
|
|
(324,595
|
)
|
Net loss attributable to redeemable non-controlling interest in FXCM Group, LLC
|
(2,804
|
)
|
|
—
|
|
Net loss attributable to other non-controlling interests
|
(57,314
|
)
|
|
(54,273
|
)
|
Net income (loss) attributable to Global Brokerage, Inc.
|
$
|
70,643
|
|
|
$
|
(553,929
|
)
|
|
|
|
|
Income (loss) from continuing operations attributable to Global Brokerage, Inc.
|
$
|
96,680
|
|
|
$
|
(513,600
|
)
|
Loss from discontinued operations attributable to Global Brokerage, Inc.
|
(26,037
|
)
|
|
(40,329
|
)
|
Net income (loss) attributable to Global Brokerage, Inc.
|
$
|
70,643
|
|
|
$
|
(553,929
|
)
|
|
|
|
|
Weighted average shares of Class A common stock outstanding — Basic and Diluted
|
5,609
|
|
|
5,087
|
|
|
|
|
|
Net income (loss) per share attributable to stockholders of Class A common stock of Global Brokerage, Inc. — Basic and Diluted:
|
|
|
|
Continuing operations
|
$
|
17.24
|
|
|
$
|
(100.96
|
)
|
Discontinued operations
|
(4.64
|
)
|
|
(7.93
|
)
|
Net income (loss) attributable to Global Brokerage, Inc.
|
$
|
12.60
|
|
|
$
|
(108.89
|
)
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Net income (loss)
|
$
|
43,933
|
|
|
$
|
(932,797
|
)
|
Other comprehensive (loss) income
|
|
|
|
|
|
Foreign currency translation loss
|
(5,198
|
)
|
|
(4,013
|
)
|
Realization of cumulative translation adjustment
|
—
|
|
|
24,923
|
|
Other comprehensive (loss) income, net of tax
|
(5,198
|
)
|
|
20,910
|
|
Comprehensive income (loss)
|
38,735
|
|
|
(911,887
|
)
|
Comprehensive income (loss) attributable to non-controlling interest in Global Brokerage Holdings, LLC
|
31,903
|
|
|
(316,552
|
)
|
Comprehensive loss attributable to redeemable non-controlling interest in FXCM Group, LLC
|
(3,181
|
)
|
|
—
|
|
Comprehensive loss attributable to other non-controlling interests
|
(57,314
|
)
|
|
(54,289
|
)
|
Comprehensive income (loss) attributable to Global Brokerage, Inc.
|
$
|
67,327
|
|
|
$
|
(541,046
|
)
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Brokerage, Inc.
|
|
|
Non-
controlling
Interests
|
|
Retained Earnings (Accumulated Deficit)
|
|
Accumulated Other Comprehensive (Loss) Income
|
|
Additional
Paid-in
Capital
|
|
Common
Stock - Class A
|
|
Common
Stock - Class B
|
|
Total
Stockholders’
Equity (Deficit)
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
|
Balance as of January 1, 2015
|
|
$
|
358,328
|
|
|
$
|
22,379
|
|
|
$
|
(11,879
|
)
|
|
$
|
274,139
|
|
|
4,788,994
|
|
|
$
|
48
|
|
|
34
|
|
|
$
|
1
|
|
|
$
|
643,016
|
|
Net loss
|
|
(378,868
|
)
|
|
(553,929
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(932,797
|
)
|
Other comprehensive income, net of tax
|
|
8,027
|
|
|
—
|
|
|
12,883
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,910
|
|
Comprehensive (loss) income
|
|
(370,841
|
)
|
|
(553,929
|
)
|
|
12,883
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(911,887
|
)
|
Class A common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Class A common stock
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(61
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Equity-based compensation
|
|
2,083
|
|
|
—
|
|
|
—
|
|
|
2,254
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,337
|
|
Exchange of Holdings Units to Class A common stock
|
|
9,157
|
|
|
—
|
|
|
—
|
|
|
(9,165
|
)
|
|
808,672
|
|
|
8
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
Assignment of permitted transferees
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Stock options issued
|
|
123
|
|
|
—
|
|
|
—
|
|
|
198
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
321
|
|
Vesting of restricted stock units
|
|
57
|
|
|
—
|
|
|
—
|
|
|
(57
|
)
|
|
4,929
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Distributions
—
non-controlling members
|
|
(14,507
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,507
|
)
|
Balance as of December 31, 2015
|
|
(15,601
|
)
|
|
(531,550
|
)
|
|
1,004
|
|
|
267,369
|
|
|
5,602,534
|
|
|
56
|
|
|
25
|
|
|
1
|
|
|
(278,721
|
)
|
Net (loss) income
|
|
(23,906
|
)
|
|
70,643
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,737
|
|
Other comprehensive loss, net of tax
|
|
(1,505
|
)
|
|
—
|
|
|
(3,316
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,821
|
)
|
Comprehensive (loss) income
|
|
(25,411
|
)
|
|
70,643
|
|
|
(3,316
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,916
|
|
Class A common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation
|
|
541
|
|
|
—
|
|
|
—
|
|
|
1,155
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,696
|
|
Exchange of Holdings Units to Class A common stock
|
|
5,210
|
|
|
—
|
|
|
—
|
|
|
(5,215
|
)
|
|
535,992
|
|
|
5
|
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
Vesting of restricted stock units
|
|
14
|
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
4,771
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Distributions
—
non-controlling members
|
|
(1,782
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,782
|
)
|
Issuance of redeemable non-controlling interest (see Note 3)
|
|
59,602
|
|
|
—
|
|
|
—
|
|
|
126,622
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
186,224
|
|
Balance as of December 31, 2016
|
|
$
|
22,573
|
|
|
$
|
(460,907
|
)
|
|
$
|
(2,312
|
)
|
|
$
|
389,917
|
|
|
6,143,297
|
|
|
$
|
61
|
|
|
8
|
|
|
$
|
1
|
|
|
$
|
(50,667
|
)
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Cash Flows From Operating Activities
|
|
|
|
|
Net income (loss)
|
$
|
43,933
|
|
|
$
|
(932,797
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
|
|
|
|
|
Depreciation and amortization
|
27,289
|
|
|
40,690
|
|
Equity-based compensation
|
1,857
|
|
|
4,183
|
|
Deferred tax (benefit) expense
|
(781
|
)
|
|
187,978
|
|
Goodwill impairment losses
|
—
|
|
|
64,378
|
|
Loss on classification as held for sale assets
|
126,511
|
|
|
66,660
|
|
(Gain) loss on derivative liabilities — Letter & Credit Agreements
|
(206,777
|
)
|
|
354,657
|
|
Amortization of deferred bond discount
|
5,960
|
|
|
5,607
|
|
Amortization of deferred financing cost
|
1,210
|
|
|
2,653
|
|
Amortization of original issue discount — Credit Agreement
|
28,110
|
|
|
65,577
|
|
Amortization of issuance fee, deferred financing fee and acquisition costs — Credit Agreement
|
7,148
|
|
|
15,677
|
|
Loss on equity method investments, net
|
2,618
|
|
|
1,734
|
|
Gain on disposition of equity method investment
|
(679
|
)
|
|
—
|
|
Provision for debt forgiveness
|
8,249
|
|
|
—
|
|
Gain on business dispositions
|
(37,157
|
)
|
|
(7,313
|
)
|
Transaction costs associated with business dispositions
|
(1,755
|
)
|
|
(7,410
|
)
|
Due to related parties pursuant to tax receivable agreement
|
44
|
|
|
(145,080
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
Cash and cash equivalents, held for customers
|
23,980
|
|
|
299,572
|
|
Due from brokers
|
8,562
|
|
|
10,287
|
|
Accounts receivable, net
|
(42
|
)
|
|
4,749
|
|
Tax receivable, net
|
1,567
|
|
|
92
|
|
Other assets
|
2,494
|
|
|
(5,551
|
)
|
Customer account liabilities
|
(23,107
|
)
|
|
(298,598
|
)
|
Accounts payable and accrued expenses
|
8,621
|
|
|
(5,465
|
)
|
Other liabilities — Current
|
2,629
|
|
|
—
|
|
Other liabilities — Non-current
|
(6,759
|
)
|
|
6,514
|
|
Payments for tax receivable agreement
|
(188
|
)
|
|
(5,352
|
)
|
Due to brokers
|
443
|
|
|
(15,240
|
)
|
Securities sold, not yet purchased
|
(3,624
|
)
|
|
(615
|
)
|
Foreign currency remeasurement gain (loss)
|
1,510
|
|
|
(932
|
)
|
Net cash provided by (used in) operating activities
|
21,866
|
|
|
(293,345
|
)
|
Cash Flows From Investing Activities
|
|
|
|
|
Purchases of office, communication and computer equipment, net
|
(18,226
|
)
|
|
(17,336
|
)
|
Proceeds from sale of office, communication and computer equipment, net
|
—
|
|
|
499
|
|
Purchase of intangible assets
|
(2,000
|
)
|
|
(518
|
)
|
Proceeds from notes receivable
|
—
|
|
|
1,500
|
|
Proceeds from business dispositions, net of cash
|
36,000
|
|
|
65,979
|
|
Payments for equity investment, net of cash acquired
|
(450
|
)
|
|
—
|
|
Net cash provided by investing activities
|
15,324
|
|
|
50,124
|
|
Cash Flows From Financing Activities
|
|
|
|
|
Distributions to non-controlling members
|
(683
|
)
|
|
(14,507
|
)
|
Proceeds from issuance of stock options
|
—
|
|
|
321
|
|
Common stock repurchases
|
—
|
|
|
(1
|
)
|
Payments on borrowings under Revolving credit agreement
|
—
|
|
|
(25,000
|
)
|
Proceeds from the Leucadia Transaction
|
—
|
|
|
279,000
|
|
Principal payments on borrowings under the Credit Agreement
|
(38,175
|
)
|
|
(117,315
|
)
|
Debt acquisition costs — Credit Agreement
|
—
|
|
|
(1,876
|
)
|
Net cash (used in) provided by financing activities
|
(38,858
|
)
|
|
120,622
|
|
Effect of foreign currency exchange rate changes on cash and cash equivalents
|
(2,680
|
)
|
|
(1,575
|
)
|
Net decrease in cash and cash equivalents
|
(4,348
|
)
|
|
(124,174
|
)
|
Cash and cash equivalents
(1)
|
|
|
|
Beginning of year
|
214,640
|
|
|
338,814
|
|
End of year
|
$
|
210,292
|
|
|
$
|
214,640
|
|
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows - (continued)
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Supplemental disclosures of cash flow activities
|
|
|
|
|
Cash paid (received) for taxes
|
$
|
468
|
|
|
$
|
(399
|
)
|
Cash paid for interest
|
$
|
37,761
|
|
|
$
|
31,297
|
|
Supplemental disclosure of non-cash investing activities
|
|
|
|
|
Exchange of Holdings Units for shares of Class A common stock
|
$
|
(5,210
|
)
|
|
$
|
(9,157
|
)
|
Deferred payment for purchase of intangible assets
|
$
|
—
|
|
|
$
|
5,482
|
|
Proceeds receivable from business disposition
|
$
|
4,000
|
|
|
$
|
—
|
|
Supplemental disclosure of non-cash financing activities
|
|
|
|
Non-cash distribution to non-controlling members
|
$
|
1,099
|
|
|
$
|
—
|
|
Exchange of Letter Agreement for Redeemable non-controlling interest
|
$
|
235,509
|
|
|
$
|
—
|
|
The following amounts reflected in the statements of cash flows are included in discontinued operations:
|
|
|
|
Depreciation and amortization
|
$
|
—
|
|
|
$
|
12,359
|
|
Equity-based compensation
|
$
|
—
|
|
|
$
|
1,494
|
|
Deferred tax expense
|
$
|
—
|
|
|
$
|
6,181
|
|
Goodwill impairment losses
|
$
|
—
|
|
|
$
|
54,865
|
|
Loss on classification as held for sale assets
|
$
|
126,511
|
|
|
$
|
66,660
|
|
Gain on business dispositions
|
$
|
—
|
|
|
$
|
7,313
|
|
Transaction costs associated with business dispositions
|
$
|
—
|
|
|
$
|
(7,410
|
)
|
Gain (loss) on equity method investments, net
|
$
|
435
|
|
|
$
|
(1,267
|
)
|
Purchases of office, communication and computer equipment, net
|
$
|
(182
|
)
|
|
$
|
(338
|
)
|
Proceeds from sale of office, communication and computer equipment
|
$
|
—
|
|
|
$
|
499
|
|
Proceeds from business dispositions, net of cash
|
$
|
—
|
|
|
$
|
65,979
|
|
Gain on disposition of equity method investment
|
$
|
679
|
|
|
$
|
—
|
|
(1)
Includes Cash and cash equivalents from continuing and discontinued operations
See accompanying notes to the consolidated financial statements.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Organization
Global Brokerage, Inc. (“Global Brokerage” or the “Corporation”) (f/k/a “FXCM Inc.”), a Delaware holding company incorporated on
August 10, 2010
, 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 Corporation operates through its managing membership interest in Global Brokerage Holdings, LLC (“Holdings”) (f/k/a “FXCM Holdings, LLC”), the Corporation’s sole operating asset. Holdings is a majority-owned, controlled and consolidated subsidiary of the Corporation. In January 2015, Holdings transferred its interest in its operating subsidiaries to FXCM Newco, LLC (“Newco”), which was then a wholly-owned subsidiary of Holdings, formed in connection with the financing arrangement entered into with Leucadia National Corporation (“Leucadia”) (“the Leucadia Transaction”) (see Note 19). On September 1, 2016, the Company completed a restructuring transaction with Leucadia (the "Restructuring Transaction") (see Note 19). In connection with the Restructuring Transaction, the financing arrangement with Leucadia was amended, Newco was renamed FXCM Group, LLC ("Group") and Leucadia acquired a
49.9%
membership interest in Group, with Holdings owning the remaining
50.1%
membership interest in Group. Group is a majority-owned, controlled and consolidated subsidiary of Holdings. As used in these notes, the term “Company” collectively refers to the Corporation, Holdings, Group and subsidiaries of Group.
As an online provider of FX trading, CFD trading, spread betting and related services, the Company offers its retail and institutional customers access to global over-the-counter FX markets. In a FX trade, a participant buys one currency and simultaneously sells another, a combination known as a “currency pair.” The Company’s proprietary trading platform presents its FX customers with the price quotations on several currency pairs from a number of global banks, financial institutions and market makers (“FX market makers”). The Company’s primary FX offering to retail customers is what is referred to as agency execution or an agency model. Under the agency model, when a customer executes a trade on the price quotation presented by the FX market maker, the Company acts as a credit intermediary, or a riskless principal, simultaneously entering into a trade with the customer and the FX market maker. This agency model has the effect of hedging our positions and eliminating market risk exposure. The Company earns trading revenue from fees charged as a markup to the price provided by the FX market makers or commissions, not trading profit or losses. We offer a dealing desk, or principal, execution model to smaller retail clients. Under the dealing desk model, the Company maintains its trading position and does not offset the trade with another party on a one for one basis. As a result, the Company may incur trading losses under the dealing desk model from changes in the prices of currencies where the Company is not hedged. Additionally, the Company offers its customers the ability to trade CFDs and spread betting through its United Kingdom (“U.K.”) subsidiaries. CFDs, primarily a dealing desk offering, allow for the exchange of the difference in the value of a particular asset such as a stock index or oil or gold contracts, between the time at which a contract is opened and the time at which it is closed. Spread betting allows our customers to bet on the price fluctuations of various financial markets such as FX, indices, oil and metals.
The Company’s trading revenue also
includes commission income generated by facilitating spot FX trades on behalf of institutional customers. The Company offers FX trading services to retail FX and CFD brokers, small hedge funds and emerging market banks, on an agency model basis, through its FXCM Pro offering. The Company also offers Prime of Prime services (“FXCM Prime”) where it provides small and medium sized high frequency trading customers access to prime broker services under the Company’s name. These services allow customers to obtain optimal prices offered by external banks and other price providers. The counterparties to these trades are external financial institutions that hold customer account balances and settle the transactions. The Company receives commissions for providing these services without taking any market or credit risk. The Company, through its
50.1%
controlling interest in Lucid Markets Trading Limited, is also an electronic market-maker and trader in the institutional FX market. In addition, through its
50.1%
controlling interest in V3 Markets, LLC, the Company has expanded its market making and electronic trading into other asset classes. As discussed below, Lucid Markets Trading Limited and V3 Markets, LLC are included in the Company’s businesses to be disposed of as of December 31, 2016.
Discontinued Operations
During the first quarter of 2015, the Company commenced the process of disposing of its interests in certain retail and institutional trading businesses. The retail businesses are FXCM Asia Limited, FXCM Japan Securities Co., Ltd. and the equity trading business of FXCM Securities Limited. The institutional businesses are Faros Trading LLC, Lucid Markets Trading Limited, V3 Markets, LLC and the Company’s equity interest in FastMatch, Inc. (“FastMatch”). In April 2015, the Company completed the sale of FXCM Japan Securities Co., Ltd. and Faros Trading LLC. In September 2015, the Company completed the sale of FXCM Asia Limited. In December 2015, the Company completed the sale of the equity trading business of FXCM Securities Limited. The Company remains committed to a plan to sell the remaining businesses which continue to be actively
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Organization - (continued)
marketed. As a result, these businesses are considered to be held for sale and their results of operations have been reported as discontinued operations (see Note 4).
Note 2. Significant Accounting Policies and Estimates
Basis of Presentation
Basis of Consolidation
The accompanying 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 Newco's formation in connection with the Leucadia Transaction, the Company determined that Newco was a VIE and concluded that Holdings was the primary beneficiary of Newco, which resulted in the consolidation of the financial results of Newco by Holdings. The Company determined that the Restructuring Transaction (see Note 19) is a reconsideration event under ASC 810 and re-evaluated the previous conclusion that Newco (subsequently renamed to Group) is a VIE. Upon reconsideration, the Company determined that Group remains a VIE and concluded that Holdings is the primary beneficiary of Group since Holdings has the ability to direct the activities of Group that most significantly impact Group’s economic performance and the obligation to absorb losses of Group or the right to receive benefits from Group that could be significant to Group. As a result, Holdings continues to consolidate the financial results of Group.
The Corporation records a non-controlling interest for the economic interest in Holdings not owned by the Corporation. The Corporation’s and the non-controlling unit holders’ economic interest in Holdings was
74.5%
and
25.5%
, respectively, as of December 31,
2016
. The Corporation’s and the non-controlling unit holders’ economic interest in Holdings was
67.9%
and
32.1%
, respectively, as of December 31,
2015
.
The Company’s 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”)
|
FXCM Asia Limited
(2)
|
|
(“HK”)
|
Forex Capital Markets Limited
|
|
(“UK LTD”)
|
FXCM Australia Pty. Limited
|
|
(“Australia”)
|
FXCM Securities Limited
(3)
|
|
(“FSL”)
|
FXCM Japan Securities Co., Ltd.
(4)
|
|
(“FXCMJ”)
|
FXCM UK Merger Limited
|
|
(“Merger”)
|
Lucid Markets Trading Limited
|
|
(“Lucid”)
|
Lucid Markets LLP
|
|
(“Lucid LLP”)
|
Faros Trading LLC
(4)
|
|
(“Faros”)
|
V3 Markets, LLC
|
|
(“V3”)
|
____________________________________
(1)
FXCM Newco, LLC was renamed FXCM Group, LLC effective September 1, 2016
(2)
Sold by the Company in September 2015
(3)
Sold by the Company in December 2015
(4)
Sold by the Company in April 2015
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Net income or loss attributable to the non-controlling interest in Holdings in the 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 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.
Net income or loss attributable to other non-controlling interests in the consolidated statements of operations represents the portion of earnings or loss attributable to the non-controlling interests of Lucid, Faros (prior to the sale of Faros' operations in the second quarter of 2015), V3 and other consolidated entities based on the economic interests held by the non-controlling members. The non-controlling members of Lucid, Faros (prior to the sale of Faros' operations in the second quarter of 2015) 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 consolidated statements of operations (see Note 4).
Redeemable non-controlling interest on the consolidated statements of financial condition represents the non-controlling membership interest in Group held by Leucadia. Non-controlling interests on the 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 consolidated statements of financial condition and earnings or losses are included in Income or loss on equity method investments, net in the 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 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 consolidated statements of operations (see Note 6).
Reclassifications
Certain reclassifications of prior period amounts related to the Company's retrospective adoption of Accounting Standards Update (“ASU”) No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
, have been made to conform to the current period's presentation in the consolidated statements of financial condition.
Use of Estimates
The preparation of consolidated 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 consolidated financial statements as well as the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates and could have a material impact on the consolidated financial statements.
Discontinued Operations
As discussed in Note 1, during the first quarter of 2015, management committed to a plan to dispose of certain businesses. The Company determined that these businesses represent components pursuant to ASC 205-20,
Presentation of Financial Statements
—
Discontinued Operations
(“ASC 205-20”). The unsold businesses are considered held for sale at the respective reporting dates. When viewed as a whole, the disposal of these components represents a strategic shift as contemplated by ASC 205-20 and the results of operations are reported as discontinued operations for each period presented (see Note 4).
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Segments
ASC 280,
Segment Reporting
(“ASC 280”) establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The guidance defines reportable segments as operating segments that meet certain quantitative thresholds. It was determined in the first quarter of 2015 that as a result of the events of January 15, 2015, and the decision to sell certain institutional assets, the composition of the Company’s previously reported Institutional segment changed significantly, such that the remaining institutional business reported in continuing operations no longer meets the quantitative criteria for separate reporting. In addition, the continuing institutional business shares common management strategies, customer support and trading platforms with the Company’s retail business. Accordingly, the Company operates in a single operating segment for all periods presented.
Cash and Cash Equivalents
Cash and cash equivalents include cash at banks, U.S. Treasury bills and other highly liquid instruments with original maturities of less than
90
days at the time of purchase and cash on deposit held with FX and CFD market makers related to economic hedging activities. At times, balances held in U.S. bank accounts may exceed federally insured limits. This potentially subjects the Company to concentration risk. The Company has not experienced losses in such accounts.
Cash and Cash Equivalents, held for customers
Cash and cash equivalents, held for customers represents cash held to fund customer liabilities. At times, balances held in U.S. bank accounts may exceed federally insured limits. This potentially subjects the Company to concentration risk. The Company has not experienced losses in such accounts.
The balance arises primarily from cash deposited by customers and net realized gains from customer trading activity. The Company maintains a corresponding liability in connection with this amount that is included in customer account liabilities in the consolidated statements of financial condition (see Note 11). A portion of the balance is not available for general use due to regulatory restrictions in certain jurisdictions. The restricted balances related to continuing operations were
$0.3 billion
and
$0.4 billion
as of December 31,
2016
and
2015
, respectively.
Due from/to Brokers
Due from/to brokers represents the amount of the unsettled spot currency trades that the Company has with financial institutions. Also included in due from/to brokers is the fair value of derivative financial instruments discussed below. The Company has master netting agreements with its respective counterparties which allows the Company to present due from/to brokers on a net-by-counterparty basis in accordance with ASC 815,
Derivatives and Hedging
(“ASC 815”), and ASC 210,
Balance Sheet
(“ASC 210”). Due from/to brokers related to businesses classified as discontinued operations are included as a component of assets/liabilities held for sale on the consolidated statements of financial condition (see Note 4).
Derivatives
Derivative financial instruments are accounted for in accordance with ASC 815 and are included in Due from/to brokers in the consolidated statements of financial condition. The Company recognizes all derivative financial instruments in the consolidated statements of financial condition as either assets or liabilities at fair value. The Company enters into futures contracts to (i) economically hedge the open customer contracts on its CFD business and (ii) hedge trading in its electronic market making and institutional foreign exchange spot and futures markets. Futures contracts are exchange traded contracts to either purchase or sell a specific asset at a specified future date for a specified price. Gains or losses on futures contracts related to the Company’s CFD business are included in Trading revenue in the consolidated statements of operations and gains or losses on hedge trading in the Company’s electronic market making and institutional foreign exchange spot and futures markets and other asset classes are included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations (see Note 22).
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. These three levels of fair value hierarchy are defined as follows:
Level 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 and 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 (see Note 23).
Accounts Receivable, net
As of
December 31, 2016
and
2015
, Accounts receivable, net, consisted primarily of amounts due from institutional customers relating to the Company’s FX business, fees receivable from the Company’s white label service to third parties, interest receivable, a refund of regulatory fees and a broker receivable. As of December 31, 2016, Accounts receivable, net also includes proceeds receivable from the sale of an investment. Receivables are shown net of reserves for uncollectible accounts. The reserve for bad debts is maintained at a level that management believes to be sufficient to absorb estimated losses in the accounts receivable portfolio. The reserve is increased by the provision for bad debts which is charged against operating results and decreased by the amount of charge-offs, net of recoveries. The amount charged against operating results is based on several factors including, but not limited to, a continuous assessment of the collectability of each account, the length of time a receivable is past due and our historical experience with the particular customer. As of both December 31,
2016
and 2015, the reserve netted against receivables in the consolidated statements of financial condition was
$6.8 million
, which was recorded against an uncollected broker receivable.
As of December 31, 2016 and 2015, Accounts receivable, net, also includes advances to employees and non-controlling members of Holdings.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Office, Communication and Computer Equipment, net
Office, communication and computer equipment, net, consists of computer equipment, purchased technology hardware and software, internally-developed software, leasehold improvements, furniture and fixtures and other equipment, licenses and communication equipment. Office, communication and computer equipment are recorded at historical cost, net of accumulated depreciation. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Certain costs of software developed or obtained for internal use are capitalized. Depreciation is computed using the straight-line method. The Company depreciates these assets using the following useful lives:
|
|
|
|
Computer equipment
|
|
3 to 5 years
|
Capitalized software
|
|
2 to 5 years
|
Leasehold improvements
|
|
Lesser of the estimated economic useful life or the term of the lease
|
Furniture and fixtures and other equipment
|
|
3 to 5 years
|
Licenses
|
|
2 to 3 years
|
Communication equipment
|
|
3 to 5 years
|
Office, communication and computer equipment, net related to businesses classified as discontinued operations are included as a component of assets held for sale on the consolidated statements of financial condition (see Note 4). Depreciation related to these assets ceased as of the date they were determined to be held for sale and is included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations.
Valuation of Other Long-Lived Assets
The Company assesses potential impairments of its other long-lived assets, including office, communication and computer equipment, when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset exceeds its fair value and is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results.
Goodwill
The Company recorded goodwill from various acquisitions. Goodwill represents the excess purchase price over the value assigned to the net tangible and identifiable intangible assets of a business acquired. The Company operates in a single operating segment, which also represents the reporting unit for purposes of the goodwill impairment test. Annually, or in interim periods if an event occurs or circumstances change that indicate the fair value of the reporting unit may be below its carrying amount (“triggering events”), the Company first performs a qualitative assessment as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test in accordance with ASC 350,
Intangibles
—
Goodwill and Other
(“ASC 350”). If the qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit is below its carrying amount, the Company proceeds with the quantitative test described below. The Company tests goodwill for impairment annually during the fourth quarter of its fiscal year using October 1 carrying values.
The first step of the two-step process involves a comparison of the estimated fair value of the reporting unit to its carrying amount, including goodwill. In performing the first step, the Company determines the fair value of the reporting unit using a discounted cash flow (“DCF”) analysis. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The cash flows employed in the DCF analyses are based on the Company’s most recent budgets and business plans and, when applicable, various growth rates are assumed for years beyond the current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the reporting unit. If the estimated fair value of the
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its carrying amount to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that reporting unit including any unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid). If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the reporting unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.
Other Intangible Assets, net
Other intangible assets, net, classified as held for use include customer relationships recorded from various acquisitions. Intangible assets classified as held for sale primarily include non-compete agreements, an executory contract, trade name and proprietary technology also recorded from various acquisitions.
The useful lives of these finite-lived intangible assets are based on the period they are expected to contribute to future cash flows as determined by the Company’s historical experience. The customer relationships are amortized on a straight-line basis over their estimated average useful life of
3
to
9
years. Prior to being classified as held for sale, the non-compete agreements, executory contract, trade name and proprietary technology were amortized on a straight-line basis over their estimated average useful lives of
1
to
9
years,
3
years,
3
years and
4
to
7
years, respectively, however amortization related to these intangible assets ceased as of the date they were determined to be held for sale.
For finite-lived intangible assets subject to amortization, impairment is considered upon certain “triggering events” and is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible asset.
The Company’s indefinite-lived intangible asset, an FX trading license, is classified as held for use. Indefinite-lived assets are not amortized but tested for impairment. The Company’s policy is to test for impairment at least annually or in interim periods if certain events occur indicating that the fair value of the asset may be less than its carrying amount. An impairment test on this indefinite-lived asset is performed during the fourth quarter of the Company’s fiscal year using the October 1
st
carrying value. Impairment exists if the carrying value of the indefinite-lived intangible asset exceeds its fair value.
Equity Method Investments
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. Additionally, the carrying value of investments accounted for using the equity method of accounting is adjusted downward to reflect any impairment in value. For investments accounted for using the equity method of accounting, the Company evaluates information (e.g., budgets, business plans, financial statements, etc.) in addition to quoted market prices, if any, in determining whether an other-than-temporary decline in value exists. Factors indicative of an impairment in value include recurring operating losses, credit defaults and subsequent rounds of financing at an amount below the cost basis of the Company’s investment.
The Company’s equity method investments from continuing operations are included in Other assets in the consolidated statements of financial condition and its share of the earnings or losses is included in Loss on equity method investments, net in the consolidated statements of operations (see Note 6). The Company’s equity method investments related to businesses classified as discontinued operations are included as a component of assets held for sale on the consolidated statements of financial condition and the share of earnings or losses is included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations (see Note 4).
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Notes Receivable
Notes receivable represent receivables for notes acquired for cash plus accrued interest. Notes receivable are initially recorded at the amount of cash exchanged plus accrued interest. Interest income on the notes is recorded on an accrual basis and included in Interest income in the consolidated statements of operations. The Company individually assesses its notes receivables for impairment using methods including internally generated cash flow projections to determine if the notes will be repaid under the expected terms of the note agreements. If the Company concludes that the counterparty will not repay a note in accordance with its terms, the Company considers the note impaired and begins recognizing interest income on a cash basis, if any. To measure impairment, the Company calculates the estimated fair value of the collateral. If the estimated fair value of the collateral is less than the carrying value of the note receivable, the Company establishes an impairment reserve for the difference. If it is likely that a note will not be collected based on financial or other business indicators, the Company’s policy is to charge off the note in the period which it deems it uncollectible (see Note 5).
Other Assets
Other assets include prepaid expenses, equity and cost method investments and deposits for rent security (see Note 10). Other assets related to businesses classified as discontinued operations are included as a component of assets held for sale on the consolidated statements of financial condition (see Note 4).
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include operating expenses payable, commissions payable, which represents balances owed to referring brokers for trades transacted by customers that were introduced to the Company by such brokers, bonuses payable, income taxes payable, and interest due on borrowings (see Note 12). Accounts payable and accrued expenses related to businesses classified as discontinued operations, which includes amounts due to the Lucid non-controlling members for services provided, is included as a component of liabilities held for sale on the consolidated statements of financial condition (see Note 4).
Litigation
The Company may from time to time be involved in litigation and claims that arise in the ordinary course of business, including intellectual property claims. In addition, our business is subject to extensive regulation, which may result in regulatory proceedings against us. The Company records a liability when it is both probable that a loss has been incurred and the amount of the loss can be reasonably estimated. When the reasonable estimate of the possible loss is within a range of amounts, the minimum of the range of possible loss is accrued, unless a higher amount within the range is a better estimate than any other amount within the range. Significant judgment is required to determine both probability and the estimated amount. The Company reviews these provisions at least quarterly and adjusts them accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Securities Sold, Not Yet Purchased
Securities sold, not yet purchased, represent the Company’s obligations to deliver a specified security at the contracted price at a future point in time, and thereby create a liability to repurchase the securities in the market at the prevailing prices. The liability for such securities sold short, included as a component of liabilities held for sale on the consolidated statements of financial condition, is marked to market based on the current fair value of the underlying security at the reporting date. Changes in fair value of securities sold, not yet purchased are recorded as unrealized gains or losses and included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations (see Note 4). The Company repurchased the securities sold short in August 2016 and realized a loss of
$1.1 million
for the year ended December 31, 2016. Total unrealized gains and losses related to these securities for the years ended December 31,
2016
and
2015
were a gain of
$0.6 million
and a loss of
$0.1 million
, respectively.
Due to Related Parties Pursuant to Tax Receivable Agreement
Exchanges of Holdings membership units (“Holdings Units”) for the Corporation’s Class A common stock that are executed by the members of Holdings result in transfers of and increases in the tax basis of the tangible and intangible assets of
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Holdings, primarily attributable to a portion of the goodwill inherent in the business. These transfers and increases in tax basis will increase (for tax purposes) amortization and therefore reduce the amount of tax that the Company would otherwise be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. Holdings has entered into a tax receivable agreement with the members of Holdings whereby the Corporation has agreed to pay to the exchanging members
85%
of the amount of cash tax savings, if any, in U.S. federal, state and local income tax that the Corporation realizes as a result of these increases in tax basis. The Corporation expects to benefit from the remaining
15%
of cash tax savings, if any, in income tax it realizes. Payments under the tax receivable agreement will be based on the tax reporting positions that the Corporation takes in preparing its tax returns. The Corporation will not be reimbursed for any payments previously made under the tax receivable agreement if a tax basis increase is successfully challenged by the Internal Revenue Service.
Holdings records an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the exchange. To the extent that Holdings estimates that the exchanging members will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, its expectation of future earnings, the Company will reduce the deferred tax asset with a valuation allowance. The Corporation records
85%
of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the contingent liability due under the tax receivable agreement. Presently, the liability is a contingent liability based on the estimated future earnings of the Corporation and the expected tax benefit realized by the Corporation, but upon certain events such as a change in control or a material breach of the tax receivable agreement, the liability no longer stays contingent but rather becomes absolute. The remaining
15%
of the estimated realizable tax benefit is initially recorded as an increase to the Corporation’s capital. All of the effects to the deferred tax asset of changes in any of the estimates after the tax year of the exchange will be reflected in the provision for income taxes. Similarly, the effect of subsequent changes in the enacted tax rates will be reflected in the provision for income taxes.
Convertible Debt Transactions
The Company separately accounts for the liability and equity components of convertible debt instruments that may be settled entirely or partially in cash upon conversion by allocating the proceeds from issuance between the liability component and the embedded conversion option, or equity component, in accordance with ASC 470,
Debt
(“ASC 470”). The value of the equity component is calculated by first measuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component. The Company recognizes the accretion of the resulting discount as part of interest expense in the consolidated statements of operations.
Derivative Liability
—
Letter Agreement
At issuance in January 2015, the Letter Agreement was accounted for separately from the Credit Agreement. Pursuant to ASC 480,
Distinguishing Liabilities from Equity
(“ASC 480”), a financial instrument that is entered into in conjunction with some other transaction and is legally detachable and separately exercisable is a freestanding financial instrument and should be accounted for separately. Based on the Company’s review of the Letter Agreement, the Company concluded that the Letter Agreement was legally detachable from the Credit Agreement because it could be freely transferred. In addition, the Company determined that the Letter Agreement was separately exercisable since payments to the holder of the Letter Agreement are made after the repayment of the Credit Agreement. Accordingly, the Letter Agreement was determined to be a freestanding financial instrument and was accounted for separately from the Credit Agreement. Further, the Company concluded that the legal form of the Letter Agreement was equity. The Company considered the guidance in ASC 480 and determined that the accounting for the Letter Agreement did not fall within the scope of ASC 480 since the Letter Agreement was not mandatorily redeemable and did not require settlement by issuance of a variable number of equity shares. The Company then considered the guidance under ASC 815, and concluded that several features of the Letter Agreement required bifurcation as embedded derivatives and should be accounted for as a derivative liability. Changes in the fair value of the derivative liability resulting from the Letter Agreement were recorded each reporting period in the consolidated statements of operations. On September 1, 2016, the Letter Agreement was terminated (see “Redeemable Non-controlling Interest” below for further information).
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Redeemable Non-controlling Interest
In connection with the Restructuring Transaction completed on September 1, 2016 (see Note 19), 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 (the "Group Agreement"). The Group Agreement replaced the existing FXCM Newco, LLC agreement and FXCM Newco, LLC was renamed FXCM Group, LLC. In exchange for terminating 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 above. Following a Change of Control (as defined in the Group Agreement and described in Note 19), the membership units held by Leucadia are redeemable for cash at an amount equal to the fair market value of Leucadia's economic rights under the Group Agreement. Accordingly, the non-controlling interest held by Leucadia is recorded as Redeemable non-controlling interest and is classified outside of permanent equity on the consolidated statements of financial condition pursuant to ASC 480.
The cash distributions and earnings or loss from Group subsequent to September 1, 2016 are allocated among its members based on the contractual provisions in the Group Agreement (the "Revised Waterfall"), which differ from the members' stated ownership percentages. The Company determined that the Revised Waterfall represents a substantive profit sharing arrangement and concluded that the appropriate methodology for allocating profits and losses of Group is the hypothetical liquidation at book value method (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 each member would 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 member's share of the net income or loss from Group.
As indicated above, the membership units held by Leucadia are redeemable for cash following a change of control event (see Note 19), which is not solely within the control of the Company. The Company evaluates the probability of redemption at each reporting date. The Company concluded that the non-controlling interest in Group is not currently redeemable and it is not probable that it will become redeemable. 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.
Foreign Currency
Foreign denominated assets and liabilities are re-measured into the functional currency at exchange rates in effect at the statements of financial condition dates through the consolidated statements of operations. Gains or losses resulting from foreign currency transactions are re-measured using the rates on the dates on which those elements are recognized during the period, and are included in Trading revenue in the consolidated statements of operations. The Company recorded gains of
$0.8 million
and
$2.3 million
for the years ended
December 31, 2016
and
2015
, respectively.
Translation gains or losses resulting from translating the Company’s subsidiaries’ financial statements from the functional currency to the reporting currency, net of tax, are included in Foreign currency translation gain (loss) in the consolidated statements of comprehensive income. Assets and liabilities are translated at the statement of financial condition date while revenues and expenses are translated at an applicable average rate.
Revenue Recognition
The Company makes foreign currency markets for customers trading in FX spot markets. FX transactions are recorded on the trade date and positions are marked to market daily with related gains and losses, including gains and losses on open spot transactions, recognized currently in income.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Trading Revenue
Under the Company’s retail agency FX offering, trading revenue is earned from charging a separate commission or by adding a markup to the price provided by FX market makers generating trading revenue based on the volume of transactions and is recorded on trade date. Under the agency model, when a customer executes a trade on the best price quotation presented by the FX market maker, the Company acts as a credit intermediary, or a riskless principal, simultaneously entering into a trade with the customer and the FX market maker. This agency model has the effect of hedging the Company’s positions and eliminating market risk exposure. Trading revenues earned from commissions and mark-up principally represent the difference between the Company’s realized and unrealized foreign currency trading gains or losses on its positions with customers and the systematic hedge gains and losses from the trades entered into with the FX market makers. Under the Company’s dealing desk, or principal, execution model, revenues earned include the markup on the FX trade and the Company’s realized and unrealized foreign currency trading gains or losses on its positions with customers. Trading revenue also includes fees earned from arrangements with other financial institutions to provide platform, back office and other trade execution services. This service is generally referred to as a white label arrangement. The Company earns a commission or a percentage of the markup charged by the financial institutions to their customers. Fees from this service are recorded when earned on a trade date basis.
Additionally, the Company earns income from trading in CFDs, rollovers and spread betting. Income or loss on CFDs represents the difference between the realized and unrealized trading gains or losses on the Company’s positions and the hedge gains or losses with the other financial institutions. Income or loss on CFDs is recorded on a trade date basis. Income or loss on rollovers is the interest differential customers earn or pay on overnight currency pair positions held and the markup that the Company receives on interest paid or received on currency pair positions held overnight. Income or loss on rollovers is recorded on a trade date basis. Spread betting is where a customer takes a position against the value of an underlying financial instrument moving either upward or downward in the market. Income on spread betting is recorded as earned on a trade date basis.
Trading revenues from institutional customers include commission income generated by facilitating spot FX trades on behalf of institutional customers through the services provided by FXCM Pro and FXCM Prime, which allow these customers to obtain the best execution price from external banks and routes the trades to outside financial institutions that also hold customer account balances for settlement. The Company receives commission income on these trades without taking any market or credit risk. Revenue earned from institutional customers is recorded on a trade date basis.
The Company also earns income from market making and electronic trading in the institutional foreign exchange spot and futures markets through Lucid and market making and electronic trading into other asset classes through V3. Income on market making and electronic trading in foreign exchange spot and future currencies represents the spread between the bid and ask price for positions purchased and sold and the change in value of positions purchased and sold. Income on market making is recorded as trading gains, net of trading losses, on a trade date basis, and is included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations.
Interest Income
Interest income consists of interest earned on cash and cash equivalents and cash and cash equivalents, held for customers and is recognized in the period earned. Interest income also includes interest on the Notes receivable.
Other Income
Other income includes amounts earned from the sale of market data, fees for post-sale services related to businesses sold, service fees related to an equity method investee, account maintenance fees, ancillary fee income and the net reversal of the tax receivable agreement liability.
Communications and Technology
Communications and technology expense consists primarily of costs for network connections to our electronic trading platforms, telecommunications costs, and fees paid for access to external market data. This expense is affected primarily by the growth of electronic trading, our network/ platform capacity requirements and by changes in the number of telecommunication hubs and connections which provide our customers with direct access to our electronic trading platforms.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Trading Costs, Prime Brokerage and Clearing Fees
Trading costs, prime brokerage and clearing fees primarily represent fees paid to third party clearing banks and prime brokers for clearing foreign exchange spot futures currency and contract transactions, transaction fees paid to exchanges, equity options brokerage activity fees, and fees paid to third party providers for use of their platform for the Company’s market making trading business. Clearing fees primarily fluctuate based on changes in volume, rate of clearing fees charged by clearing banks and rate of fees paid to exchanges.
Referring Broker Fees
Referring broker fees represent commissions paid to brokers for introducing trading customers to the Company. Commissions are determined based on the number and size of transactions executed by the customers and are recorded on a trade date basis.
Compensation and Benefits
Compensation and benefits expense represents employee and member salaries and benefit expense, including stock-based compensation expense.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718,
Compensation-Stock Compensation
(“ASC 718”). The Company’s stock-based compensation expense is measured at the date of grant, based on the estimated fair value of the award, and recognized on a straight-line basis over the requisite service period of the award, net of estimated forfeitures. The fair value of the Company’s non-qualified stock options is estimated using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) is based on the fair market value of the Corporation’s Class A common stock on the date of grant, adjusted for the present value of dividends expected to be paid on the Corporation’s Class A common stock prior to vesting. Stock-based compensation expense is included in Compensation and benefits in the consolidated statements of operations (see Note 15).
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"). The Management Incentive Plan is a long-term program with a
five
-year vesting period. Distributions under the plan will be made only after the principal and interest under the Credit Agreement have been repaid and will range from
10.0%
to
14.0%
of the distributions made from Group. If a participant terminates employment, he or she will receive either a non-voting membership interest in Group entitling the participant to the same share of distributions that would have otherwise been received, or a lump-sum cash payment, at the Company's 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.
Advertising and Marketing
Advertising and marketing costs are charged to operations when incurred.
General and Administrative Expenses
General and administrative expenses include bank processing and regulatory fees, professional and consulting fees, occupancy and equipment expense and other administrative costs. Bank processing fees are costs associated with the processing of credit and debit card transactions. Regulatory fees are volume-based costs and annual fees charged by certain regulatory authorities and include fines and restitution imposed by regulators from time to time. General and administrative expense also includes a provision for forgiveness of a notes receivable and other miscellaneous client debit balances.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
Income Taxes
Holdings operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal, state, and local income tax purposes. Since January 2015, all of Holdings’ operations are held by Group, a limited liability company that is also treated as a partnership between Holdings and Leucadia for U.S. federal, state and local income tax purposes. As a result, neither Holdings’ nor Group’s income from its U.S. operations is subject to U.S. federal income tax because the income is attributable to its members. Accordingly, the Company’s U.S. tax provision is solely based on the portion of income attributable to the Corporation from the lower tier limited liability companies and excludes the income attributable to other members whose income is included in Net income (loss) attributable to non-controlling interest in Global Brokerage Holdings, LLC in the consolidated statements of operations.
Income taxes are accounted for in accordance with ASC 740,
Income Taxes
(“ASC 740”), which requires that deferred tax assets and liabilities are recognized, using enacted tax rates, for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. Deferred tax assets, including net operating losses and income tax credits, are reduced by a valuation allowance if it is “more likely than not” that some portion or all of the deferred tax assets will not be realized (see Note 24).
In addition to U.S. federal and state income taxes, the Company is subject to Unincorporated Business Tax which is attributable to Group’s operations apportioned to New York City. The Company’s foreign subsidiaries are also subject to taxes in the jurisdictions in which they operate.
In accordance with ASC 740, the Company evaluates a tax position to determine whether it is more likely than not that the tax position will be sustained upon examination, based on the technical merits of the position. If the position does not meet a more likely than not threshold, a tax reserve is established and no income tax benefit is recognized. The Company is audited by U.S. federal and state, as well as foreign, tax authorities. In some cases, many years may elapse before a tax return containing tax positions for which an ASC 740 reserve has been established is examined and an audit is completed. As audit settlements are reached, the Company adjusts the corresponding reserves, if required, in the period in which the final determination is made. While it is difficult to predict the final outcome or timing of a particular tax matter, the Company believes that its reserves for uncertain tax positions are recorded pursuant to the provisions of ASC 740.
The Company currently does not plan to permanently reinvest the earnings of its foreign subsidiaries and therefore does record U.S. income tax expense for the applicable earnings. This treatment could change in the future.
Recently Adopted Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. The standard requires management to explicitly evaluate for each reporting period whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosure in certain circumstances. The standard is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The Company adopted ASU No. 2014-15 for the year ended December 31, 2016.
In February 2015, the FASB issued ASU No. 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
. ASU No. 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU No. 2015-02 (i) modifies the evaluation of whether limited partnership and similar legal entities are VIEs, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with VIEs that have fee arrangements and related party relationships, and (iv) provides a scope exception from consolidation guidance for certain investment companies and similar entities. The Company adopted ASU No. 2015-02 on January 1, 2016 which did not have an impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. ASU No. 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the corresponding debt liability rather than as an asset. The costs will continue to be amortized and reported as interest expense. The Company adopted ASU No. 2015-03 on January 1, 2016 on a retrospective basis. The
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
adoption of ASU No. 2015-03 resulted in the reclassification of
$2.9 million
of unamortized debt issuance costs related to the Senior convertible notes from Other assets to the Senior convertible notes liability within the consolidated statements of financial condition as of December 31, 2015 (see Note 20). The adoption of ASU No. 2015-03 also resulted in the reclassification of
$0.5 million
of unamortized debt issuance costs related to the Credit Agreement from Other assets to the Credit Agreement liability within the consolidated statements of financial condition as of December 31, 2015 (see Note 19). Other than these reclassifications, the adoption of ASU No. 2015-03 did not have an impact on the Company's consolidated financial statements.
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 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.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
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 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 guidance in this update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. An entity should apply the amendments in this update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company adopted this guidance on January 1, 2017 and does not expect it will have a material impact on its 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 guidance in this update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is permitted. The Company adopted this guidance on January 1, 2017 and does not expect it will have a material impact on its 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 guidance in this update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Certain of the amendments related to timing of the recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to classification on the statement of cash flows should be applied retrospectively. All other provisions may be applied on a prospective or modified retrospective basis. The Company adopted this guidance on January 1, 2017 and does not expect it will have a material impact 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 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 amendments in ASU No. 2016-17 are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. Entities that already have adopted the amendments in ASU No. 2015-02 are required to apply the amendments in this update retrospectively to all relevant prior periods beginning
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies and Estimates - (continued)
with the fiscal year in which the amendments in ASU No. 2015-02 initially were applied. The Company adopted this guidance on January 1, 2017 and does not expect it will have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The amendments in ASU No. 2016-18 address diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. Under this guidance, companies will be required to present restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The amendments in ASU No. 2016-18 are required to be applied retrospectively and are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company expects to adopt this guidance beginning January 1, 2018 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.
In 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 amendments in ASU No. 2017-04 are required to be applied prospectively and are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company expects to early adopt this guidance effective January 1, 2017 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.
Note 3. Non-Controlling Interests
Redeemable Non-controlling Interest
In connection with the Restructuring Transaction completed on September 1, 2016 (see Note 19), the Letter Agreement was terminated and the parties signed the Group Agreement as described in Note 2. 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 2. 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 consolidated statements of financial condition as Redeemable non-controlling interest. As of
December 31, 2016
, 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 year ended
December 31, 2016
, with amounts in thousands:
|
|
|
|
|
Balance as of January 1, 2016
|
$
|
—
|
|
Issuance of redeemable non-controlling interest (net of HLBV allocation, discussed below)
|
49,285
|
|
Net loss attributable to redeemable non-controlling interest
|
(2,804
|
)
|
Other comprehensive loss attributable to redeemable non-controlling interest
|
(377
|
)
|
Equity-based compensation
|
260
|
|
Balance as of December 31, 2016
|
$
|
46,364
|
|
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 3. Non-Controlling Interests - (continued)
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
$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. 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.
Changes in the non-controlling and the Corporation’s interests in Holdings for the years ended December 31,
2015
and
2016
are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling Units
|
|
Non-
Controlling Units
|
|
Total Units
|
|
Global Brokerage,
Inc.
|
|
Non-
Controlling
|
|
Total
|
Balance as of January 1, 2015
|
4,788,994
|
|
|
3,445,761
|
|
|
8,234,755
|
|
|
58.1
|
%
|
|
41.9
|
%
|
|
100.0
|
%
|
Exchange of Holdings Units to Class A common stock
|
808,672
|
|
|
(808,672
|
)
|
|
—
|
|
|
9.8
|
%
|
|
(9.8
|
)%
|
|
—
|
%
|
Repurchase of Holdings Units related to repurchase of Class A common stock
|
(61
|
)
|
|
—
|
|
|
(61
|
)
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Vesting of restricted stock units
|
4,929
|
|
|
—
|
|
|
4,929
|
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Balance as of December 31, 2015
|
5,602,534
|
|
|
2,637,089
|
|
|
8,239,623
|
|
|
67.9
|
%
|
|
32.1
|
%
|
|
100.0
|
%
|
Exchange of Holdings Units to Class A common stock
|
535,992
|
|
|
(535,992
|
)
|
|
—
|
|
|
6.6
|
%
|
|
(6.6
|
)%
|
|
—
|
%
|
Vesting of restricted stock units
|
4,771
|
|
|
—
|
|
|
4,771
|
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Balance as of December 31, 2016
|
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 consolidated statements of financial condition (see Note 4). The Company no longer holds a controlling interest in Faros as a result of the sale of Faros’ operations in the second quarter of 2015.
Note 4. Dispositions
Discontinued Operations
As a result of the losses incurred by the Company on January 15, 2015 related to the Swiss National Bank (“SNB”) releasing the peg of the Swiss Franc to the Euro and the subsequent Leucadia financing arrangement entered into by the Company on January 16, 2015, the Company committed to a plan during the first quarter of 2015 to sell its interests in certain
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 4. Dispositions - (continued)
retail and institutional businesses in order to pay down the Leucadia debt. The retail businesses are HK, FXCMJ and the equity trading business of FSL. The institutional businesses are Faros, Lucid, V3 and the Company’s equity interest in FastMatch. In April 2015, the Company completed the sales of FXCMJ and Faros. In September 2015, the Company completed the sale of HK. In December 2015, the Company completed the sale of the equity trading business of FSL. The Company remains committed to a plan to sell Lucid, V3 and its equity interest in FastMatch and continues to actively market these businesses.
The Company considered the guidance in ASC 205-20 in evaluating the accounting and presentation in the consolidated financial statements of the businesses that have been sold during the period and the remaining businesses to be sold. The operations and cash flows of these businesses are clearly distinguishable and, accordingly, have been determined to represent a group of components as defined in the guidance. It was further determined that the remaining businesses to be sold continue to meet the criteria for classification as held for sale as of
December 31, 2016
. Accordingly, the assets and liabilities of these businesses have been classified as assets and liabilities held for sale in the consolidated statements of financial condition as of
December 31, 2016
and 2015.
In accordance with ASC 205-20, to qualify for reporting as a discontinued operation, components that are disposed of or classified as held for sale must represent a strategic shift that has or will have a major effect on the Company's operations and financial results. The Company believes that the dispositions of these businesses represent a strategic shift from the Company’s diversification strategy undertaken for the past several years and concluded that the businesses to be disposed of qualify for reporting as discontinued operations. Accordingly, the results of operations of these businesses are reported in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations for the years ended
December 31, 2016
and 2015.
Completed dispositions
In April 2015, the Company completed the sale of FXCMJ to Rakuten Securities, Inc. ("Rakuten Sec") for a cash purchase price of
$62.2 million
. The Company recognized a net gain of approximately
$2.0 million
related to the sale, which included a reversal of
$23.4 million
of foreign currency translation loss out of accumulated other comprehensive income. The net gain was recorded in earnings as a component of Income (loss) from discontinued operations, net of tax for the year ended December 31, 2015. In connection with the sale of FXCMJ, the Company agreed to provide certain transitional services, including use of the Company’s trading platform and data services, 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
$2.1 million
and accordingly allocated
$2.1 million
of proceeds received as deferred income. The deferred income was entirely amortized into other income over the nine-month period ending December 31, 2015. The terms of the services agreement provided for the Company to receive a monthly fee for these services beginning January 1, 2016 for a period of ten months ending on October 31, 2016. The Company recorded other income for these transitional services of
$1.6 million
for the year ended
December 31, 2016
.
In April 2015, Faros completed the sale of its operations to Jefferies Group LLC. Consideration will be 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 years ended
December 31, 2016
and 2015.
In September 2015, the Company completed the sale of HK to Rakuten Sec for a cash purchase price of
$37.9 million
. The Company recognized a net gain related to the sale of approximately
$12.4 million
. The net gain was recorded in earnings as a component of Income (loss) from discontinued operations, net of tax for the year ended December 31, 2015. In connection with the sale of HK, the Company agreed to provide certain transitional services, 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
$0.6 million
and
$0.4 million
of other income for these transitional services for the years ended
December 31, 2016
and 2015, respectively. The terms of the services agreement provide for the Company to receive a monthly fee for these services beginning in June 2016 for an expected period of nine months. The Company recorded other income of
$1.2 million
related to these service fees for the year ended
December 31, 2016
.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 4. Dispositions - (continued)
In December 2015, the Company completed the sale of the equity trading business of FSL to AS Expobank for a cash purchase price of
$2.3 million
. The Company recognized a net loss of approximately
$7.1 million
related to the sale, which includes a reversal of
$1.5 million
of foreign currency translation loss out of accumulated other comprehensive income. The net loss was recorded in earnings as a component of Income (loss) from discontinued operations, net of tax for the year ended December 31, 2015. In connection with the sale of the equity trading business of FSL, the Company agreed to provide certain transitional services, 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. For the years ended December 31, 2016 and 2015, the amount of deferred income amortized into other income for these transitional services was
$0.5 million
and not material, respectively.
The following table presents the major classes of line items constituting the pretax and after-tax profit or loss of discontinued operations for the years ended
December 31, 2016
and
2015
, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Revenues
|
|
|
|
Trading revenue
|
$
|
31,101
|
|
|
$
|
71,500
|
|
Interest income
|
309
|
|
|
272
|
|
Brokerage interest expense
|
—
|
|
|
(100
|
)
|
Net interest revenue
|
309
|
|
|
172
|
|
Other income
|
113
|
|
|
5,700
|
|
Total net revenues
|
31,523
|
|
|
77,372
|
|
Operating Expenses
|
|
|
|
Compensation and benefits
|
(248
|
)
|
|
14,708
|
|
Allocation of net income to Lucid members for services provided
|
3,029
|
|
|
5,064
|
|
Total compensation and benefits
|
2,781
|
|
|
19,772
|
|
Referring broker fees
|
—
|
|
|
208
|
|
Advertising and marketing
|
—
|
|
|
736
|
|
Communication and technology
|
5,694
|
|
|
8,248
|
|
Trading costs, prime brokerage and clearing fees
|
13,062
|
|
|
18,378
|
|
General and administrative
|
2,395
|
|
|
6,314
|
|
Bad debt expense
|
—
|
|
|
8,408
|
|
Depreciation and amortization
|
—
|
|
|
12,359
|
|
Goodwill impairment loss
|
—
|
|
|
54,865
|
|
Total operating expenses
|
23,932
|
|
|
129,288
|
|
Operating income (loss)
|
7,591
|
|
|
(51,916
|
)
|
Other (Income) Expense
|
|
|
|
(Gain) loss on equity method investments, net
|
(1,114
|
)
|
|
1,267
|
|
Income (loss) from discontinued operations before income taxes
|
8,705
|
|
|
(53,183
|
)
|
Net gain on completed dispositions
|
—
|
|
|
7,313
|
|
Loss on classification as held for sale before income taxes
|
126,511
|
|
|
66,660
|
|
Total loss from discontinued operations before income taxes*
|
(117,806
|
)
|
|
(112,530
|
)
|
Income tax provision
|
54
|
|
|
5,764
|
|
Loss from discontinued operations, net of tax
|
$
|
(117,860
|
)
|
|
$
|
(118,294
|
)
|
* Total loss from discontinued operations before income taxes attributable to Global Brokerage, Inc. was
$26.0 million
and
$38.7 million
for the years ended
December 31, 2016
and
2015
, respectively.
Global Brokerage, Inc.
Notes to 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
December 31, 2016
and
2015
, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
9,378
|
|
|
$
|
10,786
|
|
Due from brokers
(1)
|
14,090
|
|
|
22,234
|
|
Accounts receivable, net
|
251
|
|
|
178
|
|
Office, communication and computer equipment, net
|
1,336
|
|
|
1,154
|
|
Goodwill
|
223,613
|
|
|
223,613
|
|
Other intangible assets, net
|
27,269
|
|
|
27,269
|
|
Other assets
(2) (3)
|
14,337
|
|
|
15,363
|
|
Loss recognized on classification as held for sale
|
(193,171
|
)
|
|
(66,660
|
)
|
Total assets classified as held for sale on the consolidated statements of financial condition
|
$
|
97,103
|
|
|
$
|
233,937
|
|
|
|
|
|
Liabilities
|
|
|
|
Accounts payable and accrued expenses
(4)
|
$
|
2,266
|
|
|
$
|
10,838
|
|
Due to brokers
(1)
|
45
|
|
|
—
|
|
Securities sold, not yet purchased
|
—
|
|
|
3,624
|
|
Other liabilities
|
14
|
|
|
48
|
|
Total liabilities classified as held for sale on the consolidated statements of financial condition
|
$
|
2,325
|
|
|
$
|
14,510
|
|
____________________________________
(1)
Includes as of
December 31, 2016
and
2015
: a) derivative assets, net of
$1.6 million
and
$0.9 million
, respectively; b) Unsettled spot FX, net of
$0.2 million
and
$0.3 million
, respectively; c) Unsettled common stock of
nil
and
$3.0 million
, respectively; and d) Excess cash collateral of
$12.2 million
and
$18.0 million
, respectively.
(2)
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 exchanges. 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. The Company had previously owned shares in the Intercontinental Exchange which were sold in April 2015. The Company recognized a gain
$0.1 million
related to the sale which was recorded in earnings as a component of Income (loss) from discontinued operations, net of tax for the year ended December 31, 2015. During 2015, the Company acquired additional ownership interests and shares in CME Group Inc. from one of the non-controlling members of Lucid which were recorded at a total cost of
$3.7 million
. There were no exchange membership impairments for the years ended
December 31, 2016
or
2015
. As of both
December 31, 2016
and
2015
, the carrying value of ownership interests was
$4.6 million
and the carrying value of shares owned was
$4.8 million
. In January 2017, the Company sold its ownership interests and shares in CME Group Inc. and expects to recognize a gain of
$0.8 million
related to the sale during the first quarter of 2017.
(3)
Includes the carrying value of the Company’s equity interest in FastMatch of
$4.6 million
and
$4.2 million
as of
December 31, 2016
and
2015
, respectively. The carrying value of the Company’s previously-held equity interest in the V3-related LLC of
$1.5 million
is included as of
December 31, 2015
(see Note 6).
(4)
Includes as of
December 31, 2016
and
2015
amounts due related to the allocation of income to Lucid non-controlling members for services provided of
$0.7 million
and
$6.5 million
, respectively.
Sale of Investment
The Company sold its DailyFX business to FX Publications, Inc. on October 28, 2016 (the “Closing Date”) for a cash purchase price of
$40.0 million
, payable in two installments. DailyFX is 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
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 4. Dispositions - (continued)
certain migration requirements. The migration was completed on February 24, 2017 and the final payment is expected in the first quarter of 2017. After transaction costs, the Company recognized a gain of
$37.2 million
related to the sale which is recorded in Gain on sale of investment in the consolidated statements of operations for the year ended December 31, 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 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 to end 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 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 year ended
December 31, 2016
.
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
. Subsequent to the completion of the migration, the quarterly amount payable will be reduced or increased in accordance with a pre-determined formula based on the actual number of leads received in the previous quarter, compared to the baseline leads as defined in the agreement, not to exceed a total of
$0.8 million
per quarter. If actual leads received in any given quarter after the migration is complete do not meet a set threshold, the Company has the right to immediately terminate the agreement and will not be required to pay the quarterly fee. As of
December 31, 2016
, the Company recorded a liability of
$0.4 million
related to the digital advertising agreement, which is included in Accounts payable and accrued expenses on the consolidated statements of financial condition. The costs associated with the digital advertising agreement are expensed as incurred.
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 is included in General and administrative expense in the consolidated statements of operations for the year ended
December 31, 2016
. The Company recorded
$0.1 million
and
$0.2 million
of interest income related to the notes receivable for the years ended December 31, 2016 and 2015, respectively.
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. During the fourth quarter of 2016, the Company evaluated its investment for impairment as a result of declines in the investee’s financial condition, earnings and near-term operational prospects. The Company determined that an impairment of value had occurred that is other-than-temporary and recorded an impairment charge of
$2.1 million
, which is included in Loss on equity method investments, net in the consolidated statements of operations for the year ended December 31, 2016. The carrying value of the Company’s equity interest in the FX trading software developer is
nil
and
$2.6 million
as of
December 31, 2016
and
2015
, respectively, and is included as a component of Other assets in the consolidated statements of financial condition. The Company’s share of the loss of the FX trading software developer was
$0.5 million
for both of the years ended
December 31, 2016
and
2015
and is included in Loss on equity method investments, net in the consolidated statements of operations.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 6. Equity Method Investments - (continued)
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. During the fourth quarter of 2016, the Company evaluated its investment for impairment as a result of declines in the investee’s financial condition, earnings and near-term operational prospects. The Company determined that an impairment of value had occurred that is other-than-temporary and recorded an impairment charge of
$0.5 million
, which is included in Loss on equity method investments, net in the consolidated statements of operations for the year ended December 31, 2016. The carrying value of the Company’s equity interest in the software developer is
nil
as of both December 31, 2016 and 2015. The Company’s share of the loss of the FX analytical software developer was
nil
for both of the years ended December 31, 2016 and 2015.
The Company has a
34.4%
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.
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. Until December 31, 2015, the other members of the V3-related LLC had not consented to the transfer of the
66.3%
non-controlling interest to the Company and the investment had been accounted for using the equity method. On December 31, 2015, the other members of the V3-related LLC approved a resolution to transfer the
66.3%
non-controlling interest to the Company and, in a related transaction, to distribute the assets held by the V3-related LLC to its members, including the Company, and subsequently liquidate the V3-related LLC. These transactions were completed during the first quarter of 2016 and 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 was
$1.1 million
as of
December 31, 2016
and is included as a component of Other assets in the consolidated statements of financial condition (see Note 10). 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 year ended
December 31, 2016
includes a gain of
$0.7 million
related to the disposition of the V3-related LLC in 2016.
The carrying values of the Company's equity interest in FastMatch and the V3-related LLC (prior to its disposition) are included in assets held for sale in the consolidated statements of financial condition. As of
December 31, 2016
and
2015
, the carrying values of the Company’s equity method investments included in assets held for sale were
$4.6 million
and
$5.7 million
, respectively. The Company’s share of the income or loss of FastMatch and the V3-related LLC (prior to its disposition) is included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations. Total income (loss) on equity method investments included in Income (loss) from discontinued operations, net of tax was
$0.4 million
and
$(1.3) million
for the years ended
December 31, 2016
and
2015
, respectively.
The Company did not receive any dividend distributions from its equity method investments during the years ended
December 31, 2016
and
2015
.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 7. Office, Communication and Computer Equipment, net
Office, communication and computer equipment, net consisted of the following as of
December 31, 2016
and
2015
, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Computer equipment
|
$
|
12,633
|
|
|
$
|
17,637
|
|
Capitalized software
|
80,624
|
|
|
70,750
|
|
Leasehold improvements
|
8,775
|
|
|
10,024
|
|
Furniture and fixtures and other equipment
|
1,599
|
|
|
1,677
|
|
Licenses
|
2,883
|
|
|
3,026
|
|
Communication equipment
|
1,894
|
|
|
1,885
|
|
Total office, communication and computer equipment
|
108,408
|
|
|
104,999
|
|
Less: Accumulated depreciation
|
(75,593
|
)
|
|
(69,108
|
)
|
Office, communication and computer equipment, net
|
$
|
32,815
|
|
|
$
|
35,891
|
|
Depreciation is computed on a straight-line basis (see Note 2). Depreciation expense from continuing operations, including impairments, included in the consolidated statements of operations was
$20.1 million
and
$21.3 million
for the years ended
December 31, 2016
and
2015
, respectively. Also included in depreciation expense from continuing operations is amortization related to capitalized software development costs of
$14.8 million
and
$14.5 million
for the years ended
December 31, 2016
and
2015
, respectively. Unamortized capitalized software development costs were
$23.9 million
and
$24.7 million
as of
December 31, 2016
and
2015
, respectively.
During
2016
and
2015
, the Company disposed of fully depreciated assets from continuing operations of
$10.5 million
and
$13.2 million
, respectively. During 2016, the Company recorded a charge of
$1.1 million
to fully impair the carrying amount of capitalized software and website development costs related to the DailyFX business as a result of its sale during the fourth quarter of 2016 (See Note 4). The impairment charge reduced the gain on sale and is included in Gain on sale of investments in the consolidated statements of operations for the year ended December 31, 2016. There were
no
impairments of fixed assets for the year ended December 31, 2015.
Office, communication and computer equipment related to businesses to be disposed of are included as a component of assets held for sale on the consolidated statements of financial condition and are not included in the table above. Depreciation related to these assets ceased as of the date they were determined to be held for sale. Depreciation expense related to these assets (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 consolidated statements of operations.
Note 8. Goodwill
The Company performed its annual assessment of goodwill for impairment as of October 1, 2016, (the “Annual Assessment Date”). Due to the negative equity of the reporting unit, the Company performed a qualitative assessment to determine whether it would be necessary to perform the second step of the goodwill impairment test. The Company evaluated qualitative factors, including market and economic conditions, industry-specific events and company-specific financial results, and determined that it was not more likely than not that goodwill was impaired as of the Annual Assessment Date.
In conjunction with the qualitative assessment, the Company performed a calculation of the fair value of the reporting unit as of the Annual Assessment Date primarily using the income approach. The income approach incorporated the use of a discounted cash flow (“DCF”) method whereby the estimated future cash flows and terminal values for the reporting unit are discounted to a present value using a discount rate. The estimated future cash flows are based on management’s forecasts and projections for the reporting unit which are driven by key assumptions, including revenue growth, operating margins, capital expenditures, non-cash expenses and income tax rate. When applicable, various growth rates are assumed for years beyond the current business plan period. The discount rate is based on a market participant weighted-average cost of capital, calculated
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 8. Goodwill - (continued)
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.
Due to the negative equity of the reporting unit at the Annual Assessment date, the Company assessed the reasonableness of the calculated fair value of the reporting unit by comparing the fair value of the reporting unit, adjusted for the fair value of interest-bearing debt and the fair value of Leucadia’s non-controlling membership units in Group, to the market capitalization of the Company. An implied control premium was then estimated, which represents the excess of the reporting unit’s fair value less adjustments over the market capitalization. Finally, 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 exceeded the indicated carrying value of the reporting unit. The fair value calculation was an additional factor considered within the overall qualitative assessment, indicating that it was not more likely than not that goodwill was impaired as of the Annual Assessment Date.
Due to the nature and significance of the regulatory events that occurred in February 2017 (see Note 28), the Company determined that a triggering event had occurred requiring an assessment of goodwill as of December 31, 2016. The Company performed a qualitative assessment to determine whether it was more likely than not that goodwill was impaired as of December 31, 2016. The qualitative assessment considered market conditions and overall financial performance during the fourth quarter of 2016, and included an updated fair value calculation using the same DCF methodology described above. In performing the DCF analysis as of December 31, 2016, the Company adjusted its estimated future cash flows assumptions and financial projections by reflecting the sale of its U.S. customer accounts and the implementation of cost reduction plans. In addition, inputs to the discount rate were revised to reflect changes to the risk-free rate of return and beta. Based on the analysis, the calculated fair value of the reporting unit exceeded its indicated carrying value as of December 31, 2016. As a result of the overall qualitative assessment performed, the Company determined that it was not more likely than not that goodwill was impaired as of December 31, 2016.
As noted above, the regulatory events that occurred subsequent to year-end are considered a triggering event, and will require an interim evaluation of goodwill in the first quarter of 2017. As of the report date, an estimate of the financial impact of this interim assessment cannot be made and will not be determined until the impairment testing is complete.
During the first quarter of 2015, the Company performed an interim impairment assessment of goodwill due to the events of January 15, 2015 and the Company's plan to sell certain businesses. This assessment resulted in the Company recording goodwill impairment losses of
$9.5 million
from continuing operations primarily due to a decline in the implied fair value of certain institutional businesses subsequent to January 15, 2015. The impairment loss is presented as a separate line item in the consolidated statements of operations and included as a component of Loss from continuing operations for the year ended December 31, 2015.
Changes in goodwill from continuing operations for the years ended December 31,
2015
and
2016
are presented in the following table and reflect the Company’s single operating segment, with amounts in thousands:
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
$
|
39,242
|
|
Impairment of goodwill
|
|
(9,513
|
)
|
Foreign currency translation and other adjustments
|
|
(1,649
|
)
|
Balance at December 31, 2015
|
|
28,080
|
|
Foreign currency translation and other adjustments
|
|
(4,601
|
)
|
Balance at December 31, 2016
|
|
$
|
23,479
|
|
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 9. Other Intangible Assets, net
The Company’s acquired intangible assets consisted of the following as of
December 31, 2016
and
2015
, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Finite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
35,460
|
|
|
$
|
(27,522
|
)
|
|
$
|
7,938
|
|
|
$
|
35,460
|
|
|
$
|
(21,223
|
)
|
|
$
|
14,237
|
|
Foreign currency translation adjustment
|
(4,971
|
)
|
|
2,718
|
|
|
(2,253
|
)
|
|
(1,910
|
)
|
|
855
|
|
|
(1,055
|
)
|
Total finite-lived intangible assets
|
30,489
|
|
|
(24,804
|
)
|
|
5,685
|
|
|
33,550
|
|
|
(20,368
|
)
|
|
13,182
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
License
|
600
|
|
|
—
|
|
|
600
|
|
|
600
|
|
|
—
|
|
|
600
|
|
Total Other intangible assets, net
|
$
|
31,089
|
|
|
$
|
(24,804
|
)
|
|
$
|
6,285
|
|
|
$
|
34,150
|
|
|
$
|
(20,368
|
)
|
|
$
|
13,782
|
|
During 2015, the Company acquired certain margin FX trading accounts from Citibank, N.A. and Citibank International Limited. 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
December 31, 2016
. The customer relationships are amortized on a straight-line basis over a weighted-average amortization period of
three
years.
Customer relationships are amortized on a straight-line basis over
three
to
nine
years which approximates the weighted-average useful lives. Indefinite-lived assets are not amortized (see Note 2). Amortization expense from continuing operations included in the consolidated statements of operations was
$7.2 million
and
$7.0 million
for the years ended
December 31, 2016
and
2015
, respectively.
Intangible assets related to businesses to be disposed of are included as a component of assets held for sale on the 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 related to these assets (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 consolidated statements of operations.
There was
no
impairment of intangible assets during the year ended
December 31, 2016
. During the first quarter of 2015, the Company performed an interim impairment evaluation of intangible assets due to the events of January 15, 2015 and the Company's plans to sell certain businesses. This evaluation resulted in the Company recording impairment losses of
$5.4 million
due to a decline in the implied fair value of certain institutional businesses subsequent to the events of January 15, 2015. The impairment charge is included as a component of amortization expense within discontinued operations for the year ended December 31, 2015.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 9. Other Intangible Assets, net - (continued)
Estimated future amortization expense for acquired intangible assets outstanding as of
December 31, 2016
is as follows, with amounts in thousands:
|
|
|
|
|
Year Ending December 31,
|
|
2017
|
3,983
|
|
2018
|
1,401
|
|
2019
|
301
|
|
2020
|
—
|
|
2021
|
—
|
|
Thereafter
|
—
|
|
|
$
|
5,685
|
|
Note 10. Other Assets
Other assets were comprised of the following as of December 31,
2016
and
2015
, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Prepaid expenses
|
$
|
4,229
|
|
|
$
|
5,807
|
|
Equity method investments
|
—
|
|
|
2,603
|
|
Cost method investment
|
1,103
|
|
|
—
|
|
Deposits
|
1,871
|
|
|
2,727
|
|
Other
|
161
|
|
|
284
|
|
Total
|
$
|
7,364
|
|
|
$
|
11,421
|
|
As discussed in Note 2, as a result of the Company's adoption of ASU No. 2015-03 in the first quarter of 2016, deferred debt issuance costs of
$3.4 million
as of
December 31, 2015
were reclassified from Other assets, as previously reported, to the respective debt liabilities on the consolidated statements of financial condition (see Notes 19 and 20).
Other assets related to businesses classified as discontinued operations are included as a component of assets held for sale on the consolidated statements of financial condition and are not included in the table above (see Note 4).
Note 11. Customer Account Liabilities
Customer account liabilities represent amounts due to customers related to cash and margin transactions. This includes cash deposits and gains and losses on settled FX, CFDs and spread betting trades as well as unrealized gains and losses on open FX commitments, CFDs and spread betting. Customer account liabilities were
$661.9 million
and
$685.0 million
as of
December 31, 2016
and
2015
, respectively.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 12. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were comprised of the following as of December 31,
2016
and
2015
, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Operating expenses payable
|
$
|
24,926
|
|
|
$
|
16,529
|
|
Commissions payable
|
7,271
|
|
|
8,671
|
|
Bonus payable
|
22,210
|
|
|
11,551
|
|
Income tax payable
|
920
|
|
|
1,375
|
|
Interest due on borrowings
|
162
|
|
|
162
|
|
Other
|
2
|
|
|
10
|
|
Total
|
$
|
55,491
|
|
|
$
|
38,298
|
|
Accounts payable and accrued expenses related to businesses classified as discontinued operations are included as a component of liabilities held for sale on the consolidated statements of financial condition and are not included in the table above (see Note 4).
Note 13. 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 year ended December 31, 2015, 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 the year ended December 31, 2015.
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 Class A common stock of Global Brokerage, Inc. The option has a strike price of
$22.50
. For the years ended
December 31, 2016
and 2015, the stock option was not included in the computation of diluted EPS because it was antidilutive under the treasury method.
In computing diluted EPS, outstanding stock options and other equity awards granted to certain employees, non-employees and independent directors in the aggregate of
721,622
and
749,856
for the years ended December 31,
2016
and
2015
, respectively, were excluded because they were antidilutive under the treasury method.
As described in Note 20, in June 2013 Global Brokerage, Inc. issued $
172.5 million
principal amount of
2.25%
senior convertible notes maturing on June 15, 2018 (the “Convertible Notes”). The Convertible Notes will be convertible at an initial conversion rate of
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
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 13. Earnings per Share - (continued)
number of shares of the Corporation’s Class A common stock that is necessary to settle such excess is considered issued. For the years ended December 31,
2016
and 2015, 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 20, the Company also entered into a warrant transaction whereby the Company sold to the counterparties warrants to purchase shares of the Corporation's Class A common stock. For the years ended December 31,
2016
and 2015, 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. During the years ended
December 31, 2016
and
2015
, certain members of Holdings exchanged
0.5 million
and
0.8 million
, respectively, of their Holdings Units on a
one
-for-one basis, for shares of Class A common stock of the Corporation.
The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations, with amounts in thousands, except per share data:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Basic and diluted net income (loss) per share of Class A common stock:
|
|
|
|
|
Numerator
|
|
|
|
Income (loss) from continuing operations attributable to Global Brokerage, Inc.
|
$
|
96,680
|
|
|
$
|
(513,600
|
)
|
Loss from discontinued operations attributable to Global Brokerage, Inc.
|
(26,037
|
)
|
|
(40,329
|
)
|
Net income (loss) available to holders of Class A common stock
|
70,643
|
|
|
(553,929
|
)
|
Earnings allocated to participating securities
|
—
|
|
|
—
|
|
Income (loss) available to common stockholders
|
$
|
70,643
|
|
|
$
|
(553,929
|
)
|
Denominator
|
|
|
|
Weighted average shares of Class A common stock
|
5,609
|
|
|
5,087
|
|
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
|
5,609
|
|
|
5,087
|
|
Net income (loss) per share of Class A common stock — Basic and Diluted:
|
|
|
|
Continuing operations
|
$
|
17.24
|
|
|
$
|
(100.96
|
)
|
Discontinued operations
|
(4.64
|
)
|
|
(7.93
|
)
|
Basic net income (loss) per share of Class A common stock
|
$
|
12.60
|
|
|
$
|
(108.89
|
)
|
____________________________________
(1)
No dilutive effect for either period presented, therefore
zero
incremental shares included
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 14. Related Party Transactions
Amounts receivable from, and payable to, related parties are set forth below, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Receivables
|
|
|
|
|
Advances to Holdings non-controlling members
|
$
|
3
|
|
|
$
|
112
|
|
Accounts receivable — Lucid non-controlling members
|
—
|
|
|
15
|
|
Advances to employees
|
55
|
|
|
201
|
|
Accounts receivable — Liquidity provider
|
308
|
|
|
—
|
|
Due from Liquidity provider
|
128
|
|
|
—
|
|
Notes receivable and interest — Lucid non-controlling members
|
—
|
|
|
8,171
|
|
Total receivables from related parties
|
$
|
494
|
|
|
$
|
8,499
|
|
|
|
|
|
Payables
|
|
|
|
Employees and equity method investments
|
$
|
732
|
|
|
$
|
1,370
|
|
Accounts payable — Equity method investment
|
180
|
|
|
90
|
|
Due to Lucid non-controlling members in connection with the allocation of income to Lucid non-controlling members for services provided
|
741
|
|
|
6,500
|
|
Tax receivable agreement
|
—
|
|
|
145
|
|
Total payables to related parties
|
$
|
1,653
|
|
|
$
|
8,105
|
|
The Company has advanced funds for withholding taxes to several non-controlling members of Holdings. The outstanding balances as of
December 31, 2016
and
2015
, included in the table above, are included in Accounts receivable, net in the consolidated statements of financial condition.
Included in Current assets held for sale in the consolidated statements of financial condition are advances to the Lucid non-controlling members. As of
December 31, 2016
and
2015
, advances to the Lucid non-controlling members were
nil
and not material, respectively.
The Company has advanced funds to several employees. The outstanding balances as of
December 31, 2016
and
2015
, included in the table above, are included in Accounts receivable, net in the 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 year ended
December 31, 2016
, the Company recorded trading profits of
$0.7 million
which is included in Trading revenue in the consolidated statements of operations. As of
December 31, 2016
Accounts receivable, net in the consolidated statements of financial condition included a receivable from the Leucadia affiliate of
$0.3 million
for trading profits, and Due from broker included a balance of
$0.1 million
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, which is included in Notes receivable in the consolidated statements of financial condition as of December 31,
2015
. 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 is included in General and administrative expense in the consolidated statements of operations for the year ended
December 31, 2016
. The Company recorded
$0.1 million
and
$0.2 million
of interest income related to the notes receivable for the years ended December 31, 2016 and 2015, respectively.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 14. Related Party Transactions - (continued)
During the year ended December 31, 2015, Lucid acquired
ownership interests and shares in CME Group Inc. from one of the non-controlling members of Lucid in a market-based transaction. The total carrying value of the ownership interests and shares was
$3.7 million
as of both
December 31, 2016
and
2015
and is included in assets held for sale (see Note 4).
Customers account liabilities in the consolidated statements of financial condition included balances for employees and equity method investments.
Included in Accounts payable and accrued expenses in the consolidated statements of financial condition are amounts payable to an equity method investee for platform trading services of
$0.2 million
and
$0.1 million
as of December 31, 2016 and 2015, respectively. The Company recorded
$1.1 million
in each of the years ended December 31, 2016 and 2015 for such platform services, which is included in Communication and technology in the consolidated statements of operations.
Amounts due related to the allocation of income to Lucid non-controlling members for services provided were
$0.7 million
and
$6.5 million
as of
December 31, 2016
and
2015
, respectively, and are included in Current liabilities held for sale in the consolidated statements of financial condition (see Note 4).
Prior to July 1, 2015, the Company received commission or mark-up income from institutional customers’ trades executed on FastMatch's electronic trading platform, an entity in which the Company owns a
34.4%
equity interest (see Note 6). The Company paid a per trade fee to FastMatch for use of the platform. Effective July 1, 2015, institutional customers trading via the FastMatch platform became direct customers of FastMatch. Fees collected from customers for trades executed on the FastMatch platform were
nil
and
$6.3 million
for the years ended
December 31, 2016
and
2015
, respectively, and are included in Trading revenue in the consolidated statements of operations. Fees paid to FastMatch were
nil
and
$4.3 million
for the years ended
December 31, 2016
and
2015
, respectively, and are reflected as a component of Communication and technology in the consolidated statements of operations. The Company received
$0.1 million
and
$0.3 million
from FastMatch during the years ended
December 31, 2016
and
2015
, respectively, for occupancy and operational costs, which is included in Other income in the 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. During the years ended
December 31, 2016
and
2015
, certain members of Holdings exchanged
0.5 million
and
0.8 million
, respectively, of their Holding Units, on a
one
-for-one basis, for shares of Class A common stock of the Corporation pursuant to the exchange agreement.
Equity Distribution Agreement
Pursuant to the terms of the Equity Distribution Agreement (see Note 16), 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 year ended
December 31, 2016
,
no
amount has been paid to Jefferies. T
he Company has agreed to reimburse a portion of the expenses that Jefferies incurs in connection with the offer and sale of the common stock. The Company recorde
d
$0.2 million
for the year ended
December 31, 2016
for reimbursements of such expenses.
Payments under Tax Receivable Agreement
The Corporation entered into a tax receivable agreement with the members of Holdings, including former members of Holdings (other than the Corporation) that will provide for the payment by the Corporation to Holdings’ members (other than the Corporation) as defined therein. Assuming sufficient taxable income is generated such that the Corporation fully realizes the tax benefits of the amortization specified in the tax receivable agreement, the aggregate payments currently estimated that would be due are
$145.6 million
and
$146.8 million
as of
December 31, 2016
and
2015
, respectively. During the first quarter of
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 14. Related Party Transactions - (continued)
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
December 31, 2016
, the Corporation continues to believe it will not benefit from the tax deduction and the contingent liability remains
zero
. During the years ended
December 31, 2016
and
2015
, payments of
$0.2 million
and
$5.4 million
, respectively, were made pursuant to the tax receivable agreement. The payment made during the year ended
December 31, 2016
relates to the 2014 tax return year. The Corporation does not currently expect to make a payment for the 2015 and 2016 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. See Note 19 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.
Other
UK LTD was party to an arrangement with Global Finance Company (Cayman) Limited (“Global Finance”) and Master Capital Group, S.A.L. (“Master Capital”). An affiliated shareholder of the Company beneficially owns more than
90%
of the equity of Global Finance and Master Capital. Pursuant to such arrangement, Global Finance and Master Capital were permitted to use the brand name “FXCM” and the Company’s technology platform to act as its local presence in certain countries in the Middle East and North Africa (“MENA”). UK LTD collected and remitted to Global Finance and Master Capital fees and commissions charged by Global Finance and Master Capital to customers in MENA countries. Effective May 4, 2015, UK LTD terminated the arrangement with Global Finance and Master Capital. For the years ended
December 31, 2016
and
2015
, the fees and commissions related to the arrangement were
nil
and
$0.2 million
, respectively, and are included in Referring broker fees in the consolidated statements of operations.
Note 15. Stock-Based Compensation
The Company’s Amended and Restated 2010 Long-Term Incentive Plan (the “LTIP”) permits the grant of various equity-based awards to employees, directors or other service providers of the Company and its subsidiaries. Under the LTIP, the Company has granted non-qualified stock options and other equity awards, including shares of the Corporation’s Class A common stock (“Shares”) and RSUs. The total number of Shares which may be issued under the LTIP is
1,529,500
. The Shares issued may consist, in whole or in part, of unissued Shares or treasury Shares. The issuance of Shares shall reduce the total number of Shares available under the LTIP. As of December 31,
2016
,
450,417
shares remained available for future issuance.
In arriving at stock-based compensation expense, the Company estimates the number of equity-based awards that will forfeit due to employee turnover. The Company’s forfeiture assumption is based primarily on its turn-over historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the Company’s financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in the Company’s financial statements. The expense the Company recognizes in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period.
Stock Options
Stock options to purchase Shares are granted to employees (“Employee Stock Options”) and the independent members of the board of directors (“Independent Directors Options”) (collectively, the “Stock Options”). Stock options are granted to employees and independent directors with exercise prices at least equal to the fair market value of a Share on the date the option is granted. The Employee Stock Options have a
four
-year graded vesting schedule and a contractual term of
seven years
from the date of grant. The Independent Directors Options vest on the first anniversary after the grant date and have a
seven
-year contractual term. Under the terms of the LTIP, the Company may issue new Shares or treasury shares upon share option exercise
.
During the years ended
December 31, 2016
and
2015
, the Company did not grant Employee Stock Options or Independent Directors Options.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation - (continued)
The following table summarizes the Company’s activity related to the Stock Options as of
December 31, 2016
and changes for the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(In thousands)
|
Outstanding at January 1, 2016
|
678,019
|
|
|
$
|
136.29
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
22,825
|
|
|
$
|
143.25
|
|
|
|
|
|
Outstanding at December 31, 2016
|
655,194
|
|
|
$
|
136.05
|
|
|
1.49
|
|
$
|
—
|
|
Options vested and expected to vest at December 31, 2016
|
654,513
|
|
|
$
|
136.03
|
|
|
1.49
|
|
$
|
—
|
|
Options exercisable at December 31, 2016
|
630,469
|
|
|
$
|
135.09
|
|
|
1.39
|
|
$
|
—
|
|
There were no options exercised in the years ended December 31,
2016
and
2015
. The total grant-date fair value of options vested in the years ended December 31,
2016
and
2015
was
$1.4 million
and
$3.1 million
, respectively.
Valuation Assumptions
The fair value of each option awarded to employees is estimated on the date of grant using the Black-Scholes option pricing model, consistent with the provisions of ASC 718. Options granted to the Company’s independent directors are considered options granted to employees under ASC 718 as defined therein.
Expected term for the Employee Stock Options and Independent Directors Options is based on the simplified method outlined in ASC 718.
In accordance with ASC 718, options are considered to be exercised halfway between the average vesting date and the contractual term of each option grant. The simplified method is applicable for “plain-vanilla” stock options, as defined in ASC 718, only if the Company does not have sufficient historical share option exercise experience upon which to estimate an expected term. The Corporation’s Shares have been publicly traded for approximately
six
years, however there is a lack of sufficient exercise history for Stock Options during this period, including the most recent
two
years. Consequently, the Company believes that the simplified method is an applicable methodology to estimate the expected term of the options as of the grant date.
The risk-free interest rates for the Employee Stock Options and Independent Directors Options are based on U.S. Treasury instruments whose terms are commensurate with the Stock Options’ expected terms
.
Expected volatility is based on a weighing of the historical and implied volatilities of the Company and for a set of public guideline companies deemed comparable to it
.
The guideline companies selected operate in a similar industry, pursue similar market opportunities, and are subject to similar risks of the Company. Changes in the subjective assumptions required in the valuation models may significantly affect the estimated value of the Company’s Stock Options, the related stock-based compensation expense and, consequently, its results of operations and comprehensive income.
Dividend yield is determined based on the Company’s expected dividend payouts.
Stock-based compensation expense before income taxes attributable to continuing operations for the Employee Stock Options, which is included in Compensation and benefits in the consolidated statements of operations, was
$1.2 million
and
$1.9 million
for the years ended December 31,
2016
and
2015
, respectively. Stock-based compensation expense before income taxes attributable to continuing operations for the Independent Directors Options, which is included in Compensation and benefits in the consolidated statements of operations, was
nil
and not material for the years ended
December 31, 2016
and
2015
, respectively. The total compensation cost capitalized and included in Office, communication and computer equipment, net, in the consolidated statements of financial condition was not material and
$0.1 million
for the years ended December 31,
2016
and
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation - (continued)
2015
, respectively. The Company did not recognize any tax benefit related to stock-based compensation expense for the years ended December 31,
2016
and
2015
.
As of
December 31, 2016
, there was
$0.8 million
of total unrecognized compensation cost related to unvested Stock Options that is expected to be recognized over a weighted average period of
1.1
years.
There were
no
cash proceeds received nor any income tax benefits realized from the exercise of Stock Options for the years ended
December 31, 2016
and
2015
.
Other Equity Awards
The LTIP provides for the grant of other stock-based awards (“Other Equity Awards”) which may include Shares and other awards that are valued in whole or in part by reference to, or are otherwise based on the fair market value of, Shares.
RSUs
Service-based RSUs were granted to employees during 2014. The RSUs vest in equal annual installments over a
four
-year period following the date of grant, subject to the employees’ continuing employment. RSUs that vest are settled by issuance of
one
Share for each RSU. If the employee terminates for any reason, any RSUs that have not vested as of the date of termination are forfeited and returned to the Company. There were
no
RSUs granted to employees during the years ended
December 31, 2016
and
2015
.
Holders of RSUs do not have dividend, voting or any other rights of a shareholder with respect to the Shares underlying the RSUs unless and until the RSUs vest and are settled by the issuance of such Shares. The fair value of RSUs is based on the fair market value of Shares on the date of grant, adjusted for the present value of dividends expected to be paid on Shares prior to vesting. Such value is recognized as an expense over the requisite service period, net of estimated forfeitures.
The following table summarizes the Company’s unvested RSU activity as of
December 31, 2016
and changes for the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
Units
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Weighted-
Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Unvested at January 1, 2016
|
|
14,903
|
|
|
$
|
162.50
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Vested
|
|
4,771
|
|
|
$
|
162.50
|
|
|
|
|
|
|
Forfeited
|
|
638
|
|
|
$
|
162.50
|
|
|
|
|
|
|
Unvested at December 31, 2016
|
|
9,494
|
|
|
$
|
162.50
|
|
|
1.96
|
|
$
|
67
|
|
RSUs expected to vest at December 31, 2016
|
|
8,948
|
|
|
$
|
162.50
|
|
|
1.96
|
|
$
|
63
|
|
The total fair value of RSUs vested during the years ended December 31,
2016
and
2015
was not material.
Stock-based compensation expense before income taxes attributable to continuing operations for RSUs, which is included in Compensation and benefits in the consolidated statements of operations, was
$0.7 million
and
$0.8 million
for the years ended
December 31, 2016
and
2015
, respectively. The total compensation cost capitalized for RSUs, which is included in Office, communication and computer equipment, net, in the consolidated statements of financial condition, was
$0.1 million
for each of the years ended December 31,
2016
and
2015
.
As of
December 31, 2016
, there was
$1.4 million
of total unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted-average period of
1.96
years.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation - (continued)
Shares
The Company did not grant Shares as Other Equity Awards during the years ended December 31,
2016
and
2015
.
Note 16. Stockholders’ Equity
The Corporation’s authorized capital stock consists of
3,000,000,000
shares of Class A common stock, par value
$0.01
per share,
1,000,000
shares of Class B common stock, par value
$0.01
per share, and
300,000,000
shares of preferred stock, par value
$0.01
per share, of which
55,120
shares have been designated as Series A Junior Participating Preferred Stock.
Class A Common Stock
Holders of shares of the Corporation’s Class A common stock are entitled to
one
vote for each share held of record on all matters submitted to a vote of stockholders. Holders of shares of Class A common stock are entitled to receive dividends when and if declared by the Corporation’s board of directors out of funds legally available therefore, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Upon dissolution or liquidation or the sale of all or substantially all of the Corporation’s assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of Class A common stock will be entitled to receive pro rata the Corporation’s remaining assets available for distribution. Holders of shares of Class A common stock do not have preemptive, subscription, redemption or conversion rights.
Class B Common Stock
Each holder of the Corporation’s Class B common stock is entitled, without regard to the number of shares of Class B common stock held by such holder, to
one
vote for each Holdings Unit in Holdings held by such holder. The unit holders of Holdings collectively have a number of votes in the Corporation that is equal to the aggregate number of Holdings Units that they hold. Holders of our Class B common stock do not have any right to receive dividends or to receive a distribution upon a liquidation or dissolution of the Corporation.
Class A Common Stock Repurchase Program
Our Board of Directors previously approved the repurchase of
$80.0 million
of Global Brokerage, Inc.’s Class A common stock (the “Stock Repurchase Program”). In November 2014, our Board of Directors approved a
$50.0 million
incremental increase in the Stock Repurchase Program for an aggregate of
$130.0 million
. Since inception of the Stock Repurchase Program in May 2011 through November 2016, the Company repurchased
5.1 million
pre-reverse split shares for
$64.2 million
under these authorizations. In November 2016, the Board of Directors of the Company canceled the Stock Repurchase Program.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 16. Stockholders’ Equity - (continued)
The following table presents the changes in the Company’s Class A common stock outstanding during the years ended
December 31, 2016
and 2015:
|
|
|
|
|
Class A Common Stock
|
|
|
Balance at January 1, 2015
|
|
4,788,994
|
|
Issued
|
|
—
|
|
Repurchased in conjunction with vesting of RSUs
|
|
(61
|
)
|
Exchange of Holdings Units to Class A common stock (see Note 3)
|
|
808,672
|
|
Vesting of RSUs
|
|
4,929
|
|
Balance at December 31, 2015
|
|
5,602,534
|
|
Issued
|
|
—
|
|
Repurchased
|
|
—
|
|
Exchange of Holdings Units to Class A common stock (see Note 3)
|
|
535,992
|
|
Vesting of RSUs (see Note 15)
|
|
4,771
|
|
Balance at December 31, 2016
|
|
6,143,297
|
|
As of
December 31, 2016
and
2015
, there were
8
and
25
shares, respectively, of Class B common stock issued and held by the members of Holdings.
As of
December 31, 2016
and
2015
, there were
no
shares of the Company’s Series A Junior Participating Preferred Stock outstanding.
Holders of shares of Class A common stock and Class B common stock vote together as a single class on all matters presented to the Company’s stockholders for their vote or approval, except as otherwise required by applicable law.
Option Agreement
In April 2015, the Company entered into an Option Agreement (the “Option Agreement”) pursuant to which the Company issued an option to purchase
56,934
shares of the Corporation’s Class A common stock (the “Option”) with an exercise price of
$22.50
. The Option was exercisable immediately, expires
two
years from the date of issuance, and includes standard anti-dilution protections. The Option Agreement was entered into as part of a negative equity balance settlement with a customer. The fair value of the Option on the date of issuance was estimated at
$0.3 million
and was determined using the Black-Scholes-Merton option pricing model. The Option was not exercised during the years ended December 31, 2016 and 2015.
Amendment to Stockholder Rights Plan
In January 2016, the Company entered into an Amended and Restated Rights Agreement (the “Amended Rights Agreement”) which amended the Company’s original Rights Agreement (the “Original Rights Agreement”) dated January 29, 2015. In connection with the adoption of the Original Rights Agreement, the Corporation's Board of Directors declared a dividend distribution of
one
right on each outstanding share of the Corporation's Class A common stock. The Original Rights Agreement was amended to protect the interests of the Company and its stockholders by helping to preserve the value of the Company’s net operating loss carryforwards and tax credits.
Under the terms of the Amended Rights Agreement, each right initially entitles stockholders to buy one one-thousandth (1/1000) of a share of the Series A Junior Participating Preferred Stock of the Corporation, at an initial exercise price of
$44.12
, in the event the rights become exercisable. As amended, the rights generally become exercisable if a person or group becomes the beneficial owner of
4.9%
or more of (a) the outstanding Class A common stock of the Corporation or (b) the fair market value of all capital stock of the Corporation. Prior to this amendment, the beneficial ownership percentage threshold
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 16. Stockholders’ Equity - (continued)
to trigger the rights plan was
10.0%
of all voting securities, a trigger that, after this amendment, remains in place in addition to the aforementioned
4.9%
trigger.
The Amended Rights Agreement extends the expiration date of the rights from January 29, 2018 to January 26, 2019, unless the rights are earlier redeemed or exchanged in accordance with the Amended Rights Agreement or the Amended Rights Agreement is earlier terminated by the Company’s Board of Directors.
As of
December 31, 2016
, the Company is not aware of the occurrence of any events that would trigger the exercise of the rights under the Amended Rights Agreement.
This amendment is not a taxable event, will not affect the reported financial condition or results of operations, including earnings per share, of the Corporation and will not change the manner in which the Corporation’s Class A common stock is currently traded.
Listing on the NASDAQ Global Market
In September 2016, the Corporation provided written notice to the New York Stock Exchange ("NYSE") of its intention to voluntarily delist its Class A common stock on the NYSE and to list on the NASDAQ Global Market of The NASDAQ Stock Market LLC ("NASDAQ"). The listing and trading of the Corporation’s Class A common stock on NYSE ceased at market close on September 23, 2016 and commenced on NASDAQ at market open on September 26, 2016. The Class A common stock traded on NASDAQ under the symbol "FXCM" until the Corporation changed its name to Global Brokerage, Inc. on February 24, 2017 (see Note 28). Effective at market open on February 27, 2017, the Corporation's Class A common stock trades on NASDAQ under the symbol "GLBR."
At-the-Market Common Stock Offering
In October 2016, the Company entered into an Equity Distribution Agreement (the "Equity Distribution Agreement") with Jefferies, as sales agent (the "Sales Agent"). Under the terms of the Equity Distribution Agreement, the Company may, from time to time, issue and sell shares of its Class A common stock, par value
$0.01
per share, having an aggregate offering price of up to
$15.0 million
, through the Sales Agent. The common stock will be sold pursuant to the Company's shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on August 2, 2016. The Company has not issued or sold any shares pursuant to the Equity Distribution Agreement during the year ended December 31, 2016.
Note 17. Employee Benefit Plan
The Company maintains a defined contribution employee profit-sharing and savings 401(k) plan for all eligible employees. The Company was not required to and made no contributions to the plan for the years ended
December 31, 2016
and
2015
.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 18. Net Capital Requirements
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
December 31, 2016
and
2015
, with amounts in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
US
|
|
UK LTD
|
|
Australia
|
|
Lucid LLP
|
Capital
|
$
|
43.6
|
|
|
$
|
76.3
|
|
|
$
|
12.0
|
|
|
$
|
10.9
|
|
Minimum capital requirement
|
28.3
|
|
|
27.6
|
|
|
0.7
|
|
|
4.0
|
|
Excess capital
|
$
|
15.3
|
|
|
$
|
48.7
|
|
|
$
|
11.3
|
|
|
$
|
6.9
|
|
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.
As a result of regulatory settlements reached with the Commodity Futures Trading Commission (the “CFTC”) and the National Futures Association (the “NFA”) in February 2017, US has withdrawn from business in the U.S. and deregistered from the CFTC and the NFA (see Note 28).
Note 19. 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 Newco 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, Newco and Leucadia also entered into an agreement (the “Letter Agreement”) that set the terms and conditions upon which the Corporation, Holdings and Newco would pay in cash to Leucadia and its assignees a percentage of the proceeds received in connection with certain transactions. In connection with these financing transactions, Holdings formed Newco and contributed all of the equity
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 19. Leucadia Transaction - (continued)
interests owned by Holdings in its subsidiaries to Newco. 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 (“Amendment”) became effective on September 1, 2016. The Amendment extends the maturity date of the term loan by
one year
to January 16, 2018. Additionally, the Amendment permits the Company to defer any three of the remaining interest payments by paying interest in kind. Until the term loan under the amended Credit Agreement is fully repaid, all distributions and sales proceeds will continue to be used solely to repay the principal plus interest.
The Company concluded that the terms of the amended Credit Agreement and the Credit Agreement dated January 24, 2015 are not substantially different. Accordingly, the Amendment is accounted for as a modification on a prospective basis pursuant to ASC 470. The components of interest expense related to the amended Credit Agreement, which are included in Interest on borrowings in the 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 amended Credit Agreement 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 Group 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." In February 2017, the Management Agreement was amended to provide the board of directors with certain rights of termination (see Note 28).
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 19. 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%
. In February 2017, Group and Leucadia entered into an acknowledgment pursuant to which the parties agree that Leucadia may terminate the Management Incentive Plan on behalf of Group at any time and for any reason in its sole discretion (see Note 28).
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
December 31, 2016
, the fair value of the Management Incentive Plan was estimated at
$54.1 million
. As of
December 31, 2016
, 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 year ended December 31, 2016.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 19. 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 2.
Leucadia has designated
three
directors to the board of directors of Group. 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
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 19. Leucadia Transaction - (continued)
the guidance under 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.
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 is 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. The change in the estimated fair value of the derivative liability between January 1, 2016 and the date of the Restructuring Transaction was a gain of
$212.9 million
and is recorded in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the consolidated statements of operations for the year ended
December 31, 2016
. As of
December 31, 2015
, the fair value of the derivative liability resulting from the Letter Agreement was estimated at
$448.5 million
and is included in Derivative liability — Letter Agreement on the consolidated statements of financial condition.
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 consolidated statements of financial condition as Redeemable non-controlling interest. The Company evaluates the probability of redemption at each reporting date. As of
December 31, 2016
, 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, as discussed in Note 2. 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 loss attributable to redeemable non-controlling interest in FXCM Group, LLC in the 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 and other comprehensive income of Group for the period from inception through
December 31, 2016
attributable to the non-controlling member was allocated based on the HLBV method. As of
December 31, 2016
, the carrying amount of the Redeemable non-controlling interest on the consolidated statements of financial condition was
$46.4 million
.
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 Newco. 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. Holdings’ prior revolving credit agreement with Bank of America, N.A. was repaid in full and terminated effective January 20, 2015.
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
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 19. Leucadia Transaction - (continued)
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.
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 year ended
December 31, 2016
.
The Credit Agreement requires 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
December 31, 2016
, the Company has paid
$155.5 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
7.1%
post-Restructuring Transaction. 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 is included in the consolidated statements of operations for the year ended
December 31, 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.
As of
December 31, 2016
, the Company estimated the fair value of the derivative liability related to the embedded derivatives bifurcated from the Credit Agreement by 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
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 19. Leucadia Transaction - (continued)
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 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
December 31, 2016
and 2015, the fair value of the derivative liability resulting from the Credit Agreement was estimated at
$6.2 million
and
nil
, respectively, and is included in Credit Agreement on the 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 consolidated statements of operations.
The balance of the Credit Agreement as of
December 31, 2016
and 2015 was as follows, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Debt principal
|
$
|
154,509
|
|
|
$
|
192,685
|
|
Original issue discount
|
(7,857
|
)
|
|
(35,967
|
)
|
Discount — issuance fee
|
(1,276
|
)
|
|
(5,227
|
)
|
Deferred financing fee
|
(918
|
)
|
|
(3,762
|
)
|
Debt issuance costs
|
(114
|
)
|
|
(467
|
)
|
Embedded derivative — Mandatory prepayment provision
|
6,172
|
|
|
—
|
|
Debt — net carrying value
|
$
|
150,516
|
|
|
$
|
147,262
|
|
Interest expense related to the Credit Agreement, included in Interest on borrowings in the consolidated statements of operations for the years ended
December 31, 2016
and 2015, consists of the following, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Contractual interest
|
$
|
33,879
|
|
|
$
|
27,337
|
|
Deferred interest
|
(3,045
|
)
|
|
5,789
|
|
Amortization of original issue discount
|
28,110
|
|
|
65,577
|
|
Amortization of issuance fee discount
|
3,951
|
|
|
8,665
|
|
Amortization of deferred financing fee
|
2,844
|
|
|
6,238
|
|
Amortization of debt issuance costs
|
353
|
|
|
774
|
|
Total interest expense — Credit Agreement
|
$
|
66,092
|
|
|
$
|
114,380
|
|
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 reflected as a discount to the Credit Agreement loan balance on the 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
$4.0 million
and
$8.7 million
for the years ended
December 31, 2016
and
2015
, respectively. The portion allocated to the Letter Agreement is reflected in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the consolidated statements of operations for the year ended December 31, 2015.
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
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 19. Leucadia Transaction - (continued)
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 amended Credit Agreement. Amortization of Credit Agreement issuance costs included in Interest on borrowings was
$0.4 million
and
$0.8 million
for the years ended
December 31, 2016
and
2015
, respectively. The portion allocated to the Letter Agreement is reflected in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the consolidated statements of operations for the year ended December 31, 2015. As discussed in Note 2, as a result of the Company’s adoption of ASU No. 2015-03 in the first quarter of 2016, unamortized debt issuance costs of
$0.5 million
as of
December 31, 2015
were reclassified from Other assets, as previously reported, to the Credit Agreement liability on the consolidated statements of financial condition.
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 amended Credit Agreement. Amortization of the deferred financing fee included in Interest on borrowings was
$2.8 million
and
$6.2 million
for the years ended
December 31, 2016
and
2015
, respectively. The deferred financing fee was paid on April 1, 2015.
The Company recorded a recovery of bad debt expense of
$0.1 million
from continuing operations in the consolidated statements of operations for the year ended
December 31, 2016
related to the events of January 15, 2015. There was
zero
bad debt expense from discontinued operations in the consolidated statements of operations for the year ended
December 31, 2016
related to the events of January 15, 2015. Bad debt expense from continuing operations in the consolidated statements of operations for the year ended
December 31, 2015
includes net expense of
$257.0 million
related to the debit balances. Bad debt expense for the year ended
December 31, 2015
includes
$0.1 million
of reversal of recoveries returned to clients, as well as
$0.3 million
reversal of recovery as payment for an option agreement entered into with a customer as part of a negative equity balance settlement (see Note 16). Bad debt expense from continuing operations for the year ended
December 31, 2015
reflects net recoveries of
$9.7 million
. Bad debt expense included in Loss from discontinued operations, net of tax in the consolidated statements of operations for the year ended
December 31, 2015
includes net expense of
$8.4 million
related to the debit balances, which reflects recoveries during this period of
$0.1 million
.
Note 20. Debt
Revolving Credit Agreement
In December 2011, Holdings entered into a credit agreement (“Revolving Credit Agreement”) with a syndicate of financial institutions. In January 2015, in connection with the Leucadia Transaction, Holdings’ outstanding balance under the Revolving Credit Agreement of
$25.0
million was repaid in full and the Revolving Credit Agreement was terminated effective January 20, 2015.
Interest expense related to borrowings under the Revolving Credit Agreement, including the amortization of debt financing costs, included in Interest on borrowings in the consolidated statements of operations was
$1.5 million
for the year ended December 31, 2015. For the same period, the weighted average dollar amount of borrowings under the Revolving Credit Agreement was
$1.3 million
and the weighted average interest rate was
2.92%
.
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.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 20. Debt - (continued)
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).
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 consolidated statements of financial condition and the recorded values will not be adjusted for subsequent changes in their respective fair values.
The Convertible Note Hedge Transaction and the Warrant Transaction are separate transactions, in each case, entered into by the Company with certain counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's right under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Convertible Hedge Transaction or the Warrant Transaction.
Under ASC 470, 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 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 will be amortized to interest expense over the life of the Convertible Notes. As discussed in Note 2, as a result of the Company’s adoption of ASU No. 2015-03 in the first quarter of 2016, unamortized debt issuance costs of
$2.9 million
as of December 31, 2015 were reclassified from Other assets, as previously reported, to the Senior convertible notes liability on the consolidated statements of financial condition.
The balances of the liability and equity components as of
December 31, 2016
and
2015
were as follows, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Liability component — principal
|
$
|
172,500
|
|
|
$
|
172,500
|
|
Deferred bond discount
|
(9,355
|
)
|
|
(15,315
|
)
|
Deferred debt issuance costs
|
(1,720
|
)
|
|
(2,930
|
)
|
Liability component — net carrying value
|
$
|
161,425
|
|
|
$
|
154,255
|
|
Equity component
|
$
|
29,101
|
|
|
$
|
29,101
|
|
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 20. Debt - (continued)
Interest expense related to the Convertible Notes, included in Interest on borrowings in the consolidated statements of operations, consists of the following, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Stated coupon rate
|
$
|
3,881
|
|
|
$
|
3,881
|
|
Amortization of deferred bond discount
|
5,960
|
|
|
5,607
|
|
Amortization of debt issuance cost
|
1,210
|
|
|
1,209
|
|
Total interest expense — Convertible note
|
$
|
11,051
|
|
|
$
|
10,697
|
|
Note 21. 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). The Company has the right to immediately terminate the agreement if actual leads received in any given quarter do not meet a set threshold. The costs associated with the digital advertising agreement are expensed as incurred.
Future payments under the three-year digital advertising agreement are as follows as of December 31, 2016, with amounts in thousands:
|
|
|
|
|
Year Ending December 31,
|
|
2017
|
$
|
3,117
|
|
2018
|
3,281
|
|
2019
|
3,008
|
|
Total
|
$
|
9,406
|
|
The advertising expense under the digital advertising agreement was
$0.4 million
for the year ended December 31, 2016 and is included in Advertising and marketing expense in the consolidated statements of operations.
Guaranty
In July 2015, the Company entered into a guaranty with Citibank, N.A. (the “Guaranty”) following the transition of certain institutional customers from the Company to FastMatch (see Note 14). Under the terms of the Guaranty, the Company agreed to guaranty FastMatch for any liabilities and other amounts that became due and payable by FastMatch for services provided by Citibank N.A. as the intermediating counterparty for trading transactions executed on the FastMatch platform. The Guaranty expired on March 1, 2016 and was not renewed. No payments were made by the Company to Citibank N.A. under the terms of the Guaranty.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 21. Commitments - (continued)
Operating Lease Commitments
The Company leases office space under operating leases. Some of the lease agreements contain renewal options ranging from
3
to
5 years
at prevailing market rates. The leases for the office facilities are subject to escalation factors primarily related to property taxes and building operating expenses. As of
December 31, 2016
, future minimum lease payments under non-cancelable operating leases with terms in excess of one year, including leases that renewed in 2017, are as follows, with amounts in thousands:
|
|
|
|
|
Year Ending December 31,
|
|
2017
|
$
|
6,468
|
|
2018
|
4,768
|
|
2019
|
4,633
|
|
2020
|
3,372
|
|
2021
|
3,390
|
|
Thereafter
|
13,146
|
|
|
$
|
35,777
|
|
The aggregate operating lease expense from continuing operations, included in General and administrative expense in the consolidated statements of operations, for the years ended
December 31, 2016
and
2015
was
$7.3 million
and
$6.2 million
, respectively. As of
December 31, 2016
, there were no sublease commitments. The Company leases its corporate office location under an operating lease agreement expiring in May 2026.
Note 22. 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 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 and 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 consolidated statements of financial condition and gains or losses on these transactions are included in Trading revenue in the 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 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 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 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 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
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 22. Derivative Financial Instruments - (continued)
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
December 31, 2016
and
2015
. 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 December 31, 2016
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Statement of Financial Condition Location
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
|
Notional
|
Exchange traded options
|
Current assets held for sale
(1)
|
|
$
|
3,209
|
|
|
$
|
10,562
|
|
|
$
|
—
|
|
|
$
|
—
|
|
CFD contracts
|
Due from brokers
(2)
|
|
131
|
|
|
24,286
|
|
|
—
|
|
|
—
|
|
Futures contracts
|
Due from/Due to brokers and Current assets/liabilities held for sale
(1) (2)
|
|
4,868
|
|
|
839,975
|
|
|
5,720
|
|
|
763,605
|
|
OTC options
|
Current assets/liabilities held for sale
(1)
|
|
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
|
|
|
|
|
____________________________________
(1)
As of
December 31, 2016
, the aggregate fair value of derivative assets and liabilities, gross attributable to discontinued operations is
$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.
(2)
As of
December 31, 2016
, the aggregate fair value of derivative assets and liabilities, gross attributable to continuing operations is
$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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Statement of Financial Condition Location
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
|
Notional
|
Exchange traded options
|
Current assets/liabilities held for sale
(3)
|
|
$
|
6,503
|
|
|
$
|
15,399
|
|
|
$
|
5,805
|
|
|
$
|
18,282
|
|
CFD contracts
|
Due from/Due to brokers
(4)
|
|
206
|
|
|
109,715
|
|
|
36
|
|
|
99,036
|
|
Futures contracts
|
Due from/Due to brokers and Current assets/liabilities held for sale
(3) (4)
|
|
4,212
|
|
|
794,960
|
|
|
3,102
|
|
|
1,047,239
|
|
Total derivatives, gross
|
|
|
$
|
10,921
|
|
|
$
|
920,074
|
|
|
$
|
8,943
|
|
|
$
|
1,164,557
|
|
Netting agreements and cash collateral netting
|
|
|
(8,909
|
)
|
|
|
|
(8,909
|
)
|
|
|
Total derivatives, net
|
|
|
$
|
2,012
|
|
|
|
|
$
|
34
|
|
|
|
____________________________________
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 22. Derivative Financial Instruments - (continued)
(3)
As of
December 31, 2015
, the aggregate fair value of derivative assets and liabilities, gross attributable to discontinued operations is
$9.7 million
and
$8.8 million
, respectively. These amounts are offset by netting agreements and cash collateral netting of
$8.8 million
and
$8.8 million
, respectively.
(4)
As of
December 31, 2015
, the aggregate fair value of derivative assets and liabilities, gross attributable to continuing operations is
$1.2 million
and
$0.1 million
, respectively. These amounts are offset by netting agreements and cash collateral netting of
$0.1 million
and
$0.1 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 consolidated statements of operations for the years ended
December 31, 2016
and
2015
, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Exchange traded options
(5)
|
$
|
2,463
|
|
|
$
|
8,573
|
|
CFD contracts
(6)
|
(749
|
)
|
|
(9,166
|
)
|
Futures contracts
(7)
|
(52,687
|
)
|
|
49,485
|
|
OTC options
(5)
|
31
|
|
|
1,086
|
|
Total
|
$
|
(50,942
|
)
|
|
$
|
49,978
|
|
____________________________________
(5)
Included in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations.
(6)
Included in Trading revenue in the consolidated statements of operations.
(7)
The portion included in Income (loss) from continuing operations in the consolidated statements of operations is
$(60.7) million
and
$31.2 million
for the years ended
December 31, 2016
and
2015
, respectively.
Note 23. 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.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 23. Fair Value Measurements - (continued)
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and the related hierarchy levels, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
As of December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Counterparty and Cash Collateral Netting
|
|
Total
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
$
|
2,198
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,198
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
Exchange traded options
|
3,209
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,209
|
|
Futures contracts
|
4,868
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,868
|
|
CFD contracts
|
—
|
|
|
131
|
|
|
—
|
|
|
—
|
|
|
131
|
|
OTC options
|
—
|
|
|
270
|
|
|
—
|
|
|
—
|
|
|
270
|
|
Netting
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,854
|
)
|
|
(4,854
|
)
|
Total derivative assets
(1)
|
8,077
|
|
|
401
|
|
|
—
|
|
|
(4,854
|
)
|
|
3,624
|
|
Total assets
|
$
|
10,275
|
|
|
$
|
401
|
|
|
$
|
—
|
|
|
$
|
(4,854
|
)
|
|
$
|
5,822
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Customer account liabilities
|
$
|
—
|
|
|
$
|
661,936
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
661,936
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
5,720
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,720
|
|
OTC options
|
—
|
|
|
225
|
|
|
—
|
|
|
—
|
|
|
225
|
|
Netting
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,854
|
)
|
|
(4,854
|
)
|
Total derivative liabilities
(1)
|
5,720
|
|
|
225
|
|
|
—
|
|
|
(4,854
|
)
|
|
1,091
|
|
Mandatory Prepayment Provision — Credit Agreement
|
—
|
|
|
—
|
|
|
6,172
|
|
|
—
|
|
|
6,172
|
|
Total liabilities
|
$
|
5,720
|
|
|
$
|
662,161
|
|
|
$
|
6,172
|
|
|
$
|
(4,854
|
)
|
|
$
|
669,199
|
|
As of
December 31, 2016
, the Company’s total notional absolute value of open FX and CFD customer assets and liabilities by currency pair or product was
$2.0 billion
and
$2.7 billion
, respectively. The Company’s total net notional value for open FX and CFD positions was
$2.1 billion
.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 23. Fair Value Measurements - (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
As of December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Counterparty and Cash Collateral Netting
|
|
Total
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
Exchange traded options
|
$
|
6,503
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,503
|
|
CFD contracts
|
—
|
|
|
206
|
|
|
—
|
|
|
—
|
|
|
206
|
|
Futures contracts
|
4,212
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,212
|
|
Netting
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,909
|
)
|
|
(8,909
|
)
|
Total derivative assets
(1)
|
10,715
|
|
|
206
|
|
|
—
|
|
|
(8,909
|
)
|
|
2,012
|
|
Total assets
|
$
|
10,715
|
|
|
$
|
206
|
|
|
$
|
—
|
|
|
$
|
(8,909
|
)
|
|
$
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Customer account liabilities
|
$
|
—
|
|
|
$
|
685,043
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
685,043
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Exchange traded options
|
5,805
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,805
|
|
CFD contracts
|
—
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
36
|
|
Futures contracts
|
3,102
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,102
|
|
Netting
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,909
|
)
|
|
(8,909
|
)
|
Total derivative liabilities
(1)
|
8,907
|
|
|
36
|
|
|
—
|
|
|
(8,909
|
)
|
|
34
|
|
Securities sold, not yet purchased
(2)
|
3,624
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,624
|
|
Letter Agreement
|
—
|
|
|
—
|
|
|
448,458
|
|
|
—
|
|
|
448,458
|
|
Total liabilities
|
$
|
12,531
|
|
|
$
|
685,079
|
|
|
$
|
448,458
|
|
|
$
|
(8,909
|
)
|
|
$
|
1,137,159
|
|
As of
December 31, 2015
, the Company’s total notional absolute value of open FX and CFD customer assets and liabilities by currency pair or product was
$2.5 billion
and
$2.5 billion
, respectively. The Company’s total net notional value for open FX and CFD positions was
$2.2 billion
.
____________________________________
(1)
Attributable to continuing and discontinued operations. See Note 22 for details of the classification of amounts on the consolidated statements of financial condition.
(2)
Attributable to discontinued operations. Amounts classified as held for sale on the consolidated statements of financial condition (see Note 4).
U.S. Treasury Bills
U.S. Treasury bills, included in Cash and cash equivalents on the consolidated statements of financial condition, are measured at fair value based on quoted market prices in an active market.
Derivative Assets and Liabilities
Exchange traded options and open futures contracts are measured at fair value based on exchange prices. CFD contracts and over-the-counter (“OTC”) options are measured at fair value based on market price quotations (where observable) obtained from independent brokers.
Customer Account Liabilities
Customer account liabilities represent amounts due to customers related to cash and margin transactions, including cash deposits and gains and losses on settled FX, CFDs and spread betting trades as well as unrealized gains and losses on open
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 23. Fair Value Measurements - (continued)
FX commitments, CFDs and spread betting. Customer account liabilities, included on the consolidated statements of financial condition, are measured at fair value based on the market prices of the underlying products.
Securities Sold, Not Yet Purchased
Securities sold, not yet purchased, represent the Company’s obligations to deliver the specified security at the contracted price at a future point in time, and thereby create a liability to repurchase the securities in the market at the prevailing prices. The liability for such securities sold short, included on the consolidated statements of financial condition, is marked to market based on the current fair value of the underlying security at the reporting date which is determined based on exchange prices. Changes in fair value of securities sold, not yet purchased are recorded in Income (loss) from discontinued operations, net of tax in the consolidated statements of operations. These transactions may involve market risk in excess of the amount currently reflected in the consolidated statements of financial condition.
Letter Agreement
The embedded derivatives bifurcated from the Letter Agreement are accounted for separately as a derivative liability. The fair value of the derivative liability resulting from the Letter Agreement is determined by the use of valuation techniques that incorporate a combination of Level 1 and Level 3 inputs. The Level 1 input is comprised of the common stock price of the Corporation. The significant Level 3 inputs, summarized in the following table, are considered more relevant in the analysis and are given a higher weighting in the overall fair value determination.
On September 1, 2016, in conjunction with the Restructuring Transaction, the Letter Agreement was terminated and its material terms are now reflected in the Group Agreement (see Note 19). The Company determined the fair value of the derivative liability resulting from the Letter Agreement as of August 31, 2016 (just prior to the termination of the Letter Agreement) by using an enterprise valuation based on the traded (or closing) common stock price of the Corporation of
$9.33
. This valuation approach incorporated an option pricing model for the allocation of enterprise value between the derivative liabilities resulting from the Letter and Credit Agreements, the Management Incentive Plan, common stock and convertible debt.
The following table summarizes the significant Level 3 inputs used in the fair value determination of the Letter Agreement as of August 31, 2016 and December 31, 2015, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
|
August 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Option-Pricing Method
|
|
Term (years)
|
|
1.8
|
|
|
2.5
|
|
|
|
Volatility
|
|
131.1
|
%
|
|
79.1
|
%
|
|
|
Risk-free rate
|
|
0.8
|
%
|
|
1.2
|
%
|
|
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
|
Reliance placed on public indication of value
|
|
100.0
|
%
|
|
100.0
|
%
|
Prior to the date of the Restructuring Transaction, the derivative liability resulting from the Letter Agreement, included on the consolidated statements of financial condition, was marked to market at each reporting date and changes in the fair value were recorded through earnings in the consolidated statements of operations as gains or losses resulting from the Letter Agreement.
Mandatory Prepayment Provision — Credit Agreement
The Credit Agreement contains mandatory prepayment provisions that may be triggered by events or circumstances that are not considered clearly and closely related to the Credit Agreement, such as asset sales, and, as such, represent embedded derivatives in accordance with ASC 815. The embedded derivatives are bifurcated from the Credit Agreement and accounted for separately as a derivative liability. The fair value of the derivative liability resulting from the mandatory prepayment provisions of the Credit Agreement is estimated using the “with” and “without” method. Using this methodology,
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 23. Fair Value Measurements - (continued)
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 value of the Credit Agreement in the "with" and "without" scenarios was estimated using a risk-neutral valuation model. Specifically, to estimate the fair value of the Credit Agreement, the expected cash flows were modeled over the life of the debt, including the extension of the maturity date by
one year
as part of the Restructuring Transaction.
The valuation of the derivative liability resulting from the mandatory prepayment provision primarily utilizes Level 3 inputs. The significant Level 3 inputs include the expected recovery rate in the case of a default and the expected timing for the remaining businesses to be sold. A recovery rate of
53.4%
was used in the valuation as of
December 31, 2016
, which was estimated using market observed long-term average recovery rates for debt instruments of similar seniority. The timing for the remaining businesses to be sold was estimated by management to occur within the first half of 2017.
The derivative liability resulting from the mandatory prepayment provision, included in the Credit Agreement on the consolidated statements of financial condition, is marked to market at each reporting date and changes in the fair value are recorded through earnings in the consolidated statements of operations as gains or losses resulting from the Credit Agreement. The valuation techniques used are sensitive to certain key assumptions. For example, a
5.0%
increase (decrease) in the market price of the Senior convertible notes would result in a decrease of approximately
$2.7 million
(increase of approximately
$2.6 million
) in this valuation, assuming no other change in any other factors considered.
The following tables present the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value in the consolidated statements of financial condition, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Fair Value Measurements using:
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Due from brokers — unsettled spot FX
(4)
|
$
|
1,600
|
|
|
$
|
1,600
|
|
|
$
|
—
|
|
|
$
|
1,600
|
|
|
$
|
—
|
|
Due from brokers — excess cash collateral
(5)
|
12,229
|
|
|
12,229
|
|
|
—
|
|
|
12,229
|
|
|
—
|
|
Exchange memberships
(5)
|
9,434
|
|
|
10,190
|
|
|
—
|
|
|
10,190
|
|
|
—
|
|
Total assets
|
$
|
23,263
|
|
|
$
|
24,019
|
|
|
$
|
—
|
|
|
$
|
24,019
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Due to brokers — unsettled spot FX
(4)
|
$
|
425
|
|
|
$
|
425
|
|
|
$
|
—
|
|
|
$
|
425
|
|
|
$
|
—
|
|
Senior convertible notes
|
161,425
|
|
|
94,875
|
|
|
—
|
|
|
94,875
|
|
|
—
|
|
Credit Agreement
|
150,516
|
|
|
148,813
|
|
|
—
|
|
|
—
|
|
|
148,813
|
|
Total liabilities
|
$
|
312,366
|
|
|
$
|
244,113
|
|
|
$
|
—
|
|
|
$
|
95,300
|
|
|
$
|
148,813
|
|
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 23. Fair Value Measurements - (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Fair Value Measurements using:
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Due from brokers — unsettled spot FX
(4)
|
$
|
2,939
|
|
|
$
|
2,939
|
|
|
$
|
—
|
|
|
$
|
2,939
|
|
|
$
|
—
|
|
Due from brokers — unsettled common stock
(5)
|
3,054
|
|
|
3,054
|
|
|
—
|
|
|
3,054
|
|
|
—
|
|
Due from brokers — excess cash collateral
(5)
|
18,010
|
|
|
18,010
|
|
|
—
|
|
|
18,010
|
|
|
—
|
|
Notes receivable
|
7,881
|
|
|
7,881
|
|
|
—
|
|
|
—
|
|
|
7,881
|
|
Exchange memberships
(5)
|
9,434
|
|
|
8,655
|
|
|
—
|
|
|
8,655
|
|
|
—
|
|
Total assets
|
$
|
41,318
|
|
|
$
|
40,539
|
|
|
$
|
—
|
|
|
$
|
32,658
|
|
|
$
|
7,881
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Due to brokers — unsettled spot FX
(4)
|
$
|
1,039
|
|
|
$
|
1,039
|
|
|
$
|
—
|
|
|
$
|
1,039
|
|
|
$
|
—
|
|
Senior convertible notes
|
157,185
|
|
|
121,187
|
|
|
—
|
|
|
121,187
|
|
|
—
|
|
Credit Agreement
|
147,729
|
|
|
192,685
|
|
|
—
|
|
|
—
|
|
|
192,685
|
|
Total liabilities
|
$
|
305,953
|
|
|
$
|
314,911
|
|
|
$
|
—
|
|
|
$
|
122,226
|
|
|
$
|
192,685
|
|
____________________________________
(4)
Attributable to continuing and discontinued operations. See Note 4 for amounts classified as held for sale on the consolidated statements of financial condition.
(5)
Attributable to discontinued operations and included in assets held for sale on the consolidated statements of financial condition (see Note 4).
Due from/to Brokers
—
Unsettled Spot FX
Unsettled spot FX, included in Due from/Due to brokers and assets and liabilities held for sale on the consolidated statements of financial condition, is carried at contracted amounts which approximate fair value based on market price quotations (where observable) obtained from independent brokers.
Due from Brokers
—
Unsettled Common Stock
The receivable for exchange membership shares sold short, included in assets held for sale on the consolidated statements of financial condition, is carried at the contracted amount which approximates fair value based on quoted prices.
Due from Brokers
—
Excess Cash Collateral
Excess cash collateral, included in assets held for sale on the consolidated statements of financial condition, is carried at contractual amounts which approximate fair value.
Notes Receivable
Notes receivable are carried at contracted amounts which approximate fair value.
Exchange Memberships
Exchange memberships, which include ownership interests and shares owned, are carried at cost. The fair value is based on quoted prices or recent sales.
Senior Convertible Notes
Senior convertible notes are carried at contractual amounts. The fair value of the Senior convertible notes is based on similar recently executed transactions and market price quotations (where observable) obtained from independent brokers.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 23. Fair Value Measurements - (continued)
Credit Agreement
Credit Agreement is carried at the contracted amount less original issue discount. The fair value of the Credit Agreement is based on a valuation model that considers the probability of default, Leucadia's secured interest and the observable trading value of the Senior convertible notes.
The following tables reconcile the opening and ending balances of the recurring fair value measurements categorized as Level 3, which are included in the consolidated statements of financial condition, and identifies the total gains and losses the Company recognized during the years ended
December 31, 2016
and
2015
, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
Balance as of
December 31, 2015
|
|
Net Unrealized
(Gain) Loss
|
|
Addition/(Reversal)
|
|
Balance as of
December 31, 2016
|
Letter Agreement
|
|
$
|
448,458
|
|
|
$
|
(212,949
|
)
|
|
$
|
(235,509
|
)
|
|
$
|
—
|
|
Mandatory Prepayment Provision — Credit Agreement
|
|
—
|
|
|
6,172
|
|
|
—
|
|
|
6,172
|
|
Total Level 3 liabilities
|
|
$
|
448,458
|
|
|
$
|
(206,777
|
)
|
|
$
|
(235,509
|
)
|
|
$
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
Balance as of
December 31, 2014
|
|
Net Unrealized
(Gain) Loss
|
|
Addition/(Reversal)
|
|
Balance as of
December 31, 2015
|
Letter Agreement
|
|
$
|
—
|
|
|
$
|
354,022
|
|
|
$
|
94,436
|
|
|
$
|
448,458
|
|
Total Level 3 Liabilities
|
|
$
|
—
|
|
|
$
|
354,022
|
|
|
$
|
94,436
|
|
|
$
|
448,458
|
|
The net unrealized gains and losses summarized in the tables above are related to the changes in the fair value of the Letter Agreement and the embedded derivative related to the mandatory prepayment provision of the Credit Agreement for the years ended
December 31, 2016
and
2015
and are included i
n Gain (loss) on derivative liabilities
— Letter & Credit Agreements in the consolidated statements of operations.
There were no transfers into or out of Level 1, 2 or 3 of the fair value hierarchy during the years ended
December 31, 2016
and 2015.
Note 24. Income Taxes
Holdings operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal, state, and local income tax purposes. Since January 2015, all of Holdings’ operations are held by Group, a limited liability company that is also treated as a partnership between Holdings and Leucadia for U.S. federal, state and local income tax purposes. As a result, neither Holdings’ nor Group’s income from its U.S. operations is subject to U.S. federal income tax because the income is attributable to its members. Accordingly, the Company’s U.S. tax provision is solely based on the portion of income attributable to the Corporation from the lower tier limited liability companies and excludes the income attributable to other members of Holdings and Group whose income is included in Net income (loss) attributable to non-controlling interest in Global Brokerage Holdings, LLC in the consolidated statements of operations.
In addition to U.S. federal and state income taxes, the Company is subject to Unincorporated Business Tax which is attributable to Group’s operations apportioned to New York City. The Company’s foreign subsidiaries are also subject to local taxes.
Income (loss) from continuing operations before income taxes, as shown in the consolidated statements of operations, includes the following components, with amounts in thousands:
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 24. Income Taxes - (continued)
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Domestic
|
$
|
100,414
|
|
|
$
|
(628,527
|
)
|
Foreign
|
62,156
|
|
|
(4,778
|
)
|
|
$
|
162,570
|
|
|
$
|
(633,305
|
)
|
The provision for income taxes attributable to continuing operations consists of the following, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Current
|
|
|
|
Federal income tax benefit
|
$
|
—
|
|
|
$
|
(176
|
)
|
State and local tax benefit
|
(34
|
)
|
|
(11
|
)
|
Foreign income tax expense (benefit)
|
1,592
|
|
|
(412
|
)
|
Subtotal
|
1,558
|
|
|
(599
|
)
|
|
|
|
|
Deferred
|
|
|
|
Federal income tax
|
—
|
|
|
172,618
|
|
State and local income tax
|
—
|
|
|
7,474
|
|
Foreign income tax (benefit) expense
|
(781
|
)
|
|
1,705
|
|
Subtotal
|
(781
|
)
|
|
181,797
|
|
Total provision for taxes attributable to continuing operations
|
$
|
777
|
|
|
$
|
181,198
|
|
The following table reconciles the provision for income taxes attributable to continuing operations to the U.S. federal statutory tax rate:
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Statutory U.S. federal income tax rate
|
34.0
|
%
|
|
34.0
|
%
|
Income passed through to non-controlling members
|
(10.6
|
)
|
|
(17.0
|
)
|
State and local income tax
|
2.1
|
|
|
1.3
|
|
Foreign income tax
|
(0.3
|
)
|
|
(1.1
|
)
|
Tax Receivable Agreement true-up
|
—
|
|
|
7.8
|
|
Loss on liquidation of subsidiary
|
(1.4
|
)
|
|
—
|
|
Non-deductible penalty
|
1.1
|
|
|
—
|
|
Valuation allowance
|
(27.1
|
)
|
|
(50.9
|
)
|
Non-deductible interest
|
2.3
|
|
|
(2.3
|
)
|
Other
|
0.4
|
|
|
(0.4
|
)
|
Effective tax rate
|
0.5
|
%
|
|
(28.6
|
)%
|
The change in the effective tax rate for the year ended
December 31, 2016
compared to the year ended
December 31, 2015
is predominantly the result of reversing the valuation allowance previously established on the deferred tax assets of the Company to offset the tax provision associated with the book income for the period. During 2015, the Corporation determined that, given the losses incurred from the events of January 15, 2015 and due to the Leucadia Transaction, it was not more likely than not that it would benefit from the tax deduction attributable to the tax basis step-up from the conversion of the non-controlling membership units of Holdings, nor would it receive tax benefit from the losses incurred. As a result, a valuation allowance was established on substantially all of the deferred tax assets of the Company due to their doubtful realizability, which was the primary driver of the tax provision recorded for the year ended
December 31, 2015
. The negative tax rate for the year ended
December 31, 2015
reflects the recording of a tax provision on the book loss for the period.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 24. Income Taxes - (continued)
Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences from continuing operations is as follows, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Deferred tax assets
|
|
|
|
|
Equity-based compensation
|
$
|
294
|
|
|
$
|
336
|
|
Investment in partnership
|
190,844
|
|
|
277,775
|
|
Fixed assets
|
—
|
|
|
747
|
|
Tax loss carryforwards
|
125,898
|
|
|
120,580
|
|
Intangible assets
|
679
|
|
|
302
|
|
Tax credit carryforward/foreign sub income
|
4,539
|
|
|
5,090
|
|
Gain/(Loss) on derivative liability — Letter Agreement
|
—
|
|
|
3,067
|
|
Other
|
1,072
|
|
|
491
|
|
Gross deferred tax assets
|
323,326
|
|
|
408,388
|
|
Less: valuation allowance
|
(322,201
|
)
|
|
(407,590
|
)
|
Net deferred tax asset
|
1,125
|
|
|
798
|
|
Deferred tax liabilities
|
|
|
|
Fixed assets
|
28
|
|
|
5
|
|
Intangible assets
|
228
|
|
|
714
|
|
Software development cost
|
171
|
|
|
245
|
|
Other
|
583
|
|
|
539
|
|
Gross deferred tax liabilities
|
1,010
|
|
|
1,503
|
|
Net deferred tax asset (liability)
|
$
|
115
|
|
|
$
|
(705
|
)
|
The increase in net deferred tax assets was primarily driven by a decrease in the deferred tax liability associated with certain identified intangibles and the reversal of valuation allowance. Additionally, the increase in deferred tax assets is driven by the increase in the Corporation’s ownership in Holdings as a result of members of Holdings exchanging their membership units for the Corporation's Class A common stock. As Existing Unit Holders exchange their membership units, the Company records a deferred tax benefit related to Holdings election under Section 754 of the Internal Revenue Code (see Note 2). The increase in net operating loss carryforwards also contributed to the increase.
The Company assesses available positive and negative evidence to estimate if it is more-likely-than-not to use certain jurisdiction-based deferred tax assets including certain tax credits and net operating loss carryovers. On the basis of this assessment, a valuation allowance of
$85.4 million
was released during the year ended
December 31, 2016
.
As of December 31,
2016
, the Company has
$258.7
million of domestic net operating loss carryforwards and
$480.1 million
of foreign net operating loss carryforwards from all operations. The U.S. net operating loss carryforwards have various expiration dates through 2036 with the net operating losses generated by certain of our U.K. subsidiaries having indefinite carryforward periods.
The tax credit carryforward includes foreign tax credits of
$3.5 million
and a research and development credit of
$0.5 million
, each of which may be carried forward for a period of
10
years and begin to expire in 2021 and New York City unincorporated business tax credits of
$0.5 million
that may be carried forward for
7
years.
The Company does provide for deferred taxes on the excess of the financial reporting over the tax basis in its investments in foreign subsidiaries because the amounts are not deemed to be permanent in duration.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 24. Income Taxes - (continued)
Income tax payable as of
December 31, 2016
and
2015
was
$0.9 million
and
$1.4 million
, respectively, and is included in Accounts payable and accrued expenses in the consolidated statements of financial condition (see Note 12). Tax receivable as of
December 31, 2016
and
2015
was
$0.2 million
and
$1.8 million
, respectively.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Unrecognized tax benefits – January 1
|
$
|
390
|
|
|
$
|
409
|
|
Gross increases – tax positions in prior period
|
36
|
|
|
—
|
|
Gross decreases – tax positions in prior period
|
—
|
|
|
(137
|
)
|
Gross increases – tax positions in current period
|
166
|
|
|
118
|
|
Lapse of statute of limitations
|
(51
|
)
|
|
—
|
|
Unrecognized tax benefits – December 31
|
$
|
541
|
|
|
$
|
390
|
|
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated statements of financial condition. Related to the unrecognized tax benefits noted above, the Company accrued penalties and interest of immaterial amounts during the years ended December 31,
2016
and
2015
.
The Company does not believe that it will have a material increase in its unrecognized tax benefits during the coming year.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of
December 31, 2016
, the Company’s tax years for 2013, 2014 and 2015 are subject to examination by the tax authorities. Currently, the Company and Holdings’ 2013 U.S. Federal tax returns are under examination along with the Company’s 2013 and 2014 New York State tax returns. Additionally, several of the Company’s U.K. subsidiaries are under examination for the 2012 tax year.
Note 25. Foreign Currencies and Concentrations of Credit Risk
Under the agency model, the Company accepts and clears FX spot contracts for the accounts of its customers (see Notes 1 and 2). These activities may expose the Company to off-balance sheet risk in the event that the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss.
In connection with these activities, the Company executes and clears customers’ transactions involving the sale of foreign currency not yet purchased, substantially all of which are transacted on a margin basis subject to internal policies. Such transactions may expose the Company to off-balance sheet risk in the event margin deposits are not sufficient to fully cover losses that customers may incur. In the event that a customer fails to satisfy its obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer’s obligation.
The Company controls such risks associated with its customer activities by requiring customers to maintain margin collateral, in the form of cash, in compliance with various internal guidelines. The Company’s trading software technology monitors margin levels on a real time basis and, pursuant to such guidelines, requires customers to deposit additional cash collateral, or to reduce positions, if necessary. The system is designed to ensure that any breach in a customer’s margin requirement as a result of losses on the trading account will automatically trigger a final liquidation, which will execute the closing of all positions.
Exposure to credit risk is dependent on market liquidity. Prior to the events of January 15, 2015, the Company’s customers rarely had significant negative equity balances, and exposure to credit risk from customers was therefore minimal. Following the events of January 15, 2015, the Company took a number of actions to reduce credit risk from customers, including increasing margin requirements and discontinuing currency pairs from the trading platform that are believed to carry significant risk due to overactive manipulation by their respective governments either by a floor, ceiling, peg or band. For the
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 25. Foreign Currencies and Concentration of Credit Risk - (continued)
year ended
December 31, 2016
, losses incurred from customer accounts that had gone negative were approximately
$2.5 million
, primarily related to the Brexit event in June 2016 and the GBP flash crash in October 2016. For the year ended December 31,
2015
, losses incurred from customer accounts that had gone negative were
$0.5 million
(excluding the events of January 15, 2015).
Institutional customers are permitted credit pursuant to limits set by the Company’s prime brokers. The prime brokers incur the credit risk relating to the trading activities of these customers in accordance with the respective agreements between such brokers and the Company.
The Company is engaged in various trading activities with counterparties which include brokers and dealers, futures commission merchants, banks and other financial institutions. In the event that such counterparties do not fulfill their obligations, the Company may be exposed to credit risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the financial instrument. It is the Company’s policy to: (i) perform credit reviews and due diligence prior to conducting business with counterparties; (ii) set exposure limits and monitor exposure against such limits; and (iii) periodically review, as necessary, the credit standing of counterparties using multiple sources of information. The Company’s total Due from brokers balance included in the consolidated statements of financial condition was
$17.5 million
(1)
and
$26.0 million
(1)
as of December 31,
2016
and
2015
, respectively. As of
December 31, 2016
and
2015
,
89.8%
and
94.7%
, respectively, of the Company’s total Due from brokers balance was from
three
large financial institutions.
Three
banks held more than
10.0%
each of the Company’s total cash and cash equivalents and cash and cash equivalents, held for customers as of December 31,
2016
.
Five
banks held more than
10.0%
each of the Company’s total cash and cash equivalents and cash and cash equivalents, held for customers as of December 31,
2015
.
____________________________________
(1)
As of
December 31, 2016
and
2015
,
$3.4 million
and
$3.8 million
, respectively, is attributable to continuing operations. See Note 4 for amounts classified as assets held for sale on the consolidated statements of financial condition.
Note 26. Segment Information
ASC 280 establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The guidance defines reportable segments as operating segments that meet certain quantitative thresholds. It was determined in the first quarter of 2015 that as a result of the events of January 15, 2015, and the decision to sell certain institutional assets, the composition of the Company’s previously reported Institutional segment changed significantly, such that the remaining institutional business reported in continuing operations no longer meets the quantitative criteria for separate reporting. In addition, the continuing institutional business shares common management strategies, customer support and trading platforms with the Company’s retail business. Accordingly, the Company operates in a single operating segment for all periods presented.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 26. Segment Information - (continued)
Geographic Locations
Trading revenue from external customers is attributed to individual countries based on the customers’ country of domicile. Trading revenue from continuing operations by geographical region is as follows, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Trading Revenue from Continuing Operations
|
|
|
|
U.S.
|
$
|
37,002
|
|
|
$
|
35,413
|
|
Asia
|
108,905
|
|
|
98,147
|
|
Europe, Middle East and North Africa
|
103,375
|
|
|
86,723
|
|
Rest of World
|
21,421
|
|
|
20,329
|
|
Other
|
5,297
|
|
|
9,430
|
|
Total
|
$
|
276,000
|
|
|
$
|
250,042
|
|
Trading revenue attributable to China represented
30.3%
and
27.4%
of total trading revenue from continuing operations for the years ended
December 31, 2016
and
2015
, respectively. Trading revenue attributable to the U.S. represented
13.4%
and
14.2%
of total trading revenue from continuing operations for the years ended
December 31, 2016
and
2015
, respectively.
As of December 31,
2016
and
2015
, substantially all of the Company’s long-lived assets were located in the U.S.
Concentrations of Significant Customers
No single customer accounted for
10.0%
or more of total trading revenue from continuing operations for the years ended
December 31, 2016
and
2015
.
Note 27. Litigation
In the ordinary course of business, the Company and certain of its officers, directors and employees may from time to time be involved in litigation and claims incidental to the conduct of its businesses, including intellectual property claims. In addition, the Company’s business is also subject to extensive regulation, which may result in administrative claims, investigations and regulatory proceedings against it. The Company has been named in various arbitration and civil litigation cases brought by customers seeking damages for trading losses. Management has investigated these matters and believes that such cases are without merit and is defending them vigorously. However, the arbitrations and litigations are presently in various stages of the judicial process and no judgment can be made regarding the ultimate outcome of the arbitrators’ and/or court’s decisions.
In January 2014, the equity receiver for a former client of US, Revelation Forex Fund (“Revelation”), its principal, Kevin G. White, and related entities RFF GP, LLC and KGM Capital Management, LLC, filed suit against US, and certain unrelated defendants, in Texas state court. The suit alleges that US is liable for damages in excess of
$3.8 million
, plus exemplary damages, interest, and attorneys’ fees in connection with a Ponzi scheme run by Mr. White through his companies. In June 2015, that same equity receiver filed a complaint against US seeking
$2.0 million
, plus interest, and attorneys’ fees, based on allegations that the amount in controversy represents the net fraudulent transfers from Revelation to US under New York law. In September 2015, the parties agreed to arbitration proceeding before the National Futures Association (“NFA”) on these claims. In June 2016, the parties agreed to settle all related matters for
$2.3 million
. The Company recorded a charge for
$2.3 million
in the year ended December 31, 2016, which is included in General and administrative expense in the consolidated statements of operations.
In April 2014, the Securities and Futures Commission ("SFC") initiated an investigation relating to HK’s past trade execution practices concerning the handling of price improvements in the Company’s trading system prior to August 2010. On October 19, 2016, the parties entered into a final settlement whereby HK volun
tarily agreed to make full restitution to affected
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 27. Litigation - (continued)
clients in the amount of
$1.5 million
and pay a fine of
$0.5 million
.
The Company paid the
$2.0 million
settlement in November 2016.
On January 15, 2015, as a result of the unprecedented volatility in the EUR/CHF currency pair after the SNB discontinued its currency floor of
1.2
CHF per EUR, US suffered a temporary breach of certain regulatory capital requirements. On August 18, 2016, the Commodity Futures Trading Commission ("CFTC") filed a complaint,
U.S. Commodity Futures Trading Commission v. Forex Capital Markets, LLC
, in the U.S. District Court for the Southern District of New York, alleging that US was undercapitalized following the SNB’s decision to remove the currency peg, that US failed to notify the CFTC of its undercapitalization, and that US guaranteed customer losses. On December 8, 2016, the CFTC filed an amended complaint. On or about February 13, 2017, US settled with the CFTC without admitting or denying any of the allegations, and pursuant to a consent order entered by the court, agreed to pay a civil monetary penalty in the amount of
$0.7 million
to the CFTC (see Note 28). The Company recorded a charge for
$0.7 million
in the year ended December 31, 2016, which is included in General and administrative expense in the consolidated statements of operations.
In connection with an earlier settlement between FSL and the Financial Conduct Authority regarding trade execution practices for the period 2006 to 2010, in February 2015, FSL paid an additional
$0.7 million
in restitution to affected clients.
On May 8, 2015, the International Union of Operating Engineers Local No. 478 Pension Fund filed a complaint against the Company, its former Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Southern District of New York, individually and on behalf of all purchasers of the Company’s common stock between June 11, 2013 and January 20, 2015. The complaint alleges that the defendants violated certain provisions of the federal securities laws and seeks compensatory damages as well as reasonable costs and expenses. An amended and consolidated complaint was filed on January 11, 2016. The Company filed a motion to dismiss the consolidated complaint on February 25, 2016 which was granted by the Court on August 18, 2016. On October 7, 2016, the District Court entered an order of final judgment closing the case. On November 3, 2016, plaintiffs filed a notice of appeal in the U.S. Court of Appeals for the Second Circuit to challenge the district court’s order and final judgment that dismissed the case with prejudice. The appeal is currently pending.
In September 2015, US settled a complaint brought by the CFTC alleging that US failed to supervise an account determined to have been involved in wrongdoing and inadvertently omitted certain documents from its responses to document request. Under the terms of the settlement, US agreed, without admitting or denying any of the allegations, to pay a fine of
$0.7 million
to the CFTC and disgorge commissions and fees of
$0.1 million
.
On December 15, 2015, Brett Kandell, individually and on behalf of nominal defendant, Global Brokerage, Inc., filed a shareholder derivative complaint against the members of Global Brokerage’s board of directors (the “Board”) in the Delaware Court of Chancery. The case is captioned
Brett Kandell v. Dror Niv et al.
, C.A. No. 11812-VCG. On March 4, 2016, plaintiff filed an amended shareholder derivative complaint, which alleges claims for breach of fiduciary duty, contribution and indemnification, waste of corporate assets, abuse of control and unjust enrichment and seeks compensatory damages, rescission of certain agreements as well as reasonable costs and expenses. A second amended shareholder derivative complaint was filed on May 31, 2016 and the Board filed a motion to dismiss on July 15, 2016. Subsequently, plaintiff filed a third amended shareholder derivative complaint on September 1, 2016 and the Board filed a motion to dismiss on October 17, 2016. The court has not yet ruled on the motion to dismiss.
On February 6, 2017, US, Holdings, Dror Niv and William Ahdout entered into a settlement with the CFTC, and US, Messrs. Niv, Ahdout and Ornit Niv entered into a settlement with the NFA. During the relevant times, Mr. Niv was the Company’s CEO, a member of Holdings, and/or the CEO of US; Mr. Ahdout was a member of Holdings and a Managing Director of US; and Ms. Niv was the CEO of US. Both settlements concerned allegations that aspects of US’s relationship with one of its liquidity providers had not been disclosed to customers and regulators. The NFA settlement included additional, unrelated allegations of violations of certain NFA Rules and Requirements. The Company’s subsidiaries are cooperating with regulatory authorities outside the U.S. in relation to their requests for information arising from the settlements announced on February 6, 2017.
Under the settlement with the CFTC, the named entities and individuals were required, jointly and severally, to pay a civil monetary penalty of
$7.0 million
, agreed to withdraw from CFTC registration and agreed not to apply for or claim exemption from CFTC registration in the future. Under the settlement with the NFA, no monetary fine was imposed and the named individuals and entities agreed to withdraw from NFA membership and not to reapply for membership in the future. The
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 27. Litigation - (continued)
named entities and individuals did not admit or deny the allegations associated with the settlements. The Company recorded a charge for
$7.0 million
in the year ended December 31, 2016, which is included in General and administrative expense in the consolidated statements of operations. As discussed more fully in Note 28, the Company will be withdrawing from business in the U.S. and, on February 7, 2017, agreed to sell all of its U.S.-domiciled customer accounts to Gain Capital Group, LLC.
In response to the Company’s announcement on February 6, 2017 regarding settlements with the NFA and the CFTC, three new putative securities class action lawsuits have been filed against Global Brokerage, Inc., Dror Niv, and Robert Lande in the U.S. District Court for the Southern District of New York. These putative securities class actions are captioned: (1)
Khoury v. FXCM Inc.
, Case No. 1:17-cv-916; (2)
Zhao v. FXCM Inc.
, Case No. 1:17-cv-955; and (3)
Blinn v. FXCM Inc.
, Case No. 1:17-cv-1028. The complaints in these three actions allege that the defendants violated certain provisions of the federal securities laws and seek compensatory damages as well as reasonable costs and expenses. The Company intends to vigorously defend against the claims asserted in these actions.
For the outstanding matters referenced above, including ordinary course of business litigation and claims referenced in the first paragraph hereto, for which a loss is more than remote but less than likely, whether in excess of an accrued liability or where there is no accrued liability, we have estimated a range of possible loss. Management believes the estimate of the aggregate range of possible loss in excess of accrued liabilities for such matters is between
nil
and
$1.6 million
as of
December 31, 2016
.
In view of the inherent difficulty of predicting the outcome of litigation and claims, the Company cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be. Furthermore, the above-referenced matters represented in the estimated aggregate range of possible loss will change from time to time and actual results may vary significantly from the current estimate. An adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
Note 28. Subsequent Events
Amendment to Management Agreement
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. Pursuant to the Management Agreement Amendment, the Management Agreement was modified to provide Board Members (as defined therein) with certain rights of termination. Specifically, the Management Agreement Amendment specifies that the Management Agreement may be terminated by a vote of at least three members of the Group Board after the occurrence of certain events, including a change of control.
Acknowledgment Regarding Management Incentive Plan
On February 2, 2017, Group and Leucadia also entered into an acknowledgment (the “Acknowledgment”), as it relates to the Management Incentive Plan that became effective September 1, 2016. Pursuant to the Acknowledgment, Group and Leucadia agreed that Leucadia may terminate the Management Incentive Plan on behalf of Group at any time and for any reason in its sole discretion.
Regulatory Settlement Agreements
On February 6, 2017, the Company announced simultaneous regulatory settlements with the NFA and the CFTC against US, 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. The Company paid the
$7.0 million
fine on February 16, 2017, which is recorded in General and administrative expense in the consolidated statements of operations for the year ended December 31, 2016.
Pursuant to the aforementioned settlement agreements, the Company has withdrawn from business in the U.S. and deregistered from the CFTC and the NFA.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 28. Subsequent Events - (continued)
On February 8, 2017, the CFTC issued an order filing and settling charges against US for insufficient capital on January 15 and 16, 2015 due to the SNB event. The order requires Respondents to pay a monetary penalty of
$0.7 million
. The amount is recorded in General and administrative expense in the statement of operations for the year ended December 31, 2016. The funds were placed into escrow on February 8, 2017.
Sale of U.S. Customer Accounts
On February 7, 2017, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which the Company agreed to sell substantially all of its U.S.-domiciled customer accounts to Gain Capital Group, LLC (“Gain”). Under the terms of the 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 closing date. The closing took place on February 24, 2017.
Restructuring Plan
In connection with its withdrawal from business in the U.S. pursuant to the settlement agreements with the NFA and the CFTC, the Company intends to implement a restructuring plan that includes the termination of approximately
150
employees, which represents approximately
19%
of its global workforce. The Company expects to recognize approximately
$4.0 million
to
$5.0 million
in pre-tax restructuring charges in the first quarter of 2017.
Changes Related to FXCM Inc.
On February 21, 2017, Mr. Dror Niv resigned from his positions as a member and Chairman of the Board of Directors (the “Board”) of FXCM Inc., effective immediately, and as the Chief Executive Officer of FXCM Inc., to be effective upon the appointment of his successor.
Following Mr. Niv’s departure from the Board, Mr. Bryan I. Reyhani has been appointed to serve as Chairman of the Board.
On February 21, 2017, Mr. William Ahdout resigned from his position as a member of FXCM Inc.’s Board, effective immediately.
On February 24, 2017, FXCM Inc. changed its name to Global Brokerage, Inc. At the opening of trading on February 27, 2017, the trading ticker symbol for the Corporation's Class A common stock on the NASDAQ Global Market changed to "GLBR."
Second Amendment to Amended and Restated Credit Agreement
In connection with the CFTC regulatory fine of
$7.0 million
described above, Leucadia consented to waive compliance with certain sections in the Credit Agreement and the LLC 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 certain provisions of the LLC Agreement regarding distributions (as defined in the LLC 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 (the “Effective Date”), 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
, resulting in
$158.0 million
in total principal outstanding on the Credit Agreement as of the Effective Date. The Second Amendment will be accounted for as a modification on a prospective basis pursuant to ASC 470 beginning in the first quarter of 2017 and is not expected to have a material impact on the Company’s consolidated financial statements.
Global Brokerage, Inc.
Notes to Consolidated Financial Statements
Note 28. Subsequent Events - (continued)
Repayment on the Credit Agreement
As a result of the release of regulatory capital in connection with the Company’s withdrawal from business in the U.S. and termination of its registration as a futures commission merchant and retail foreign exchange dealer in the U.S., the Company repaid
$30.0 million
in principal on the Leucadia term loan on March 17, 2017.