UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2019
 
 
 
 
 
 
 
OR
 
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from ________ to _________
 
Commission File Number 001-33034
 
FREEDOM HOLDING CORP.
(Exact name of registrant as specified in its charter)
 
Nevada
 
30-0233726
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
 “Esentai Tower” BC, Floor 7
77/7 Al Farabi Ave
 
 
Almaty, Kazakhstan
 
050040
(Address of principal executive offices)
 
(Zip Code)
 
  (801) 355-2227
(Registrant's telephone number, including area code)
 
Securities registered under Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
None
 
N/A
 
N/A
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the
past 90 days.
Yes
 
 
No
 
 
 
 
 
 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes
 
 
No
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ☐                                                                                                  Accelerated filer ☑
Non-accelerated filer ☐ (Do not check if smaller reporting company)                            Smaller reporting company ☑
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.)
Yes ☐
 
 
No ☑
 
 
 
 
 
 
 
As of August 8, 2019, the registrant had 58,093,212 shares of common stock, par value $0.001, issued and outstanding.
 

 
 
 
FREEDOM HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION
Page
 
 
Item 1. Unaudited Condensed Consolidated Financial Statements
2
 
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2019 and March 31, 2019
2
 
 
 
 
Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) for the Three Months Ended June 30, 2019 and 2018
3
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2019 and 2018
4
 
 
 
 
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended June 30, 2019 and 2018
6
 
 
 
 
Notes to Condensed Consolidated Financial Statements
7
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
 
 
Item 3. Qualitative and Quantitative Disclosures About Market Risk
37
 
 
Item 4. Controls and Procedures
37
 
 
PART II — OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
38
 
 
Item 1A. Risk Factors
38
 
 
Item 6. Exhibits
39
 
 
Signatures
 40
 
 

 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
June 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $141,900
 $49,960 
Restricted cash
 42,437
  38,460 
Trading securities
  161,021 
  167,949 
Available-for-sale securities, at fair value
  2 
  2 
Brokerage and other receivables, net
  43,191 
  73,836 
Loans issued
  2,616 
  2,525 
Deferred tax assets
  822 
  1,265 
Fixed assets, net
  6,011 
  5,563 
Intangible assets, net
  4,012 
  4,226 
Goodwill
  2,956 
  2,936 
Operating lease right-of-use assets
  14,281 
  - 
Other assets, net
  9,852 
  4,189 
 
    
    
TOTAL ASSETS
 $429,101 
 $350,911 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
 
    
    
Loans received
 $92 
 $4,008 
Debt securities issued
  29,772 
  28,538 
Customer liabilities
  174,143 
  82,032 
Trade payables
  12,600 
  32,695 
Deferred distribution payments
  8,534 
  8,534 
Securities repurchase agreement obligations
  56,566 
  73,621 
Current income tax liability
  1,602 
  754 
Operating lease obligations
  15,856 
  - 
Other liabilities
  4,121 
  3,132 
TOTAL LIABILITIES
  303,286 
  233,314 
 
    
    
Commitments and Contingent Liabilities
  - 
  - 
 
    
    
STOCKHOLDERS’ EQUITY
    
    
 
    
    
Preferred stock - $0.001 par value; 20,000,000 shares authorized, no shares issued or outstanding
  - 
  - 
Common stock - $0.001 par value; 500,000,000 shares authorized; 58,093,212 and 58,043,212 shares issued and outstanding as of June 30, 2019 and March 31, 2019, respectively
  58 
  58 
Additional paid in capital
  99,965 
  99,093 
Retained earnings
  48,201 
  41,498 
Accumulated other comprehensive loss
  (22,409)
  (23,052)
TOTAL STOCKHOLDERS’ EQUITY
  125,815 
  117,597 
 
    
    
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $429,101 
 $350,911 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
2
 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
 
 
 
Three months ended
June 30,
 
 
 
2019
 
 
2018
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fee and commission income
 $22,592 
 $5,428 
Net gain/(loss) on trading securities
  2,562 
  (3,288)
Interest income
  4,131 
  7,372 
Net loss on foreign exchange operations
  (36)
  (2,110)
 
    
    
TOTAL REVENUE, NET
  29,249 
  7,402 
 
    
    
Expense:
    
    
Interest expense
  3,608 
  4,614 
Fee and commission expense
  4,031 
  764 
Operating expense
  12,685 
  9,111 
(Recovery)/provision for impairment losses
  (1,073)
  6 
Other expense/(income), net
  308 
  (60)
 
    
    
TOTAL EXPENSE
  19,559 
  14,435 
NET INCOME/(LOSS) BEFORE INCOME TAX
  9,690 
  (7,033)
 
    
    
Income tax (expense)/benefit
  (1,476)
  150 
 
    
    
NET INCOME/(LOSS)
 $8,214 
 $(6,883)
 
    
    
OTHER COMPREHENSIVE INCOME/(LOSS)
    
    
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect
 $- 
 $22 
    Foreign currency translation adjustments, net of tax effect
  643 
  (6,698)
 
    
    
COMPREHENSIVE INCOME/(LOSS)
 $8,857 
 $(13,559)
 
    
    
BASIC NET INCOME/(LOSS) PER COMMON SHARE (In U.S. Dollars)
 $0.14 
 $(0.12)
DILUTED NET INCOME/(LOSS) PER COMMON SHARE (In U.S. Dollars)
 $0.14 
 $(0.12)
Weighted average number of shares (basic)
  58,052,656 
  58,033,212 
Weighted average number of shares (diluted)
  58,249,344 
  58,191,542 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
For the three months ended
 
 
 
June 30, 2019
 
 
June 30, 2018
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities
 
 
 
 
 
 
Net income/(loss)
 $8,214 
 $(6,883)
Adjustments to reconcile net income/(loss) from operating activities:
    
    
       Depreciation and amortization
  530 
  396 
       Depreciation of lease asset
  1,038 
  - 
Loss on sale of fixed assets
  - 
  33 
Change in deferred taxes
  466 
  (109)
Stock compensation expense
  773 
  838 
Unrealized loss on trading securities
  2,479 
  7,856 
Net change in accrued interest
  272 
  13 
Allowance for receivables
  (1,073)
  - 
Changes in operating assets and liabilities:
    
    
        Changes in lease liabilities
  (1,470)
  - 
Trading securities
  5,555 
  6,089 
Brokerage and other receivables
  34,222 
  (15,710)
Loans issued
  (63)
  (8,441)
Other assets
  (5,540)
  (568)
Customer liabilities
  88,453 
  9,131 
Current income tax liability
  844 
  - 
Trade payables
  (22,055)
  7,251 
Securities sold, not yet purchased
  - 
  718 
Other liabilities
  921
  806 
Net cash flows from operating activities
  113,566 
  1,420 
 
    
    
Cash Flows From Investing Activities
    
    
Purchase of fixed assets
  (721)
  (477)
Proceeds from sale of fixed assets
  7 
  276 
Proceeds from sale of available-for-sale securities, at fair value
  - 
  238 
Consideration paid for Asyl Invest
  - 
  (2,240)
Net cash flows used in investing activities
  (714)
  (2,203)
 
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
 
Repurchase of securities repurchase agreement obligations
  (16,919)
  (30,436)
Proceeds from issuance of debt securities
  1,194 
  9,708 
Repurchase of debt securities
  (9)
  - 
(Repayment of)/proceeds from loans received
  (3,916)
  7,336 
Exercise of options
  99 
  - 
Capital contributions
  - 
  225 
Net cash flows used in financing activities
  (19,551)
  (13,167)
 
Effect of changes in foreign exchange rates on cash and cash equivalents
  2,616 
  (3,884)
 
    
    
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
  95,917 
  (17,834)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
  88,420 
  87,693 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
 $184,337 
 $69,859 
 
 
4
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
For the three months ended
 
 
 
June 30, 2019
 
 
June 30, 2018
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid for interest
 $2,942 
 $4,327 
Income tax paid
 $66
 $237 
 
    
    
Supplemental non-cash disclosures:
    
    
Operating lease right-of-use assets obtained in exchange for operating lease obligations
 $14,960 
 $- 
Lease obligations obtained on adoption of new lease standard
 $16,471 
 $- 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Additional paid in capital
 
 
Retained earnings
 
 
Accumulated other comprehensive loss
 
 
Total
 
At March 31, 2018
  58,033,212 
 $58 
 $100,180 
 $34,351 
 $(7,557)
 $127,032 
 
    
    
    
    
    
    
Capital contributions
  - 
  - 
  225 
  - 
  - 
  225 
Acquisition of Asyl Invest
  - 
  - 
  (2,240)
  - 
  - 
  (2,240)
Stock based compensation
  - 
  - 
  838 
  - 
  - 
  838 
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect
  - 
  - 
  - 
  - 
  22 
  22 
Translation difference
  - 
  - 
  - 
  - 
  (6,698)
  (6,698)
Net loss
  - 
  - 
  - 
  (6,883)
  - 
  (6,883)
At June 30, 2018
  58,033,212 
 $58 
 $99,003 
 $27,468 
 $(14,233)
 $112,296 
 
    
    
    
    
    
    
At March 31, 2019
  58,043,212 
 $58 
 $99,093 
 $41,498 
 $(23,052)
 $117,597 
 
    
    
    
    
    
    
Cumulative-effect adjustment due to adoption of ASU 2016-02(1)
  - 
  - 
  - 
  (1,511)
  - 
  (1,511)
Exercise of options
  50,000 
  - 
  99 
  - 
  - 
  99 
Stock based compensation
  - 
  - 
  773 
  - 
  - 
  773 
Translation difference
  - 
  - 
  - 
  - 
  643 
  643 
Net income
  - 
  - 
  - 
  8,214 
  - 
  8,214 
 
    
    
    
    
    
    
At June 30, 2019
  58,093,212 
 $58 
 $99,965 
 $48,201 
 $(22,409)
 $125,815 
  
(1) Cumulative-effect adjustment to beginning retained earnings related to the recognition of pre-existing lease liabilities and operating lease right-of-use assets in accordance with ASU 2016-02, adopted as of April 1, 2019.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
NOTE 1 – DESCRIPTION OF BUSINESS
 
Overview
 
Freedom Holding Corp. (the “Company” or “FRHC”) is a corporation organized in the United States under the laws of the State of Nevada that through its operating subsidiaries provides financial services including retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking and underwriting services in Eastern Europe and Central Asia. The Company is headquartered in Almaty, Kazakhstan, with supporting administrative office locations in Russia, Cyprus and the United States. The Company has retail locations in Russia, Kazakhstan, Ukraine, Uzbekistan, Kyrgyzstan and Germany.
 
The Company owns directly, or through subsidiaries, the following companies: LLC Investment Company Freedom Finance, a Moscow, Russia-based securities broker-dealer (“Freedom RU”); LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based securities broker-dealer (“Freedom KZ”); Freedom Finance Cyprus Limited, a Limassol, Cyprus-based broker-dealer (“Freedom CY”); Freedom Finance Germany TT GmbH (“Freedom GE”), a Munich, Germany-based tied agent of Freedom CY; LLC Freedom Finance Ukraine, a Kiev, Ukraine-based broker-dealer (“Freedom UA”); LLC Freedom Finance Uzbekistan, a Tashkent, Uzbekistan-based broker-dealer (“Freedom UZ”); and FFIN Securities, Inc., a Nevada corporation (“FFIN”).
 
The Company’s subsidiaries are participants on the Kazakhstan Stock Exchange (KASE), Astana International Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPB), Ukrainian Exchange (UX), and Republican Stock Exchange of Tashkent (UZSE). Freedom CY serves to provide the Company’s clients with operations support and access to the investment opportunities, relative stability, and integrity of the U.S. and European securities markets, which under the regulatory regimes of many jurisdictions where the Company operates do not currently allow investors direct access to international securities markets.
 
Unless otherwise specifically indicated or as is otherwise contextually required, FRHC, Freedom RU, FFIN Bank, Freedom KZ, Freedom CY, Freedom GE, Freedom UA, Freedom UZ and FFIN are collectively referred to herein as the “Company”.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation and principles of consolidation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended June 30, 2019, are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2020.
 
 
7
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The Condensed Consolidated Balance Sheet at March 31, 2019, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.
 
The Company’s consolidated financial statements present the consolidated accounts of FRHC, Freedom RU, Freedom KZ, FFIN Bank, Freedom CY, Freedom UA, Freedom UZ, Freedom GE and FFIN. All significant inter-company balances and transactions have been eliminated from the consolidated financial statements.
 
For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019.
 
Use of estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from those estimates.
 
Revenue recognition
 
Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services promised to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. A significant portion of the Company’s revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans and investment securities, as these activities are subject to other U.S. GAAP guidance discussed elsewhere within these disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC Topic 606, which are presented in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) as components of non-interest income are as follows:
 
Commissions on brokerage services;
Commissions on banking services (money transfers, foreign exchange operations and other); and
Commissions on investment banking services (underwriting, market making, and bondholders’ representation services).
 
 
8
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The Company adopted the new guidance on April 1, 2018. Under Topic 606, the Company is required to recognize incentive fees when they are probable and there is not a significant chance of reversal in the future. For the brokerage commission, banking service commission and investment banking services commission contracts in place at the time of adoption, this change in policy did not result in any actual change in revenue that had already been recognized and therefore there was no transition adjustment necessary. Based on a review of the Company’s brokerage commission, banking service commission and investment banking services commission contracts in place at the time of adoption, the Company does not believe the actual timing of recognition of incentive fees this change in policy did not result in any actual change in revenue that had already been recognized and therefore there was no transition adjustment necessary.
 
The Company recognizes revenue when five basic criteria have been met:
 
The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.
The entity can identify each party’s rights regarding the goods or services to be transferred.
The entity can identify the payment terms for the goods or services to be transferred.
The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).
It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
 
Derivative financial instruments
 
In the normal course of business, the Company invests in various derivative financial contracts including futures. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative.
 
Functional currency
 
Management has adopted ASC 830, Foreign Currency Translation Matters as it pertains to its foreign currency translation. The Company’s functional currencies are the Russian ruble, European euro, Ukrainian hryvnia, Uzbekistani som and Kazakhstani tenge, and its reporting currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in “Other Comprehensive Income/(Loss)”.
 
 
9
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
For financial reporting purposes, foreign currencies are translated into U.S. dollars as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive loss”.
 
Cash and cash equivalents
 
Cash and cash equivalents are generally comprised of certain highly liquid investments with maturities of three months or less at the date of purchase. Cash and cash equivalents include reverse repurchase agreements which are recorded at the amounts at which the securities were acquired or sold plus accrued interest.
 
Securities reverse repurchase and repurchase agreements
 
A reverse repurchase agreement is a transaction in which the Company purchases financial instruments from a seller, typically in exchange for cash, and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller for an amount equal to the cash or other consideration exchanged plus interest at a future date. Securities purchased under reverse repurchase agreements are accounted for as collateralized financing transactions and are recorded at the contractual amount for which the securities will be resold, including accrued interest. Financial instruments purchased under reverse repurchase agreements are recorded in the financial statements as cash placed on deposit collateralized by securities and classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.
 
A repurchase agreement is a transaction in which the Company sells financial instruments to another party, typically in exchange for cash, and simultaneously enters into an agreement to reacquire the same or substantially the same financial instruments from the buyer for an amount equal to the cash or other consideration exchanged plus interest at a future date. These agreements are accounted for as collateralized financing transactions. The Company retains the financial instruments sold under repurchase agreements and classifies them as trading securities in the Condensed Consolidated Balance Sheets. The consideration received under repurchase agreements is classified as securities repurchase agreement obligations in the Condensed Consolidated Balance Sheets.
 
The Company enters into reverse repurchase, repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to leverage and grow its proprietary trading portfolio, cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. The Company enters into these transactions in accordance with normal market practice. Under standard terms for repurchase transactions, the recipient of collateral has the right to sell or repledge the collateral, subject to returning equivalent securities on settlement of the transaction.
 
 
10
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Available-for-sale securities
 
Financial assets categorized as available-for-sale (“AFS”) are non-derivatives that are either designated as available-for-sale or not classified as (a) loans and receivables, (b) held to maturity investments or (c) trading securities.
 
Listed shares and listed redeemable notes held by the Company that are traded in an active market are classified as AFS and are stated at fair value. The Company has investments in unlisted shares that are not traded in an active market but that are also classified as investments AFS and stated at fair value (because Company management considers that fair value can be reliably measured). Gains and losses arising from changes in fair value are recognized in other comprehensive income/(loss) and are accumulated in accumulated other comprehensive loss, with the exception of other-than-temporary impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses, which are recognized in the Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss). Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments’ revaluation reserve is then reclassified to Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss).
 
Trading securities
 
Financial assets are classified as trading securities if the financial asset has been acquired principally for the purpose of selling it in the near term.
 
Trading securities are stated at fair value, with any gains or losses arising on remeasurement recognized in revenue. Changes in fair value are recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) and included in net gain/(loss) on trading securities. Interest earned and dividend income are recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) and are included in interest income, according to the terms of the contract and when the right to receive the payment has been established.
 
Investments in nonconsolidated managed funds are accounted for at fair value based on the net asset value (“NAV”) of the funds provided by the fund managers with gains or losses included in net gain on trading securities in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).
 
Debt securities issued
 
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized over the period of the borrowings using the effective interest method. If the Company purchases its own debt, it is removed from the Condensed Consolidated Balance Sheets and the difference between the carrying amount of the liability and the consideration paid is recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).
 
 
11
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Brokerage and other receivables
 
Brokerage and other receivables are comprised of commissions and receivables related to the securities brokerage and banking activity of the Company. At initial recognition, brokerage and other receivables are recognized at fair value. Subsequently, brokerage and other receivables are carried at cost net of any allowance for impairment losses.
 
Derecognition of financial assets
 
A financial asset (or, where applicable a part of a financial asset or a part of a group of similar financial assets) is derecognized where all of the following conditions are met:
 
The transferred financial assets have been isolated from the Company - put presumptively beyond the reach of the Company and its creditors, even in bankruptcy or other receivership.
The transferee has rights to pledge or exchange financial assets.
The Company or its agents do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets.
 
Where the Company has not met the asset derecognition conditions above, it continues to recognize the asset to the extent of its continuing involvement.
 
Impairment of long lived assets
 
In accordance with the accounting guidance for the impairment or disposal of long-lived assets, the Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the fair value from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows, discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. As of June 30, 2019 and March 31, 2019, the Company had not recorded any charges for impairment of long-lived assets.
 
Impairment of goodwill
 
As of June 30, 2019 and March 31, 2019, goodwill recorded in the Company’s Condensed Consolidated Balance Sheets totaled $2,956 and $2,936, respectively. The Company performs an impairment review at least annually, unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. In its annual goodwill impairment test, the Company estimated the fair value of the reporting unit based on the income approach (also known as the discounted cash flow method) and determined the fair value of the Company’s goodwill exceeded the carrying amount of the Company’s goodwill.
 
 
12
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The changes in the carrying amount of goodwill as of March 31, 2019 and for the three months ended June 30, 2019 were as follows:
 
Balance as of March 31, 2019
 $2,936 
 
    
Foreign currency translation
  20 
 
    
Balance as of June 30, 2019
 $2,956 
 
Income taxes
 
The Company recognizes deferred tax liabilities and assets based on the difference between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
 
Current income tax expenses are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the asset and liability approach. Under this method, deferred income taxes are recognized for tax consequences in future years based on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income.
 
The Company will include interest and penalties arising from the underpayment of income taxes in the provision for income taxes. As of June 30, 2019 and March 31, 2019, the Company had no accrued interest or penalties related to uncertain tax positions.
 
On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted, which significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Tax Reform Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has presented the deferred tax impacts of GILTI tax in its consolidated financial statements as of June 30, 2019 and March 31, 2019.
 
 
13
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Financial instruments  
 
Financial instruments are carried at fair value as described below.
 
Fair value is 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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. Fair value is the current bid price for financial assets, current ask price for financial liabilities and the average of current bid and ask prices when the Company is both in short and long positions for the financial instrument. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
 
Leases
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases have been classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The new standard also requires disclosures that provide additional information on recorded lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases –Targeted Improvements, which provides an optional transition method that allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
 
The Company adopted the provisions of ASU 2018-11, including the optional transition method, on April 1, 2019. Operating lease assets and corresponding lease liabilities were recognized on the Company’s unaudited condensed consolidated statements of financial condition. Refer to Note 17 - Leases, within the notes to the unaudited condensed consolidated financial statements for additional disclosure and significant accounting policies affecting leases.
 
Fixed assets
 
Fixed assets are carried at cost, net of accumulated depreciation. Maintenance, repairs, and minor renewals are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range between three and seven years.
 
 
14
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Segment Information
 
The Company operates in a single operating segment offering financial services to its customers in a single geographic region covering Central Asia and Eastern Europe. The Company’s financial services business provides retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking and underwriting services to its customers. The Company generates revenue from customers primarily from fee and commission income and interest income. The Company does not use profitability reports or other information disaggregated on a regional, country or divisional basis for making business decisions.
 
Recent accounting pronouncements
 
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. In March 2014, the Board issued a proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this Update apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.
 
In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology replaces the probable, incurred loss model for those assets. Through that Update, the Board added Topic 326 and made several consequential amendments to the FASB Accounting Standards Codification. The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The effective date and transition requirements for the amendments in this Update are the same as the effective dates and transition requirements in Update 2016-13, as amended by this Update. The Company does not expect a material impact from the new guidance on its condensed consolidated financial statements.
 
 
15
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
In April 2019, FASB also issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and in May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326). The ASU 2019-04 amendments affect a variety of Topics in the Codification and is part of the Board’s ongoing project on Codification improvement. The FASB received several agenda request letters asking that the Board consider amending the transition guidance for Update 2016-13. ASU 2019-05 addresses stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. For entities that have not yet adopted the amendments in Update 2016-13, the effective dates and transition requirements for the amendments related to ASU 2019-04 are the same as the effective dates and transition requirements in Update 2016-13. ASU 2019-05 is effective for entities that have adopted the amendments in Update 2016-13 for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of this Update as long as an entity has adopted the amendments in Update 2016-13. The Company is currently evaluating the impact from new guidance on its condensed consolidated financial statements.
 
NOTE 3 – CASH AND CASH EQUIVALENTS
 
 
 
June 30, 2019
 
 
March 31, 2019
 
 
 
 
 
 
 
 
Accounts with stock exchanges
 $51,196 
 $10,507 
Current accounts with commercial banks
  28,985 
  6,656 
Current accounts in clearing organizations
  22,958 
  5,887 
Current accounts with brokers
  19,973 
  10,220 
Securities purchased under reverse repurchase agreements
  8,065 
  7,887 
Petty cash in bank vault and on hand
  6,156 
  2,674 
Current account with National Settlement Depository (Russia)
  2,049 
  1,275 
Current account with Central Depository (Kazakhstan)
  1,549 
  2,693 
Current account with Central Bank (Russia)
  969 
  2,161 
Total cash and cash equivalents
 $141,900 
 $49,960 
 
As of June 30, 2019 and March 31, 2019, cash and cash equivalents were not insured.
 
 
16
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
As of June 30, 2019 and March 31, 2019, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:
 
 
 
June 30, 2019
 
 
 
Interest rates and remaining contractual maturity of the agreements
 
 
 
Average Interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
 
Total
 
Securities purchased under reverse repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  11.42%
 $8,065 
 $- 
 $8,065 
Total
    
 $8,065 
 $- 
 $8,065 
 
 
 
March 31, 2019
 
 
 
Interest rates and remaining contractual maturity of the agreements
 
 
 
Average Interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
 
Total
 
Securities purchased under reverse repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  11.90%
 $4,328 
 $804 
 $5,132 
Corporate debt
  14.00%
  120 
  - 
  120 
Non-U.S. sovereign debt
  8.25%
  2,635 
  - 
  2,635 
Total
    
 $7,083 
 $804 
 $7,887 
 
The securities received by the Company as collateral under reverse repurchase agreements are liquid trading securities with market quotes and significant trading volume. The fair value of collateral received by the Company under reverse repurchase agreements as of June 30, 2019 and March 31, 2019, was $8,867 and $8,472, respectively.
 
NOTE 4 – RESTRICTED CASH
 
As of June 30, 2019 and March 31, 2019, the Company’s restricted cash consisted of deferred distribution payments, cash segregated in a special custody account for the exclusive benefit of our brokerage customers and required reserves with the Central Bank of the Russian Federation which represents cash on hand balance requirements. The deferred distribution payment amount is a reserve held for distribution to shareholders who have not yet claimed their distributions from the 2011 sale of the Company’s oil and gas exploration and production operations of $8,534. This distribution is currently payable, subject to the entitled shareholders completing and submitting to the Company the necessary documentation to claim his, her or its distribution payments. The Company has no control over when, or if, any entitled shareholder will submit the necessary documentation to claim his, her, or its distribution payment.
 
 
17
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Restricted cash consisted of:
 
 
 
 
June 30, 2019
 
 
March 31, 2019
 
 
 
 
 
 
 
 
Brokerage customers’ cash
 $32,622 
 $28,931 
Deferred distribution payments
  8,534 
  8,534 
Reserve with Central Bank of Russia
  671 
  732 
Guaranty deposits
  610 
  263 
Total restricted cash
 $42,437 
 $38,460 
 
NOTE 5 – TRADING SECURITIES
 
As of June 30, 2019 and March 31, 2019, trading securities consisted of:
 
 
 
June 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Equity securities
 $98,353 
 $105,017 
Debt securities
  62,668 
  62,691 
Mutual investment funds
  - 
  241 
Total trading securities
 $161,021 
 $167,949 
 
The Company recognized no other than temporary impairment in accumulated other comprehensive income.
 
The fair value of assets and liabilities is determined using observable market data based on recent trading activity. Where observable market data is unavailable due to a lack of trading activity, the Company utilizes internally developed models to estimate fair value and independent third parties to validate assumptions, when appropriate. Estimating fair value requires significant management judgment, including benchmarking to similar instruments with observable market data and applying appropriate discounts that reflect differences between the securities that the Company is valuing and the selected benchmark. Depending on the type of securities owned by the Company, other valuation methodologies may be required.
 
Measurement of fair value is classified within a hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
 
The valuation hierarchy contains three levels:
 
Level 1 - Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets.
Level 2 - Valuation inputs are quoted market prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured.
Level 3 - Valuation inputs are unobservable and significant to the fair value measurement.
 
 
18
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The following tables present trading securities assets in the condensed consolidated financial statements at fair value on a recurring basis as of June 30, 2019 and March 31, 2019:
 
 
 
 
 
 
Fair Value Measurements at
 
 
 
 
 
 
June 30, 2019 using
 
 
 
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant Unobservable Inputs
 
 
 
June 30, 2019
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 $98,353 
 $98,353 
 $- 
 $- 
Debt securities
  62,668 
  62,668 
  - 
  - 
Total trading securities
 $161,021 
 $161,021 
 $- 
 $- 
 
 
 
 
 
 
Fair Value Measurements at
 
 
 
 
 
 
March 31, 2019 using
 
 
 
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant Unobservable Inputs
 
 
 
 March 31, 2019
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 $105,017 
 $105,017 
 $- 
 $- 
Debt securities
  62,691 
  62,187 
  - 
  504 
Mutual investment funds
  241 
  241 
  - 
  - 
Total trading securities
 $167,949 
 $167,445 
 $- 
 $504 
 
The table below presents the Valuation Techniques and Significant Level 3 Inputs used in the valuation as of March 31, 2019. The table is not intended to be all inclusive, but instead captures the significant unobservable inputs relevant to determination of fair value.
 
Type
Valuation Technique
FV as of March 31,
2019
Significant Unobservable Inputs
%
 
 
 
 
 
Corporate bonds
DCF
$ 504
Discount rate
11.3%
 
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended June 30, 2019:
 
 
 
Amount
 
Balance as of March 31, 2019
 $504 
 
    
Sale of investments that use Level 3 inputs
  (497)
Foreign currency translation
  (7)
 
    
Balance as of June 30, 2019
 $- 
 
 
19
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
As of June 30, 2019 and March 31, 2019, approximately $56,780 and $60,000, respectively, worth of the Company’s proprietary trading account was invested in the securities of a single company. This represents approximately 35% and 36%, respectively, of the Company’s proprietary portfolio.
 
NOTE 6 – BROKERAGE AND OTHER RECEIVABLES, NET
 
 
 
June 30,
2019
 
 
March 31,
2019
 
 
    
    
Margin lending receivables
 $27,752 
 $46,716 
Receivables from purchase or sale of securities
  13,481 
  27,684 
Receivables from brokerage clients
  1,555 
  824 
Dividends accrued
  819 
  108 
Other receivables
  189 
  130 
 
    
    
Allowance for receivables
  (605)
  (1,626)
 
    
    
Total brokerage and other receivables, net
 $43,191 
 $73,836 
 
On June 30, 2019 and March 31, 2019, amounts due from a single related party customer were $17,090 or 40% and $31,792 or 43%, respectively. Based on experience, the Company considers receivables due from related parties fully collectible. During the three months ended June 30, 2019 and year ended March 31, 2019, using historical and statistical data, the Company recorded an allowance for brokerage receivables in the amount of $605 and $1,626, respectively.
 
NOTE 7 – LOANS ISSUED
 
Loans issued as of June 30, 2019, consisted of the following:
 
 
 
Amount Outstanding
 
 
Due Dates
 
Average Interest Rate
 
 
Fair Value of Collateral
 
Loan Currency
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated loan
 $2,006 
April 2024
  6.00%
 $- 
USD
Bank customer loans
  610 
October 2019 - May 2039
  12.60%
  - 
RUB
 
 $2,616 
 
    
    
 
 
 
20
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Loans issued as of March 31, 2019, consisted of the following:
 
 
 
Amount Outstanding
 
 
Due Dates
 
Average Interest Rate
 
 
Fair Value of Collateral
 
Loan Currency
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized brokerage loans
 $1,888 
Dec. 2019
  4.75%
 $4,718 
USD
Bank customer loans
  637 
May 2019 – Jan. 2039
  13.34%
  - 
RUB
 
 $2,525 
 
    
    
 
 
NOTE 8 – DEFERRED TAX ASSETS
 
The Company is subject to taxation in the Russian Federation, Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan, Germany and the United States of America.
 
The tax rates used for deferred tax assets and liabilities as of June 30, 2019 and March 31, 2019 is 21% for the U.S., 20% for the Russian Federation, Kazakhstan, Kyrgyzstan, 31% for Germany, 12.5% for Cyprus, 18% for Ukraine and 12% for Uzbekistan.
 
Deferred tax assets and liabilities of the Company are comprised of the following:
 
 
 
June 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Deferred tax assets:
 
 
 
 
 
 
Tax losses carryforward
 $2,451
 $2,376 
Revaluation on trading securities
  129 
  2,095 
Accrued liabilities
  64 
  35 
Valuation allowance
  (1,822)
  (3,241)
Deferred tax assets
 $822 
 $1,265 
 
    
    
Deferred tax liabilities:
    
    
Revaluation on trading securities
 $- 
 $- 
 
    
    
Deferred tax liabilities
 $-
 $-
 
 $- 
 $- 
Net deferred tax assets
 $822 
 $1,265 
 
During the three months ended June 30, 2019 and 2018, the effective tax rate was equal to 15.23% and (2.13%), respectively. The increase in effective tax rate was primarily attributable to a $10,713 and $6,002 increase in commissions earned by Freedom CY and Freedom RU, respectively, compared to the three months ended June 30, 2018
 
Tax losses carryforward as of June 30, 2019 and March 31, 2019 was $2,451 and $2,376, respectively, and is subject to income tax in US, Russia, Ukraine and Uzbekistan.
 
 
21
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
NOTE 9 – LOANS RECEIVED
 
Borrower
 
Lender
 
June 30,
 2019
 
 
March 31, 2019
 
 
Interest rate
 
Term
 
Maturity date
Freedom Finance Cyprus Limited
 
Non-Bank
 $92 
 $91 
  1%
2 year
 
12/11/2019
Freedom Holding Corp.
 
Non-Bank
  - 
  3,917 
  3%
1-2 year
 
04/30/2019-12/31/2019
Total
 
 
 $92 
 $4,008 
    
 
 
 
 
Non-bank loans received are unsecured. As of June 30, 2019 and March 31, 2019, accrued interest on the loans totaled $1 and $52, respectively.
 
NOTE 10 – DEBT SECURITIES ISSUED
 
 
 
June 30,
2019
 
 
March 31,
2019
 
Debt securities issued denominated in USD
 $21,384 
 $20,265 
Debt securities issued denominated in RUB
  7,955 
  7,724 
Accrued interest
  433 
  549 
Total
 $29,772 
 $28,538 
 
As of June 30, 2019 and March 31, 2019, the Company had outstanding bonds of Freedom KZ and RU issued under Kazakhstan and Russian Federation law in the amount of $29,772 and $28,538 respectively. As of June 30, 2019, Company these bonds had fixed annual coupon rates ranging from 8% to 12% and maturity dates ranging from June 2020 to February 2022.
 
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. Debt securities issued as of June 30, 2019 and March 31, 2019, included $433 and $549 accrued interest, respectively. The bonds are actively traded on the KASE and the MOEX. 
 
NOTE 11 – CUSTOMER LIABILITIES
 
The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:
 
 
 
June 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Banking customers
 $100,068 
 $34,346 
Brokerage customers
  74,075 
  47,686 
Total
 $174,143 
 $82,032 
 
As of June 30, 2019, banking customer liabilities consisted of current accounts and deposits of $81,184 and $18,884, respectively. As of March 31, 2019, banking customer liabilities consisted of current accounts and deposits of $12,383 and $21,963, respectively.
 
22
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
NOTE 12 – TRADE PAYABLES
 
 
 
June 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Margin lending payable
 $7,380 
 $29,081 
Trade payable for securities purchased
  3,025 
  2,939 
Payables to suppliers of goods and services
  1,955 
  555 
Other
  240 
  120 
Total
 $12,600 
 $32,695 
 
On June 30, 2019 and March 31, 2019, trade payables due to a single related party were $3,557 or 28% and $938 or 3%, respectively.
 
NOTE 13 – SECURITIES REPURCHASE AGREEMENT OBLIGATIONS
 
As of June 30, 2019 and March 31, 2019, trading securities included collateralized securities subject to repurchase agreements as described in the following table:
 
 
 
June 30, 2019
 
 
 
Interest rates and remaining contractual maturity of the agreements
 
 
 
Average interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
Over 90 days
 
 
Total
 
Securities sold under repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
 12.26%
 $34,258 
 $- 
 $- 
 $34,258 
Corporate debt
 10.36%
  12,175 
  - 
  - 
  12,175 
Non-U.S. sovereign debt
  8.72%
  10,133 
  - 
  - 
  10,133 
Total securities sold under repurchase agreements
    
 $56,566 
 $- 
 $- 
 $56,566 
 
 
 
March 31, 2019
 
 
 
Interest rate and remaining contractual maturity of the agreements
 
 
 
Average interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
Over 90 days
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  12.06%
 $49,048 
 $- 
 $2,146 
 $51,194 
Corporate debt
  10.38%
  13,548 
  - 
  - 
  13,548 
Non-U.S. sovereign debt
  8.62%
  8,879 
  - 
  - 
  8,879 
Total securities sold under repurchase agreements
    
 $71,475 
 $- 
 $2,146 
 $73,621 
 
The fair value of collateral pledged under repurchase agreements as of June 30, 2019 and March 31, 2019, was $75,621 and $105,842, respectively.
 
Securities pledged as collateral by the Company under repurchase agreements are liquid trading securities with market quotes and significant trading volume.
 
 
23
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
NOTE 14 – RELATED PARTY TRANSACTIONS
 
During the three months ended June 30, 2019 and 2018, the Company earned commission income from related parties in the amounts of $19,826 and $4,439, respectively. Commission income earned from related parties is comprised primarily of brokerage commissions and commissions for money transfers by brokerage clients.
 
During the three months ended June 30, 2019 and 2018, the Company paid commission expense to related parties in the amount of $924 and $0, respectively.
 
As of June 30, 2019 and March 31, 2019, the Company had bank commission receivables and receivables from brokerage clients from related parties totaling $363 and $192, respectively. Brokerage and other receivables from related parties result principally from commissions receivable on the brokerage operations of related parties.
 
As of June 30, 2019 and March 31, 2019, the Company had cash and cash equivalents held in brokerage accounts of related parties totaling $4,460 and $8,444, respectively.
 
As of June 30, 2019 and March 31, 2019, the Company had loans issued to related parties totaling $17 and $1,888, respectively.
 
As of June 30, 2019 and March 31, 2019, the Company had margin lending receivables with related parties totaling $24,439 and $43,720, respectively.
 
As of June 30, 2019 and March 31, 2019, the Company had margin lending payables to related parties, totaling $5,532 and $1,090, respectively.
 
As of June 30, 2019 and March 31, 2019, the Company had loans received from a related party totaling $92 and 3,957, respectively.
 
As of June 30, 2019 and March 31, 2019, the Company had accounts payable due to a related party totaling $454 and $345, respectively.
 
As of June 30, 2019 and March 31, 2019, the Company had consideration due to a related party for the Nettrader acquisition totaling $2,590.
 
As of June 30, 2019 and March 31, 2019, the Company had customer liabilities on brokerage accounts and bank accounts of related parties totaling $91,642 and $29,904, respectively and held restricted customer cash on brokerage accounts of related parties totaling $6,592 and $13,999, respectively.
 
NOTE 15 – STOCKHOLDERS’ EQUITY
 
During the three months ended June 30, 2019 and 2018, shareholders made capital contributions of $0 and $225 to FRHC, respectively.
 
 
24
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
On October 6, 2017, the Company awarded restricted stock grants totalling 3,900,000 shares of its common stock to 16 employees and awarded nonqualified stock options to purchase an aggregate of 360,000 shares of its common stock to two employees. Of the 3,900,000 shares awarded pursuant to the restricted stock grant awards, 1,200,000 shares are subject to two-year vesting conditions and 2,700,000 shares are subject to three-year vesting conditions. All of the nonqualified stock options are subject to three-year vesting conditions. The Company recorded stock based compensation expense for restricted stock grants and stock options in the amount of $773 during the three months ended June 30, 2019. The Company recorded stock based compensation expense for restricted stock grants and stock options in the amount of $838 during the three months ended June 30, 2018.
 
During the three months ended June 30, 2019, nonqualified stock options to purchase 50,000 shares were exercised at a strike price of $1.98 per share for total proceeds of $99.
 
NOTE 16 – STOCK BASED COMPENSATION
 
As disclosed in Note 15, on October 6, 2017, the Company issued restricted stock awards totaling 3,900,000 shares of its common stock to 16 employees and awarded nonqualified stock options to purchase an aggregate of 360,000 shares of its common stock at a strike price of $1.98 per share to two employees. Shares of restricted stock have the same dividend and voting rights as common stock while options do not. All awards were issued at the fair value of the underlying shares at the grant date.
 
During the three months ended June 30, 2019, no stock options were granted. Total compensation expense related to options granted was $54 for the three months ended June 30, 2019, and $54 for the three months ended June 30, 2018. As of June 30, 2019, there was total remaining compensation expense of $274 related to stock options, which will be recorded over a weighted average period of approximately 1.27 years. During the three months ended June 30, 2019, options to purchase a total of 50,000 shares were exercised.
 
The Company has determined the fair value of such stock options using the Black-Scholes option valuation model based on the following key assumptions:
 
Vesting period (years)
  3 
Volatility
  165.33%
Risk-free rate
  1.66%
 
Stock-based compensation expense for the cost of the awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options.
 
 
25
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The following is a summary of stock option activity for the three months ended June 30, 2019:
 
 
 
    Shares
 
 
    Weighted Average Exercise Price
 
 
    Weighted Average Remaining Contractual Term (in Years)
 
 
    Aggregate Intrinsic Value
 
Outstanding, March 31, 2019
  350,000 
 $1.98 
  8.52 
 $2,342 
Granted
  - 
  - 
  - 
  - 
Exercised
  (50,000)
  1.98 
  - 
 394
Forfeited/cancelled/expired
  - 
  - 
  - 
  - 
Outstanding, at June 30, 2019
  300,000 
 $1.98 
  8.27 
 $2,679 
Exercisable, at June 30, 2019
  60,000 
 $1.98 
  8.27 
 $536 
 
During the three months ended June 30, 2019, no restricted shares were awarded. The compensation expense related to restricted stock grants was $719 during the three months ended June 30, 2019, and $784 during the three months ended June 30, 2018. As of June 30, 2019, there was $2,667 of total unrecognized compensation cost related to non-vested shares of common stock granted. The cost is expected to be recognized over a weighted average period of 1.17 years.
 
The table below summarizes the activity for the Company’s restricted stock outstanding during the three months ended June 30, 2019:
 
 
 
Shares
 
 
Weighted Average Fair Value
 
Outstanding, March 31, 2019
  2,275,000 
 $4,777 
Granted
  - 
  - 
Vested
  - 
  - 
Forfeited/cancelled/expired
  - 
  - 
Outstanding, at June 30, 2019
  2,275,000 
 $4,777 
 
NOTE 17 – LEASES
 
The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.
 
The Company leases its corporate office space and certain facilities under long-term operating leases expiring through fiscal year 2024. Effective April 1, 2019, the Company adopted the provision of ASC 842 Leases.
 
 
26
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets as of June 30, 2019:
 
 
Classification on Balance Sheet
 
June 30, 2019
 
Assets
 
 
 
 
Operating lease assets
Right-of-use assets
 $14,281 
Total lease assets
 
 $14,281 
 
    
Liabilities
 
    
     Operating lease liability
Operating lease obligations
 $15,856 
Total lease liability
 $15,856 
 
Lease obligations at March 31, 2019, consisted of the following:
 
Twelve months ending March 31,
 
 
 
2020 – remainder
 $4,353 
2021
  5,727 
2022
  5,236 
2023
  3,592 
2024
  200 
Total payments
  19,108 
Less: amounts representing interest
  (3,252)
Lease obligation, net
 $15,856 
Weighted average remaining lease term (in months)
  34 
Weighted average discount rate
  12%
 
Lease commitments for short term operating lease as of June 30, 2019 is approximately $509. The Company’s rent expense for office space was $122 and $1,086 for the three months ended June 30, 2019 and 2018, respectively.
 
NOTE 18 – SUBSEQUENT EVENTS
 
The Company has performed an evaluation of subsequent events through the time of filing this quarterly report on Form 10-Q with the SEC.
 
 
27
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q contain additional information that should be referred to when reviewing this material and this document should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the U.S. Securities and Exchange Commission (the “Commission”) including our annual report on Form 10-K filed with the Commission on June 14, 2019.
 
Special Note About Forward-Looking Information
 
Certain information included herein and the documents incorporated by reference in this document, if any, contain statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are based on management’s current expectations, that involve risks and uncertainties that could cause our results to differ materially from our current expectations. These forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “potential,” and similar expressions, including the negatives of these terms. Our actual results could differ materially from the results contemplated by these forward-looking statements and are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from current expectations due to a number of factors, including, but not limited to: (i) the ability of our current management to effectively execute our business strategy; (ii) our capability to compete with financial services companies that have greater experience, financial resources and competitive advantages in the markets where we operate; (iii) our CEO and Chairman owns the controlling interest in our common stock and therefore has the ability to direct our business with his reasonable business judgment without approval of other shareholders; (iv) our capacity to comply with the extensive, pervasive and ever evolving legal, regulatory and oversight requirements in the various jurisdictions where our subsidiaries operate, the failure of which could prevent us from conducting our business in such jurisdictions; (v) volatility in the capital markets, currency fluctuations and general economic conditions; (vi) our ability to attract and retain key management and other properly licensed and experienced personnel to satisfy applicable regulatory standards and operate our business profitably; (vii) our ability to properly manage the market, leverage and customer risks that arise from our proprietary trading; and (viii) such other risks as set forth elsewhere in this report, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
 
Overview
 
We own several operating subsidiaries that provide financial services including, full-service retail securities brokerage, investment education, securities trading, investment banking and market making activities in Eastern Europe and Central Asia. We are headquartered in Almaty, Kazakhstan, with supporting administrative offices in Russia, Cyprus and the United States.
 
 
28
 
 
Our subsidiaries are participants of the Kazakhstan Stock Exchange (KASE), the Astana International Exchange (AIX), the Moscow Stock Exchange (MOEX), the Saint-Petersburg Stock Exchange (SPB), the Ukrainian Exchange (UX), and the Republican Stock Exchange of Tashkent (UZSE). Our Cyprus office provides our clients with operations support and access to the investment opportunities, relative stability, and integrity of the U.S. and European securities markets, which under the regulatory regimes of many jurisdictions where we operate do not currently allow investors direct access to international securities markets.
 
Our business is directed toward providing an array of financial services to our target retail audience which is upper middle class individuals and businesses seeking access to the largest financial markets in the world and to diversify their investment portfolios to manage economic risk associated with political, regulatory, currency, banking, and national uncertainties. Clients are provided online tools and retail locations to establish accounts and conduct securities trading on transaction-based pricing. We market to our customer demographic through a number of channels, including telemarketing, training seminars and investment conferences, print and online advertising using social media, our mobile app and search engine optimization activities.
 
Executive Summary
 
Customer Base
 
We serviced more than 121,000 client accounts of which more than 60% carried positive cash or asset account balances as of June 30, 2019. Internally, we designate “active accounts” as those in which one transaction occurs per quarter. For the three month ended June 30, 2019, we had approximately 27,000 active accounts.
 
We have accelerated our growth through several strategic acquisitions which has enabled us to expand our market reach, increase our client base and provide our clientele the convenience of both a state-of-the-art proprietary electronic trading platform, Tradernet, and 78 retail brokerage and financial services offices located across Kazakhstan (16), Kyrgyzstan (1), Russia (38), Uzbekistan (8), Ukraine (13), Cyprus (1) and Germany (1) that provide an array of financial services, investment consulting and education. In Russia 17 of our brokerage and financial services offices also provide banking services to firm customers.
 
Significant Events
 
In May 2019, Freedom KZ acted as the sole book runner for the placement of approximately $132 million of Kazakhstani tenge denominated bonds of Eurasian Development Bank.
 
In July 2019, we announced that Standard and Poor’s Financial Services, LLC (“S&P”) had assigned Freedom KZ and Freedom RU an issuer credit rating of B-/stable/B and assigned B-/B long-term and short-term foreign currency issuer credit ratings. Additionally, S&P assigned Freedom KZ a national scale rating of KzBB-.
 
Financial Results
 
During the three months ended June 30, 2019, we realized net income of approximately $8.2 million and basic and diluted earnings per share of $0.14. As a result of the strengthening of our functional currencies against our reporting currency and the resulting foreign currency translation adjustment, net of tax, we realized foreign currency translation adjustments of approximately $0.7 million, resulting in comprehensive income of approximately $8.9 million during the three months ended June 30, 2019.
 
 
29
 
 
All dollar amounts reflected under the headings “Results of Operations,” “Liquidity and Capital Resources,” and “Cash Flows” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands of U.S. dollars unless the context indicates otherwise.
 
Results of Operations
 
Three months ended June 30, 2019 compared to the three months ended June 30, 2018
 
The following quarter-to-quarter comparison of our financial results is not necessarily indicative of future results.
 
 
 
Three Months Ended
June 30, 2019
 
 
Three Months Ended
June 30, 2018
 
 
 
Amount  
 
 
%*
 
 
Amount  
 
 
%*
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Fee and commission income
 $22,592 
  77%
 $5,428 
  73%
Net gain/(loss) on trading securities
  2,562 
  9%
  (3,288)
  (44%)
Interest income
  4,131 
  14%
  7,372 
  100%
Net loss on foreign exchange operations
  (36)
  0%
  (2,110)
  (29%)
Total revenue, net
  29,249 
  100%
  7,402 
  100%
 
    
    
    
    
Expenses:
    
    
    
    
Interest expense
  3,608 
  12%
  4,614 
  62%
Fee and commission expense
  4,031 
  14%
  764 
  10%
Operating expense
  12,685 
  43%
  9,111 
  123%
(Recovery)/provision for impairment losses
  (1,073)
  (4%)
  6 
  0%
Other expense/(income), net
  308 
  1%
  (60)
  (1%)
Total expense
  19,559 
  66%
  14,435 
  194%
 
    
    
    
    
Net income/(loss) before income tax
  9,690 
  33%
  (7,033)
  (95%)
Income tax (expense)/benefit
  (1,476)
  (5%)
  150 
  2%
Net income/(loss)
 $8,214 
  28%
 $(6,883)
  (93%)
 
    
    
    
    
Other comprehensive income/(loss)
    
    
    
    
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect
 $- 
  0%
 $22 
  0%
Foreign currency translation adjustments, net of tax
  643 
  2%
  (6,698)
  (90%)
Comprehensive income/(loss)
 $8,857 
  30%
 $(13,559)
  (183%)
* Reflects percentage of total revenues, net.
 
Revenue
 
We derive revenue primarily from gains realized from fee and commission income earned from our retail brokerage clients, underwriting and market making activities, our proprietary trading activities, and interest income.
 
 
 
Three Months Ended
 June 30, 2019
 
 
Three Months Ended
 June 30 2018
 
 
Change
 
 
 
Amount
 
 
%
 
 
Amount
 
 
%
 
 
Amount
 
 
%
 
Fee and commission income
 $22,592 
  77%
 $5,428 
  73%
 $17,164 
  316%
Net gain/(loss) on trading securities
  2,562 
  9%
  (3,288)
  (44%)
  5,850 
  (178%)
Interest income
  4,131 
  14%
  7,372 
  100%
  (3,241)
  (44%)
Net loss on foreign exchange operations
  (36)
  0%
  (2,110)
  (29%)
  2,074 
  (98%)
Total revenue, net
 $29,249 
  100%
 $7,402 
  100%
 $21,847 
  295%
 
 
30
 
 
During the three months ended June 30, 2019 and 2018, we realized total net revenue of $29,249 and $7,402, respectively. Revenue during the three months ended June 30, 2019, was significantly higher than the three months ended June 30, 2018, primarily due to increased fee and commission income, a net gain on our proprietary trading activities and a decrease in net loss on foreign exchange operations.
 
Fee and commission income. Fee and commission income consisted principally of broker fees from customer trading and related banking services, underwriting and market making services. During the three months ended June 30, 2019 and 2018, fees and commissions generated from brokerage and related banking services were $22,592 and $5,428, respectively, an increase of $17,164.
 
During the three months ended June 30, 2019, fees and commissions from brokerage services increased $17,117 as compared to the three months ended June 30, 2018. This growth resulted from a focus on developing this revenue stream to reduce our reliance on the results of our proprietary trading. During the three months ended June 30, 2019, the number of clients we serviced was higher as a result of our efforts during our 2019 fiscal year to enlarge our branch office network via acquisitions and internal growth, increase the number of our retail financial advisers, expand the volume of analysts’ reports available to our customer base and growth in trading activity by our existing customers. Fees and commissions realized from underwriting and market making services increased by $233 during the three months ended June 30, 2019, due to our engaging in more underwritings and market making activities compared to the three months ended June 30, 2018. This increase was partially offset by a $186 decrease in fees and commissions from our related banking services during the three months ended June 30, 2019. Fees for bank services consist primarily of wire transfer fees, commissions for payment processing and commissions for currency exchange operations.
 
Net gain/(loss) on trading securities. Net gain/(loss) on trading securities reflects the gains and losses from trading activities in our proprietary trading accounts. Net gains or losses are comprised of realized and unrealized gains and losses. Gains or losses are realized when we close a position in a security and realize a gain or a loss on that position. U.S. GAAP requires that we reflect in our financial statements unrealized gains and losses on all our securities trading positions that remain open as of the end of each period. Fluctuations in unrealized gains or losses from one period to another may result from factors within our control, such as when we elect to close an open securities position, which would have the effect of reducing our open positions and, thereby potentially reducing or increasing the amount of unrealized gains or losses in a period. Fluctuations in unrealized gains and losses from period to period may also occur as a result of factors beyond our control, such as fluctuations in the market prices of the open securities positions we hold. This may adversely affect the ultimate value we realize from these investments. Unrealized gains or losses in a particular period may or may not be indicative of the gain or loss we will realize on a securities position when the position is closed. As a result, we may realize significant swings in gains and losses realized on our trading securities year-over-year and quarter-over-quarter. You should not assume that a gain or loss in any particular period is indicative of a trend or of the gain or loss we may ultimately realize when we close a position.
 
During the three months ended June 30, 2019, we recognized a net gain on trading securities of $2,562, which included $5,041 of realized net gain and $2,479 of unrealized net loss compared to a net loss of $3,288 on trading securities for three months ended June 30, 2018, which included $5,094 of realized net gain and $8,382 of unrealized net loss. The primary contributing factor to our net gain on trading securities during the three months ended June 30, 2019, was increases in the share prices of several securities we held. At June 30, 2019, we had reduced our proprietary trading portfolio by $23,329 compared to June 30, 2018.
 
 
31
 
 
Interest incomeDuring the years ended June 30, 2019 and 2018, we recorded interest income from several sources: interest income on trading securities, interest income on cash and cash equivalents held in financial institutions, interest income on reverse repurchase transactions and amounts due from banks. Interest income on trading securities consists of interest earned from investments in debt securities and dividends earned on equity securities held in our proprietary trading accounts. During the three months ended June 30, 2019, we realized interest income of $4,131 compared to $7,372 for the three months ended June 30, 2018. The decrease in interest income of $3,241 was the result of two factors, a decrease in interest income on trading securities in the amount of $2,757 and a $598 decrease in interest income from reverse repurchase transactions, which were partially offset by increased interest from loans to customers in the amount of $126.
 
During the three months ended June 30, 2019, we realized lower interest income from trading securities because we decreased our investments in interest bearing securities as compared to the three months ended June 30, 2018. Interest income from reverse repurchase transactions was also lower during the three months ended June 30, 2019, because we decreased the volume of reverse repurchase transactions as compared to the three months ended June 30, 2018.
 
Net loss on foreign exchange operations. Net loss on foreign exchange operations resulted from revaluation of assets and liabilities denominated in currencies other than the reporting currency of each of our companies. During the three months ended June 30, 2019, we realized a net loss on foreign exchange operations of $36 compared to a net loss of $2,110 during the three months ended June 30, 2018. In accordance with U.S. GAAP, we are required to revalue assets denominated in foreign currencies into our reporting currency, which is the U.S. dollar.
 
During the three months ended June 30, 2019, the value of the Kazakhstani tenge appreciated approximately 0.1% against the United States dollar and as a result of slight fluctuations our net loss on foreign exchange operations was insignificant. By comparison, during the three months ended June 30, 2018, the value of the Kazakhstani tenge decreased by approximately 7% against the U.S. dollar. As a result of the increase in Kazakhstani tenge denominated financial assets we held during the three months ended June 30, 2018, coupled with the aforementioned reduction in value of the Kazakhstani tenge against the U.S. dollar, we realized an $815 loss on foreign exchange revaluations, a $699 loss on the revaluation of corporate bonds issued by Freedom KZ indexed to the U.S. dollar, and a $603 loss on the revaluation of U.S. dollar denominated loans from JSC AsiaCreditBank received by Freedom KZ. These losses were only partially offset by a $204 gain on foreign exchange operations as the result of revaluation of U.S. dollar denominated securities held by Freedom KZ during the three months ended June 30, 2018.
 
 
Expense
 
 
 
Three Months Ended
June 30, 2019
 
 
Three Months Ended
June 30, 2018
 
 
Change
 
 
 
Amount
 
 
%
 
 
Amount
 
 
%
 
 
Amount
 
 
%
 
Interest expense
 $3,608 
  18%
 $4,614 
  32%
 $(1,006)
  (22%)
Fee and commission expense
  4,031 
  21%
  764 
  5%
  3,267 
  428%
Operating expense
  12,685 
  64%
  9,111 
  63%
  3,574 
  39%
Provision/(recovery)
for impairment losses
  (1,073)
  (5%)
6 
  0%
  (1,079)
  (17,983%)
Other expense/(income), net
  308 
  2%
  (60)
  0%
  368 
  (613%)
Total expense/(income)
 $19,559 
  100%
 $14,435 
  100%
 $5,124 
  35%
 
 
32
 
 
During the three months ended June 30, 2019 and 2018, we incurred total expenses of $19,559 and $14,435, respectively. Expenses during the three months ended June 30, 2019, increased primarily as a result of our continued efforts to grow our business and were only partially offset by lower interest expense and recovery for impairment losses.
 
Interest expense. During the three months ended June 30, 2019, we recognized total interest expense of $3,608, compared to $4,614 during the three months ended June 30, 2018. The decrease in interest expense of $1,006 was primarily attributable to a decrease in interest expense for loans received totaling $180 and a decrease in interest expense due to a lower volume of short-term financing attracted by means of securities repurchase agreements totaling $1,533. These decreases were only partially offset by increased interest expense for customer deposits received totaling $254 and increased interest expense related to the issuance of debt securities totaling $8. Also, on April 1, 2019, we adopted the new lease standard promulgated by the PCAOB which resulted in our recognition of interest expense in the amount of $445 during the three months ended June 30, 2019, compared to $0 during the three months ended June 30, 2018.
 
Fee and commission expense. During the three months ended June 30, 2019, we recognized fee and commission expense of $4,031, compared to fee and commission expense of $764 during the three months ended June 30, 2018. The increase was associated with higher commission fees paid to the Central Depository, stock exchanges and brokerage fees to our prime brokers of $3,345 as well as a decrease in bank services commissions of $78. The increases in fee and commission expense were the result of both growth in our client base and increased transaction volume from our existing clients.
 
Operating expense. During the three months ended June 30, 2019, operating expense totaled $12,685 compared to operating expense of $9,111 for the three months ended June 30, 2018. The increase was primarily attributable to higher general and administrative expenses related to expansion of our operations and growth of our branch office network. In particular, the rise in operating expenses during the three months ended June 30, 2019 included a $2,754 increase in payroll expenses, a $321 increase in professional services fees, a $238 increase in advertising expenses, a $178 increase in depreciation and amortization expenses, and $235 decrease in repair expenses due to the fact that most repair expenses were incurred in the previous period. Moreover, as a result of adopting the new lease standard, the Company realized a $964 decrease in rent expenses and a $1,038 increase in lease depreciation expenses.
 
Provision/(recovery) for impairment losses. During the three months ended June 30, 2019, receivables in the amount of approximately $16,800 were repaid, including $1,417 which management had previously estimated may be uncollectible and for which had recognized an impairment loss in prior period. This recovery was partially offset by an additional provision for impairment losses in the amount of $372. We anticipate the $1,417 recovery of impairment loss during the quarter ended June 30, 2019, to be a one-time event that will not recur in future periods.
 
Other expense/(income), net. During the three months ended June 30, 2019 and 2018, we incurred other expense of $308 and other income of $60, respectively. During the three months ended June 30, 2019, other expense was higher primarily due to one-off expense related to the purchase of securities in the amount of $224.
 
 
33
 
 
Income tax benefit/(expense)
 
We recognized net income before income tax of $9,690 during the three months ended June 30, 2019, and net loss before income tax of $7,033 during the three months ended June 30, 2018, respectively. During the three months ended June 30, 2019, we realized an income tax expense of $1,476 compared to an income tax benefit of $150 during the three months ended June 30, 2018, as a result of changes in the composition of the revenues we realized from our operating activities and the tax treatment of those revenues in the various foreign jurisdictions where our subsidiaries operate along with the incremental U.S. tax on Global Intangible Low-taxed Income (“GILTI”).
 
Comprehensive income
 
The functional currencies of our operating subsidiaries are the Russian ruble, Kazakhstani tenge, European euro, Ukrainian hryvnia and Uzbekistani sum. Our reporting currency is the United States dollar. Pursuant to U.S. GAAP we are required to revalue our assets from our functional currencies to our reporting currency for financial reporting purposes. As a result of the strengthening of the Russian ruble by 1% against the U.S. dollar we realized a foreign currency translation gain of $643 during the three months ended June 30, 2019. In comparison, as a result of depreciation of the Russian ruble by 10% and the Kazakhstani tenge by 7% against the U.S. dollar during the three months ended June 30, 2018 we realized a foreign currency translation loss of $6,698. During the three months ended June 30, 2019, we realized a gain on foreign currency translation of $643, which when coupled with net income from the same quarter, resulted in comprehensive income of $8,857. By comparison, during the three months ended June 30, 2018, we realized a $6,698 loss on foreign currency translation during the three months ended June 30, 2018, which, when coupled with our net loss during that same period, resulted in a comprehensive loss of $13,559.
 
Liquidity and Capital Resources
 
Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes. Our operations are funded through a combination of existing cash on hand, cash generated from operations, proceeds from the issuance of common stock, proceeds from the sale of bonds of our subsidiaries, our credit facility and other borrowings and capital contributions from our controlling shareholder. Regulatory requirements applicable to our subsidiaries require each of them to maintain minimum capital levels.
 
As of June 30, 2019, we had cash and cash equivalents of $141,900 compared to cash and cash equivalents of $49,960, as of March 31, 2019. At June 30, 2019, we had total assets of $429,101 and total liabilities of $303,286. By comparison, at March 31, 2019, we had total assets of $350,911 and total liabilities of $233,314. At June 30, 2019, we had net liquid assets of $355,966, consisting of cash and cash equivalents, trading securities, available-for-sale securities, at fair value, brokerage and other receivables and other assets compared to $295,936 at March 31, 2019.
 
Currency fluctuations during the periods discussed above led to a 1% increase in the value of the Russian ruble against the U.S. dollar, while the Kazakhstani tenge increased approximately 0.1% against the U.S. dollar during the period from March 31, 2019 to June 30, 2019. As a result, in accordance with U.S. GAAP, balance sheet items denominated in Russian rubles and Kazakhstani tenge had to be revalued. This caused us to realize a $36 net loss on foreign exchange operations and a foreign currency translation gain of $643 during the three months ended June 30, 2019.
 
 
34
 
 
As of June 30, 2019, the value of the trading securities held in our proprietary trading account totaled $161,021 compared to $167,949 at March 31, 2019. This reduction in trading securities was primarily attributable to the sale of trading securities. As of June 30, 2019, $75,621, or 47%, of the trading securities held in our proprietary trading account were subject to securities repurchase obligations and of the $141,900 in cash and cash equivalents at June 30, 2019, $8,065, or approximately 6%, was subject to reverse repurchase agreements.
 
Our subsidiaries, Freedom RU and Freedom KZ had outstanding bonds issued at June 30, 2019 and March 31, 2019, totaling $29,772 and $28,538 respectively. These bonds have fixed annual coupon rates ranging from 8% to 12% and maturity dates ranging from June 2020 to February 2022.
 
As registered broker-dealers and a bank, our subsidiaries are required to satisfy minimum net capital requirements to maintain licensure to conduct the brokerage and/or banking services we provide. These minimum net capital requirements range from approximately $30 to $4,760 and fluctuate depending on various factors. As of June 30, 2019, we had net assets of $125,815. In the event we fail to maintain minimum net capital, we may be subject to fines and penalties, suspension of operations, revocation of licensure and disqualification of our management from working in the industry.
 
We monitor and manage our leverage and liquidity risk through various committees and processes we have established. We assess our leverage and liquidity risk based on considerations and assumptions of market factors, as well as other factors, including the amount of available liquid capital (i.e., the amount of their cash and cash equivalents not invested in our operating business). While we are confident in the risk management monitoring and management processes we have in place, a significant portion of our trading securities and cash and cash equivalents are subject to collateralization agreements. This significantly enhances our risk of loss in the event financial markets move against our positions. When this occurs our liquidity, capitalization and business can be negatively impacted. Because of the amount of leverage we employ in our proprietary trading activities, coupled with our strategy to at times take large positions in select companies or industries, our liquidity, capitalization, projected return on investment and results of operations can be significantly affected when we misjudge the impact of events, timing and liquidity of the market for those securities.
 
As of June 30, 2019, approximately $57,000 of our proprietary trading account was invested in the securities of a single company. Our position in this security is highly leveraged. We invested in this security based on our analysis that this company is significantly undervalued and presents a good investment opportunity. As of the date of this report, this position remains open. Based on the size of the position and the leveraging we have employed to maintain it, our liquidity, capitalization, projected return on investment and results of operations could be significantly negatively affected if our analysis of this investment opportunity and/or market conditions, including our ability to liquidate the position as needed, proves to be incorrect.
 
 
35
 
 
We have pursued an aggressive growth strategy during the past several years, and we anticipate continuing efforts to rapidly expand the footprint of our financial services business in Eastern Europe and Central Asia. While this strategy has led to revenue growth it also results in increased expenses and greater need for capital resources. Further growth and expansion may require greater capital resources than we currently possess, which could require us to pursue additional equity or debt financing from outside sources. We cannot assure that such financing will be available to us on acceptable terms, or at all, at the time it is needed.
 
We believe that our current cash and cash equivalents, cash expected to be generated from operating activities, and forecasted returns from our proprietary trading will be sufficient to meet our working capital needs for the next 12 months. We continue to monitor our financial performance to ensure adequate liquidity to fund operations and execute our business plan.
 
Cash Flows
 
The following table presents our cash flows for the three months ended June 30, 2019 and 2018:
 
 
 
For the three
months ended
June 30,
2019
 
 
For the three
months ended
June 30,
2018
 
 
 
 
 
 
 
 
Net cash flows from operating activities
 $113,566 
 $1,420 
Net cash flows used in investing activities
  (714)