UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
|
| |||||||||
| For the quarterly period ended | |||||||||
|
| |||||||||
| 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
(Exact name of registrant as specified in its charter) |
| ||||||||||||
(State or other jurisdiction of |
| (I.R.S. Employer | ||||||||||
incorporation or organization) |
| Identification No.) |
|
| |||||||||||
| ||||||||||||
(Address of principal executive offices) |
| (Zip Code) |
(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 |
The |
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.
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).
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.
Large accelerated filer | ☐ | ☒ | |
Non-accelerated filer | ☐ | 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
As of November 6, 2020, the registrant had
FREEDOM HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION |
| Page |
| |
|
|
|
| |
Item 1. | Unaudited Condensed Consolidated Financial Statements |
| 3 |
|
|
|
|
|
|
| Condensed Consolidated Balance Sheets as of September 30, 2020 and March 31, 2020 |
| 3 |
|
|
|
|
|
|
|
| 4 |
| |
|
|
|
|
|
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2020 and 2019 |
| 5 |
|
|
|
|
|
|
|
| 7 |
| |
|
|
|
|
|
|
| 8 |
| |
|
|
|
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 30 |
|
|
|
|
| |
Item 3. |
| 46 |
| |
|
|
|
| |
Item 4. |
| 46 |
| |
|
|
|
| |
|
|
| ||
|
|
|
| |
Item 1. |
| 47 |
| |
|
|
|
| |
Item 1A. |
| 47 |
| |
|
|
|
| |
Item 6. |
| 62 |
| |
|
|
|
| |
| 63 |
|
2 |
Table of Contents |
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Restricted cash |
|
|
|
|
|
| ||
Trading securities |
|
|
|
|
|
| ||
Derivative assets |
|
|
|
|
|
| ||
Available-for-sale securities, at fair value |
|
|
|
|
|
| ||
Brokerage and other receivables, net |
|
|
|
|
|
| ||
Loans issued |
|
|
|
|
|
| ||
Deferred tax assets |
|
|
|
|
|
| ||
Fixed assets, net |
|
|
|
|
|
| ||
Intangible assets, net |
|
|
|
|
|
| ||
Goodwill |
|
|
|
|
|
| ||
Right-of-use asset |
|
|
|
|
|
| ||
Prepayment on acquisition |
|
|
|
|
|
| ||
Other assets, net |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ |
|
| $ |
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Debt securities issued |
| $ |
|
| $ |
| ||
Customer liabilities |
|
|
|
|
|
| ||
Trade payables |
|
|
|
|
|
| ||
Deferred distribution payments |
|
|
|
|
|
| ||
Securities repurchase agreement obligations |
|
|
|
|
|
| ||
Current income tax liability |
|
|
|
|
|
| ||
Lease liability |
|
|
|
|
|
| ||
Deferred tax liabilities |
|
|
|
|
|
| ||
Other liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
|
|
|
| ||
Commitments and Contingent Liabilities |
|
|
|
|
|
| ||
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Preferred stock - $ |
|
|
|
|
|
| ||
Common stock - $ |
|
|
|
|
|
| ||
Additional paid in capital |
|
|
|
|
|
| ||
Retained earnings |
|
|
|
|
|
| ||
Accumulated other comprehensive loss |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Non-controlling interest |
|
| ( | ) |
|
| ( | ) |
TOTAL SHAREHOLDERS’ EQUITY |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ |
|
| $ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
Table of Contents |
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
|
| Three months ended September 30, |
|
| Six months ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fee and commission income |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Net gain on trading securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net gain on foreign exchange operations |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) on derivative assets |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUE, NET |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fee and commission expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Provision/(recovery) for impairment losses |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Other (income)/expense, net |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSE |
|
|
|
|
|
|
|
|
|
|
| 41,047 |
| |||
NET INCOME BEFORE INCOME TAX |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income/(loss) attributable to noncontrolling interest in subsidiary |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
| ( | ) | |
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME/(LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities, net of tax effect |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Reclassification adjustment relating to available-for-sale securities disposed of in the period, net of tax effect |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments, net of tax effect |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME BEFORE NONCONTROLLING INTERESTS |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income/(loss) attributable to noncontrolling interest in subsidiary |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
BASIC NET INCOME PER COMMON SHARE |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
DILUTED NET INCOME PER COMMON SHARE |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Weighted average number of shares (basic) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of shares (diluted) |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4 |
Table of Contents |
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
|
| For the six months ended |
| |||||
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||
|
|
|
|
|
|
| ||
Cash Flows From Operating Activities |
|
|
|
|
|
| ||
Net income |
| $ |
|
| $ |
| ||
Adjustments to reconcile net income from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
| ||
Noncash lease expense |
|
|
|
|
|
| ||
Loss on sale of fixed assets |
|
|
|
|
|
| ||
Change in deferred taxes |
|
|
|
|
|
| ||
Stock compensation expense |
|
|
|
|
|
| ||
Share based payment |
|
|
|
|
|
| ||
Unrealized (gain)/loss on trading securities |
|
| ( | ) |
|
|
| |
Net loss on derivatives |
|
|
|
|
|
| ||
Net change in accrued interest |
|
| ( | ) |
|
|
| |
Allowance/(recoveries) for receivables |
|
|
|
|
| ( | ) | |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Lease liabilities |
|
| ( | ) |
|
| ( | ) |
Derivative assets |
|
| ( | ) |
|
|
| |
Trading securities |
|
| ( | ) |
|
|
| |
Brokerage and other receivables |
|
| ( | ) |
|
|
| |
Loans issued |
|
|
|
|
| ( | ) | |
Other assets |
|
| ( | ) |
|
| ( | ) |
Derivative liabilities |
|
|
|
|
|
| ||
Customer liabilities |
|
|
|
|
|
| ||
Current income tax liability |
|
|
|
|
|
| ||
Trade payables |
|
|
|
|
| ( | ) | |
Securities sold, not yet purchased |
|
|
|
|
|
| ||
Other liabilities |
|
|
|
|
|
| ||
Net cash flows from operating activities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
| ( | ) |
|
| ( | ) |
Proceeds from sale of fixed assets |
|
|
|
|
|
| ||
Proceeds from sale/(purchase) of available-for-sale securities, at fair value |
|
|
|
|
| ( | ) | |
Prepayment on acquisition |
|
| ( | ) |
|
|
| |
Consideration paid for Zerich Capital Management |
|
| ( | ) |
|
|
| |
Cash, cash equivalents and restricted cash received from acquisitions |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Net cash flows from/(used in) investing activities |
|
|
|
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Repurchase/(repayment) of securities repurchase agreement obligations |
|
|
|
|
| ( | ) | |
Proceeds from issuance of debt securities |
|
|
|
|
|
| ||
Repurchase of debt securities |
|
| ( | ) |
|
| ( | ) |
Repayment of loans received |
|
|
|
|
| ( | ) | |
Exercise of options |
|
|
|
|
|
| ||
Net cash flows from/(used in) financing activities |
|
|
|
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
Effect of changes in foreign exchange rates on cash and cash equivalents |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
|
|
|
| ||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD |
|
|
|
|
|
| ||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD |
| $ |
|
| $ |
|
5 |
Table of Contents |
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
|
| For the six months ended |
| |||||
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
| ||
Cash paid for interest |
| $ |
|
| $ |
| ||
Income tax paid |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental non-cash disclosures: |
|
|
|
|
|
|
|
|
Operating lease right-of-use assets obtained in exchange for operating lease obligations |
| $ |
|
| $ |
| ||
Operating lease right-of-use assets obtained/disposed of in exchange for operating lease obligations during the period, net |
| $ |
|
| $ |
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the statement of cash flow:
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||
|
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Restricted cash |
|
|
|
|
|
| ||
Total cash, cash and cash equivalents and restricted cash as shown in the statement of cash flows |
| $ |
|
| $ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6 |
Table of Contents |
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
|
| Common Stock |
|
| Additional paid in |
|
| Retained |
|
| Accumulated other comprehensive |
|
| Non-controlling |
|
|
| |||||||||||
|
| Shares |
|
| Amount |
|
| capital |
|
| earnings |
|
| loss |
|
| interest |
|
| Total |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
June 30, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Translation difference |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||||
Net income/(loss) |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Translation difference |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||||
Net income |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
|
| Common Stock |
|
| Additional paid in |
|
| Retained |
|
| Accumulated other comprehensive |
|
| Non-controlling |
|
|
| |||||||||||
|
| Shares |
|
| Amount |
|
| capital |
|
| earnings |
|
| loss |
|
| interest |
|
| Total |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
June 30, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Share based payment |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Sale of Freedom UA shares |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Translation difference |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||||
Net income/(loss) |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options |
|
|
|
|
| - |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
| |||
Stock based compensation |
|
| - |
|
|
| - |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
| ||
Share based payment |
|
| - |
|
|
| - |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
| ||
Sale of Freedom UA shares |
|
| - |
|
|
| - |
|
|
| ( | ) |
|
| - |
|
|
| - |
|
|
|
|
|
|
| ||
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
| - |
|
|
|
| ||
Translation difference |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| ( | ) |
|
| - |
|
|
| ( | ) |
Net income/(loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
| - |
|
|
| ( | ) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7 |
Table of Contents |
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 Eurasia. 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’s common stock trades on the Nasdaq Capital Market.
The Company owns directly, or through subsidiaries, the following companies: LLC Investment Company Freedom Finance (“Freedom RU”) and JSC Investment Company Zerich Capital Management (“Zerich”), Moscow, Russia-based securities broker-dealers; LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based securities broker-dealer (“Freedom KZ”); Freedom Finance Global, PLC, an Astana International Financial Centre-based securities broker-dealer, (“Freedom Global”); Freedom Finance Europe Limited, a Limassol, Cyprus-based broker-dealer (“Freedom CY”); Freedom Finance Management Limited, a Limassol, Cyprus limited company, (“Freedom Management”); Freedom Finance Germany TT GmbH, a Berlin, Germany-based tied agent (“Freedom GE”); LLC Freedom Finance Uzbekistan, a Tashkent, Uzbekistan-based broker-dealer (“Freedom UZ”); and FFIN Securities, Inc., a Nevada corporation (“FFIN”).
The Company also owns a
The Company’s subsidiaries are participants on the Kazakhstan Stock Exchange (KASE), Astana Stock Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPBX), Ukrainian Exchange (UX), Republican Stock Exchange of Tashkent (UZSE), and Uzbek Republican Currency Exchange (UZCE). 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 provide only limited or no direct investor access to international securities markets.
Unless otherwise specifically indicated or as is otherwise contextually required, FRHC, Freedom RU, Zerich, FFIN Bank, Freedom KZ, Freedom Global, Freedom CY, Freedom Management, Freedom GE, Freedom UZ, FFIN and Freedom UA are collectively referred to herein as the “Company.”
8 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting principles
The Company’s accounting policies and accompanying condensed consolidated financial statements conform to accounting principles generally accepted in the United States of America (U.S. GAAP).
These financial statements have been prepared on the accrual basis of accounting.
Basis of presentation and principles of consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with 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 six-month period ended September 30, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2021
The Condensed Consolidated Balance Sheet at September 30, 2020, has been derived from the audited consolidated financial statements at March 31, 2020, but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.
The Company’s condensed consolidated financial statements present the consolidated accounts of FRHC, Freedom RU, Zerich, FFIN Bank, Freedom KZ, Freedom Global, Freedom CY, Freedom Management, Freedom GE, Freedom UZ, FFIN and Freedom UA. 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, 2020.
Consolidation of variable interest entities
In accordance with accounting standards regarding consolidation of VIEs, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. VIEs must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
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.
9 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
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 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). |
Under ASC 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.
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.
10 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
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 U.S. dollar. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. 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.”
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 shareholders’ 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.
11 |
Table of Contents |
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 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 included 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. When 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.
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 and included in net gain on trading securities. Interest earned and dividend income are recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income 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.
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.
12 |
Table of Contents |
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 September 30, 2020 and March 31, 2020, the Company had not recorded any charges for impairment of long-lived assets.
Impairment of goodwill
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.
13 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
Goodwill as of March 31, 2020, and the changes in the carrying amount of goodwill for the six months ended September 30, 2020 were as follows:
Balance as of March 31, 2020 |
| $ |
| |
|
|
|
|
|
Acquisition of Zerich |
|
|
| |
Foreign currency translation |
|
|
| |
|
|
|
|
|
Balance as of September 30, 2020 |
| $ |
|
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 September 30, 2020, and March 31, 2020, the Company had no accrued interest or penalties related to uncertain tax positions.
The Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Cuts and Jobs Act of 2017 (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 September 30, 2020 and March 31, 2020.
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.
14 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
Leases
The Company adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet.
The Company adopted the provisions of ASU 2018-11 “Leases (Topic 842),” including the optional transition method, on April 1, 2019, and selected practical expedients package as follows:
| • | An entity need not reassess whether any expired or existing contracts are or contain leases; |
|
|
|
| • | An entity need not reassess the lease classification for any expired or existing leases; |
|
|
|
| • | An entity need not reassess initial direct costs for any existing leases. |
Operating lease assets and corresponding lease liabilities were recognized on the Company’s condensed consolidated balance sheets. Refer to Note 18 - Leases, within the notes to the 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.
Segment Information
The Company operates in a single operating segment offering financial services to its customers in a single geographic region covering Eurasia. 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
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. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. The Board developed a philosophy to extend and simplify how effective dates are staggered between larger public companies (bucket one) and all other entities (bucket two). Those other entities include private companies, smaller public companies, not-for-profit organizations, and employee benefit plans. Under this philosophy, a major update would first be effective for bucket-one entities, that is, public business entities that are Securities and Exchange Commission (SEC) filers, excluding entities eligible to be smaller reporting companies (SRCs) under the SEC’s definition. The Master Glossary of the Codification defines public business entities and SEC filers. All other entities, including SRCs, other public business entities, and nonpublic business entities (private companies, not-for-profit organizations, and employee benefit plans) would compose bucket two. For those entities, it is anticipated that the Board will consider requiring an effective date staggered at least two years after bucket one for major updates. The Company is currently an SRC and according to ASU 2019-10, qualifies for bucket two. Accordingly, ASU 2016-13 and ASU 2017-12 are effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact that ASU 2016-13 and 2019-10 will have on its condensed consolidated financial statements and related disclosures.
15 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
In August 2020, the FASB has issued Accounting Standards Update No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends FASB Accounting Standards Codification (ASC or the “Codification”) to simplify the guidance on (1) accounting for convertible instruments, and (2) the derivatives scope exception for contracts in an entity’s own equity. The Board issued this update to address issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. Complexity associated with the accounting is a significant contributing factor to numerous financial statement restatements and results in complexity for users attempting to understand the results of applying the current guidance. In addressing the complexity, the Board focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity. The Company is currently evaluating the impact that ASU 2020-06 will have on its condensed consolidated financial statements and related disclosures.
Revision of Previously Issued Condensed Consolidated Financial Statements
Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on the previously reported net income. The table below details the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income reclassifications:
|
| For the six months ended September 30, 2019 |
| |||||||||
STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME (as corrected) |
| As previously reported |
|
| Reclassified |
|
| As corrected |
| |||
|
|
|
|
|
|
|
|
|
| |||
Expense: |
|
|
|
|
|
|
|
|
| |||
Interest expense |
| $ |
|
|
| ( | ) |
| $ |
| ||
Fee and commission expense |
|
|
|
|
|
|
|
|
| |||
Operating expense |
|
|
|
|
|
|
|
|
| |||
Recovery of impairment losses |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Other expense, net |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSE |
| $ |
|
|
|
|
| $ |
|
16 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
NOTE 3 - CASH AND CASH EQUIVALENTS
As of September 30, 2020, and March 31, 2020, cash and cash equivalents consisted of the following:
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Current accounts with brokers |
| $ |
|
| $ |
| ||
Current account with National Settlement Depository (Russia) |
|
|
|
|
|
| ||
Securities purchased under reverse repurchase agreements |
|
|
|
|
|
| ||
Current account with Central Bank (Russia) |
|
|
|
|
|
| ||
Accounts with stock exchange |
|
|
|
|
|
| ||
Current accounts with commercial banks |
|
|
|
|
|
| ||
Petty cash in bank vault and on hand |
|
|
|
|
|
| ||
Current accounts in clearing organizations |
|
|
|
|
|
| ||
Current account with Central Depository (Kazakhstan) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
| $ | 443,439 |
|
| $ | 63,208 |
|
As of September 30, 2020 and March 31, 2020, with the exception of funds deposited with a bank in the United States which may qualify for FDIC insurance up to $
As of September 30, 2020 and March 31, 2020, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:
|
| September 30, 2020 |
| |||||||||||||
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-U.S. sovereign debt |
|
| % |
| $ |
|
| $ |
|
| $ |
| ||||
Corporate equity |
|
| % |
|
|
|
|
|
|
|
|
| ||||
Corporate debt |
|
| % |
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
|
| March 31, 2020 |
| |||||||||||||
|
| 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 |
|
| % |
| $ |
|
| $ |
|
| $ |
| ||||
Corporate debt |
|
| % |
|
|
|
|
|
|
|
|
| ||||
Non-U.S. sovereign debt |
|
| % |
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
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 September 30, 2020 and March 31, 2020, was $
17 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
NOTE 4 - RESTRICTED CASH
Restricted cash for the periods ended September 30, 2020 and March 31, 2020, consisted of:
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Brokerage customers’ cash |
| $ |
|
| $ |
| ||
Deferred distribution payments |
|
|
|
|
|
| ||
Reserve with Central Bank of Russia |
|
|
|
|
|
| ||
Guaranty deposits |
|
|
|
|
|
| ||
Total restricted cash |
| $ |
|
| $ |
|
As of September 30, 2020 and March 31, 2020, the Company’s restricted cash included the cash portion of the funds 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 and deferred distribution payments. The deferred distribution payment amount is a reserve held for distribution to stockholders who have not yet claimed their distributions from the 2011 sale of the Company’s oil and gas exploration and production operations of $
NOTE 5 -TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE
As of September 30, 2020 and March 31, 2020, trading and available-for-sale securities consisted of:
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Debt securities |
| $ |
|
| $ |
| ||
Equity securities |
|
|
|
|
|
| ||
Mutual investment funds |
|
|
|
|
|
| ||
Total trading securities |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Equity securities |
| $ |
|
| $ |
| ||
Certificate of deposit |
|
|
|
|
|
| ||
Mutual investment funds |
|
|
|
|
|
| ||
Debt securities |
|
|
|
|
|
| ||
Preferred shares |
|
|
|
|
|
| ||
Total available-for-sale securities, at fair value |
| $ |
|
| $ |
|
The Company recognized no other-than-temporary impairment in accumulated other comprehensive income.
18 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
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. |
The following tables present securities assets in the condensed consolidated financial statements at fair value on a recurring basis as of September 30, 2020 and March 31, 2020:
|
|
|
| Fair Value Measurements at |
| |||||||||||
|
|
|
| September 30, 2020 using |
| |||||||||||
|
| September 30, |
|
| Quoted Prices in Active Markets for Identical Assets |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||
|
| 2020 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Debt securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mutual investment funds |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total trading securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Total available-for-sale securities, at fair value |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
|
|
| Fair Value Measurements at |
| |||||||||||
|
|
|
| March 31, 2020 using |
| |||||||||||
|
| March 31, |
|
| Quoted Prices in Active Markets for Identical Assets |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||
|
| 2020 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Debt securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total trading securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Certificate of deposit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mutual investment funds |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Preferred shares |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total available-for-sale securities, at fair value |
| $ |
|
| $ |
|
| $ |
|
| $ |
|
19 |
Table of Contents |
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 valuation techniques and significant level 3 inputs used in the valuation as of September 30, 2020 and March 31, 2020. 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 September 30, 2020 |
|
| FV as of March 31, 2020 |
|
| Significant Unobservable Inputs |
| % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Equity securities |
|
| $ |
|
| $ |
|
|
|
| % | |||||
|
|
|
|
|
|
|
|
|
|
|
| Estimated number of years |
|
| ||
Equity securities |
|
| $ |
|
|
|
|
|
|
| % | |||||
|
|
|
|
|
|
|
|
|
|
|
| Estimated number of years |
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended September 30, 2020 and the year ended March 31, 2020:
|
| Trading securities |
|
| Available-for-sale securities |
| ||
Balance as of March 31, 2020 |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Sale of investments that use Level 3 inputs |
|
| ( | ) |
|
|
| |
Purchase of investments that use Level 3 inputs |
|
|
|
|
|
| ||
Revaluation of investments that use Level 3 inputs |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2020 |
| $ |
|
| $ |
|
|
| Trading securities |
|
| Available-for-sale securities |
| ||
Balance as of March 31, 2019 |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
| ||
Sale of investments that use Level 3 inputs |
|
| ( | ) |
|
|
| |
Purchase of investments that use Level 3 inputs |
|
|
|
|
|
| ||
Revaluation of investments that use Level 3 inputs |
|
|
|
|
|
| ||
Foreign currency translation |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
| ||
Balance as of March 31, 2020 |
| $ |
|
| $ |
|
20 |
Table of Contents |
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 amortized cost, unrealized gains and losses accumulated in other comprehensive income/(loss), and fair value of available-for-sale securities as of September 30, 2020 and March 31, 2020:
|
| September 30, 2020 |
| |||||||||
|
| Assets measured at amortized cost |
|
| Unrealized loss accumulated in other comprehensive income/(loss) |
|
| Assets measured at fair value |
| |||
|
|
|
|
|
| |||||||
Equity securities |
| $ |
|
| $ |
|
| $ |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2020 |
| $ |
|
| $ |
|
| $ |
|
|
| March 31, 2020 |
| |||||||||
|
| Assets measured at amortized cost |
|
| Unrealized loss accumulated in other comprehensive income/(loss) |
|
| Assets measured at fair value |
| |||
|
|
|
|
|
| |||||||
Certificate of deposit |
| $ |
|
| $ |
|
| $ |
| |||
Mutual investment funds |
|
|
|
|
| ( | ) |
|
|
| ||
Debt securities |
|
|
|
|
| ( | ) |
|
|
| ||
Preferred shares |
|
|
|
|
| ( | ) |
|
|
| ||
Equity securities |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2020 |
| $ |
|
| $ | ( | ) |
| $ |
|
In connection with the 2011 sale of the Company’s oil and gas exploration and production operations the Company declared distributions to its stockholders. Certain stockholders, however, never completed and submitted the necessary documentation to establish their right to receive the distributions. The total amount held in reserve by the Company on behalf of such stockholders is equal to available-for-sale securities, at fair value, less equity securities, plus the amount identified as “deferred distribution payments” in Note 4 - Restricted Cash. These funds are currently payable. The Company has no control over when, or if, any entitled stockholder will submit the necessary documentation to establish a claim to receive such stockholder’s distribution payment.
NOTE 6 - DERIVATIVE ASSETS
On June 30, 2020, the Company entered into two call option agreements in connection with successfully completing an underwritten securities offering for a third party. Both derivative instruments grant the Company the right to purchase
21 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
NOTE 7 - BROKERAGE AND OTHER RECEIVABLES, NET
Brokerage and other receivables for the periods ended September 30, 2020 and March 31, 2020 consisted of:
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Margin lending receivables |
| $ |
|
| $ |
| ||
Receivables from brokerage clients |
|
|
|
|
|
| ||
Receivable for underwriting and market-making services |
|
|
|
|
|
| ||
Receivable from sale of securities |
|
|
|
|
|
| ||
Bank commissions receivable |
|
|
|
|
|
| ||
Other receivables |
|
|
|
|
|
| ||
Bonds coupon receivable |
|
|
|
|
|
| ||
Dividends receivable |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Allowance for receivables |
|
| ( | ) |
|
| ( | ) |
Total brokerage and other receivables, net |
| $ |
|
| $ |
|
On September 30, 2020 and March 31, 2020, amounts due from a single related party customer were $
NOTE 8 - LOANS ISSUED
Loans issued as of September 30, 2020, consisted of the following:
|
| Amount Outstanding |
|
| Due Dates |
| Average Interest Rate |
|
| Fair Value of Collateral |
|
| Loan Currency | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Subordinated loan |
| $ |
|
|
|
| % |
|
|
|
| USD | |||||
Uncollateralized non-bank loan |
|
|
|
|
|
| % |
|
|
|
| USD | |||||
Subordinated loan |
|
|
|
|
|
| % |
|
|
|
| UAH | |||||
Bank customer loans |
|
|
|
|
|
| % |
|
|
|
| RUB | |||||
Uncollateralized non-bank loan |
|
|
|
|
|
| % |
|
|
|
| RUB | |||||
Other loans issued |
|
|
|
|
|
| % |
|
|
|
| EUR | |||||
|
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans issued as of March 31, 2020, consisted of the following:
|
| Amount Outstanding |
|
| Due Dates |
| Average Interest Rate |
|
| Fair Value of Collateral |
|
| Loan Currency | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Subordinated loan |
| $ |
|
|
|
| % |
|
|
|
| USD | |||||
Uncollateralized non-bank loan |
|
|
|
|
|
| % |
|
|
|
| USD | |||||
Bank customer loans |
|
|
|
|
|
| % |
|
|
|
| RUB | |||||
Subordinated loan |
|
|
|
|
|
| % |
|
|
|
| UAH | |||||
Uncollateralized non-bank loan |
|
|
|
|
|
| % |
|
|
|
| RUB | |||||
Other loans issued |
|
|
|
|
|
| % |
|
|
|
| EUR | |||||
|
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
NOTE 9 - INCOME TAXES
The Company is subject to taxation in the Russian Federation, Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan, Germany and the U.S.
The tax rates used for deferred tax assets and liabilities as of September 30, 2020 and March 31, 2020, is
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Deferred tax assets: |
|
|
|
|
|
| ||
Tax loss carryforwards |
| $ |
|
| $ |
| ||
Accrued liabilities |
|
|
|
|
|
| ||
Depreciation |
|
|
|
|
|
| ||
Valuation allowance |
|
| ( | ) |
|
| ( | ) |
Revaluation on trading securities |
|
|
|
|
|
| ||
Deferred tax assets |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Revaluation on trading securities |
| $ |
|
| $ |
| ||
Other liabilities |
|
|
|
|
|
| ||
Deferred tax liabilities |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities) |
| $ | ( | ) |
| $ |
|
During the six months ended September 30, 2020 and 2019, the effective tax rate was equal to
Tax loss carryforwards as of September 30, 2020 and March 31, 2020, was $
NOTE 10 - PREPAYMENT ON ACQUISITION
In August 2020, we announced that we entered into an agreement to acquire all of the issued and outstanding ordinary shares of Bank Kassa Nova from ForteBank. As of September 30, 2020, the Company prepaid $
23 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
NOTE 11 - DEBT SECURITIES ISSUED
Debt securities issued for the periods ended September 30, 2020 and March 31, 2020, consisted of:
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Debt securities issued denominated in USD |
| $ |
|
| $ |
| ||
Debt securities issued denominated in RUB |
|
|
|
|
|
| ||
Accrued interest |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
|
As of September 30, 2020 and March 31, 2020, the Company had debt securities issued in the amount of $
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. Debt securities issued as of September 30, 2020 and March 31, 2020, included $
NOTE 12 - CUSTOMER LIABILITIES
The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Brokerage customers |
| $ |
|
| $ |
| ||
Banking customers |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
|
As of September 30, 2020, banking customer liabilities consisted of current accounts and deposits of $
NOTE 13 - TRADE PAYABLES
Trade payables for the periods ended September 30, 2020 and March 31, 2020, consisted of:
|
| September 30, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Margin lending payable |
| $ |
|
| $ |
| ||
Advances received |
|
|
|
|
|
| ||
Trade payable for securities purchased |
|
|
|
|
|
| ||
Payables to suppliers of goods and services |
|
|
|
|
|
| ||
Other |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
|
On September 30, 2020 and March 31, 2020, trade payables due to a single related party were $
24 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
NOTE 14 - SECURITIES REPURCHASE AGREEMENT OBLIGATIONS
As of September 30, 2020 and March 31, 2020, trading securities included collateralized securities subject to repurchase agreements as described in the following table:
|
| September 30, 2020 |
| |||||||||||||||||
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-U.S. sovereign debt |
|
| % |
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Corporate debt |
|
| % |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate equity |
|
| % |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total securities sold under repurchase agreements |
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
| March 31, 2020 |
| |||||||||||||||||
|
| 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 |
|
| % |
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Corporate debt |
|
| % |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-U.S. sovereign debt |
|
| % |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total securities sold under repurchase agreements |
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
The fair value of collateral pledged under repurchase agreements as of September 30, 2020 and March 31, 2020, was $
Securities pledged as collateral by the Company under repurchase agreements are liquid trading securities with market quotes and significant trading volume.
NOTE 15 - RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2020 and 2019, the Company earned commission income from related parties in the amounts of $
25 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
During the three months ended September 30, 2020 and 2019, the Company paid commission expense to related parties in the amount of $
As of September 30, 2020 and March 31, 2020, the Company had cash and cash equivalents held in brokerage accounts of related parties totaling $
As of September 30, 2020 and March 31, 2020, the Company had loans issued to related parties totaling $
As of September 30, 2020 and March 31, 2020, the Company had bank commission receivables and receivables from brokerage clients from related parties totaling $
As of September 30, 2020 and March 31, 2020, the Company had margin lending receivables with related parties totaling $
As of September 30, 2020 and March 31, 2020, the Company had margin lending payables to related parties, totaling $
As of September 30, 2020 and March 31, 2020, the Company had accounts payable due to a related party totaling $
As of September 30, 2020 and March 31, 2020, the Company had customer liabilities to related parties totaling $
As of September 30, 2020 and March 31, 2020, the Company had restricted customer cash deposited in current and brokerage accounts with related parties in the amounts of $
Brokerage and related banking services, including margin lending, were provided to related parties pursuant to standard client account agreements and at standard market rates.
NOTE 16 - SHAREHOLDERS’ EQUITY
During the six months ended September 30, 2020, no stock options were exercised and during the six months ended September 30, 2019, nonqualified stock options to purchase
On October 6, 2017,
26 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
NOTE 17 - STOCK-BASED COMPENSATION
During the six months ended September 30, 2020, no stock options were granted. Total compensation expense related to outstanding options was $
As of September 30, 2020, there was total remaining compensation expense of $4 related to stock options, which will be recorded over a weighted average period of approximately
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) |
|
|
| |
Volatility |
|
| % | |
Risk-free rate |
|
| % |
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.
The following is a summary of stock option activity for the three months ended September 30, 2020:
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term (In Years) |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding, March 31, 2020 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Granted |
|
| - |
|
|
|
|
|
| - |
|
|
| - |
| |
Exercised |
|
| - |
|
|
|
|
|
| - |
|
|
| - |
| |
Forfeited/cancelled/expired |
|
| - |
|
|
|
|
|
| - |
|
|
| - |
| |
Outstanding, at September 30, 2020 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Exercisable, at September 30, 2020 |
|
| - |
|
| $ |
|
|
| - |
|
| $ |
|
27 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
During the three and six months ended September 30, 2020, no restricted shares were awarded. The compensation expense related to restricted stock grants was $
The table below summarizes the activity for the Company’s restricted stock outstanding during the three months ended September 30, 2020:
|
| Shares |
|
| Weighted Average Fair Value |
| ||
Outstanding, March 31, 2020 |
|
|
|
| $ |
| ||
Granted |
|
| - |
|
|
| - |
|
Vested |
|
| - |
|
|
| - |
|
Forfeited/cancelled/expired |
|
| - |
|
|
| - |
|
Outstanding, at September 30, 2020 |
|
|
|
| $ |
|
NOTE 18 - 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 (Topic 842).”
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets as of September 30, 2020:
|
| Classification on Balance Sheet |
| September 30, 2020 |
| |
Assets |
|
|
|
|
| |
Operating lease assets |
| Right-of-use assets |
| $ |
| |
Total lease assets |
|
|
| $ |
| |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Operating lease liability |
| Operating lease obligations |
| $ |
| |
Total lease liability |
|
|
| $ |
|
28 |
Table of Contents |
FREEDOM HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
Lease obligations at September 30, 2020, consisted of the following:
Twelve months ending March 31, |
|
|
| |
2021 - remaining after September 30 |
| $ |
| |
2022 |
|
|
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
2026 |
|
|
| |
Total payments |
|
|
| |
Less: amounts representing interest |
|
| ( | ) |
Lease obligation, net |
| $ |
| |
Weighted average remaining lease term (in months) |
|
|
| |
Weighted average discount rate |
|
| % |
Lease commitments for short term operating leases as of September 30, 2020, are approximately $
NOTE 19 - ACQUISITION
On July 2, 2020, we completed the acquisition of Zerich, following receipt of approval from the Russian Federal Antimonopoly Service. Zerich commenced business in 1995 and is one of the oldest securities brokerage firms in Russia, currently ranking as the 19th largest brokerage house in Russia in terms of clients. The Company agreed to acquire Zerich for $
|
| Purchase price allocation |
| |
|
| As of July 2, 2020 |
| |
Assets: |
|
|
| |
Cash and cash equivalents |
| $ |
| |
Restricted cash |
|
|
| |
Trading securities |
|
|
| |
Fixed assets |
|
|
| |
Intangible assets |
|
|
| |
Right-of-use asset |
|
|
| |
Brokerage and other receivables |
|
|
| |
Other assets |
|
|
| |
Total assets |
| $ |
| |
|
|
|
|
|
Liabilities: |
|
|
|
|
Customer liabilities |
| $ |
| |
Securities repurchase agreement obligation |
|
|
| |
Lease liabilities |
|
|
| |
Trade and other payables |
|
|
| |
Other liabilities |
|
|
| |
Total liabilities |
| $ |
| |
|
|
|
|
|
Net assets acquired |
| $ |
| |
|
|
|
|
|
Goodwill |
|
|
| |
|
|
|
|
|
Total purchase price |
| $ |
|
NOTE 20 - 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 and did not have any material recognizable subsequent events.
29 |
Table of Contents |
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 “SEC”) including our annual report on Form 10-K filed with the SEC on July 14, 2020.
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,” “subject to,” 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 stockholders; (iv) our capacity to comply with the extensive, pervasive and ever evolving legal, regulatory and oversight requirements, the failure of which could prevent us from conducting our business; (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 trading operations; (viii) our ability to properly address the risks and impacts of the COVID-19 pandemic; (ix) the purchase prices we may pay to complete certain proposed acquisitions; (x) our ability to obtain necessary governmental approval for proposed acquisitions; and (xi) 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, 2020. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
Our operating subsidiaries provide financial services including full-service retail securities brokerage, investment education, securities trading, investment banking and market making activities in Eurasia. We are headquartered in Almaty, Kazakhstan, with supporting administrative offices in Russia, Cyprus and the U.S.
30 |
Table of Contents |
Our subsidiaries are participants of the KASE, AIX, MOEX, SPBX, UX, UZSE and UZCE. 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, provide only limited or no direct investor 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 195,000 client accounts of which more than 51% carried positive cash or asset account balances as of September 30, 2020. Internally, we designate “active accounts” as those in which one transaction occurs per quarter. For the three months ended September 30, 2020, we had approximately 61,000 active accounts.
In addition to organic customer acquisition, 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 85 retail brokerage and financial services offices located across Kazakhstan (17), Kyrgyzstan (1), Russia (43), Uzbekistan (8), Ukraine (13), Cyprus (2) and Germany (1) that provide an array of financial services, investment consulting and education. In Russia, 15 of our brokerage and financial services offices also provide banking services to firm customers.
Significant Events
In July 2020, we announced that we had completed the acquisition of Zerich following receipt of approval from the Russian Federal Antimonopoly Service to complete the acquisition. Zerich commenced business in 1995 and is one of the oldest securities brokerage firms in Russia, currently ranking as the 19th largest brokerage house in Russia in terms of clients.
In August 2020, we announced that we had entered into an agreement to acquire all of the issued and outstanding ordinary shares of Bank Kassa Nova from ForteBank. In September 2020, we announced that we had entered into an agreement to acquire all of the issued and outstanding preferred shares of Bank Kassa Nova. We also expect to enter into agreements to acquire all of the outstanding subordinated debt of Bank Kassa Nova from the holders thereof. Bank Kassa Nova was established in 2009 and currently has nine branch offices across Kazakhstan. The acquisition of Bank Kassa Nova is expected to enhance our financial services offerings in Kazakhstan where Freedom KZ currently operates 16 retail brokerage offices serving Kazakhstani clientele. The Bank Kassa Nova acquisition is an extension of our successful strategy pioneered in Russia where we operate securities brokerage activities through Freedom RU in tandem with focused banking services provided by FFIN Bank to deliver a wide range of services to clients. Closing of the Bank Kassa Nova transaction is contingent upon, among other things, receipt of necessary governmental approvals of the transaction in Kazakhstan, which the parties expect to occur by the end of the calendar year. Upon completion of the transaction Bank Kassa Nova will become a wholly owned subsidiary of Freedom KZ.
31 |
Table of Contents |
Impact of COVID-19
During the initial stages of the COVID-19 pandemic outbreak in the first few months of 2020, the markets declined sharply. This led to significant intervention from the U.S. Federal Reserve Bank, other central banks and various governments which has led to a sharp rebound in the financial markets during the second and third calendar quarters of 2020 and stimulated significant activity in the equity and debt capital markets. As a result, we experienced strong growth in fee and commission income realized from increased customer activity, as well as a significant gain in our proprietary portfolio. Toward the end of the third calendar quarter and into the fourth calendar quarter, the spread of COVID-19 appears to be accelerating again.
We continue to monitor conditions surrounding COVID-19, as well as economic and capital market conditions. We experienced significant growth in total revenue during the six months ended September 30, 2020. We believe, much of that growth may be attributed to the unique market conditions experienced from February 2020 through September 2020 and we cannot, at this time, predict whether that growth will continue, or whether the recent spike in COVID-19 cases will cause customer activity in the markets to pull back. We believe the ultimate extent of the impact of COVID-19 on our business, operational and financial performance over the longer term will depend on certain developments, including the duration and spread of the pandemic, including secondary outbreaks such as we appear to currently be experiencing, and the impact on our customers, employees, operations, local and global economy and the financial markets, all of which continue to be uncertain and difficult to predict. At this time, the extent to which COVID-19 may impact our business, financial condition, liquidity, results of operations or cash flows cannot be reasonably estimated.
Financial Results
During the three months ended September 30, 2020, we realized net income of approximately $23.6million and basic and diluted earnings per share of $0.40.During the six months ended September 30, 2020, we realized net income of approximately $47.8million and basic and diluted earnings per share of $0.82. During the three months ended September 30, 2019, we realized net income of approximately $8.6 million and basic and diluted earnings per share of $0.15. During the six months ended September 30, 2019, net income totaled $16.9 million and basic and diluted earnings per share were $0.29.
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.
32 |
Table of Contents |
Results of Operations
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
The following quarter-to-quarter comparison of our financial results is not necessarily indicative of future results.
|
| Three months ended |
|
| Three months ended |
| ||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||||||
|
| Amount |
|
|