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, 2018
 
 
 
 
 
 
 
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)
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).
 
Yes
 
No
 ☐
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 a 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 10, 2018, the registrant had 58,033,212 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, 2018 and March 31, 2018
2
 
 
 
 
Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) for the Three Months Ended June 30, 2018 and 2017
3
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2018 and 2017
4
 
 
 
 
Notes to Condensed Consolidated Financial Statements
5
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
 
 
Item 3. Qualitative and Quantitative Disclosures About Market Risk
36
 
 
Item 4. Controls and Procedures
36
 
 
PART II — OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
37
 
 
Item 1A. Risk Factors
37
 
 
Item 5. Other Information
37
 
 
Item 6. Exhibits
38
 
 
Signatures
39
 
 
 
 
 
 
1
 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
June 30, 2018
 
 
March 31, 2018*
 
 
 
 
 
 
(Recast)
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $45,057 
 $65,731 
Restricted cash
  24,802 
  21,962 
Trading securities
  184,350 
  212,595 
Available-for-sale securities, at fair value
  2 
  240 
Brokerage and other receivables, net
  42,245 
  24,854 
Loans issued
  16,757 
  8,754 
Deferred tax assets
  812 
  772 
Fixed assets, net
  2,471 
  2,571 
Intangible assets, net
 4,807
 5,531
Goodwill
 3,103
 3,288
Other assets, net
  4,823 
  4,573 
 
    
    
TOTAL ASSETS
 $329,229
 $350,871
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
 
    
    
Securities sold, not yet purchased - at fair value
 $1,756 
 $1,135 
Loans received
  13,977 
  7,143 
Debt securities issued
  19,969 
  11,222 
Customer liabilities
  40,402 
  30,672 
Trade payables
  15,742 
  9,013 
Deferred distribution payments
  8,534 
  8,534 
Securities repurchase agreement obligation
  114,572 
  154,775 
Other liabilities
  2,012 
  1,376 
TOTAL LIABILITIES
  216,964 
  223,870 
 
    
    
Commitments and Contingencies (Note 20)
  - 
  - 
 
    
    
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; 58,033,212 and 58,033,212 shares issued and outstanding as of June 30, 2018 and March 31,2018, respectively
  58 
  58 
Additional paid in capital
 99,003
 100,180
Retained earnings
 27,437
 34,320
Accumulated other comprehensive loss
  (14,233)
  (7,557)
TOTAL STOCKHOLDERS’ EQUITY
 112,265
 127,001
 
    
    
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $329,229
 $350,871
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
* See Notes 2 and 3 for information regarding recast amounts and basis of financial statement presentation.
 
 
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, unless otherwise stated)
 
 
 
Three months ended June 30,
 
 
 
2018
 
 
2017*
 
Revenue:
 
 
 
 
(Recast)
 
 
 
 
 
 
 
 
Fee and commission income
 $5,428 
 $3,057 
Net gain/(loss) on trading securities
  (3,288)
  7,131 
Interest income
  7,372 
  2,647 
Net gain on derivatives
  - 
  490 
Net gain/(loss) on foreign exchange operations
  (2,110)
  659 
 
    
    
TOTAL REVENUE, NET
  7,402 
  13,984 
 
    
    
Expense:
    
    
Interest expense
  4,614 
  2,030 
Fee and commission expense
  764 
  289 
Operating expense
 9,111
 3,663
Other expense/(income), net
  (54)
  45 
 
    
    
TOTAL EXPENSE
  14,435 
 6,027
NET INCOME/(LOSS) BEFORE INCOME TAX
  (7,033)
 7,957
 
    
    
Income tax benefit
  150 
  33 
 
    
    
NET INCOME/(LOSS)
 $(6,883)
 $7,990
 
    
    
OTHER COMPREHENSIVE INCOME/(LOSS)
    
    
    Change in unrealized gain on investments available-for-sale, net of tax effect
 $- 
 $(59)
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
  (6,698)
  (2,169)
 
    
    
COMPREHENSIVE INCOME/(LOSS)
 $(13,559)
 $5,762
 
    
    
BASIC NET INCOME/(LOSS) PER COMMON SHARE (In US Dollars)
 $(0.12)
 $0.71 
DILUTED NET INCOME/(LOSS) PER COMMON SHARE (In US Dollars)
 $(0.12)
 $0.71 
Weighted average number of shares (basic)
  58,033,212 
  11,306,084 
Weighted average number of shares (diluted)
  58,191,542 
  11,306,084 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
* See Notes 2 and 3 for information regarding recast amounts and basis of financial statement presentation.
 
 
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, 2018
 
 
June 30, 2017*
 
 
 
 
 
 
(Recast)
 
Cash Flows From Operating Activities
 
 
 
 
 
 
Net income/(loss)
 $(6,883)
 $7,990
 
 
    
    
Adjustments to reconcile net income/(loss) from operating activities:
    
    
Depreciation and amortization
  396
 
  271
 
Loss on sale of fixed assets
  33 
  - 
Change in deferred taxes
  (109)
  173 
Stock compensation expense
  838 
  - 
Unrealized loss on trading securities
  7,856 
  1,563
 
Net gain on derivative
  - 
  (490)
Net change in accrued interest
  13 
  155 
Changes in operating assets and liabilities:
    
    
Trading securities
  6,089 
  (15,079)
Brokerage and other receivables
  (15,710)
  (18,937)
Loans issued
  (8,441)
  226 
Other assets
  (568)
  (769)
Customer liabilities
  9,131 
  8,724 
Current income tax liability
  - 
  (137)
Trade payables
  7,251 
  6,943 
Securities repurchase agreement obligation
  (30,436)
  17,925 
Securities sold, not yet purchased
  718 
  - 
Other liabilities
  806 
  237
 
 
    
    
Net cash flows (used in)/from operating activities
  (29,016)
  8,795
 
 
    
    
Cash Flows From Investing Activities
    
    
Purchase of fixed assets
  (477)
  (457)
Proceeds from sale of fixed assets
  276 
  21 
Proceeds from sale of intangible assets
  - 
  224
 
Proceeds from sale/(purchase) of available-for-sale securities, at fair value
  238 
  (3,069)
Consideration paid for Asyl
  (2,240)
  - 
Cash received at acquisition
  -
 
  1,368 
Net cash flows used in investing activities
  (2,203)
  (1,913)
 
Cash Flows From Financing Activities
 
 
 
 
 
 
Proceeds from issuance of debt securities
  9,708 
  4,256 
Repurchase of debt securities
  - 
  (775)
Proceeds from loans received
  7,336 
  - 
Capital contributions
  225 
  8,164
 
 
    
    
Net cash flows from financing activities
  17,269 
  11,645
 
Effect of changes in foreign exchange rates on cash and cash equivalents
  (3,884)
  (1,753)
 
    
    
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
  (17,834)
 16,774
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
  87,693 
 35,365
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
 $69,859 
 $52,139 
 
 
 
For the three months ended
 
 
 
June 30, 2018
 
 
  June 30, 2017*
 
 
 
 
 
 
(Recast)
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid for interest
 $4,327 
 $1,844 
Income tax paid
 $237 
 $159 
 
Non-cash investing and financing activities:
 
Assets received from acquisition of Asyl
 $- 
 $4,666
Liabilities assumed from acquisition of Asyl
 $- 
 $82 
Assets received from acquisition of Nettrader
 $- 
 $11,158 
Liabilities assumed from acquisition of Nettrader
 $- 
 $4,121 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
* See Notes 2 and 3 for information regarding recast amounts and basis of financial statement presentation.

 
4
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 owns several operating subsidiaries that engage in a broad range of activities in the securities industry, including retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking and underwriting services in Central Asia. The Company is headquartered in Almaty, Kazakhstan, with supporting administrative office locations in Russia, Cyprus and the United States.
 
The Company owns directly, or through subsidiaries, the following companies: LLC Investment Company Freedom Finance, a Moscow, Russia-based securities broker-dealer (“Freedom RU”); FFIN Bank, a Moscow, Russia-based bank (“FFIN Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based securities broker-dealer (“Freedom KZ”); FFINEU Investments Limited, a Limassol, Cyprus-based broker-dealer (“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 professional participants on the Kazakhstan Stock Exchange (KASE), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPB), the Ukrainian Exchange, and the 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.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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, 2018, are not necessarily indicative of the results that may be expected for the year ended March 31, 2019.
 
The Condensed Consolidated Balance Sheet at March 31, 2018, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.
 
 
5
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
The Company’s condensed consolidated financial statements present the consolidated accounts of FRHC, FFIN, Freedom RU, Freedom KZ, FFIN Bank, Freedom CY, Freedom UA, Freedom UZ, LLC First Stock Store (“Freedom 24”) and Branch Office of LLC IC Freedom Finance in Kazakhstan (“KZ Branch”). All significant inter-company balances and transactions have been eliminated from the condensed 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, 2018.
 
Use of estimates
 
The preparation of financial statements in conformity with US 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. The majority 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 US 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 these income statements 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).
 
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 under future contracts will be materially impacted in the future.  However, the new policy may result in incentive fees being recognized sooner in the future than they would have been under the Company’s revenue recognition policy in place prior to the adoption of Topic 606.
 
 
6
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
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. Derivatives are included in assets and liabilities at fair value through profit or loss in the consolidated balance sheet.
 
The Company purchases foreign currency futures contracts from financial institutions to minimize the risk caused by foreign currency fluctuation on its foreign currency receivables and payables and also purchases foreign currency futures contracts for speculative purposes. Futures are traded on the Kazakhstan Stock Exchange and represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price.
 
All gains and losses on foreign currency contracts were realized during the three months ended June 30, 2018 and 2017, and are included in net gain on derivatives in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).
 
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 revenue.
 
For financial reporting purposes, foreign currencies are translated into United States 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 income/(loss)” reserve.
 
 
7
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
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 agreements, repurchase agreements, 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.
 
8
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 and accumulated in the Accumulated other comprehensive income/(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 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 reclassified to profit or 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).
 
 
9
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 comprise 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 Company 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, 2018 and March 31, 2018, the Company had not recorded any charges for impairment of long-lived assets.
 
Impairment of goodwill
 
As of June 30, 2018 and March 31, 2018, goodwill recorded in the Company’s Condensed Consolidated Balance Sheets totaled $3,103 and $3,288, 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.
 
 
10
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
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, 2018 and March 31, 2018, 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 may be subject to incremental U.S. tax on GILTI income beginning in 2018, depending upon expense allocations and the applicable U.S. foreign tax credit rules. The Company has presented the deferred tax impacts of GILTI tax in its consolidated financial statements for the quarter ended June 30, 2018.
 
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.
 
 
11
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Leases
 
Rent payable under operating leases is charged to expense on a straight-line basis over the term of the relevant lease.
 
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.
 
Recent accounting pronouncements
 
In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. The FASB issued this Update to supersede outdated guidance related to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges (Circular 202). The Board has an ongoing project on its agenda about Codification improvements to clarify the FASB Accounting Standards Codification or to correct unintended application of guidance. Those Codification improvement items generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities. The amendments in this Update are of a similar nature, and, therefore, the Board is addressing the improvements through the Codification improvements project. The Board decided to issue a separate Update to increase stakeholders’ awareness of the improvements to Topic 942, Financial Services—Depository and Lending. The amendments in this Update remove outdated guidance related to Circular 202 and should have no effect on reporting entities.
 
ASU 2016-02, “Leases,” ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842): Targeted Improvements”: In February 2016, the FASB issued ASU 2016-02 which requires entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to exclude from the balance sheet those leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as finance or operating, and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous provisions of U.S. GAAP, other than certain changes to align lessor accounting to specific changes made to lessee accounting and ASC 606. ASU 2016-02 also requires new qualitative and quantitative disclosures for both lessees and lessors. In July 2018 the FASB adopted ASU 2018-10 which makes technical corrections and clarifications to the accounting guidance in Topic 842.
 
For public entities, these ASU 2016-02, 2018-01, 2018-10 and 2018-11 are effective for fiscal years beginning after December 15, 2018, including interim periods therein, with early adoption permitted. ASU 2016-02 requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2018-11, adopted in July 2018, provides entities an optional transition method to apply the new guidance as of the adoption date, rather than as of the earliest period presented. In transition, entities may elect certain practical expedients when applying ASU 2016-02. These include a package of practical expedients that must be applied in its entirety to all leases commencing before the effective date, unless the lease is modified, to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. ASU 2016-02 also includes a practical expedient to use hindsight in making judgments when determining the lease term and any long-lived asset impairment. ASU 2018-01, adopted in January 2018, allows entities to elect a practical expedient that would exclude application of ASU 2016-02 to land easements that existed prior to its adoption, if they were not accounted for as leases under previous U.S. GAAP. ASU 2018-11 provides a lessor practical expedient for separating lease and non-lease components. We are currently evaluating the effect of the standards on our ongoing financial reporting.
 
 
12
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
NOTE 3 – REVISION OF FINANCIAL STATEMENT
 
When preparing the condensed consolidated financial statements as of and for the three months ended June 30, 2018, management determined that certain amounts included in the Company’s condensed consolidated financial statements as of March 31, 2018 and for the three months ended June 30, 2017 required revision, due to closing of the acquisition of Freedom RU on June 29, 2017, and Freedom CY on November 1, 2017 and the closing of the mergers of Nettrader LLC (“Nettrader”) in May 2018 and Asyl Invest JSC (“Asyl”) in April 2018, which were deemed to be entities under common control with the Company.
 
Certain reclassifications also have been made to the prior year’s consolidated financial statements to enhance comparability with the current year’s consolidated financial statements following the increase in intangible assets of the Company related to acquisition of the Tradernet trading platform. As a result, certain line items have been amended in the Condensed Consolidated Balance Sheets. Comparative figures have been adjusted to conform to the current period’s presentation.
 
The previously issued Condensed Consolidated Balance Sheet as of March 31, 2018, and Condensed Consolidated Statement of Operations and Statements of Other Comprehensive Income for the three months ended June 30, 2017 have been revised as follows:
 
 
 
As of March 31, 2018
 
 BALANCE SHEETS (RECAST)
 
As previously reported
 
 
Recast
 
 
As recasted
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $64,531 
 $1,200 
 $65,731 
Restricted cash
  13,671 
  8,291 
  21,962 
Trading securities
  212,319 
  276 
  212,595 
Available-for-sale securities, at fair value
  2 
  238 
  240 
Brokerage and other receivables, net
  21,109 
  3,745 
  24,854 
Loans issued
  8,754 
  - 
  8,754 
Deferred tax assets
  1,046 
  (274)
  772 
Fixed assets, net
  2,362 
  209 
  2,571 
Intangible assets, net
  - 
 5,531
 5,531
Goodwill
  1,798 
 1,490
 3,288
Other assets, net
  4,494 
  79 
  4,573 
TOTAL ASSETS
 $330,086 
 $20,785
 $350,871
 
    
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
    
 
    
    
    
Securities sold, not yet purchased - at fair value
 $1,135 
 $- 
 $1,135 
Loans received
  7,143 
  - 
  7,143 
Debt securities issued
  10,840 
  382 
  11,222 
Customer liabilities
  21,855 
  8,817 
  30,672 
Trade payables
  8,998 
  15 
  9,013 
Deferred distribution payments
  8,534 
  - 
  8,534 
Securities repurchase agreement obligation
  154,775 
  - 
  154,775 
Deferred income tax liabilities
  387 
  (387)
  - 
Other liabilities
  1,319 
  57 
  1,376 
TOTAL LIABILITIES
  214,986 
  8,884 
  223,870 
 
    
    
    
STOCKHOLDERS’ EQUITY
    
    
    
 
    
    
    
Preferred stock
  - 
  - 
  - 
Common stock
  58 
  - 
  58 
Additional paid in capital
  87,049 
 13,131
 100,180
Retained earnings
  35,387 
  (1,067)
  34,320
Accumulated other comprehensive loss
  (7,394)
  (163)
  (7,557)
TOTAL STOCKHOLDERS’ EQUITY
  115,100 
 11,901
 127,001
 
    
    
    
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $330,086 
 $20,785
 $350,871
 
 
13
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
For the three months ended June 30, 2017
 
STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME (RECAST)
 
As previously reported
 
 
Recast
 
 
As recasted
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Fee and commission income
 $2,855 
 $202 
 $3,057 
Net gain on trading securities
  7,009 
  122 
  7,131 
Interest income
  2,584 
  63 
  2,647 
Net gain on derivatives
  490 
  - 
  490 
Net gain on foreign exchange operations
  617 
  42 
  659 
 
    
    
    
TOTAL REVENUE, NET
  13,555 
  429 
  13,984 
 
    
    
    
Expense:
    
    
    
Interest expense
  1,987 
  43 
  2,030 
Fee and commission expense
  238 
  51 
  289 
Operating expense
  2,911 
 752
 3,663
Other expense, net
  78 
  (33)
  45 
 
    
    
    
TOTAL EXPENSE
  5,214 
 813
 6,027
 
    
    
    
NET INCOME BEFORE INCOME TAX
  8,341 
  (384)
 7,957
 
    
    
    
Income tax benefit
  31 
  2 
  33 
 
    
    
    
NET INCOME
 $8,372 
 $(382)
 $7,990
 
    
    
    
OTHER COMPREHENSIVE INCOME
    
    
    
Change in unrealized gain on investments available-for-sale, net of tax effect
 $- 
 $(59)
 $(59)
Foreign currency translation adjustments, net of tax
  (1,758)
  (411)
  (2,169)
 
    
    
    
COMPREHENSIVE INCOME
 $6,614 
 $(852)
 $5,762
 
NOTE 4 – CASH AND CASH EQUIVALENTS
 
 
 
June 30, 2018
 
 
 
March 31, 2018
 (Recast)
 
 
 
 
 
 
 
 
Securities purchased under reverse repurchase agreements
 $19,514 
 $27,389 
Current account with commercial banks
  7,616 
  9,032 
Petty cash in bank vault and on hand
  5,834 
  2,712 
Current account with Central Depository (Kazakhstan)
  4,588 
  1,280 
Current accounts with brokers
  3,781 
  22,749 
Current account with National Settlement Depository (Russia)
  1,770 
  1,244 
Current account with Central Bank (Russia)
  991 
  980 
Accounts with stock exchange
  814 
  214 
Current account in clearing organizations
  149 
  131 
Total cash and cash equivalents
 $45,057 
 $65,731 
 
 
14
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, 2018 and March 31, 2018, cash and cash equivalents were not insured. As of June 30, 2018 and March 31, 2018, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:
 
 
 
June 30, 2018
 
 
 
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
  14.88%
  9,156 
  9,656 
  18,812 
Corporate debt
  15.00%
  702 
  - 
  702 
 
    
    
    
    
Total
    
 $9,858 
 $9,656 
 $19,514 
 
 
 
March 31, 2018 (Recast)
 
 
 
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
  14.99%
 $11,095 
 $15,572 
 $26,667 
Corporate debt
  14.96%
  521 
  201 
  722 
 
    
    
    
    
Total
    
 $11,616 
 $15,773 
 $27,389 
 
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, 2018 and March 31, 2018, is $33,729 and $28,311, respectively. For additional information please see Note 9 – Securities sold, not yet purchased – at fair value.
 
NOTE 5 – RESTRICTED CASH
 
As of June 30, 2018, and March 31, 2018, 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 the 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 shareholder 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, an entitled shareholder will submit the necessary documentation to claim his, her, or its distribution payment. Restricted cash consisted of:
 
 
15
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
 
June 30, 2018
 
 
March 31, 2018 (Recast)
 
 
 
 
 
 
 
 
Brokerage customers’ cash
 $15,439 
 $12,963 
Deferred distribution payments
  8,534 
  8,534 
Guaranty deposits
  640 
  350 
Reserve with Central Bank of Russia
  189 
  115 
Total restricted cash
 $24,802 
 $21,962 
 
NOTE 6 – TRADING SECURITIES
 
As of June 30, 2018, and March 31, 2018, trading securities consisted of:
 
 
 
June 30, 2018
 
 
March 31, 2018 (Recast)
 
 
 
 
 
 
 
 
Equity securities
 $146,487 
 $177,339 
Debt securities
  37,615 
  34,986 
Mutual investment funds
  248 
  270 
Total trading securities
 $184,350 
 $212,595 
 
    
    
 
The following tables present trading securities assets in the condensed consolidated financial statements at fair value on a recurring basis as of June 30, 2018 and March 31, 2018:
 
 
 
 
 
 
Fair Value Measurements at
 
 
 
 
 
 
June 30, 2018 using
 
 
 
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant unobservable units
 
 
 
June 30, 2018
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 $146,487 
 $146,487 
 $- 
 $- 
Debt securities
  37,615 
  37,615 
  - 
  - 
Mutual investment funds
  248 
  248 
  - 
  - 
Total trading securities
 $184,350 
 $184,350 
 $- 
 $- 
 
 
 
 
 
 
Fair Value Measurements at
 
 
 
 
 
 
March 31, 2018 (Recast) using
 
 
 
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant unobservable units
 
 
 
March 31, 2018
 (Recast)
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 $177,339 
 $177,339 
 $- 
 $- 
Debt securities
  34,986 
  34,986 
  - 
  - 
Mutual investment funds
  270 
  270 
  - 
  - 
Total trading securities
 $212,595 
 $212,595 
 $- 
 $- 
 
 
16
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
NOTE 7 – LOANS ISSUED
 
As of June 30, 2018, and March 31, 2018 the Company had loans issued in the amount of $16,757 and $8,754, respectively.
 
Loans issued as of June 30, 2018, consisted of the following:
 
 
Amount Outstanding
 
 
Due Dates
 
Average Interest Rate
 
Fair Value of Collateral
 
Loan Currency
 
 
 
 
 
 
 
 
 
 
Collateralized brokerage loans
$ 4,720
 
Jan. 2019 – Feb. 2019
 
3.00%
 
$ 4,479
 
USD
Uncollateralized brokerage loan
$ 11,496
 
Sep. 2018
 
3.00%
 
-
 
KZT
Bank customer loans
$ 541
 
Nov. 2018- Feb. 2028
 
12.59%
 
-
 
RUB
 
Loans issued as of March 31, 2018, consisted of the following:
 
 
Amount Outstanding
 
 
Due Dates
 
Average Interest Rate
 
Fair Value of Collateral
 
Loan Currency
 
 
 
 
 
 
 
 
 
 
Collateralized brokerage loans
$ 5,371
 
Jan. 2019 – Feb. 2019
 
3.00%
 
$ 6,992
 
USD
Uncollateralized brokerage loan
$ 2,832
 
Jan. 2019 – Mar. 2019
 
0.00%
 
-
 
KZT
Bank customer loans
$ 551
 
Nov. 2018- Feb. 2028
 
12.32%
 
-
 
RUB
 
NOTE 8 – DEFERRED TAX ASSETS
 
The Company is subject to taxation in the Russian Federation, Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan and the United States of America.
 
The tax rates used for deferred tax assets and liabilities for the three months ended June 30, 2018 and 2017, is 25% and 37.3%, respectively for the US and 20% for the Russian Federation, Kazakhstan, Kyrgyzstan, Ukraine and Uzbekistan.
 
 
17
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Deferred tax assets and liabilities of the Company are comprised of the following:
 
 
 
June 30, 2018
 
 
March 31, 2018 (Recast)
 
 
 
 
 
 
 
 
Deferred tax assets:
 
 
 
 
 
 
Tax losses carryforward
 $3,283 
 $3,050 
GILTI losses
  404 
  - 
Accrued liabilities
  34 
  49 
Revaluation on trading securities
  151 
  88 
Stock compensation expenses
  718 
  405 
Valuation allowance
  (3,736)
  (2,433)
Deferred tax assets
  854 
  1,159 
 
    
    
Deferred tax liabilities:
    
    
Revaluation on trading securities
  42 
  387 
 
    
    
Deferred tax liabilities
    
    
 
  42 
  387 
Net deferred tax assets
 $812 
 $772 
 
During the three months ended June 30, 2018 and 2017, the effective tax rate was equal to 2.13% and (0.41%), respectively. During the three months ended June 30, 2018, effective tax rate was primarily impacted due to unrecognized tax losses carryforward on Freedom KZ and FRHC in the amount of $309 and $1,666, respectively, and during the three months ended June 30, 2017 due to non-taxable gains on trading securities in Freedom KZ in the amount of $7,795.
 
During the three-month period ended June 30, 2018, the Company realized net loss before income tax of $7,033, primarily from operating expenses of the Company and losses of Freedom KZ on trading operations. This resulted in the Company realizing an income tax benefit during the three months ended June 30, 2018 of $150. During the three months ended June 30, 2017, the Company realized a net income before income tax of $7,957 primarily from non-taxable revenues generated from Freedom KZ’s trading operations and utilized tax loss carryforwards of $203. This resulted in the Company realizing an income tax benefit during the three months ended June 30, 2017 of $33.
 
NOTE 9 – SECURITIES SOLD, NOT YET PURCHASED – AT FAIR VALUE
 
As of June 30, 2018, and March 31, 2018, the Company’s securities sold, not yet purchased – at fair value was $1,756 and $1,135 respectively.
 
During the quarter ended June 30, 2018, the Company sold shares received as a pledge under reverse repurchase agreements and recognized financial liabilities at fair value in the amount of $6,996, and partially closed short position in the amount of $5,216 by purchasing securities from a third party, reducing the financial liability. During the quarter ended June 30, 2018, the Company recognized a gain on the change in fair value of financial liabilities at fair value through the Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) in the amount of $956 with a foreign exchange translation gain of $203.
 
 
18
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
A short sale involves the sale of a security that is not owned in the expectation of purchasing the same security (or a security exchangeable) at a later date at a lower price. A short sale involves the risk of a theoretically unlimited increase in the market price of the security that would result in a theoretically unlimited loss.
 
NOTE 10 – DERIVATIVE LIABILITY
 
On December 28, 2016, Freedom RU entered into a derivative instrument agreement with a related party that included a call option feature for the purchase of shares held by Freedom RU. This call option was classified as a derivative liability in the Consolidated Balance Sheets and measured at each reporting period using the Black-Scholes Model. The gain associated with this derivative instrument is recognized as a gain on derivative instrument in the Consolidated Statements of Operations and Statements of Other Comprehensive Income. In exchange for a $2,629 premium paid upfront, this derivative instrument granted the holder the right to purchase 11.8 million shares of a top rated Russian commercial bank – Sberbank, on June 14, 2017, at a strike price $3.10 per share.
The Company recorded a derivative liability of $495 as of March 31, 2017, as a result of the fair value of the call option. On June 14, 2017, the derivative instrument expired, unexercised by the option holder, and the Company recognized a gain on the derivative instrument of $490.
 
NOTE 11 – LOANS RECEIVED
 
Borrower
 
Lender
 
June 30, 2018
 
 
March 31, 2018
 
 
Interest rate
 
Term
 
Maturity date
JSC Freedom Finance
 
Bank
 $9,049 
 $7,044 
  7%
1 year
 
2/5/2019
Freedom Holding Corp.
 
Non-Bank
  4,834 
  - 
  3%
3 months
 
9/30/2018
FFINEU Investments Limited
 
Non-Bank
  94 
  99 
  1%
1 year
 
12/11/2018
Total
 
 
 $13,977 
 $7,143 
    
 
 
 
 
As of June 30, 2018 and March 31, 2018, the Company had received United States dollar denominated loans from JSC AsiaCreditBank in the total amount of $8,954 and $7,031, respectively, under a credit line agreement with $9,000 in total available for withdrawal. The Company pledged 3.1 million shares of Kcell with a fair value $13,970 as of June 30, 2018, to collateralize the AsiaCreditBank loan. Non-bank loans received are unsecured. As of June 30, 2018 and March 31, 2018, accrued interest on the loans totaled $68 and $16, respectively.
 
NOTE 12 – DEBT SECURITIES ISSUED
 
 
 
June 30, 2018
 
 
March 31, 2018
 
 
 
 
 
 
(Recast)
 
Debt securities issued denominated in USD
 $10,605 
 $7,006 
Debt securities issued denominated in KZT
  9,253 
  4,025 
Accrued interest
  111 
  191 
 
    
    
Total
 $19,969 
 $11,222 
 
 
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, 2018, and March 31, 2018, the Company had bonds of Freedom KZ issued under Kazakhstan law in the amount of $19,969 and $11,222 respectively. As of June 30, 2018, Company issued bonds with fixed annual coupon rate ranging from 8% to 11.5% and maturity dates ranging from January 2019 to May 2021. As of March 31, 2018, debt securities issued included Asyl bonds in the amount of $3,015 with 8% fixed annual coupon rate and maturity date of August 2018, which were fully redeemed in April 2018.
 
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, 2018 and March 31, 2018 included $111 and $191 accrued interest, respectively. The Freedom KZ bonds are actively traded on Kazakhstan Stock Exchange.
 
NOTE 13 – CUSTOMER LIABILITIES
 
The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:
 
 
 
June 30, 2018
 
 
March 31, 2018 (Recast)
 
 
 
 
 
 
 
 
Brokerage customers
 $21,927 
 $21,367 
Banking customers
  18,475 
  9,305 
Total
 $40,402 
 $30,672 
 
NOTE 14 – SECURITIES REPURCHASE AGREEMENT OBLIGATIONS
 
As of June 30, 2018, and March 31, 2018, trading securities included collateralized securities subject to repurchase agreements as described in the following table:
 
 
 
June 30, 2018
 
 
 
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%
 $86,961 
 $906 
 $6,532 
 $94,399 
Corporate debt
  6.83%
  9,896 
  - 
  - 
  9,896 
Non-US sovereign debt
  8.41%
  10,277 
  - 
  - 
  10,277 
Total securities sold under repurchase agreements
    
 $107,134 
 $906 
 $6,532 
 $114,572 
 
 
20
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
March 31, 2018 (Recast)
 
 
 
Interest rate and remaining contractual maturity of the agreements
 
 
 
Average interest rate
 
 
Overnight and continuous
 
 
Up to 30 days
 
 
30-90 days
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  12.04%
 $109,821 
 $8,961 
 $7,148 
 $125,930 
Corporate debt
  10.64%
  24,257 
  2,023 
  - 
  26,280 
Non-US sovereign debt
  8.54%
  2,565 
  - 
  - 
  2,565 
Total securities sold under repurchase agreements
    
 $136,643 
 $10,984 
 $7,148 
 $154,775 
 
The fair value of collateral pledged under repurchase agreements as of June 30, 2018 and March 31, 2018, was $155,459 and $203,140, respectively.
 
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
 
On December 28, 2016, Freedom RU entered into a derivative instrument agreement with a related party which included a call option feature. The gain or loss associated with this agreement is recognized as gain on a derivative instrument in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss). The Company recorded a derivative liability of $495 as of March 31, 2017. On June 14, 2017, the derivative instrument expired unexercised by the holder, and the Company recognized a gain on the derivative instrument of $490 for the three months ended June 30, 2017.
 
During the three months ended June 30, 2018 and 2017, the Company earned commission income from related parties in the amounts of $4,439 and $661, respectively. Commission income earned from related parties is comprised primarily of brokerage commissions and agency fees for referrals of new brokerage clients to other brokers and commissions for money transfers by brokerage clients.
 
As of June 30, 2018 and March 31, 2018, the Company had bank commission receivables and receivable from brokerage clients from related parties totaling $615 and $1,055, respectively. Brokerage and other receivables from related parties result principally from commissions receivable on the brokerage operations of related parties.
 
As of June 30, 2018 and March 31, 2018, the Company had brokerage accounts with related parties totaling $2,700 and $17,795, respectively.
 
As of June 30, 2018, and March 31, 2018, the Company had loans issued to related parties totaling $5 and $1,748, respectively.
 
As of June 30, 2018, and March 31, 2018, the Company had margin lending receivables with related parties totaling $10,818 and $8,748, respectively.
 
 
21
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, 2018, and March 31, 2018, the Company had advances received for the sale of fixed assets from a related party totaling $0 and $288, respectively.
 
As of June 30, 2018, and March 31, 2018, the Company had margin lending payables due to related parties, totaling $0 and $81, respectively.
 
As of June 30, 2018, and March 31, 2018, the Company had loans received from a related party totaling $843 and $99, respectively.
 
As of June 30, 2018, and March 31, 2018, the Company had customer liabilities on brokerage accounts and bank accounts of related parties totaling $11,104 and $3,402, respectively. As of June 30, 2018, and March 31, 2018, the Company had restricted customer cash on brokerage accounts and cash on bank accounts of related parties totaling $9,762 and $2,004, respectively.
 
NOTE 16 – STOCKHOLDERS’ EQUITY
 
During the three months ended June 30, 2018, Mr. Turlov made capital contributions of $225 to FRHC. At the time such contributions were made, Mr. Turlov was the Chief Executive Officer, Chairman of the board, and majority shareholder of the Company.
 
On June 29, 2017, the Company and Mr. Turlov closed the acquisition of Freedom RU. Pursuant to the terms of the Acquisition Agreement, Mr. Turlov received a total of 20,665,023 shares of restricted common stock in exchange for his 100% interest in Freedom RU.
 
On October 6, 2017, the Company awarded restricted stock grants 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 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 $838 during the three months ended June 30, 2018.
 
As disclosed in Note 1 on November 10, 2017, FRHC issued 12,758,011 shares of restricted Company common stock in exchange for Mr. Turlov 100% equity interest in Freedom CY and Freedom CY became a wholly owned subsidiary of the Company.
 
As disclosed in Note 1, on November 1, 2017, the Company entered into a Share Exchange and Acquisition Agreement and agreed to issue 387,700 shares of restricted common stock to BusinessTrain Ltd. to acquire 100% of the outstanding equity interest of Freedom UA.
 
On December 8, 2017, the Company completed a private placement of 3,681,667 shares of its restricted common stock in exchange for an aggregate offering proceeds of $11,045. The shares of common stock were sold to non-U.S. persons pursuant to the exemption from registration provided in Regulation S promulgated under the Securities Act for offers and sales made outside the United States. Arkady Rakhilkin, a Company director, purchased 348,333 shares for $1,045.
 
 
22
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
On March 2, 2018, the Company completed a private placement of 5,426,612 shares of its restricted common stock in exchange for an aggregate offering proceeds of $29,399. The shares of common stock were sold to non-U.S. persons pursuant to the exemption from registration provided in Regulation S promulgated under the Securities Act for offers and sales made outside the United States. Askar Tashtitov, a Company director, purchased 28,000 shares for $154.
 
NOTE 17 – STOCK BASED COMPENSATION
 
As disclosed in Note 16, 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 $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 year ended March 31, 2018, stock options covering a total of 360,000 shares of common stock were granted. No options were granted for the quarter ended June 30, 2018. Total compensation expense related to options granted was $54 for the quarter ended June 30, 2018 and $0 for the quarter ended June 30, 2017. As of June 30, 2018, there was total remaining compensation expense of $489 related to stock options, which will be recorded over a weighted average period of approximately 2.27 years. No options were exercisable or exercised during the quarter ended June 30, 2018.
 
The Company has determined fair value of stock options using the Black-Scholes option valuation model based on the following key assumptions during the quarter ended June 30, 2018:
 
Vesting Period (years)
3
Volatility
165.33%
Risk-free rate
1.66%
 
During the year ended March 31, 2018 a total of 3,900,000 restricted shares were awarded. During the three months ended June 30, 2018, no restricted shares were awarded. The compensation expense related to restricted stock awards was $784 during the quarter ended June 30, 2018, and $0 during the quarter ended June 30, 2017. As of June 30, 2018, there was $5,884 of total unrecognized compensation cost related to nonvested shares of restricted stock granted. The cost is expected to be recognized over a weighted average period of 1.96 years.
 
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.
 
 
23
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 year ended June 30, 2018:
 
 
 Shares 
 
Weighted Average Exercise Price
 
 
Weighted Average Remaining Contractual Term (In Years)
 
 
Aggregate Intrinsic Value  
 
Outstanding, beginning of year
 $360,000 
 $1.98 
  9.27 
 $1,753
Granted
  - 
  - 
  - 
  - 
Exercised
  - 
  - 
  - 
  - 
Forfeited/cancelled/expired
  - 
  - 
  - 
  - 
Outstanding, at June 30, 2018
 $360,000 
 $1.98 
  9.27 
 $1,879
Exercisable at June 30, 2018
 $- 
 $- 
  - 
 $- 
 
The table below summarizes the activity for the Company's restricted stock outstanding during the quarter ended June 30, 2018:
 
 
 
Shares
 
 
Weighted Average Fair Value
 
Outstanding, beginning of year
 $3,900,000 
 $8,190 
Granted
  - 
    
Vested
  - 
  - 
Forfeited/cancelled/expired
  - 
  - 
Outstanding, at June 30, 2018
 $3,900,000 
 $8,190 
 
NOTE 18 – ACQUISITIONS
 
Acquisition of Asyl
 
On April 12, 2018, we completed the acquisition and merger of Asyl into the Company. This acquisition joined the two largest retail brokerage firms in Kazakhstan and increased our client accounts in Kazakhstan by 16,000 accounts. Asyl was formerly controlled by Mr. Turlov since April 28, 2017. The Company agreed to acquire Asyl from Mr. Turlov. We acquired Asyl for approximately $2.2 million, which was equal to the fair value of the net assets acquired by the Company.
 
When preparing the condensed consolidated financial statements for the three months ended June 30, 2018, management determined that certain amounts included in the Company’s consolidated financial statements as of March 31, 2018 and for the three months ended June 30, 2017 required revision, due to closing of the completion of merger of Asyl in April 2018, which was deemed to be an entity under common control with the Company since April 28, 2017.
 
Acquisition of Nettrader
 
On May 28, 2018, we completed the acquisition and merger of Nettrader. This resulted in the acquisition of approximately 16,000 new Russian client accounts. This acquisition also finalized our acquisition of the Tradernet trading platform, a browser-based application and in some countries a supporting mobile app to facilitate our customers’ trading activities and ability to monitor and manage all aspects of their personal accounts and participate in our client social network. Nettrader was formerly owned by Mr. Turlov since May 18, 2017. We acquired Nettrader for approximately $3.8 million, which was equal to the fair value of the net assets acquired by the Company.
 
 
24
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
When preparing the condensed consolidated financial statements for the three months ended June 30, 2018, management determined that certain amounts included in the Company’s consolidated financial statements as of March 31, 2018 and for the three months ended June 30, 2017 required revision, due to closing of the completion of merger of Nettrader in May 2018, which was deemed to be an entity under common control with the Company since May 18, 2017.
 
NOTE 19 – REVERSE STOCK SPLIT
 
On September 6, 2017, the Company effected a one-share-for-twenty-five-shares reverse stock split of its common stock. All share and earnings per share information has been retroactively adjusted to reflect the stock split. The effect of this stock split on the Company’s earnings per share is as follows:
 
 
 
For the three months ended June 30, 2018
 
 
For the three months ended June 30, 2017
(Recast)
 
 
 
 
 
 
 
 
Basic and diluted net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss)
 $(6,883)
 $7,990
 
    
    
Net income/(loss) per common share - basic (in US dollars)
 $(0.12)
 $0.71 
Net income/(loss) per common share - diluted (in US dollars)
 $(0.12)
 $0.71 
 
    
    
Shares used in the calculation of net income per common share:
    
    
Basic
  58,033,212 
  11,306,084 
Diluted
  58,191,542 
  11,306,084 
 
NOTE 20 – COMMITMENTS AND CONTINGENT LIABILITIES
 
The table below shows approximate lease commitments and other contingent liabilities of the Company as of June 30, 2018:
 
Contractual obligations
 
Total
 
 
Less than 1 year
 
 
2-3 years
 
Office leases(1)
 $8,609 
 $5,568 
 $3,041 
TOTAL
 $8,609 
 $5,568 
 $3,041 
 
(1)
The Company has number of lease agreements for office spaces in different locations. In general, all agreements are made for a one-year period with extension or termination provisions, except three lease agreements with longer lease terms.
 
The Company’s rent expense for office space was $1,086 and $377 for the three months ended June 30, 2018 and 2017, respectively.
 
 
25
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
NOTE 21 – SUBSEQUENT EVENTS
 
The Company evaluated all material events and transactions that occurred after June 30, 2018 through August 14, 2018. During this period the Company did not have any additional material recognizable subsequent events.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
26
 
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 29, 2018.
 
Special Note About Forward-Looking Information
 
Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) such as statements relating to our anticipated revenues and operating results, estimates used in the preparation of our financial statements, future performance, plans for future expansion, analyses, prospects, strategies, capital spending, sources of liquidity, and financing sources. Forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These forward-looking statements can sometimes be recognized by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” and similar expressions. Such statements are subject to known and unknown risks, uncertainties, and other factors, including the meaningful and important risks and uncertainties discussed in this report. These forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management. These statements include, among other things:
 
the ability of our current management to effectively execute our business strategy;
 
our capability to compete with financial services companies that have greater experience, financial resources and competitive advantages in the markets where we operate;
 
Timur Turlov 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;
 
our capacity to comply with the extensive, pervasive and ever evolving regulatory and oversight requirements in the various jurisdictions where our subsidiaries operate, the failure of which could prevent us from conducting our business;
 
volatility in the domestic and international capital markets, currency fluctuations and general economic conditions;
 
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; and
 
our ability to properly manage the market, leverage and customer risks that arise from our proprietary trading.
 
 
27
 
 
Although we have attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause the forward-looking statements not to be accurate as described in this report. These forward-looking statements are only predictions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially.
 
You should not rely on forward-looking statements as predictions of future events. While we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance and achievements. Moreover, neither we nor any other person assumes any responsibility for the accuracy and completeness of these statements or undertakes any obligation to revise these forward-looking statements to reflect events and circumstances after the date of this report or to reflect the occurrence of unanticipated events.
 
This discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the fiscal quarters ended June 30, 2018 and 2017.
 
Overview
 
We own several operating subsidiaries that conduct full-service retail securities brokerage, investment counseling, securities trading, investment banking and underwriting services in Central Asia. We are headquartered in Almaty, Kazakhstan, with supporting administrative offices in Russia, Cyprus and the United States.
 
Our companies are professional participants of the Kazakhstan Stock Exchange (KASE), the Moscow Stock Exchange (MOEX), the Saint-Petersburg Stock Exchange (SPB), the Ukrainian Exchange, and the Republican Stock Exchange of Tashkent (UZSE). We operate a brokerage office in Cyprus that serves to provide 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 initial line of business has been directed toward providing a comprehensive array of financial services to our target retail audience which is high-net-worth individuals and small businesses seeking 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 81,000 client accounts, approximately 34,000 of them were received as result of acquisitions of JSC Asyl Invest and LLC Nettrader Brokerage, more than 40% of which carried positive cash or asset account balances during the three months ended June 30, 2018. During the three months ended June 30, 2018 we opened over 3,000 new accounts, against 55 account closures. Our total client transaction volume for the quarter exceeded $8 billion.
 
 
28
 
 
We have accelerated our growth through the completion of several strategic acquisitions which have 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 and 58 retail brokerage and financial services offices located across Kazakhstan (16), Kyrgyzstan (1), Russia (39), Uzbekistan (1) and Ukraine (1) that provide a full array of financial services, investment consulting and education.
 
Recent Acquisitions
 
In April 2018, we completed the acquisition and merger of Asyl into the Company. This acquisition joined the two largest retail brokerage firms in Kazakhstan and increased our client accounts in Kazakhstan to more than 49,000. Asyl was formerly controlled by Mr. Turlov. We acquired Asyl for approximately $2.2 million, which was equal to the fair value of the net assets we acquired.
 
In May 2018, we completed the acquisition and merger of Nettrader. This resulted in the acquisition of approximately 16,000 new Russian client accounts. This acquisition also finalized our acquisition of the Tradernet trading platform, a browser-based application and in some countries a supporting mobile app to facilitate our customers’ trading activities and ability to monitor and manage all aspects of their personal accounts and participate in our client social network. Nettrader was formerly owned by Mr. Turlov. We acquired Nettrader for approximately $3.8 million, which was equal to the fair value of the net assets we acquired.
 
OTCQX
 
Subsequent to the quarter end, on July 18, 2018, our common stock began trading on the OTCQX® Best Market, a premium market operated by OTC Markets, Inc. Previously, our common stock was trading on the OTC Pink® Open Market. We believe trading on the OTCQX will help to expand our exposure and increase investor access and presents an opportunity at this stage in our growth to communicate with our shareholders and with securities market professionals in the U.S. and abroad.
 
Financing Activities
 
During three months ended June 30, 2018, we placed United States dollar and Kazakhstani tenge denominated bonds of Freedom KZ in Kazakhstan in the amount of approximately $9.7 million. These bonds have fixed annual coupon rates of 8.00% or 11.5% and maturity dates ranging from January 2019 to May 2021.
 
Financial Results
 
During the three months ended June 30, 2018, we realized a net loss of approximately $6.9 million and basic and diluted loss per share of $0.12, compared to a net income of approximately $8 million and basic and diluted earnings per share of $0.71 during the quarter ended June 30, 2017. As a result of the weakening of our functional currencies against our reporting currency and the resulting currency translation adjustments, net of tax, we realized a comprehensive loss of approximately $13.6 million during the 2018 period compared to a comprehensive income of approximately $5.8 million during the comparable 2017 period.
 
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.
 
 
29
 
 
Results of Operations
 
Three months ended June 30, 2018 compared to the three months ended June 30, 2017
 
The following quarter-to-quarter comparison of our financial results is not necessarily indicative of future results.
 
 
 
Three Months Ended
June 30, 2018
 
 
Three Months EndedJune 30, 2017
(Recast)
 
 
 
Amount  
 
 
%*
 
 
Amount  
 
 
%*
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Fee and commission income
 $5,428 
  73%
 $3,057 
  22%
Net gain/(loss) on trading securities
  (3,288)
  (44%)
  7,131 
  50%
Interest income
  7,372 
  100%
  2,647 
  19%
Net gain on derivatives
  - 
  0%
  490 
  4%
Net gain/(loss) on foreign exchange operations
  (2,110)
  (29%)
  659 
  5%
Total revenues, net
  7,402 
  100%
  13,984 
  100%
 
    
    
    
    
Expenses:
    
    
    
    
Interest expense
  4,614 
  62%
  2,030 
  15%
Fee and commission expense
  764 
  10%
  289 
  2%
Operating expense
 9,111
 123%
 3,663
  26%
Other expense/(income), net
  (54)
  (1%)
  45 
  0%
Total expense
 14,435
 194%
 6,027
  43%
 
    
    
    
    
Net income/(loss) before income taxes
  (7,033)
  (95%)
 7,957
 57%
Income tax benefit
  150 
  2%
  33 
  0%
Net income/(loss)
 $(6,883)
 $(93%)
 $7,990
 $57%
 
    
    
    
    
Other comprehensive income/(loss)
    
    
    
    
Changes in unrealized gain on investments available-for-sale
 $- 
  0%
 $(59)
  0%
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect
  22 
  0%
  - 
  0%
Foreign currency translation adjustments, net of tax
  (6,698)
  (90%)
  (2,169)
  (16%)
Comprehensive income/(loss)
 $(13,559)
  (183%)
 $5,762
  (41%)
  * Reflects percentage of Total revenues, net.
 
Revenue
 
We derive revenue primarily from gains realized from our proprietary trading activities, fee and commission income earned from our retail brokerage clients, fees and commission from investment banking services, and interest income.
 
 
 
Three Months Ended June 30, 2018
 
 
Three Months Ended June 30 2017
(Recast)
 
 
Change
 
 
 
Amount
 
 
%
 
 
Amount
 
 
%
 
 
Amount
 
 
%
 
Fee and commission income
 $5,428 
  73%
 $3,057 
  22%
 $2,371 
  78%
Net gain/(loss) on trading securities
  (3,288)
  (44%)
  7,131 
  50%
  (10,419)
  (146%)
Interest income
  7,372 
  100%
  2,647 
  19%
  4,725 
  179%
Net gain on derivatives
  - 
  0%
  490 
  4%
  (490)
  (100%)
 Net gain/(loss) on foreign exchange operations
  (2,110)
  (29%)
  659 
  5%
  (2,769)
  (420%)
 
    
    
    
    
    
    
Total revenue, net
 $7,402 
  100%
 $13,984 
  100%
 $(6,582)
  (47%)
 
 
30
 
 
During the three months ended June 30, 2018 and 2017, we realized total net revenue of $7,402 and $13,984, respectively. Revenue during the three months ended June 30, 2018, was significantly lower than during the three months ended June 30, 2017, primarily due to realizing net losses on trading securities and foreign exchange operations during the period ended June 30, 2018, compared to net gains during the period ended June 30, 2017. The losses were only partially offset by significant increases in fee and commission income and interest income during the three months ended June 30, 2018.
 
Fee and commission income. During the three months ended June 30, 2018, fee and commission income increased $2,371 compared to the three months ended June 30, 2017. This increase resulted principally from increased fees and commissions for the retail brokerage and related banking services we provide our clients. During the three months ended June 30, 2018, fees and commissions generated from brokerage and related banking services amounted to $3,758 and $1,670, respectively.
 
These increases in fees and commissions resulted primarily from the growth of our customer base, increased client transaction volume, and greater demand for the other services we offer. Fees and commissions for brokerage services consisted principally of broker fees from customer trading, underwriting and market making services and agency fees. During the three months ended June 30, 2018, brokerage fees and commissions increased $2,442 as a result of increased client transaction volume. During the three months ended June 30, 2017, we engaged in significantly more underwriting and market making activities than during the three months ended June 30, 2018, as a result fees and commissions realized from underwriting and market making services decreased by $1,024. Fees for bank services consist primarily of wire transfer fees, commissions for payment processing and commissions for currency exchange operations. The $1,182 increase in fees and commission from banking services during the three months ended June 30, 2018, compared to the same period 2017 is attributable to the fact that we continue to grow our brokerage-related banking operations and opening new locations.
 
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 the amount of unrealized gains or losses in a period.  Fluctuations in unrealized gains and losses from period to period may occur as a result of factors beyond our control, such as fluctuations in the market prices of the open securities positions we hold. 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. 
 
During the three months ended June 30, 2018, we recognized a net loss on trading securities of $3,288, which included $5,094 of realized net gain and $8,382 of unrealized net loss compared to a net gain of $7,131 on trading securities for three months ended June 30, 2017, which included $9,631 of realized net gain and $2,500 of unrealized net loss. The primary contributing factor to our net loss on trading securities during the three months ended June 30, 2018, was a decrease in the share price of JSC Kcell - Kazakhstan’s largest cellular service provider, resulting in a loss in the amount of $6,415, which included $2,033 of realized net gain and $8,448 of unrealized net loss. Our net loss on trading securities was partially offset by unrealized gains on the revaluation of securities due to an increase in share price of JSC Kazakhtelecom – Kaza