Freedom Holding Corp 10-Q for FY2021 Q3
Freedom Holding Corp. (FRHC)
About this 10-Q
Freedom Holding Corp filed this 10-Q on February 9, 2021, covering the quarter ended December 31, 2020 (FY2021 Q3).
Headline figures
Quarter ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $100.23M
- up 239.0% from $29.57M a year earlier
- Net income
- $42.32M
- up 945.0% from net income of $4.05M a year earlier
- Diluted EPS
- $0.72
- up 928.6% from $0.07 a year earlier
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 | |||||||||||||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
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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 | |
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| 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 February 8, 2021, the registrant had
FREEDOM HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION |
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Item 1. | Unaudited Condensed Consolidated Financial Statements |
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| Condensed Consolidated Balance Sheets as of December 31, 2020 and March 31, 2020 |
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| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2020 and 2019 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
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ASSETS |
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Cash and cash equivalents |
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Restricted cash |
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Trading securities |
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Available-for-sale securities, at fair value |
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Brokerage and other receivables, net |
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Loans issued |
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Deferred tax assets |
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Fixed assets, net |
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Intangible assets, net |
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Goodwill |
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Right-of-use asset |
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Other assets, net |
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TOTAL ASSETS |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Securities sold, not yet purchased – at fair value |
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Loans received |
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Debt securities issued |
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Customer liabilities |
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Trade payables |
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Deferred distribution payments |
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Securities repurchase agreement obligations |
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Current income tax liability |
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Lease liability |
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Deferred tax liabilities |
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Other liabilities |
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TOTAL LIABILITIES |
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Commitments and Contingent Liabilities (Note 20) |
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STOCKHOLDERS’ EQUITY |
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Preferred stock - $ |
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Common stock - $ |
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Additional paid in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY |
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Noncontrolling interest |
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TOTAL STOCKHOLDERS’ EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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The accompanying notes are an integral part of these condensed consolidated financial statements
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| 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) |
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Revenue: |
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Fee and commission income |
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Net gain on trading securities |
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Interest income |
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Net (loss)/gain on foreign exchange operations |
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Net gain on derivatives |
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TOTAL REVENUE, NET |
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Expense: |
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Interest expense |
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Fee and commission expense |
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Operating expense |
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Provision/(recovery) for impairment losses |
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Other expense, net |
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TOTAL EXPENSE |
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NET INCOME BEFORE INCOME TAX |
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Income tax (expense)/benefit |
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NET INCOME |
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Less: Net (loss)/income attributable to noncontrolling interest in subsidiary |
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NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
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OTHER COMPREHENSIVE INCOME/(LOSS) |
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Change in unrealized gain/(loss) on available-for-sale securities, net of tax effect |
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Reclassification adjustment relating to available-for-sale securities disposed of in the period, net of tax effect |
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Foreign currency translation adjustments, net of tax effect |
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COMPREHENSIVE INCOME BEFORE NONCONTROLLING INTERESTS |
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Less: Comprehensive (loss)/income attributable to noncontrolling interest in subsidiary |
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COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
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BASIC NET INCOME PER COMMON SHARE |
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DILUTED NET INCOME PER COMMON SHARE |
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Weighted average number of shares (basic) |
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Weighted average number of shares (diluted) |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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| Table of Contents |
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
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Cash Flows From Operating Activities |
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Net income |
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Adjustments to reconcile net income from operating activities: |
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Depreciation and amortization |
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Noncash lease expense |
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Loss on sale of fixed assets |
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Change in deferred taxes |
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Stock compensation expense |
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Share based payment |
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Unrealized (gain)/loss on trading securities |
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Unrealized gain on derivative asset |
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Net change in accrued interest |
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Allowance/(recoveries) for receivables |
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Changes in operating assets and liabilities: |
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Lease liabilities |
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Trading securities |
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Brokerage and other receivables |
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Loans issued |
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Other assets |
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Customer liabilities |
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Current income tax liability |
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Trade payables |
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Securities sold, not yet purchased |
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Other liabilities |
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Net cash flows from operating activities |
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Cash Flows From Investing Activities |
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Purchase of fixed assets |
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Proceeds from sale of fixed assets |
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Proceeds from sale/(purchase) of available-for-sale securities, at fair value, net |
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Consideration paid for Zerich |
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Consideration paid for Prime Executions |
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Consideration paid for Freedom Bank KZ |
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Cash, cash equivalents and restricted cash received from acquisitions |
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Net cash flows from/(used in) investing activities |
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Cash Flows From Financing Activities |
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Repurchase/(repayment) of securities repurchase agreement obligations |
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Proceeds from issuance of debt securities |
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Repurchase of debt securities |
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Repayment of loans received |
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Proceeds from loans received |
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Exercise of options |
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Net cash flows from/(used in) financing activities |
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Effect of changes in foreign exchange rates on cash and cash equivalents |
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NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD |
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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) |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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Income tax paid |
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Supplemental non-cash disclosures: |
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Operating lease right-of-use assets obtained in exchange for operating lease obligations |
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Operating lease right-of-use assets obtained/disposed of in exchange for operating lease obligations during the period, net |
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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 Condensed Consolidated Statements of Cash Flows:
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| December 31, 2020 |
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| December 31, 2019 |
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Cash and cash equivalents |
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Restricted cash |
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Total cash, cash and cash equivalents and restricted cash as shown in the statement of cash flows |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
| Table of Contents |
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
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Balance as of September 30, 2020 |
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Stock based compensation |
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Share based payment |
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Exercise of options |
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Translation difference |
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Net income/(loss) |
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Balance as of December 31, 2020 |
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|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
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Balance as of March 31, 2020 |
|
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|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
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Stock based compensation |
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Share based payment |
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Exercise of options |
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Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect |
|
| - |
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Translation difference |
|
| - |
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Net income |
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| - |
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Balance as of December 31, 2020 |
|
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| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
| 7 |
| Table of Contents |
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued) (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
|
| Common Stock |
|
| Additional paid in |
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| Retained |
|
| Accumulated other comprehensive |
|
| Non-controlling |
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| ||||||||||
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| Shares |
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| Amount |
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| capital |
| earnings | loss | interest | Total |
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| |||||||
Balance as of September 30, 2019 |
|
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| $ |
|
| $ |
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| $ |
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| $ | ( | ) |
| $ |
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| $ |
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Exercise of options |
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| |||||||
Stock based compensation |
|
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| ||||||
Share based payment |
|
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|
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|
|
|
|
|
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| |||||||
Change in unrealized gain on available-for-sale securities, net of tax effect |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||||
Translation difference |
|
| - |
|
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| ||||||
Net income/(loss) |
|
| - |
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| ( | ) |
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| |||||
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
|
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|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
| ||||||
|
|
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|
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|
|
|
|
|
Exercise of options |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Stock based compensation |
|
| - |
|
|
|
|
|
|
|
|
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| ||||||
Share based payment |
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| |||||||
Sale of Freedom UA shares |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Change in unrealized gain on available-for-sale securities, net of tax effect |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
| ||||||
Translation difference |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
| ||||||
Net income/(loss) |
|
| - |
|
|
|
|
|
|
|
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|
|
|
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|
| ( | ) |
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| |||||
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|
|
|
|
|
|
|
Balance as of December 31, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 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 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”), Moscow, a Russia-based securities broker-dealer; LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based securities broker-dealer (“Freedom KZ”); Bank Freedom Finance Kazakhstan JSC, (formerly known as JSC Bank Kassa Nova), an Almaty, Kazakhstan-based bank (“Freedom Bank KZ”); Prime Executions, Inc., New York, United States-based agency only securities broker-dealer operating on the floor of the New York Stock Exchange (“Prime Executions”); 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 Technologies Ltd (“Freedom Technologies”), a Limassol, Cyprus limited company, (formerly known as Freedom Finance Management Limited); 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
In July 2020, we completed the acquisition of Zerich Capital Management (“Zerich”). On December 27, 2020, Zerich was merged into Freedom RU and its separate legal existence terminated. In connection with the merger, the assets and liabilities of Zerich were transferred to Freedom RU.
| 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) |
The Company’s subsidiaries are participants on the Kazakhstan Stock Exchange (KASE), Astana Stock Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPBX), New York Stock Exchange (NYSE), Nasdaq Stock Exchange (Nasdaq), 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, FFIN Bank, Freedom KZ, Freedom Bank KZ, Prime Executions, Freedom Global, Freedom CY, Freedom Technologies, Freedom GE, Freedom UZ, FFIN and Freedom UA are collectively referred to herein as the “Company.”
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 nine-month period ended December 31, 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 December 31, 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 Bank KZ; Prime Executions; Freedom Global, Freedom CY, Freedom Technologies, 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.
| 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) |
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.
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.
| 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) |
The Company recognizes revenue in accordance with the core principle by applying the following steps:
| · | Step 1: Identify the contract(s) with a customer - A contract is an agreement between two or more parties that creates enforceable rights and obligations. |
| · | Step 2: Identify the performance obligations in the contract - A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately. |
| · | Step 3: Determine the transaction price - The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash. The transaction price also is adjusted for the effects of the time value of money if the contract includes a significant financing component and for any consideration payable to the customer. If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. |
| · | Step 4: Allocate the transaction price to the performance obligations in the contract - An entity typically allocates the transaction price to each performance obligation on the basis of the relative standalone selling prices of each distinct good or service promised in the contract. If a standalone selling price is not observable, an entity estimates it. Sometimes, the transaction price includes a discount or a variable amount of consideration that relates entirely to a part of the contract. |
| · | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation - An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, an entity recognizes revenue over time by selecting an appropriate method for measuring the entity’s progress toward complete satisfaction of that performance obligation. |
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.
| 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) |
Functional currency
Management has adopted ASC 830, Foreign Currency Translation Matters, as it pertains to its foreign currency translation. The functional currencies of the Company’s subsidiaries are the Russian ruble, European euro, Ukrainian hryvnia, Uzbekistani som, Kazakhstani tenge and U.S. dollar. The Company’s 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/(Loss).”
For financial reporting purposes, foreign currencies are translated into U.S. dollars as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive loss.”
Cash and cash equivalents
Cash and cash equivalents are generally comprised of certain highly liquid investments with maturities of three months or less at the date of purchase. Cash and cash equivalents include reverse repurchase agreements which are recorded at the amounts at which the securities were acquired or sold plus accrued interest.
Securities reverse repurchase and repurchase agreements
A reverse repurchase agreement is a transaction in which the Company purchases financial instruments from a seller, typically in exchange for cash, and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller for an amount equal to the cash or other consideration exchanged plus interest at a future date. Securities purchased under reverse repurchase agreements are accounted for as collateralized financing transactions and are recorded at the contractual amount for which the securities will be resold, including accrued interest. Financial instruments purchased under reverse repurchase agreements are recorded in the financial statements as cash placed on deposit collateralized by securities and classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.
A repurchase agreement is a transaction in which the Company sells financial instruments to another party, typically in exchange for cash, and simultaneously enters into an agreement to reacquire the same or substantially the same financial instruments from the buyer for an amount equal to the cash or other consideration exchanged plus interest at a future date. These agreements are accounted for as collateralized financing transactions. The Company retains the financial instruments sold under repurchase agreements and classifies them as trading securities in the Condensed Consolidated Balance Sheets. The consideration received under repurchase agreements is classified as securities repurchase agreement obligations in the Condensed Consolidated Balance Sheets.
| 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) |
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.
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 securities 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.
| 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) |
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.
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 when 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 December 31, 2020, and March 31, 2020, the Company had not recorded any charges for impairment of long-lived assets.
| 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) |
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.
Goodwill as of March 31, 2020, and the changes in the carrying amount of goodwill for the nine months ended December 31, 2020 were as follows:
Balance as of March 31, 2020 |
| $ |
| |
|
|
|
|
|
Acquisition of Freedom Bank KZ |
|
|
| |
Acquisition of Prime Executions |
|
|
| |
Acquisition of Zerich |
|
|
| |
Foreign currency translation |
|
|
| |
|
|
|
|
|
Balance as of December 31, 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.
| 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) |
The Company will include interest and penalties arising from the underpayment of income taxes in the provision for income taxes. As of December 31, 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 condensed consolidated financial statements as of December 31, 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.
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 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.
| 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) |
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
In June 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 U.S. Securities and Exchange Commission (“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 2017-12 will have on its condensed consolidated financial statements and related disclosures.
| 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) |
In August 2020, the FASB 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. ASU 2020-06 is effective for fiscal years beginning after August 5, 2020. The Company is currently evaluating the impact that ASU 2020-06 will have on its condensed consolidated financial statements and related disclosures.
In October 2020, the FASB issued Accounting Standards Update (ASU) No. 2020-09, Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762, which amends various Securities and Exchange Commission (SEC) paragraphs in the FASB Accounting Standards Codification based on the issuance of SEC Final Rulemaking Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities. Release No. 33-10762 amends Rules 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, and 3-16 of Regulation S-X, Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered, both of which apply mainly to specific types of registered debt offerings. The amendments, which are the result of the SEC’s ongoing, comprehensive evaluation of its existing disclosure requirements, are intended to (1) make the disclosures required by the rules more useful to investors and to simplify and streamline the disclosure obligations imposed on registrants; (2) encourage issuers to offer registered guaranteed or collateralized securities, thereby potentially providing investors protection they may not be afforded in offerings conducted on an unregistered basis; and (3) increase the number of registered offerings that include guarantees as credit enhancements, which could result in a lower cost of capital for issuers and an increased level of protection for investors. ASU 2020-09 is effective for fiscal years beginning after January 4, 2021. The Company is currently evaluating the impact that ASU 2020-09 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 nine months ended December 31, 2019 |
| |||||||||
STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME (as reclassified) |
| As previously reported |
|
| Reclassified |
|
| As reclassified |
| |||
|
|
|
|
|
|
|
|
|
| |||
Expense: |
|
|
|
|
|
|
|
|
| |||
Interest expense |
| $ |
|
|
| ( | ) |
| $ |
| ||
Fee and commission expense |
|
|
|
|
|
|
|
|
| |||
Operating expense |
|
|
|
|
|
|
|
|
| |||
Recovery of impairment losses |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Other expense, net |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSE |
| $ |
|
|
|
|
| $ |
| |||
| 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) |
NOTE 3 – CASH AND CASH EQUIVALENTS
As of December 31, 2020, and March 31, 2020, cash and cash equivalents consisted of the following:
|
| December 31, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Securities purchased under reverse repurchase agreements |
| $ |
|
| $ |
| ||
Current accounts with brokers |
|
|
|
|
|
| ||
Current account with National Settlement Depository (Russia) |
|
|
|
|
|
| ||
Current account with Central Depository (Kazakhstan) |
|
|
|
|
|
| ||
Current accounts in clearing organizations |
|
|
|
|
| |
| |
Current accounts with commercial banks |
|
|
|
|
|
| ||
Accounts with stock exchanges |
|
|
|
|
|
| ||
Petty cash in bank vault and on hand |
|
|
|
|
|
| ||
Current account with Central Bank (Russia) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
| $ |
|
| $ |
| ||
As of December 31, 2020, and March 31, 2020, with the exception of funds deposited with banks in the United States which may qualify for FDIC insurance up to $
As of December 31, 2020, and March 31, 2020, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:
|
| December 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 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
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 December 31, 2020 and March 31, 2020, was $
| 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) |
NOTE 4 – RESTRICTED CASH
Restricted cash for the periods ended December 31, 2020 and March 31, 2020, consisted of:
|
| December 31, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Brokerage customers’ cash |
| $ |
|
| $ |
| ||
Deferred distribution payments |
|
|
|
|
|
| ||
Reserve with Central Bank of Russia |
|
|
|
|
|
| ||
Guaranty deposits |
|
|
|
|
|
| ||
Total restricted cash |
| $ |
|
| $ |
| ||
As of December 31, 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 $
| 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 5 – TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE
As of December 31, 2020, and March 31, 2020, trading and available-for-sale securities consisted of:
|
| December 31, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Debt securities |
| $ |
|
| $ |
| ||
Equity securities |
|
|
|
|
|
| ||
Exchange traded notes |
|
|
|
|
|
| ||
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.
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 December 31, 2020, and March 31, 2020:
|
|
|
|
| Fair Value Measurements at |
| ||||||||||
|
|
|
|
| December 31, 2020, using |
| ||||||||||
|
|
|
| Quoted Prices in Active Markets for |
|
| Significant Other Observable |
|
| Significant Unobservable |
| |||||
|
| December 31, |
|
| Identical Assets |
|
| Inputs |
|
| Inputs |
| ||||
|
| 2020 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Debt securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Exchange traded notes |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total trading securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Total available-for-sale securities, at fair value |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 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) |
|
|
|
| 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 |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
The table below presents the valuation techniques and significant level 3 inputs used in the valuation as of December 31, 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 December 31, 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 nine months ended December 31, 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 December 31, 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 |
| $ |
|
| $ |
| ||
| 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) |
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 December 31, 2020, and March 31, 2020:
|
| December 31, 2020 |
| |||||||||
|
| Assets measured at amortized cost |
|
| Unrealized loss accumulated in other comprehensive income/(loss) |
|
| Assets measured at fair value |
| |||
|
|
|
|
|
| |||||||
Equity securities |
| $ |
|
| $ |
|
| $ |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 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.
| 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 6 – BROKERAGE AND OTHER RECEIVABLES, NET
Brokerage and other receivables for the periods ended December 31, 2020, and March 31, 2020, consisted of:
|
| December 31, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Margin lending receivables |
| $ |
|
| $ |
| ||
Receivables from brokerage clients |
|
|
|
|
|
| ||
Long-term installments receivables |
|
|
|
|
|
| ||
Receivable for underwriting and market-making services |
|
|
|
|
|
| ||
Receivable from sale of securities |
|
|
|
|
|
| ||
Bank commissions receivable |
|
|
|
|
|
| ||
Dividends receivable |
|
|
|
|
|
| ||
Other receivables |
|
|
|
|
|
| ||
Allowance for receivables |
|
| ( | ) |
|
| ( | ) |
Total brokerage and other receivables, net |
| $ |
|
| $ |
| ||
On December 31, 2020, and March 31, 2020, amounts due from a single related party customer were $
NOTE 7 – LOANS ISSUED
Loans issued as of December 31, 2020, consisted of the following:
|
| Amount Outstanding |
|
| Due Dates |
| Average Interest Rate |
|
| Fair Value of Collateral |
|
| Loan Currency | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Subordinated loan |
| $ |
|
|
|
| % |
| $ |
|
| ||||||
Uncollateralized non-bank loan |
|
|
|
|
|
| % |
|
|
|
| ||||||
Uncollateralized non-bank loan |
|
|
|
|
|
| % |
|
|
|
| ||||||
Subordinated loan |
|
|
|
|
|
| % |
|
|
|
| ||||||
Bank customer loans |
|
|
|
|
|
| % |
|
|
|
| ||||||
Bank customer loans |
|
|
|
|
|
| % |
|
|
|
| ||||||
|
| $ |
|
|
|
|
|
|
|
| $ |
|
|
| |||
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 |
| $ |
|
|
|
| % |
| $ |
|
| ||||||
Uncollateralized non-bank loan |
|
|
|
|
|
| % |
|
|
|
| ||||||
Bank customer loans |
|
|
|
|
|
| % |
|
|
|
| ||||||
Subordinated loan |
|
|
|
|
|
| % |
|
|
|
| ||||||
Uncollateralized non-bank loan |
|
|
|
|
|
| % |
|
|
|
| ||||||
Other loans issued |
|
|
|
|
|
| % |
|
|
|
| ||||||
|
| $ |
|
|
|
|
|
|
|
| $ |
|
|
| |||
| 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) |
NOTE 8 – 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 December 31, 2020, and March 31, 2020, is
|
| December 31, 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 |
| $ |
|
| $ |
| ||
Depreciation |
|
|
|
|
|
| ||
Subordinated debt |
|
|
|
|
| |
| |
Other liabilities |
|
|
|
|
|
| ||
Deferred tax liabilities |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities) |
| $ | ( | ) |
| $ |
| |
During the nine months ended December 31, 2020, and 2019, the effective tax rate was equal to
Tax loss carryforwards as of December 31, 2020, and March 31, 2020, were $
NOTE 9 – LOANS RECEIVED
Loans received as of December 31, 2020, consisted of the following:
Borrower |
| Lender |
| Amount Outstanding |
|
| Average Interest Rate |
|
| Term |
| Maturity date |
| Loan Currency | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
|
| % |
|
|
| ||||||||
As of December 31, 2020, non-bank loans received were unsecured. As of December 31, 2020, and March 31, 2020, accrued interest on the loans totaled $
| 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) |
Debt securities issued for the periods ended December 31, 2020, and March 31, 2020, consisted of:
|
| December 31, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Debt securities issued denominated in USD |
| $ |
|
| $ |
| ||
Debt securities issued denominated in RUB |
|
|
|
|
|
| ||
Accrued interest |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
As of December 31, 2020, the Company’s outstanding debt securities had fixed annual coupon rates ranging from
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs.
The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:
|
| December 31, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Brokerage customers |
| $ |
|
| $ |
| ||
Banking customers |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
As of December 31, 2020, banking customer liabilities consisted of current accounts and deposits of $
| 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) |
NOTE 12– SECURITIES SOLD, NOT YET PURCHASED - AT FAIR VALUE
As of December 31, 2020, and March 31, 2020, the Company’s securities sold, not yet purchased at fair value was $
During the nine months ended December 31, 2020, the Company sold shares that were not owned by the Company in the amount of $
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 13 – TRADE PAYABLES
Trade payables for the periods ended December 31, 2020, and March 31, 2020, consisted of:
|
| December 31, 2020 |
|
| March 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Margin lending payable |
| $ |
|
| $ |
| ||
Payables to suppliers of goods and services |
|
|
|
|
|
| ||
Trade payable for securities purchased |
|
|
|
|
|
| ||
Other |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
On December 31, 2020 and March 31, 2020, trade payables due to a single related party were $
As of December 31, 2020, and March 31, 2020, trading securities included collateralized securities subject to repurchase agreements as described in the following table:
|
| December 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate debt |
|
| % |
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Non-US sovereign debt |
|
| % |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate equity |
|
| % |
|
|
|
|
|
|
|
|
|
|
|
| |||||
US sovereign debt |
|
| % |
|
|
|
|
|
|
|
|
|
|
|
| |||||
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 |
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 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) |
The fair value of collateral pledged under repurchase agreements as of December 31, 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.
During the three months ended December 31, 2020, and 2019, the Company earned commission income from related parties in the amounts of $
During the three months ended December 31, 2020, and 2019, the Company paid commission expense to related parties in the amount of $
As of December 31, 2020, and March 31, 2020, the Company had cash and cash equivalents held in brokerage accounts of related parties totaling $
As of December 31, 2020, and March 31, 2020, the Company had loans issued to related parties totaling $
As of December 31, 2020, and March 31, 2020, the Company had bank commission receivables and receivables from brokerage clients from related parties totaling $
As of December 31, 2020, and March 31, 2020, the Company had margin lending receivables with related parties totaling $
As of December 31, 2020, and March 31, 2020, the Company had margin lending payables to related parties, totaling $
As of December 31, 2020, and March 31, 2020, the Company had accounts payable due to a related party totaling $
| 29 |
| Table of Contents |
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
As of December 31, 2020, and March 31, 2020, the Company had financial liability with related parties totaling $
As of December 31, 2020, and March 31, 2020, the Company had customer liabilities to related parties totaling $
As of December 31, 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.
During the nine months ended December 31, 2020, non-qualified stock options to purchase
On December 30, 2020, the Company awarded restricted stock grants in the amount of
On October 6, 2017,the Company awarded restricted stock grants totalling
The Company recorded stock-based compensation expense for restricted stock grants and stock options in the amount of $
During the nine months ended December 31, 2020, no stock options were granted. Total compensation expense related to options granted was $
| 30 |
| 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 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 nine months ended December 31, 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 December 31, 2020 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Exercisable, at December 31, 2020 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
During the three and nine months ended December 31, 2020, a total of
| 31 |
| 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 summarizes the activity for the Company’s restricted stock outstanding during the nine months ended December 31, 2020:
|
| Shares |
|
| Weighted Average Fair Value |
| ||
Outstanding, March 31, 2020 |
|
|
|
| $ |
| ||
Granted |
|
|
|
|
|
| ||
Vested |
|
| ( | ) |
|
| ( | ) |
Forfeited/cancelled/expired |
|
| - |
|
|
|
| |
Outstanding, at December 31, 2020 |
|
|
|
| $ |
| ||
During the nine months ended December 31, 2020 and December 31, 2019, the Company recorded expenses for share based payments for consulting services in the amount of $
The Company determines whether a contract 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.
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets as of December 31, 2020:
|
| Classification on Balance Sheet |
| December 31, 2020 |
| |
Assets |
|
|
|
|
| |
Operating lease assets |
| Right-of-use assets |
| $ |
| |
Total lease assets |
|
|
| $ |
| |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Operating lease liability |
| Operating lease obligations |
| $ |
| |
Total lease liability |
|
|
| $ |
| |
Lease obligations at December 31, 2020, consisted of the following:
Twelve months ending March 31, |
|
|
| |
2021 – remaining after December 31 |
| $ |
| |
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 December 31, 2020, are approximately $
| 32 |
| 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 acquisitions below were accounted for under the acquisition method of accounting in accordance with ASU Topic 805, Business Combinations.
Acquisition of Zerich
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. The Company acquired 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 |
| $ |
| |
| 33 |
| Table of Contents |
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
On December 27, 2020, Zerich was merged into Freedom RU and its separate legal existence terminated. The assets and liabilities of Zerich were transferred to Freedom RU at their perspective carrying amounts on the date of the merger was completed.
Acquisition of Prime Executions
On December 29, 2020, the Company completed the acquisition of Prime Executions. Prime Executions commenced business in 1985 and is an agency only execution broker dealer located on the floor of the NYSE. The Company acquired Prime Executions for $
| Purchase price allocation |
| ||
|
| As of December 29, 2020 |
| |
Assets: |
|
|
| |
Cash and cash equivalents |
| $ |
| |
Brokerage and other receivables |
|
|
| |
Intangible assets |
|
|
| |
Other assets |
|
|
| |
Total assets |
| $ |
| |
|
|
|
|
|
Liabilities: |
|
|
|
|
Other liabilities |
| $ |
| |
Total liability |
| $ |
| |
|
|
|
|
|
Net Assets Acquired |
| $ |
| |
|
|
|
|
|
Goodwill |
|
|
| |
|
|
|
|
|
Total purchase price |
| $ |
| |
| 34 |
| Table of Contents |
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
Acquisition of Freedom Bank KZ
On December 28, 2020, the Company closed the acquisition of Freedom Bank KZ, following receipt of approval from the Agency of the Republic of Kazakhstan for Regulation and Development of Financial Market. Freedom Bank KZ is a Kazakhstani based second tier Bank. For accounting purposes, on December 25, 2020, the Company acquired control over the entity by purchasing the common shares of Freedom Bank KZ. The total purchase price of this acquisition was $
|
| Purchase price allocation As of December 25, 2020 |
| |
Assets: |
|
|
| |
Cash and cash equivalents |
| $ |
| |
Trading securities |
|
|
| |
Brokerage and other receivables |
|
|
| |
Fixed assets |
|
|
| |
Intangible assets |
|
|
| |
Right-of-use asset |
|
|
| |
Loans issued |
|
|
| |
Other assets |
|
|
| |
Total assets |
| $ |
| |
|
|
|
|
|
Liabilities: |
|
|
|
|
Customer liabilities |
| $ |
| |
Current income tax liability |
|
|
| |
Trade payables |
|
|
| |
Securities repurchase agreement obligation |
|
|
| |
Lease liability |
|
|
| |
Other liabilities |
|
|
| |
Deferred income tax liabilities |
|
|
| |
Total liability |
| $ |
| |
|
|
|
|
|
Net Assets Acquired |
| $ |
| |
|
|
|
|
|
Goodwill |
|
|
| |
|
|
|
|
|
Consideration paid for common shares |
|
|
| |
Consideration paid for preferred shares |
|
| |
|
Consideration paid for subordinated loans |
|
|
| |
Total purchase price |
| $ |
| |
| 35 |
| Table of Contents |
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
Unaudited Supplemental Pro forma Information
The following unaudited supplemental pro forma information reflects our combined results of operations had the acquisition occurred at the beginning of fiscal 2019. The pro forma information reflects certain adjustments related to the acquisition. The pro forma information does not reflect any potential operating efficiencies or cost savings that may result from the acquisition. Accordingly, this pro forma information is for illustrative purposes and is not intended to represent the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of fiscal 2019, nor is it intended to indicate future results of operations. The pro forma combined results of operations for the three-months ended and nine-months ended December 31, 2020, and 2019 are as follows:
|
| Unaudited supplemental pro forma information |
| |||||||||||||
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net Interest Income |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Net Сommission Income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WA number of shares (basic) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
WA number of shares (diluted) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS (basic) |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
EPS (diluted) |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 36 |
| Table of Contents |
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, unless otherwise stated) |
Freedom Bank KZ is a party to certain off-balance sheet financial instruments. These financial instruments include guarantees and unfunded commitments under existing lines of credit. These commitments expose the Company to varying degrees of credit and market risk which are essentially the same as those involved in extending loans to customers, and are subject to the same credit policies used in underwriting loans. Collateral may be obtained based on the Company’s credit evaluation of the counterparty. The Company’s maximum exposure to credit loss is represented by the contractual amount of these commitments.
Unfunded commitments under lines of credit
Unfunded commitments under lines of credit include commercial, commercial real estate, home equity and consumer lines of credit to existing customers. These commitments may mature without being fully funded.
Bank guarantees
Bank guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing guarantees is essentially the same as that involved in extending loan facilities to customers. A significant portion of the issued guarantees are collateralized by cash. Total lending related commitments outstanding at December 31, 2020, were as follows:
|
| As of December 31, 2020 |
| |
Bank guarantees |
| $ |
| |
Unfunded commitments under lines of credit |
|
|
| |
|
| $ |
| |
The Company has performed an evaluation of subsequent events through the time of filing this quarterly report on Form 10-Q with the SEC. During this period the Company did not have any additional material recognizable subsequent events.
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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 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 quarterly report on Form 10-Q, 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 develop and 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 maintain effective cybersecurity systems to protect the integrity and security of our clients’, vendors’ and our own information and systems; (ix) our ability to properly address the risks and impacts of the COVID-19 pandemic; and (x) 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 and our quarterly report for the quarter ended September 30, 2020. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
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Overview
Freedom Holding Corp. is a holding company. 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. As described in more detail below, on December 29, 2020, the Company completed the acquisition of Prime Executions, an agency only execution broker dealer registered with the SEC.
Our subsidiaries are participants of the KASE, AIX, MOEX, SPBX, UX, UZSE, UZCE, NYSE and NASDAQ. Our Cyprus office provides our clients with operations support and access to the investment opportunities, relative stability, and integrity of the U.S., European and Asian 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, as well as institutional clients. 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 229,000 client accounts of which more than 57% carried positive cash or asset account balances as of December 31, 2020. Internally, we designate “active accounts” as those in which at least one transaction occurs per quarter. For the three months ended December 31, 2020, we had approximately 68,000 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 96 retail brokerage and financial services offices located across Kazakhstan (27), Kyrgyzstan (1), Russia (43), Uzbekistan (8), Ukraine (14), 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
Acquisition – Freedom Bank KZ
On December 28, 2020, we completed the previously announced acquisition of Freedom Bank KZ, including all of the outstanding subordinated loans of Freedom Bank KZ, for an aggregate purchase price of $53,097 (the “Freedom Bank KZ Acquisition”). For additional information regarding the purchase price allocation and unaudited supplemental pro forma financial information, see Note 19 to our condensed consolidated financial statements.
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| Table of Contents |
Freedom Bank KZ, a second-tier Kazakhstani bank, was established in 2009 and has ten branch offices across Kazakhstan. Historically, Freedom Bank KZ’s core business was consumer mortgage lending. As a condition to closing, Freedom Bank KZ sold all but a small portion of its loan portfolio for cash, as we do not anticipate engaging in significant consumer lending activities, consistent with our existing business model.
The Freedom Bank KZ Acquisition will allow us to enhance our financial services offerings in Kazakhstan where Freedom KZ currently operates 17 retail brokerage offices serving Kazakhstani clientele. The Freedom Bank KZ 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.
We expect integration of Freedom Bank KZ’s banking services and Freedom KZ’s securities brokerage services to continue over the next 12 to 18 months. As part of the integration, we are in the process of replacing management and the board of Freedom Bank KZ, and have begun efforts to reduce overlapping, redundant or unneeded roles at Freedom Bank KZ, particularly among employees who were primarily engaged in consumer mortgage lending activities. As part of the integration and our rebranding strategy, we changed the name of the bank from Bank Kassa Nova to Freedom Finance Bank Kazakhstan JSC in January 2021.
Acquisition – Prime Executions
On December 29, 2020, we completed the acquisition of Prime Executions for $2,500 (the “Prime Executions Acquisition”). The purchase price is subject to customary post-closing price adjustments. For additional information regarding the purchase price allocation, see Note 19 to our condensed consolidated financial statements.
Prime Executions is a broker dealer registered with the SEC and a member of the NYSE where it acts as an agency only execution broker dealer operating from the floor of the NYSE. It is also a member of NASDAQ, FINRA and SIPC. Prime Executions was founded in 1986 and is a qualified “Blue Line” NYSE brokerage firm. Prime Executions combines an experienced sales team, brokers and all the available technologies provided by the NYSE to a wide variety of clients on both the buy side and sell side.
The acquisition of Prime Executions represents the Company’s initial entry into the U.S. markets. We expect this acquisition will provide our customers another avenue for execution of U.S. market trades, that is both cost efficient and timely. The Prime Executions Acquisition will also allow us to continue expanding our business by making available to both U.S. and Eurasian market participants cross-market financial opportunities.
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S&P Rating
On November 30, 2020, Standard and Poor’s Financial Services, LLC (“S&P”) revised the ratings outlook of Company subsidiaries Freedom KZ and Freedom RU from “B-/stable/B” to “B-/Positive/B. The long-term and short-term ratings of both companies remained at the level of "B - /B". The national scale rating of Freedom KZ was also revised from “kzBB –“ to “kzBB”.
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 remainder of 2020 and stimulated significant activity in the equity and debt capital markets. As a result, we have experienced strong growth in fee and commission income realized from increased customer activity, as well as significant gains in our proprietary portfolio.
We continue to monitor conditions surrounding COVID-19, as well as economic and capital market conditions. We continue to follow the enhanced cleaning practices and other measures employed in our offices and retail locations in response to local health mandates. We have restricted non-essential business travel and implemented practices to ensure that exposed employees, or those displaying symptoms of COVID-19, self-quarantine. In spring 2020, we transitioned the vast majority of our workforce to work remotely, with only essential employees working in the office. Where dictated by local health mandates, or as seems prudent to local management, this practice continues. There have been no material disruptions to our business or processes to date as a result of these changes.
We experienced significant growth in total revenue during the nine months ended December 31, 2020. We believe much of that growth is attributable to the unique market conditions experienced during 2020. At this time we cannot predict whether that growth will continue or whether ongoing concerns over world economic conditions, the U.S. political environment, and COVID-19 will cause customer activity in the markets to pull back. At this time the extent to which these things may impact our business, financial condition, liquidity, results of operations or cash flows cannot be reasonably estimated.
Financial Results
During the three months ended December 31, 2020, we realized net income of approximately $42.3 million and basic and diluted earnings per share of $0.72. During the nine months ended December 31, 2020, we realized net income of approximately $90.2 million and basic and diluted earnings per share of $1.54. During the three months ended December 31, 2019, we realized net income of approximately $4 million and basic and diluted earnings per share of $0.07. During the nine months ended December 31, 2019, net income totaled $20.9 million and basic and diluted earnings per share were $0.36.
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 (“MD&A”) are presented in thousands of U.S. dollars unless the context indicates otherwise.
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Results of Operations
Three months ended December 31, 2020, compared to the three months ended December 31, 2019
The following third fiscal quarter to third fiscal quarter comparison of our financial results is not necessarily indicative of future results.
|
| Three Months Ended December 31, 2020 |
|
| Three Months Ended December 31, 2019 |
| ||||||||||
|
| Amount |
|
| %* |
|
| Amount |
|
| %* |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fee and commission income |
| $ | 74,333 |
|
|
| 74 | % |
| $ | 20,583 |
|
|
| 70 | % |
Net gain on trading securities |
|
| 18,944 |
|
|
| 19 | % |
|
| 6,448 |
|
|
| 22 | % |
Interest income |
|
| 7,374 |
|
|
| 7 | % |
|
| 3,063 |
|
|
| 10 | % |
Net loss on foreign exchange operations |
|
| (1,413 | ) |
| (1 | %) |
|
| (1,080 | ) |
| (4 | %) | ||
Net gain on derivatives |
|
| 995 |
|
|
| 1 | % |
|
| 556 |
|
|
| 2 | % |
Total revenue, net |
|
| 100,233 |
|
|
| 100 | % |
|
| 29,570 |
|
|
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 6,649 |
|
|
| 7 | % |
|
| 2,713 |
|
|
| 9 | % |
Fee and commission expense |
|
| 20,278 |
|
|
| 20 | % |
|
| 5,525 |
|
|
| 19 | % |
Operating expense |
|
| 21,921 |
|
|
| 22 | % |
|
| 17,062 |
|
|
| 58 | % |
Provision for impairment losses |
|
| 1,109 |
|
|
| 1 | % |
|
| 152 |
|
|
| 1 | % |
Other expense, net |
|
| 244 |
|
|
| 0 | % |
|
| 118 |
|
|
| 0 | % |
Total expense |
|
| 50,201 |
|
|
| 50 | % |
|
| 25,570 |
|
|
| 87 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes |
|
| 50,032 |
|
|
| 50 | % |
|
| 4,000 |
|
|
| 14 | % |
Income tax benefit/(expense) |
|
| (7,711 | ) |
| (8 | %) |
|
| 50 |
|
|
| 0 | % | |
Net income |
| $ | 42,321 |
|
|
| 42 | % |
| $ | 4,050 |
|
|
| 14 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to noncontrolling interest in subsidiary |
|
| (53 | ) |
|
| 0 | % |
|
| (991 | ) |
| (3 | %) | |
Net income attributable to common stockholders |
| $ | 42,374 |
|
|
| 42 | % |
| $ | 5,041 |
|
|
| 17 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain on available-for-sale, net of tax effect |
| $ | - |
|
|
| 0 | % |
| $ | (1 | ) |
|
| 0 | % |
Foreign currency translation adjustments, net of tax effect |
|
| 6,851 |
|
|
| 7 | % |
|
| 2,841 |
|
|
| 10 | % |
Comprehensive income before noncontrolling interests |
| $ | 49,172 |
|
|
| 49 | % |
| $ | 6,890 |
|
|
| 24 | % |
Less: comprehensive loss attributable to noncontrolling interest in subsidiary |
|
| (53 | ) |
|
| 0 | % |
|
| (991 | ) |
| (3 | %) | |
Comprehensive income attributable to common stockholders |
| $ | 49,225 |
|
|
| 49 | % |
| $ | 7,881 |
|
|
| 27 | % |
_____________
* Reflects percentage of total revenues, net.
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| Table of Contents |
Revenue
We derive revenue primarily from fee and commission income earned from our retail brokerage clients, underwriting and market making activities, gains realized from our proprietary trading activities, and interest income.
During the three months ended December 31, 2020 and 2019, we realized total net revenue of $100,233, and $29,570, respectively. Revenue during the three months ended December 31, 2020, was significantly higher than the three months ended December 31, 2019, primarily due to increased fee and commission income, a net gain on trading securities, interest income and a net gain on derivatives. The gains realized during the three months ended December 31, 2020 and 2019, were partially offset by a net loss on foreign exchange operations.
|
| Three Months Ended December 31, 2020 |
|
| Three Months Ended December 31, 2019 |
|
| Change |
| |||||||||||||||
|
| Amount |
|
| %* |
|
| Amount |
|
| %* |
|
| Amount |
|
| % |
| ||||||
Fee and commission income |
| $ | 74,333 |
|
|
| 74 | % |
| $ | 20,583 |
|
|
| 70 | % |
| $ | 53,750 |
|
|
| 261 | % |
Net gain on trading securities |
|
| 18,944 |
|
|
| 19 | % |
|
| 6,448 |
|
|
| 22 | % |
|
| 12,496 |
|
|
| 194 | % |
Interest income |
|
| 7,374 |
|
|
| 7 | % |
|
| 3,063 |
|
|
| 10 | % |
|
| 4,311 |
|
|
| 141 | % |
Net loss on foreign exchange operations |
|
| (1,413 | ) |
| (1) | % |
|
| (1,080 | ) |
| (4) | % |
|
| (333 | ) |
|
| 31 | % | ||
Net gain on derivatives |
|
| 995 |
|
|
| 1 | % |
|
| 556 |
|
|
| 2 | % |
|
| 439 |
|
|
| 79 | % |
Total revenue, net |
| $ | 100,233 |
|
|
| 100 | % |
| $ | 29,570 |
|
|
| 100 | % |
| $ | 70,663 |
|
|
| 239 | % |
_____________
* Reflects percentage of total revenues, net.
Fee and commission income. Fee and commission income consisted principally of broker fees from customer trading and related banking services, underwriting and market making services. During the three months ended December 31, 2020 and 2019, fees and commissions generated from brokerage, underwriting and market making and related banking services were $74,333 and $20,583 respectively, an increase of $53,750.
During the three months ended December 31, 2020, fees and commissions from brokerage services increased by $49,960 as compared to the three months ended December 31, 2019. We believe this growth was partially attributable to significantly increased trading volume and customer activity resulting from the significant market growth during 2020. We believe this growth was also the result of our ongoing efforts to expand our brokerage customer base both organically and through acquisitions. Fees and commissions from related banking services increased during the three months ended December 31, 2020, by $1,851 compared to the three months ended December 31, 2019. Fees for bank services consist primarily of wire transfer fees, commissions for payment processing and commissions for currency exchange operations. Fees and commissions realized from underwriting services increased by $421 during the three months ended December 31, 2020, due to our engaging in more underwritings and activities compared to the three months ended December 31, 2019. Fees and commissions from consulting services increased by $1,518 during the three months ended December 31, 2020, compared to the three months ended December 31, 2019. Because of the uncertainty relating to the COVID-19 pandemic, world economic conditions and the current U.S. political environment, we cannot predict with any certainty whether market conditions similar to those experienced during the quarter ended December 31, 2020, will continue in future periods.
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Net gain on trading securities. Net gain on trading securities reflects the gains and losses from trading activities in our proprietary trading accounts. Net gains or losses are comprised of realized and unrealized gains and losses. Gains or losses are realized when we close a position in a security and realize a gain or a loss on that position. U.S. GAAP requires that we reflect in our financial statements unrealized gains and losses on all our securities trading positions that remain open as of the end of each period. Fluctuations in unrealized gains or losses from one period to another may result from factors within our control, such as when we elect to close an open securities position, which would have the effect of reducing our open positions and, thereby potentially reducing or increasing the amount of unrealized gains or losses in a period. Changes in unrealized gains and losses from period to period may also occur as a result of factors beyond our control, such as fluctuations in the market prices of the open securities positions we hold. This may adversely affect the ultimate value we realize from these investments. Unrealized gains or losses in a particular period may or may not be indicative of the gain or loss we will realize on a securities position when the position is closed. As a result, we may realize significant swings in gains and losses realized on our trading securities year-over-year and quarter-to-quarter. You should not assume that a gain or loss in any particular period is indicative of a trend or of the gain or loss we may ultimately realize when we close a position.
During the three months ended December 31, 2020, we recognized a net gain on trading securities of $18,944, which included $11,462 of realized net gain and $7,482 of unrealized net gain compared to a net gain of $6,448 on trading securities for the three months ended December 31, 2019, which included $11,452 of realized net gain and $5,004 of unrealized net loss. The main contributing factors to the increase in net gain on trading securities during the three months ended December 31, 2020, included favorable market conditions, a significant increase upon revaluation of certain Level 3 securities we hold, increased use and success of intraday algorithmic trading and increased market-making activities on the SPBX outside of regular U.S. market hours.
Interest income. During the three months ended December 31, 2020, and 2019, we recorded interest income from several sources including interest income on trading securities, interest income on cash and cash equivalents held in financial institutions, interest income on reverse repurchase transactions and amounts due from banks. Interest income on trading securities consists of interest earned from investments in debt securities and dividends earned on equity securities held in our proprietary trading accounts. During the three months ended December 31, 2020, we realized interest income of $7,374 compared to $3,063 for the three months ended December 31, 2019. The increase in interest income of $4,311 was the result of an increase in interest income on trading securities in the amount of $3,898, interest income from loans to customers in the amount of $5, interest income due from banks in the amount of $210, and interest income from reverse repurchase agreements in the amount of $198.
During the three months ended December 31, 2020, we realized higher interest income from trading securities because we increased our investments in interest bearing securities as compared to the three months ended December 31, 2019. Interest income from reverse repurchase agreements was higher during the three months ended December 31, 2020, because we increased the volume of reverse repurchase transactions as compared to the three months ended December 31, 2019.
Net loss on foreign exchange operations. Under U.S. GAAP we are required to revalue assets and liabilities denominated in foreign currencies into our reporting currency, the U.S. dollar, which can result in gains or losses on foreign exchange operations. During the three months ended December 31, 2020, we realized a net loss on foreign exchange operations of $1,413 compared to a net loss of $1,080 during the three months ended December 31, 2019.
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During the three months ended December 31, 2020, the value of the Russian ruble and Kazakhstani tenge appreciated by approximately 6% and 3% against the U.S. dollar, respectively. In connection with the increase in U.S. dollar-denominated assets in our subsidiary Freedom RU, we realized a net loss on foreign exchange operations of $993. As a result of depreciation of the Kazakhstani tenge against the Russian ruble by approximately 4%, Freedom RU also realized a $794 net loss in trading securities, securities reverse repurchases agreement obligations, and direct repurchase agreement obligations denominated in Kazakhstani tenge. Our subsidiary Freedom KZ realized a negative revaluation of U.S. dollar-denominated trading securities and securities reverse repurchase agreements of $370 during the three months ended December 31, 2020. These losses were partially offset by the gains on debt securities issued indexed to the U.S. dollar and U.S. dollar-denominated securities repurchase agreement obligations of $410. Our subsidiary FFIN Bank, recognized a gain on foreign exchange operations in the amount of $172 due to a large amounts of bank customer deposits denominated in U.S. dollar. Due to higher volume of cash and non-cash operations, we recognized a $162 gain on foreign exchange operations.
Net gain on derivatives. During the three months ended December 31, 2020, we recognized a net gain on derivatives of $995, compared to $556 during the three months ended December 31, 2019. During the three months ended December 31, 2020, Freedom KZ exercised call options received in connection with successfully completing underwriting services for a third party, and upon the exercise date, Freedom KZ recognized a $946 gain on derivatives in Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income. This was the primary contributing factor to the increase in net gain on derivatives during the three months ended December 31, 2020.
Expense
During the three months ended December 31, 2020, and 2019, we incurred total expenses of $50,201 and $25,570, respectively. Expenses during the three months ended December 31, 2020, increased primarily as a result of the continued growth of our business.
|
| Three Months Ended December 31, 2020 |
|
| Three Months Ended December 31, 2019 |
|
| Change |
| |||||||||||||||
|
| Amount |
|
| %* |
|
| Amount |
|
| %* |
|
| Amount |
|
| % |
| ||||||
Interest expense |
| $ | 6,649 |
|
|
| 13 | % |
| $ | 2,713 |
|
|
| 11 | % |
| $ | 3,936 |
|
|
| 145 | % |
Fee and commission expense |
|
| 20,278 |
|
|
| 40 | % |
|
| 5,525 |
|
|
| 22 | % |
|
| 14,753 |
|
|
| 267 | % |
Operating expense |
|
| 21,921 |
|
|
| 44 | % |
|
| 17,062 |
|
|
| 66 | % |
|
| 4,859 |
|
|
| 28 | % |
Provision for impairment losses |
|
| 1,109 |
|
|
| 2 | % |
|
| 152 |
|
|
| 1 | % |
|
| 957 |
|
|
| 630 | % |
Other expense, net |
|
| 244 |
|
|
| 1 | % |
|
| 118 |
|
|
| 0 | % |
|
| 126 |
|
|
| 107 | % |
Total expense, net |
| $ | 50,201 |
|
|
| 100 | % |
| $ | 25,570 |
|
|
| 100 | % |
| $ | 24,631 |
|
|
| 96 | % |
_____________
* Reflects percentage of total expense, net.
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| Table of Contents |
Interest expense. During the three months ended December 31, 2020, we recognized total interest expense of $6,649, compared to $2,713 during the three months ended December 31, 2019. The increase in interest expense of $3,936 was primarily attributable to interest expense related to short-term financing attracted by means of securities repurchase agreements totaling $1,978, an increase in interest expense for customer deposits received totaling $1,301 as a result of the growth in customer deposits from both existing and new customers, interest expense of $584 related to the FRHC notes issued during the period from December 2019 through February 2020, and interest expense related to loans received in the amount of $73.
Fee and commission expense. During the three months ended December 31, 2020, we recognized fee and commission expense of $20,278, compared to fee and commission expense of $5,525 during the three months ended December 31, 2019. The increase of $14,753 was associated with higher brokerage fees to our prime brokers of $13,591, commission fees paid for bank services of $992 and commission fees paid to the Central Depository and stock exchanges of $170. The increase in fee and commission expense was the result of both increased transaction volume from our existing clients and growth in our customer base. Generally, we expect fee and commission expense to increase and decrease in correspondence with increases and decreases in fee and commission income.
Operating expenses. During the three months ended December 31, 2020, operating expenses totaled $21,921, compared to $17,062 during the three months ended December 31, 2019. The increase of $4,859 is primarily attributable to a higher general and administrative expenses related to the expansion of our operations, including, a $4,340 increase in payroll and bonuses, a $808 increase in professional services, a $395 increase in software support, a $272 increase in communication services, a $206 increase in depreciation and amortization, and a $90 increase of other expenses. During the three months ended December 31, 2020, we realized decreases in stock compensation by $511, lease cost by $426 and business trip expenses by $315.
Provision/(recovery) for impairment losses. During the three months ended December 31, 2020, receivables in the amount of approximately $473 were repaid, including $311, which management had previously estimated may be uncollectible and for which management had recognized an impairment loss in a prior period. This recovery was partially offset by an additional provision for impairment losses in the amount of approximately $1,337.
Income tax benefit/(expense)
We recognized net income before income tax of $50,032 and $4,000 during the three months ended December 31, 2020 and 2019, respectively. During the three months ended December 31, 2020, we realized an income tax expense of $7,711 compared to an income tax benefit of $50 during the three months ended December 31, 2019. This increase in income tax expense is attributable to increased revenues realized from our operating activities and the tax treatment of those revenues in the various foreign jurisdictions where our subsidiaries operate along with the incremental U.S. tax on GILTI.
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Comprehensive income
The functional currencies of our operating subsidiaries are the Russian ruble, Kazakhstani tenge, European euro, U.S. dollar, Ukrainian hryvnia and Uzbekistani sum. Our reporting currency is the U.S. dollar. Pursuant to U.S. GAAP we are required to revalue our assets from our functional currencies to our reporting currency for financial reporting purposes. As a result of strengthening of the Russian ruble and Kazakhstani tenge by approximately 3% and 6% against the U.S. dollar we realized a foreign currency translation gain of $6,851 during the three months ended December 31, 2020. In comparison, as a result of appreciation of the Kazakhstani tenge and Russian ruble by approximately 3% and 4% against the U.S. dollar during the three months ended December 31, 2019, we realized a foreign currency translation gain of $2,841. As a result of the gain on foreign currency translation we realized comprehensive income of $49,172 during the three months ended December 31, 2020, compared to comprehensive income of $6,890 during the three months ended December 31, 2019.
Results of Operations
Nine months ended December 31, 2020, compared to the nine months ended December 31, 2019
The following period-to-period comparison of our financial results is not necessarily indicative of future results.
|
| Nine months Ended |
|
| Nine months Ended |
| ||||||||||
|
| Amount |
|
| %* |
|
| Amount |
|
| %* |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fee and commission income |
| $ | 171,949 |
|
|
| 76 | % |
| $ | 69,538 |
|
|
| 75 | % |
Net gain on trading securities |
|
| 36,330 |
|
|
| 16 | % |
|
| 12,957 |
|
|
| 14 | % |
Interest income |
|
| 16,571 |
|
|
| 7 | % |
|
| 8,999 |
|
|
| 10 | % |
Net gain/(loss) on foreign exchange operations |
|
| 1,359 |
|
|
| 1 | % |
|
| (241 | ) |
|
| 0 | % |
Net gain on derivatives |
|
| 149 |
|
|
| 0 | % |
|
| 556 |
|
|
| 1 | % |
Total revenue, net |
|
| 226,358 |
|
|
| 100 | % |
|
| 91,809 |
|
|
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 15,092 |
|
|
| 7 | % |
|
| 8,614 |
|
|
| 9 | % |
Fee and commission expense |
|
| 50,068 |
|
|
| 22 | % |
|
| 14,068 |
|
|
| 15 | % |
Operating expense |
|
| 52,214 |
|
|
| 23 | % |
|
| 44,576 |
|
|
| 49 | % |
Provision/(recovery) for impairment losses |
|
| 1,775 |
|
|
| 1 | % |
|
| (1,316 | ) |
| (1 | %) | |
Other expense, net |
|
| 149 |
|
|
| 0 | % |
|
| 675 |
|
|
| 1 | % |
Total expense |
|
| 119,298 |
|
|
| 53 | % |
|
| 66,617 |
|
|
| 73 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes |
|
| 107,060 |
|
|
| 47 | % |
|
| 25,192 |
|
|
| 27 | % |
Income tax expense |
|
| (16,900 | ) |
| (7 | %) |
|
| (4,292 | ) |
| (5 | %) | ||
Net income |
| $ | 90,160 |
|
|
| 40 | % |
| $ | 20,900 |
|
|
| 22 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income/(loss) attributable to noncontrolling interest in subsidiary |
|
| 243 |
|
|
| 0 | % |
|
| (1,120 | ) |
| (1 | %) | |
Net income attributable to common stockholders |
| $ | 89,917 |
|
|
| 40 | % |
| $ | 22,020 |
|
|
| 23 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities, net of tax effect |
| $ | - |
|
|
| 0 | % |
| $ | 26 |
|
|
| 0 | % |
Reclassification adjustment relating to available-for-sale securities disposed of in the period, net of tax effect |
|
| 71 |
|
|
| 0 | % |
|
| - |
|
|
| - |
|
Foreign currency translation adjustments, net of tax |
|
| 4,565 |
|
|
| 2 | % |
|
| 1,408 |
|
|
| 2 | % |
Comprehensive income before noncontrolling interests |
| $ | 94,796 |
|
|
| 42 | % |
| $ | 22,334 |
|
|
| 25 | % |
Less: comprehensive income/(loss) attributable to noncontrolling interest in subsidiary |
|
| 243 |
|
|
| 0 | % |
|
| (1,120 | ) |
| (1 | %) | |
Comprehensive income attributable to common stockholders |
| $ | 94,553 |
|
|
| 42 | % |
| $ | 23,454 |
|
|
| 26 | % |
_____________
* Reflects percentage of total revenues, net.
| 47 |
| Table of Contents |
Revenue
We derive revenue primarily from gains realized from fee and commission income earned from our retail brokerage clients, underwriting and market making activities, our proprietary trading activities, and interest income.
During the nine months ended December 31, 2020 and 2019, we realized total net revenue of $226,358 and $91,809, respectively. Revenue during the nine months ended December 31, 2020, was significantly higher than the nine months ended December 31, 2019, primarily due to increased fee and commission income, higher net gain on trading securities, interest income, and increased net gain on derivatives, which were partially offset by a decrease in net loss on foreign exchange operations.
|
| Nine Months Ended December 31, 2020 |
|
| Nine Months Ended December 31, 2019 |
|
| Change |
| |||||||||||||||
|
| Amount |
|
| %* |
|
| Amount |
|
| %* |
|
| Amount |
|
| % |
| ||||||
Fee and commission income |
| $ | 171,949 |
|
|
| 76 | % |
| $ | 69,538 |
|
|
| 75 | % |
| $ | 102,411 |
|
|
| 147 | % |
Net gain on trading securities |
|
| 36,330 |
|
|
| 16 | % |
|
| 12,957 |
|
|
| 14 | % |
|
| 23,373 |
|
|
| 180 | % |
Interest income |
|
| 16,571 |
|
|
| 7 | % |
|
| 8,999 |
|
|
| 10 | % |
|
| 7,572 |
|
|
| 84 | % |
Net gain/(loss) on foreign exchange operations |
|
| 1,359 |
|
|
| 1 | % |
|
| (241 | ) |
|
| 0 | % |
|
| 1,600 |
|
|
| (664 | %) |
Net gain on derivatives |
|
| 149 |
|
|
| 0 | % |
|
| 556 |
|
|
| 1 | % |
|
| (407 | ) |
|
| (73 | %) |
Total revenue, net |
| $ | 226,358 |
|
|
| 100 | % |
| $ | 91,809 |
|
|
| 100 | % |
| $ | 134,549 |
|
|
| 147 | % |
_____________
* Reflects percentage of total revenues, net.
Fee and commission income. Fee and commission income consisted principally of broker fees from customer trading and related banking services, underwriting and market making services. During the nine months ended December 31, 2020 and 2019, fees and commissions generated from brokerage, underwriting and market making and related banking services were $171,949 and $69,538 respectively, an increase of $102,411.
During the nine months ended December 31, 2020, fees and commissions from brokerage services increased $91,708 as compared to the nine months ended December 31, 2019. As discussed above, we believe this growth was primarily attributable to significantly increased trading volume and customer activity resulting from the significant market growth during 2020 as well as our ongoing efforts to expand our brokerage customer base both organically and through acquisitions. Fees and commissions from related banking services increased during the nine months ended December 31, 2020, by $2,665 compared to the nine months ended December 31, 2019. Fees for bank services consist primarily of wire transfer fees, commissions for payment processing and commissions for currency exchange operations. Fees and commissions realized from underwriting services increased by $4,992 during the nine months ended December 31, 2020, due to our engaging in more underwritings and activities compared to the nine months ended December 31, 2019. Fees and commissions from consulting services increased by $3,046 during the nine months ended December 31, 2020, compared to the nine months ended December 31, 2019. As noted above, because of the uncertainty relating to the COVID-19 pandemic, world economic conditions and the current U.S. political environment, we cannot at this time predict with any certainty whether market conditions similar to those experienced during the nine-months ended December 31, 2020, will continue in future periods.
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| Table of Contents |
Net gain on trading securities. During the nine months ended December 31, 2020, we recognized a net gain on trading securities of $36,330, which included $28,635 of realized net gain and $7,695 of unrealized net gain compared to a net gain of $12,957 on trading securities for the nine months ended December 31, 2019, which included $18,208 of realized net gain and $5,251 of unrealized net loss. The main contributing factors to the increase in net gain on trading securities during the nine months ended December 31, 2020, included favorable market conditions, a significant increase upon revaluation of certain Level 3 securities we hold, increased use and success of intraday algorithmic trading and increased market-making activities on the SPBX outside of regular U.S. market hours. During the nine months ended December 31, 2020, we continued our efforts to reallocate a portion of our proprietary trading portfolio from equity securities to fixed income instruments.
Interest income. During the nine months ended December 31, 2020, and 2019, we recorded interest income from several sources, including interest income on trading securities, interest income on cash and cash equivalents held in financial institutions, interest income on reverse repurchase transactions and amounts due from banks. Interest income on trading securities consists of interest earned from investments in debt securities and dividends earned on equity securities held in our proprietary trading accounts. During the nine months ended December 31, 2020, we realized interest income of $16,571 compared to $8,999 for the nine months ended December 31, 2019. The increase in interest income of $7,572 was the result of several factors including, an increase in interest income on trading securities in the amount of $7,111, interest income due from banks in the amount of $289, and interest from reverse repurchase agreements in the amount of $201 which was partially offset by decreased interest income from loans to customers in the amount of $29.
During the nine months ended December 31, 2020, we realized higher interest income from trading securities because we increased our investments in interest bearing securities as compared to the nine months ended December 31, 2019. Interest income from reverse repurchase transactions was higher during the nine months ended December 31, 2020, because we increased the volume of reverse repurchase transactions as compared to the nine months ended December 31, 2019.
Net gain on foreign exchange operations. Under U.S. GAAP we are required to revalue assets and liabilities denominated in foreign currencies into our reporting currency, the U.S. dollar. As a result of this revaluation, we may realize a gain or loss on foreign exchange operations. During the nine months ended December 31, 2020, we realized a net gain on foreign exchange operations of $1,359 compared to a net loss of $241 during the nine months ended December 31, 2019.
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During the nine months ended December 31, 2020, the value of the Russian ruble and Kazakhstani tenge appreciated nearly 5% and 6%, respectively against the U.S. dollar. During the nine months ended December 31, 2020, the Company sold debt securities that were not owned by the Company and recognized a loss on the revaluation of financial liabilities in the amount of $224. Our subsidiary Freedom KZ realized a negative revaluation of U.S. dollar-denominated trading securities and securities reverse repurchase agreements of $942 during the nine months ended December 31, 2020. These losses were partially offset by the gains on revaluation of debt securities issued indexed to the U.S. dollar and U.S. dollar-denominated securities repurchase agreement obligations of $1,162. The value of the U.S. dollar declined significantly against the Russian ruble during our first quarter ended June 30, 2020, then it recovered along with the increase of the U.S. dollar denominated net assets in our subsidiary Freedom RU, as a result, we realized a net gain on foreign exchange operations of $449. Due to a higher volume of banking cash and non-cash operations, we recognized a $914 gain on foreign exchange operations.
Expense
During the nine months ended December 31, 2020 and 2019, we incurred total expenses of $119,298 and $66,617, respectively. Expenses during the nine months ended December 31, 2020, increased primarily as a result of our continued efforts to grow our business and were partially offset by lower other expense.
|
| Nine Months Ended December 31, 2020 |
|
| Nine Months Ended December 31, 2019 |
|
| Change |
| |||||||||||||||
|
| Amount |
|
| %* |
|
| Amount |
|
| %* |
|
| Amount |
|
| % |
| ||||||
Interest expense |
| $ | 15,092 |
|
|
| 13 | % |
| $ | 8,614 |
|
|
| 13 | % |
| $ | 6,478 |
|
|
| 75 | % |
Fee and commission expense |
|
| 50,068 |
|
|
| 42 | % |
|
| 14,068 |
|
|
| 21 | % |
|
| 36,000 |
|
|
| 256 | % |
Operating expense |
|
| 52,214 |
|
|
| 44 | % |
|
| 44,576 |
|
|
| 67 | % |
|
| 7,638 |
|
|
| 17 | % |
Provision/(recovery) for impairment losses |
|
| 1,775 |
|
|
| 1 | % |
|
| (1,316 | ) |
|
| (2 | %) |
|
| 3,091 |
|
|
| (235 | %) |
Other expense, net |
|
| 149 |
|
|
| 0 | % |
|
| 675 |
|
|
| 1 | % |
|
| (526 | ) |
|
| (78 | %) |
Total expense, net |
| $ | 119,298 |
|
|
| 100 | % |
| $ | 66,617 |
|
|
| 100 | % |
| $ | 52,681 |
|
|
| 79 | % |
_____________
* Reflects percentage of total expense, net.
Interest expense. During the nine months ended December 31, 2020, we recognized total interest expense of $15,092, compared to $8,614 during the nine months ended December 31, 2019. The increase in interest expense of $6,478 was primarily attributable to interest expense for customer accounts totaling $2,552 as a result of increased customer deposits from both existing and new customers, interest expense of $2,065 related to FRHC notes issued during the period from December 2019 through February 2020, interest expense for direct repurchase agreements totaling $1,781 and interest expense for loans received totaling $80.
Fee and commission expense. During the nine months ended December 31, 2020, we recognized fee and commission expense of $50,068 compared to fee and commission expense of $14,068 during the nine months ended December 31, 2019. The increase of $36,000 was associated with higher brokerage fees to our prime brokers of $34,786, commission fees paid for bank services of $897 and commission fees paid to the Central Depository and stock exchanges of $317. The increases in fee and commission expense were the result of both growth in our client base and increased transaction volume from our existing clients. Generally, we expect fee and commission expense to increase and decrease in correspondence with increases and decreases in fee and commission income.
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Operating expense. During the nine months ended December 31, 2020, operating expenses totaled $52,214 compared to $44,576 during the nine months ended December 31, 2019. The increase of $7,638 is primarily attributable to a higher general and administrative expenses related to the expansion of our operations, including a $8,199 increase in payroll and bonuses, a $589 increase in depreciation and amortization, a $586 increase in software support, a $428 increase in communication services and a $92 increase in other expenses. During the nine months ended December 31, 2020, we realized decreases in stock-based compensation by $1,011, business trip expenses by $644, and advertising expenses by $601.
Provision/(recovery)for impairment losses. During the nine months ended December 31, 2020, receivables in the amount of approximately $1,525 were repaid, including $801 which management had previously estimated may be uncollectible and for which management had recognized an impairment loss in a prior period. This recovery was partially offset by an additional provision for impairment losses in the amount of approximately $2,637.
Income tax expense
We recognized net income before income tax of $107,060 during the nine months ended December 31, 2020, and net income before income tax of $25,192 during the nine months ended December 31, 2019, respectively. During the nine months ended December 31, 2020, we realized income tax expense of $16,900 compared to $4,292 during the nine months ended December 31, 2019. This increase in income tax expense is attributable to the increase in revenues we realized from our operating activities and the tax treatment of those revenues in the various foreign jurisdictions where our subsidiaries operate along with the incremental U.S. tax on GILTI.
Comprehensive income
As a result of the strengthening of the Russian ruble by approximately 5% and Kazakhstani tenge by nearly 6% against the U.S. dollar we realized a foreign currency translation gain of $4,565 during the nine months ended December 31, 2020, compared to $1,408 during the nine months ended December 31, 2019. This led to comprehensive income of $94,796 during the nine months ended December 31, 2020, compared to comprehensive income of $22,334 during the nine months ended December 31, 2019.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes including ongoing commitments to repay debts and payables, make interest payments on outstanding borrowings, fulfill securities repurchase obligations and fund operations. Our operations are funded through a combination of existing cash on hand, cash generated from operations, returns on our own capital, collateralized securities financing arrangements, margin loans, proceeds from sale of notes, proceeds from the sale of bonds of our subsidiaries, our credit facilities and other borrowings. Regulatory requirements applicable to our subsidiaries require them to maintain minimum capital levels.
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As of December 31, 2020, we had cash and cash equivalents of $624,572 and restricted cash of $368,344 compared to cash and cash equivalents of $63,208 and restricted cash of $66,597, as of March 31, 2020. At December 31, 2020, we had total assets of $1,473,654 and total liabilities of $1,248,096, including customer liabilities of $967,256. By comparison, at March 31, 2020, we had total assets of $453,523 and total liabilities of $324,486, including customer liabilities of $168,432. The increases in restricted cash, cash and cash equivalents and customer liabilities at December 31, 2020, are the result of increased customer deposits resulting from organic and inorganic customer acquisition through business acquisitions, and growth in customer account size as customers have increased their deposits and become more active in the markets to take advantage of the recent favorable market conditions. As discussed elsewhere in this report, because of the uncertainties relating to the COVID-19 pandemic, the current U.S. political environment and their potential impacts on the markets and the global economy, we cannot reasonably estimate whether or for how long such market conditions and the related growth will continue.
As of December 31, 2020, the value of the trading securities held in our proprietary trading accounts totaled $345,313 compared to $156,544 at March 31, 2020. This growth is primarily attributable to the purchase of additional debt securities in our proprietary trading portfolio and favorable market conditions. As of December 31, 2020, around 83% of our trading portfolio consisted of debt securities, compared to approximately 56% as of March 31, 2020. The funds necessary to acquire the additional securities in our proprietary trading portfolio were raised primarily through collateralized securities financing arrangements.
As of December 31, 2020, $144,696, or 42%, of the trading securities held in our proprietary trading accounts were subject to securities repurchase obligations compared to $54,222, or 35%, as of March 31, 2020. Typically, the term of these securities repurchase obligations is not more than 30 days. Of the $624,572 in cash and cash equivalents at December 31, 2020, $213,211, or approximately 35%, were subject to reverse repurchase agreements. By comparison, at March 31, 2020, cash and cash equivalents totaled $63,208, of which $9,645, or 15%, were subject to reverse repurchase agreements. Reverse repurchase agreements are fully collateralized and generally have terms ranging from 1 to 90 days, but typically up to 30 days.
As of December 31, 2020, the Company’s outstanding debt securities had fixed annual coupon rates ranging from 6.5% to 12% and maturity dates ranging from May 2021 to January 2023. The Company’s debt securities include bonds of Freedom KZ and Freedom RU issued under Kazakhstani and Russian Federation law, which trade on the KASE and the MOEX, respectively. The Company’s debt securities also include $20,496 in the aggregate number of notes of FRHC issued from December 2019 to February 2020. The FRHC notes, denominated in U.S. dollars, have minimum denominations of $100 bear interest at an annual rate of 7.000% and are due in 2022. The FRHC notes were issued under Astana International Financial Centre law and trade on the AIX.
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Currency fluctuations during the nine months ended December 31, 2020, led to a 5% increase in the value of the Russian ruble against the U.S. dollar and a 6% increase in the Kazakhstani tenge against the U.S. dollar. As a result, in accordance with U.S. GAAP, balance sheet items denominated in Russian rubles and Kazakhstani tenge had to be revalued. This caused us to realize a $1,359 gain on foreign exchange operations and a foreign currency translation gain of $4,565 during the nine months ended December 31, 2020.
As described in more detail elsewhere in this Management’s Discussion and Analysis and in Note 19 to our condensed consolidated financial statements, during the quarter ended December 31, 2020, we completed the acquisition of Freedom Bank KZ, including the outstanding preferred shares and subordinated debt, for $53,097 and Prime Executions for $2,500.
We monitor and manage our leverage and liquidity risk through various committees and processes we have established. We assess our leverage and liquidity risk based on considerations and assumptions of market factors, as well as other factors, including the amount of available liquid capital. While we are confident in the risk monitoring and management processes we have in place, a significant portion of our trading securities and cash and cash equivalents are subject to collateralization agreements. This significantly enhances our risk of loss in the event financial markets move against our positions. When this occurs our liquidity, capitalization and business can be negatively impacted. Because of the amount of leverage we employ in our proprietary trading activities, coupled with our strategy to at times take large positions in select countries, companies or industries, our liquidity, capitalization, projected return on investment and results of operations can be significantly affected when we misjudge the impact of events, timing and liquidity of the market for those securities.
We have pursued an aggressive growth strategy, both organically and through acquisition, during the past several years, and we anticipate continuing efforts to expand our footprint through future acquisitions. While this strategy has led to customer and revenue growth it also results in increased expenses and greater need for capital resources. Further growth and expansion may require greater capital resources than we currently possess, which could require us to pursue additional equity or debt financing from outside sources. We cannot assure that such financing will be available to us on acceptable terms, or at all, at the time it is needed.
Based on our current commitments, business plans, assets and anticipated results of operations, we believe that our current cash and cash equivalents, cash expected to be generated from operating activities, and forecasted returns from our proprietary trading will be sufficient to meet our working capital needs for the next 12 months. Our assessment, however, could be impacted by various uncertainties and risks, including the ongoing effects of the COVID-19 pandemic and the potential impacts the current U.S. political environment, could have on the global economy, the financial markets and on our business. We monitor our financial performance to ensure adequate liquidity to fund operations and execute our business plan.
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| Table of Contents |
Cash Flows
The following table presents our cash flows for the nine months ended December 31, 2020 and 2019:
|
| For the nine months ended December 31, 2020 |
|
| For the nine months ended December 31, 2019 |
| ||
|
|
|
|
|
|
| ||
Net cash flows from operating activities |
| $ | 698,954 |
|
| $ | 68,645 |
|
Net cash flows from/(used in) investing activities |
|
| 98,418 |
|
|
| (10,595 | ) |
Net cash flows from/(used in) financing activities |
|
| 61,952 |
|
|
| (8,372 | ) |
Effect of changes in foreign exchange rates on cash and cash equivalents |
|
| 3,787 |
|
|
| 5,281 |
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH |
| $ | 863,111 |
|
| $ | 54,959 |
|
Net cash from operating activities during the nine months December 31, 2020, was $698,954. By comparison, during the nine months ended December 31, 2019, net cash from operating activities was $68,645. Net cash from operating activities during the nine months ended December 31, 2020, was driven by net income adjusted for non-cash movements (depreciation and amortization, non-cash lease expense, non-cash stock compensation expense, unrealized gain on trading securities, allowance for receivables) and net cash from operating activities primarily from changes in operating assets and liabilities, including a $114,807 increase in trading securities primarily from increased purchases of securities held in our proprietary account, a $646,950 increase in customer liabilities resulting from deposits from new and existing customers and a $10,934 increase in trade payables for margin, which principally resulted from margin lending payables.
During the nine months ended December 31, 2020, net cash from investing activities was $98,418 compared to cash used in investing activities $10,595 during the nine months ended December 31, 2019. Cash from investing activities during the nine months ended December 31, 2020, included $157,533 received in the acquisition of Zerich, Freedom Bank KZ and Prime Executions and $6,437 from proceeds on the sale of investments available-for-sale, which was partially offset by consideration paid for the Freedom Bank KZ acquisition of $53,097, the Zerich acquisition of $7,110, the Prime Executions acquisition of $2,500 and the purchase of fixed assets, net of sales of $2,845. Cash used in investing activities during the nine months ended December 31, 2019, was used for the purchase of fixed assets, net of sales in the amount of $3,140 and to purchase available-for-sale securities in the amount of $7,455.
During the nine months December 31, 2020, net cash from financing activities was $61,952, compared to net cash used in financing activities of $8,372 during the nine months ended December 31, 2019. Net cash from financing activities during the nine months ended December 31, 2020, consisted principally of the proceeds from securities repurchase agreement obligations in the amount of $63,166, which was partially offset with net cash used in repurchase of outstanding Freedom KZ debt securities in amount of $4,632. Net cash used in financing activities during the nine months ended December 31, 2019, consisted principally of securities repurchase agreement obligations in the amount of $15,285 and repayment of loans received in the amount of $4,008. This was offset by proceeds from the issuance debt securities of FRHC and Freedom KZ and the repurchase of Freedom KZ debt securities, resulting in net proceeds of $10,466 and from proceeds from stock option exercises in the amount of $455.
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Contractual Obligations and Contingencies
For a discussion of our significant contractual obligations and contingencies, please see Note 18 and Note 20 to our condensed consolidated financial statements.
Off-Balance Sheet Financing Arrangements
For a discussion of off-balance sheet financing arrangements of the Company as of December 31, 2020, please see Note 20 to our condensed consolidated financial statements.
Critical Accounting Policies and Estimates
For a discussion of critical accounting policies and estimates, please see Note 2 to our condensed consolidated financial statements.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Because we are a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of end of the period covered by this quarterly report, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the 2013 framework of the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) our principal executive officer and principal financial officer concluded that as of December 31, 2020, our disclosure controls and procedures were effective. Disclosure controls and procedures enable us to record, process, summarize and report information required to be included in our Exchange Act filings within the required time period. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the periodic reports filed with the SEC is accumulated and communicated to our management, including our principal executive, financial and accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2020, no changes occurred that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The securities brokerage and banking industry is highly regulated and many aspects of our business involve substantial risk of liability. In recent years, there has been an increasing incidence of litigation involving the financial services industry, including class action suits that generally seek substantial damages, including in some cases punitive damages. Compliance and trading problems that are reported to federal, state and provincial regulators, exchanges or other self-regulatory organizations by dissatisfied customers are investigated by such regulatory bodies, and, if pursued by such regulatory body or such customers, may rise to the level of arbitration or disciplinary action. We are also subject to periodic regulatory audits and inspections.
From time to time, our subsidiaries are party to various routine legal proceedings, claims, and regulatory inquiries arising out of the ordinary course of their business. Management believes that the results of these routine legal proceedings, claims, and regulatory matters will not have a material adverse effect on our financial condition, or on our operations and cash flows. However, we cannot estimate the legal fees and expenses to be incurred in connection with these routine matters and, therefore, are unable to determine whether future legal fees and expenses will have a material impact on our operations and cash flows. It is our policy to expense legal and other fees as incurred.
Item 1A. Risk Factors
We believe there are no additions to the risk factors disclosed in our annual report on Form 10-K for the year ended March 31, 2020, filed with the SEC on July 14, 2020 and our quarterly report on Form 10-Q for the period ended September 30, 2020, filed with the SEC on November 9, 2020.
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Item 6. Exhibits
Exhibits. The following exhibits are filed or furnished, as applicable, as part of this report:
Exhibit No. |
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| Terms and Conditions of FRHC 7.000% Interest Notes due December 2022(2) | |
| Exchange Bond Terms and Conditions in the Framework of the Exchange Bond Program(3) | |
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| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
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101 |
| The following Freedom Holding Corp. financial information for the periods ended December 31, 2020, formatted in inline XBRL (eXtensive Business Reporting Language): (i) the Cover Page; (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Operations, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements.* |
104 |
| Cover page formatted in inline XBRL (included in Exhibit 101).* |
* Filed herewith.
(1) Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on August 3, 2020.
(2) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with the SEC on February 10, 2020.
(3) Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on July 14, 2020.
(4) Incorporated by reference to Registrant’s Current Report on Form 8-K/A-1 filed with the SEC on September 23, 2020.
(5) Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on December 29, 2020.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| FREEDOM HOLDING CORP. |
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Date: February 9, 2021 | /s/ Timur Turlov |
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| Timur Turlov Chief Executive Officer |
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Date: February 9, 2021 | /s/ Evgeniy Ler |
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| Evgeniy Ler Chief Financial Officer |
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