PART I
OVERVIEW
Freedom
Holding Corp. (referred to herein as the “Company”,
“FRHC”, “we” “our” and
“us”) is a corporation organized in the United States
under the laws of the State of Nevada. We own several operating
subsidiaries that engage in a broad range of activities in the
securities industry, including retail securities brokerage,
investment research, investment counseling, securities trading,
market making, investment banking and underwriting services in
Eastern Europe and Central Asia. Our headquarters is in Almaty,
Kazakhstan, with supporting administrative office locations in
Russia, Cyprus and the United States.
We own
directly, or through subsidiaries, the following companies: LLC
Investment Company Freedom Finance (“Freedom RU”) and
JSC Investment Company Zerich Capital (“Zerich
Capital”), Moscow, Russia-based securities broker-dealer
firms; LLC FFIN Bank (“FFIN Bank”), a Moscow,
Russia-based bank; JSC Freedom Finance (“Freedom KZ”),
an Almaty, Kazakhstan-based securities broker-dealer; Freedom
Finance Global PLC (“Freedom Global”), an Astana
International Financial Centre-based securities broker-dealer,
Freedom Finance Europe Limited (“Freedom CY”), a
Limassol, Cyprus-based broker-dealer (formerly known as Freedom
Finance Cyprus Limited); LLC Freedom Finance Uzbekistan
(“Freedom UZ”), a Tashkent, Uzbekistan-based
broker-dealer; Freedom Finance Germany TT GmbH (“Freedom
GE”), a Berlin, Germany-based tied agent of Freedom CY; and
FFIN Securities, Inc. (“FFIN Securities”), a Nevada
corporation. We own a minority interest in LLC Freedom Finance Ukraine (“Freedom
UA”), a Kiev, Ukraine-based broker-dealer. The majority
interest of Freedom UA is held by Askar Tashtitov, the
Company’s president. However, as a result of a series of
contractual relationships between the Company and Freedom UA, we
account for Freedom UA as a variable interest entity
(“VIE”) under the accounting standards of the Financial
Accounting Standards Board (“FASB”). Accordingly, the
financial statements of Freedom UA are consolidated into the
financial statements of the Company provided with this annual
report.
Through
our operating companies we are professional participants on the
Kazakhstan Stock Exchange (KASE), Astana International Exchange
(AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPBX),
the Ukrainian Exchange (UX), and the Republican Stock Exchange of
Tashkent (UZSE). In addition to our status as professional
participants, we also own minority equity interests in both the UX
and the SPBX. Our Cyprus brokerage office serves to provide our
clients with operations support and access to the investment
opportunities, relative stability, and integrity of the U.S. and
European securities markets, which under the regulatory regimes of
many jurisdictions where we operate provide only limited or no
direct investor access to international securities
markets.
We
operate under various securities licenses in the jurisdictions
where we conduct business, plus we have a banking license in Russia
that allows us to expand the types of financial services we provide
to our Russian clientele. We are not registered with the SEC as a
broker-dealer under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) nor as an investment adviser under
the Investment Advisers Act of 1940, as amended (the
“Advisers Act”). We are a member of the Russian
National Association of Securities Market Participants
(“NAUFOR”), a statutory self-regulatory organization
with wide responsibility in regulation, supervision and enforcement
of its broker-dealer, investment banking, commercial banking and
other member firms in Russia. In Kazakhstan, Freedom KZ is a member
of the Association of Financiers of Kazakhstan in Kazakhstan.
Freedom UA is a member of the Professional Association of Capital
Market participants and Derivatives (PARD) in Ukraine. FFIN Bank is
a member of the National Financial Association in
Russia.
Our
Cyprus operations are conducted in Limassol, Cyprus where we are
licensed to receive, transmit and execute customer orders,
establish custodial accounts, engage in foreign currency exchange
services and margin lending, and trade our own investment
portfolio. Through our Cyprus office we provide transaction
handling and intermediary services to our offices requiring access
to securities markets in the U.S. and Europe.
Our
common stock is listed for trading on the following exchanges:
Nasdaq Capital Market, KASE and SPBX.
RETAIL BROKERAGE SERVICES
We
provide a comprehensive array of financial services to our target
retail audience which is upper middle-class individuals and
businesses seeking to diversify their investment portfolios to
manage economic risk associated with political, regulatory,
currency, banking, and national uncertainties. Our clients also
include other broker-dealers. 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, mobile app and search engine
optimization activities.
We
serviced more than 140,000 client accounts of which more than 50%
carried positive cash or asset account balances at our fiscal year
ended March 31, 2020. During the same period customer accounts
increased by approximately 25,000 as we continued to have our
customer base grow organically. Internally, we designate
“active accounts” as those in which one transaction
occurs per quarter. During fiscal 2020 we had approximately 41,500
active accounts.
We have
accelerated our growth through nonorganic growth strategies,
including 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 79 retail brokerage and
financial services offices located across Kazakhstan (16),
Kyrgyzstan (1), Russia (39), Uzbekistan (8), Ukraine (13), Cyprus
(1) and Germany (1) that provide our full array of financial
services, investment consulting and education. In Russia 15
brokerage and financial services offices also provide banking
services to firm customers.
Our
Tradernet platform provides clients a browser-based desktop
application and, in some countries, a supporting mobile app to
facilitate trading activity. Tradernet provides clients with
trading capabilities and access to the KASE, AIX, Ukrainian
Exchange, MOEX, SPBEX, NYSE, NASDAQ, LSE, CME, Hong Kong Stock
Exchange and Deutsche Börse. Additionally, Tradernet allows
clients to monitor and manage all aspects of their personal
accounts and participate in our client social network.
Full-Service
Brokerage — We offer full-service brokerage covering a
broad array of investment alternatives including exchange-traded
and over-the-counter corporate equity and debt securities, money
market instruments, exchange traded options and futures contracts,
government bonds, and mutual funds. A substantial portion of our
revenue is derived from commissions from clients through accounts
with transaction-based pricing. Brokerage commissions are charged
on investment products in accordance with a schedule we have
formulated that aligns with local practices.
In
Russia we have augmented our brokerage operations with banking
services conducted in rubles and foreign currencies for individuals
and legal entities. In accordance with federal law in Russia, the
Deposit Insurance Agency of Russia insures 100% of deposits of
individuals up to 1.4 million Russian rubles (approximately $18,000
as of March 31, 2020). We generate revenue by providing services
that include money transfers, foreign currency exchange, interbank
lending, deposits, settlements and escrow services. Currently, we
focus our banking services to support our securities brokerage
customers. We are an authorized Visa/MasterCard issuer, and a
participant in the Mir payment system in Russia. The Mir payment
system is a national electronic payment system established by the
National Bank of Russia. We also issue multi-currency cards. We
provide internet banking and mobile applications for Android/iOS
for companies and individuals. In addition, we offer clients
several investment and structured banking products (insured
deposits with option features and currency risk hedging products as
permitted by local laws).
Margin Lending
— We extend credit to customers, collateralized by securities
and cash in the customer’s account, for a portion of the
purchase price, and we receive income from interest charged on such
extensions of credit. The customer is charged for such margin
financing at interest rates established by us.
Investor Education
— We provide a variety of investment education and training
courses to clients. We do not engage currently in asset or
portfolio management nor do we engage in discretionary trading in
our client account investment advisory services. Our clients are
provided online access to tools that enable them to manage and
monitor their accounts and portfolio performance via the Tradernet
platform.
Investment Research
— We employ 15 research and securities analysts that conduct
equity and debt research covering a number of individual securities
worldwide. We provide regular research reports, notes and earnings
updates to our clients. The research department supports our
clients and sales department with equity and fixed-income research
focused on the Kazakhstani, Ukrainian, Russian, European and US
markets. Our research reports focus primarily on large, liquid
public companies along with other linked commodities and currency
markets. Our research reports are based on fundamental valuation
and are typically issued on a quarterly-basis or when significant
events occur. Our analysts also perform analysis of fixed-income
securities and portfolios and provide research and analysis of
market forecasts and macroeconomic conditions for certain
industries.
CAPITAL MARKETS
Our
success and growth in retail securities brokerage has allowed us to
extend our activities and participation in the capital markets and
issuer funding activities.
Investment Banking
We have
established teams of investment banking professionals in Almaty and
Moscow. Our investment banking division provides strategic advisory
services and capital markets products. Our investment banking team
focuses on certain sectors including consumer and business
services, energy, financial institutions and real estate,
technology, media and communications. Our investment banking
activities are concentrated in Kazakhstan, Russia and Uzbekistan
where the governments continue to privatize industries, but
commercial banks concentrate their services on large enterprises or
state-owned enterprises. In these countries, the commercial lending
sources also impose loan structures and debt covenants that exclude
many companies. This has created growing interest and demand in our
services. To date our activities have included underwriting of debt
and equity offerings on “best efforts” and firm
underwriting bases.
Equities Capital
Markets — We provide capital raising solutions for
corporate clients through initial public offerings and follow-on
offerings including listing companies on appropriate exchanges. We
focus on companies in growth industries and participate as market
makers in our underwritten securities offerings after the initial
placements of shares.
Debt Capital Markets
— We offer a range of debt capital markets solutions for
emerging growth and small market companies. We focus on structuring
and distributing private and public debt, for various purposes
including buyouts, acquisitions, growth capital financings, and
recapitalizations. In addition, we participate in bond financings
for both sovereign and corporate emerging market
issuers.
Proprietary Trading and Investment Activities
In the
regular course of our business, we take securities positions as a
market maker and/or principal to facilitate customer transactions
and for investment purposes. In market making activities and when
trading for our own account, we expose our own capital to the risk
of fluctuations in market value. Investment decisions are
determined in accordance with internal policy and recommendations
of our internal investment committees. The size of our securities
positions vary substantially based upon economic and market
conditions, allocations of capital, underwriting commitments and
trading volume of an individual issuer’s securities. Also,
the aggregate value of inventories of securities which we may carry
is limited by the Net Capital Rule as in effect in the
jurisdictions where we conduct our business. See “Regulatory
Capital Requirements” herein and “Management's
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources” in Item 7
of Part II of this annual report.
Repurchase and Reverse Repurchase Agreements
Additionally,
through the use of securities sold under agreements to repurchase
and securities purchased under agreements to resell, we act as an
intermediary between borrowers and lenders of short-term funds and
provide funding for various inventory positions. We also employ
repurchase and reverse repurchase agreements in our proprietary
trading activities. For additional information regarding our
repurchase and reverse repurchase activities see “Securities
reverse repurchase and repurchase agreements” in Note 2
– Summary of Significant Accounting Policies and Note 16
– Securities Repurchase Agreement Obligations of our
consolidated financial statements. All references to our
“consolidated financial statements” are to
“Financial Statements and Supplementary Data” in Item 8
of Part II of this annual report.
Securities Lending
In
connection with both our trading and brokerage activities, we
borrow securities to cover short sales and to complete transactions
in which customers have failed to deliver securities by the
required settlement date and lend securities to other brokers and
dealers for similar purposes. We earn interest on our cash
collateral provided and pay interest on the cash collateral
received less a rebate earned for lending securities.
EMPLOYEES
Administration and
operations personnel are responsible for the processing of
securities transactions; the receipt, identification and delivery
of funds and securities; the maintenance of internal financial
controls; accounting functions; custody of customers' securities;
the handling of margin accounts for us and our correspondents; and
general office services.
At
March 31, 2020, the Company employed 1,493 employees (1,376
full-time and 117 part-time), of whom 643 were retail financial
advisers, 467 were operations personnel, 15 were research and
securities analysts, 9 were capital markets team, 78 were MIS and
IT systems personnel and 281 were administrative
personnel.
COMPETITION
We face
aggressive competition in each of the markets where we offer our
services. We compete with international, regional and local
brokerage, banking, and financial services firms that offer an
array of financial products and services. The brokerage and
financial service firms with which we principally compete for
customers include: (i) BrokerCreditService and JSC IC Finam in
Russia; (ii) Halyk Finance, BCC Invest and First Heartland
Securities in Kazakhstan; (iii) BrokerCreditService and Otkrytie in
Cyprus; (iv) Dragan Capital, Univer Capital and Investment Capital
Ukraine in Ukraine; and (v) Kapital Depozit, Portfolio Investments
and Tat Reestr in Uzbekistan. While there are many large banks in
Russia, FFIN Bank has identified its principal banking competitors
as Tinkoff, BCS and JSC IC Finam.
Many of
the firms with which we compete are larger, provide additional and
more diversified services and products, provide access to more
international markets, and have greater technical, and financial
resources. We leverage competitive advantages we have developed,
including our extensive experience in providing local investors
access to the U.S. and European securities markets, our ability to
deliver high quality analytical information and our focus on
providing convenient, high tech user friendly access to our
services and the markets. We also believe we provide our customers
advantages in their regional markets, particularly in the area of
access to participation in IPOs of foreign issuers and well-known
global companies. We have also been an active participant in
various privatization programs, which has allowed us to develop
expertise and a prominent reputation in the public placement of
securities of local issuers in the regions where we
operate.
We
identify business continuity as the capability to continue the
delivery of services to our clients, employees and various business
partners and counterparties at acceptable predefined levels
following a disruption that may occur in one or more business
activities and/or in one or more operating locations due to local,
national, regional or worldwide disasters, including pandemics,
such as COVID-19, or due to failure of one or more components of
information technology infrastructure, including proprietary or
self-developed information system, databases, software and hardware
that we operate to provide such service. Since our operations are
conducted through our subsidiary companies, our business continuity
plans are developed and managed locally by our subsidiaries to
cover key business areas, provide contingency plans for IT
infrastructure and communication to employees, clients and
counterparties.
Our operating subsidiaries in each geographical
location rely on local public utilities for electric power with
additional electric generator back up (if available). For
telephone, internet and data center services besides primary
on-site, we engage, where available back up providers. All of these
service providers have assured management of our subsidiary
companies that they have plans for providing continued service in
the case of an unexpected event that might disrupt their services.
At the same time, our business continuity plans have little impact
if a failure occurs from disruption of third-party service
providers that cannot be replaced in a reasonable time by another
provider due to uniqueness or special services, such as stock
exchanges, depositories, clearing houses, clearing firms or other
financial intermediaries used to facilitate our securities
transactions. For this purpose, our subsidiaries have established
continuous communication with the service providers to ensure
timely receipt of data about their planned and actual
activities. We are continuing
to implement increased uniformity across our subsidiaries to
address business operations continuity and expertise by pursuing a
standard for business continuity that will conclude ISO 22301
Societal security - Business continuity management
systems.
We have employees in a number of cities in Russia,
Kazakhstan, Ukraine, Kyrgyzstan, Uzbekistan, Germany and Cyprus,
all of whom need to work and communicate as an integrated team. As
a result of the COVID-19 pandemic, each country in which we operate
instituted some form of quarantine, stay at home or remote work
order, social distancing guidelines, travel and/or other
restrictions and a significant percentage of our employees
have transitioned to being able to work remotely, as needed.
Generally, the business continuity plans we had in place and
continue to develop have allowed us and our employees to continue
to deliver services to our customers, various busines partners and
counterparties.
CYBERSECURITY
Cybersecurity
continues to be a high priority for us, as it is across the
financial services industry. Development of internet, cloud
technologies and remote access to services has increased the risk
of personal/sensitive/confidential data theft, unauthorized access
to systems and databases, and interruption of business services to
unprecedented levels. Recent security incidents have demonstrated
the problematic element of cybersecurity is the constantly evolving
nature of security risks, as new threats appear on a daily basis
and bad actors are taking malware to new levels of sophistication
and impact. Ransomware, malware, social engineering and phishing
are key cybersecurity threats today.
Traditional
antivirus and next-generation antivirus are primarily designed to
block file-based malware through scanning files on disk and
quarantining malicious executables. Cybersecurity attacks have
evolved to bypass antivirus protection through widespread adoption
of fileless delivery techniques. Advisory organizations and
regulatory bodies are requiring companies to provide more
proactive, adaptive and sophisticated defenses. They also recommend
a shift toward continuous monitoring and real-time assessment. We
conduct ongoing planning and control of crucial areas of our
business to detect and prevent cyber-attacks and to mitigate the
risks of service disruption, loss of client, financial,
confidential and other data with restricted or limited
access.
We are continuing to implement additional
standards that will be based on, but not limited to ISO/IEC 27001
Information security management standards. See Risk Factors –
“Interruptions in the proper functioning of our
information technology, or “IT” systems, including from
cybersecurity threats, could disrupt operations and cause
unanticipated increases in costs or decreases in revenues, or
both” “Risk Factors” in Item 1A of this annual
report.
REGULATORY OVERSIGHT
We
operate in a highly regulated industry across several legal
jurisdictions. Our securities and banking business activities are
subject to extensive regulation and oversight by the stock
exchanges, central/national banks, governmental and self-regulatory
authorities in the foreign jurisdictions where we conduct business
activities, the Markets in Financial Instruments Directive II and
Regulation of the European Union, and certain laws and regulations
of the United States. We expect that the regulatory environment
will continue to raise standards and impose new regulation with
which we will be required to comply in a timely
manner.
In the
foreign jurisdictions where we conduct business we are subject to
overlapping schemes of regulation that govern all aspects of our
relationship with our customers. These regulations cover a broad
range of practices and procedures, including:
●
minimum net capital
requirements;
●
the use and
safekeeping of customers’ funds and securities;
●
recordkeeping and
reporting requirements;
●
client
identification, clearance and monitoring to identify and prevent
money laundering and funding of terrorism, OFAC sanctions
violations and to facilitate FATCA reporting;
●
supervisory and
organizational procedures intended to monitor and assure compliance
with relevant laws and regulations and to prevent improper trading
practices;
●
employee-related
matters, including qualification and certification of
personnel;
●
provision of
investment and ancillary services, clearance, and settlement
procedures;
●
maximum loan and
bank guarantees concentration issued to shareholders;
●
credit risk
requirements;
●
liquidity risk
requirements;
●
qualification of
firm management; and
●
risk detection,
management, and correction.
The
regulatory authorities in each jurisdiction where we operate
establish minimum net capital requirements we must meet to maintain
our licensure to conduct the brokerage and/or banking services we
provide. These minimum net capital requirements currently range
from approximately $30,000 to $3,900,000 and fluctuate depending on
various factors. In the event we fail to maintain minimum net
capital, we may be subject to fines and penalties, suspension of
operations, and disqualification of our management from working in
the industry.
Compliance with
minimum capital requirements could limit our expansion into
activities and operations that require significant capital. Minimum
capital requirements could also restrict our ability to transfer
funds among our subsidiaries.
Violations of
securities, banking, anti-money laundering and financing of
terrorism laws, rules and regulations can subject us to a broad
range of disciplinary actions including imposition of fines and
sanctions, other remedial actions, such as cease and desist orders,
removal from managerial positions, loss of licensing, and civil and
criminal proceedings.
Foreign Corrupt Practices
Act. In the U.S.,
the 1970 Foreign Corrupt Practices Act, or FCPA, broadly prohibits
foreign bribery and mandates recordkeeping and accounting
practices. The foreign countries where our subsidiaries operate
have similar anti-bribery and anti-corruption laws imposed on our
subsidiaries. The anti-bribery provisions make it illegal for us,
either directly or through any subsidiary that we may acquire, to
bribe any foreign official for the purpose of obtaining business.
The term “public official” is defined broadly to
include persons affiliated with government-sponsored or owned
commercial enterprises as well as appointed or elected public
officials. The recordkeeping provisions require that we and our
subsidiaries make and maintain books that, in reasonable detail,
reflect our transactions and dispositions of assets and devise and
maintain a system of internal accounting controls that enables us
to provide reasonable assurance that transactions are properly
recorded in accordance with management’s authorizations, that
transactions are recorded as necessary to permit the preparation of
financial statements, that access to our funds and other assets is
permitted only in accordance with management’s
authorizations, and that the recorded accounts for assets are
compared periodically with the existing assets to assure
conformity.
The
FCPA requires that we establish and maintain an effective
compliance program to ensure compliance with U.S. law. Failure to
comply with the FCPA can result in substantial fines and other
sanctions.
Anti-Money Laundering,
Anti-Terrorism Funding and Economic Sanctions Laws. The USA
Patriot Act, the U.S. Bank Secrecy Act and similar legislation in
the jurisdictions where our subsidiaries operate, as well as
certain exchanges and self-regulatory organizations impose a
variety of rules that require registered broker-dealers to
“know their customers” and monitor their
customers’ transactions for potentially suspicious
activities. Our subsidiaries have implemented policies, procedures
and internal controls that are designed to comply with local
anti-money laundering and anti-terrorism (“AML”) rules
and regulations. Significant criminal and civil penalties, fines
and regulatory penalties can be imposed for violations of such AML
laws.
The
U.S. Treasury Department’s Office of Foreign Assets Control
(“OFAC”), in connection with its administration and
enforcement of economic and trade sanctions publishes lists of
individuals and companies, known as “Specially Designated
Nationals,” or SDNs. Assets of SDNs are blocked, and U.S.
companies are generally prohibited from dealing with them. OFAC
also administers a number of comprehensive sanctions and embargoes
that target certain countries, governments and geographic regions.
Freedom Holding Corp, is, and in certain instances, its
subsidiaries might be prohibited from engaging in transactions
involving any individual, entity, country, region or government
that is subject to such sanctions.
Foreign Account Tax
Compliance Act. The 2010
Foreign Account Tax Compliance Act, or FATCA, was enacted in the
United States to target non-compliance by U.S. taxpayers using
foreign accounts. FATCA requires foreign financial institutions,
such as the Freedom Companies, to report to the United States
Internal Revenue Service (“IRS”) information about
financial accounts held by U.S. taxpayers, or by foreign entities
in which U.S. taxpayers hold a substantial ownership
interest.
The
United States has entered into intergovernmental agreements with a
number of countries establishing mutually agreed-upon rules for the
implementation of the data sharing requirements of FATCA. It has
not, however, entered into such an agreement with Russia. As a
result, Russia adopted legislation to allow financial institutions
to share foreign taxpayer data with foreign tax authorities, such
as the IRS, without breaching Russian data protection and
confidentiality laws. The Russian legislation sets forth extensive
rules relating to when and how the financial institution may gather
and share foreign taxpayer information. The Russian legislation
establishes extensive monitoring procedures requiring, among other
things, the notification to various Russian state bodies by the
financial institution of registration with a foreign tax authority,
receipt of requests for foreign taxpayer data, and the delivery to
Russian state bodies of foreign taxpayer data prior to delivery to
a foreign tax authority. Under the legislation, Russian regulators
retain the right to prohibit disclosure of foreign taxpayer
information in certain instances. Failure to comply with the
Russian legislation may result in monetary fines for the financial
institution and its officers.
Because
of the lack of an agreement between the U.S. and Russia
establishing mutually agreed-upon guidelines for data sharing,
inconsistencies in the two legal regimes exist, which can place
financial institutions in Russia, such as Freedom RU, Zerich
Capital and FFIN Bank, in the position of having to decide whether
to comply with Russian legislation or with FATCA. For example,
under Russian legislation, a financial institution may share
foreign taxpayer data only with the consent of the foreign
taxpayer, and even when consent is given, Russian regulators may,
in certain circumstances, prohibit disclosure. There is no
exemption for foreign financial institutions from the FATCA
disclosure requirements. Similarly, FATCA generally requires
foreign financial institution to withhold 30% of designated
payments. However, the Russian legislation does not grant financial
institutions the authority to act as a withholding agent for a
foreign tax authority. The Russian legislation does allow financial
institutions to decline to provide services to foreign
taxpayers.
Cyprus,
Kazakhstan, Ukraine and Uzbekistan have entered into Model 1
intergovernmental agreements with the United States containing
provisions regulating the process for financial institutions in
these countries to collect information on U.S. taxpayer accounts
and provide that information to the IRS. In general, the
requirements of the agreements concern the analysis of new and
existing customer accounts to identify U.S. taxpayers. The
agreement requires financial institutions in these countries to
identify their clients and analyze their products to identify the
accounts of customers affected by FATCA and collect all necessary
information to classify those accounts in compliance with the
requirements of FATCA. After classifying the accounts, financial
institutions are obligated to regularly present information,
including name, taxpayer identification number, and account
balance, to the local tax authorities for transfer to the IRS. The
agreements also address when financial institutions in these
countries are required to withhold taxes to be remitted to the IRS.
Pursuant to these intergovernmental agreements, our subsidiaries in
these countries are required to obtain client documentation
associated with the indicia of his, her, or its U.S. tax residency
status as well as related account information in order to report
accordingly.
The
failure to comply with FATCA could result in adverse financial and
reputational consequences to us as well as the imposition of
sanctions or penalties including responsibility for the taxes on
any funds distributed without the proper withholdings set
aside.
MONETARY POLICY
Our
earnings are and will be affected by domestic economic conditions
and the monetary and fiscal policies of the governments of
Kazakhstan, Kyrgyzstan, Russia, Uzbekistan, Ukraine, Cyprus and the
United States. The monetary policies of these countries may have a
significant effect upon our operating results. It is not possible
to predict the nature and impact of future changes in monetary and
fiscal policies.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The
following table sets forth information regarding our executive
officers as of July 8, 2020:
|
Name
|
|
Age
|
|
Position
|
|
Timur
Turlov
|
|
32
|
|
Chief
Executive Officer and Chairman of the Board
|
|
Askar
Tashtitov
|
|
41
|
|
President
|
|
Evgeniy
Ler
|
|
37
|
|
Chief
Financial Officer
|
Timur Turlov
– Mr. Turlov has served as the
chief executive officer and chairman of the board since November
2015. He graduated from Russia State Technic University (named
after Tsiolkovsky) in 2009 with a Bachelor of Science degree in
economics and management. Mr. Turlov has more than 10 years of
experience in various areas in the international securities
industry. From July 2013 to July 2017, Mr. Turlov served as the
Advisor to the Chairman of the Board of Freedom KZ. In that
capacity, Mr. Turlov was primarily responsible for strategic
management, public and investor relations events, investment
strategy, sales strategy, and government relations. In July 2017,
Mr. Turlov became Chairman of the Board of Directors of Freedom KZ.
He has also served as the General Director of Freedom RU since
August 2011. As the General Director, Mr. Turlov is responsible for
establishing Freedom RU’s strategic goals, including
acquisition and retention of large clients, sales strategy and
company development. From May 2012 through January 2013, Mr. Turlov
served as the Chairman of the Board of Directors of JSC Nomad
Finance where he oversaw business set up and acquisition of large
clients. From July 2010 through August 2011, Mr. Turlov was
employed as the Vice Director of the International Sales Department
of Nettrader LLC. In this capacity, his major responsibilities
included consulting to set up access to foreign markets, trading,
back office, and internal accounting functions. Mr. Turlov also
owns interests in other businesses, including other securities
brokerage firms that are not subsidiaries of the
Company.
Askar Tashtitov
– Mr. Tashtitov has served as
president of the Company since June 2018 and leads our investment
banking activities. He has served as a director of the Company
since May 2008 and was employed with BMB Munai, Inc., the
predecessor of the Company, from 2004 through 2015, serving as the
president from May 2006 to November 2015. Mr. Tashtitov earned a
Bachelor of Arts degree from Yale University majoring in economics
and history in 2002.
Evgeniy Ler – Mr. Ler has served as the chief financial
officer of the Company since November 2015. Prior to that time, he
served as chief financial officer of BMB Munai, Inc., the
predecessor of the Company from April 2009 to November 2015. Mr.
Ler joined BMB Munai in 2006 and served in several capacities
including finance manager and reporting manager before being
appointed chief financial officer. From September 2011 to December
2012, Mr. Ler also served as a Deputy Director for Emir Oil, LLP, a
wholly owned subsidiary of BMB Munai. In 2003, Mr. Ler was awarded
a Bachelor’s degree in financial management from the
Kazakh-American University located in Almaty,
Kazakhstan.
There
are no arrangements or understandings between any of our executive
officers and any other person pursuant to which such individual was
selected as an executive officer.
AVAILABLE INFORMATION
Our
investor relations website is located at
https://ir.freedomholdingcorp.com. We intend to use our investor
relations website as a means for disclosing material non-public
information and for complying with SEC Regulation FD and our other
disclosure obligations. We are subject to the reporting
requirements of the Exchange Act. Reports filed with or furnished
to the SEC pursuant to the Exchange Act, including annual and
quarterly reports, are available free of charge, through our
website. Our corporate governance policies, code of ethics and
Board committee charters are also posted on our investor relations
website. The content of our website is not intended to be
incorporated by reference into this annual report or in any other
report or document that we file. We make them available on our
website as soon as reasonably possible after we file them with the
SEC. The reports we file with or furnish to the SEC are also
available on the SEC’s website (www.sec.gov).
This annual report contains forward-looking statements and
information concerning us, our plans, and other future events. The
risks described below are not the only ones we face, and the
statements contained elsewhere in this annual report, including our
financial statements, should be read together with these risk
factors. The occurrence of any of, or a combination of, the
following risks or additional risks and uncertainties not presently
known to us or that we currently believe to be immaterial could
materially and adversely affect our business, financial position,
results of operations, liquidity or cash flows. Our actual results
could differ materially from those anticipated in the
forward-looking statements as a result of specific factors,
including the risks and uncertainties described below.
The outbreak of the COVID-19 pandemic has impacted and will likely
continue to impact the global economy, global financial markets and
our business which may have a material adverse effect on our
business, financial condition and results of
operations.
In
March 2020, the World Health Organization recognized the outbreak
of a novel strain of coronavirus, COVID-19, as a pandemic. The
pandemic has affected every country in which we operate. In
response to the pandemic, governments and communities have taken
measures to contain the spread of the COVID-19 pandemic, including
temporary closures of businesses; social distancing; travel
restrictions; “shelter in place” and other governmental
regulations; which have caused significant volatility in the
financial markets and general economic conditions. These measures
have negatively impacted businesses, market participants, financial
markets and the global economy and could continue to do so for a
prolonged period of time.
In
response to local COVID-19 related restrictions, a significant
percentage of our employees have transitioned to working remotely.
For those functions that cannot be performed remotely, we have
implemented a number of measures to maintain the health and safety
of our employees and customers, including reducing the hours our
bank branch offices are open, meeting with customers only by
appointment, limiting customer interaction to functions that cannot
be performed remotely, limiting non-essential travel, cancelling
in-person work-related meetings, and temperature screening.
Widespread illness or long-term continuation of such measures could
negatively impact our business.
The
COVID-19 measures did not go into effect in most countries where we
operate until the latter part of March 2020. As a result, we do not
believe they had a significant adverse impact on our financial
condition and results of operations during the period ended March
31, 2020. The extent of the impact of COVID-19 on our business,
operational and financial performance will depend on certain
developments, including the duration and spread of the outbreak,
including any secondary outbreaks, and the impact on our customers,
employees and the markets in which we operate, all of which is
uncertain at this time and cannot be predicted. The extent to which
COVID-19 may impact our business, financial condition, liquidity,
results of operations, cash flows, strategies and prospects cannot
be reasonably estimated at this time.
Our business is affected by general business and economic
conditions, which could materially and adversely impact our
business, financial position, results of operations or cash
flows.
Demand
for our products and services is affected by a number of general
business and economic conditions. A decline in the Russian,
Kazakhstani, Ukrainian, Cypriot, European or United States
financial markets or general economies could materially and
adversely affect our business, financial position, results of
operations or cash flows. Our profit margins, as well as overall
demand for our services, could decline as a result of a number of
factors beyond our control, including economic recessions, changes
in customer preferences, investor and consumer confidence,
inflation, availability of credit, fluctuation in interest and
currency exchange rates, changes in the fiscal or monetary policies
of governments, a widespread pandemic, such as COVID-19, and
political circumstances (including wars and terrorist acts) in the
regions in which we operate.
We
cannot predict the duration of current conditions or the timing or
strength of any future activities on economies generally, or the
global markets. Weakness in the markets in which we operate could
have a material adverse effect on our business, financial
condition, results of operations or cash flows. More generally, because our business is correlated
to the general economic outlook, a significant deterioration in
that outlook or realization of certain events could have a
significant negative impact on our businesses and overall results
of operations.
We operate in emerging consumer financial services sectors in
Eastern Europe and Central Asia, which is a competitive landscape
where increased competition from larger service providers with
greater resources or superior service offerings could materially
and adversely affect our business, financial position, results of
operations or cash flows.
We
derive our revenues from brokerage, banking and financial services
businesses serving customers principally located in Russia,
Kazakhstan, Ukraine and Uzbekistan. Investing by retail customers,
particularly in U.S. and European securities, is an emerging market
in these countries, and we could encounter increased price
competition as this industry matures and new online brokerage
services become available. We believe we may experience competitive
pressures in these and other areas as existing or new competitors
seek to obtain market share by competing on the basis of price or
service. In addition, our retail brokerage business will likely
face pressure from larger competitors, which may be better able to
offer a broader range of complementary products and services to
retail brokerage clients in order to win their trading business.
Our inability to compete effectively with our competitors could
materially and adversely affect our business, financial position,
results of operations or cash flows.
Failure to meet capital adequacy and liquidity guidelines could
affect the financial condition and operations of our
subsidiaries.
Our
subsidiary companies must meet certain ongoing capital and
liquidity standards, which are subject to evolving rules and
qualitative judgments by government regulators regarding the
adequacy of their capital and internal assessment of their capital
needs. These net capital rules may limit the ability of each
subsidiary to transfer capital to us. New regulatory capital,
liquidity, and stress testing requirements may limit or otherwise
restrict how each subsidiary utilizes its capital and may require
us to increase our capital and/or liquidity or to limit our growth.
Failure by our subsidiaries to meet minimum capital requirements
could result in certain mandatory and additional discretionary
actions by regulators that, if undertaken, could adversely affect
our liquidity, business, financial position, results of operations
or cash flows.
We may suffer significant losses from credit
exposures.
Our
business is subject to the risk that a customer, counterparty or
issuer will fail to perform its contractual obligations, or that
the value of collateral held to secure obligations will prove to be
inadequate to cover their obligations to us. We are also subject to
the same risk in connection with our own failures in connection
with our proprietary trading. While we have policies and procedures
designed to manage this risk, the policies and procedures may not
be fully effective to protect us against the risk of loss. Our
exposure results principally from repurchase and reverse repurchase
agreements, margin lending, clients’ options trading, futures
activities, securities lending, our role as counterparty in
financial contracts, investing activities, and trading our
proprietary trading.
When we
purchase securities on margin, enter into securities repurchase
agreements, or trade options or futures, we are subject to the risk
that we, or our customers, may default on those obligations when
the value of the securities and cash in our own proprietary or in
the customers’ accounts falls below the amount of the
indebtedness. Abrupt changes in securities valuations and the
failure to meet margin calls could result in substantial financial
losses.
We have
exposure to credit risk associated with our proprietary
investments. Our investments are subject to price fluctuations as a
result of changes in the Russian, Kazakhstani, European and U.S.
financial markets’ assessment of credit quality. Loss in
securities value can negatively affect our financial performance
and earnings if our management determines that such securities are
other-than-temporarily-impaired (OTTI). The evaluation of whether
OTTI exists is a matter of judgment, which includes the assessment
of several factors. If our management determines that a security
is OTTI, the cost basis of the security may be adjusted, and a
corresponding loss may be recognized in current earnings.
Deterioration in the value of securities held in our proprietary
portfolio could result in the recognition of future impairment
charges. Even if a security is not considered OTTI, if we were
forced to sell the security sooner than intended, we may have to
recognize any unrealized losses at that time.
We rely
upon the use of credit arrangements as a significant component of
our trading strategy. We are constantly searching for reliable
counterparties for such transactions. Our inability to access an
adequate pool of quality reliable counterparties to engage with
could limit our ability to undertake certain transactions, which
could negatively impact our business, results of operations and
cash flows.
Our investments can expose us to a significant risk of capital
loss.
We use
a significant portion of our capital to engage in a variety of
investment activities. We have relied on leveraging to increase the
size of our proprietary portfolio. As a result, we might face risks
of illiquidity, loss of principal and revaluation of assets. The
companies in which we invest may concentrate on markets which are
or may be disproportionately impacted by pressures in the sectors
on which they focus, and their existing business operations or
investment strategies may not perform as projected. As a result, we
may suffer losses from our investment
activities.
Our
proprietary portfolio is leveraged and concentrated in relatively
few companies. A consequence of this investment strategy is that
our investment returns could be materially and adversely affected
if this investment does not perform as anticipated. Moreover,
because we rely on leverage in our portfolio, when an investment
such as this does not perform within the time horizon we project,
we face significant risk of either having to close the position at
a time when the market price or liquidity might be unfavorable, or
extending financing arrangements beyond the time frame initially
anticipated, which can result in paying higher financing costs than
projected. If a significant investment such as this fails to
perform as anticipated our return on investment, business,
liquidity, cash flow, financial condition and results of operations
could be materially negatively affected, and the magnitude of the
loss could be significant.
Even if
we follow our investment policies, we cannot give assurance that
the value of the investment will be profitable. For example, an
increase in interest rates, a general decline in the stock markets
or economic slowdown, delays in timing of anticipated events, an
inability to identify and engage suitable counterparties, or other
market conditions adverse to companies or investments of the type
in which we invest, or other world events, such as wars, natural
disasters or the outbreak of a pandemic, could result in a decline
in the value of our investments. Additionally, changes in existing
laws, rules or regulations, or judicial or administrative
interpretations thereof, or new laws, rules or regulations could
have an adverse impact on the businesses and industries in which we
invest.
We are subject to risks associated
with our securities lending business.
We
engage in securities lending business in which we borrow securities
from one party and lend them to another. As a result, market
risk in our securities lending business arises when the market
value of securities borrowed declines relative to the cash posted
as collateral with the lender; and when the market value of
securities loaned increases relative to the cash received as
collateral from the borrower. Market value fluctuations in our
securities lending business are measured daily and any exposure
versus cash received or posted is settled daily with
counterparties. In addition, credit risk from our securities
lending operations arises if a lender or borrower defaults on an
outstanding securities loan or borrowing transaction and the cash
or securities they are holding is insufficient to cover the amount
they owe us for that receivable. Finally, there is systemic risk
associated with the concentration of clearing and related functions
in covered clearing agencies involved in securities lending
activities. The market and credit risks associated with our
securities lending business have the potential of adversely
impacting our business, financial condition and results of
operations.
Operating risks associated with
our securities lending business may result in counterparty
losses, and in certain circumstances, potential financial
liabilities.
As part
of our securities lending business, we lend securities to banks and
broker-dealers. In these securities lending transactions,
the borrower is required to provide and maintain collateral at or
above regulatory minimums. Securities on loan are marked to market
daily to determine if the borrower is required to pledge additional
collateral. We must manage this process and mitigate the associated
operational risks. Failure to mitigate such operational risks could
result in financial losses for counterparties in the securities
lending business apart from the risks of collateral
investments. Additionally, in certain circumstances, we could
potentially be held liable for the failure to manage any such
risks.
Larger and more frequent capital
commitments in our trading and underwriting business activities
increases the potential for us to incur significant
losses.
We
commit our capital to maintain trading positions in the equity,
convertible securities and debt markets. We may enter into large
transactions in which we commit our own capital. The number and
size of these large transactions may adversely affect our results
of operations in a given period. Although we may take measures to
manage market risk, such as employing position limits and using
quantitative risk measures, we may incur significant losses from
our trading activities due to leverage, market fluctuations,
currency fluctuations and volatility. To the extent that we own
assets, i.e., have long positions, a downturn in the value of
those assets or markets could result in losses. Conversely, to the
extent we have sold assets we do not own, i.e., have short
positions, an upturn in those markets could expose us to
potentially large losses as we attempt to cover our short positions
by acquiring assets in a rising market.
We may need to raise additional capital, and we cannot be sure that
additional financing will be available.
To
satisfy or refinance existing obligations, service our debt
obligations, support the development of our business or pursue
additional growth through acquisition, we depend on our ability to
generate cash flow from operations and to borrow funds and issue
securities in the capital markets. To the extent we are unable to
generate cash flows sufficient to meet our obligations during the
COVID-19 pandemic, we may require additional financing for
liquidity, capital requirements or growth initiatives. We may not
be able to obtain financing on terms and at interest rates that are
favorable to us, or at all. An inability by us to obtain financing
in the future could materially and adversely affect our plans,
business, financial position, results of operations or cash
flows.
We are dependent on our executive management team, in particular
Timur Turlov. If we are unable to hire, engage and retain skilled
personnel, our business, financial position, results of operations
or cash flows could be materially and adversely
affected.
We
depend on the efforts, skills, reputations and business contacts of
our executive management team, in particular Timur Turlov, and the
management teams of our subsidiaries. We believe our success
depends, to a significant extent, upon the experience of these
individuals, whose continued service is not guaranteed. If certain
individuals leave or are otherwise no longer available to us for
any number of reasons, including because of the outbreak of a
pandemic such as COVID-19, we may not be able to replace them with
comparable capable personnel.
The
pool of experienced and qualified employee candidates might be
limited in the geographical areas where we conduct business, and
competition for skilled employees might be significant. We are
dependent, in part, on our continued ability to hire, engage and
retain skilled employees. Additionally, we rely upon experienced
managerial, marketing and support personnel to effectively manage
our business and to successfully promote our range of services. If
we do not succeed in engaging and retaining skilled employees and
other personnel, or if we experience a potential loss of such
personnel, or their productivity significantly declines because of
events such as the COVID-19 pandemic, we may be unable to meet our
objectives and, as a result, our business, financial position,
results of operations or cash flows could be materially and
adversely affected.
Interruptions in the proper functioning of our information
technology, or “IT” systems, including from
cybersecurity threats, could disrupt operations and cause
unanticipated increases in costs or decreases in revenues, or
both.
Our
broker-dealer, financial services and banking businesses are highly
dependent on processing, on a daily basis, a large number of
communications and increasingly complex transactions across diverse
markets, in various languages. The financial, accounting, or other
data processing systems we or the firms that clear transactions on
behalf of our customers use may fail to operate properly or become
disabled as a result of events that are wholly or partially beyond
our control, including a disruption of electrical or communications
services or our inability to occupy one or more of our facilities,
as a result of any number of occurrences, including the outbreak of
a pandemic such as COVID-19. The inability of these systems to
accommodate an increasing volume of transactions could also
constrain our ability to expand our business operations. If any of
these systems do not operate properly or are disabled, or if there
are other shortcomings or failures in our internal processes,
personnel, or systems, we could suffer impairment to our liquidity,
financial loss, a disruption of business, liability to clients,
regulatory intervention, or reputational damage.
We also
face the risk of operational failure at the exchanges,
depositories, clearing houses, clearing firms and other financial
intermediaries we use to facilitate our customer transactions. Any
such failure or termination could adversely affect our ability to
effect transactions and to manage our exposure to
risk.
Our
ability to conduct business may also be adversely impacted by a
disruption in the infrastructure that supports our business and the
communities in which we and third parties with whom we conduct
business are located, including disruption involving electrical,
communications, transportation, or other services, whether due to
fire, natural disaster, a world health crisis, such as COVID-19,
power or communications failure, act of terrorism, war, or
otherwise. We have employees in a number of cities in Russia,
Kazakhstan, Ukraine, Kyrgyzstan, Uzbekistan and Cyprus, all of whom
need to work and communicate as an integrated team. If a disruption
occurs in one location and our employees in that location are
unable to communicate with or travel to other locations, our
ability to service and interact with our customers may suffer.
While we have contingency plans in place to address such issues,
these plans may not always be deployed successfully or be
sufficiently adequate to fully offset the impacts of such
disruptions. We do not maintain insurance policies to mitigate
these risks because it may not be available or may be more
expensive than the perceived benefit. Further, any insurance that
we may purchase to mitigate certain risks may not cover all
losses.
Our
operations rely on the secure processing, storage, and transmission
of confidential and other information in our computer systems and
networks. Our computer systems, software, and networks may be
vulnerable to unauthorized access, computer viruses, spyware or
other malicious code, and other events that could have a security
impact. The occurrence of one or more of these events could:
(a) jeopardize confidential and other information processed
by, stored in, and transmitted through our computer systems and
networks or the computer systems and networks of our customers or
other third parties with whom we conduct business; or
(b) otherwise cause interruptions or malfunctions in our
operations or the operations of our customers or third parties with
whom we conduct business. In addition, new and expanding data
privacy laws and regulations are, or soon will be, in effect in
many of the jurisdictions where we conduct business. These pose
increasingly complex compliance challenges, which may increase
compliance costs, and compliance failures could result in
significant fines, penalties and liability.
As a
result of the COVID-19 pandemic the vast majority of our employees,
including those who process our transactions are working remotely.
While we have implemented risk management and contingency plans and
taken other precautions designed to address cybersecurity, there is
no guarantee such measures will adequately protect our business, as
remote working environments may be less secure and more susceptible
to hacking attacks. Cyber incidents can result from deliberate
attacks or unintentional events. These incidents can include, but
are not limited to, gaining unauthorized access to digital systems
for purposes of misappropriating assets or sensitive information,
corrupting data, or causing operational disruption. Cybersecurity
attacks in particular are becoming more sophisticated and include,
but are not limited to, malicious software, attempts to gain
unauthorized access to data (either directly or through our
vendors) and other electronic security breaches. Despite our
security measures, our IT systems and infrastructure and those of
third parties we work with may be vulnerable to such cyber
incidents. The result of these incidents could include, but are not
limited to, disrupted operations, misstated or misappropriated
financial data, theft of our intellectual property or other
confidential information (including of our customers,
counterparties and employees), liability for stolen assets or
information, increased cybersecurity protection costs and
reputational damage adversely affecting customer or investor
confidence. In addition, if any information about our customers,
counterparties or employees, including payment information, were
the subject of a successful cybersecurity attack against us, we
could be subject to litigation or other claims by the affected
parties which could result in monetary damage awards against us. We
have incurred costs and may incur significant additional costs in
order to implement the security measures we feel are appropriate to
protect our IT systems.
We face risks relating to doing business internationally that could
materially and adversely affect our business, financial position,
results of operations or cash flows.
Our
business operates and serves customers in a number of countries,
including Russia, Kazakhstan, Ukraine, Uzbekistan, Kyrgyzstan,
Germany and Cyprus. There are certain risks inherent in doing
business internationally, including:
●
economic
volatility and sustained economic downturns;
●
difficulties
in enforcing contractual and intellectual property
rights;
●
currency
exchange rate fluctuations and currency exchange
controls;
●
changes
in securities brokerage, financial services and banking laws and
regulations;
●
difficulties
in developing, staffing, and simultaneously managing a number of
foreign operations;
●
potentially
adverse tax developments;
●
exposure
to different legal standards;
●
political
or social unrest, including terrorism;
●
risks
related to government regulation and uncertain protection and
enforcement of our intellectual property rights; and
●
the
presence of corruption in certain countries.
One or
more of these factors could materially and adversely affect our
business, financial position, results of operations or cash
flows.
Unforeseen or catastrophic events, including the emergence of a
pandemic, terrorist attacks, extreme weather events or other
natural disasters could materially negatively impact our
business.
The
occurrence of unforeseen or catastrophic events, including the
emergence of a pandemic, such as COVID-19, or other widespread
health emergency (or concerns over the possibility of such an
emergency), terrorist attacks, extreme weather events or other
natural disasters, could create, and in the case of COVID-19 has
created, and may continue to create, economic and financial
disruptions, and could lead to, or in the case of COVID-19 has led
to, operational difficulties (including quarantine, shelter in
place and travel limitations) that could impair, or in the case of
COVID-19 have impaired, our ability to operate our business as it
is normally operated.
The countries in which we operate have changing regulatory regimes,
regulatory policies, and interpretations.
The
countries in which we operate our financial services business have
differing regulatory regimes governing the operation of
broker-dealers in each country, the transfer of funds to and from
such countries, and other aspects of the finance, investment and
banking industries. These provisions were promulgated during
changing political circumstances, are continuing to change, and may
be relatively untested, particularly insofar as they apply to
foreign investments by residents of various countries. Therefore,
there may exist little or no administrative or enforcement history
or established practice that can aid us in evaluating how the
regulatory regimes may impact our operations. It is possible that
those governmental policies will change or that new laws and
regulations, administrative practices or policies, or
interpretations of existing laws and regulations will materially
and adversely affect our activities in one or more of the countries
where we operate. Further, since the history and practice of
industry regulation is limited, our activities may be particularly
vulnerable to the decisions and positions of individuals, who may
change, be subject to external pressures, or administer policies
inconsistently. Internal bureaucratic politics may have
unpredictable and negative consequences. Our revenue and
profitability could also be affected by changes to rules and
regulations that impact the business and financial communities
generally, including changes to the laws governing taxation,
foreign ownership, electronic commerce, client privacy and security
of client data. In addition, changes to these rules and
regulations could result in limitations on the lines of business we
conduct, modifications to our business practices, more
stringent capital and liquidity requirements, or
additional costs. These changes may also require us to invest
significant management attention and resources to evaluate and make
necessary changes to our compliance, risk management, treasury and
operations functions.
We are exposed to foreign currency fluctuations that can impact our
financial results.
Because
our business is conducted outside the United States, we face
exposure to movements in foreign currency exchange rates. This
exposure may change over time as business practices evolve and can
have a material impact on our financial statements. Our functional
currency is the United States dollar. The functional currencies of
our subsidiary companies include the Russian ruble, European euro,
Ukrainian hryvnia, Uzbekistani som and the Kazakhstani tenge. For
financial reporting purposes, those currencies are translated into
United States dollars as the reporting currency. Assets and
liabilities are translated at the exchange rate in effect at the
balance sheet dates. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. As
the value of the functional currencies of our subsidiaries weakens
against the United States dollar, we may realize losses arising as
a result of translating such foreign currencies to U.S. dollars.
Conversely, as the value of the United States dollar weakens
against the functional currencies of our subsidiaries, we may
realize gains arising as a result of currency
translation.
We
conduct operations in a number of different currencies. This
subjects us to currency exchange rate risk. Fluctuations in
currency exchange rates have had, and will continue to have, an
impact on our results of operations. We cannot assure that such
currency exchange rate fluctuations will not adversely impact our
operating results, cash flows and financial condition. While we may
employ strategies to hedge against currency fluctuations, the use
of such strategies can also result in the loss of potential
benefits that might result from favorable exchange rate
fluctuations.
Interest rate changes could affect our results of operations and
financial condition.
Fluctuations in
interest rates can impact our earnings. Declines in interest rates
can have a detrimental effect on the interest we earn. While we
believe we are positioned to benefit from rising interest rates, a
rise in interest rates could negatively impact us if market
conditions or the competitive environment induces us to raise our
interest rates, or replace deposits with higher cost funding
sources without offsetting increases in yields on interest-earning
assets.
We are dependent upon our relationships with U.S. securities
broker-dealer and clearing firms to receive and transmit funds
internationally.
Funds
invested by our customers in securities of U.S. companies are
transmitted to U.S. registered securities broker-dealer and
clearing firms. Funds from the sale of securities are transmitted
from such U.S. registered securities broker-dealer and clearing
firms back to us through international banking electronic
transfers, which can experience clerical and administrative
mistakes, be subject to technical interruption, be delayed, or
otherwise fail to work as planned. We do not have any control over
these funds transfers. Failures or substantial delays in funds
transfers could impair our customer relationships. Damage to or the
loss of our relationships with these U.S. registered securities
broker-dealers and clearing firms could also impair our ability to
continue to offer such services to our customers which could have a
material adverse impact on our business, results of operations
and/or financial condition.
We may be unable to identify, acquire, close or integrate
acquisition targets successfully.
Acquisitions have
been, and will likely continue to be, a significant component of
our growth strategy; however, there can be no assurance that we
will be able to continue to grow our business through acquisitions
as we have done historically or that businesses acquired will
perform in accordance with expectations or that business judgments
concerning the value, strengths and weaknesses of businesses
acquired will prove to be correct. We will continue to analyze and
evaluate the acquisition of strategic businesses or product lines
with the potential to strengthen our industry position, expand our
customer base or enhance our existing service offerings. We cannot
assure you that we will identify or successfully complete
transactions with suitable acquisition candidates in the future,
nor can we assure you that completed acquisitions will be
successful. If an acquired business fails to operate as anticipated
or cannot be successfully integrated with our existing business,
our business, financial condition, results of operations or cash
flows could be materially and adversely affected.
In
addition, there is substantial cost and time expended to complete
post-closing integration of acquisitions, including human resource
training, data and technology systems and operational processes. We
may also incur unanticipated liabilities. Any such difficulties
could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results
of operations. Furthermore, we cannot provide any assurance that we
will realize the anticipated benefits and/or synergies of any such
acquisition or investment.
We could be adversely affected by violations of the anti-corruption
and anti-criminal regulations in effect in the United States and
the foreign jurisdictions where we conduct business.
The
U.S. Foreign Corrupt Practices Act, or the “FCPA,” and
similar foreign anti-corruption laws generally prohibit companies
and their intermediaries from making improper payments or providing
anything of value to influence foreign government officials for the
purpose of obtaining or retaining business or obtaining an unfair
advantage. Recent years have seen a substantial increase in the
global enforcement of anti-corruption laws and anti-criminal laws,
with more frequent voluntary self-disclosures by companies,
aggressive investigations and enforcement proceedings, resulting in
record fines and penalties, increased enforcement activity, and
increases in criminal and civil proceedings brought against
companies and individuals.
We have
operations in Russia, Kazakhstan, Ukraine, Kyrgyzstan, Uzbekistan,
Germany and Cyprus. Enforcement officials interpret anti-corruption
laws’ prohibitions on improper payments to government
officials to apply to officials like those of the Central Bank of
the Russian Federation, the Agency for Regulation and Development
of the Financial Market of the Republic of Kazakhstan, the Center
for Coordination and Development of Securities Market of the
Republic of Uzbekistan, the National Commission for securities
markets of Ukraine and the Cyprus Securities and Exchange
Commission, the principal regulatory bodies that would control and
monitor our operations in Russia, Kazakhstan, Ukraine, Uzbekistan
and Cyprus. Our internal policies and those of our subsidiaries
provide for compliance with all applicable anti-corruption and
anti-criminal laws. Despite our training and compliance programs,
we cannot assure you that our internal control policies and
procedures always will protect us from unauthorized reckless or
criminal acts committed by our employees, agents or independent
contractors outside the scope of their employment. In the event
that we believe or have reason to believe that our employees,
agents or independent contractors have or may have violated
applicable anti-corruption and anti-criminal laws, we may be
required to investigate or have outside counsel investigate the
relevant facts and circumstances, which can be expensive and
require significant time and attention from senior management.
Violations of these laws may result in severe criminal or civil
sanctions, which could disrupt our business and result in a
material adverse effect on our business, financial condition,
results of operations and cash flows.
We are a holding company with little or no operations of our own
other than the funding and management of our operating
subsidiaries, however, our financial statements are presented on a
consolidated basis.
Our
operations are conducted primarily through our subsidiaries and our
ability to generate cash to fund our operations and expenses, to
pay dividends or to meet debt service obligations is highly
dependent on the earnings and the receipt of funds from our
subsidiaries through dividends or intercompany loans. Deterioration
in the financial condition, earnings or cash flow of our
subsidiaries for any reason could limit or impair their ability to
pay such distributions. Additionally, to the extent our
subsidiaries are restricted from making such distributions under
applicable law or regulation or under the terms of financing
arrangements, or are otherwise unable to provide funds to the
extent of our needs, there could be a material adverse effect on
our business, financial condition, results of operations or cash
flows.
Timur Turlov has control over key decision making as a result of
his ownership of a majority of our voting stock.
Timur
Turlov, our chief executive officer and chairman of our board of
directors, beneficially owns 72.7% of our outstanding common stock.
Mr. Turlov currently has sole voting control of FRHC and can
control the outcome of matters submitted to stockholders for
approval, including the election of directors, stock splits,
recapitalizations, and any merger, consolidation, or sale of all or
substantially all of our assets. In addition, Mr. Turlov has the
ability to control our management and affairs as a result of his
position as our chief executive officer, chairman of our board of
directors and his ability to control the election of our directors.
As a board member and officer, Mr. Turlov owes fiduciary
duties to our stockholders and must act in good faith and in a
manner he reasonably believes to be in the best interest of our
stockholders. As a stockholder, however, Mr. Turlov is
entitled to vote his shares of common stock according to his
personal interests, which may not always be in the interest of our
stockholders generally. Mr. Turlov is prohibited from membership of
our audit committee under the terms of the audit committee charter
adopted by our board of directors.
The price of our common stock has fluctuated historically and may
be volatile.
The
market price of our common stock may fluctuate significantly. Among
the factors that could affect our stock price are:
●
industry
or general market conditions;
●
domestic
and international economic factors unrelated to our
performance;
●
country
risk associated with the countries in which we conduct
operations;
●
changes
in our customers’ preferences;
●
new
regulatory pronouncements and changes in regulatory
guidelines;
●
lawsuits,
enforcement actions and other claims by third parties or
governmental authorities;
●
actual
or anticipated fluctuations in our quarterly operating
results;
●
changes
in securities analysts’ estimates of our financial
performance or lack of research coverage and reports by industry
analysts;
●
actions
by large position stockholders, including future sales of our
common stock;
●
announcements
by us of significant impairment charges;
●
speculation
in the press or investment community;
●
investor
perception of us and our industry;
●
changes
in market valuations or earnings of similar companies;
●
announcements
by us or our competitors of significant contracts, acquisitions,
dispositions or strategic partnerships;
●
completions
of significant asset acquisitions or dispositions;
●
war,
terrorist acts, civil unrest and epidemic disease;
●
any
future sales of our common stock or other securities;
●
additions
or departures of key personnel; and
●
misconduct
or other improper actions of our employees.
Stock
markets can experience extreme volatility unrelated to the
operating performance of any particular company. These broad market
fluctuations may adversely affect the trading price of our common
stock. In the past, following periods of volatility in the market
price of a company’s securities, class action litigation has
often been instituted against the affected company. Any litigation
of this type brought against us could result in substantial costs
and a diversion of our management’s attention and resources,
which could materially and adversely affect our business, financial
position, results of operations or cash flows.
Future offerings of securities which would rank senior to our
common stock may adversely affect the market price of our common
stock.
Our
Articles of Incorporation authorize our board of directors to fix
the relative rights and preferences of our 20,000,000 shares of
authorized preferred stock, without approval from our stockholders.
This could affect the rights of our common stockholders regarding,
among other things, voting, distributions, dividends and
liquidation. We could also use the preferred stock to deter or
delay a change in control of FRHC that may be opposed by our
management, even if the transaction might be favorable to our
common stockholders.
If, in
the future, we decide to issue debt or equity securities that rank
senior to our common stock, it is possible that such securities
will be governed by an indenture or other instrument containing
covenants restricting our operating flexibility. Additionally, any
convertible or exchangeable securities that we issue in the future
may have rights, preferences and privileges more favorable than
those of our common stock and may result in dilution to owners of
our common stock. We and, indirectly, our stockholders, will bear
the cost of issuing and servicing such securities. Because our
decision to issue debt or equity securities in any future offering
will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or nature
of our future offerings. Thus, holders of our common stock will
bear the risk of our future offerings reducing the market price of
our common stock and diluting the value of their stock holdings in
FRHC.
Fulfilling our obligations incident to being a public company,
including with respect to the requirements of and related rules
under the Sarbanes-Oxley Act and the Dodd-Frank Act, are expensive
and time-consuming, and any delays or difficulties in satisfying
these obligations could have a material adverse effect on our
future results of operations and our stock price.
We are
subject to extensive corporate governance, reporting and accounting
disclosure requirements under U.S. securities laws and regulations
of the SEC. These laws, as well as the listing standards of the
Nasdaq Stock Exchange, impose certain compliance requirements,
costs and obligations on listed companies. This requires a
significant commitment of resources and management oversight. The
expenses associated with being a public company include auditing,
accounting and legal fees and expenses, investor relations
expenses, increased directors’ fees and director and officer
liability insurance costs, registrar and transfer agent fees and
listing fees, as well as other expenses. Failure to comply with
Sarbanes-Oxley Act or Dodd-Frank Act could potentially subject us
to sanctions or investigations by the SEC or other regulatory,
exchange or market authorities.
We do not intend to pay dividends on our common stock for the
foreseeable future and, consequently, your ability to achieve a
return on your investment will depend on appreciation in the price
of our common stock.
We
currently intend to use our future earnings, if any, to repay debt,
to fund our growth, to develop our business, for working capital
needs and for general corporate purposes. We are not likely to pay
dividends on our common stock for the foreseeable future, and the
success of an investment in shares of our common stock will depend
upon any future appreciation in the value of our common stock.
There is no guarantee that shares of our common stock will
appreciate in value or even maintain their current value. Payments
of dividends, if any, are at the sole discretion of our board of
directors after taking into account various factors, including
general and economic conditions, our financial condition and
operating results, our available cash and current and anticipated
cash needs, capital requirements, contractual, legal, tax and
regulatory restrictions and implications of the payment of
dividends by us to our stockholders or by our subsidiaries to us,
and such other factors as our board of directors may deem relevant.
In addition, our operations are conducted almost entirely through
our subsidiaries. As such, to the extent that we determine in the
future to pay dividends on our common stock, none of our
subsidiaries will be obligated to make funds available to us for
the payment of dividends. Further, Nevada law imposes additional
requirements that may restrict our ability to pay dividends to
holders of our common stock.
We are deemed to be a “controlled company” within the
meaning of the rules of Nasdaq and, as a result, we qualify for
exemptions from certain corporate governance requirements. You will
not have the same protections afforded to stockholders of companies
that are subject to such requirements.
Timur
Turlov controls a majority of the voting power of our outstanding
common stock. Accordingly, we qualify as a “controlled
company” within the meaning of Nasdaq corporate governance
standards. Under Nasdaq rules, a company of which more than 50% of
the voting power is held by one individual is a “controlled
company” and may elect not to comply with certain corporate
governance standards, including:
●
the
requirement that a majority of the board of directors consist of
independent directors;
●
the
requirement that we have an audit committee that is composed
entirely of independent directors with a written charter addressing
the committee’s purpose and responsibilities;
●
the
requirement that our nominating and corporate governance committee
be composed entirely of independent directors with a written
charter addressing the committee’s purpose and
responsibilities;
●
the
requirement that we have a compensation committee that is composed
entirely of independent directors with a written charter addressing
the committee’s purpose and responsibilities;
and
●
the
requirement for an annual performance evaluation of the nominating
and corporate governance and compensation committees.
We
currently utilize exemptions to allow for one non-independent
director to sit on each of our nominating and corporate governance
committee and our compensation committee. The charters for each of
those committees provide for annual performance evaluations.
Currently we do have a majority of independent directors on the
board of directors. Our status as a controlled company could make
our common stock less attractive to some investors or otherwise
harm our stock price.
Item 1B. Unresolved Staff
Comments
None.
We do
not own any real estate or other physical properties that are
materially important to our operation. Our principal executive
offices are located at “Esentai Tower BC, Floor 7, 77/7 Al
Farabi Ave. Almaty, Kazakhstan 050040.
We
currently lease office space for 79 retail, executive,
administrative and operational facilities in Eastern Europe,
Central Asia, Europe and the U.S, including 15 brokerage and
financial services offices in Russia that also provide banking
services to firm customers. Our total leased square footage is
approximately 264,000 square feet for which we incur rent expense
of approximately $530,000 per month. For additional information
regarding our office lease commitments see Note 26 –
Leases.
Item
3. Legal Proceedings
The
securities 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
brokerage 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 governmental and regulatory
audits and inspections.
From
time to time, we, or our subsidiaries may be named as defendants in
various routine legal proceedings, claims, and regulatory inquiries
arising out of the ordinary course of our 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 these 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 4. Mine Safety Disclosures
Not
applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Shareholders and Board of Directors
Freedom Holding Corp.
Las Vegas, Nevada
Opinion on Internal Control over Financial Reporting
We have audited Freedom Holding Corp.’s (the
“Company’s”) internal control over financial
reporting as of March 31, 2020, based on criteria established
in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO
criteria”). In our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of March 31, 2020, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the
Company as of March 31, 2020 and 2019, the related consolidated
statements of operations and comprehensive income/(loss),
shareholders’ equity, and cash flows for each of the two
years in the period ended March 31, 2020, and the related notes and
our report dated July 13, 2020 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, Management’s
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit of internal control over financial reporting
in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ WSRP, LLC
Salt
Lake City, Utah
July 13, 2020
FREEDOM HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$63,208
|
$49,960
|
|
Restricted
cash
|
66,597
|
38,460
|
|
Trading
securities
|
156,544
|
167,949
|
|
Available-for-sale
securities, at fair value
|
6,438
|
2
|
|
Brokerage
and other receivables, net
|
113,687
|
73,836
|
|
Loans
issued
|
10,461
|
2,525
|
|
Deferred
tax assets
|
570
|
1,265
|
|
Fixed
assets, net
|
6,384
|
5,563
|
|
Intangible
assets, net
|
3,422
|
4,226
|
|
Goodwill
|
2,607
|
2,936
|
|
Right-of-use
asset
|
14,543
|
-
|
|
Other
assets, net
|
9,062
|
4,189
|
|
|
|
|
|
TOTAL ASSETS
|
$453,523
|
$350,911
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Debt
securities issued
|
$72,296
|
$28,538
|
|
Customer
liabilities
|
168,432
|
82,032
|
|
Trade
payables
|
8,398
|
32,695
|
|
Deferred
distribution payments
|
8,534
|
8,534
|
|
Securities
repurchase agreement obligations
|
48,204
|
73,621
|
|
Current
income tax liability
|
1,407
|
754
|
|
Lease
liability
|
14,384
|
-
|
|
Loans
received
|
-
|
4,008
|
|
Other
liabilities
|
2,831
|
3,132
|
|
TOTAL LIABILITIES
|
324,486
|
233,314
|
|
|
|
|
|
Commitments and Contingencies
|
-
|
-
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Preferred
stock - $0.001 par value; 20,000,000 shares authorized, no shares
issued or outstanding
|
-
|
-
|
|
Common
stock - $0.001 par value; 500,000,000 shares authorized; 58,358,212
and 58,043,212 shares issued and outstanding as of March 31, 2020
and 2019, respectively
|
58
|
58
|
|
Additional
paid in capital
|
102,890
|
99,093
|
|
Retained
earnings
|
66,335
|
41,498
|
|
Accumulated
other comprehensive loss
|
(37,974)
|
(23,052)
|
|
TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY
|
131,309
|
117,597
|
|
|
|
|
|
Non-controlling
interest
|
(2,272)
|
-
|
|
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
129,037
|
117,597
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$453,523
|
$350,911
|
The
accompanying notes are an integral part of these consolidated
financial statements.
FREEDOM HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE
INCOME/(LOSS)
(All
amounts in thousands of United States dollars, unless otherwise
stated)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Fee
and commission income
|
$92,668
|
$44,316
|
|
Net
gain on trading securities
|
14,923
|
20,162
|
|
Interest
income
|
12,134
|
13,925
|
|
Net
loss on derivatives
|
(138)
|
-
|
|
Net
gain /(loss) on foreign exchange operations
|
2,315
|
(4,118)
|
|
|
|
|
|
TOTAL REVENUE, NET
|
121,902
|
74,285
|
|
|
|
|
|
Expense:
|
|
|
|
Interest
expense
|
12,399
|
14,649
|
|
Fee
and commission expense
|
21,936
|
6,238
|
|
Operating
expense
|
59,990
|
43,134
|
|
Provision
for impairment (recoveries)/losses
|
(1,164)
|
1,498
|
|
Other
expense, net
|
609
|
236
|
|
Loss
from disposal of subsidiary
|
-
|
15
|
|
|
|
|
|
TOTAL EXPENSE
|
93,770
|
65,770
|
|
NET
INCOME BEFORE INCOME TAX
|
28,132
|
8,515
|
|
|
|
|
|
Income
tax expense
|
(6,002)
|
(1,368)
|
|
|
|
|
|
NET INCOME
|
$22,130
|
$7,147
|
|
|
|
|
|
Less:
Net loss attributable to noncontrolling interest in
subsidiary
|
(2,707)
|
-
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
$24,837
|
$7,147
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME/(LOSS)
|
|
|
|
Change
in unrealized gain on investments available-for-sale,
net
of tax effect
|
(71)
|
-
|
|
Reclassification
adjustment relating to available-for-sale investments disposed of
in the period, net of tax effect
|
-
|
22
|
|
Foreign
currency translation adjustments, net of tax
|
(14,851)
|
(15,517)
|
|
|
|
|
|
COMPREHENSIVE
INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS
|
7,208
|
(8,348)
|
|
|
|
|
|
Less:
Comprehensive loss attributable to noncontrolling interest in
subsidiary
|
(2,707)
|
-
|
|
|
|
|
|
COMPREHENSIVE
INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
$9,915
|
$(8,348)
|
|
BASIC
NET INCOME PER COMMON SHARE (In US Dollars)
|
$0.38
|
$0.12
|
|
DILUTED
NET INCOME PER COMMON SHARE (In US Dollars)
|
$0.38
|
$0.12
|
|
Weighted
average number of shares (basic)
|
58,163,691
|
58,037,102
|
|
Weighted
average number of shares (diluted)
|
58,251,588
|
58,237,123
|
The
accompanying notes are an integral part of these consolidated
financial statements.
FREEDOM HOLDING CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018
|
58,033,212
|
$58
|
$100,180
|
$34,351
|
$(7,557)
|
$-
|
$127,032
|
|
|
|
|
|
|
|
|
|
|
Capital
contributions
|
-
|
-
|
225
|
-
|
-
|
-
|
225
|
|
Exercise
of options
|
10,000
|
-
|
20
|
-
|
-
|
-
|
20
|
|
Acquisition
of Nettrader
|
-
|
-
|
(2,590)
|
-
|
-
|
-
|
(2,590)
|
|
Acquisition
of Asyl Invest
|
-
|
-
|
(2,240)
|
-
|
-
|
-
|
(2,240)
|
|
Stock
based compensation
|
-
|
-
|
3,498
|
-
|
-
|
-
|
3,498
|
|
Reclassification
adjustment relating to available-for-sale investments disposed of
in the period, net of tax effect
|
-
|
-
|
-
|
-
|
22
|
-
|
22
|
|
Translation
difference
|
-
|
-
|
-
|
-
|
(15,517)
|
-
|
(15,517)
|
|
Net
income
|
-
|
-
|
-
|
7,147
|
-
|
-
|
7,147
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2019
|
58,043,212
|
$58
|
$99,093
|
$41,498
|
$(23,052)
|
$-
|
$117,597
|
|
|
|
|
|
|
|
|
|
|
Exercise
of options
|
230,000
|
-
|
455
|
-
|
-
|
-
|
455
|
|
Stock
based compensation
|
-
|
-
|
2,625
|
-
|
-
|
-
|
2,625
|
|
Share
based payment
|
85,000
|
-
|
1,052
|
-
|
-
|
-
|
1,052
|
|
Sale
of Freedom UA shares
|
-
|
-
|
(335)
|
-
|
-
|
435
|
100
|
|
Change
in unrealized gain on available-for-sale securities, net of tax
effect
|
-
|
-
|
-
|
-
|
(71)
|
-
|
(71)
|
|
Translation
difference
|
-
|
-
|
-
|
-
|
(14,851)
|
-
|
(14,851)
|
|
Net
income/(loss)
|
-
|
-
|
-
|
24,837
|
-
|
(2,707)
|
22,130
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2020
|
58,358,212
|
$58
|
$102,890
|
$66,335
|
$(37,974)
|
$(2,272)
|
$129,037
|
The
accompanying notes are an integral part of these consolidated
financial statements.
FREEDOM HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
Net
income
|
$22,130
|
$7,147
|
|
|
|
|
|
Adjustments to
reconcile net income from /(used in)operating
activities:
|
|
|
|
Depreciation and
amortization
|
2,658
|
2,034
|
|
Noncash lease
expense
|
6,298
|
-
|
|
Loss on sale of
fixed assets
|
201
|
30
|
|
Change in deferred
taxes
|
545
|
(580)
|
|
Stock compensation
expense
|
2,625
|
3,498
|
|
Share based
payment
|
1,052
|
-
|
|
Unrealized loss on
trading securities
|
7,847
|
5,373
|
|
Net change in
accrued interest
|
(816)
|
322
|
|
Allowance for
receivables
|
(1,164)
|
1,498
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Trading
securities
|
(22,870)
|
8,452
|
|
Brokerage and other
receivables, net
|
(47,089)
|
(52,174)
|
|
Loans
issued
|
(7,787)
|
5,536
|
|
Other assets,
net
|
(5,619)
|
(244)
|
|
Securities sold,
but not yet purchased – at fair value
|
-
|
(1,063)
|
|
Customer
liabilities
|
115,844
|
52,745
|
|
Current income tax
liability
|
650
|
754
|
|
Trade
payables
|
(23,933)
|
23,201
|
|
Changes in lease
liability
|
(6,474)
|
-
|
|
Other
liabilities
|
173
|
1,946
|
|
|
|
|
|
Net
cash flows from operating activities
|
44,271
|
58,475
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
Purchase of fixed
assets
|
(4,631)
|
(4,987)
|
|
Proceeds from sale
of fixed assets
|
285
|
264
|
|
(Purchase
of)/proceeds from sale of available-for-sale securities, at fair
value
|
(6,508)
|
231
|
|
Consideration paid
for Asyl Invest
|
-
|
(2,240)
|
|
|
|
|
|
Net
cash flows used in investing activities
|
(10,854)
|
(6,732)
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
Repurchase of
securities repurchase agreement obligations
|
(16,730)
|
(59,663)
|
|
Proceeds from
issuance of debt securities
|
62,970
|
34,287
|
|
Repurchase of debt
securities
|
(9,578)
|
(14,786)
|
|
Capital
contributions
|
-
|
225
|
|
Exercise of
options
|
455
|
20
|
|
Proceeds from loans
received
|
-
|
5,609
|
|
Repayment of loans
received
|
(4,008)
|
(8,015)
|
|
|
|
|
|
Net
cash flows from/(used in) financing activities
|
33,109
|
(42,323)
|
|
|
|
|
|
Effect
of changes in foreign exchange rates on cash and cash
equivalents
|
(25,141)
|
(8,693)
|
|
|
|
|
|
NET
CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
41,385
|
727
|
|
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF
PERIOD
|
88,420
|
87,693
|
|
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
|
$129,805
|
$88,420
|
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash paid for
interest
|
$(9,538)
|
$(13,323)
|
|
Income tax
paid
|
$(5,286)
|
$(1,287)
|
|
|
|
|
|
Supplemental
non-cash disclosures:
|
|
|
|
Operating lease
right-of-use assets obtained in exchange for operating lease
obligations on adoption of new lease standard
|
$16,979
|
$-
|
|
Operating lease
right-of-use assets obtained/disposed of in exchange for operating
lease obligations during the period, net
|
$4,722
|
$-
|
The
following table provides a reconciliation of cash, cash
equivalents, and restricted cash reported within the statement of
financial position that sum to the total of the same such amounts
shown in the statement of cash flow:
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$63,208
|
$49,960
|
|
Restricted
cash
|
66,597
|
38,460
|
|
Total
cash, cash and cash equivalents and restricted cash shown in the
statement of cash flows
|
$129,805
|
$88,420
|
The
accompanying notes are an integral part of these consolidated
financial statements.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 1 - DESCRIPTION OF
BUSINESS
Overview
Freedom
Holding Corp. (the “Company” or “FRHC”) is
a corporation organized in the United States under the laws of the
State of Nevada that through its operating subsidiaries provides
financial services including retail securities brokerage, research,
investment counseling, securities trading, market making, corporate
investment banking and underwriting services in Eastern Europe and
Central Asia. The Company is headquartered in Almaty, Kazakhstan,
with supporting administrative office locations in Russia, Cyprus
and the United States. The Company has retail locations in Russia,
Kazakhstan, Ukraine, Uzbekistan, Kyrgyzstan and Germany. The
Company’s common stock trades on the Nasdaq Capital
Market.
The
Company owns directly, or through subsidiaries, the following
companies: LLC Investment Company Freedom Finance, a Moscow,
Russia-based securities broker-dealer (“Freedom RU”);
LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN
Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based
securities broker-dealer (“Freedom KZ”); Freedom
Finance 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”), formerly known as Freedom Finance
Cyprus, 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 32.88% interest in LLC Freedom Finance Ukraine,
a Kiev, Ukraine-based broker-dealer (“Freedom UA”). The
remaining 67.12% interest in Freedom UA is owned by Askar
Tashtitov, the Company’s president. The Company has entered
into a series of contractual arrangements with Freedom UA and Mr.
Tashtitov, including a consulting services agreement, an operating
agreement and an option agreement. Because such agreements obligate
the Company to guarantee the performance of all Freedom UA
obligations and provide Freedom UA sufficient funding to cover all
Freedom UA operating losses and net capital requirements, enable
the Company to receive 90% of the net profits of Freedom UA after
tax, and require the Company to provide Freedom UA the management
competence, operational support, and ongoing access to the
Company’s significant assets, necessary technology resources
and expertise to conduct the business of Freedom UA, the Company
accounts for Freedom UA as a variable interest entity
(“VIE”) under the accounting standards of the Financial
Accounting Standards Board (“FASB”). Accordingly, the
financial statements of Freedom UA are consolidated into the
financial statements of the Company.
The
Company’s subsidiaries are participants on the Kazakhstan
Stock Exchange (KASE), Astana Stock Exchange (AIX), Moscow Exchange
(MOEX), Saint-Petersburg Exchange (SPBX), the Ukrainian Exchange
(UX), and the Republican Stock Exchange of Tashkent (UZSE). Freedom
CY serves to provide the Company’s clients with operations
support and access to the investment opportunities, relative
stability, and integrity of the U.S. and European securities
markets, which under the regulatory regimes of many jurisdictions
where the Company operates do not currently allow investors direct
access to international securities markets.
Unless
otherwise specifically indicated or as is otherwise contextually
required, FRHC, Freedom RU, FFIN Bank, Freedom KZ, Freedom Global,
Freedom CY, 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 consolidated
financial statements conform to accounting principles generally
accepted in the United States of America (US GAAP).
These
financial statements have been prepared on the accrual basis of
accounting.
Basis of presentation and principles of consolidation
The
Company’s consolidated financial statements present the
consolidated accounts of FRHC, Freedom RU, FFIN Bank, Freedom KZ,
Freedom Global, Freedom CY, Freedom GE, Freedom UZ, Freedom GE,
FFIN and Freedom UA. All significant inter-company balances and
transactions have been eliminated from the consolidated financial
statements.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
Consolidation of variable interest entities
In
accordance with accounting standards regarding consolidation of
variable interest entities, 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 US GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Management believes that the estimates
utilized in preparing its financial statements are reasonable and
prudent. Actual results could differ from those
estimates.
Revenue and expense 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 US GAAP guidance discussed
elsewhere within these disclosures. Descriptions of the
Company’s revenue-generating activities that are within the
scope of ASC Topic 606, which are presented in the 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
Topic 606, the Company is required to recognize incentive fees when
they are probable and there is not a significant chance of reversal
in the future. For the brokerage commission, banking service
commission and investment banking services commission contracts in
place at the time of adoption, this change in policy did not result
in any actual change in revenue that had already been recognized
and therefore there was no transition adjustment
necessary.
The
Company recognizes revenue when five basic criteria have been
met:
●
The parties to the
contract have approved the contract (in writing, orally, or in
accordance with other customary business practices) and are
committed to perform their respective obligations.
●
The entity can
identify each party’s rights regarding the goods or services
to be transferred.
●
The entity can
identify the payment terms for the goods or services to be
transferred.
●
The contract has
commercial substance (that is, the risk, timing, or amount of the
entity’s future cash flows is expected to change as a result
of the contract).
●
It is probable that
the entity will collect substantially all of the consideration to
which it will be entitled in exchange for the goods or services
that will be transferred to the customer.
Derivative financial instruments
In the
normal course of business, the Company invests in various
derivative financial contracts including futures. Derivatives are
initially recognized at fair value at the date a derivative
contract is entered into and are subsequently re-measured to their
fair value at each reporting date. The fair values are estimated
based on quoted market prices or pricing models that take into
account the current market and contractual prices of the underlying
instruments and other factors. Derivatives are carried as assets
when their fair value is positive and as liabilities when it is
negative.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
Functional currency
Management
has adopted ASC 830, Foreign Currency Translation Matters as it
pertains to its foreign currency translation. The Company’s
functional currencies are the Russian ruble, European euro,
Ukrainian hryvnia, Uzbekistani som and Kazakhstani tenge, and its
reporting currency is the U.S. dollar. For financial reporting
purposes, foreign currencies are translated into U.S. dollars as
the reporting currency. 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. 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 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 Consolidated Balance
Sheets. The consideration received under repurchase agreements is
classified as securities repurchase agreement obligations in the
Consolidated Balance Sheets.
The Company enters into reverse repurchase agreements, repurchase
agreements, securities borrowed and securities loaned transactions
to, among other things, acquire securities to leverage and grow its
proprietary trading portfolio, cover short positions and settle
other securities obligations, to accommodate customers’ needs
and to finance its inventory positions. The Company enters
into these transactions in accordance with normal market practice.
Under standard terms for repurchase transactions, the recipient of
collateral has the right to sell or repledge the collateral,
subject to returning equivalent securities on settlement of the
transaction.
Available-for-sale securities
Financial
assets categorized as available-for-sale (“AFS”) are
non-derivatives that are either designated as available-for-sale or
not classified as (a) loans and receivables, (b) held to maturity
investments or (c) trading securities.
Listed
shares and listed redeemable notes held by the Company that are
traded in an active market are classified as AFS and are stated at
fair value. The Company has investments in unlisted shares that are
not traded in an active market but that are also classified as
investments AFS and stated at fair value (because Company
management considers that fair value can be reliably measured).
Gains and losses arising from changes in fair value are recognized
in other comprehensive income and accumulated in the Accumulated
other comprehensive income/(loss), with the exception of
other-than-temporary impairment losses, interest calculated using
the effective interest method, dividend income and foreign exchange
gains and losses are recognized in the Consolidated Statements of
Operations and Statements of other Comprehensive Income/(Loss).
Where the investment is disposed of or is determined to be
impaired, the cumulative gain or loss previously accumulated in the
investments revaluation reserve is reclassified to profit or
loss.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
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 Consolidated Statements of Operations
and Statements of Other Comprehensive Income/(Loss) and included in
net gain/(loss) on trading securities. Interest earned and dividend
income are recognized in the Consolidated Statements of Operations
and Statements of Other Comprehensive Income/(Loss) and 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 of the funds provided by the fund
managers with gains or losses included in net gain on trading
securities in the Consolidated Statements of Operations and
Statements of Other Comprehensive Income/(Loss).
Debt securities issued
Debt
securities issued are initially recognized at the fair value of the
consideration received, less directly attributable transaction
costs. Subsequently, amounts due are stated at amortized cost and
any difference between net proceeds and the redemption value is
recognized over the period of the borrowings using the effective
interest method. If the Company purchases its own debt it is
removed from the Consolidated Balance Sheets and the difference
between the carrying amount of the liability and the consideration
paid is recognized in the Consolidated Statements of Operations and
Statements of Other Comprehensive Income/(Loss).
Brokerage and other receivables
Brokerage
and other receivables comprise commissions and receivables related
to the securities brokerage and banking activity of the Company. At
initial recognition, brokerage and other receivables are recognized
at fair value. Subsequently, brokerage and other receivables are
carried at cost net of any allowance for impairment
losses.
Derecognition of financial assets
A
financial asset (or, where applicable a part of a financial asset
or a part of a group of similar financial assets) is derecognized
where all of the following conditions are met:
●
The transferred
financial assets have been isolated from the Company - put
presumptively beyond the reach of the Company and its creditors,
even in bankruptcy or other receivership.
●
The 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 March
31, 2020 and March 31, 2019, the Company had not recorded any
charges for impairment of long-lived assets.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
Impairment of goodwill
As of
March 31, 2020 and March 31, 2019, goodwill recorded in the
Company’s Consolidated Balance Sheets totaled $2,607 and
$2,936, respectively. The Company performs an impairment review at
least annually unless indicators of impairment exist in interim
periods. The impairment test for goodwill uses a two-step approach.
Step one compares the estimated fair value of a reporting unit with
goodwill to its carrying value. If the carrying value exceeds the
estimated fair value, step two must be performed. Step two compares
the carrying value of the reporting unit to the fair value of all
of the assets and liabilities of the reporting unit as if the
reporting unit was acquired in a business combination. If the
carrying amount of a reporting unit's goodwill exceeds the implied
fair value of its goodwill, an impairment loss is recognized in an
amount equal to the excess. In its annual goodwill impairment test,
the Company estimated the fair value of the reporting unit based on
the income approach (also known as the discounted cash flow method)
and determined the fair value of the Company’s goodwill
exceeded the carrying amount of the Company’s goodwill. The
goodwill value as March 31, 2020 decreased compared to March 31,
2019 due to foreign exchange currency translation.
The
changes in the carrying amount of goodwill as of March 31, 2019 and
for the year ended March 31, 2020 were as follows:
|
|
|
|
Balance
as of March 31, 2019
|
$2,936
|
|
|
|
|
Foreign currency
translation
|
(329)
|
|
|
|
|
Balance
as of March 31, 2020
|
$2,607
|
Income taxes
The
Company recognizes deferred tax liabilities and assets based on the
difference between the financial statements and tax basis of assets
and liabilities using the enacted tax rates in effect for the year
in which the differences are expected to reverse. The measurement
of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not
expected to be realized.
Current
income tax expenses are provided for in accordance with the laws of
the relevant taxing authorities. As part of the process of
preparing financial statements, the Company is required to estimate
its income taxes in each of the jurisdictions in which it operates.
The Company accounts for income taxes using the asset and liability
approach. Under this method, deferred income taxes are recognized
for tax consequences in future years based on differences between
the tax bases of assets and liabilities and their reported amounts
in the financial statements at each year-end and tax loss carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates applicable for the differences that are expected
to affect taxable income.
The
Company will include interest and fines arising from the
underpayment of income taxes in the provision for income taxes (if
anticipated). As of March 31, 2020 and March 31, 2019, the Company
had no accrued interest or fines related to uncertain tax
positions.
The
Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax
Reform Act require the Company to include in its U.S. income tax
return foreign subsidiary earnings in excess of an allowable return
on the foreign subsidiary’s tangible assets. The Company has
presented the deferred tax impacts of GILTI tax in its consolidated
financial statements as of March 31, 2020 and March 31,
2019.
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.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
Leases
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842),
which establishes a right-of-use model that requires a lessee to
record a right-of-use asset and a lease liability on the balance
sheet for all leases with terms longer than 12 months. Leases have
been classified as either finance or operating, with classification
affecting the pattern of expense recognition in the Consolidated
Statements of Operations and Statements of Other Comprehensive
Income/(Loss). The new standard also requires disclosures that
provide additional information on recorded lease arrangements. In
July 2018, the FASB issued ASU 2018-11, Leases –Targeted
Improvements, which provides an optional transition method that
allows entities to initially apply the new lease standard at the
adoption date and recognize a cumulative-effect adjustment to the
opening balance of retained earnings in the period of
adoption.
The Company adopted the provisions of ASU 2018-11, including the
optional transition method, on April 1, 2019, 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 consolidated balance sheets.
Refer to Note 26 - Leases, within the notes to consolidated
financial statements for additional disclosure and significant
accounting policies affecting leases.
Fixed assets
Fixed assets are carried at cost, net of accumulated depreciation.
Maintenance, repairs, and minor renewals are expensed as incurred.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range between three and
seven years.
Segment information
The Company operates in a single operating segment offering
financial services to its customers in a single geographic region
covering Central Asia and Eastern Europe. The Company’s
financial services business provides retail securities
brokerage, research, investment counseling, securities trading,
market making, corporate investment banking and underwriting
services to its customers. The Company generates revenue from
customers primarily from fee and commission income and interest
income. The Company does not use
profitability reports or other information disaggregated on a
regional, country or divisional basis for making business
decisions.
Advertising expense
For the years ended March 31, 2020 and 2019, the Company had
expenses related to advertising in the amount of $5,635 and $4,500,
respectively. All costs associated with advertising are expensed in
the period incurred.
Recent accounting pronouncements
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (Topic 820), Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. In March 2014,
the Board issued a proposed FASB Concepts Statement, Conceptual
Framework for Financial Reporting—Chapter 8: Notes to
Financial Statements, which the Board finalized on August 28, 2018.
The disclosure framework project’s objective and primary
focus are to improve the effectiveness of disclosures in the notes
to financial statements by facilitating clear communication of the
information required by GAAP. The amendments in this Update modify
the disclosure requirements on fair value measurements in Topic
820, Fair Value Measurement, based on the concepts in the Concepts
Statement, including the consideration of costs and benefits. The
amendments in this Update apply to all entities that are required,
under existing GAAP, to make disclosures about recurring or
nonrecurring fair value measurements. The amendments in this Update
are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2019. The Company does not expect that the new guidance will
significantly impact on its consolidated financial
statements.
In
November 2018, the FASB issued ASU No. 2018-19, Codification
Improvements to Topic 326, Financial Instruments—Credit
Losses. On June 16, 2016, the FASB issued Accounting Standards
Update No. 2016-13, Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments,
which introduced an expected credit loss methodology for the
impairment of financial assets measured at amortized cost basis.
That methodology replaces the probable, incurred loss model for
those assets. Through that Update, the Board added Topic 326 and
made several consequential amendments to the FASB Accounting
Standards Codification. The amendment clarifies that receivables
arising from operating leases are not within the scope of Subtopic
326-20. Instead, impairment of receivables arising from operating
leases should be accounted for in accordance with Topic 842,
Leases. For public business entities that are U.S. Securities and
Exchange Commission (SEC) filers, the amendments in this Update are
effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The effective
date and transition requirements for the amendments in this Update
are the same as the effective dates and transition requirements in
Update 2016-13, as amended by this Update. The Company does not
expect a material impact from the new guidance on its consolidated
financial statements.
In
April 2019, FASB also issued ASU No. 2019-04, Codification
Improvements to Topic 326, Financial Instruments-Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial
Instruments and in May 2019, FASB issued ASU No. 2019-05, Financial
Instruments-Credit Losses (Topic 326). The ASU 2019-04 amendments
affect a variety of Topics in the Codification and is part of the
Board’s ongoing project on Codification improvement. The FASB
received several agenda request letters asking that the Board
consider amending the transition guidance for Update 2016-13. ASU
2019-05 addresses stakeholders’ concerns by providing an
option to irrevocably elect the fair value option for certain
financial assets previously measured at amortized cost basis. For
those entities, the targeted transition relief will increase
comparability of financial statement information by providing an
option to align measurement methodologies for similar financial
assets. Furthermore, the targeted transition relief also may reduce
the costs for some entities to comply with the amendments in Update
2016-13 while still providing financial statement users with
decision-useful information. For entities that have not yet adopted
the amendments in Update 2016-13, the effective dates and
transition requirements for the amendments related to ASU 2019-04
are the same as the effective dates and transition requirements in
Update 2016-13. ASU 2019-05 is effective for entities that have
adopted the amendments in Update 2016-13 for fiscal years beginning
after December 15, 2019, including interim periods within those
fiscal years. Early adoption is permitted in any interim period
after the issuance of this Update as long as an entity has adopted
the amendments in Update 2016-13. The Company does not expect that
the new guidance will significantly impact its consolidated
financial statements.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
In July
2019, the FASB issued ASU 2019-07, Codification Updates to SEC
Sections. This ASU amends various SEC paragraphs pursuant to the
issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update
and Simplification, and Nos. 33-10231 and 33-10442, Investment
Company Reporting Modernization. One of the changes in the ASU
requires a presentation of changes in stockholders’ equity in
the form of a reconciliation, either as a separate financial
statement or in the notes to the financial statements, for the
current and comparative year-to-date interim periods. The Company
presented changes in stockholders' equity as separate financial
statements for the current and comparative year-to-date interim
periods beginning on April 1, 2019. The additional elements of the
ASU did not have a material impact on the Company's consolidated
financial statements. This guidance was effective immediately upon
issuance.
In
November 2019, the FASB issued ASU 2019-10 Financial
Instruments-Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842). On the basis of feedback
obtained from outreach with stakeholders and monitoring of
implementation, the Board has gained a greater understanding about
the implementation challenges encountered by all types of entities
when adopting a major Update. The Board developed a philosophy to
extend and simplify how effective dates are staggered between
larger public companies (bucket one) and all other entities (bucket
two). Those other entities include private companies, smaller
public companies, not-for-profit organizations, and employee
benefit plans. Under this philosophy, a major Update would first be
effective for bucket-one entities, that is, public business
entities that are Securities and Exchange Commission (SEC) filers,
excluding entities eligible to be smaller reporting companies
(SRCs) under the SEC's definition. The Master Glossary of the
Codification defines public business entities and SEC filers. All
other entities, including SRCs, other public business entities, and
nonpublic business entities (private companies, not-for-profit
organizations, and employee benefit plans) would compose bucket
two. For those entities, it is anticipated that the Board will
consider requiring an effective date staggered at least two years
after bucket one for major Updates. The Company is currently an SRC
and according to the ASU 2019-10, qualifies for bucket two, ASU
2016-13, ASU 2017-12 and ASU 2016-02 is effective for fiscal years
beginning after December 15, 2022. ASU 2016-02, Leases (Topic 842)
was adopted by the Company beginning April 1, 2019. The Company is
currently evaluating the impact that ASU 2019-10 will have on its
consolidated financial statements and related
disclosures.
In
November 2019, the FASB issued ASU 2019-11, Codification
Improvements to Topic 326, Financial Instruments-Credit Losses. On
June 16, 2016, the FASB issued Accounting Standards Update No.
2016-13, Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which
introduced an expected credit loss model for the impairment of
financial assets measured at amortized cost basis. That model
replaces the probable, incurred loss model for those assets.
Through the amendments in that Update, the Board added Topic 326,
Financial Instruments—Credit Losses, and made several
consequential amendments to the Codification. The amendments apply
to all reporting entities within the scope of the affected
accounting guidance. ASU 2019-11 is effective for fiscal years
beginning after December 15, 2022. The Company is currently
evaluating the impact that this guidance will have on its
consolidated financial statements and related
disclosures.
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the
Accounting for Income Taxes (“ASU 2019-12”), which
simplifies the accounting for income taxes, eliminates certain
exceptions within ASC 740, Income Taxes, and clarifies certain
aspects of the current guidance to promote consistency among
reporting entities. ASU 2019-12 is effective for fiscal years
beginning after December 15, 2021. Most amendments within the
standard are required to be applied on a prospective basis, while
certain amendments must be applied on a retrospective or modified
retrospective basis. The Company is currently evaluating the
impacts of the provisions of ASU 2019-12 on its financial
condition, results of operations, and cash flows.
In
January 2020, the FASB issued ASU 2020-01, Investments –
Equity Securities (Topic 321), Investments—Equity Method and
Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
– Clarifying the Interactions between Topic 321, Topic 323,
and Topic 815 (a consensus of the Emerging Issues Task Force)
(“ASU 2020-01”). The amendments in this Update clarify
certain interactions between the guidance to account for certain
equity securities under Topic 321, the guidance to account for
investments under the equity method of accounting in Topic 323, and
the guidance in Topic 815, which could change how an entity
accounts for an equity security under the measurement alternative
of a forward contract or purchased option to purchase securities
that, upon settlement of the forward contract or exercise of the
purchased option, would be accounted for under the equity method of
accounting or the fair value option in accordance with Topic 825,
Financial Instruments. These amendments improve current GAAP by
reducing diversity in practice and increasing comparability of the
accounting for these interactions. For public business entities,
the amendments in this Update are effective for fiscal years
beginning after December 15, 2020, and interim periods within those
fiscal years. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2021, and interim
periods within those fiscal years for fiscal years beginning after
December 15, 2020, and interim periods within those fiscal years
and should be applied prospectively. Early adoption is permitted.
The Company is currently evaluating the impact that ASU 2020-01 may
have on its consolidated financial statements and related
disclosures.
In
February 2020, the FASB issued Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC
Section on Effective Date Related to Accounting Standards Update
No. 2016-02, Leases (Topic 842). Generally, amendments included
clarifications on SAB Topic 6.M, Financial Reporting Release No. 28
- Accounting for Loan Losses by Registrants Engaged in Lending
Activities Subject to FASB ASC regarding measurement of current
expected losses, development, governance and documentation of a
systematic methodology, documentation of results of a systematic
methodology and validation of a systematic
methodology.
In
terms of amendments of Accounting Standards Update No. 2019-10,
Financial Instruments-Credit Losses (Table of Contents link Topic
326), Derivatives and Hedging (Table of Contents link Topic 815),
and Leases (Table of Contents link Topic 842), SEC staff announced
that it would not object to a public business entity that otherwise
would not meet the definition of a public business entity except
for a requirement to include or the inclusion of its financial
statements or financial information in another entity's filing with
the SEC adopting Table of Contents link Topic 842 for fiscal years
beginning after December 15, 2020, and interim periods within
fiscal years beginning after December 15, 2021. Those dates are
consistent with the effective dates for Table of Contents link
Topic 842 as amended in Update 2019-10. The Company is currently
evaluating the impact these Updates may have on its consolidated
financial statements and related disclosures.
In
March 2020, the FASB issued ASU No. 2030-20 Codification
Improvements to Financial Instruments, An Amendment of the FASB
Accounting Standards Codification: a)in ASU No. 2016-01, b) in
Subtopic 820-10, c) for depository and lending institutions
clarification in disclosure requirements, d) in Subtopic 470-50, e)
in Subtopic 820-10, f) Interaction of Topic 842 and Topic 326, g)
Interaction of the guidance in Topic 326 and Subtopic 860-20.The
amendments in this Update represent changes to clarify or improve
the Codification. The amendments make the Codification easier to
understand and easier to apply by eliminating inconsistencies and
providing clarifications. For public business entities updates
under the following paragraphs: a), b), d) and e) are effective
upon issuance of this final update. The effective date for c) is
for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. The Company does not
expect that the new guidance will significantly impact its
consolidated financial statements.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 3 – CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
Accounts
with stock exchange
|
$14,904
|
$10,507
|
|
Current account
with commercial banks
|
14,462
|
6,656
|
|
Securities
purchased under reverse repurchase agreements
|
9,645
|
7,887
|
|
Petty
cash in bank vault and on hand
|
8,981
|
2,674
|
|
Current
account in clearing organizations
|
6,590
|
5,887
|
|
Current
accounts with brokers
|
4,051
|
10,220
|
|
Current account
with Central Bank (Russia)
|
2,726
|
2,161
|
|
Current account
with National Settlement Depository (Russia)
|
1,348
|
1,275
|
|
Current
account with Central Depository (Kazakhstan)
|
501
|
2,693
|
|
Total
cash and cash equivalents
|
$63,208
|
$49,960
|
As of
March 31, 2020, and March 31, 2019, with the exception of funds
deposited with a bank in the United States which may qualify for
FDIC insurance up to $250,000, cash and cash equivalents were not
insured. As of March 31, 2020 and March 31, 2019, the cash and cash
equivalents balance included collateralized securities received
under reverse repurchase agreements on the terms presented
below:
|
|
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
|
|
Securities
purchased under reverse repurchase agreements
|
|
|
|
|
|
Corporate
equity
|
14.08%
|
$9,212
|
$15
|
$9,227
|
|
Corporate
debt
|
14.25%
|
108
|
-
|
108
|
|
Non-US sovereign
debt
|
17.18%
|
53
|
257
|
310
|
|
|
|
|
|
|
|
Total
|
|
$9,373
|
$272
|
$9,645
|
|
|
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
|
|
Securities
purchased under reverse repurchase agreements
|
|
|
|
|
|
Corporate
equity
|
11.90%
|
$4,328
|
$804
|
$5,132
|
|
Corporate
debt
|
14.00%
|
120
|
-
|
120
|
|
Non-US sovereign
debt
|
8.25%
|
2,635
|
-
|
2,635
|
|
|
|
|
|
|
|
Total
|
|
$7,083
|
$804
|
$7,887
|
The
securities received by the Company as collateral under reverse
repurchase agreements are liquid trading securities with market
quotes and significant trading volume. The fair value of collateral
received by the Company under reverse repurchase agreements as of
March 31, 2020 and March 31, 2019, was $10,272 and $8,472,
respectively.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 4 – RESTRICTED CASH
As of
March 31, 2020 and March 31, 2019, the Company’s restricted
cash consisted of the cash portion of the funds allocated for
deferred distribution payments, cash segregated in a special
custody account for the exclusive benefit of our brokerage
customers and required reserves with the Central Bank of the
Russian Federation which represents cash on hand balance
requirements. In June 2019 the Company invested a portion of the
deferred distribution payments into certain financial instruments.
For additional information regarding that portion of the funds held
for deferred distribution payments that have been invested into
certain financial instruments, see Note 5 - Trading and
Available-For-Sale Securities at Fair Value.
Restricted
cash consisted of:
|
|
|
|
|
|
|
|
|
Brokerage
customers’ cash
|
$63,506
|
$28,931
|
|
Deferred
distribution payments
|
2,097
|
8,534
|
|
Guaranty
deposits
|
518
|
732
|
|
Reserve with
Central Bank of Russia
|
476
|
263
|
|
Total
restricted cash
|
$66,597
|
$38,460
|
NOTE 5 – TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR
VALUE
As of
March 31, 2020, and March 31, 2019, trading and available-for-sale
securities consisted of:
|
|
|
|
|
|
|
|
|
Debt
securities
|
$87,014
|
$62,691
|
|
Equity
securities
|
69,530
|
105,017
|
|
Mutual investment
funds
|
-
|
241
|
|
Total
trading securities
|
$156,544
|
$167,949
|
|
|
|
|
|
Certificate of
deposit
|
$5,076
|
$-
|
|
Mutual investment
funds
|
672
|
-
|
|
Debt
securities
|
405
|
-
|
|
Preferred
shares
|
284
|
-
|
|
Equity
securities
|
1
|
2
|
|
Total
available-for-sale securities, at fair value
|
$6,438
|
$2
|
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
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 trading securities assets in the Consolidated Financial
Statements or disclosed in the Notes to the Consolidated Financial
Statements at fair value on a recurring basis as of March 31, 2020
and March 31, 2019:
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
unobservable units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
$87,014
|
$87,014
|
$-
|
$-
|
|
Equity
securities
|
69,530
|
58,271
|
-
|
11,259
|
|
Total
trading securities
|
$156,544
|
$145,285
|
$-
|
$11,259
|
|
|
|
|
|
|
|
Equity
securities
|
$1
|
$-
|
$-
|
$1
|
|
Debt
securities
|
405
|
-
|
405
|
-
|
|
Certificate
of deposit
|
5,076
|
-
|
5,076
|
-
|
|
Mutual
investment funds
|
672
|
672
|
-
|
-
|
|
Preferred
shares
|
284
|
-
|
284
|
-
|
|
Total
available-for-sale securities, at fair value
|
$6,438
|
$672
|
$5,765
|
$1
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
unobservable units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
$105,017
|
$105,017
|
$-
|
$-
|
|
Debt
securities
|
62,691
|
62,187
|
-
|
504
|
|
Mutual investment
funds
|
241
|
241
|
-
|
-
|
|
Total
trading securities
|
$167,949
|
$167,445
|
$-
|
$504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
$2
|
$-
|
$-
|
$2
|
|
Total
available-for-sale securities, at fair value
|
$2
|
$-
|
$-
|
$2
|
The
table below presents the Valuation Techniques and Significant Level
3 Inputs used in the valuation as of March 31, 2020 and 2019. The
table is not intended to be all inclusive, but instead captures the
significant unobservable inputs relevant to determination of fair
value.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
Type
|
Valuation
Technique
|
FV as of March
31, 2020
|
FV as of March
31, 2019
|
Significant
Unobservable Inputs
|
%
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
DCF
|
-
|
$
504
|
Discount
rate
|
11.3%
|
|
Equity
securities
|
DCF
|
$
11,259
|
-
|
Discount
rate
|
9.5%
|
|
|
|
|
|
Estimated
number of years
|
9
years
|
The
following table provides a reconciliation of the beginning and
ending balances for investments that use Level 3 inputs for the
year ended March 31, 2020:
|
|
|
Available-for-sale
securities
|
|
Balance
as of March 31, 2019
|
$504
|
$2
|
|
|
|
|
|
Sale of investments
that use Level 3 inputs
|
(497)
|
-
|
|
Purchase of
investments that use Level 3 inputs
|
10,430
|
-
|
|
Revaluation of
investments that use Level 3 inputs
|
829
|
-
|
|
Foreign currency
translation
|
(7)
|
-
|
|
Balance
as of March 31, 2020
|
$11,259
|
$2
|
|
|
|
|
|
Assets measured at
amortized cost
|
Unrealized loss
accumulated in other comprehensive
income/(loss)
|
Assets
measured at fair value
|
|
|
|
|
Certificate of
deposit
|
$5,050
|
$26
|
$5,076
|
|
Mutual investment
funds
|
696
|
(24)
|
672
|
|
Debt
securities
|
456
|
(51)
|
405
|
|
Preferred
shares
|
306
|
(22)
|
284
|
|
Equity
securities
|
1
|
-
|
1
|
|
|
|
|
|
|
Balance as of March 31, 2020
|
$6,509
|
$(71)
|
$6,438
|
|
|
|
|
|
Assets measured at
amortized cost
|
Unrealized loss
accumulated in other comprehensive
income/(loss)
|
Assets
measured at fair value
|
|
|
|
|
Equity
securities
|
$1
|
$1
|
$2
|
|
|
|
|
|
|
Balance
as of March 31, 2020
|
$1
|
$1
|
$2
|
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
In
connection with the 2011 sale of the Company’s oil and gas
exploration and production operations the Company declared
distributions to its shareholders. Certain shareholders, 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
shareholders 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 shareholder will submit
the necessary documentation to establish their claim to receive
their distribution payment.
NOTE 6 – BROKERAGE AND OTHER RECEIVABLES, NET
|
|
|
|
|
|
|
|
|
Marginal lending
receivables
|
$107,770
|
$46,716
|
|
Receivables from
brokerage clients
|
4,396
|
824
|
|
Receivable from
sale of securities
|
1,498
|
27,684
|
|
Bank commissions
receivable
|
218
|
17
|
|
Receivable for
underwriting and market-making services
|
67
|
88
|
|
Dividends
accrued
|
1
|
108
|
|
Other
receivables
|
50
|
25
|
|
|
|
|
|
Allowance for
receivables
|
(313)
|
(1,626)
|
|
|
|
|
|
Total
brokerage and other receivables, net
|
$113,687
|
$73,836
|
On
March 31, 2020 and March 31, 2019, amounts due from a single
related party customer were $90,696 and $31,792, respectively or
80% and 43%, respectively of total brokerage and other receivables,
net. Based on historical data, the Company considers receivables
due from related parties fully collectible. As of March 31, 2020
and 2019, using historical and statistical data, the Company
recorded an allowance for brokerage receivables in the amount of
$313 and $1,626, respectively.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 7– LOANS ISSUED
Loans
issued as of March 31, 2020, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
loan
|
$5,042
|
December,
2022-April, 2024
|
3.69%
|
-
|
USD
|
|
Uncollateralized
non-bank loan
|
2,313
|
January, 2021 -
February, 2021
|
3.00%
|
-
|
USD
|
|
Bank customer
loans
|
1,635
|
July, 2020 - May,
2044
|
14.31%
|
258
|
RUB
|
|
Subordinated
loan
|
1,333
|
September,
2029
|
7.00%
|
-
|
UAH
|
|
Uncollateralized
non-bank loan
|
129
|
March,
2021
|
6.00%
|
-
|
RUB
|
|
Loans to key
employees
|
9
|
December,
2020
|
4.50%
|
-
|
EUR
|
|
|
$10,461
|
|
|
|
|
Loans
issued as of March 31, 2019, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
brokerage loans
|
$1,888
|
Dec.
2019
|
4.75%
|
4,718
|
USD
|
|
Bank customer
loans
|
637
|
May 2019 –
Jan. 2039
|
13.34%
|
-
|
RUB
|
|
|
$2,525
|
|
|
|
|
NOTE 8 – DEFERRED TAX ASSETS
The
Company is subject to taxation in the Russian Federation,
Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan, Germany and
the United States of America.
The tax
rates used for deferred tax assets and liabilities for the years
ended March 31, 2020 and 2019, were 21% for the U.S., 20% for the
Russian Federation, Kazakhstan, Kyrgyzstan, 31% for Germany, 12.5%
for Cyprus, 18% for Ukraine and 12% for Uzbekistan.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
Deferred
tax assets and liabilities of the Company are comprised of the
following:
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
Tax losses
carryforward
|
$1,691
|
$2,376
|
|
Revaluation on
trading securities
|
72
|
2,095
|
|
Accrued
liabilities
|
7
|
35
|
|
Stock compensation
expenses
|
4
|
-
|
|
Valuation
allowance
|
(677)
|
(3,241)
|
|
Deferred
tax assets
|
$1,097
|
$1,265
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Revaluation on
trading securities
|
$513
|
$-
|
|
Other
liabilities
|
14
|
-
|
|
|
|
|
|
Deferred
tax liabilities
|
$527
|
$-
|
|
|
|
|
|
Net
deferred tax assets
|
$570
|
$1,265
|
The
Company is subject to the U.S. federal income taxes at a rate of
21%. The reconciliation of the provision for income taxes at the
21% tax rate compared to the Company’s income tax expense as
reported is as follows:
|
|
Year
ended
March
31, 2020
|
Year
ended
March
31, 2019
|
|
|
|
|
|
Profit before tax
at 21% and 34%
|
$5,908
|
$1,788
|
|
Global Intangible
Low Taxed Income
|
4,803
|
573
|
|
Permanent
differences
|
793
|
430
|
|
Stock based
compensation
|
551
|
309
|
|
Valuation
allowance
|
416
|
808
|
|
Nontaxable
gains
|
401
|
(3,811)
|
|
Other
differences
|
20
|
418
|
|
Losses carried
forward adjustment
|
(154)
|
1,678
|
|
Provision for
impairment losses
|
(295)
|
386
|
|
Foreign tax rate
differential
|
(2,938)
|
(1,211)
|
|
Foreign tax
credit
|
(3,503)
|
-
|
|
Income tax provision
|
$6,002
|
$1,368
|
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
income tax expense comprises:
|
|
Year
ended
March 31,
2020
|
Year
ended
March 31,
2019
|
|
Current income tax
charge
|
$5,307
|
$1,817
|
|
Deferred income tax
charge/(benefit)
|
695
|
(449)
|
|
Income
tax provision
|
$6,002
|
$1,368
|
During
the years ended March 31, 2020 and 2019, the Company realized net
income before income tax of $28,132 and $8,515, respectively.
During the same periods, the Company’s effective tax rate was
equal to 21.34% and 16.07%, respectively. This increase in income
tax expense was primarily attributable to a $43,231 increase in
commissions earned by Freedom CY during the fiscal year ended March
31, 2020.
Tax
losses carryforward as of March 31, 2020 was $1,691 and is subject
to income tax in US, Russia, Ukraine and Uzbekistan.
NOTE 9 – FIXED ASSETS, NET
|
|
|
|
|
|
|
|
|
Office
equipment
|
$2,184
|
$1,452
|
|
Capital
expenditures on leasehold improvements
|
1,968
|
1,724
|
|
Furniture
|
1,865
|
1,713
|
|
Processing and
storage data centers
|
960
|
679
|
|
Land
|
778
|
394
|
|
Vehicles
|
378
|
353
|
|
Other
|
476
|
457
|
|
|
|
|
|
Less: Accumulated
depreciation
|
(2,225)
|
(1,209)
|
|
|
|
|
|
Total fixed
assets
|
$6,384
|
$5,563
|
Depreciation
expense totaled $1,407 and $790 for the years ended March 31, 2020
and 2019, respectively.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 10 – INTANGIBLE ASSETS, NET
|
|
|
|
|
|
|
|
|
Trading
platform
|
$2,542
|
$3,052
|
|
Client
base
|
2,185
|
2,502
|
|
Other intangible
assets
|
1,838
|
1,062
|
|
|
|
|
|
Less: Accumulated
amortization
|
(3,143)
|
(2,390)
|
|
|
|
|
|
Total intangible
assets
|
$3,422
|
$4,226
|
Amortization
expense totaled $1,251 and $1,244 for the years ended March 31,
2020 and 2019, respectively.
NOTE 11 – OTHER ASSETS, NET
|
|
|
|
|
|
|
|
|
Advances
paid
|
$5,830
|
$1,851
|
|
Rent guarantee
deposit
|
1,355
|
714
|
|
Current income tax
asset
|
851
|
502
|
|
Outstanding
settlement operations
|
310
|
429
|
|
Taxes other than
income taxes
|
310
|
149
|
|
Guaranty
deposit
|
67
|
69
|
|
Prepaid
insurance
|
22
|
21
|
|
Other
|
338
|
516
|
|
|
|
|
|
Total
other assets
|
9,083
|
4,251
|
|
|
|
|
|
Allowance
for other assets
|
(21)
|
(62)
|
|
|
|
|
|
Other assets, net
|
$9,062
|
$4,189
|
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 12 – SECURITIES SOLD, NOT YET PURCHASED – AT FAIR
VALUE
As of
March 31, 2020, and March 31, 2019, the Company’s securities
sold, not yet purchased – at fair value was $0.
During
the year ended March 31, 2020, the Company sold shares received as
pledges under reverse repurchase agreements and recognized
financial liabilities at fair value in the amount $3,155 and closed
short positions in the amount of $3,118 by purchasing securities
from third parties, reducing its financial liability. During the
year ended March 31, 2020, the Company recognized a gain on the
change in the fair value of financial liabilities in the
Consolidated Statements of Operations and Statements of Other
Comprehensive Income/(Loss) in the amount of $37, with no foreign
exchange translation gains/(loss).
During
the year ended March 31, 2020, the Company sold shares that were
not owned by the Company and recognized relevant financial
liabilities at fair value in the amount of $3,550 and closed short
positions in the amount of $4,377 reducing its financial liability.
During the year ended March 31, 2020, the Company recognized a loss
on the change in fair value of financial liabilities at fair value
in the Consolidated Statements of Operations and Statements of
Other Comprehensive Income/(Loss) in the amount of $827 with no
foreign exchange translation gain/(loss).
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 – DEBT SECURITIES ISSUED
|
|
|
|
|
|
|
|
|
Debt securities
issued denominated in USD
|
$64,783
|
$20,265
|
|
Debt securities
issued denominated in RUB
|
6,432
|
7,724
|
|
Accrued
interest
|
1,081
|
549
|
|
Total
|
$72,296
|
$28,538
|
As of
March 31, 2020, and March 31, 2019, the Company had debt securities
issued in the amount of $72,296 and $28,538 respectively. As of
March 31, 2020, the Company’s outstanding debt securities had
fixed annual coupon rates ranging from 6.5% to 12% and maturity
dates ranging from June 2020 to January 2023. The Company’s
debt securities include bonds of Freedom KZ and RU issued under
Kazakhstani and Russian Federation law, which trade on the
Kazakhstan Stock Exchange and the Moscow Exchange, respectively.
The Company’s debt securities also include $20.5 million in
the aggregate number of notes of FRHC issued from December 2019 to
February 2020. The FRHC issued notes, denominated in USD, which
have minimum denominations of $100,000, bear interest at an annual
rate of 7% and are due in 2022. The FRHC notes were sold only in
Kazakhstan to non-U.S. persons in compliance with Astana
International Financial Centre law and trade on the Astana
International Exchange.
Debt
securities issued are initially recognized at the fair value of the
consideration received, less directly attributable transaction
costs. Debt securities issued as of March 31, 2020 and March 31,
2019, included $1,081 and $549 accrued interest, respectively. The
FRHC notes are actively traded on AIX, KASE and MOEX.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 14 – CUSTOMER LIABILITIES
The
Company recognizes customer liabilities associated with funds held
by our brokerage and bank customers. Customer liabilities consist
of:
|
|
|
|
|
|
|
|
|
Brokerage
customers
|
$115,922
|
$47,686
|
|
Banking
customers
|
52,510
|
34,346
|
|
Total
|
$168,432
|
$82,032
|
As of
March 31, 2020, banking customer liabilities consisted of current
accounts and deposits of $25,384 and $27,126, respectively. As of
March 31, 2019, banking customer liabilities consisted of current
accounts and deposits of $12,383 and $21,963,
respectively.
NOTE 15 – TRADE PAYABLES
|
|
|
|
|
|
|
|
|
Margin lending
payable
|
$6,101
|
$29,081
|
|
Trade payable for
securities purchased
|
1,860
|
2,939
|
|
Payables to
suppliers of goods and services
|
202
|
555
|
|
Other
|
235
|
120
|
|
|
|
|
|
Total
|
$8,398
|
$32,695
|
On
March 31, 2020 and March 31, 2019, amounts due to a single related
party $4,306 or 51% and $938 or 3%, respectively.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 16 – SECURITIES REPURCHASE AGREEMENT
OBLIGATIONS
As of
March 31, 2020 and March 31, 2019, trading securities included
collateralized securities subject to repurchase agreements as
described in the following table:
|
|
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
|
|
|
|
|
Corporate
equity
|
12.16%
|
$20,711
|
$-
|
$-
|
$20,711
|
|
Corporate
debt
|
13.27%
|
15,974
|
-
|
-
|
15,974
|
|
Non-US sovereign
debt
|
13.00%
|
11,519
|
-
|
-
|
11,519
|
|
Total
securities sold under repurchase agreements
|
|
$48,204
|
$-
|
$-
|
$48,204
|
|
|
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
|
|
|
|
|
Corporate
equity
|
12.06%
|
$49,048
|
$-
|
$2,146
|
$51,194
|
|
Corporate
debt
|
10.38%
|
13,548
|
-
|
-
|
13,548
|
|
Non-US sovereign
debt
|
8.62%
|
8,879
|
-
|
-
|
8,879
|
|
Total
securities sold under repurchase agreements
|
|
$71,475
|
$-
|
$2,146
|
$73,621
|
The
fair value of collateral pledged under repurchase agreements as of
March 31, 2020 and March 31, 2019, was $54,222 and $105,842,
respectively.
Securities
pledged as collateral by the Company under repurchase agreements
are liquid trading securities with market quotes and significant
trading volume.
NOTE 17 – LOANS RECEIVED
|
Company
|
|
|
|
|
|
|
|
Freedom Holding
Corp.
|
Non-Bank
|
$-
|
$3,917
|
3%
|
1-2
year
|
04/30/2019
- 12/31/2019
|
|
Freedom Finance
Europe Limited
|
Non-Bank
|
-
|
91
|
1%
|
2 year
|
12/11/2019
|
|
Total
|
|
$-
|
$4,008
|
|
|
|
Non-bank
loans received are unsecured. As of March 31, 2020 and March 31,
2019, accrued interest on the loans totaled $0 and $52,
respectively.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 18 – OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
Salaries and other
employee benefits
|
$999
|
$1,307
|
|
Vacation
reserve
|
933
|
942
|
|
Payable to
suppliers
|
353
|
212
|
|
Outstanding
settlements operations
|
307
|
314
|
|
Taxes payable other
than income tax
|
38
|
127
|
|
Other
|
201
|
230
|
|
|
|
|
|
Total
|
$2,831
|
$3,132
|
NOTE 19 – FEE AND COMMISSION INCOME/(EXPENSE)
|
|
Year
ended
March 31,
2020
|
Year
ended
March 31,
2019
|
|
|
|
|
|
Fee and commission income:
|
|
|
|
|
|
|
|
Brokerage
services
|
$82,800
|
$36,810
|
|
Bank
services
|
7,240
|
6,133
|
|
Underwriting
services
|
2,360
|
861
|
|
Other commission
income
|
268
|
512
|
|
|
|
|
|
Total
fee and commission income
|
$92,668
|
$44,316
|
|
|
|
|
|
|
|
|
|
Fee and commission expense:
|
|
|
|
|
|
|
|
Brokerage
services
|
$18,673
|
$4,164
|
|
Bank
services
|
1,299
|
919
|
|
Central Depository
services
|
775
|
301
|
|
Exchange
services
|
710
|
574
|
|
Other commission
expense
|
479
|
280
|
|
|
|
|
|
Total
fee and commission expense
|
$21,936
|
$6,238
|
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 20 – NET GAIN ON TRADING SECURITIES
|
|
Year
ended
March 31,
2020
|
Year
ended
March 31,
2019
|
|
|
|
|
|
Net gain recognized
during the period on trading securities sold during the
period
|
$22,770
|
$25,535
|
|
Net unrealized loss
recognized during the reporting period on trading securities still
held at the reporting date
|
(7,847)
|
(5,373)
|
|
Net
gain recognized during the period on trading
securities
|
$14,923
|
$20,162
|
NOTE 21 – NET INTEREST INCOME/ (EXPENSE)
|
|
Year
ended
March 31,
2020
|
Year
ended
March 31,
2019
|
|
|
|
|
|
Interest income:
|
|
|
|
Interest income on
financial assets recorded at amortized cost comprises:
|
|
|
|
|
|
|
|
Interest income on
reverse repurchase agreements and amounts due from
banks
|
$1,586
|
$2,290
|
|
Interest income on
loans to customers
|
572
|
264
|
|
|
|
|
|
Total interest
income on financial assets recorded at amortized cost
|
2,158
|
2,554
|
|
|
|
|
|
Interest income on
financial assets recorded at fair value through profit or loss
comprises:
|
|
|
|
|
|
|
|
Interest income on
trading securities
|
9,976
|
11,371
|
|
|
|
|
|
Total interest
income on financial assets recorded at fair value through profit or
loss
|
9,976
|
11,371
|
|
|
|
|
|
Total
interest income
|
$12,134
|
$13,925
|
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
Year
ended
March 31,
2020
|
Year
ended
March 31,
2019
|
|
|
|
|
|
Interest expense:
|
|
|
|
Interest expense on
financial liabilities recorded at amortized cost
comprises:
|
|
|
|
|
|
|
|
Interest expense on
securities repurchase agreement obligations
|
$7,140
|
$11,113
|
|
Interest expense on
debt securities issued
|
3,220
|
1,907
|
|
Interest expense on
customer accounts and deposits
|
1,598
|
1,305
|
|
Interest expense on
loans received
|
437
|
324
|
|
Other interest
expense
|
4
|
-
|
|
|
|
|
|
Total interest
expense on financial liabilities recorded at amortized
cost
|
12,399
|
14,649
|
|
|
|
|
|
Total
interest expense
|
$12,399
|
$14,649
|
NOTE 22 – NET GAIN/(LOSS) ON FOREIGN EXCHANGE
OPERATIONS
|
|
Year
ended
March 31,
2020
|
Year
ended
March 31,
2019
|
|
|
|
|
|
Sales and purchases
of foreign currency, dealing
|
$1,197
|
$(3)
|
|
Translation
difference
|
1,118
|
(4,115)
|
|
|
|
|
|
Total
net gain/(loss) on foreign exchange operations
|
$2,315
|
$(4,118)
|
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 23 – RELATED PARTY TRANSACTIONS
During
the years ended March 31, 2020 and 2019, the Company earned
commission income from related parties in the amounts of $79,143
and $38,974, respectively. Commission income earned from related
parties is comprised primarily of brokerage commissions and
commissions for money transfers by brokerage clients.
During
the years ended March 31, 2020 and 2019, the Company paid
commission expense to related parties in the amount of $3,668 and
$0, respectively.
As of
March 31, 2020 and March 31, 2019, the Company had cash and cash
equivalents held in brokerage accounts of related parties totaling
$212 and $8,444, respectively.
As of
March 31, 2020 and March 31, 2019, the Company had loans issued to
related parties totaling $1,477 and $1,888,
respectively.
As of
March 31, 2020 and March 31, 2019, the Company had bank commission
receivables and receivables from brokerage clients from related
parties totaling $3,611 and $192, respectively. Brokerage and other
receivables from related parties result principally from
commissions receivable on the brokerage operations of related
parties.
As of
March 31, 2020 and March 31, 2019, the Company had margin lending
receivables with related parties totaling $105,892 and $43,720,
respectively.
As of
March 31, 2020 and March 31, 2019, the Company had margin lending
payables to related parties, totaling $4,306 and $1,090,
respectively.
As of
March 31, 2020, and March 31, 2019, the Company had loans received
from a related party totaling $0 and $3,957,
respectively.
As of
March 31, 2020, and March 31, 2019, the Company had accounts
payable due to a related party totaling $1,879 and $345,
respectively.
As of
March 31, 2020, and March 31, 2019, the Company had consideration
due to a related party for the Nettrader acquisition totaling $0
and $2,590, respectively.
As of
March 31, 2020, and March 31, 2019, the Company had customer
liabilities on brokerage accounts and bank accounts of related
parties totaling $26,150 and $29,904, respectively and held
restricted customer cash on brokerage accounts of related parties
totaling $8,410 and $13,999, respectively.
Brokerage
and related banking services, including margin lending, were
provided to such related parties pursuant standard client account
agreements and at standard market rates.
In
August 2019, to comply with certain foreign ownership restrictions
relating to registered Ukrainian broker-dealers, the Company sold
67.12% of the outstanding equity interest of Freedom UA to Askar
Tashtitov, the Company’s president, for $100. The Company
retained the remaining 32.88% of the outstanding equity interests
in Freedom UA. In connection with this transaction, the Company
also entered into a series of contractual arrangements with Freedom
UA and Mr. Tashtitov, including a consulting services agreement, an
operating agreement and an option agreement. For additional
information regarding this transaction, see Note 1 –
Description of Business.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 24 – STOCKHOLDERS’ EQUITY
During
the years ended March 31, 2020 and 2019, shareholders made capital
contributions of $0 and $225 to FRHC, respectively. During the
years ended March 31, 2020 and 2019 awarded nonqualified stock
options were exercised in the amount of $455 and $20,
respectively.
On
October 6, 2017, the Company awarded restricted stock grants
totaling 3,900,000 shares of its common stock to 16 employees and
awarded nonqualified stock options to purchase an aggregate of
360,000 shares of its common stock to two employees. Of the
3,900,000 shares awarded pursuant to the restricted stock grant
awards, 1,200,000 shares are subject to two-year vesting conditions
and 2,700,000 shares are subject to three-year vesting conditions.
All of the nonqualified stock options are subject to three-year
vesting conditions. The Company recorded stock compensation expense
for restricted stock grants and stock options in the amount of
$2,625 during the year ended March 31, 2020. The Company recorded
stock-based compensation expense for restricted stock grants and
stock options in the amount of $3,498 during year ended March 31,
2019, respectively.
NOTE 25 – STOCK BASED COMPENSATION
During
the year ended March 31, 2020, no stock options were granted. Total
compensation expense related to options granted was $216 for the
year ended March 31, 2020 and $215 for the year ended March 31,
2019.
As of
March 31, 2020, there was total remaining compensation expense of
$112 related to stock options, which will be recorded over a
weighted average period of approximately 0.52 years. During the
year ended March 31, 2020, options to purchase a total of 230,000
shares were exercised.
As
disclosed in Note 24, on October 6, 2017, the Company issued
restricted stock awards totaling 3,900,000 shares of its common
stock to 16 employees and awarded nonqualified stock options to
purchase an aggregate of 360,000 shares of its common stock at a
strike price of $1.98 per share to two employees. Shares of
restricted stock have the same dividend and voting rights as common
stock while options do not. All awards were issued at the fair
value of the underlying shares at the grant date.
The
Company has determined fair value of stock options using the
Black-Scholes option valuation model based on the following key
assumptions:
|
Term
(years)
|
3
|
|
Volatility
|
165.33%
|
|
Risk-free
rate
|
1.66%
|
Stock-based
compensation expense for the cost of the awards granted is based on
the grant-date fair value. For stock option awards, the fair value
is estimated at the date of grant using the Black-Scholes
option-pricing model. This model requires the input of highly
subjective assumptions, changes to which can materially affect the
fair value estimate. Additionally, there may be other factors that
would otherwise have a significant effect on the value of employee
stock options granted but are not considered by the model.
Accordingly, while management believes that the Black-Scholes
option-pricing model provides a reasonable estimate of fair value,
the model does not necessarily provide the best single measure of
fair value for the Company's employee stock options.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
following is a summary of stock option activity for year ended
March 31, 2020:
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Term
(In Years)
|
Aggregate
Intrinsic Value
|
|
Outstanding,
March 31, 2019
|
350,000
|
$1.98
|
8.52
|
$2,342
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
(230,000)
|
1.98
|
-
|
2,630
|
|
Forfeited/cancelled/expired
|
-
|
-
|
-
|
-
|
|
Outstanding,
at March 31, 2020
|
120,000
|
$1.98
|
7.52
|
1,466
|
|
Exercisable,
at March 31, 2020
|
-
|
$-
|
-
|
$-
|
During
the year ended March 31, 2020, no restricted shares were awarded.
The compensation expense related to restricted stock awards was
$2,409 during the year ended March 31, 2020, and $3,283 during the
year ended March 31, 2019. As of March 31, 2020, there was $977 of
total unrecognized compensation cost related to non-vested shares
of restricted stock granted. The cost is expected to be recognized
over a weighted average period of 0.52 years.
The
table below summarizes the activity for the Company's restricted
stock outstanding during the year ended March 31,
2020:
|
|
|
Weighted Average Fair Value
|
|
Outstanding,
March 31, 2019
|
2,275,000
|
$4,777
|
|
Granted
|
-
|
-
|
|
Vested
|
-
|
-
|
|
Forfeited/cancelled/expired
|
-
|
-
|
|
Outstanding,
at March 31, 2020
|
2,275,000
|
$4,777
|
During
the year ended March 31, 2020, the Company recorded expenses for
share based payments in the amount of $1,052.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
2020
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 26 – LEASES
The
Company determines whether a contract is or contains a lease at
inception of the contract and whether that lease meets the
classification criteria of a finance or operating lease. When
available, the Company uses the rate implicit in the lease to
discount lease payments to present value; however, most of the
Company’s leases do not provide a readily determinable
implicit rate. Therefore, the Company must discount lease payments
based on an estimate of its incremental borrowing
rate.
The
table below presents the lease related assets and liabilities
recorded on the Company’s consolidated balance sheets as of
March 31, 2020:
|
|
Classification on Balance Sheet
|
|
|
Assets
|
|
|
|
Operating
lease assets
|
Right-of-use
assets
|
$14,543
|
|
Total lease assets
|
|
$14,543
|
|
|
|
|
Liabilities
|
|
|
|
Operating
lease liability
|
Operating
lease obligations
|
$14,384
|
|
Total lease liability
|
$14,384
|
Lease
obligations at March 31, 2020, consisted of the
following:
|
Twelve
months ending March 31,
|
|
|
2021
|
$5,966
|
|
2022
|
5,562
|
|
2023
|
4,371
|
|
2024
|
949
|
|
2025
|
219
|
|
Total
payments
|
17,067
|
|
Less:
amounts representing interest
|
(2,683)
|
|
Lease
obligation, net
|
14,384
|
|
Weighted
average remaining lease term (in months)
|
29
|
|
Weighted
average discount rate
|
12%
|
Lease
commitments for short-term operating leases as of March 31, 2020
was approximately $354. The Company’s rent expense for office
space was $1,147 for the year ended March 31, 2020 and $4,819 for
the year ended March 31, 2019, respectively.
NOTE 27 – SUBSEQUENT EVENTS
The
Company has performed an evaluation of subsequent events through
the time of filing this annual report on Form 10K with the SEC.
Other than as disclosed below, during this period the Company did
not have any additional material recognizable subsequent
events.
On July
6, 2020 the Company announced that the Company has concluded the
acquisition of IC ZERICH Capital Management JSC following receipt
of approval from the Russian Federal Antimonopoly Service. Zerich
Capital commenced business in 1995 and is one of the oldest
securities brokerage firms in Russia, currently ranking as the 19th
largest brokerage house in Russia in terms of clients.
On July
2, 2020, the Company announced that it had a fixed annual cretired
debt securities denominated in USD which had a fixed annual coupon
rate of 8% and a carrying value of $6,175 including interest
accrued of $124 as of March 31, 2020.
BMB MUNAI, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS MARCH 31, 2014
EXHIBIT INDEX
|
Exhibit
No.
|
|
Exhibit
Description
|
|
|
|
|
|
|
|
Description
of Securities
|
|
|
|
Exchange
Bond Terms and Conditions in the Framework of the Exchange Bond
Program
|
|
|
|
Agreement
to furnish instruments and agreement defining rights of holders of
long-term debt
|
|
|
|
Employment
Contract No. 10 between Beliv Gorod IC LLC and Timur
Turlov
|
|
|
|
Supplementary
agreement No. 1 to the employment contract No. 10 dated August 11,
2011 between Freedom Finance IC LLC and Timur Turlov
|
|
|
|
Supplementary
agreement No. 2 to the employment contract No. 10 dated August 11,
2011 between Freedom Finance IC LLC and Timur Turlov
|
|
|
|
Supplementary
Agreement dated January 25, 2016 to the Employment Contract No.
15-128 dated February 9, 2015 between Freedom Finance Joint Stock
Company and Evgeniy Ler
|
|
|
|
Supplementary
Agreement to an Employment Contract No. 15-128 from 09 February
2015 between Freedom Finance Joint Stock Company and Evgeniy
Ler*+^#
|
|
|
|
Employment
Agreement No. 18-107/1 dated November 1, 2018 between Freedom
Finance Joint Stock Company and Askar Tashtitov
|
|
|
|
Supplementary
Agreement to an Employment Contract No. 18-107/1 from 01 November
2018 between Freedom Finance Joint Stock Company and Askar
Tashtitov*+^#
|
|
|
|
Subsidiaries
|
|
|
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|