UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
☑ ☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 20182020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 001-33034
FREEDOM HOLDING CORP.
(Exact name of registrant as specified in its charter)
| Nevada | | 30-0233726 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
| | | |
Office 1704, 4B Building “Esentai Tower” BC, Floor 7
“Nurly Tau” BC
1777/7 Al Farabi Ave
| | |
| Almaty, Kazakhstan | | 050059050040 |
| (Address of principal executive offices) | | (Zip Code) |
+7 727 311 10 64
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common | | FRHC | | The Nasdaq Capital Market |
Securities registered under Section 12(g) of the Exchange Act: Common, $0.001 par valueNone
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☑☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes ☑☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)☑
☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ ☒ |
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
☐ Yes ☑☒ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity last sold as of the last business day of the registrant’s most recently completed second fiscal quarter computed by reference to the price at which the common equity was last sold was $4,410,642.$184,050,740.
As of June 26, 2018,July 8, 2020, the registrant had 58,033,21258,358,212 shares of common stock, par value $0.001, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information requiredPortions of the registrant's Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated herein by Items 10 through 14 ofreference in Part III of this Annual Report on Form 10-K to the extent not set forth herein, is incorporated herein by reference to portions of the Registrant’s definitivestated herein. Such proxy statement for the Registrant’s 2018 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later thanwithin 120 days afterof the endregistrant's fiscal year ended March 31, 2020.
EXPLANATORY NOTE
As previously disclosed in the Current Report on Form 8-K filed by Freedom Holding Corp. (referred to herein as the “Company”, “FRHC”, “we” “our” and “us”) with the Securities and Exchange Commission (the “SEC”) on June 12, 2020, the Company expected that the filing of this Annual Report on Form 10-K for the fiscal year ended March 31, 2018. Except with respect2020, (“annual report”) originally due on June 14, 2020, would be delayed due to disruptions resulting from the information specifically incorporated by reference in this Form 10-K, the Registrant’s definitive proxy statement is not deemed to be filednovel coronavirus (“COVID-19”) pandemic. In particular, as a partresult of this Form 10-K.the 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. This delayed the ability of certain of our subsidiaries to access their books and records and other information necessary to timely complete our financial statements and perform the internal review processes relating to our annual report. Travel restrictions also constrained the ability of our auditors to travel to our offices. This led to delays in timely providing all necessary documentation to our auditors to complete their audit of our financial statements and controls. The COVID-19 related precautionary measures also caused delays in our interactions with our legal advisors and others who assist us in preparing the periodic reports we file with the SEC. As a result, we required additional time to complete our annual report.
The Company is relying upon Release No. 34-88465 issued by the SEC on March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934, as amended, in filing this annual report after the original due date of June 14, 2020.
Table of Contents
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| | PART II |
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| | PART III |
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| | PART IV |
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FREEDOM HOLDING CORP.
Unless otherwise specifically indicated or as is otherwise contextually required, references herein to the “Company”, “we”, “our” or “us” means Freedom Holding Corp. a Nevada corporation and its wholly-ownedconsolidated subsidiaries, LLC IC Freedom Finance, including its wholly owned subsidiaries: JSC Freedom Finance, LLC; FFIN Bank; LLC First Stock Store; and Branch Office of LLC IC Freedom Finance in Kazakhstan; FFINEU Investments Limited, LLC Freedom Finance Ukraine, LLC Freedom Finance Uzbekistan and FFIN Securities, Inc.as well as any predecessor entities. Unless otherwise indicated by the context indicates otherwise all dollar amounts stated in this annual reportAnnual Report on Form 10-K (“annual report”) are in thousands of U.S. dollars.
Special Note about Forward-Looking Information
Certain information included hereinin this annual report, including (without limitation) “Business” in Item 1 of Part I, “Risk Factors” in Item 1A of Part I, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this annual report, contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking information involves important risks and uncertainties, many of which may be beyond our control, that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein.
All statements other than statementstatements of historical fact are statements that could be forward-looking statements.forward-looking. You can recognize these statements through our use of words such as “anticipate,” “assume,” “believe,” “consider,” “contemplate,” “continue, ” “could,” “estimate,” “expect,” “indicate,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,”“will” and “would,” and other similar expressions. Such statements are subject to known and unknown risks, uncertainties, and other factors, including the meaningful and important risks and uncertainties discussed in this annual report. These forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management and apply only as of the date of this annual report or the respective date of the document from which they are incorporate by reference.
Although we have attempted to identify importantAny number of factors that could cause actual results to differ materially, there may be other factors that cause the forward-looking statements not to come true as described in this annual report, including those described in Part I,“Risk Factors” in Item 1A “Risk Factors”of Part I and elsewhere in this annual report and those described from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC"“SEC”). These forward-looking statements are only predictions. Should onepredictions and are inherently subject to risks and uncertainties, many of which cannot be quantified. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or morethe extent to which any factor, or combination of these risks or uncertainties materialize, or should underlying assumptions prove incorrect,factors, may cause actual results may vary materially.to differ materially from those contained in any forward-looking statements.
YouUndue reliance should not relybe placed on these forward-looking statements as predictions of future events.statements. While we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neitherNeither we nor any other person assumes any responsibility for the accuracy or completeness of these forward-looking statements or undertakes any obligation to revise these forward-looking statements to reflect events or circumstances after the date onof this annual report or to reflect the occurrence of unanticipated events.events except as required by law.
The following discussion should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this annual report and in our other filings with the SEC.
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 that ownsNevada. 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, corporate investment banking and underwriting services in Eastern Europe and Central Asia. The CompanyOur headquarters is headquartered 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 a(“Freedom RU”) and JSC Investment Company Zerich Capital (“Zerich Capital”), Moscow, Russia-based securities broker-dealer;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; FFINEU InvestmentsFreedom 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; LLCbroker-dealer. The majority interest of Freedom Finance Uzbekistan,UA is held by Askar Tashtitov, the Company’s president. However, as a Tashkent, Uzbekistan-based broker-dealer;result of a series of contractual relationships between the Company and FFIN Securities, Inc.,Freedom UA, we account for Freedom UA as a Nevada corporation.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 (SPB)(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 do not currently allow investorsprovide 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/dealerbroker-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 itsour 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 that are secure without the constraint of trading through omnibus clearing accounts that are disfavored by regulators and U.S. financial institutions.Europe.
Our common stock is listed for trading on the following exchanges: Nasdaq Capital Market, KASE and SPBX.
RETAIL BROKERAGE SERVICES
Our initial line of business has been directed toward providingWe provide a comprehensive array of financial services to our target retail audience which is high-net-worthupper middle-class individuals and small 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 46,000140,000 client accounts of which more than 67%50% carried positive cash or asset account balances at our fiscal year ended March 31, 2018.2020. During the fiscal yearsame period customer accounts increased by approximately 25,000 as we opened over 10,700 new accounts, against only 235 account closures. Our total client transaction volume for the year exceeded $14 billion.
As described in more detail in “Recent Acquisitions” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as result of acquisitions of JSC Asyl Invest and LLC Nettrader Brokerage, made subsequentcontinued to the fiscal year end,have our customer base increased togrow organically. Internally, we designate “active accounts” as those in which one transaction occurs per quarter. During fiscal 2020 we had approximately 80,000 client41,500 active accounts. In terms of registered client accounts, data published by the KASE places us as the largest broker in the country and data published by the MOEX places us as the 9th largest retail securities broker in Russia.
We have accelerated our growth through completion ofnonorganic growth strategies, including several strategic acquisitions which havehas 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 5579 retail brokerage and financial services offices located across Kazakhstan (16), Kyrgyzstan (1), Russia (36)(39), Uzbekistan (8), Ukraine (13), Cyprus (1) and UkraineGermany (1) that provide our full array of financial services, investment consulting and education. We areIn Russia 15 brokerage and financial services offices also in process of opening 12 addition locations in Ukraine.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 augmenthave augmented our retail brokerage servicesoperations 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.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 have introducedprovide 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)products as permitted by local laws).
Margin Lending — We extend credit to customers, collateralized by securities and cash in the customer'scustomer’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 Tradernet.the Tradernet platform.
Investment Research — We employ 1115 research and securities analysts that conduct equity and debt research covering severala 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.markets and issuer funding activities.
Investment Banking
We have established a teamteams of investment banking professionals in Almaty and Moscow. Our investment banking division provides strategic advisory services and capital markets products to emerging growth and small market businesses as well as financial sponsors.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 RussiaUzbekistan where the governments continue to privatize industries, but commercial banks concentrate their services on large enterprises or state-owned enterprises. TheIn 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 the underserved small and emerging company sector.our services. To date our activities have beenincluded underwriting of debt and equity offerings on a “best efforts” and firm underwriting basis.bases.
Equities Capital Markets — We provide capital raising solutions for corporate clients through initial public offerings and follow-on offerings and private investments in public entities.including listing companies on appropriate exchanges. We focus on emerging 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 and financial sponsors.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 marketsactivities 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.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“Regulatory Capital Requirements"Requirements” herein and "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources"Resources” in Item 7.7 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, the Company actswe act as an intermediary between borrowers and lenders of short-term funds and providesprovide funding for various inventory positions. The CompanyWe also employsemploy repurchase and reverse repurchase agreements in itsour 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, 2018,2020, the Company employed 6511,493 employees (623(1,376 full-time and 28117 part-time), of whom 191643 were retail financial advisers, 362467 were operations personnel, 1115 were research and securities analysts, 129 were capital markets team, 3478 were MIS and IT systems personnel and 41281 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 Centras Securities and KazkommertsFirst Heartland Securities in Kazakhstan; (iii) BrokerCreditService and (iii)Otkrytie in Cyprus; (iv) Dragan Capital, and Univer Capital and Investment Capital Ukraine in Ukraine.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 Bank Otkritie 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 regional disaster,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 constant and ongoingcontinuous communication with the service providers to ensure timely receipt of data about their planned and actual activities. We are in process of developingcontinuing 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 growinghigh priority for companies of all sizes,us, as it is across all industries, especially in 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 planningcontinuing 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.1A of this annual report.
REGULATORY OVERSIGHT
We operate in a highly regulated industry.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.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:
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minimum net capital requirements;
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the use and safekeeping of customers’ funds and securities;
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recordkeeping and reporting requirements;
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client identification, clearance and monitoring to identify and prevent money laundering and funding of terrorism, OFAC sanctions violations and to facilitate FATCA reporting;
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supervisory and organizational procedures intended to monitor and assure compliance with relevant laws and regulations and to prevent improper trading practices;
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employee-related matters, including qualification and certification of personnel;
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provision of investment and ancillary services, clearance, and settlement procedures;
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transaction execution, clearance, and settlement procedures;
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maximum loan and bank guarantees concentration issued to shareholders;
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credit risk requirements;
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liquidity risk requirements;
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qualification of firm management; and
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risk detection, management, and correction; andcorrection.
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anti-money laundering and financing of terrorism.
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 $262,000$30,000 to $5,340,000$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, includingsuch 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 the 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 maintainintend to use our U.S. administrative offices at 324 South 400 West, Suite 250, Salt Lake City, Utah 84101. Our telephone number ininvestor 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 United States is (801) 355-2227. You may read and copy this Annual Report on Form 10-K for the year ended March 31, 2018 at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies by mail from the Public Reference Roomreporting requirements of the SEC at prescribed rates. To obtain information on the operation of the Public Reference Room, you can callExchange Act. Reports filed with or furnished to the SEC at 1-800-SEC-0330.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 SEC also maintains an internetcontent of our website that contains reports, proxy and information statements andis not intended to be incorporated by reference into this annual report or in any other information regarding issuers,report or document that we file. We make them available on our website as soon as reasonably possible after we file electronicallythem with the SEC. The address ofreports we file with or furnish to the SEC's internetSEC are also available on the SEC’s website is http://www.sec.gov.(www.sec.gov).
Item 1A. Risk FactorsFactors
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 affectimpact 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, Kazakhstan, Ukraine, Uzbekistan, Kyrgyzstan and CyprusKazakhstani, 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 large 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, and 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 economic conditions or the timing or strength of any future activities in ouron 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. We may haveMore generally, because our business is correlated to close underperforming facilities from time to time as warranted bythe general economic conditions and/outlook, a significant deterioration in that outlook or weakness in the markets in which we operate. This, combined withrealization of certain events could have a significant negative impact on our financial commitments could negatively impact our business, financial condition,businesses and overall results of operations or cash flows.operations.
We operate in the emerging consumer financial services sectorsectors 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 Uzbekistan, Kyrgyzstan and Cyprus.Uzbekistan. Investing by retail customers, particularly in U.S. and European securities, is an emerging market in thosethese countries, and we expect tocould encounter intenseincreased price competition in this business as this industry matures with more competitive service providers.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 companysubsidiary 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 itsour capital and/or liquidity or to limit itsour 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.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 from our trading for our proprietary accounts.
trading.
When we for our own accounts, and our customers, for their accounts, purchase securities on margin, borrow on lines of credit collateralized byenter 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 Russia, KazakhstanRussian, Kazakhstani, European and U.S. financial markets’ assessment of credit quality. Loss ofin securities value of securities can negatively affect our financial performance and earnings if our management determines that such securities are other than temporarily impaired.other-than-temporarily-impaired (OTTI). The evaluation of whether other-than-temporary impairment (OTTI)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 performancevalue of available for sale 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 wouldmay 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. Historically and currently, weWe 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 strategystrategies may not perform as projected. As a result, we have suffered losses in the past and may suffer losses from our investment activities in the future.activities.
Our proprietary portfolio is currently highly leveraged and concentrated in relatively few companies. Approximately $105 million of our proprietary portfolio is currently invested in one company. 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 heavily 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 we anticipateanticipated 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 very significant.
Even if we make appropriatefollow our investment decisions based on the intrinsic value of an enterprise,policies, we cannot give assurance that the value of the investment will not decline, perhaps materially, as a result of conditions beyond our control, including delays in anticipated transactions, general market conditions or changes in law.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 businessbusinesses and industries in which we invest.
We are subject to risks associated with our securities lending business.
Our brokerages have activeWe engage in securities borrowed and loanedlending business in which theywe 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 we postposted as collateral with the lender; and when the market value of securities we have loaned increases relative to the cash we have 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 inventory 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 in our results of operations.volatility. To the extent that we own assets, i.e., have long positions, in any of those markets, a downturn in the value of those assets or in those markets could result in losses. Conversely, to the extent we have sold assets we do not own, i.e., have short positions, in any of those markets, 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, andservice 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. WeTo 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. AnyAn 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 keyskilled personnel, our business, financial position, results of operations or cash flows could be materially and adversely affected.
We depend on the efforts, skill,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. We have no assurance that the services of these individuals will continue to be available to the full extent of our needs. 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 and may be unable to execute our business plan.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 key employees at the centers of our international operations.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 keyskilled 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 differentvarious 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.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 any of the exchanges, depositories, clearing houses, clearing firms orand other financial intermediaries we use to facilitate our securitiescustomer 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, other 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 whowhom 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 clientscustomers may suffer, andsuffer. While we have contingency plans in place to address such issues, these plans may not always be abledeployed successfully or be sufficiently adequate to successfully implement contingency plans that depend on communication or travel.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 of these risks may not cover theseall 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 whichwhom we conduct business; or (b) otherwise cause interruptions or malfunctions in our operations or the operations of our customers or third parties with whichwhom we conduct business. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance. In addition, new and expanding data privacy laws and regulations includingare, or soon will be, in effect in many of the new European Union General Data Protection Regulation (“GDPR”) effective May 2018,jurisdictions where we conduct business. These pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulationscompliance failures could result in significant penalties.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 orand those of our 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, supplierscounterparties and employees), liability for stolen assets or information, increased cyber securitycybersecurity 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 customers.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 certain foreigna number of countries, including Russia, Kazakhstan, Ukraine, Uzbekistan, Kyrgyzstan, Germany and Cyprus. There are certain risks inherent in doing business internationally, including:
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economic volatility and sustained economic downturns;
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difficulties in enforcing contractual and intellectual property rights;
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currency exchange rate fluctuations and currency exchange controls;
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changes in the securities brokerage, financial services and banking laws and regulations;
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difficulties in developing, staffing, and simultaneously managing a number of foreign operations;
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potentially adverse tax developments;
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exposure to different legal standards;
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political or social unrest, including terrorism;
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risks related to government regulation and uncertain protection and enforcement of our intellectual property rights; and
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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 within those countries,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.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 sparse,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 relationshiprelationships with a U.S. securities broker-dealer and clearing firmfirms to receive and transmit funds internationally.
Funds invested by our customers in securities of U.S. companies are transmitted to a U.S. registered securities broker-dealer and clearing firm and fundsfirms. Funds from the sale of securities are transmitted from thesuch U.S. registered securities broker-dealer and clearing firmfirms 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 arehave 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 any 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, we do not have extensive experience in integratingthere is substantial cost and time expended to complete post-closing integration of acquisitions, including human resource training, data and we could experience difficulties incorporating an acquired company's personnel, operations, technology systems and service offerings into our own or in retaining and motivating key personnel from these businesses.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.
As a result of our international operations, weWe could be adversely affected by violations of the U.S. Foreign Corrupt Practices Actanti-corruption and similaranti-criminal regulations in effect in the United States and the foreign anti-corruption laws.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, by both the U.S. Department of Justice and the SEC, resulting in record fines and penalties, increased enforcement activity, by non-U.S. regulators, 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 the FCPA’s prohibitionanti-corruption laws’ prohibitions on improper payments to government officials to apply to officials like those of the Central Bank of the Russian Federation, the CommitteeAgency for the ControlRegulation and SupervisionDevelopment of the Financial Market and Financial Organizations of the National Bank 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.contractors outside the scope of their employment. In the event that we believe or have reason to believe that our employees, agents or distributorsindependent contractors have or may have violated applicable anti-corruption and anti-criminal laws, including the FCPA, 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 we depend on our subsidiaries for cash to fund allmanagement of our operations and expenses, including making future dividend payments, if any.operating subsidiaries, however, our financial statements are presented on a consolidated basis.
Our operations are conducted entirelyprimarily 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 our 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.
Mr.Timur Turlov has control over key decision making as a result of his ownership of a majority of our voting stock.
Mr.Timur Turlov, our chief executive officer and chairman of our board of directors, beneficially owns approximately 73.1%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, recapitalization,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 a fiduciary dutyduties to our stockholders and must act in good faith and in a manner he reasonably believes to be in the best interestsinterest 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.
Our common stock has a limited public market, and the marketThe price of our common stock has fluctuated historically and may be volatile and could decline.volatile.
There is a limited public market for our common stock traded on the OTC Pink Market. We cannot assure you of the level of trading activity for our common stock will increase or be sustained. In the absence of an active public trading market you may not be able to sell our shares in open market transactions. An inactive market may also impair our ability to raise capital to fund operations by selling common stock and may impair our ability to make strategic investments by using our common stock as consideration. In addition, theThe market price of our common stock may fluctuate significantly. Among the factors that could affect our stock price are:
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industry or general market conditions;
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domestic and international economic factors unrelated to our performance;
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country risk associated with the countries in which we conduct operations;
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changes in our customers’ preferences;
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new regulatory pronouncements and changes in regulatory guidelines;
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lawsuits, enforcement actions and other claims by third parties or governmental authorities;
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actual or anticipated fluctuations in our quarterly operating results;
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changes in securities analysts’ estimates of our financial performance or lack of research coverage and reports by industry analysts;
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actions by large position stockholders, including future sales of our common stock;
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announcements by us of significant impairment charges;
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speculation in the press or investment community;
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investor perception of us and our industry;
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changes in market valuations or earnings of similar companies;
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announcements by us or our competitors of significant contracts, acquisitions, dispositions or strategic partnerships;
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completions of significant asset acquisitions or dispositions;
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war, terrorist acts, civil unrest and epidemic disease;
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any future sales of our common stock or other securities;
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additions or departures of key personnel; and
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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 debt or equity 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 likelypossible 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 the reporting, accounting andextensive corporate governance, reporting and accounting disclosure requirements under U.S. securities laws and regulations of the Sarbanes-Oxley Act and the Dodd-Frank Act. When appropriate we intend to seek a listing of our common stock on a U.S. exchange or market.SEC. These Acts andlaws, as well as the listing standards of exchanges and markets willthe Nasdaq Stock Exchange, impose certain compliance requirements, costs and obligations upon us. The changes necessitated by publicly listing our equity on a securities exchange will requirelisted companies. This requires a significant commitment of additional resources and management oversight which will increase our operating costs. Further, to comply with the requirements of being a public company, we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. In addition, we may identify control deficiencies which could result in a material weakness or significant deficiency.
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. As a public company, we may be required, among other things, to define and expand the roles and the duties of our board of directors and its committees and institute more comprehensive compliance and investor relations functions. 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 do not intend to declare and pay dividends on our common stock for the foreseeable future. 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. Therefore, weWe 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 their value.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, will beare 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.
If we were to list on the NYSE or NASDAQ we would beWe are deemed to be a “controlled company” within the meaning of theirthe rules of Nasdaq and, as a result, we would 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 expect to qualify as a “controlled company” within the meaning of exchange or marketsNasdaq corporate governance standards. Under suchNasdaq rules, a company of which more than 50% of the voting power is held by anone individual is a “controlled company” and may elect not to comply with certain corporate governance standards, including:
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the requirement that a majority of the board of directors consist of independent directors;
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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;
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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;
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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
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the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
If we make and are subsequently granted an exchange or market listing, we intendWe currently utilize exemptions to utilize these exemptions. Currently we do not have a majorityallow for one non-independent director to sit on each of independent directors, our nominating and corporate governance committee and our compensation committeecommittee. The charters for each of those committees provide for annual performance evaluations. Currently we do not consist entirelyhave a majority of independent directors and such committees may not be subject to annual performance evaluations, and for as long as we are a controlled company, we anticipate taking advantageon the board of these exemptions. Consequently, you do not and will not have the same protections afforded to stockholders of companies that are subject to all of corporate governance rules and requirements.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. UnresolvedUnresolved Staff Comments
None.
Item 2. PropertiesProperties
We do not own any real estate or other physical properties that are materially important to our operation. Our principal executive offices are currently located at Office 1704, 4B Building, “Nurly Tau”“Esentai Tower BC, 17Floor 7, 77/7 Al Farabi Ave. Almaty, Kazakhstan 050059, where we050040.
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 10,600264,000 square feet for which we incur rent expense of space. This lease expires in July 2018. We also lease facilities in other locations in the CIS, Cyprus and the U.S. where we conduct our operations
The following table sets forth certainapproximately $530,000 per month. For additional information regarding our leased facilities including, the principal use of the facility, the number of facilities by specific purpose per country, the average size of each facility by country and expiration date or range of dates of the various facilities:office lease commitments see Note 26 – Leases.
| Principal Use | | Offices | | Approximate Square Footage | | Expiration |
| Administrative Offices and Operations Centers | | | | | | |
| | Russia | | 1 | | 7,500 | | April 2020 |
| | Kazakhstan | | 1 | | 10,600 | | July 2018(1) |
| | United States | | 1 | | 100 | | Month-to-month |
| | Cyprus | | 1 | | 1,300 | | September 2019 |
| | | | | | | | |
| Retail Brokerage Locations | | | | | | |
| | Russia | | 35 | | 1,300(2) | | 2018 to 2019(3) |
| | Kazakhstan | | 15 | | 1,200(2) | | 2018 to 2019(3) |
| | Ukraine | | 1 | | 3,000 | | April 2020 |
| | Uzbekistan | | 1 | | 650 | | March 2019 |
| | Kyrgyzstan | | 1 | | 2,600 | | October 2018 |
(1)
Following expiration of this lease, we will be moving our executive offices to 77/7 al-Farabi ave., “Esentai Tower” BC, Floor 7 and 3, Almaty Kazakhstan 050059. Our new offices will be approximately 34,700 square feet in size. The term of our lease for this new space will expire in March 2023.
(2)
Average square footage of all retail locations.
(3)
Our lease agreements for these locations expire at various times during 2018 and 2019.
We believe our present facilities, together with our current options to extend lease terms, are adequate for our current needs.
Item 3.Legal Proceedings 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 are party tomay be named as defendants in various routine legal proceedings, claims, and regulatory inquiries arising out of the ordinary course of theirour business. Management believes that the results of these routine legal proceedings, claims, and regulatory matters will not have a material adverse effect on the Company’sour financial condition, or on the Company’sour operations and cash flows. However, the Companywe cannot estimate the legal fees and expenses to be incurred in connection with these routine matters and, therefore, isare unable to determine whether these future legal fees and expenses will have a material impact on the Company’sour operations and cash flows. It is the Company’sour policy to expense legal and other fees as incurred.
Item 4. Mine Safety DisclosuresDisclosures
Not applicable.
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table sets forthMarket Information
Our common stock was approved for listing and commenced trading on the periods indicatedNasdaq Capital Market on October 15, 2019 under the high and low bid prices forsymbol “FRHC”. Prior to that time, our common stock aswas quoted under the symbol “FRHC” on the Over-the-Counter PinkOTCQX Best Market for the fiscal years ended March 31, 2018 and 2017. These quotations were furnished to us byof the OTC Markets Group, Inc. andOver-the-counter quotations on the OTCQX Best Market reflect interdealer prices without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions:
Fiscal year ended March 31, 2018 | | |
| | | |
| Fourth quarter | $7.90 | $6.11 |
| Third quarter | $6.36 | $1.70 |
| Second quarter | $2.60 | $0.25 |
| First quarter | $0.35 | $0.16 |
| | | |
Fiscal year ended March 31, 2017 | | |
| | | |
| Fourth quarter | $0.425 | $0.125 |
| Third quarter | $0.200 | $0.075 |
| Second quarter | $0.150 | $0.075 |
| First quarter | $0.175 | $0.050 |
We completed a one-share-for-twenty-five-shares (1:25) reverse split of our outstandingtransactions. The Company’s common stock which was declared effective byalso trades on the Financial Industry Regulatory Authority (“FINRA”)KASE under the symbol “US_FRHC” and on September 6, 2017. Bid prices have been adjusted to give effect to the reverse split.SPBX under the symbol “FRHC”.
Holders
As of June 26, 2018,July 8, 2020, we had approximately 652552 shareholders of record holding 58,033,212 shares of our common stock.record. The number of record holders was determined from the records of our stock transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers, and registered clearing houses or agencies.
Dividends
We have not declared or paid a cash dividend on our common stock during the past two fiscal years. Our ability to payAny payment of cash dividends is subject to limitations imposed by Nevada law. Under Nevada law, dividends may be paid to the extent that a corporation’s assets exceed it liabilities and it is able to pay its debts as they become dueon stock in the usual coursefuture will be at the discretion of business.our board of directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual and legal restrictions and other factors deemed relevant by our board of directors. We currently intend to retain any future earnings to fund the operation, development and expansion of our business, and therefore we do not anticipate paying any cash dividends on common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information onInformation regarding securities authorized for issuance under our equity compensation plans (including individual compensation arrangements)is set forth under which our equity securities are authorizedthe heading “Securities Authorized for issuance:Issuance Under Equity Compensation Plans” in “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in Item 12 of this annual report.
| Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)(c) |
| | | | |
| Equity compensation plans approved by security holders | 360,000 | $1.98 | 740,000 |
| Equity compensation plans not approved by security holders | -- | -- | -- |
| Total | 360,000 | $1.98 | 740,000 |
This information is not required to be provided by smaller reporting companies.
Recent Sales of Unregistered Equity Securities
Except as reported in a Current Report on Form 8-K we filed withDuring the SEC ontwelve months ended March 8, 2018,31, 2020, we did not sell any unregistered shares of our equity securities during the quarter ended March 31, 2018.securities.
Issuer Purchases of Equity Securities
We did not repurchase any equity securities of the Company during the fiscal year ended March 31, 2018.2020.
Item 6. Selected Financial DataData
This information is not required forto be provided by smaller reporting companies.
Item 7. Management'sManagement's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our audited annualconsolidated financial statements and the related notes thereto included elsewhere in this annual report. This discussion contains certain forward-looking statements that involve risks and uncertainties, as described under the heading “Special Note Aboutabout Forward-Looking Information” in this annual report. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the disclosure under the heading “Risk Factors” elsewhere in Item 1A or Part I of this annual report.
This discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the fiscal years ended March 31, 20182020 and 2017.2019.
Overview
We own several operating subsidiaries that conduct full-service retail securities brokerage, investment counseling, securities trading, investment banking and underwriting services in Eastern Europe and Central Asia. We are headquartered in Almaty, Kazakhstan, with supporting administrative offices in Russia, Cyprus and the United States. We have retail brokerage and financial services offices in Kazakhstan, Kyrgyzstan, Russia, Ukraine, Uzbekistan and Germany. A number of our brokerage and financial services offices in Russia also offer banking services to firm customers.
Our companies are professional participants of the Kazakhstan Stock Exchange (KASE), the Moscow Stock Exchange (MOEX)KASE, AIX, MOEX, SPBX, UZSE and the Saint-Petersburg Stock Exchange (SPB), the Ukrainian Exchange, and the Republican Stock Exchange of Tashkent (UZSE).Exchange. We operate a brokerage office in Cyprus that serves to provide our clients with operations support and access to the investment opportunities, relative stability, and integrity of the U.S. and European securities markets, which under the regulatory regimes of many jurisdictions where we operate do not currently allow investors direct access to international securities markets.
Our initial line of business has been directed toward providingWe provide a comprehensive array of financial services to our target retail audience which is high-net-worthupper middle-class individuals and small businesses seeking to diversify their investment portfolios to manage economic risk associated with political, regulatory, currency, banking, and national uncertainties. ClientsOur customers 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.
Significant Events
Executive Summary
Customer Base
We serviced more than 46,000 client accounts more than 67% ofIn December 2019 we acquired approximately a 13% interest in the Saint-Petersburg Exchange Joint-Stock Company, which carried positive cash or asset account balances asowns the Saint-Petersburg Stock Exchange (“SPBX”) for approximately $10.5 million. The SPBX is one of the fiscal year ended March 31, 2018. During fiscal 2018 we opened over 10,700 new accounts, against 235 account closures. Our total client transaction volume foroldest Russian exchanges. It is the year exceeded $14 billion.
We have accelerated our growth through completionsecond most active stock exchange in Russia by volume. In November 2014 the SPBX started trading in the securities of several strategic acquisitions which have enabled uscertain S&P 500 Index listed companies and enables local private investors access to expand our market reach, increase our client basecertain U.S. securities. In June 2019 the SPBX announced that the exchange trades in nearly 1,000 American shares, depository receipts and provide our clientele the convenience of both a state-of-the-art proprietary electronic trading platform and 55 retail brokerage and financial services offices located across Kazakhstan (16), Kyrgyzstan (1), Russia (36), Uzbekistan (1) and Ukraine (1) that provide a full array of financial services, investment consulting and education.
Recent Acquisitionsbonds.
In November 2017,June 2020 we completed the acquisition of Freedom UA in exchange for approximately 387,700 shares of Company common stock with a market value of approximately $1.5 million on the date of acquisition. This acquisition provided us access to the Ukrainian securities brokerage market including approximately 2,400 client accounts. We are in the process of opening 12 additional retail locations in Ukraine.
Subsequent to the end of our fiscal year, in May 2018, we announced that we had completed the acquisition of a 20% stake in the Ukrainian Exchange (“UX”). The UX is the leading local securities market for equities and mergerderivatives in Ukraine and is committed to being a technology leader with an order-driven trading market and repo market trading system that results in convenience and cost savings for local securities market investors. We believe our investments in the SPBX and the UX, demonstrate our commitment to the future of JSC Asyl Invest intolocal exchanges serving local investors
In July 2020 we announced the Company. This acquisition joinedof Zerich Capital following receipt of approval from the two largest retailRussian Federal Antimonopoly Service. Zerich Capital commenced business in 1995 and is one of the oldest securities brokerage firms in KazakhstanRussia, currently ranking as the 19th largest brokerage house in Russia in terms of clients. We expect integration of Zerich Capital’s current business structure over the next few months should provide many advantages to existing Zerich Capital customers.
Impact of COVID-19
Because measures designed to curb the spread of COVID-19 did not go into effect in most countries where we operate until the latter part of March 2020, generally we do not believe they had a significant adverse impact on our financial condition and increased our client accounts in Kazakhstan to more than 49,000. Asyl Invest was formerly controlled by Mr. Turlov. We acquired Asyl Invest for approximately $2.25 million, which was equal toresults of operations during the fair valueperiod ended March 31, 2020. The extent of the net assets acquired byimpact of COVID-19 on our business, operational and financial performance over the Company.
Also subsequent tolonger terms will depend on certain developments, including the end of our fiscal year, in June 2018, we announced completionduration and spread of the acquisitionoutbreak, including any secondary outbreaks, and mergerthe impact on our customers, employees and the markets in which we operate, all of Nettrader Brokerage Company. This resulted inwhich is uncertain at this time and cannot be predicted. At this time, the acquisitionextent to which COVID-19 may impact our business, financial condition, liquidity, results of approximately 16,000 new Russian client accounts. This acquisition also finalized our acquisition of the Tradernet trading platform, a browser-based application and in some countries a supporting mobile app to facilitate our customers’ trading activities and ability to monitor and manage all aspects of their personal accounts and participate in our client social network. Nettrader was formerly owned by Mr. Turlov. We acquired Nettrader for approximately $3.8 million, which was equal to the fair value of the net assets acquired by the Company.
operations or cash flows cannot be reasonably estimated.
Financing Activities
InDuring the quarter ended March 31, 2020, we placed an additional $6 million of FRHC 7.000% notes due December 2017,2022 (the “FRHC Notes”) with accredited investors in Kazakhstan in accordance with and governed by the laws of the Astana International Financial Centre (“AIFC”). The FRHC Notes are listed on the AIX. Through March 31, 2020, we completedplaced an aggregate of $20.5 million FRHC Notes. The FRHC Notes were issued in denominations of U.S $100,000, with interest payable semi-annually in June and December and include customary events of default relating to disposition of Company assets outside the ordinary course of business, defaults on Company liabilities and obligations, corporate reorganizations, initiation of bankruptcy proceeding, termination of the AIX listing by the Company, and substitution of the principal debtor without requisite approval. The FRHC Notes were not registered under the United States Securities Act of 1933, as amended (the “Securities Act”) and were offered and sold pursuant to and in accordance with the exemption from registration in the United States provided under Regulation S. The FRHC Notes were not offered or sold in the United States or to, or for the account or benefit of U.S. persons.
During the quarter ended March 31, 2020, we placed approximately $30 million of Freedom RU US dollar denominated 6.5% bonds (the “Freedom RU USD Bonds”). The Freedom RU USD Bonds have a private placementterm of approximate 3.7three years, with a quarterly coupon payment. The Freedom RU USD Bonds were issued in denominations of U.S. $1,000, with a minimum purchase requirement of 1.4 million sharesRussian rubles. Freedom RU is authorized to place up to a maximum of 40,000 of these Freedom RU USD Bonds. The Freedom RU USD Bonds are listed on the MOEX and are governed by the “Exchange Bond Terms and Conditions in the Framework of the Exchange Bonds Program”, a copy of which is attached to this annual report on Form 10-K as Exhibit 4.03 and incorporated herein by this reference.
During fiscal 2020, we placed an aggregate total of approximately $63.0 million of our restricted common stock at $3.00 per share, raising aggregate offering proceeds of approximately $11 million.
In March 2018, we completed we concluded a private placement of approximately 5.4 million shares of our restricted common stock at $5.50 per share, raising net offering proceeds of approximately $29.3 million.
In February 2018, we received a line of credit that allows us to borrow up to $9 million at a rate of 7% per annum. The term ofown debt securities, including the credit line is one year. As ofFRHC Notes and the Freedom RU USD Bonds discussed above. At March 31, 2018,2020, we had drawn down approximately $7$72.3 million of the line of credit. This line of credit is collateralized by stock held in our proprietary trading account.
During fiscal 2018, we placed USD denominateddebt securities outstanding (including accrued interest), with 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, Freedom RU and notes of FRHC issued under Kazakhstani and Russian Federation law, which trade on the KASE, MOEX and AIX, respectively. Approximately 90% of our outstanding debt securities are denominated in Kazakhstan in the amount of approximately $11.9 million. These bonds have an 8.00% fixed annual coupon rate and mature in June 2020.
U.S. dollars.
Financial HighlightsResults
During the year ended March 31, 2018,2020, we realized total net revenue of approximately $122 million, net income attributable to our common shareholders of approximately $19.2$22.1 million and basic and diluted earnings per share of approximately $0.58,$0.38, respectively, compared to total net revenue of approximately $6.3$74.3 million, net income of approximately $7.1 million and $0.56basic and diluted earnings per share of approximately $0.12, respectively, during the year ended March 31, 2017.2019.
All dollar amounts reflected under the headings “Results of Operations,” “Liquidity and Capital Resources,” and “Cash Flows” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands of U.S. dollars unless the context indicates otherwise.
Results of Operations
The following year to year comparison of our financial results is not necessarily indicative of future results.
| | | Year Ended March 31, 2017 (Recast) | | |
| | | | | | | | | |
| Revenue: | | |
| Fee and commission income | $10,796 | 20% | $4,090 | 21% | $92,668 | 76% | $44,316 | 60% |
| Net gain on trading securities | 33,746 | 61% | 10,806 | 56% | 14,923 | 12% | 20,162 | 27% |
| Interest income | 8,184 | 15% | 2,006 | 10% | 12,134 | 10% | 13,925 | 19% |
| Net gain on derivatives | 643 | 1% | 1,905 | 10% | |
| Net realized gain on investments available for sale | - | 0% | 276 | 2% | |
| Net gain on sale of fixed assets | 5 | 0% | 29 | 0% | |
| Net gain on foreign exchange operations | 1,850 | 3% | 274 | 1% | |
| Net loss on derivatives | | (138) | 0% | - | 0% |
| Net gain /(loss) on foreign exchange operations | | 2,315 | 2% | (4,118) | (6%) |
| Total revenue, net | 55,224 | 100% | 19,386 | 100% | 121,902 | 100% | 74,285 | 100% |
| | | |
| | | |
| Expense: | | |
| Interest expense | 14,244 | 26% | 3,807 | 20% | 12,399 | 10% | 14,649 | 20% |
| Fee and commission expense | 2,066 | 4% | 346 | 2% | 21,936 | 18% | 6,238 | 8% |
| Operating expense | 18,927 | 34% | 9,251 | 48% | 59,990 | 49% | 43,134 | 58% |
| Provision for impairment (recoveries)/losses | | (1,164) | (1%) | 1,498 | 2% |
| Other expense, net | 275 | 0% | 210 | 1% | 609 | 0% | 236 | 0% |
| Loss from disposal of subsidiary | | - | 15 | 0% |
| Total expense | 35,512 | 64% | 13,614 | 71% | 93,770 | 77% | 65,770 | 89% |
| | | |
| Net income before income taxes | 19,712 | 36% | 5,772 | 30% | |
| Income tax (expense)/benefit | (479) | (1%) | 524 | 2% | |
| Net income before noncontrolling interests | 19,233 | 35% | 6,296 | 32% | |
| Net income before income tax | | 28,132 | 23% | 8,515 | 11% |
| Income tax expense | | (6,002) | (5%) | (1,368) | (2%) |
| Net income | | $22,130 | 18% | 7,147 | 9% |
| | | |
| Less: Net income attributable to noncontrolling interest in subsidiary | - | 0% | 9 | 0% | |
| Less: Net loss attributable to noncontrolling interest in subsidiary | | (2,707) | (2%) | - |
| Net income attributable to common shareholders | 19,233 | 35% | 6,287 | 32% | $24,837 | 20% | 7,147 | 9% |
| | | |
| Other comprehensive income | | |
| Other comprehensive income/loss | | |
| Changes in unrealized gain on investments available-for-sale, net of tax effect | - | 0% | 7 | 0% | $(71) | 0% | - | 0% |
| Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect | - | 0% | (276) | (1%) | - | 0% | 22 | 0% |
| Foreign currency translation adjustments, net of tax | (457) | (1%) | 4,465 | 23% | (14,851) | (12%) | (15,517) | (21%) |
| Comprehensive income before noncontrolling interests | 18,776 | 34% | 10,492 | 54% | |
| Less: comprehensive income attributable to noncontrolling interest in subsidiary | - | 0% | 9 | 0% | |
| Comprehensive income attributable to common shareholders | $18,776 | 34% | $10,483 | 54% | |
| Comprehensive income/(loss) before noncontrolling interests | | 7,208 | 6% | (8,348) | (11%) |
| Less: comprehensive loss attributable to noncontrolling interest in subsidiary | | (2,707) | (2%) | - | 0% |
| Comprehensive income/(loss) attributable to common shareholders | | $9,915 | 8% | $(8,348) | (11%) |
* Reflects percentage of total revenues, net.
Revenue
We derive revenue primarily from gains realized from our proprietary trading activities, fee and commission income earned from our retail brokerage clients, fees and commission from investment banking services, our proprietary trading activities and interest income.
| | | Year Ended March 31, 2017 (Recast) | | | | |
| | | | | | | | | | | | | |
| Fee and commission income | $10,796 | 20% | $4,090 | 21% | $6,706 | 164% | $92,668 | 76% | $44,316 | 60% | $48,352 | 109% |
| Net gain on trading securities | 33,746 | 61% | 10,806 | 56% | 22,940 | 212% | 14,923 | 12% | 20,162 | 27% | (5,239) | (26%) |
| Interest income | 8,184 | 15% | 2,006 | 10% | 6,178 | 308% | 12,134 | 10% | 13,925 | 19% | (1,791) | (13%) |
| Net gain on derivatives | 643 | 1% | 1,905 | 10% | (1,262) | (66%) | |
| Net realized gain on investments available for sale | - | 0% | 276 | 2% | (276) | (100%) | |
| Net gain on sale of fixed assets | 5 | 0% | 29 | 0% | �� (24) | (83%) | |
| Net gain on foreign exchange operations | 1,850 | 3% | 274 | 1% | 1,576 | 575% | |
| | | |
| Net loss on derivatives | | (138) | 0% | - | 0% | (138) | (100%) |
| Net gain /(loss) on foreign exchange operations | | 2,315 | 2% | (4,118) | (6%) | 6,433 | (156%) |
| Total revenue, net | $55,224 | 100% | $19,386 | 100% | $35,838 | 185% | $121,902 | 100% | $74,285 | 100% | $47,617 | 64% |
During the years ended March 31, 20182020 and 2017,2019, we realized total net revenue net of $55,224$121,902 and $19,386,$74,285, respectively. Revenue during the year ended March 31, 2018,2020, was significantly higher than during the year ended March 31, 2017,2019 primarily due to realizing higher fee and commission income, higher net gain on trading securities, increased interest incomerevenues and realizing a larger net gain on foreign exchange operations during the year ended March 31, 2018.2020. The gains realized during the year ended March 31, 2020, were partially offset by decreases in net gain on trading securities and interest income and a net loss on derivatives.
Fee and commission income. During the year ended March 31, 2018, fee and commission income increased $6,706 compared to the year ended March 31, 2017. This increase resulted principally from increased feesFees and commissions for the retail brokerage services consisted principally of broker fees from customer trading and related banking services, we provide our clients.underwriting and market making services. During the yearyears ended March 31, 2018,2020 and 2019, fees and commissions generated from brokerage and related banking services increased by $4,266were $92,668 and $2,319, respectively.$44,316, respectively, an increase of $48,352.
During the year ended March 31, 2018, we experienced increases in2020, fees and commissions and fees forfrom brokerage services providedincreased $45,747 as compared to our customers resulting from the growth of our customer base, increases in our client transaction volume, and greater demand for the other services we offer. Fees and commissions for brokerage services consist principally of broker fees from customer trading, underwriting and market making services and agency fees.year ended March 31, 2019. During the year ended March 31, 2018, brokerage fees and commissions increased $4,2252020, the number of clients we serviced was higher as a result of increased client transactioncontinued efforts to grow our customer base, increase the number of retail financial advisers, expand the volume of analysts’ reports available to our customer base and underwritinggrow trading activity among existing customers. Fees and market making feescommissions from related banking services increased $1,483 as a result of our participation in more initial and secondary public offerings. We earned no agency fees during March 31, 2018, as we provided no agency services in fiscal 2018, compared to $1,561 in agency fees during the year ended March 31, 2017.2020 by $1,106 compared to the year ended March 31, 2019. Fees for bank services consist primarily of wire transfer fees, commissions for payment processing and commissions for currency exchange operations. The increaseFees and commissions realized from underwriting and market making services increased by $1,499 during the year ended March 31, 2020, due to our engaging in feesmore underwriting and commission from banking services is attributablemarket making activities compared to the fact that during fiscal 2017 we were in the process of acquiring the bank and the bank did not engage in significant operations until fiscal 2018.year ended March 31, 2019.
Net gain on trading securities. Net gain on trading securities reflects the gains and losses from trading activities in our proprietary trading accounts. Net gains or losses are comprised of realized and unrealized gains and losses. Gains or losses are realized when we close a position in a security and realize a gain or a loss on that position. U.S. GAAP requires that we reflect in our financial statements unrealized gains and losses on all our securities trading positions that remain open as of the end of each period. Unrealized gains or losses reflect the value of our open securities positions at the end of the periods reported. Fluctuations in unrealized gains or losses from one period to another may result from factors within our control, such as when we elect to close an open securities position, which would have the effect of reducing our open positions and, thereby potentially reducing or increasing the amount of unrealized gains or losses in a period. Fluctuations in unrealized gains and losses from period to period may also occur as a result of factors beyond our control, such as fluctuations in the market prices of the open securities positions we hold. This may adversely affect the ultimate value we realize from these investments. Unrealized gains or losses in a particular period may or may not be indicative of the gain or loss we will realize on a securities position when the position is closed. As a result, we may realize significant swings in gains and losses realized on our trading securities year-over-year and quarter-over-quarter. You should not assume that a gain or loss in any particular period. is indicative of a trend or of the gain or loss we may ultimately realize when we close a position.
During the year ended March 31, 2018,2020, we recognized a net gain on trading securities of $33,746,$14,923, which included $17,314$22,770 of realized net gain and $16,432$7,847 of unrealized net gain,loss compared to a net gain of $10,806, which included $5,322 of realized net gain and $5,484 of unrealized net gain,$20,162 on trading securities for the year ended March 31, 2017. During2019, which included $25,535 of realized net gain and $5,373 of unrealized net loss. The primary contributing factors to the reduction of net gain on trading securities during the year ended March 31, 2018,2020, was the fact that we reallocated a significant portion of net gainour proprietary trading portfolio from equity instruments to fixed income instruments during the year ended March 31, 2020, as compared to the prior year, as disclosed in Note 5 - Trading and Available-for-sale securities at Fair Value, within the notes to the audited consolidated financial statements that accompany this report, coupled with the a decrease in the amount of our proprietary trading portfolio based on revaluation of securities resulted fromdenominated in Russian rubles and Kazakhstani tenge held in the following four securities: JSC Kcell - Kazakhstan’s largest cellular service provider, JSC Astana Banki – Kazakhstan’s retail bank, JSC Kazakhtelecom - largest telecommunications companyportfolio during the year ended March 31, 2020 compared to the prior year. We intend to continue reallocating some of our proprietary trading portfolio to fixed income instruments, unless changes in Kazakhstan and JSC KEGOC - Kazakhstan’s largest electricity grid company which contributed $16,132, $8,186, $3,980 and $1,847 respectively.market, economic or our financial condition dictate otherwise.
Interest incomeincome.. During the years ended March 31, 20182020 and 2017,2019, we recorded interest income from several sources: interest income on trading securities, and interest income on cash and cash equivalents held in financial institutions, interest income on reverse repurchase transactions and amounts due from banks. Interest income on trading securities consistedconsists of interest earned from investments in debt securities and dividends earned on equity securities held in our proprietary trading accounts. During the year ended March 31, 2018,2020, we realized interest income of $8,184$12,134 compared to $2,006$13,925 for the year ended March 31, 2017.2019. The increasedecrease in interest income of $6,178$1,791 was primarily due to an increasethe result of a decrease in interest income onfrom trading securities in the amount of $3,694 and an increase in interest income from$1,395, reverse repurchase transactionsagreements in the amount of $2,485 as a result of increased volume of reverse repurchase transactions.
Net gain$693 and decreased interest income on derivative. On December 28, 2016, Freedom RU entered into a derivative instrument agreement with a related party that included a call option feature for the purchase of shares held by Freedom RU. This call option was classified as a derivative liabilitydue from banks in the Consolidated Balance Sheets and measured at each reporting period using the Black-Scholes Model. The gain associated with this derivative instrument is recognized as gainamount of $10, which was partially offset by increased interest income on a derivative instrumentloans to customers in the Consolidated Statementsamount of Operations and Statements of Other Comprehensive Income. In exchange for a $2,629 premium paid upfront, this derivative instrument granted the holder the right to purchase 11.8 million shares of a top rated Russian commercial bank - Sberbank on June 14, 2017, at a strike price $3.10 per share.$307.
In connection with the transaction described in the preceding paragraph, we recorded a derivative liability of $495 as of March 31, 2017. On June 14, 2017, the derivative instrument expired unexercised by the option holder, and the Company recognized a gain on the derivative instrument of $482.
During the year ended March 31, 2018, Freedom KZ purchased foreign currency futures contracts to sell $25,000 at2020, we realized lower interest income from trading securities because the weighted average exchange ratecomposition of 345.63 KZT/USDour proprietary trading portfolio was not as heavily invested in December 2017 and March 2018.equity securities. As a result, ofdividend income decreased as compared to the increase in the KZT/USD exchange rateyear ended March 31, 2019. Interest income from reverse repurchase transactions was also lower during the year ended March 31, 2018,2020, because we recognized a $161 gain ondecreased the tradingvolume of futures duringreverse repurchase transactions as compared to the year ended March 31, 2018. The Company uses foreign currency futures contracts to minimize the risk caused by foreign currency fluctuation on its foreign currency receivables and payables by purchasing futures with financial institutions. The futures contracts are traded on the Kazakhstan Stock Exchange and represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price.2019.
Net gaingain/(loss) on foreign exchange operations. Net gain /(loss) on foreign exchange operations resulted from two sources: revaluation of assets and liabilities denominated in currencies other than the reporting currencies of each subsidiary of the Company and from purchases and sales of currencies at exchange rates different from official exchange rates set by the National Bank of Kazakhstan and the Central Bank of Russia.currency. During the year ended March 31, 2018,2020, we realized a net gain on foreign exchange operations of $1,850$2,315 compared to $274a $4,118 net gainloss on foreign exchange operations. This increase was due to several factors. First,operations during the year ended March 31, 2018,2019. In accordance with U.S. GAAP, we realized a $642 gain onare required to revalue assets denominated in foreign exchange operations ascurrencies into our reporting currency, which is the resultU.S. dollar.
During the year ended March 31, 2020, the value of currency trading activity during the year. Second, asKazakhstani tenge depreciated by 18% against the United States dollar and the Russian ruble depreciated at value against the United States dollar by 20%. As a result of an increase of Russian ruble denominated financial liabilities, coupled with the aforementioned depreciation in the value of the Russian ruble against the United States dollar, we realized a $422 gain on foreign exchange revaluations. In addition, Freedom KZ realized positive revaluation of USD denominated trading securities in the amount of Kazakhstani tenge denominated assets held by FRHC in$3,283 during the last quarter of the fiscal year ended March 31, 2018, we realized2020, as a $410 gain on foreign exchange operations due to the appreciationresult of above-mentioned decrease in value of the Kazakhstani tenge against the United States dollar during that period. Third, wedollar. We also realized a $369net gain on foreign exchange operations of $1,070 due to a higher volume of cash and non-cash foreign exchange operations executed by the Bank, as a result of reduction in value of the Russian ruble against the United Stated dollar. These gains were partially offset by a loss on revaluation of corporate bonds indexed to United States dollars issued by Freedom KZ in the amount of $2,745 due to appreciation ondepreciation of Kazakhstani tenge against United States dollar.
Expense
| | | Year Ended March 31, 2017 (Recast) | | | | |
| | | | | | | | | | | | | |
| Interest expense | $14,244 | 40% | $3,807 | 28% | $10,437 | 274% | $12,399 | 13% | $14,649 | 22% | $(2,250) | (15%) |
| Fee and commission expense | 2,066 | 6% | 346 | 3% | 1,720 | 497% | 21,936 | 23% | 6,238 | 10% | 15,698 | 252% |
| Operating expense | 18,927 | 53% | 9,251 | 68% | 9,676 | 105% | 59,990 | 64% | 43,134 | 66% | 16,856 | 39% |
| Provision for impairment (recoveries)/losses | | (1,164) | (1%) | 1,498 | 2% | (2,662) | (178%) |
| Other expense, net | 275 | 1% | 210 | 1% | 65 | 31% | 609 | 1% | 236 | 0% | 373 | 158% |
| | | |
| Loss from disposal of subsidiary | | - | 0% | 15 | 0% | (15) | 0% |
| Total expense | $35,512 | 100% | $13,614 | 100% | $21,898 | 161% | $93,770 | 100% | $65,770 | 100% | $28,000 | 43% |
During the years ended March 31, 20182020 and 2017,2019, we incurred total expenses of $35,512$93,770 and $13,614,$65,770, respectively. Expenses during the year ended March 31, 2018,2020, increased primarily as a result of our continued efforts to expand and grow our business.
Interest expense. During the year ended March 31, 2018,2020, we recognized total interest expense of $14,244,$12,399 compared to total interest expense of $3,807$14,649 during the year ended March 31, 2017.2019. The increasedecrease in interest expense of $2,250 was primarily attributable to higher amountsa lower volume of short-term financing attracted by means of securities repurchase agreements totaling $9,750.$3,969.This decrease was partially offset by increased interest expense for customer accounts totaling $292,interest expense for loans received totaling $114 and increased interest expense related to the issuance of debt securities totaling $1,313.
Fee and commission expense. During the year ended March 31, 2018,2020, we recognized fee and commission expense of $2,066,$21,936, compared to fee and commission expense of $346$6,238 during the year ended March 31, 2017.2019. The increase was mainly associated with an increase in custody bank services fee of $1,280. The higher custody bank service fees resulted from a significant increase in our position in the shares of Kcell which we purchased on international stock markets. We realized increased commission fees paid to the Central Depository, stock exchanges and brokerage fees to otherour prime brokers of $440. We also started to work with payment systems, including Apple Pay and Visa which resulted in a $110$15,318 as well as an increase in expenses.bank services commissions of $380. The increases in fee and commission expense were the result of both growth in our client base and increased transaction volume from our existing clients.
Operating expense.During the year ended March 31, 2018,2020, operating expenseexpenses totaled $18,927$59,990, compared to operating expenses of $9,251 for$43,134 during the year ended March 31, 2017.2019. The increase wasis primarily attributable to higher general and administrative expenses related to growth inthe expansion of our operations, including a $2,652operations. The increase in operating expenses during the year ended March 31, 2020, included an increase of $11,081 in payroll expenses,and bonuses, a $1,621 increase in equity compensation expense for equity awards made to employees, a $1,355 increase in rent expense, a $637 increase in office equipment expenses, a $548 increase in office repair expenses, a $365$2,120 increase in professional services fees,expenses, a $319 increase in insurance, a $264$1,135 increase in advertising expenses, a $130$676 increase in utilities,representative expenses, a $108$624 increase in depreciation and amortization, a $623 increase in business trip expenses, a $254 increase in utilities, charity and a $459 increaseother expenses. During the year ended March 31, 2020, we realized decreases in stock compensation expenses of $873, repairs of $773, and in expenses for communication services, trainingsoffice supplies, consumables, goods, and conferences, charity, IT services fees, insurance feesmaterials used to furnish new branch offices by $637. As a result of adopting the new lease standard, the Company realized a $3,672 decrease in rent expense and a $6,298 increase in lease cost expenses,lease cost expenses for taxes, other than income tax.which also, increased due to higher number of offices during the year.
Provision for impairment losses
During the year ended March 31, 2020, receivables in the amount of approximately $27,000 were repaid, including $1,392 which management had previously estimated may be uncollectible and for which management had recognized an impairment loss in prior period of year ended March 31, 2019. This recovery was partially offset by an additional provision for impairment losses in the amount of $228. We anticipate the $1,392 recovery of impairment loss during the year ended March 31, 2020, to be a one-time event that will not recur in future periods.
Income tax (expense)/benefitexpense
We recognized net income before income tax of $19,712$28,132 during the year ended March 31, 2018,2020, and $5,772$8,515 during the year ended March 31, 2017.2019. During the year ended March 31, 2018,2019, we realized income tax expense of $479,$6,002, compared to an income tax benefitexpense of $524$1,368 during the year ended March 31, 2017.2019. The change of the effective tax rates from an income tax benefit in 201716% during the year ended March 31, 2019 to an income tax expense in 2018,21% during the year ended March 31, 2020, was the result of changes in the composition of the revenues we realized from our revenuesoperating activities and the tax treatment of those revenues in the various foreign jurisdictions where our subsidiaries operate.
Net income before non-controlling interests
Foroperate along with the reasons discussed above, during the year ended March 31, 2018, we realized net income before noncontrolling interest of $19,233 compared to net income before noncontrolling interest of $6,296 for the year ended March 31, 2017.incremental U.S. tax on GILTI.
Comprehensive income attributable to common shareholders
The functional currencies of our operating subsidiaries are the Russian ruble, Kazakhstani tenge, European euro, Ukrainian hryvnia and Uzbekistani som and the Kazakhstani tenge.som. Our reporting currency is the USUnited States dollar. As a resultPursuant to U.S. GAAP we are required to revalue our assets from our functional currencies to our reporting currency for financial reporting purposes. Due to the depreciation of fluctuations in the Russian ruble by 20% and the Kazakhstani tenge by 18% against the USUnited States dollar during the periods covered in this annual report, we realized a foreign currency translation loss of $457$14,851 during the year ended March 31, 2018,2020, compared to a foreign currency translation gainloss of $4,465$15,517 during the year ended March 31, 2017. As a result, during the year ended March 31, 2018, we realized comprehensive income attributable to common shareholders of $18,776, compared to a comprehensive income attributable to common shareholders of $10,483 during the year ended March 31, 2017.2019.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes. Our operations are funded through a combination of existing cash on hand, cash generated from operations, proceeds from the issuance of common stock, proceeds from the sale of bonds of one of our subsidiaries, our credit facilityand other borrowings and capital contributions from our controlling shareholder.borrowings. Regulatory requirements applicable to our subsidiaries require them to maintain minimum capital levels.
As of March 31, 2018,2020, we had cash and cash equivalents of $64,531,$63,208 compared to cash and cash equivalents of $22,616,$49,960, as of March 31, 2017.2019. At March 31, 2018,2020, we had total current assets (less restricted cash) of $302,455$453,523 and total current liabilities of $203,759, resulting in working capital of $98,696.$324,486. By comparison, at March 31, 2017,2019, we had total current assets (less restricted cash) of $105,446$350,911 and total current liabilities of $74,017, resulting in working capital$233,314. At March 31, 2020, we had net liquid assets of $31,429.$342,501, consisting of cash and cash equivalents, trading securities, brokerage and other receivables and other assets compared to $295,936 at March 31, 2019. As discussed above, during the fiscal year ended March 31, 2020, we realized total revenue net of $121,902 and net income of $22,130 compared to total revenue net of $74,285 and net income of $7,147 during the fiscal year ended March 31, 2019.
Currency fluctuations during the periods discussed above led to approximately a 20% decrease in more detail above under the heading "Financing Activities",value of the Russian ruble against the U.S. dollar, while the Kazakhstani tenge decreased approximately 18% against the U.S. dollar during the period from March 31, 2019 to March 31, 2020. As a result, in accordance with U.S. GAAP, balance sheet items denominated in Russian rubles and Kazakhstani tenge had to be revalued. This caused us to realize a $2,315 gain on foreign exchange operations and a foreign currency translation loss of $14,851 during the year ended March 31, 2018, we raised net proceeds of $40,444 through private placements of our common stock and $11,933 through the sale of bonds. We also received loans of $7,127. During fiscal 2018, Mr. Turlov made capital contributions to the Company of $8,594. During the fiscal years ended March 31, 2018 and 2017, we generated net income of $19,233 and $6,296.2020.
AtAs of March 31, 2018, we held2020, the value of the trading securities held in our proprietary trading account of $212,319. Of this amount, $209,088 worth oftotaled $156,544 compared to $167,949 at March 31, 2019. This decrease in trading securities was primarily attributable to the effect of depreciation of the Kazakhstani tenge and Russian ruble against the U.S. dollar on the Kazakhstani tenge and Russian ruble denominated securities held in our portfolio. During the year ended March 31, 2020, we also reallocated a portion of our proprietary trading portfolio from equity instruments to fixed income instruments, as compared to the prior year.
As of March 31, 2020, $54,222, or 35%, of the trading securities held in our proprietary trading account were subject to securities repurchase obligations and subjectcompared to pledge loans received.$101,124 or 60% as of March 31, 2019. Of our $64,531the $63,208 in cash and cash equivalents we held at March 31, 2018, $26,320 was2020, $9,645, or approximately 15%, were subject to reverse repurchase agreements. By comparison, at March 31, 2019, we had cash and cash equivalents of $49,960, of which $7,887, or 16%, were subject to reverse repurchase agreements.
Our obligations under securities repurchase agreements denominated in Kazakhstani tenge, which bore interest at an average rate of 12%, decreased by $25,417 from March 31, 2019 to March 31, 2020. During the same period, we issued $62,970 worth of FRHC notes and Freedom KZ and Freedom RU bonds denominated in United States dollars and repurchased or redeemed $16,730 worth of Freedom KZ bonds. The bonds denominated in United States dollars have a coupon rate from 6.5% to 8%.
As of March 31, 2020 and March 31, 2019, we had outstanding debt securities totaling $72,296 and $28,538 respectively. Our outstanding debt securities at March 31, 2020 and March 31, 2019, included outstanding bonds of our subsidiaries Freedom KZ and Freedom RU. These bonds have fixed annual coupon rates ranging from 6.5% to 12% and maturity dates ranging from June 2020 to January 2023. From December 2019 through March 31, 2020 we placed approximately $20.5 million of FRHC 7.000% notes due December 2022 and during the quarter ended March 31, 2020, we placed approximately $30 million of the 6.5% Freedom RU USD Bonds. Proceeds from these debt placements have been and will be used for restructuring corporate borrowing, general corporate purposes, potential acquisitions and financing of business development initiatives. While we believe we can realize higher rates of return than we are obligated to pay our bond and note holders, there is no guarantee that will be the case or that our projections of market conditions will be prove to be accurate. If we are unable to realize the rates of returns we project, our liquidity and results of operations could be negatively impacted.
As registered broker-dealers and a bank, our subsidiaries are required to satisfy minimum net capital requirements to maintain licensure to conduct the brokerage and/or banking services we provide. These minimum net capital requirements range from approximately $30 to $3,900 and fluctuate depending on various factors. As of March 31, 2020, we had net assets of $129,037. In the event we fail to maintain minimum net capital, we may be subject to fines and penalties, suspension of operations, revocation of licensure and disqualification of our management from working in the industry.
We monitor and manage our leverage and liquidity risk through various committees and processes we have established. We assess our leverage and liquidity risk based on considerations and assumptions of market factors, as well as other factors, including the amount of available liquid capital (i.e., the amount of their cash and cash equivalents not invested in our operating business). While we are confident in the risk management monitoring and management processes we have in place, a significant portion of our trading securities and cash and cash equivalents are subject to collateralization agreements. This significantly enhances our risk of loss in the event financial markets move against our positions. When this occurs our liquidity, capitalization and business can be negatively impacted. Because of the amount of leverage we employ in our proprietary trading activities, coupled with our strategy to at times take large positions in select companies or industries, our liquidity, capitalization, projected return on investment and results of operations can also be significantly affected when we misjudge the impact of events, timing and liquidity of the market for those securities.
As of March 31, 2018, approximately $105,000 worth of our proprietary trading account was invested in the securities of a single company. Our position in this security is highly leveraged. We invested in this security based on our analysis that this company is significantly undervalued and presents a good investment opportunity. As of the date of this report, this position remains open. Based on the size of the position and the leveraging we have employed to maintain it, our liquidity, capitalization, projected return on investment and results of operations could be significantly negatively affected if our analysis of this investment opportunity and/or market conditions, including our ability to liquidate the position as needed, proves to be incorrect.
We have pursued an aggressive growth strategy during the past several years, and we anticipate continuing efforts to rapidly expand the footprint of our full service financial services business in Eastern Europe and Central Asia. While this strategy has led to revenue growth it also results in increased expenses and greater need for capital resources. Further growth and expansionexpansion may require greater capital resources than we currently possess, which could require us to pursue additional equity or debt financing from outside sources. We cannot assure that such financing will be available to us on acceptable terms, or at all, at the time it is needed.
We believe that our current cash and cash equivalents, cash expected to be generated from operating activities, and forecasted returns from our proprietary trading will be sufficient to meet our working capital needs for the next 12 months. We continue to monitor our financial performance to ensure adequate liquidity to fund operations and execute our business plan.
Cash Flows
The following table presents our cash flows for the yearyears ended March 31, 20182020 and 2017:2019:
| | | Year ended March 31, 2017 (Recast) |
| | | |
| Net cash flows (used in)/from operating activities | $(19,191) | $4,802 |
| Net cash flows used in investing activities | (869) | (2,701) |
| Net cash flows from financing activities | 64,777
| 11,766 |
| Effect of changes in foreign exchange rates on cash and cash equivalents | (1,880) | 2,118 |
| NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | $42,837 | $15,985 |
| | | |
| | | |
| Net cash flows from operating activities | $44,271 | $58,475 |
| Net cash flows used in investing activities | (10,854) | (6,732) |
| Net cash flows from/(used in) financing activities | 33,109 | (42,323) |
| Effect of changes in foreign exchange rates on cash | (25,141) | (8,693) |
| | | |
| NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | $41,385 | $727 |
Net cash used infrom operating activities during the year ended March 31, 2018,2020, was higher compared to$44,271. By comparison, during the year ended March 31, 2017,2019, net cash from operating activities was $58,475. Net cash from operating activities during the year ended March 31, 2020, was driven by net income adjusted for non-cash movements (depreciation and amortization, non-cash stock compensation expense, unrealized loss/(gain) on trading securities, allowance for receivables, net change in accrued interest, change in deferred taxes and loss on sale of fixed assets) and net cash from operating activities primarily because of changes in operating liabilities, which were comprised primarily of a $97,759 increase in securities repurchase agreement obligations, a $13,225 increase in customer liabilities, and a $8,762 increase in trade payables, offset byfrom changes in operating assets which were comprised principally ofand liabilities, including a $113,439 increase in trading securities, a $19,669$47,089 increase in brokerage and other receivables due to significantly higher amounts of margin receivables entered into with customers as of the reporting date compared to March 31, 2019, a $115,844 increase in customer liabilities resulting from our increased client base and operations, an $22,870 increase in trading securities primarily due to purchase of securities, and a $8,627 increase$23,933 decrease in loans issued.trade payables for margin, which principally resulted from repayments made during trading activities.
During the year ended March 31, 2018,2020, net cash used in investing activities was $869$10,854 compared to $2,701net cash from investing activities of $6,732 during the year ended March 31, 2017.During the year ended March 31, 2017, we acquired the remaining 90.72% interest in FFIN Bank for $2,771.2019. Cash used in investing activities during the year ended March 31, 2018,2020, was primarily toused for the purchases of fixed assets, net of sales, of $4,346, and for the purchase of available-for-sale securities, at fair value of $6,508. Cash used in investing activities during the year ended March 31, 2019, was primarily used for the acquisition of Asyl in the amount of $2,240 and for the purchases of fixed assets.assets, net of sales, of $4,723 which was partially offset by cash received from the sale of available-for-sale securities, at fair value of $231.
During the year ended March 31, 2020, net cash from financing activities was $33,109 compared to net cash used in financing activities of $42,323 during the year ended March 31, 2019. Net cash from financing activities during the year ended March 31, 2020, consisted principally of private placement proceeds in amountrepurchase of $40,444,proceeds from loans receivedsecurities repurchase agreement obligations in the amount of $7,127,$16,730, repayments of loans in the amount of $4,008, proceeds from the issuance of debt securities of Freedom KZ, Freedom RU and the FRHC Notes in the amount of $62,970 and repurchase of debt securities of Freedom KZ in the amount of $11,933,$9,578, and proceeds from stock option exercises in the amount of $455. By comparison, net cash flows from financing activities during the year ended March 31, 2019, consisted principally of repurchase of securities repurchase agreement obligations in the amount of $59,663, proceeds from loans received in the amount of $5,609, repayment of loans received in the amount of $8,015, proceeds from the issuance and repurchase of debt securities of Freedom KZ in the amount of $34,287 and $14,786, respectively, and capital contributions to the Company by Mr. Turlov in the amount of $8,594, partially offset by repurchases of Freedom KZ debt securities in amount of $3,319.$225.
Off-Balance Sheet Financing Arrangements
As of March 31, 2018,2020, we had no off-balance sheet financing arrangements.
Critical Accounting Estimates
We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating thisItem 7. Management Discussion and Analysis of Financial Condition and Results of Operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include:
●
Fixed assets depreciation;
●
Allowance for accounts receivable;
●
Goodwill and intangible assets — Impairment assessments;
●
Accounting for income taxes; and
●
Legal and other contingencies.
Recent Accounting Pronouncements
For details of applicable new accounting standards, please, refer to Recent accounting pronouncements in Note 2 of our financial statements accompanying this annual report.
Item 7A. QualitativeQualitative and Quantitative Disclosures about Market Risk
This information is not required forto be provided by smaller reporting companies.
Item 8. FinancialFinancial Statements and Supplementary Data
The financial statements and supplementary data required by this Item 8 are included beginning at page F-1 of this annual report.
Item 9. ChangesChanges in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and ProceduresProcedures
Evaluation of Disclosure Controls and Procedures
We maintainOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as(as defined in RulesRule 13a-15(e) and 15d-15(e) under the Exchange Act, which areAct) as of the end of the period covered by this annual report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this annual report our disclosure controls and other procedures that are designedwere effective to provide reasonable assurance that information required to be disclosed by a companyus in the reports that it fileswe file or submitssubmit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controlsforms, and procedures include without limitation, controls and procedures designed to ensure that the information required to be disclosed by a companyus in thesuch reports that it files or submits under the Exchange Act is accumulated and communicated to the company’sour management, including its principal executiveour Chief Executive Officer and principal financial officers,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the evaluation of our disclosure controls and procedures as of March 31, 2018, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at a reasonable assurance level.disclosures.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) or 15d-15(f) under the Exchange Act. Our internal control over financial reporting refers to 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 and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we. Management conducted an evaluation of the effectivenessassessment of our internal control over financial reporting as of the end of the period covered by this Annual Report on Form 10-K. This evaluation wasannual report based on the framework set forthestablished by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this evaluation underassessment and the frameworkcriteria set forth by COSO in theInternal Control – Integrated Framework (2013), our2013, management including our Chief Executive Officer and our Chief Financial Officer concluded that our internal control over financial reporting was effective as of March 31, 2018.
Attestation Report2020. The effectiveness of Independent Registered Public Accounting Firm
This Annual Report on Form 10-K does not includethe Company’s internal control over financial reporting as of March 31, 2020, has been audited byWSRP, LLC, an attestation report of our independent registered public accounting firm regarding internal control overwhich has also audited our consolidated financial reporting. Management’sstatements, as stated in their report was not subject to attestation by our independent registered public accounting firm pursuant to an exemption for non-accelerated filers set forthincluded in Section 404 of the Sarbanes-Oxley Act of 2002.this annual report.
Changes in Internal Control over Financial Reporting
During Aside from improvements made in connection with the quarter ended March 31, 2018, there were no changes in ourdocumentation and testing of internal control over financial reporting as part of the foregoing internal control evaluation, during the fiscal year ended March 31, 2020, no other changes occurred that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realitiesreality that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. Other InformationInformation
None.
PART III
TheExcept as otherwise provided herein, the information required by Items 10 through 14 of this Form 10-Kannual report is, pursuant to General Instruction G (3) of Form 10-K, incorporated by reference herein from our definitive proxy statement for our 20182020 Annual Meeting of Stockholders to be filed with SEC (the “Proxy Statement”) within 120 days of the end of our fiscal year.
Item 10. Directors, Executive OfficersOfficers and Corporate Governance Information regarding our executive officers is incorporated herein by reference to Part I, Item 1 above. Other information required by this item will be contained in the Proxy Statement and such information is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be contained in the Proxy Statement and such information is incorporated herein by reference.
Item 11. Executive12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information about security ownership of certain beneficial owners and management will be contained in the Proxy Statement and such information is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information on compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance:
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
|
| | | | |
| Equity compensation plans approved by security holders | 120,000 | $1.98 | 3,655,000(1) |
| Equity compensation plans not approved by security holders | - | - | |
| Total | 120,000 | $ 1.98 | 3,655,000 |
(1) Consists of 3,655,000 shares, including stock options, stock appreciation rights, restricted stock and other equity-based awards, that may be awarded under the Freedom Holding Corp. 2019 Equity Incentive Plan.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item will be contained in the Proxy Statement and such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners14. Principal Accounting Fees and Management and Related Stockholder MattersServices
The information required by this item will be contained in the Proxy Statement and such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item will be contained in the Proxy Statement and such information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item will be contained in the Proxy Statement and such information is incorporated herein by reference.
PART IV
Item 15. Exhibits,Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this annual report:
Financial Statements
ReportReports of Independent Registered Public Accounting Firm – WSRP, LLC, dated June 29, 2018July 13, 2020
Consolidated Balance Sheets as of March 31, 20182020 and 20172019
Consolidated Statements of Operations and Statements of Other Comprehensive IncomeIncome/(Loss) for the years ended March 31, 20182020 and 20172019
Consolidated Statements of Shareholders’ Equity for the years ended March 31, 20182020 and 20172019
Consolidated Statements of Cash Flows for the years ended March 31, 20182020 and 20172019
Notes to the Consolidated Financial Statements
Financial Statement Schedules
Schedules are omitted because the required information is either inapplicable or presented in the financial statements or related notes.
Exhibits
|
| | Exhibit Description |
| | |
| | Restated Articles of Incorporation of BMB Munai, Inc.Freedom Holding Corp.(1) |
| | Amendment to ArticlesBy-Laws of IncorporationFreedom Holding Corp. (as amended through February 4, 2019)(1)
|
| | Description of BMB Munai, Inc.Securities* |
| | Terms and Conditions of FRHC 7.000% Interest Notes due December 2022(2) |
| | CertificateExchange Bond Terms and Conditions in the Framework of Amendment to Articles of Incorporation of BMB Munai, Inc.the Exchange Bond Program(3)*^#
|
| | By-LawsAgreement to furnish instruments and agreement defining rights of BMB Munai, Inc. (as amended through July 8, 2010)holders of long-term debt*
|
| 10.01 | | Freedom Holding Corp., 2019 Equity Incentive Plan(3) + |
| | 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*+^# |
| | Code of Ethics(4) |
| | Schedule of SubsidiariesFreedom Holding Corp., 2018 Equity Incentive Plan(5) +* |
| | Form of Restricted Stock Grant Award Agreement(6) +
|
| | Form of Nonqualified Stock Option Award Agreement(6) +
|
| | Code of Ethics(7)
|
| | Schedule of Subsidiaries* |
| | Consent of Independent Registered Public Accounting Firm*Firm* |
| | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*2002* |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*2002* |
| | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*2002* |
| 101 | | | The following Freedom Holding Corp. financial information for the year ended March 31, 2018,2020, formatted in XBRL (eXtensive Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.* |
* | Filed herewith. |
+ | Indicates management contract, compensatory plan or arrangement of the Company. |
(1) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on January 18, 2005. |
(2) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on June 26, 2006. |
(3) | Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with the SEC on September 5, 2017. |
(4) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on July 13, 2010. |
(5) | Incorporated by reference to Registrant’s Registration Statement on Form S-8 filed with the SEC on October 5, 2017. |
(6) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on October 11, 2017. |
(7) | Incorporated by reference to Registrant’s Annual Report on Form 10-KSB filed with the SEC on June 29, 2004. |
+
Indicates management contract, compensatory plan or arrangement of the Company.
^
Certain portions of this exhibit (indicated by “[***]”) have been omitted pursuant to Item 601(a)(6) of Regulation S-K.
#
This exhibit is an English translation of a foreign language document. The Company hereby agrees to furnish to the SEC, upon request, a copy of the foreign language document.
(1)
Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2019.
(2)
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with the SEC on February 10, 2020.
(3)
Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on September 21, 2018.
(4)
Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on July 27, 2018.
ITEMItem 16. FORMFORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed by the undersigned, thereunto duly authorized.
| | | | FREEDOM HOLDING CORP. |
| | | | |
| | | | |
Date: June 29, 2018 July 13, 2020 | | By: | /s/Timur Turlov
|
| | | | Timur Turlov |
| | | | Chief Executive Officer |
| | | | (Duly Authorized Representative) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dateddate indicated.
| Signatures | | Title | | Date |
| | | | | |
| | | | | |
/s/Timur Turlov
| | Chief Executive Officer and Chairman | | June 29, 2018July 13, 2020 |
| Timur Turlov | | Chairman | | |
| | | | | |
| | | | | |
/s/Evgeniy Ler
| | Chief Financial Officer | | June 29, 2018July 13, 2020 |
| Evgeniy Ler | | | | |
| | | | | |
| | | | | |
| | | | |
/s/Askar Tashtitov Tashitov
| | President and Director | | June 29, 2018July 13, 2020 |
| Askar Tashtitov | | | | |
| | | | | |
| | | | | |
/s/Jason Kerr Boris Cherdabayev
| | Director | | June 29, 2018July 10, 2020 |
| Boris Cherdabayev | | | | |
| | | | |
| | | | |
/s/ Jason Kerr
| | Director | | July 10, 2020 |
| Jason Kerr | | | | |
| | | | | |
| | | | | |
/s/Arkady Rahkilkin Leonard Stillman
| | Director | | June 29, 2018 |
Arkady Rahkilkin | | | | |
| | | | |
| | | | |
/s/July 10, 2020Leonard Stillman
| | Director | | June 29, 2018 |
| Leonard Stillman | | | | |
| | | | |
Table of Contents
| | Page |
| | |
Report | F-1 |
| | |
| F-2F-4 |
| | |
| F-3F-5 |
| | |
| F-4F-6 |
| | |
| F-5 |
| |
Notes to Audited Consolidated Financial Statements2019 | F-7 |
| | |
| F-9 |
| |
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Freedom Holding Corp.
Salt Lake City, UtahLas Vegas, Nevada
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Freedom Holding Corp. (the “Company”) as of March 31, 20182020 and 2017,2019, the related consolidated statements of operations and statements of other comprehensive income,income/(loss), shareholders’ equity, and cash flows for each of the two years in the two-year period ended March 31, 2018,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at March 31, 20182020 and 2017,2019, and the results of theirits operations and theirits cash flows for each of the two years in the period ended March 31, 20182020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), 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 (“COSO”) and our report dated July 13, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ WSRP,LLC
We have served as the Company's auditor since 2014.2015.
Salt Lake City, Utah
July 13, 2020
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 inInternal 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
June 29, 2018July 13, 2020
FREEDOM HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands of United States dollars, unless otherwise stated)
| | | | | |
| | | | |
| ASSETS | | |
| | | |
| Cash and cash equivalents | $64,531 | $22,616 | $63,208 | $49,960 |
| Restricted cash | 13,671
| 12,749 | 66,597 | 38,460 |
| Trading securities | 212,319 | 81,575 | 156,544 | 167,949 |
| Available-for-sale securities, at fair value | 2 | 6,438 | 2 |
| Brokerage and other receivables, net | 21,109 | 481 | 113,687 | 73,836 |
| Loans issued | 8,754 | 65 | 10,461 | 2,525 |
| Deferred tax assets | 1,046 | 1,026 | 570 | 1,265 |
| Fixed assets, net | 2,362 | 1,096 | 6,384 | 5,563 |
| Intangible assets, net | | 3,422 | 4,226 |
| Goodwill | 1,798 | 981 | 2,607 | 2,936 |
| Right-of-use asset | | 14,543 | - |
Other assets, net
| 4,494 | 772 | 9,062 | 4,189 |
| | | |
| TOTAL ASSETS | $330,086 | $121,363 | $453,523 | $350,911 |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | | |
| Securities sold, not yet purchased - at fair value | $1,135 | $- | |
| Derivative liability | - | 495 | |
| Loans received | 7,143 | 2 | |
| Debt securities issued | 10,840 | 3,459 | $72,296 | $28,538 |
| Customer liabilities | 21,855 | 7,635 | 168,432 | 82,032 |
| Current income tax liability | - | 149 | |
| Trade payables | 8,998 | 540 | 8,398 | 32,695 |
| Deferred distribution payments | 8,534 | 8,534 |
| Securities repurchase agreement obligation | 154,775 | 56,289 | |
| Deferred income tax liabilities | 387 | - | |
| 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 | 1,319 | 373 | 2,831 | 3,132 |
| TOTAL LIABILITIES | 214,986 | 77,476 | 324,486 | 233,314 |
| | | |
| Commitments and Contingencies (Note 29) | - | - | |
| 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; 58,033,212 and 11,213,926 shares issued and outstanding as of March 31, 2018 and 2017, respectively | 58 | 11 | |
| 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 |
| Additional paid in capital | 87,049 | 34,659 | 102,890 | 99,093 |
| Retained earnings | 35,387 | 16,154 | 66,335 | 41,498 |
| Accumulated other comprehensive loss | (7,394) | (6,937) | (37,974) | (23,052) |
| TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY | | 131,309 | 117,597 |
| | | |
| Non-controlling interest | | (2,272) | - |
| | | |
| TOTAL STOCKHOLDERS’ EQUITY | 115,100 | 43,887 | 129,037 | 117,597 |
| | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $330,086
| $121,363 | $453,523 | $350,911 |
The accompanying notes are an integral part of these consolidated financial statements.
* See Notes 1 and 3 for information regarding recast amounts and basis of financial statement presentation.
FREEDOM HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHEROTHER COMPREHENSIVE INCOMEINCOME/(LOSS) (All amounts in thousands of United States dollars, unless otherwise stated)
| | | |
| | | | | |
| Revenue: | | | |
| | | |
| Fee and commission income | $10,796 | $4,090 | $92,668 | $44,316 |
| Net gain on trading securities | 33,746 | 10,806 | 14,923 | 20,162 |
| Interest income | 8,184 | 2,006 | 12,134 | 13,925 |
| Net gain on derivatives | 643 | 1,905 | |
| Net realized gain on investments available for sale | - | 276 | |
| Net gain on sale of fixed assets | 5 | 29 | |
| Net gain on foreign exchange operations | 1,850 | 274 | |
| Net loss on derivatives | | (138) | - |
| Net gain /(loss) on foreign exchange operations | | 2,315 | (4,118) |
| | | |
| TOTAL REVENUE, NET | 55,224 | 19,386 | 121,902 | 74,285 |
| | | |
| Expense: | | |
| Interest expense | 14,244 | 3,807 | 12,399 | 14,649 |
| Fee and commission expense | 2,066 | 346 | 21,936 | 6,238 |
| Operating expense | 18,927 | 9,251 | 59,990 | 43,134 |
| Provision for impairment (recoveries)/losses | | (1,164) | 1,498 |
| Other expense, net | 275 | 210 | 609 | 236 |
| Loss from disposal of subsidiary | | - | 15 |
| | | |
| TOTAL EXPENSE | 35,512 | 13,614 | 93,770 | 65,770 |
| NET INCOME BEFORE INCOME TAX | 19,712 | 5,772 | 28,132 | 8,515 |
| | | |
| Income tax (expense)/benefit | (479) | 524 | |
| Income tax expense | | (6,002) | (1,368) |
| | | |
| NET INCOME BEFORE NONCONTROLLING INTERESTS | $19,233 | $6,296 | |
| NET INCOME | | $22,130 | $7,147 |
| | | |
| Less: Net income attributable to noncontrolling interest in subsidiary | - | 9 | |
| Less: Net loss attributable to noncontrolling interest in subsidiary | | (2,707) | - |
| | | |
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | 19,233 | 6,287 | $24,837 | $7,147 |
| | | |
| OTHER COMPREHENSIVE INCOME | | |
| Changes in unrealized gain on investments available-for-sale, net of tax effect | - | 7 | |
| 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 | - | (276) | - | 22 |
| Foreign currency translation adjustments, net of tax | (457) | 4,465 | (14,851) | (15,517) |
| | | |
| COMPREHENSIVE INCOME BEFORE NONCONTROLLING INTERESTS | 18,776 | 10,492 | |
| COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS | | 7,208 | (8,348) |
| | | |
| Less: Comprehensive income attributable to noncontrolling interest in subsidiary | - | 9 | |
| Less: Comprehensive loss attributable to noncontrolling interest in subsidiary | | (2,707) | - |
| | | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $18,776 | $10,483 | |
| COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | | $9,915 | $(8,348) |
| BASIC NET INCOME PER COMMON SHARE (In US Dollars) | $0.58 | $0.56 | $0.38 | $0.12 |
| DILUTED NET INCOME PER COMMON SHARE (In US Dollars) | $0.58 | $0.56 | $0.38 | $0.12 |
| Weighted average number of shares (basic) | 33,249,013 | 11,213,926 | 58,163,691 | 58,037,102 |
| Weighted average number of shares (diluted) | 33,393,877
| 11,213,926 | 58,251,588 | 58,237,123 |
The accompanying notes are an integral part of these consolidated financial statements.
* See Notes 1 and 3 for information regarding recast amounts and basis of financial statement presentation.
FREEDOM HOLDING CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYEQUITY (All amounts in thousands of United States dollars, unless otherwise stated)
| | | | | | | |
| | | | Additional paid-in capital | | Accumulated other comprehensive loss | | |
| At March 31, 2016 (Recast) | 11,213,926 | $11 | $23,937 | $9,803 | $(11,166) | $2,826 | $25,411 |
| | | | | | | | |
| Capital contributions | - | - | 10,722 | - | - | - | 10,722 |
| Acquisition of FFIN Bank | - | - | - | 64 | - | (2,835) | (2,771) |
| | | | | | | | |
| Translation difference | - | - | - | - | 4,498 | - | 4,498 |
| Available-for-sale securities revaluation | - | - | - | - | (269) | - | (269) |
| Net income | - | - | - | 6,287 | - | 9 | 6,296 |
| | | | | | | | |
| At March 31, 2017 (Recast) | 11,213,926 | $11 | $34,659 | $16,154 | $(6,937) | $- | $43,887 |
| | | | | | | | |
| Capital contributions | - | - | 8,594 | - | - | - | 8,594 |
| Issuance of shares of common stock in the private placement | 9,108,279 | 9 | 40,435 | - | - | - | 40,444 |
| Acquisition of Freedom RU | 20,665,023 | 21 | (21) | - | - | - | - |
| Acquisition of Freedom UA | 387,700 | - | 1,485 | - | - | - | 1,485 |
| Acquisition of Freedom CY | 12,758,011 | 13 | (13) | - | - | - | - |
| Stock based compensation | 3,900,000 | 4 | 1,617 | - | - | - | 1,621 |
| Debt forgiveness by shareholder | - | - | 293 | - | - | - | 293 |
| Fractional shares from reverse stock split | 273 | - | - | - | - | - | - |
| | | | | | | | |
| Translation difference | - | - | - | - | (457) | - | (457) |
| Net income | - | - | - | 19,233 | - | - | 19,233 |
| | | | | | | | |
| At March 31, 2018 | 58,033,212 | $58 | $87,049 | $35,387 | $(7,394) | $- | $115,100 |
| | 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.
* See Notes 1 and 3 for information regarding recast amounts and basis of financial statement presentation.
FREEDOM HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS (All amounts in thousands of United States dollars, unless otherwise stated)
| | | |
| | | | | |
| | | | |
| Cash Flows From Operating Activities | | |
| Net income | $19,233 | $6,296 | $22,130 | $7,147 |
| | | |
| Adjustments to reconcile net income (used in)/from operating activities: | | |
| Adjustments to reconcile net income from /(used in)operating activities: | | |
| Depreciation and amortization | 233 | 199 | 2,658 | 2,034 |
| Gain on sale of fixed assets | - | (29) | |
Noncash lease expense
| | 6,298 | - |
| Loss on sale of fixed assets | | 201 | 30 |
| Change in deferred taxes | 347 | (1,075) | 545 | (580) |
| Stock compensation expense | 1,621 | - | 2,625 | 3,498 |
| Unrealized gain on trading securities | (16,432) | (5,484) | |
| Share based payment | | 1,052 | - |
| Unrealized loss on trading securities | | 7,847 | 5,373 |
| Net change in accrued interest | 16 | - | (816) | 322 |
| Net gain on derivatives | - | (1,905) | |
| Allowance for receivables | | (1,164) | 1,498 |
| Changes in operating assets and liabilities: | | |
Derivative liability
| (482) | 2,346 | |
| Trading securities | (113,439) | (38,686) | (22,870) | 8,452 |
Brokerage and other receivables, net
| (19,669) | (45) | (47,089) | (52,174) |
| Loans issued | (8,627) | 28 | (7,787) | 5,536 |
Other assets, net
| (3,674) | 82 | (5,619) | (244) |
| Securities sold, but not yet purchased – at fair value | 1,135 | - | - | (1,063) |
| Customer liabilities | 13,225 | 4,168 | 115,844 | 52,745 |
| Current income tax liability | (145) | 236 | 650 | 754 |
| Trade payables | 8,762 | 8 | (23,933) | 23,201 |
| Securities repurchase agreement obligation | 97,759 | 38,620 | |
| Changes in lease liability | | (6,474) | - |
| Other liabilities | 946
| 43 | 173 | 1,946 |
| | | |
| Net cash flows (used in)/from operating activities | (19,191) | 4,802 | |
| Net cash flows from operating activities | | 44,271 | 58,475 |
| | | |
| Cash Flows From Investing Activities | | |
| Purchase of fixed assets | (1,980) | (112) | (4,631) | (4,987) |
| Acquisition of Freedom UA, net of cash received | 432 | - | |
| Proceeds from sale of fixed assets | 679 | 38 | 285 | 264 |
| Acquisition of FFIN Bank | - | (2,771) | |
| Proceeds on sale of investments available-for-sale | - | 144 | |
| (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 | (869) | (2,701) | (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 | 11,933 | 8,612 | 62,970 | 34,287 |
| Repurchase of debt securities | (3,319) | (5,524) | (9,578) | (14,786) |
| Proceeds from private placements | 40,444 | - | |
| Capital contributions | 8,594 | 8,679 | - | 225 |
| Exercise of options | | 455 | 20 |
| Proceeds from loans received | 7,127
| - | - | 5,609 |
| Repayment of loans received | (2) | (1) | (4,008) | (8,015) |
| | | |
| Net cash flows from financing activities | 64,777
| 11,766 | |
| Net cash flows from/(used in) financing activities | | 33,109 | (42,323) |
| | | |
| Effect of changes in foreign exchange rates on cash and cash equivalents | (1,880) | 2,118 | (25,141) | (8,693) |
| | | |
| NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 42,837 | 15,985 | 41,385 | 727 |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 35,365 | 19,380 | 88,420 | 87,693 |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $78,202 | $35,365 | $129,805 | $88,420 |
FREEDOM HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands of United States dollars, unless otherwise stated)
| | |
| | | |
| | | |
| Supplemental disclosure of cash flow information: | | |
| Cash paid for interest | $(13,102) | $(3,724) |
| Income tax paid | $(536) | $(356) |
Non-cash investing and financing activities:
Common stock issued for acquisition of Freedom UA | $1,485
| $-
|
Assets received from acquisition of Freedom UA | $1,652
| $-
|
Liabilities assumed from acquisition of Freedom UA | $999
| $-
|
Debt forgiveness by shareholder in Freedom CY | $293
| $-
|
The accompanying notes are an integral part of these consolidated financial statements.
* See Notes 1 and 3 for information regarding recast amounts and basis of financial statement presentation.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE
| | |
| | | |
| | | |
| 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 owns severalthrough its operating subsidiaries that engage in a broad range of activities in the securities industry,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”); FFINEU InvestmentsFreedom 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”); LLC, formerly known as Freedom Finance Ukraine,Cyprus, Limited;Freedom Finance Germany TT GmbH, a Kiev, Ukraine-based broker-dealerBerlin, Germany-based tied agent (“Freedom UA”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 professional participants on the Kazakhstan Stock Exchange (KASE), Astana Stock Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPB)(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.
In November 2015, the Company entered into a Share Exchange and Acquisition Agreement with Timur Turlov to acquire FFIN,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 CY. The acquisition of FFIN closed in November 2015. In June 2017,UA are collectively referred to herein as the Company closed the acquisition of Freedom RU, which included the acquisition of Freedom RU and its wholly-owned subsidiaries FFIN Bank and Freedom KZ. In exchange for his 100% interest in Freedom RU and its subsidiaries, Timur Turlov, our chief executive officer and chairman, was issued 20,665,023 shares of restricted Company common stock. In November 2017, the Company closed the acquisition of Freedom CY. The Company issued Mr. Turlov 12,758,011 shares of restricted Company common stock in exchange for his 100% ownership interest in Freedom CY.“Company”.
In November 2017, the Company closed the acquisition of Freedom UA (formerly known as FC Ukranet) with BusinessTrain, Ltd. in exchange for 387,700 shares of restricted Company common stock.
On September 6, 2017, the Company effected a one-share-for-twenty-five-shares reverse stock split of its common stock. Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto have been retroactively adjusted for the stock split as if such stock split occurred on the first day of the first period presented. Certain amounts in the notes to the financial statements may be slightly different than previously reported due to rounding of fractional shares as a result of the reverse stock split.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting principles
The Company’s accounting policies and accompanying 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, FFIN, Freedom RU, Freedom KZ, FFIN Bank, Freedom KZ, Freedom Global, Freedom CY, Freedom UA,GE, Freedom UZ, LLC First Stock Store (“Freedom 24”)GE, FFIN and Branch Office of LLC IC Freedom Finance in Kazakhstan (“KZ Branch”).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 Company earns interestcore 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 noninterestinvestment 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 from its proprietary trading accounts from various sources, including:are as follows:
●
Securities, derivatives and foreign exchange activities;
●
Reverse repurchase agreements; and
Revenue earnedCommissions on interest-earning assets, including unearned income and the amortization/ accretion of premiums or discounts recognized on debt securities, bank deposits and loans issued is recognized based on the constant effective yield of the financial instrument or based on other applicable accounting guidance.
Gains and losses on the sale of securities and certain derivatives are recognized on a trade-date basis.
The Company earns fees and commissions from its customers from:
●
Providing brokerage services;
●
ProvidingCommissions on banking services (money transfers, foreign exchange operations and other); and
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
The Company also earns revenues fromCommissions on investment banking underwriting,services (underwriting, market making, and bondholders’ representation services.services).
Service charges onUnder 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 agency,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 market making services, are recognized when earned. Brokerage fees are recognized on a trade-date basis.therefore there was no transition adjustment necessary.
The Company recognizes revenue when fourfive basic criteria have been met:
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Existence of persuasive evidence that an arrangement exists;
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Delivery has occurredThe parties to the contract have approved the contract (in writing, orally, or services have been rendered;in accordance with other customary business practices) and are committed to perform their respective obligations.
●
The seller’s priceentity can identify each party’s rights regarding the goods or services to the buyer is fixed and determinable; andbe transferred.
●
CollectabilityThe entity can identify the payment terms for the goods or services to be transferred.
●
The contract has commercial substance (that is, reasonably assured.the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).
●
It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Derivative financial instruments
In the normal course of business, the Company invests in various derivative financial contracts including futures. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Derivatives are included in assets and liabilities at fair value through profit or loss in the consolidated balance sheet.
The Company purchases foreign currency futures contracts from financial institutions to minimize the risk caused by foreign currency fluctuation on its foreign currency receivables and payables and also purchases foreign currency futures contracts for speculative purposes. Futures are traded on the Kazakhstan Stock Exchange and represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price.FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2020
(All gains and losses on foreign currency contracts were realized during the year ended March 31, 2018, and are includedamounts in net gain on derivatives in the Consolidated Statementsthousands of Operations and Statements of Other Comprehensive Income.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 USU.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 USU.S. dollars using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in revenue.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
The functional currencies of our operating subsidiaries are the Russian ruble, European euro, Ukrainian hryvnia, Uzbekistani som and the Kazakhstani tenge. For financial reporting purposes, those currencies are translated into USD as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income/(loss)” reserve.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.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, 20182020
(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 IncomeIncome/(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 IncomeIncome/(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 (“NAV”) 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.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.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 Companytransferee 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.
FREEDOM HOLDING CORP.Impairment of long-lived assets
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
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, 20182020 and March 31, 2017,2019, 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, 20182020 and March 31, 2017,2019, goodwill recorded in the Company’s Consolidated Balance Sheets totaled $1,798$2,607 and $981,$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 penaltiesfines arising from the underpayment of income taxes in the provision for income taxes.taxes (if anticipated). As of March 31, 20182020 and March 31, 2017,2019, the Company had no accrued interest or penaltiesfines related to uncertain tax positions.
On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted, which significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Tax Reform Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company may be subject to incremental U.S. tax on GILTI income beginning in 2018, depending upon expense allocations andhas presented the applicable U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI tax in its consolidated financial statements for the year endedas of March 31, 2018.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has considered the provisional tax impacts related to deemed repatriated earnings2020 and the benefit for the revaluation of deferred tax assets and liabilities, on its consolidated financial statements for the periods ended March 31, 2018. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. In accordance with SAB 118 the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018.2019.
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, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
Leases
Rent payable underIn 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, leases is chargedwith 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 expenseinitially 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 a straight-line basis overApril 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 term oflease 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 relevant lease.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, 20182020 and 2017,2019, the Company had expenses related to advertising in the amount of $1,011$5,635 and $866,$4,500, respectively. All costs associated with advertising are expensed in the period incurred.
Recent accounting pronouncements
In June 2016,August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the ASU 2016-13Disclosure Requirements for Fair Value Measurement. In March 2014, the Board issued a proposed FASB Concepts Statement, Conceptual Framework for Financial Instruments—Credit Losses (Topic 326): MeasurementReporting—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 Credit Losses on Financial Instruments. Among other things,disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP. The amendments in this ASU requireUpdate modify the measurement of all expected credit losses for financial instruments held at the reporting datedisclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on historical experience, current conditionsthe concepts in the Concepts Statement, including the consideration of costs and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking informationbenefits. The amendments in this Update apply to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputsall entities that are required, under existing GAAP, to those techniques will change to reflect the full amount of expected credit losses.make disclosures about recurring or nonrecurring fair value measurements. The ASU also requires additional disclosures related to estimates and judgments used to measureamendments in this Update are effective for all expected credit losses. The new guidance is effectiveentities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early applicationThe 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 permittedaccounted for all organizationsin 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, 2018.2020, and interim periods within those fiscal years and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of thisthat ASU 2020-01 may have on theits consolidated financial statements.
statements and related disclosures.
In May 2017,February 2020, the FASB issued ASUAmendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 2017-09, “Compensation—Stock Compensation119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 718)” (“ASU 2017-09”)842). ASU 2017-09 provides clarityGenerally, amendments included clarifications on SAB Topic 6.M, Financial Reporting Release No. 28 - Accounting for Loan Losses by Registrants Engaged in orderLending Activities Subject to reduce both (1) diversity in practiceFASB ASC regarding measurement of current expected losses, development, governance and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditionsdocumentation of a share-based payment award. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classificationsystematic methodology, documentation of the award (as equity or liability) changes asresults of a resultsystematic methodology and validation of the change in terms or conditions. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period.a systematic methodology.
In July 2017, the FASB issued ASUterms of amendments of Accounting Standards Update No. 2017-11, “Earnings Per Share (Topic 260)-Distinguishing Liabilities from Equity (Topic 480)-Derivatives2019-10, Financial Instruments-Credit Losses (Table of Contents link Topic 326), Derivatives and Hedging (Topic(Table of Contents link Topic 815)”. This ASU addresses narrow issues identified as, and Leases (Table of Contents link Topic 842), SEC staff announced that it would not object to a result ofpublic business entity that otherwise would not meet the complexity associated with applying US GAAP for certain financial instruments with characteristics of liabilities and equity. The amendments in Part I of this update that relate to liability or equity classification of financial instruments (or embedded features) affect all entities that issue financial instruments (for example, warrants or convertible instruments) that include down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existencedefinition of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. For public business entities,entity except for a requirement to include or the amendmentsinclusion of its financial statements or financial information in Part Ianother entity's filing with the SEC adopting Table of this ASU No. 2017-11 are effectiveContents link Topic 842 for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted2020, and interim periods within fiscal years beginning after December 15, 2021. Those dates are consistent with the effective dates for all entities.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 onwill significantly impact its consolidated financial statements.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update apply to any entity that elects to apply hedge accounting in accordance with current GAAP. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In September 2017, the FASB issued ASU 2017-13, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842). The main objective of this pronouncement is to clarify the effective date of the adoption of ASC Topic 606 and ASC Topic 842 and the definition of public business entity as stipulated in ASU 2014-09 and ASU 2016-02. ASU 2014-09 provides that a public business entity and certain other specified entities adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities are required to adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. ASU 2016-12 requires that “a public business entity and certain other specified entities adopt ASC Topic 842 for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. All other entities are required to adopt ASC Topic 842 for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020”. ASU 2017-13 clarifies that the SEC would not object to certain public business entities electing to use the non-public business entities effective dates for applying ASC 606 and ASC 842. ASU 2017-13, however, limits such election to certain public business entities that “otherwise would not meet the definition of a public business entity except for a requirement to include or inclusion of its financial statements or financial information in another entity’s filings with the SEC”. The Company expects that the adoption of this ASU will not have a material impact on its financial statements.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue From Contracts With Customers (Topic 606) which creates a single, principle-based model for revenue recognition and expands and improves disclosures about revenue. The new guidance is effective for the Company beginning October 1, 2018, and must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company is currently evaluating the potential impact of this standard on its financial statements which, (1) for investment banking advisory arrangements may change the timing of revenue recognition depending on the number and nature of the performance obligations identified, (2) for underwriting expenses and costs of advisory services and related reimbursement revenue may need to be recognized on a gross basis, and (3) for costs to obtain and fulfill a contract may need to be capitalized, amortized and reviewed regularly for impairment.
In November 2017, the FASB issued ASU No. 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). A new Accounting Standards Update (“ASU”) features amendments to select Securities and Exchange Commission (“SEC”) paragraphs under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Issued as ASU No. 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606), the standard amends the Accounting Standards Codification to incorporate the SEC guidance.
In January 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
In February 2018, the FASB issued ASU No. 2018-03 Technical Corrections and Improvements to Financial Instruments–Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2018-03 provides reporting entities with the option to move from the measurement alternative to fair value through current earnings but stipulates that once the voluntary election is made to stop using the measurement alternative it can no longer be applied to any identical or similar investment from the same issuer. ASU 2018-03 also clarifies that when applying the measurement alternative to equity investments that do not have a readily determinable fair value the equity investment is remeasured to its fair value as of the date of the observable price/transaction.
ASU 2018-03 is effective for fiscal years beginning after December 15, 2017, and interim periods beginning after June 15, 2018, but may be adopted concurrently with ASU 2016-01.The Company will be adopting ASU 2016-01 and ASU 2018-03 concurrently on June 15, 2018. The Company is currently evaluating the adoption impact of these standards, including whether to elect the measurement alternative for the investment in unregistered shares. The Company does not expect the impact of adoption to be material to the consolidated financial statements.
In January 2016, the FASB issued accounting pronouncement (FASB ASU 2016-01) related to financial instruments (FASB ASC Subtopic 825-10). This pronouncement, along with FASB 2018-03 issued in February 2018, requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net earnings. The pronouncements also impact financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The changes are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We do not expect it to have a material effect on our consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, March 2018. In this Update the Accounting Standards Codification is amended to reflect Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
NOTE 3 – REVISION OF FINANCIAL STATEMENT
When preparing the consolidated financial statements for the year ended March 31, 2018, management determined that certain amounts included in the Company’s March 31, 2017, consolidated financial statements required revision, due to closing of the acquisition of Freedom RU on June 29, 2017, and Freedom CY on November 1, 2017, which were deemed to be entities under common control with the Company.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
The previously issued Consolidated Balance Sheet as of March 31, 2017, and Consolidated Statement of Operations and Statements of Other Comprehensive Income for the year ended March 31, 2017 have been revised as follows:
| | |
| BALANCE SHEETS (RECAST) | | | |
| | | | |
| ASSETS | | | |
| Cash and cash equivalents | $51 | $22,565 | $22,616 |
| Restricted cash | 8,534 | 4,215 | 12,749 |
| Trading securities | - | 81,575 | 81,575 |
| Available-for-sale securities, at fair value | - | 2 | 2 |
| Brokerage and other receivables, net | - | 481 | 481 |
| Loans issued | - | 65 | 65 |
| Deferred tax assets | - | 1,026 | 1,026 |
| Fixed assets, net | 2 | 1,094 | 1,096 |
| Goodwill | - | 981 | 981 |
Other assets, net
| - | 772 | 772 |
| TOTAL ASSETS | $8,587 | $112,776 | $121,363 |
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT) | | | |
| | | | |
| Derivative liability | $- | $495 | $495 |
| Loans received | - | 2 | 2 |
| Debt securities issued | - | 3,459 | 3,459 |
| Customer liabilities | - | 7,635 | 7,635 |
| Current income tax liability | - | 149 | 149 |
| Trade payables | 206 | 334 | 540 |
| Deferred distribution payments | 8,534 | - | 8,534 |
| Securities repurchase agreement obligation | - | 56,289 | 56,289 |
| Other liabilities | - | 373 | 373 |
| TOTAL LIABILITIES | 8,740 | 68,736 | 77,476 |
| | | | |
| STOCKHOLDERS’ EQUITY/(DEFICIT) | | | |
| | | | |
| Preferred stock | - | - | - |
| Common stock | 280 | (269) | 11 |
| Additional paid in capital | 776 | 33,883 | 34,659 |
| Retained earnings/(Accumulated deficit) | (1,209) | 17,363 | 16,154 |
| Accumulated other comprehensive loss | - | (6,937) | (6,937) |
| TOTAL STOCKHOLDERS’ EQUITY/(DEFICIT) | (153) | 44,040 | 43,887 |
| | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $8,587 | $112,776 | $121,363 |
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
| | For the year ended March 31, 2017 |
| STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME (RECAST) | | | |
| | | | |
| Revenue: | | | |
| Fee and commission income | $- | $4,090 | $4,090 |
| Net gain on trading securities | - | 10,806 | 10,806 |
| Interest income | 4 | 2,002 | 2,006 |
| Net gain on derivatives | - | 1,905 | 1,905 |
| Net realized gain on investments available for sale | - | 276 | 276 |
| Net gain on sale of fixed assets | - | 29 | 29 |
| Net gain on foreign exchange operations | - | 274 | 274 |
| | | | |
| TOTAL REVENUE, NET | $4 | $19,382 | $19,386 |
| | | | |
| Expense: | | | |
| Interest expense | $- | $3,807 | $3,807 |
| Fee and commission expense | - | 346 | 346 |
| Operating expense | 582 | 8,669 | 9,251 |
| Other expense, net | - | 210 | 210 |
| | | | |
| TOTAL EXPENSE | $582 | $13,032 | $13,614 |
| | | | |
| NET INCOME/(LOSS) BEFORE INCOME TAX | $(578) | $6,350 | $5,772 |
| | | | |
| Income tax benefit | - | 524 | 524 |
| | | | |
| NET INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS | $(578) | $6,874 | $6,296 |
| | | | |
| Less: Net income attributable to noncontrolling interest in subsidiary | - | 9 | 9 |
NET INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $(578) | $6,865 | $6,287 |
| | | | |
| OTHER COMPREHENSIVE INCOME | | | |
| Changes in unrealized gain on investments available-for-sale, net of tax effect | $- | $7 | $7 |
| Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect | - | (276) | (276) |
| Foreign currency translation adjustments, net of tax | - | 4,465 | 4,465 |
| COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS | $(578) | $11,070 | $10,492 |
| | | | |
| Less: Comprehensive income attributable to noncontrolling interest in subsidiary | - | 9 | 9 |
| | | | |
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $(578) | $11,061 | $10,483 |
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 43 – 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 | $26,320 | $8,376 | 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 | 22,749 | 259 | 4,051 | 10,220 |
| Current account with commercial banks | 8,927
| 9,979 | |
| Petty cash in bank vault and on hand | 2,712 | 1,476 | |
| 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) | 1,256 | 986 | 501 | 2,693 |
| Current account with National Settlement Depository (Russia) | 1,242 | 696 | |
| Current account with Central Bank (Russia) | 980 | 645 | |
| Accounts with stock exchange | 214 | 8 | |
| Current account in clearing organizations | 131 | 191 | |
| Total cash and cash equivalents | $64,531 | $22,616 | $63,208 | $49,960 |
As of March 31, 20182020, and March 31, 2017,2019, 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, 20182020 and March 31, 2017,2019, 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 | Interest rates and remaining contractual maturity of the agreements |
| | | | | | | | | |
| Securities purchased under reverse repurchase agreements | | |
| Corporate equity | 14.68% | $10,026 | $15,572 | $25,598 | 14.08% | $9,212 | $15 | $9,227 |
| Corporate debt | 14.96% | 521 | 201 | 722 | 14.25% | 108 | - | 108 |
| Non-US sovereign debt | | 17.18% | 53 | 257 | 310 |
| | | |
| Total | | $10,547 | $15,773 | $26,320 | | $9,373 | $272 | $9,645 |
| | | |
| | Interest rates and remaining contractual maturity of the agreements | Interest rates and remaining contractual maturity of the agreements |
| | | | | | | | | |
| Securities purchased under reverse repurchase agreements | | |
| Corporate equity | 19.56% | $8,346 | $25 | $8,371 | 11.90% | $4,328 | $804 | $5,132 |
| Corporate debt | 24.00% | 5 | - | 5 | 14.00% | 120 | - | 120 |
| Non-US sovereign debt | | 8.25% | 2,635 | - | 2,635 |
| | | |
| Total | | $8,351 | $25 | $8,376 | | $7,083 | $804 | $7,887 |
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
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, 20182020 and March 31, 2017, is $26,7862019, was $10,272 and $8,229,$8,472, respectively. For additional information please see Note 12 – Securities sold, not yet purchased – at 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)
NOTE 54 – RESTRICTED CASH
As of March 31, 20182020 and March 31, 2017,2019, 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. TheIn June 2019 the Company invested a portion of the deferred distribution payment amount ispayments into certain financial instruments. For additional information regarding that portion of the reservefunds held for deferred distribution to shareholders whopayments that have not yet claimed their distributions from the 2011 sale of the Company’s oilbeen invested into certain financial instruments, see Note 5 - Trading and gas exploration and production operations of $8,534. This distribution is currently payable, subject to the entitled shareholder completing and submitting to the Company the necessary documentation to claim his, her or its distribution payments. The Company has no control over when, or if, an entitled shareholder will submit the necessary documentation to claim his, her, or its distribution payment. Available-For-Sale Securities at Fair Value.
Restricted cash consisted of:
| | | | | |
| | | |
| Brokerage customers’ cash | | $63,506 | $28,931 |
| Deferred distribution payments | $8,534 | $8,534 | 2,097 | 8,534 |
| Brokerage customers’ cash | 4,847 | 4,169 | |
| Guaranty deposits | 175 | - | 518 | 732 |
| Reserve with Central Bank of Russia | 115 | 46 | 476 | 263 |
| Total restricted cash | 13,671 | $12,749 | $66,597 | $38,460 |
NOTE 65 – TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE
As of March 31, 2018,2020, and March 31, 2017,2019, trading and available-for-sale securities consisted of:
| | | | | |
| | | |
| Debt securities | | $87,014 | $62,691 |
| Equity securities | $177,063 | $71,697 | 69,530 | 105,017 |
| Debt securities | 34,986 | 9,877 | |
| Mutual investment funds | 270 | 1 | - | 241 |
| Total trading securities | $212,319 | $81,575 | $156,544 | $167,949 |
| | | |
| Certificate of deposit | | $5,076 | $- |
| Mutual investment funds | | 672 | - |
| Debt securities | | 405 | - |
| Preferred shares | | 284 | - |
| Equity securities | $2 | 1 | 2 |
Total available-for-sale securities, at fair value
| $2 | $6,438 | $2 |
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 20182020
(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, 20182020 and March 31, 2017:2019:
| | | Fair Value Measurements at | | Fair Value Measurements at |
| | | | | |
| | | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant unobservable units | | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant unobservable units |
| | | | | | | | | |
| | | |
| Debt securities | | $87,014 | $- |
| Equity securities | | 69,530 | 58,271 | - | 11,259 |
| Total trading securities | | $156,544 | $145,285 | $- | $11,259 |
| | | |
| Equity securities | $177,063 | $- | $1 | $- | $1 |
| Debt securities | 34,986 | - | 405 | - | 405 | - |
| Certificate of deposit | | 5,076 | - | 5,076 | - |
| Mutual investment funds | 270 | - | 672 | - |
| Total trading securities | $212,319 | $- | |
| 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, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
| | | Fair Value Measurements at |
| | | March 31, 2017 (Recast) using |
| | | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant unobservable units |
| | | | | |
| | | | | |
| Equity securities | $71,697 | $71,697 | $- | $- |
| Debt securities | 9,877 | 9,663 | 214 | - |
| Mutual investment funds | 1 | 1 | - | - |
| Total trading securities | $81,575 | $81,361 | $214 | $- |
| | | | | |
| 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 |
| | |
| | Assets measured at amortized cost | Unrealized gain accumulated in other comprehensive income | Assets measured at fair value |
| | | | |
| Equity securities | $1 | $1 | $2 |
| | | | |
Available-for-sale securities, at fair value
| $1 | $1 | $2 |
| | |
| | Assets measured at amortized cost | Unrealized gain accumulated in other comprehensive income | Assets measured at fair value |
| | |
| Equity securities | $1 | $1 | $2 |
| | | | |
Available-for-sale securities, at fair value
| $1 | $1 | $2 |
| | | 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 |
As of March 31, 2018, approximately $105,000 worth of the Company’s our proprietary trading account was invested in the securities of a single company. This represents approximately 49% of the Company’s proprietary portfolio.
| | |
| | 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, 20182020
(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 76 – BROKERAGE AND OTHER RECEIVABLES, NET
| | | | | |
| Margin lending receivables | $14,753 | $- | |
| Receivable from purchase or sale of securities | 4,905 | - | |
| | | |
| 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 | 1,016 | 260 | 218 | 17 |
| Receivables from brokerage clients | 659 | 208 | |
| Bonds coupon receivable | 119 | - | |
| Receivable for underwriting market-making services | 72 | 68 | |
| Receivable for underwriting and market-making services | | 67 | 88 |
| Dividends accrued | | 1 | 108 |
| Other receivables | 8 | 10 | 50 | 25 |
| | | |
| Allowance for receivables | (423) | (65) | (313) | (1,626) |
| | | |
Total brokerage and other receivables, net
| $21,109 | $481 | $113,687 | $73,836 |
On March 31, 20182020 and March 31, 2017,2019, amounts due from a single related party customer were $6,564$90,696 and $31,792, respectively or 31%80% and $304 or 63%43%, respectively.respectively of total brokerage and other receivables, net. Based on experience,historical data, the Company considers receivables due from related parties fully collectible. During the year endedAs of March 31, 20182020 and 2017,2019, using historical and statistical data, the Company recorded an allowance expense for brokerage receivables in the amount of $358$313 and $65,$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 8 –7– LOANS ISSUED
As of March 31, 2018 and 2017, the Company had loans issued in the amount of $8,754 and $65, respectively. Loans issued as of March 31, 2018,2020, consisted of $5,371 collateralized loans issued with $6,992 fair value of collateral due in January-February 2019 with 3.2% interest rate, $2,832 interest free loans issued by the Company that are due in January-March 2019 and $541 of bank customer loans mainly due dates ranging from November 2018 to February 2028 with average interest rate of 12.32%.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 98 – 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, 20182020 and 2017, is the 34%2019, were 21% for the US andU.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, 20182020
(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 | $2,937 | $2,398 | $1,691 | $2,376 |
| Revaluation on trading securities | | 72 | 2,095 |
| Accrued liabilities | 49 | 20 | 7 | 35 |
| Revaluation on trading securities | 88 | 76 | |
| Stock compensation expenses | 405 | -
| 4 | - |
| Valuation allowance | (2,433) | (1,468) | (677) | (3,241) |
| Deferred tax assets | $1,046 | $1,026 | $1,097 | $1,265 |
| | | |
| Deferred tax liabilities: | | |
| Revaluation on trading securities | $387 | $- | $513 | $- |
| Other liabilities | | 14 | - |
| | | |
| Deferred tax liabilities | $387 | $- | $527 | $- |
| | | |
| Net deferred tax assets | $659 | $1,026 | $570 | $1,265 |
The Company is subject to the US stateU.S. federal income taxes at a rate of 34%21%. The reconciliation of the provision for income taxes at the 34%21% tax rate compared to the Company’s income tax expense as reported is as follows:
| | | Year ended March 31, 2017 (Recast) |
| | | |
| Profit before tax at 34% | $6,702 | $2,321 |
| Nontaxable gains | (7,129) | (6,114) |
| Provision for impairment losses | 81 | - |
| Impact of Tax Reform | 190 | - |
| Foreign tax rate differential | 30 | 288 |
| Other differences | 127 | 2,189 |
| Valuation allowance | 478 | 792 |
| Income tax provision/(benefit) | $479 | $(524)
|
The income tax expense comprises:
| | | Year ended March 31, 2017 (Recast) |
| Current income tax charge | $131 | $543 |
| Deferred income tax charge/benefit | 348 | (1,067) |
| Income tax provision/(benefit) | $479 | $(524) |
| | | |
| | | |
| 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, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
The income tax expense comprises:
| | | |
| Current income tax charge | $5,307 | $1,817 |
| Deferred income tax charge/(benefit) | 695 | (449) |
| Income tax provision | $6,002 | $1,368 |
During the yearyears ended March 31, 20182020 and 2017, the effective tax rate was equal to 2.43% and (9.08%), respectively, primarily due to non-taxable gains on trading securities in Freedom KZ in the amounts of $20,346 and $17,983, respectively. During the year ended March 31, 2018,2019, the Company realized net income before income tax of $19,712, primarily from non-taxable revenues generated from$28,132 and $8,515, respectively. During the same periods, the Company’s Freedom KZ’s trading operations.effective tax rate was equal to 21.34% and 16.07%, respectively. This resultedincrease in the Company realizing an income tax expense forwas primarily attributable to a $43,231 increase in commissions earned by Freedom CY during the fiscal year ended March 31, 2018 of $479. During the year ended March 31, 2017, the Company realized net income before income tax of $5,772 primarily from non-taxable revenues generated from Freedom KZ’s trading operations resulting in an income tax benefit of $524.2020.
Tax losses carryforward as of March 31, 2018 comprises $ 2,9372020 was $1,691 and is subject to income tax in US, Russia, KazakhstanUkraine and Cyprus. US tax reform enacted on December 22, 2017, lowered the US tax rate which will reduce tax expenses of the Company.Uzbekistan.
NOTE 109 – 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 | $617 | $- | 960 | 679 |
| Office equipment | 664 | 141 | |
| Intangible assets | 586 | 125 | |
| Land | | 778 | 394 |
| Vehicles | 419 | 366 | 378 | 353 |
| Buildings | 392 | 694 | |
| Furniture | 375 | 201 | |
| Capital expenditures on lease improvement | 17 | 44 | |
| Other | 117 | 131 | 476 | 457 |
| | | |
| Less: Accumulated depreciation and amortization | (825) | (606) | |
| Less: Accumulated depreciation | | (2,225) | (1,209) |
| | | |
| Total fixed assets | $2,362 | $1,096 | $6,384 | $5,563 |
Depreciation and amortization expense totaled $233$1,407 and $199$790 for the years ended March 31, 20182020 and 2017,2019, 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
| | | | | |
| Prepaid expenses | $1,598 | $338 | |
| Advances paid for leasehold improvements | 1,057 | - | |
| | | |
| Advances paid | | $5,830 | $1,851 |
| Rent guarantee deposit | 965 | - | 1,355 | 714 |
| Current income tax asset | 365 | - | 851 | 502 |
| Outstanding settlement operations | | 310 | 429 |
| Taxes other than income taxes | 98 | 33 | 310 | 149 |
| Guaranty deposit | 75 | 46 | 67 | 69 |
| Prepaid insurance | 26 | - | 22 | 21 |
| Due from banks | 3 | 1 | |
| Other | 365 | 360 | 338 | 516 |
| | | |
| | 4,552 | 778 | |
| Total other assets | | 9,083 | 4,251 |
| | | |
| Allowance for other assets | (58) | (6) | (21) | (62) |
| | | |
| Other assets, net | $4,494 | $772 | $9,062 | $4,189 |
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 12 – SECURITIES SOLD, NOT YET PURCHASED – AT FAIR VALUE
On October 26, 2017, Freedom KZAs 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 a pledgepledges under reverse repurchase agreements and recognized financial liabilities at fair value in the amount of $1,435. On January 30, 2018, Freedom KZ partially$3,155 and closed short positions in the amount of $723$3,118 by purchasing securities from a third partyparties, reducing theits financial liability. During the period from October 26, 2017 toyear ended March 31, 2018, Freedom KZ2020, 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 throughin the Consolidated Statements of Operations and Statements of Other Comprehensive IncomeIncome/(Loss) in the amount of $183$827 with ano foreign exchange translation loss of $56. As of March 31, 2018, Freedom KZ’s financial liabilities at fair value was $585.
On January 30, 2018, FRHC sold shares pledged under reverse repurchase agreements and recognized financial liabilities at fair value in the amount $543. During the period from January 30, 2018 to March 31, 2018, the Company recognized a foreign exchange translation loss in the amount of $7. As of March 31, 2018, the Company’s financial liabilities at fair value was $550.gain/(loss).
A short sale involves the sale of a security that areis 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 – DERIVATIVE LIABILITY
On December 28, 2016, Freedom RU entered into a derivative instrument agreement with a related party that included a call option feature for the purchase of shares held by Freedom RU. This call option was classified as a derivative liability in the Consolidated Balance Sheets and measured at each reporting period using the Black-Scholes Model. The gain associated with this derivative instrument is recognized as a gain on derivative instrument in the Consolidated Statements of Operations and Statements of Other Comprehensive Income. In exchange for a $2,629 premium paid upfront, this derivative instrument granted the holder the right to purchase 11.8 million shares of a top rated Russian commercial bank – Sberbank, on June 14, 2017, at a strike price $3.10 per share.
The Company recorded a derivative liability of $495 as of March 31, 2017, as a result of the fair value of the call option. On June 14, 2017, the derivative instrument expired, unexercised by the option holder, and the Company recognized a gain on the derivative instrument of $482.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 14 – LOANS RECEIVED
| Company | | Lender | | | Term | | Maturity date |
| JSC Freedom Finance | | JSC AsiaCreditBank | $7,044 | 7% | 1 year | | 2/5/2019 |
| FFINEU Investments Limited | | D-FINANCE Inc. | $99 | 1% | 1 year | | 12/11/2018 |
| Total | | | $7,143 | | | | |
During the year ended March 31, 2018, the Company received USD denominated loans from JSC AsiaCreditBank in the total amount of $7,031 under a credit line agreement with $9,000 in total available for withdrawal. The Company pledged 2.4 million shares of Kcell with a fair value $12,579 as of March 31, 2018, to collateralize the AsiaCreditBank loan. The D-FINANCE loan is unsecured. As of March 31, 2018, accrued interest on the loans totaled $16.
NOTE 1513 – DEBT SECURITIES ISSUED
| | | | |
| | | | |
Debt securities issued denominated in USD | $9,639 | $-
| $64,783 | $20,265 |
Debt securities issued denominated in KZT | 1,010 | 3,385
| |
| Debt securities issued denominated in RUB | | 6,432 | 7,724 |
| Accrued interest | 191 | 74 | 1,081 | 549 |
| | | |
| Total | $10,840 | $3,459 | $72,296 | $28,538 |
As of March 31, 20182020, and 2017,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 lawStock Exchange and the Moscow Exchange, respectively. The Company’s debt securities also include $20.5 million in the amountaggregate number of $10,840notes 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 $3,459, respectively. Duringare 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 year ended March 31, 2018 the Company issued bonds with fixed annual coupon rate ranging from 8% to 11.5% and maturity dates in January 2019 and June 2020. Astana International Exchange.
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. AsDebt securities issued as of March 31, 20182020 and March 31, 2017 debt securities issued2019, included $191$1,081 and $74$549 accrued interest, respectively. The Freedom KZ bondsFRHC notes are actively traded on Kazakhstan Stock Exchange.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 1614 – CUSTOMER LIABILITIES
The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:
| | | | | |
| | | |
| Brokerage customers | $12,549 | $4,167 | $115,922 | $47,686 |
| Banking customers | 9,306 | 3,468 | 52,510 | 34,346 |
| Total | $21,855 | $7,635 | $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, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 17 – TRADE PAYABLES
| | | |
| | | |
| Margin lending payable | $6,604 | $- |
| Trade payable for securities purchased | 1,065 | - |
| Guaranty fee received | 709 | - |
| Payable for acquisition of servers | 395 | - |
| Payables to suppliers of goods and services | 151 | 272 |
| Related party payable | - | 261 |
| Other | 74 | 7 |
| | | |
| Total | $8,998 | $540 |
During the year ended March 31, 2018, the Company received guaranty fee of $709 pursuant to a reverse repurchase agreement. The agreement specifies that Company has a right to claim a certain amount to be placed as a guaranty fee if the share price of the pledged securities falls significantly from the price as of the date of the transaction. In the event the price of the pledged securities falls further the Company can require an increase in the guaranty fee. The guaranty fee shall be returned by the end of the agreement terms that are ranging from January 25, 2019 to February 1, 2019.
NOTE 1816 – SECURITIES REPURCHASE AGREEMENT OBLIGATIONS
As of March 31, 20182020 and March 31, 2017,2019, trading securities included collateralized securities subject to repurchase agreements as described in the following table:
| | | |
| | Interest rates and remaining contractual maturity of the agreements | Interest rates and remaining contractual maturity of the agreements |
| | | | | | | | | | | |
| | | |
| Securities sold under repurchase agreements | | |
| Corporate equity | 12.04% | $109,821
| $8,960
| $7,149
| $125,930
| 12.16% | $20,711 | $- | $20,711 |
| Corporate debt | 10.64% | 24,257 | 2,023 | - | 26,280 | 13.27% | 15,974 | - | 15,974 |
| Non-US sovereign debt | 8.54% | 2,565 | - | 2,565 | 13.00% | 11,519 | - | 11,519 |
| Total securities sold under repurchase agreements | | $136,643 | $10,983 | $7,149 | $154,775 | | $48,204 | $- | $48,204 |
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
| | | |
| | Interest rate and remaining contractual maturity of the agreements | Interest rates and remaining contractual maturity of the agreements |
| | | | | | | | | | | |
| | | |
| Securities sold under repurchase agreements | | |
| Corporate equity | 13.08% | $-
| $29,926
| $956
| $30,882
| 12.06% | $49,048 | $- | $2,146 | $51,194 |
| 11.83% | 14,484 | 10,923 | - | 25,407 | 10.38% | 13,548 | - | 13,548 |
| Non-US sovereign debt | | 8.62% | 8,879 | - | 8,879 |
| Total securities sold under repurchase agreements | | $14,484 | $40,849 | $956 | $56,289 | | $71,475 | $- | $2,146 | $73,621 |
The fair value of collateral pledged under repurchase agreements as of March 31, 20182020 and March 31, 2017,2019, was $203,140$54,222 and $68,025,$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 1918 – OTHER LIABILITIES
| | | | | |
| | | |
| Unused vacation reserve | $537 | $219 | |
| Advance received for sale of fixed asset | 288 | - | |
| Salaries and other employee benefits | 247 | -
| $999 | $1,307 |
| Vacation reserve | | 933 | 942 |
| Payable to suppliers | | 353 | 212 |
| Outstanding settlements operations | | 307 | 314 |
| Taxes payable other than income tax | 127 | 141 | 38 | 127 |
| Other | 120 | 13 | 201 | 230 |
| | | |
| Total | $1,319 | $373 | $2,831 | $3,132 |
| | | |
NOTE 19 – FEE AND COMMISSION INCOME/(EXPENSE)
| | | |
| | | |
| 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, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 20 – FEE AND COMMISSION INCOME/(EXPENSE)
| | | Year ended March 31, 2017 (Recast) |
| | | |
| Fee and commission income: | | |
| | | |
| Brokerage services | $5,181 | $878 |
| Bank services | 3,419 | 1,100 |
| Underwriting services | 1,911 | 428 |
| Agency fees | - | 1,561 |
| Other commission income | 285 | 123 |
| | | |
| Total fee and commission income | $10,796 | $4,090 |
| | | |
| | | |
| Fee and commission expense: | | |
| | | |
| Bank services | $1,483 | $203 |
| Brokerage services | 239 | 35 |
| Exchange services | 189 | 78 |
| Central Depository services | 155 | 30 |
| | | |
| Total fee and commission expense | $2,066 | $346 |
| | | |
NOTE 2120 – NET GAIN ON TRADING SECURITIES
| | | Year ended March 31, 2017 (Recast) | | |
| | | |
| Net gain recognized during the period on trading securities sold during the period | $17,314 | $5,322 | $22,770 | $25,535 |
| Net unrealized gain recognized during the reporting period on trading securities still held at the reporting date | 16,432 | 5,484 | |
| 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 | $33,746 | $10,806 | $14,923 | $20,162 |
NOTE 21 – NET INTEREST INCOME/ (EXPENSE)
| | | |
| | | |
| 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, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
| | | |
| | | |
| 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 INTEREST INCOME/ (EXPENSE)GAIN/(LOSS) ON FOREIGN EXCHANGE OPERATIONS
| | | Year ended March 31, 2017 (Recast) |
| | | |
| Interest income: | | |
| Interest income on financial assets recorded at amortized cost comprises: | | |
| | | |
| Interest income on reverse repurchase agreements and amounts due from banks | $3,089 | $655 |
| Interest income on loans to customers | 55 | 5 |
| | | |
| Total interest income on financial assets recorded at amortized cost | $3,144 | $660 |
| | | |
| Interest income on financial assets recorded at fair value through profit or loss comprises: | | |
| | | |
| Interest income on trading securities | $5,040 | $1,346 |
| | | |
| Total interest income on financial assets recorded at fair value through profit or loss | 5,040 | 1,346 |
| | | |
| Total interest income | $8,184 | $2,006 |
| | | |
| | | |
| Interest expense: | | |
| Interest expense on financial liabilities recorded at amortized cost comprises: | | |
| | | |
| Interest expense on securities repurchase agreements | $13,268 | $3,518 |
| Interest expense on debt securities issued | 707 | 202 |
| Interest expense on customer accounts and deposits | 244 | 33 |
| Interest expense on loans received | 25 | 54 |
| | | |
| Total interest expense on financial liabilities recorded at amortized cost | 14,244 | 3,807 |
| | | |
| Total interest expense | $14,244 | $3,807 |
| | | |
| Net interest expense | $(6,060) | $(1,801) |
| | | |
| | | |
| 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, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 23 – NET GAIN ON FOREIGN EXCHANGE OPERATIONS
| | | Year ended March 31, 2017 (Recast) |
| | | |
| Translation difference | $1,208 | $(812) |
| Sales and purchases of foreign currency, dealing | 642 | 1,086 |
| | | |
| Total net gain on foreign exchange operations | $1,850 | $274 |
NOTE 2423 – RELATED PARTY TRANSACTIONS
On December 28, 2016, Freedom RU entered into a derivative instrument agreement with a related party which included a call option feature. The gain or loss associated with this agreement is recognized as gain on a derivative instrument in the Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss). The Company recorded a derivative liability of $495 as of March 31, 2017. On June 14, 2017, the derivative instrument expired unexercised by the holder, and the Company recognized a gain on the derivative instrument of $482 as of March 31, 2018.
During the years ended March 31, 20182020 and 2017,2019, the Company earned commission income from related parties in the amounts of $6,270$79,143 and $2,770,$38,974, respectively. Commission income earned from related parties is comprised primarily of brokerage commissions and agency fees for referrals of new brokerage clients to other brokers and commissions for money transfers by brokerage clients.
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, 20182020 and March 31, 2017,2019, 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 receivablereceivables from brokerage clients from related parties totaling $1,055$3,611 and $328,$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, 20182020 and March 31, 2017, the Company had brokerage accounts with related parties totaling $21,297 and $0, respectively.
As of March 31, 2018 and March 31, 2017, the Company had loans issued to related parties totaling $1,748 and $0, respectively.
As of March 31, 2018 and March 31, 2017,2019, the Company had margin lending receivables with related partyparties totaling $8,889$105,892 and $0,$43,720, respectively.
As of March 31, 20182020 and March 31, 2017,2019, the Company had advance received for sale of fixed asset frommargin lending payables to related partyparties, totaling $288$4,306 and $0,$1,090, respectively.
As of March 31, 2018,2020, and March 31, 2017,2019, the Company had margin lendingloans 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 $81$26,150 and $0,$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, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
As of March 31, 2018, and March 31, 2017, the Company had loans received from a related party totaling $99 and $0, respectively.
As of March 31, 2018, and March 31, 2017, the Company had customer liabilities on brokerage accounts and bank accounts of related parties totaling $6,471 and $2,235, respectively. As of March 31, 2018, and March 31, 2017, the Company had restricted customer cash on brokerage accounts and cash on bank accounts of related parties totaling $5,074 and $2,235, respectively.
NOTE 2524 – STOCKHOLDERS’ EQUITY
During the yearyears ended March 31, 2018, Mr. Turlov2020 and 2019, shareholders made capital contributions of $670$0 and $225 to FRHC, respectively. During the years ended March 31, 2020 and $7,924 to Freedom RU. At2019 awarded nonqualified stock options were exercised in the time such contributions were made, Mr. Turlov was the Chief Executive Officer, Chairmanamount of the board,$455 and majority shareholder of the Company.
The Company reviewed FASB ASC Topic No. 470-50, Debt Extinguishment, to evaluate the debt extinguishment gain incurred from the debt to equity transaction in Freedom CY. Upon completion of the evaluation, it was determined that the gain associated with extinguishment of the debt from shareholder to equity should be accounted for as a capital contribution and was recorded to Additional Paid in Capital. Equity interest exchanged in Freedom CY was $293.
On June 29, 2017, the Company and Mr. Turlov closed the acquisition of Freedom RU. Pursuant to the terms of the Acquisition Agreement, Mr. Turlov received a total of 20,665,023 shares of restricted common stock in exchange for his 100% interest in Freedom RU.$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 based compensation expense for restricted stock grants and stock options in the amount of $1,621$2,625 during the year ended March 31, 2018.2020. 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.
As disclosed in Note 1 on November 10, 2017, FRHC issued 12,758,011 shares of restricted Company common stock in exchange for Mr. Turlov 100% equity interest in Freedom CY and Freedom CY became a wholly owned subsidiary of the Company.
As disclosed in Note 1, on November 1, 2017, the Company entered into a Share Exchange and Acquisition Agreement and agreed to issue 387,700 shares of restricted common stock to BusinessTrain Ltd. to acquire 100% of the outstanding equity interest of Freedom UA.
On December 8, 2017, the Company completed a private placement of 3,681,667 shares of its restricted common stock in exchange for an aggregate offering proceeds of $11,045. The shares of common stock were sold to non-U.S. persons pursuant to the exemption from registration provided in Regulation S promulgated under the Securities Act for offers and sales made outside the United States. Arkady Rakhilkin, a Company director, purchased 348,333 shares for $1,045.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
On March 2, 2018, the Company completed a private placement of 5,426,612 shares of its restricted common stock in exchange for an aggregate offering proceeds of $29,399. The shares of common stock were sold to three non-U.S. persons pursuant to the exemption from registration provided in Regulation S promulgated under the Securities Act for offers and sales made outside the United States. Askar Tashtitov, a Company director, purchased 28,000 shares for $154.
NOTE 2625 – 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 25,24, 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.
During the year ended March 31, 2018, stock options covering a total of 360,000 shares of common stock were granted. No options were granted for the year ended March 31, 2017. Total compensation expense related to options granted was $104 for the year ended March 31, 2018 and $0 for the year ended March 31, 2017. As of March 31, 2017, there was total remaining compensation expense of $543 related to stock options, which will be recorded over a weighted average period of approximately 2.52 years. No options were exercisable or exercised during the year ended March 31, 2018.
The Company has determined fair value of stock options using the Black-Scholes option valuation model based on the following key assumptions during the year ended March 31, 2018:assumptions:
| Term (years) | 3 |
| Volatility | 165.33%165.33% |
| Risk-free rate | 1.66%1.66% |
During the year ended March 31, 2018 a total of 3,900,000 restricted shares were awarded. During the year ended March 31, 2017, no restricted shares were awarded. The compensation expense related to restricted stock awards was $1,517 during the year ended March 31, 2018, and $0 during the year ended March 31, 2017. As of March 31, 2018, there was $6,669 of total unrecognized compensation cost related to nonvested shares of restricted stock granted. The cost is expected to be recognized over a weighted average period of 2.3 years.
Stock-based compensation expense for the cost of the awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company's employee stock options.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 20182020
(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, 2018:2020:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (In Years) | | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (In Years) | |
| Outstanding, beginning of year | - | $- | - | $- | |
| Outstanding, March 31, 2019 | | 350,000 | $1.98 | 8.52 | $2,342 |
| Granted | 360,000 | 1.98 | 2.76 | 1,753 | - | - |
| Exercised | - | (230,000) | 1.98 | - | 2,630 |
| Forfeited/cancelled/expired | - | - | - |
| Outstanding, at March 31, 2018 | 360,000 | $1.98 | 2.76 | $1,753 | |
| Exercisable at March 31, 2018 | - | $- | - | $- | |
| 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, 2018:2020:
| | | Weighted Average Fair Value | | Weighted Average Fair Value |
| Outstanding, beginning of year | $- | |
| Outstanding, March 31, 2019 | | 2,275,000 | $4,777 |
| Granted | 3,900,000 | 8,190 | - |
| Vested | - | - | - |
| Forfeited/cancelled/expired | - | - |
| Outstanding, at December 31, 2017 | 3,900,000 | $8,190 | |
| Outstanding, at March 31, 2020 | | 2,275,000 | $4,777 |
NOTE 27 – ACQUISITIONS
Acquisition of Freedom CY
The Company agreed to acquire Freedom CY from Mr. Turlov on November 23, 2015, subject to certain closing conditions, including receipt of all required regulatory approvals to transfer ownership of Freedom CY. As disclosed in Note 1, the final condition to closing was completed on November 1, 2017 and on November 10, 2017, the Company issued 12,758,011 shares of restricted common stock to Mr. Turlov in exchange for his 100% equity interest in Freedom CY and the securities brokerage and financial services business conducted by it in Cyprus, and Freedom CY became a wholly owned subsidiary of the Company.
When preparing the consolidated financial statements forDuring the year ended March 31, 2018, management determined that certain amounts included2020, the Company recorded expenses for share based payments in the Company’s March 31, 2017, consolidated financial statements required revision, due to closingamount of the acquisition of Freedom CY on November 1, 2017, which was deemed to be entity under common control with the Company.$1,052.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 20182020
(All amounts in thousands of United States dollars, unless otherwise stated)
Acquisition of Freedom UA:
On November 1, 2017 (the Acquisition Date), FRHC acquired 100% of the outstanding common shares and voting interest in Freedom UA in exchange for 387,700 shares of restricted common stock of the Company with the fair market value of $1,485. FRHC acquired Freedom UA to expand its existing securities brokerage business to the Ukrainian securities brokerage market. The Company believes it can take advantage of the synergies that exist between its current expertise and infrastructure and Freedom UA’s existing business to rapidly expand the Company’s presence in the Ukrainian financial services industry.
As of the Acquisition Date, the fair value of Freedom UA was $653. For the five months ended March 31, 2018, net loss of Freedom UA totaled $53.NOTE 26 – LEASES
The total purchase price was allocatedCompany 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 follows:of March 31, 2020:
| | Classification on Balance Sheet | Purchase price allocationMarch 31,
2020 |
| Assets | |
Assets: | |
Cash and cash equivalentsOperating lease assets | Right-of-use assets | $432 |
Trading securities | 6
|
Fixed assets | 88
|
Customer list | 176
|
Brokerage and other receivables | 947
|
Other assets | 314,543
|
| Total lease assets | | $1,65214,543 |
| | |
Liabilities:Liabilities | |
Customer liabilities | $997
|
Trade payables | 1
|
Other liabilities | 1
|
Total liabilities | $999
|
| | |
Net assets acquiredOperating lease liability | Operating lease obligations | $65314,384 |
| |
Goodwill | 832
|
| |
Total purchase pricelease liability | $1,48514,384 |
FREEDOM HOLDING CORP.Lease obligations at March 31, 2020, consisted of the following:
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 28 – REVERSE STOCK SPLIT| 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% |
On September 6, 2017, the Company effected a one-share-for-twenty-five-shares reverse stock split of its common stock. All share and earnings per share information has been retroactively adjusted to reflect the stock split. The effect of this stock split on the Company’s earnings per share is as follows:
| | | Year ended March 31, 2017 (Recast) |
| | | |
| Basic and diluted net income per common share: | | |
| | | |
Net income before noncontrolling interests
| $19,233 | $6,296 |
| | | |
| Net income per common share - basic (in US dollars) | $0.58 | $0.56 |
| Net income per common share - diluted (in US dollars) | $0.58 | $0.56 |
| | | |
| Shares used in the calculation of net income per common share: | | |
| Basic | 33,249,013 | 11,213,926 |
| Diluted | 33,393,877
| 11,213,926 |
NOTE 29 – COMMITMENTS AND CONTINGENT LIABILITIES
The table below shows approximate leaseLease commitments and other contingent liabilities of the Companyfor short-term operating leases as of March 31, 2018:
| Contractual obligations | | | | |
Office leases(1) | $6,841 | $4,275 | $1,790 | $776 |
| TOTAL | $6,841 | $4,275 | $1,790 | $776 |
(1)
The Company has number of lease agreements for office spaces in different locations. In general, all agreements are made for a one-year period with extension or termination provisions, except two lease agreements with longer lease terms.
2020 was approximately $354. The Company’s rent expense for office space was $2,618 and $1,263$1,147 for the year ended March 31, 20182020 and 2017,$4,819 for the year ended March 31, 2019, respectively.
FREEDOM HOLDING CORP.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2018
(All amounts in thousands of United States dollars, unless otherwise stated)
NOTE 3027 – SUBSEQUENT EVENTS
The Company evaluated all materialhas performed an evaluation of subsequent events and transactions that occurred after March 31, 2018 through June 29, 2018.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 April 12, 2018 Freedom KZ completedJuly 6, 2020 the Company announced that the Company has concluded the acquisition of brokerage companyIC ZERICH Capital Management JSC Asyl Invest (“Asyl”). Asyl was 100% controlled byfollowing receipt of approval from the Company’s shareholder Timur Turlov. The consideration for closingRussian Federal Antimonopoly Service. Zerich Capital commenced business in 1995 and is one of the sale was $2,250 which was equal tooldest securities brokerage firms in Russia, currently ranking as the fair value19th largest brokerage house in Russia in terms of the net assets received by the Company as result of the acquisition.clients.
On May 28, 2018 Freedom RU completedJuly 2, 2020, the acquisitionCompany announced that it had a fixed annual cretired debt securities denominated in USD which had a fixed annual coupon rate of brokerage company LLC Nettrader (“Nettrader”). Nettrader was 100% controlled by the Company’s shareholder Timur Turlov. The consideration for closing of the sale was $3,816 which equals to the fair8% and a carrying value of the net assets received by the Company$6,175 including interest accrued of $124 as result of the acquisition.March 31, 2020.
On June 4, 2018 Freedom KZ placed USD – Denominated bonds issued under Kazakhstan law. The total placement amount is $29.4 million with 8% fixed coupon rate and a maturity date of June 2021.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 |