Freedom Holding Corp. - Quarter Report: 2018 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2018

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 incorporation or organization)		(I.R.S. Employer Identification No.)

“Esentai Tower” BC, Floor 7 77/7 Al Farabi Ave
Almaty, Kazakhstan		050040
(Address of principal executive offices)		(Zip Code)

 

  (801) 355-2227

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such file). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
(Do not check if smaller reporting company)		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

 

As of February 11, 2019, the registrant had 58,043,212 shares of common stock, par value $0.001, issued and outstanding.

 

FREEDOM HOLDING CORP.

FORM 10-Q

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION		Page
Item 1. Unaudited Condensed Consolidated Financial Statements		3
	Condensed Consolidated Balance Sheets as of December 31, 2018 and March 31, 2018	3
	Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) for the Three and Nine Months Ended December 31, 2018 and 2017	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2018 and 2017	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3. Qualitative and Quantitative Disclosures About Market Risk		45
Item 4. Controls and Procedures		46
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		47
Item 1A. Risk Factors		47
Item 5. Other Information		47
Item 6. Exhibits		49
Signatures		50

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

 

	December 31, 2018	March 31, 2018*
		(Recast)
ASSETS
Cash and cash equivalents	$41,425	$65,731
Restricted cash	27,103	21,962
Trading securities	154,542	212,595
Available-for-sale securities, at fair value	1	240
Brokerage and other receivables, net	52,839	24,885
Loans issued	2,337	8,754
Deferred tax assets	878	772
Fixed assets, net	5,033	2,571
Intangible assets, net	4,212	5,531
Goodwill	2,862	3,288
Other assets, net	4,129	4,573
TOTAL ASSETS	$295,361	$350,902
LIABILITIES AND STOCKHOLDERS’ EQUITY
Securities sold, not yet purchased - at fair value	$-	$1,135
Loans received	3,967	7,143
Debt securities issued	26,573	11,222
Customer liabilities	58,596	30,672
Trade payables	16,351	9,013
Deferred distribution payments	8,534	8,534
Securities repurchase agreement obligation	68,181	154,775
Current income tax liability	82	-
Other liabilities	1,634	1,376
TOTAL LIABILITIES	183,918	223,870
Commitments and Contingent Liabilities (Note 20)	-	-
STOCKHOLDERS’ EQUITY
Preferred stock - $0.001 par value; 20,000,000 shares authorized, no shares issued or outstanding	-	-
Common stock - $0.001 par value; 500,000,000 shares authorized; 58,043,212 and 58,033,212 shares issued and outstanding as of December 31, 2018 and March 31, 2018, respectively	58	58
Additional paid in capital	98,128	100,180
Retained earnings	38,628	34,351
Accumulated other comprehensive loss	(25,371)	(7,557)
TOTAL STOCKHOLDERS’ EQUITY	111,443	127,032
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$295,361	$350,902

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

* See Notes 2 and 3 for information regarding recast amounts and basis of financial statement presentation.

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) (Unaudited)

(All amounts in thousands of United States dollars, except Share data, unless otherwise stated)

 

	Three months ended December 31,		Nine months ended December 31,
	2018	2017*	2018	2017*
Revenue:		(Recast)		(Recast)
Fee and commission income	$12,274	$2,454	$31,033	$7,526
Net gain/(loss) on trading securities	11,641	(8,108)	12,669	31,408
Interest income	2,976	2,991	11,823	6,778
Net gain on derivatives	-	867	-	687
Net gain/(loss) on foreign exchange operations	(498)	366	(3,746)	1,989
TOTAL REVENUE, NET	26,393	(1,430)	51,779	48,388
Expense:
Interest expense	3,180	4,610	11,471	9,825
Fee and commission expense	1,422	855	3,155	1,647
Operating expense	12,117	6,696	31,272	14,149
Other expense, net	229	290	581	281
Loss from disposal of subsidiary	-	-	15	-
TOTAL EXPENSE	16,948	12,451	46,494	25,902
NET INCOME/(LOSS) BEFORE INCOME TAX	9,445	(13,881)	5,285	22,486
Income tax (expense)/benefit	(545)	413	(1,009)	(552)
NET INCOME/(LOSS)	$8,900	$(13,468)	$4,276	$21,934
OTHER COMPREHENSIVE INCOME/(LOSS)
Change in unrealized gain on investments available-for- sale, net of tax effect	$-	$(168)	$-	$(121)
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect	-	-	22	-
Foreign currency translation adjustments, net of tax effect	(5,596)	3,131	(17,836)	(3,250)
COMPREHENSIVE INCOME/(LOSS)	$3,304	$(10,505)	$(13,538)	$18,563
BASIC NET INCOME/(LOSS) PER COMMON SHARE (In US Dollars)	$0.15	$(0.30)	$0.07	$0.83
DILUTED NET INCOME/(LOSS) PER COMMON SHARE (In US Dollars)	$0.15	$(0.30)	$0.07	$0.83
Weighted average number of shares (basic)	58,038,864	45,018,578	58,035,103	26,341,542
Weighted average number of shares (diluted)	58,248,924	45,018,578	58,225,549	26,434,930

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

* See Notes 2 and 3 for information regarding recast amounts and basis of financial statement presentation.

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

 

	For the nine months ended
	December 31, 2018	December 31, 2017
		(Recast)
Cash Flows From Operating Activities
Net income	$4,276	$21,934
Adjustments to reconcile net income used in operating activities:
Depreciation and amortization	1,503	918
Loss on sale of fixed assets	31	202
Change in deferred taxes	(260)	639
Stock compensation expense	2,533	792
Unrealized loss/(gain) on trading securities	9,623	(19,578)
Net gain on derivative	-	(490)
Net change in accrued interest	75	(263)
Allowance for receivables	350	31
Changes in operating assets and liabilities:
Trading securities	14,277	(98,938)
Brokerage and other receivables	(28,968)	(2,264)
Loans issued	5,644	145
Other assets	(292)	(2,495)
Customer liabilities	32,620	7,271
Current income tax liability	81	(126)
Trade payables	4,931	1,413
Securities sold, not yet purchased	(1,071)	-
Other liabilities	526	574
Net cash flows from/used in operating activities	45,879	(90,235)
Cash Flows From Investing Activities
Purchase of fixed assets	(4,311)	(1,123)
Proceeds from sale of fixed assets	268	8
Proceeds from sale of intangible assets	-	125
Proceeds from sale/(purchase) of available-for-sale securities, at fair value	235	(3,814)
Consideration paid for Asyl	(2,240)	-
Cash received from acquisitions	-	1,800
Net cash flows used in investing activities	(6,048)	(3,004)

Cash Flows From Financing Activities
Proceeds from/(repurchase of) securities repurchase agreement obligations	(65,238)	81,421
Proceeds from issuance of debt securities	22,059	13,594
Repurchase of debt securities	(3,346)	(2,428)
Proceeds from loans received	5,615	-
Repayment of loans	(8,143)	-
Capital contributions	245	8,594
Private placement	-	11,045
Net cash flows used in/from financing activities	(48,808)	112,226

 

Effect of changes in foreign exchange rates on cash and cash equivalents	(10,188)	(1,192)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(19,165)	17,795
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	87,693	35,365
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$68,528	$53,160

 

 

 

 

	For the nine months ended
	December 31, 2018	December 31, 2017*
		(Recast)
Supplemental disclosure of cash flow information:
Cash paid for interest	$10,654	$8,467
Income tax paid	$417	$583

 

Non-cash investing and financing activities:

 

Assets received from acquisition of Asyl	$-	$4,666
Liabilities assumed from acquisition of Asyl	$-	$82
Assets received from acquisition of Nettrader	$-	$11,158
Liabilities assumed from acquisition of Nettrader	$-	$4,121
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

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

* See Notes 2 and 3 for information regarding recast amounts and basis of financial statement presentation.

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Overview

 

Freedom Holding Corp. (the “Company” or “FRHC”) is a corporation organized in the United States under the laws of the State of Nevada that owns several operating subsidiaries that engage in a broad range of activities in the financial services industry, including retail securities brokerage, investment education, securities trading, investment banking and market making activities 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 owns directly, or through subsidiaries, the following companies: LLC Investment Company Freedom Finance, a Moscow, Russia-based securities broker-dealer (“Freedom RU”);LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based securities broker-dealer (“Freedom KZ”);Freedom Finance Cyprus Limited, a Limassol, Cyprus-based broker-dealer (“Freedom CY”); Freedom Finance Germany TT GmbH (“Freedom GE”), a Munich, Germany-based tied agent of Freedom CY; LLC Freedom Finance Ukraine, a Kiev, Ukraine-based broker-dealer (“Freedom UA”); LLC Freedom Finance Uzbekistan, a Tashkent, Uzbekistan-based broker-dealer (“Freedom UZ”); and FFIN Securities, Inc., a Nevada corporation (“FFIN”).

 

The Company’s subsidiaries are members on the Kazakhstan Stock Exchange (KASE), Astana International Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPB), Ukrainian Exchange, and Republican Stock Exchange of Tashkent (UZSE). Freedom CY serves to provide the Company’s clients with operations support and access to the investment opportunities, relative stability, and integrity of the U.S. and European securities markets, which under the regulatory regimes of many jurisdictions where the Company operates do not currently allow investors direct access to international securities markets.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended December 31, 2018, are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2019.

 

 

The Condensed Consolidated Balance Sheet at March 31, 2018, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

The Company’s Condensed Consolidated Financial Statements present the consolidated accounts of FRHC, FFIN, Freedom RU, Freedom KZ, FFIN Bank, Freedom CY, Freedom UA, Freedom UZ, Freedom GE and the financial results of LLC First Stock Store (“Freedom24”) up to the date of its disposal on September 30, 2018. All significant inter-company balances and transactions have been eliminated from the condensed consolidated financial statements.

 

For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018.

 

Use of estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from those estimates.

 

Revenue recognition

 

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services promised to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. A significant portion of the Company’s revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans and investment securities, as these activities are subject to other US GAAP guidance discussed elsewhere within these disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC Topic 606, which are presented in these income statements as components of non-interest income are as follows:

 

 

 

The Company adopted the new guidance on April 1, 2018. Under Topic 606, the Company is required to recognize incentive fees when they are probable and there is not a significant chance of reversal in the future. For the brokerage commission, banking service commission and investment banking services commission contracts in place at the time of adoption, this change in policy did not result in any actual change in revenue that had already been recognized and therefore there was no transition adjustment necessary. Based on a review of the Company’s brokerage commission, banking service commission and investment banking services commission contracts in place at the time of adoption, the Company does not believe the actual timing of recognition of incentive fees under future contracts will be materially impacted in the future.  However, the new policy may result in incentive fees being recognized sooner in the future than they would have been under the Company’s revenue recognition policy in place prior to the adoption of Topic 606.

 

The Company recognizes revenue when five basic criteria have been met:

 

 

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. These 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.

 

 

All gains and losses on foreign currency contracts were realized during the three and nine month periods ended December 31, 2018 and 2017, and are included in net gain on derivatives in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).

 

Functional currency

 

Management has adopted ASC 830, Foreign Currency Translation Matters as it pertains to its foreign currency translation. The Company’s functional currencies are the Russian ruble, European euro, Ukrainian hryvnia, Uzbekistani som and Kazakhstani tenge, and its reporting currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in Other Comprehensive Income/(Loss).

 

For financial reporting purposes, foreign currencies are translated into United States dollars as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive loss”.

 

Cash and cash equivalents

 

Cash and cash equivalents are generally comprised of certain highly liquid investments with maturities of three months or less at the date of purchase. Cash and cash equivalents include reverse repurchase agreements which are recorded at the amounts at which the securities were acquired or sold plus accrued interest.

 

Securities reverse repurchase and repurchase agreements

 

A reverse repurchase agreement is a transaction in which the Company purchases financial instruments from a seller, typically in exchange for cash, and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller for an amount equal to the cash or other consideration exchanged plus interest at a future date. Securities purchased under reverse repurchase agreements are accounted for as collateralized financing transactions and are recorded at the contractual amount for which the securities will be resold, including accrued interest. Financial instruments purchased under reverse repurchase agreements are recorded in the financial statements as cash placed on deposit collateralized by securities and classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.

 

 

A repurchase agreement is a transaction in which the Company sells financial instruments to another party, typically in exchange for cash, and simultaneously enters into an agreement to reacquire the same or substantially the same financial instruments from the buyer for an amount equal to the cash or other consideration exchanged plus interest at a future date. These agreements are accounted for as collateralized financing transactions. The Company retains the financial instruments sold under repurchase agreements and classifies them as trading securities in the Condensed Consolidated Balance Sheets. The consideration received under repurchase agreements is classified as securities repurchase agreement obligations in the Condensed Consolidated Balance Sheets.

 

The Company enters into reverse repurchase agreements and repurchase agreements 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/(loss) and are accumulated in Accumulated other comprehensive loss, with the exception of other-than-temporary impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses, which are recognized in the Condensed Consolidated Statements of Operations. 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 then reclassified to Condensed Consolidated Statements of Operations.

 

Trading securities

 

Financial assets are classified as trading securities if the financial asset has been acquired principally for the purpose of selling it in the near term.

 

Trading securities are stated at fair value, with any gains or losses arising on remeasurement recognized in revenue. Changes in fair value are recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) and included in net gain/(loss) on trading securities. Interest earned, and dividend income are recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) and are included in interest income, according to the terms of the contract and when the right to receive the payment has been established.

 

 

Investments in nonconsolidated managed funds are accounted for at fair value based on the net asset value (“NAV”) of the funds provided by the fund managers with gains or losses included in net gain on trading securities in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).

 

Debt securities issued

 

Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized over the period of the borrowings using the effective interest method. If the Company purchases its own debt, it is removed from the Condensed Consolidated Balance Sheets and the difference between the carrying amount of the liability and the consideration paid is recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).

 

Brokerage and other receivables

 

Brokerage and other receivables are comprised of commissions and receivables related to the securities brokerage and banking activity of the Company. At initial recognition, brokerage and other receivables are recognized at fair value. Subsequently, brokerage and other receivables are carried at cost net of any allowance for impairment losses.

 

Derecognition of financial assets

A financial asset (or, where applicable a part of a financial asset or a part of a group of similar financial assets) is derecognized where all of the following conditions are met:

 

Where the Company has not met the asset derecognition conditions above, it continues to recognize the asset to the extent of its continuing involvement.

 

Impairment of long lived assets

 

In accordance with the accounting guidance for the impairment or disposal of long-lived assets, the Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the fair value from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows, discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. As of December 31, 2018 and March 31, 2018, the Company had not recorded any charges for impairment of long-lived assets.

 

 

Impairment of goodwill

 

As of December 31, 2018 and March 31, 2018, goodwill recorded in the Company’s Condensed Consolidated Balance Sheets totaled $2,862 and $3,288, respectively. The Company performs an impairment review at least annually, unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. In its annual goodwill impairment test, the Company estimated the fair value of the reporting unit based on the income approach (also known as the discounted cash flow method) and determined the fair value of the Company’s goodwill exceeded the carrying amount of the Company’s goodwill.

 

Income taxes

 

The Company recognizes deferred tax liabilities and assets based on the difference between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

 

Current income tax expenses are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the asset and liability approach. Under this method, deferred income taxes are recognized for tax consequences in future years based on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income.

 

The Company will include interest and penalties arising from the underpayment of income taxes in the provision for income taxes. As of December 31, 2018 and March 31, 2018, the Company had no accrued interest or penalties related to uncertain tax positions.

 

On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted, which significantly changed 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 starting with the 2018 tax year, which began April 1, 2018, depending upon expense allocations and the applicable U.S. foreign tax credit rules. The Company has presented the deferred tax impacts of GILTI tax in its consolidated financial statements for the three and nine months ended December 31, 2018.

 

 

Financial instruments  

 

Financial instruments are carried at fair value as described below.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. Fair value is the current bid price for financial assets, current ask price for financial liabilities and the average of current bid and ask prices when the Company is both in short and long positions for the financial instrument. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

 

Leases

 

Rent payable under operating leases is charged to expense on a straight-line basis over the term of the relevant lease.

 

Fixed assets

 

Fixed assets are carried at cost, net of accumulated depreciation. Maintenance, repairs, and minor renewals are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range between three and seven years.

 

Recent accounting pronouncements

 

ASU 2016-02, “Leases,” ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842): Targeted Improvements”: In February 2016, the FASB issued ASU 2016-02 which requires entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to exclude from the balance sheet those leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as finance or operating, and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous provisions of U.S. GAAP, other than certain changes to align lessor accounting to specific changes made to lessee accounting and ASC 606. ASU 2016-02 also requires new qualitative and quantitative disclosures for both lessees and lessors. In July 2018 the FASB adopted ASU 2018-10 which makes technical corrections and clarifications to the accounting guidance in Topic 842.

 

 

 

For public entities, ASU 2016-02, 2018-01, 2018-10 and 2018-11 are effective for fiscal years beginning after December 15, 2018, including interim periods therein, with early adoption permitted. ASU 2016-02 requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2018-11 provides entities an optional transition method to apply the new guidance as of the adoption date, rather than as of the earliest period presented. In transition, entities may elect certain practical expedients when applying ASU 2016-02. These include a package of practical expedients that must be applied in its entirety to all leases commencing before the effective date, unless the lease is modified, to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. ASU 2016-02 also includes a practical expedient to use hindsight in making judgments when determining the lease term and any long-lived asset impairment. ASU 2018-01 allows entities to elect a practical expedient that would exclude application of ASU 2016-02 to land easements that existed prior to its adoption, if they were not accounted for as leases under previous U.S. GAAP. ASU 2018-11 provides a lessor practical expedient for separating lease and non-lease components. The Company plans to apply the practical expedients permitted within the guidance, which allows the Company to carryforward its historical lease classification, and to apply the transition option which does not require application of the guidance to comparative periods in the year of adoption. The adoption of this ASU will result in the recognition of significant right-of-use assets and lease liabilities in the Company’s Consolidated Balance Sheets. The preparation for adoption is ongoing, including the assessment of other potential impacts of this ASU, which includes analysis of potential transitional adjustments to Stockholders’ equity and impact of adoption on the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. In March 2014, the Board issued a proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles (GAAP). The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this Update apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.

 

 

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology replaces the probable, incurred loss model for those assets. Through that Update, the Board added Topic 326 and made several consequential amendments to the FASB Accounting Standards Codification. The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The effective date and transition requirements for the amendments in this Update are the same as the effective dates and transition requirements in Update 2016-13, as amended by this Update. The Company does not expect material impact from new guidance on its condensed consolidated financial statements.

 

In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors. On February 25, 2016, the FASB issued Accounting Standards update No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The FASB has been assisting stakeholders with implementation questions and issues as organizations prepare to adopt the new lease requirements. The amendments in this Update affect the amendments in Update 2016-02, which are not yet effective but can be early adopted. The effective date and transition requirements for the amendments in this Update for entities that have not adopted Topic 842 before the issuance of this Update are the same as the effective date and transition requirements in Update 2016-02 (for example, January 1, 2019, for calendar-year-end public business entities). All entities, including early adopters, must apply the amendments in this Update to all new and existing leases. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.

 

NOTE 3 – REVISION OF FINANCIAL STATEMENT

 

When preparing the condensed consolidated financial statements as of December 31, 2018, and for the three and nine months ended December 31, 2018, management determined that certain amounts included in the Company’s consolidated financial statements as of March 31, 2018, and for the three and nine months ended December 31, 2017, required revision, due to the closing of the acquisition of Freedom RU on June 29, 2017, the closing of the acquisition of Freedom CY on November 1, 2017, and the completion of the mergers of Nettrader LLC (“Nettrader”) in May 2018, and Asyl Invest JSC (“Asyl”) in April 2018, which were deemed to be entities under common control with the Company.

 

Certain reclassifications also have been made to the prior year’s consolidated financial statements to enhance comparability with the current year’s condensed consolidated financial statements following the increase in intangible assets of the Company related to acquisition of the Tradernet trading platform. As a result, certain line items have been amended in the Condensed Consolidated Balance Sheets. Comparative figures have been adjusted to conform to the current period’s presentation.

 

 

The previously issued Consolidated Balance Sheet as of March 31, 2018, and Condensed Consolidated Statement of Operations and Statements of Other Comprehensive Income/(Loss) for the three and nine months ended December 31, 2017 have been revised as follows:

 

	As of March 31, 2018
BALANCE SHEETS (RECAST)	As previously reported	Recast	As recasted
ASSETS
Cash and cash equivalents	$64,531	$1,200	$65,731
Restricted cash	13,671	8,291	21,962
Trading securities	212,319	276	212,595
Available-for-sale securities, at fair value	2	238	240
Brokerage and other receivables, net	21,109	3,776	24,885
Loans issued	8,754	-	8,754
Deferred tax assets	1,046	(274)	772
Fixed assets, net	2,362	209	2,571
Intangible assets, net	-	5,531	5,531
Goodwill	1,798	1,490	3,288
Other assets, net	4,494	79	4,573
TOTAL ASSETS	$330,086	$20,816	$350,902
LIABILITIES AND STOCKHOLDERS’ EQUITY
Securities sold, not yet purchased - at fair value	$1,135	$-	$1,135
Loans received	7,143	-	7,143
Debt securities issued	10,840	382	11,222
Customer liabilities	21,855	8,817	30,672
Trade payables	8,998	15	9,013
Deferred distribution payments	8,534	-	8,534
Securities repurchase agreement obligation	154,775	-	154,775
Deferred income tax liabilities	387	(387)	-
Other liabilities	1,319	57	1,376
TOTAL LIABILITIES	214,986	8,884	223,870
STOCKHOLDERS’ EQUITY
Preferred stock	-	-	-
Common stock	58	-	58
Additional paid in capital	87,049	13,131	100,180
Retained earnings	35,387	(1,036)	34,351
Accumulated other comprehensive loss	(7,394)	(163)	(7,557)
TOTAL STOCKHOLDERS’ EQUITY	115,100	11,932	127,032
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$330,086	$20,816	$350,902

 

 

	For the three months ended December 31, 2017
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) (RECAST)	As previously reported	Recast	As recasted
Revenue:
Fee and commission income	$1,999	$455	$2,454
Net gain/(loss) on trading securities	(8,318)	210	(8,108)
Interest income	2,853	138	2,991
Net gain on derivatives	867	-	867
Net gain/(loss) on sale of fixed assets	16	(16)	-
Net gain/(loss) on foreign exchange operations	424	(58)	366
TOTAL REVENUE, NET	(2,159)	729	(1,430)
Expense:
Interest expense	4,487	123	4,610
Fee and commission expense	795	60	855
Operating expense	5,983	713	6,696
Other expense, net	105	185	290
TOTAL EXPENSE	11,370	1,081	12,451
NET LOSS BEFORE INCOME TAX	(13,529)	(352)	(13,881)
Income tax benefit	403	10	413
NET LOSS	$(13,126)	$(342)	$(13,468)
OTHER COMPREHENSIVE INCOME/(LOSS)
Change in unrealized gain on investments available-for-sale, net of tax effect	$-	$(168)	$(168)
Foreign currency translation adjustments, net of tax effect	1,529	1,602	3,131
COMPREHENSIVE INCOME/(LOSS)	$(11,597)	$1,092	$(10,505)

 

 

	For the nine months ended December 31, 2017
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME (RECAST)	As previously reported	Recast	As recasted
Revenue:
Fee and commission income	$6,412	$1,114	$7,526
Net gain on trading securities	30,825	583	31,408
Interest income	6,442	336	6,778
Net gain on derivatives	687	-	687
Net gain on sale of fixed assets	8	(8)	-
Net gain on foreign exchange operations	1,957	32	1,989
TOTAL REVENUE, NET	46,331	2,057	48,388
Expense:
Interest expense	9,499	326	9,825
Fee and commission expense	1,474	173	1,647
Operating expense	12,113	2,036	14,149
Other expense, net	131	150	281
TOTAL EXPENSE	23,217	2,685	25,902
NET INCOME BEFORE INCOME TAX	23,114	(628)	22,486
Income tax expense	(584)	32	(552)
NET INCOME	$22,530	$(596)	$21,934
OTHER COMPREHENSIVE INCOME
Change in unrealized gain on investments available-for-sale, net of tax effect	$-	$(121)	$(121)
Foreign currency translation adjustments, net of tax effect	(2,809)	(441)	(3,250)
COMPREHENSIVE INCOME	$19,721	$(1,158)	$18,563

 

 

NOTE 4 – CASH AND CASH EQUIVALENTS

 

	December 31, 2018	March 31, 2018  (Recast)
Securities purchased under reverse repurchase agreements	$11,466	$27,389
Current accounts with brokers	12,090	22,749
Current accounts with commercial banks	4,148	9,032
Current account with Central Bank (Russia)	3,151	980
Current account with Central Depository (Kazakhstan)	2,564	1,280
Current account with National Settlement Depository (Russia)	2,432	1,244
Petty cash in bank vault and on hand	2,091	2,712
Accounts with stock exchanges	1,882	214
Current accounts in clearing organizations	1,601	131
Total cash and cash equivalents	$41,425	$65,731

 

As of December 31, 2018 and March 31, 2018, cash and cash equivalents were not insured.

 

As of December 31, 2018 and March 31, 2018, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:

 

	December 31, 2018
	Interest rates and remaining contractual maturity of the agreements
	Average Interest rate	Up to 30 days	30-90 days	Total
Securities purchased under reverse repurchase agreements
Corporate equity	10.16%	$7,960	$791	$8,751
Corporate debt	14.00%	115	-	115
Non-US sovereign debt	8.25%	2,600	-	2,600
Total		$10,675	$791	$11,466

	March 31, 2018 (Recast)
	Interest rates and remaining contractual maturity of the agreements
	Average Interest rate	Up to 30 days	30-90 days	Total
Securities purchased under reverse repurchase agreements
Corporate equity	14.99%	$11,095	$15,572	$26,667
Corporate debt	14.96%	521	201	722
Total		$11,616	$15,773	$27,389

 

The securities received by the Company as collateral under reverse repurchase agreements are liquid trading securities with market quotes and significant trading volume. The fair value of collateral received by the Company under reverse repurchase agreements as of December 31, 2018 and March 31, 2018, was $13,246 and $28,311, respectively. For additional information please see Note 10 – Securities sold, not yet purchased – at fair value.

 

 

NOTE 5 – RESTRICTED CASH

 

As of December 31, 2018 and March 31, 2018, the Company’s restricted cash consisted of deferred distribution payments, cash segregated in a special custody account for the exclusive benefit of our brokerage customers and required reserves with the Central Bank of the Russian Federation which represents cash on hand balance requirements. The deferred distribution payment amount is a reserve held for distribution to shareholders who have not yet claimed their distributions from the 2011 sale of the Company’s oil and gas exploration and production operations of $8,534. This distribution is currently payable, subject to the entitled shareholders 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, any entitled shareholder will submit the necessary documentation to claim his, her, or its distribution payment.

 

Restricted cash consisted of:

	December 31, 2018	March 31, 2018 (Recast)
Brokerage customers’ cash	$17,544	$12,963
Deferred distribution payments	8,534	8,534
Reserve with Central Bank of Russia	673	115
Guaranty deposits	352	350
Total restricted cash	$27,103	$21,962

 

NOTE 6 – TRADING SECURITIES

 

As of December 31, 2018, and March 31, 2018, trading securities consisted of:

 

	December 31, 2018	March 31, 2018 (Recast)
Equity securities	$96,778	$177,339
Debt securities	57,529	34,986
Mutual investment funds	235	270
Total trading securities	$154,542	$212,595

 

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:

 

 

There was a transfer between Level 1 and Level 3 valuation techniques during the three and nine months ended December 31, 2018, in the amount of $508. This transfer is related to corporate bonds of one issuer, which was made due to an absence of market prices from stock exchanges. As of December 31, 2018, fair value of these bonds was determined based on the discounted cash flows methodology.

 

The following tables present trading securities assets in the condensed consolidated financial statements at fair value on a recurring basis as of December 31, 2018 and March 31, 2018:

 

		Fair Value Measurements at December 31, 2018 using
	December 31,	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
	2018	(Level 1)	(Level 2)	(Level 3)
Equity securities	$96,778	$96,778	$-	$-
Debt securities	57,529	57,021	-	508
Mutual investment funds	235	235	-	-
Total trading securities	$154,542	$154,034	$-	$508

 

		Fair Value Measurements at March 31, 2018 (Recast) using
	March 31, 2018	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
	(Recast)	(Level 1)	(Level 2)	(Level 3)
Equity securities	$177,339	$177,339	$-	$-
Debt securities	34,986	34,986	-	-
Mutual investment funds	270	270	-	-
Total trading securities	$212,595	$212,595	$-	$-

  

 

NOTE 7 – BROKERAGE AND OTHER RECEIVABLES, NET

 

	December 31,	March 31, 2018
	2018	(Recast)
Margin lending receivables	$26,533	$17,276
Receivables from the sale of securities	26,261	6,061
Receivables from brokerage clients	421	738
Receivables for underwriting and market-making services	92	79
Bank commissions receivable	-	1,016
Bonds coupon receivable	-	119
Other receivables	200	20
Allowance for receivables	(668)	(424)
Total brokerage and other receivables, net	$52,839	$24,885