Freedom Holding Corp. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2019

 

OR

 

 

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)

 

+7 727 311 10 64

(Registrant's telephone number, including area code)

 

Securities registered under Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common		FRHC		The Nasdaq Capital Market

 

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 files). Yes ☒ No ☐

 

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

 

 

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	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 November 12, 2019, the registrant had 58,153,212 shares of common stock, par value $0.001, issued and outstanding.

 

 

FREEDOM HOLDING CORP.

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION	Page
Item 1. Unaudited Condensed Consolidated Financial Statements	2
Condensed Consolidated Balance Sheets as of September 30, 2019 and March 31, 2019	2
Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) for the Three Months and Six Months Ended September 30, 2019 and 2018	3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2019 and 2018	4
Condensed Consolidated Statements of Shareholders’ Equity for the Six Months Ended September 30, 2019 and 2018	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3. Qualitative and Quantitative Disclosures About Market Risk	42
Item 4. Controls and Procedures	42
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	43
Item 1A. Risk Factors	43
Item 6. Exhibits	43
Signatures	44

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

 

	September 30, 2019	March 31, 2019
ASSETS
Cash and cash equivalents	$80,875	$49,960
Restricted cash	51,177	38,460
Trading securities	163,823	167,949
Available-for-sale securities, at fair value	8,588	2
Brokerage and other receivables, net	76,883	73,836
Loans issued	6,756	2,525
Deferred tax assets	599	1,265
Fixed assets, net	6,001	5,563
Intangible assets, net	3,821	4,226
Goodwill	2,914	2,936
Operating lease right-of-use assets	14,472	-
Other assets, net	9,732	4,189
TOTAL ASSETS	$425,641	$350,911
LIABILITIES AND STOCKHOLDERS’ EQUITY
Securities sold, not yet purchased – at fair value	$3,631	$-
Derivative liability	80	-
Loans received	89	4,008
Debt securities issued	26,776	28,538
Customer liabilities	150,615	82,032
Trade payables	9,000	32,695
Deferred distribution payments	8,534	8,534
Securities repurchase agreement obligations	70,717	73,621
Current income tax liability	2,609	754
Operating lease obligations	15,979	-
Other liabilities	3,492	3,132
TOTAL LIABILITIES	291,522	233,314
Commitments and Contingent Liabilities	-	-
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; 58,093,212 and 58,043,212 shares issued and outstanding as of September 30, 2019 and March 31, 2019, respectively	58	58
Additional paid in capital	101,247	99,093
Retained earnings	56,966	41,498
Accumulated other comprehensive loss	(24,458)	(23,052)
TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY	133,813	117,597
Noncontrolling interest	306	-
TOTAL STOCKHOLDERS’ EQUITY	134,119	117,597
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$425,641	$350,911

 

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

 

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 September 30,		Six months ended September 30,
	2019	2018	2019	2018
Revenue:
Fee and commission income	$26,363	$12,786	$48,955	$18,759
Net gain on trading securities	3,947	4,317	6,509	1,028
Interest income	1,805	1,474	5,936	8,847
Net gain/(loss) on foreign exchange operations	875	(1,138)	839	(3,248)
TOTAL REVENUE, NET	32,990	17,439	62,239	25,386
Expense:
Interest expense	3,201	3,678	6,809	8,291
Fee and commission expense	4,512	968	8,543	1,733
Operating expense	13,921	10,044	26,606	19,155
(Recovery)/ provision for impairment losses	(395)	109	(1,468)	115
Other expense, net	249	296	557	236
Loss from disposal of subsidiary	-	15	-	15
TOTAL EXPENSE	21,488	15,110	41,047	29,545
NET INCOME/(LOSS) BEFORE INCOME TAX	11,502	2,329	21,192	(4,159)
Income tax expense	(2,866)	(614)	(4,342)	(464)
NET INCOME/(LOSS)	8,636	1,715	16,850	(4,623)
Less: Net loss attributable to noncontrolling interest in subsidiary	(129)	-	(129)	-
NET INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$8,765	$1,715	$16,979	$(4,623)
OTHER COMPREHENSIVE INCOME/(LOSS)
Change in unrealized gain on available-for-sale securities, net of tax effect	$27	$-	$27	$-
Reclassification adjustment relating to available-for-sale securities disposed of in the period, net of tax effect	-	-	-	22
Foreign currency translation adjustments, net of tax effect	(2,076)	(5,523)	(1,433)	(12,240)
COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS	$6,587	$(3,808)	$15,444	$(16,841)
Less: Comprehensive loss attributable to noncontrolling interest in subsidiary	(129)	-	(129)	-
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$6,716	$(3,808)	$15,573	$(16,841)
BASIC NET INCOME/(LOSS) PER COMMON SHARE (In US Dollars)	$0.15	$0.03	$0.29	$(0.08)
DILUTED NET INCOME/(LOSS) PER COMMON SHARE (In US Dollars)	$0.15	$0.03	$0.29	$(0.08)
Weighted average number of shares (basic)	58,093,212	58,033,212	58,073,157	58,033,212
Weighted average number of shares (diluted)	58,309,147	58,213,477	58,280,178	58,213,728

 

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

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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

 

	For the six months ended
	September 30, 2019	September 30, 2018
Cash Flows From Operating Activities
Net income/(loss)	$16,850	$(4,623)
Adjustments to reconcile net income/(loss) from operating activities:
Depreciation and amortization	1,382	819
Depreciation of lease assets	2,164	-
Loss on sale of fixed assets	201	32
Change in deferred taxes	670	(173)
Stock compensation expense	1,554	1,686
Share based payment	836	-
Unrealized loss on trading securities	247	16,017
Net change in accrued interest	994	134
Allowance for receivables	(1,468)	-
Changes in operating assets and liabilities:
Changes in lease liabilities	(3,104)	-
Trading securities	1,513	24,380
Brokerage and other receivables	150	(53,928)
Loans issued	(4,215)	5,382
Other assets	(5,469)	(218)
Derivative liabilities	80	-
Customer liabilities	69,954	41,284
Current income tax liability	1,852	607
Trade payables	(25,570)	12,237
Securities sold, not yet purchased	3,631	(419)
Other liabilities	254	667
Net cash flows from operating activities	62,506	43,884
Cash Flows From Investing Activities
Purchase of fixed assets	(1,903)	(2,299)
Proceeds from sale of fixed assets	245	283
Proceeds from sale/(purchase) of available-for-sale securities, at fair value	(8,560)	241
Consideration paid for Asyl Invest	-	(2,240)
Net cash flows used in investing activities	(10,218)	(4,015)

 

Cash Flows From Financing Activities
Repurchase of securities repurchase agreement obligations	(1,404)	(61,106)
Proceeds from issuance of debt securities	2,909	17,077
Repurchase of debt securities	(4,441)	(2,794)
Repayment of loans received	(3,919)	(3,055)
Exercise of options	99	-
Capital contributions	-	225
Net cash flows used in financing activities	(6,756)	(49,653)

 

Effect of changes in foreign exchange rates on cash and cash equivalents	(1,900)	(8,539)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	43,632	(18,323)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	88,420	87,693
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$132,052	$69,370

  

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)

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

 

	For the six months ended
	September 30, 2019	September 30, 2018
Supplemental disclosure of cash flow information:
Cash paid for interest	$5,137	$7,736
Income tax paid	$1,825	$416
Supplemental non-cash disclosures:
Operating lease right-of-use assets obtained in exchange for operating lease obligations	$14,960	$-
Lease obligations obtained on adoption of new lease standard	$16,471	$-

 

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

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

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

 

	Common Stock		Additional paid in	Retained	Accumulated other comprehensive	Non-Controlling
	Shares	Amount	capital	earnings	loss	Interest	Total
At March 31, 2018	58,033,212	$58	$100,180	$34,351	$(7,557)	$-	$127,032
Capital contributions	-	-	225	-	-	-	225
Acquisition of Asyl Invest	-	-	(2,240)	-	-	-	(2,240)
Stock based compensation	-	-	1,685	-	-	-	1,685
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect	-	-	-	-	22	-	22
Translation difference	-	-	-	-	(12,240)	-	(12,240)
Net loss	-	-	-	(4,623)	-	-	(4,623)
At September 30, 2018	58,033,212	$58	$99,850	$29,728	$(19,775)	$-	$109,861
At March 31, 2019	58,043,212	$58	$99,093	$41,498	$(23,052)	$-	$117,597
Cumulative-effect adjustment due to adoption of ASU 2016-02(1)	-	-	-	(1,511)	-		(1,511)
Exercise of options	50,000	-	99	-	-	-	99
Stock based compensation	-	-	1,554	-	-	-	1,554
Share based payment	-	-	836	-	-	-	836
Sale of Freedom UA shares	-	-	(335)	-	-	435	100
Change in unrealized gain on available-for-sale securities, net of tax effect	-	-	-	-	27	-	27
Translation difference	-	-	-	-	(1,433)	-	(1,433)
Net income	-	-	-	16,979	-	(129)	16,850
At September 30, 2019	58,093,212	$58	$101,247	$56,966	$(24,458)	$306	$134,119

 

(1) Cumulative-effect adjustment to beginning retained earnings related to the recognition of pre-existing lease liabilities and operating lease right-of-use assets in accordance with ASU 2016-02, adopted as of April 1, 2019.

 

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

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Overview

 

Freedom Holding Corp. (the “Company” or “FRHC”) is a corporation organized in the United States under the laws of the State of Nevada that through its operating subsidiaries provides financial services including retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking and underwriting services in 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 was uplisted from the OTCQX Best Market and began trading on the Nasdaq Capital Market on October 15, 2019.

 

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 Uzbekistan, a Tashkent, Uzbekistan-based broker-dealer (“Freedom UZ”); and FFIN Securities, Inc., a Nevada corporation (“FFIN”).

 

To comply with certain foreign ownership restrictions relating to registered Ukrainian broker-dealers, on August 24, 2019, the Company sold 67.12% of the outstanding equity interest of LLC Freedom Finance Ukraine, a Kiev, Ukraine-based broker-dealer (“Freedom UA”) to Askar Tashtitov, the Company’s president. The Company retained the remaining 32.88% of the outstanding equity interests in Freedom UA. On August 24, 2019, 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. 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, technology resources and expertise to necessary to conduct the business of Freedom UA, the Company accounts for Freedom UA as a variable interest entity (“VIE”) under the accounting standards of the Financial Accounting Standards Board (“FASB”). Accordingly, the financial statements of Freedom UA are consolidated into the financial statements of the Company.

 

The Company’s subsidiaries are participants on the Kazakhstan Stock Exchange (KASE), Astana International Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPB), Ukrainian Exchange (UX), 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.

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

Unless otherwise specifically indicated or as is otherwise contextually required, FRHC, Freedom RU, FFIN Bank, Freedom KZ, Freedom CY, Freedom GE, Freedom UA, Freedom UZ and FFIN are collectively referred to herein as the “Company”.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended September 30, 2019, are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2020.

 

The Condensed Consolidated Balance Sheet at March 31, 2019, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.

 

The Company’s unaudited condensed consolidated financial statements present the consolidated accounts of FRHC, Freedom RU, Freedom KZ, FFIN Bank, Freedom CY, Freedom UA, Freedom UZ, Freedom GE and FFIN. All significant inter-company balances and transactions have been eliminated from the unaudited 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, 2019.

 

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.

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

Use of estimates

 

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

 

Revenue recognition

 

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

 

 

The Company adopted the 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. 

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

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

 

 

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.

 

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

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

Cash and cash equivalents

 

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

 

Securities reverse repurchase and repurchase agreements

 

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

 

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

 

The Company enters into reverse repurchase, repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to leverage and grow its proprietary trading portfolio, cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. The Company enters into these transactions in accordance with normal market practice. Under standard terms for repurchase transactions, the recipient of collateral has the right to sell or repledge the collateral, subject to returning equivalent securities on settlement of the transaction.

 

Available-for-sale securities

 

Financial assets categorized as available-for-sale (“AFS”) are non-derivatives that are either designated as available-for-sale or not classified as (a) loans and receivables, (b) held to maturity investments or (c) trading securities.

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

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 and Statements of other Comprehensive Income/(Loss). Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments’ revaluation reserve is then reclassified to Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss).

 

Trading securities

 

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

 

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

 

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

 

Debt securities issued

 

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

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

Brokerage and other receivables

 

Brokerage and other receivables 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 September 30, 2019 and March 31, 2019, the Company had not recorded any charges for impairment of long-lived assets.

 

Impairment of goodwill

 

As of September 30, 2019 and March 31, 2019, goodwill recorded in the Company’s Condensed Consolidated Balance Sheets totaled $2,914 and $2,936, respectively. The Company performs an impairment review at least annually unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. In its annual goodwill impairment test, the Company estimated the fair value of the reporting unit based on the income approach (also known as the discounted cash flow method) and determined the fair value of the Company’s goodwill exceeded the carrying amount of the Company’s goodwill.

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

The changes in the carrying amount of goodwill as of March 31, 2019 and for the six months ended September 30, 2019 were as follows:

 

Balance as of March 31, 2019	$2,936
Foreign currency translation	(22)
Balance as of September 30, 2019	$2,914

 

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 September 30, 2019 and March 31, 2019, the Company had no accrued interest or penalties related to uncertain tax positions.

 

The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has presented the deferred tax impacts of GILTI tax in its condensed consolidated financial statements as of September 30, 2019 and March 31, 2019.

 

Financial instruments  

 

Financial instruments are carried at fair value as described below.

 

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

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases have been classified as either finance or operating, with classification affecting the pattern of expense recognition in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss). The new standard also requires disclosures that provide additional information on recorded lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases –Targeted Improvements, which provides an optional transition method that allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

 

The Company adopted the provisions of ASU 2018-11, including the optional transition method, on April 1, 2019. Operating lease assets and corresponding lease liabilities were recognized on the Company’s unaudited condensed consolidated statements of balance sheets. Refer to Note 18 - Leases, within the notes to the unaudited condensed 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.

 

Recent accounting pronouncements

 

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

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

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

 

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 condensed consolidated financial statements. This guidance was effective immediately upon issuance.

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

NOTE 3 – CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents consist of the following:

 

	September 30, 2019	March 31, 2019
Accounts with stock exchanges	$24,333	$10,507
Current accounts with commercial banks	21,517	6,656
Securities purchased under reverse repurchase agreements	11,363	7,887
Petty cash in bank vault and on hand	4,938	2,674
Current accounts in clearing organizations	4,510	5,887
Current account with Central Depository (Kazakhstan)	4,202	2,693
Current accounts with brokers	4,165	10,220
Current account with National Settlement Depository (Russia)	3,502	1,275
Current account with Central Bank (Russia)	2,345	2,161
Total cash and cash equivalents	$80,875	$49,960

 

As of September 30, 2019 and March 31, 2019, cash and cash equivalents were not insured.

 

As of September 30, 2019 and March 31, 2019, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:

 

	September 30, 2019
	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	10.98%	$9,894	$-	$9,894
Corporate debt	12.75%	1,469	-	1,469
Total		$11,363	$-	$11,363

 

	March 31, 2019
	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	11.90%	$4,328	$804	$5,132
Corporate debt	14.00%	120	-	120
Non-U.S. sovereign debt	8.25%	2,635	-	2,635
Total		$7,083	$804	$7,887

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(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 September 30, 2019 and March 31, 2019, was $11,557 and $8,472, respectively.

 

NOTE 4 – RESTRICTED CASH

 

As of September 30, 2019 and March 31, 2019, 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. In June 2019 the Company invested the $8,534 held for deferred distribution payments into certain financial instruments. For additional information regarding funds held for deferred distribution payments, see Note 5 - Trading and Available-For-Sale Securities at Fair Value.

 

Restricted cash consisted of:

 

	September 30, 2019	March 31, 2019
Brokerage customers’ cash	$47,083	$28,931
Guaranty deposits	3,601	732
Reserve with Central Bank of Russia	493	263
Deferred distribution payments	-	8,534
Total restricted cash	$51,177	$38,460

 

NOTE 5 – TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE

 

As of September 30, 2019 and March 31, 2019, trading and available-for-sale securities consisted of:

 

	September 30, 2019	March 31, 2019
Equity securities	$101,058	$105,017
Debt securities	62,765	62,691
Mutual investment funds	-	241
Total trading securities	$163,823	$167,949
Certificates of deposit	$7,012	$-
Mutual investment funds	690	-
Debt securities	567	-
Preferred shares	317	-
Equity securities	2	2
Total available-for-sale securities, at fair value	$8,588	$2

 

The Company recognized no other than temporary impairment in accumulated other comprehensive income.

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

The fair value of 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:

 

 

The following tables present trading and available-for-sale securities assets in the condensed consolidated financial statements at fair value on a recurring basis as of September 30, 2019 and March 31, 2019:

 

		Fair Value Measurements at
		September 30, 2019 using
		Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
	September 30, 2019	(Level 1)	(Level 2)	(Level 3)
Equity securities	$101,058	$101,058	$-	$-
Debt securities	62,765	62,765	-	-
Total trading securities	$163,823	$163,823	$-	$-
Certificates of deposit	$7,012	$-	$7,012	$-
Mutual investment funds	690	690	-	-
Debt securities	567	-	567	-
Preferred shares	317	-	317	-
Equity securities	2	-	-	2
Total available-for-sale securities, at fair value	$8,588	$690	$7,896	$2

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

		Fair Value Measurements at March 31, 2019 using
	March 31,	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
	2019	(Level 1)	(Level 2)	(Level 3)
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, 2019. The table is not intended to be all inclusive, but instead captures the significant unobservable inputs relevant to determination of fair value.

 

Type	Valuation Technique	FV as of March 31, 2019	Significant Unobservable Inputs	%
Corporate bonds	DCF	$504	Discount rate	11.3%

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended September 30, 2019:

 

	Trading securities	Available for sale securities
Balance as of March 31, 2019	$504	$2
Sale of investments that use Level 3 inputs	(497)	-
Foreign currency translation	(7)	-
Balance as of September 30, 2019	$-	$2

 

	September 30, 2019
	Assets measured at amortized cost	Unrealized gain/(loss) accumulated in other comprehensive income/(loss)	Assets measured at fair value
Certificates of deposit	$7,002	$10	$7,012
Mutual investment funds	685	5	690
Debt securities	569	(2)	567
Preferred shares	304	13	317
Equity securities	1	1	2
Available-for-sale securities, at fair value	$8,561	$27	$8,588

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

	March 31, 2019
	Assets measured at amortized cost	Unrealized gain accumulated in other comprehensive income/(loss)	Assets measured at fair value
Equity securities	$1	$1	$2
Available-for-sale securities, at fair value	$1	$1	$2

 

Of the available-for-sale securities, $8,534 is held as a reserve 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. These funds are 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.

 

NOTE 6 – BROKERAGE AND OTHER RECEIVABLES, NET

 

	September 30, 2019	March 31, 2019
Margin lending receivables	$74,440	$46,716
Receivables from purchase or sale of securities	1,768	27,684
Receivables from brokerage clients	331	824
Dividends accrued	16	108
Other receivables	464	130
Allowance for receivables	(136)	(1,626)
Total brokerage and other receivables, net	$76,883	$73,836

 

On September 30, 2019 and March 31, 2019, amounts due from a single related party customer were $55,489 and $31,792, respectively or 72% and 43%, respectively of total brokerage and other receivables, net. Based on experience, the Company considers receivables due from related parties fully collectible. As of September 30, 2019 and March 31, 2019, using historical and statistical data, the Company recorded an allowance for brokerage receivables in the amount of $136 and $1,626, respectively.

 

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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