FREEDOM HOLDING CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS (
Unaudited
)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
|
|
|
|
ASSETS
|
|
|
Cash
and cash equivalents
|
$
34,847
|
$
22,616
|
Restricted
cash
|
14,138
|
12,749
|
Trading
securities
|
199,207
|
81,575
|
Available-for-sale
securities, at fair value
|
2
|
2
|
Brokerage
and other receivables
|
2,922
|
514
|
Loans
issued
|
250
|
65
|
Deferred
tax assets
|
325
|
1,026
|
Fixed
assets
|
2,028
|
1,096
|
Goodwill
|
1,856
|
981
|
Other
assets
|
3,271
|
739
|
|
|
|
TOTAL ASSETS
|
$
258,846
|
$
121,363
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Derivative
liability
|
$
-
|
$
495
|
Debt
securities issued
|
10,625
|
3,459
|
Customer
liabilities
|
13,911
|
7,635
|
Current
income tax liability
|
-
|
149
|
Trade
payables
|
2,218
|
545
|
Deferred
distribution payments
|
8,534
|
8,534
|
Securities
repurchase agreement obligation
|
137,436
|
56,289
|
Other
liabilities
|
599
|
370
|
TOTAL LIABILITIES
|
173,323
|
77,476
|
|
|
|
Commitments and Contingencies (Note 17)
|
-
|
-
|
|
|
|
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; 52,606,600
shares outstanding as of December 31, 2017 and 11,213,926 shares
outstanding as of March 31, 2017, respectively
|
52
|
11
|
Additional
paid in capital
|
56,533
|
34,659
|
Retained
earnings
|
38,684
|
16,154
|
Accumulated
other comprehensive loss
|
(9,746
)
|
(6,937
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
85,523
|
43,887
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
258,846
|
$
121,363
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
|
* See
Notes 1 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, unless
otherwise stated)
|
Three months
ended December 31,
|
Nine months
ended December 31,
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Fee
and commission income
|
$
1,999
|
$
1,116
|
$
6,412
|
$
2,462
|
Net
gain/(loss) on trading securities
|
(8,318
)
|
1,164
|
30,825
|
4,583
|
Interest
income
|
2,853
|
724
|
6,442
|
1,710
|
Net
gain on derivatives
|
867
|
-
|
687
|
-
|
Net
gain on sale of fixed assets
|
16
|
-
|
8
|
28
|
Net
gain/(loss) on foreign exchange operations
|
424
|
(138
)
|
1,957
|
296
|
|
|
|
|
|
TOTAL REVENUE, NET
|
(2,159
)
|
2,866
|
46,331
|
9,079
|
|
|
|
|
|
Expense:
|
|
|
|
|
Interest
expense
|
4,487
|
1,120
|
9,499
|
2,472
|
Fee
and commission expense
|
795
|
129
|
1,474
|
216
|
Operating
expense
|
5,983
|
2,461
|
12,113
|
6,694
|
Other
expense, net
|
105
|
141
|
131
|
267
|
|
|
|
|
|
TOTAL EXPENSE
|
11,370
|
3,851
|
23,217
|
9,649
|
NET
INCOME/(LOSS) BEFORE INCOME TAX
|
(13,529
)
|
(985
)
|
23,114
|
(570
)
|
|
|
|
|
|
Income
tax (expense)/benefit
|
403
|
413
|
(584
)
|
960
|
|
|
|
|
|
NET INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS
|
$
(13,126
)
|
$
(572
)
|
$
22,530
|
$
390
|
|
|
|
|
|
Less:
Net income attributable to noncontrolling interest in
subsidiary
|
-
|
-
|
-
|
7
|
NET INCOME/(LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS
|
(13,126
)
|
(572
)
|
22,530
|
383
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
Change
in unrealized gain on investments available-for-sale,
net
of tax effect
|
-
|
(276
)
|
-
|
(270
)
|
Foreign
currency translation adjustments, net of tax
|
1,529
|
453
|
(2,809
)
|
1,933
|
|
|
|
|
|
COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING
INTERESTS
|
$
(11,597
)
|
$
(395
)
|
$
19,721
|
$
2,053
|
|
|
|
|
|
Less:
Comprehensive income attributable to noncontrolling interest in
subsidiary
|
-
|
-
|
-
|
7
|
|
|
|
|
|
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS
|
$
(11,597
)
|
$
(395
)
|
$
19,721
|
$
2,046
|
BASIC
AND DILUTED NET INCOME/(LOSS) PER COMMON SHARE (In US
Dollars)
|
$
(0.29
)
|
$
(0.05
)
|
$
0.86
|
$
0.03
|
Weighted
average shares outstanding
|
45,018,578
|
11,213,926
|
26,341,542
|
11,213,926
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
* See
Notes 1 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
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
Net
income
|
$
22,530
|
$
390
|
|
|
|
Adjustments to
reconcile net income used in operating activities:
|
|
|
Depreciation and
amortization
|
198
|
156
|
Change in deferred
taxes
|
672
|
(974
)
|
Stock compensation
expense
|
792
|
-
|
Unrealized gain on
trading securities
|
(19,542
)
|
(2,837
)
|
Net gain on
derivative
|
(490
)
|
-
|
Changes in
operating assets and liabilities:
|
|
|
Trading
securities
|
(105,258
)
|
(32,179
)
|
Brokerage and other
receivables
|
(2,161
)
|
(236
)
|
Loans
issued
|
(185
)
|
21
|
Other
assets
|
(2,532
)
|
(7
)
|
Customer
liabilities
|
6,215
|
2,278
|
Current income tax
liability
|
(144
)
|
(50
)
|
Trade
payables
|
1,381
|
64
|
Securities
repurchase agreement obligation
|
85,814
|
27,121
|
Other
liabilities
|
602
|
(91
)
|
|
|
|
Net
cash flows used in operating activities
|
(12,108
)
|
(6,344
)
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
Purchase of fixed
assets
|
(1,125
)
|
(145
)
|
Acquisition of
Freedom UA, net of cash received
|
432
|
-
|
Proceeds from sale
of fixed assets
|
8
|
13
|
Acquisition of FFIN
Bank
|
-
|
(2,771
)
|
Proceeds on sale of
investments available-for-sale
|
-
|
140
|
Net
cash flows used in investing activities
|
(685
)
|
(2,763
)
|
Cash
Flows From Financing Activities
|
|
|
Proceeds from
issuance of debt securities
|
9,853
|
6,618
|
Repurchase of debt
securities
|
(2,449
)
|
(2,425
)
|
Proceeds from
issuance of common stock
|
-
|
6,574
|
Proceeds from
private placement
|
11,045
|
-
|
Capital
contributions
|
8,594
|
368
|
|
|
|
Net
cash flows from financing activities
|
27,043
|
11,135
|
Effect of changes
in foreign exchange rates on cash
and cash
equivalents
|
(630
)
|
2,182
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
13,620
|
4,210
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
35,365
|
19,380
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
48,985
|
$
23,590
|
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
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
Cash paid for
interest
|
$
8,467
|
$
2,287
|
Income tax
paid
|
$
583
|
$
124
|
Non-cash
investing and financing activities:
Common stock issued
for acquisition of Freedom UA
|
$
1,485
|
$
-
|
Assets
received from acquisition of Freedom UA
|
$
1,229
|
$
-
|
Liabilities
assumed from acquisition of Freedom UA
|
$
176
|
$
-
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
|
* See
Notes 1 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. is a Nevada corporation (“FRHC”). In
2015, FRHC entered into a Share Exchange and Acquisition Agreement
with Timur Turlov (the “Acquisition Agreement”) to
acquire several businesses owned by Timur Turlov in exchange for
controlling interest in FRHC. As the acquisitions are completed
these businesses have become operating subsidiaries of FRHC. FRHC
is building an international brokerage, banking, and financial
services firm to meet the demand of a growing number of investors
in Russia, Kazakhstan, Ukraine, Kyrgyzstan and Cyprus that desire
financial services integration and greater access to the financial
opportunities, relative stability, and integrity of the U.S.
securities markets.
Pursuant
to the Acquisition Agreement, FRHC acquired FFIN Securities, Inc.,
a Nevada corporation, (“FFIN”) from Timur Turlov and
controlling interest in FRHC was transferred to him. FFIN was
established to create or acquire a registered broker-dealer in the
United States. At the same time, FRHC began upgrading the financial
reporting capabilities of its foreign acquisition candidates to
meet the regulatory standards imposed upon FRHC as an SEC
registrant and pursuing the governmental approvals to permit FRHC
ownership of the acquisition candidates.
In June
2017, FRHC closed the acquisition of LLC Investment Company Freedom
Finance, a Russian limited liability company (“Freedom
RU”) as a wholly owned subsidiary. This acquisition included
the acquisition of three wholly owned operating subsidiaries of
Freedom RU, including JSC Freedom Finance, a Kazakhstan joint stock
company (“Freedom KZ”), LLC First Stock Store, a
Russian limited liability company (“Freedom 24”) and
LLC FFIN Bank, a Russian limited liability company (“FFIN
Bank”). Freedom RU also maintains a representative office in
Kazakhstan, referred to herein as “KZ
Branch.”
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
On
November 1, 2017, FRHC received notification from the Cyprus
Securities and Exchange Commission (“CySEC”) that it
had granted final regulatory approval to allow Timur Turlov to
transfer ownership of Freedom CY and the securities brokerage and
financial services business conducted by it in Cyprus to FRHC.
Receipt of CySEC approval was the final condition necessary to
close the acquisition of Freedom CY and the parties closed the
acquisition of Freedom CY on November 10, 2017. In exchange for his
100% equity interest in Freedom CY and the securities brokerage and
financial services business conducted by it in Cyprus, Mr Turlov
was issued 12,758,011 shares of FRHC common stock at the closing of
the acquisition and Freedom CY became a wholly owned subsidiary of
FRHC.
On
November 1, 2017, FRHC entered into a Share Exchange and
Acquisition Agreement with BusinessTrain Ltd. to acquire 100% of
the outstanding equity interest of LLC Freedom Finance Ukraine, a
Ukrainian limited liability company, formerly known as FC Ukranet
LLC, (“Freedom UA”) and the securities brokerage
business conducted by it in Ukraine in exchange for 387,700 shares
of restricted common stock of FRHC. Completion of the acquisition
required approval of the National Securities and Stock Market
Commission of Ukraine, which was received on January 30,
2018.
Freedom
RU provides brokerage and financial services in the capital markets
in Russia, including maintaining customer accounts, managing
investment portfolios, providing financial consulting and engaging
in market making activities. Freedom KZ is licensed to provide
brokerage and financial services in the capital markets of
Kazakhstan, including the right to maintain customer accounts,
manage investment portfolios, provide financial consulting, provide
underwriting services and engage in market making activities. We
formed Freedom 24, as a startup to build and manage the first
online securities marketplace for retail customers in Russia.
Freedom 24 attracts new brokerage clients to Freedom RU through a
proprietary platform and internet portal for individual investors
in Russia to establish a brokerage account and buy securities. FFIN
Bank is licensed to engage in consumer banking operations in the
Russian Federation and focuses on provided banking services to the
customers of the Company’s subsidiaries. Freedom CY is
licensed in Cyprus to provide brokerage and financial services in
Cyprus including receiving, transmitting and executing customer
orders, establishing custodial accounts, engaging in foreign
currency exchange services and margin lending, and trading its own
investment portfolio. Freedom UA is licensed to provide securities
brokerage and depository services in Ukraine.
Unless
otherwise specifically indicated or as is otherwise contextually
required, FRHC, FFIN, Freedom RU, Freedom KZ, FFIN Bank, Freedom
CY, Freedom UA, Freedom 24 and KZ Branch are collectively referred
to herein as the “Company”.
Note 2 – Summary of Significant Accounting
Policies
Accounting principles
The
Company’s accounting policies and accompanying condensed
consolidated financial statements conform to accounting principles
generally accepted in the United States of America (US
GAAP).
These
financial statements have been prepared on the accrual basis of
accounting.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Basis of presentation
The
Company’s condensed consolidated financial statements present
the consolidated accounts of FRHC, FFIN, Freedom RU, Freedom KZ,
Freedom 24, FFIN Bank, Freedom CY, Freedom UA and KZ Branch. All
significant inter-company balances and transactions have been
eliminated from the condensed consolidated financial
statements.
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 8-03 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by US GAAP for complete financial statements. In
the opinion of management of the Company, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included.
These
condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s 2017 Annual Report on
Form 10-K for the year ended March 31, 2017, which was filed with
the Securities and Exchange Commission (the
“Commission”) on June 30, 2017. The condensed
consolidated financial information as of March 31, 2017, has been
derived from the audited consolidated financial statements not
included herein. Operating results for the nine-month period ended
December 31, 2017 are not necessarily indicative of the results
that may be expected for the year ending 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 and expense recognition
The
Company earns interest and noninterest income from its proprietary
trading accounts from various sources, including:
●
Securities,
derivatives and foreign exchange activities;
●
Reverse repurchase
agreements; and
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Revenue
earned on interest-earning assets, including unearned income and
the amortization/ accretion of premiums or discounts recognized on
debt securities, bank deposits and loans issued is recognized based
on the constant effective yield of the financial instrument or
based on other applicable accounting guidance.
Gains
and losses on the sale of securities and certain derivatives are
recognized on a trade-date basis.
The
Company earns fees and commissions from its customers
from:
●
Providing brokerage
services;
●
Providing banking
services (money transfers, foreign exchange operations and other);
and
The
Company also earns revenues from investment banking, underwriting,
market making, and bondholders’ representation
services.
Service
charges on brokerage, banking, agency, investment banking and
market making services, are recognized when earned. Brokerage fees
are recognized on a trade-date basis.
The
Company recognizes revenue when four basic criteria have been
met:
●
Existence of
persuasive evidence that an arrangement exists;
●
Delivery has
occurred or services have been rendered;
●
The seller’s
price to the buyer is fixed and determinable; and
●
Collectability is
reasonably assured.
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 condensed consolidated
balance sheet.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
Company purchases foreign
currency futures contracts from financial
institutions to minimize the risk caused by foreign currency
fluctuation on its foreign currency receivables and payables and
also purchases foreign currency futures contracts for speculative
purposes. Futures are traded on the Kazakhstan Stock Exchange and
represent commitments to purchase or sell a particular foreign
currency at a future date and at a specific price.
All
gains and losses on foreign currency contracts were realized during
nine months ended December 31, 2017 and are included in net gain on
derivatives in the Condensed Consolidated Statements of Operations
and Statements of Other Comprehensive Income/(Loss). The contracts
have varying maturities of less than one year.
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, Euro, Ukrainian
hryvnia and Kazakhstani tenge, and its reporting currency is the US
dollar. Monetary assets and liabilities denominated in foreign
currencies are translated into US dollars using the exchange rate
prevailing at the balance sheet date. Non-monetary assets and
liabilities denominated in foreign currencies are translated at
rates of exchange in effect at the date of the transaction. Average
monthly rates are used to translate revenues and expenses. Gains
and losses arising on translation or settlement of foreign currency
denominated transactions or balances are included in
revenue.
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.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
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, repurchase
agreements, securities borrowed and securities loaned transactions
to, among other things, acquire securities to cover short positions
and settle other securities obligations, to accommodate
customers’ needs and to finance its inventory
positions.
The Company enters into these transactions in
accordance with normal market practice. Under standard terms for
repurchase transactions, the recipient of collateral has the right
to sell or repledge the collateral, subject to returning equivalent
securities on settlement of the transaction.
Available-for-sale securities
Financial
assets categorized as available-for-sale (“AFS”) are
non-derivatives that are either designated as available-for-sale or
not classified as (a) loans and receivables, (b) held to maturity
investments or (c) trading securities.
Listed
shares and listed redeemable notes held by the Company that are
traded in an active market are classified as AFS and are stated at
fair value. The Company has investments in unlisted shares that are
not traded in an active market but that are also classified as
investments AFS and stated at fair value (because Company
management considers that fair value can be reliably measured).
Gains and losses arising from changes in fair value are recognized
in other comprehensive income and accumulated in the investments
revaluation reserve, with the exception of other-than-temporary
impairment losses, interest calculated using the effective interest
method, dividend income and foreign exchange gains and losses on
monetary assets, 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 reclassified to profit or
loss.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Trading securities
Financial
assets are classified as trading securities if the financial asset
has been acquired principally for the purpose of selling it in the
near term.
Trading
securities are stated at fair value, with any gains or losses
arising on remeasurement recognized in revenue. Changes in fair
value are recognized in the 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 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.
Brokerage and other receivables
Brokerage
and other receivables comprise commissions and receivables related
to the securities brokerage and banking activity of the Company. At
initial recognition, brokerage and other receivables are recognized
at fair value. Subsequently, brokerage and other receivables are
carried at cost net of any allowance for impairment
losses.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Impairment of long lived assets
In
accordance with the accounting guidance for the impairment or
disposal of long-lived assets, the Company periodically evaluates
the carrying value of long-lived assets to be held and used when
events and circumstances warrant such a review. The carrying value
of a long-lived asset is considered impaired when the fair value
from such asset is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value
exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows discounted at
a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except
that fair values are reduced for the cost of disposal. As of
December 31, 2017 and March 31, 2017, the Company had not recorded
any charges for impairment of long-lived assets.
Impairment of goodwill
As of
December 31, 2017, and March 31, 2017, goodwill recorded in the
Company’s Condensed Consolidated Balance Sheets totaled
$1,856 and $981, 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, 2017 and March 31, 2017, the Company had no accrued
interest or penalties related to uncertain tax
positions.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
On
December 22, 2017, the U.S. bill commonly referred to as the Tax
Cuts and Jobs Act (“Tax Reform Act”) was enacted, which
significantly changes U.S. tax law by, among other things, lowering
corporate income tax rates, implementing a territorial tax system
and imposing a repatriation tax on deemed repatriated earnings of
foreign subsidiaries. The Tax Reform Act permanently reduces the
U.S. corporate income tax rate from a maximum of 35% to a flat 21%
rate, effective January 1, 2018. The Tax Reform Act also
provided for a one-time deemed repatriation of post-1986
undistributed foreign subsidiary earnings and profits
(“E&P”) through the year ended December 31, 2017.
The Global Intangible Low-Taxed Income ("GILTI") provisions of the
Tax Reform Act require the Company to include in its U.S. income
tax return foreign subsidiary earnings in excess of an allowable
return on the foreign subsidiary’s tangible assets. The
Company may be subject to incremental U.S. tax on GILTI income
beginning in 2018, depending upon expense allocations and the
applicable U.S. foreign tax credit rules. The Company has elected
to account for GILTI tax in the period in which it is incurred, and
therefore has not provided any deferred tax impacts of GILTI in its
condensed consolidated financial statements for the periods ended
December 31, 2017.
On
December 22, 2017, the SEC staff issued Staff Accounting Bulletin
No. 118 (“SAB 118”) to address the application of U.S.
GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for
certain income tax effects of the Tax Reform Act. The Company has
considered the provisional tax impacts related to deemed
repatriated earnings and the benefit for the revaluation of
deferred tax assets and liabilities, on its consolidated financial
statements for the periods ended December 31, 2017. The final
impact may differ from these provisional amounts, possibly
materially, due to, among other things, additional analysis,
changes in interpretations and assumptions the Company has made,
additional regulatory guidance that may be issued, and actions the
Company may take as a result of the Tax Reform Act. In accordance
with SAB 118 the financial reporting impact of the Tax Reform Act
will be completed in the fourth quarter of 2018.
Financial instruments
Financial
instruments a
re 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
Rent payable under operating leases is charged to expense on a
straight-line basis over the term of the relevant
lease.
Recent accounting pronouncements
In July
2017, the FASB issued ASU No. 2017-11, “Earnings Per Share
(Topic 260)-Distinguishing Liabilities from Equity (Topic
480)-Derivatives and Hedging (Topic 815)”. This ASU addresses
narrow issues identified as a result of the complexity associated
with applying US GAAP for certain financial instruments with
characteristics of liabilities and equity. The amendments in Part I
of this update that relate to liability or equity classification of
financial instruments (or embedded features) affect all entities
that issue financial instruments (for example, warrants or
convertible instruments) that include down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. For
freestanding equity classified financial instruments, the
amendments require entities that present earnings per share (EPS)
in accordance with Topic 260 to recognize the effect of the down
round feature when it is triggered. That effect is treated as a
dividend and as a reduction of income available to common
shareholders in basic EPS. For public business entities, the
amendments in Part I of this ASU No. 2017-11 are effective for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. Early adoption is permitted for
all entities. The Company is currently evaluating the impact of the
new guidance on its 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
August 2017, the FASB issued ASU No. 2017-12, Derivatives and
Hedging (Topic 815) Targeted Improvements to Accounting for Hedging
Activities. The amendments in this update better align an
entity’s risk management activities and financial reporting
for hedging relationships through changes to both the designation
and measurement guidance for qualifying hedging relationships and
the presentation of hedge results. To meet that objective, the
amendments expand and refine hedge accounting for both nonfinancial
and financial risk components and align the recognition and
presentation of the effects of the hedging instrument and the
hedged item in the financial statements. The amendments in this
update apply to any entity that elects to apply hedge accounting in
accordance with current GAAP. For public business entities, the
amendments in this Update are effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal
years. Early application is permitted in any interim period after
issuance of the update. The Company is currently evaluating the
impact of the new guidance on its consolidated financial
statements.
In
September 2017, the FASB issued ASU No. 2017-13, Revenue
Recognition (Topic 605), Revenue from Contracts with Customers
(Topic 606), Leases (Topic 840), and Leases (Topic 842). ASU
2017-13 essentially delays the effective date of the revenue
recognition and leases standards for a subset of public entities. A
public business entity that otherwise would not meet the definition
of a public business entity except for a requirement to include or
the inclusion of its financial statements or financial information
in another entity’s filing with the SEC would be permitted to
adopt (1) ASC Topic 606 for annual reporting periods beginning
after December 15, 2018, and interim reporting periods within
annual reporting periods beginning after December 15, 2019, and (2)
ASC Topic 842, Leases for fiscal years beginning after December 15,
2019, and interim periods within fiscal years beginning after
December 15, 2020. Such an entity would also be permitted to adopt
ASC Topic 606 and ASC Topic 842 according to the public business
entity effective dates.
In
November 2017, the FASB issued ASU No. 2017-14, Income
Statement—Reporting Comprehensive Income (Topic 220), Revenue
Recognition (Topic 605), and Revenue from Contracts with Customers
(Topic 606). A new Accounting Standards Update (“ASU”)
features amendments to select Securities and Exchange Commission
(“SEC”) paragraphs under the Financial Accounting
Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”). Issued as ASU No. 2017-14, Income
Statement—Reporting Comprehensive Income (Topic 220), Revenue
Recognition (Topic 605), and Revenue from Contracts with Customers
(Topic 606), the standard amends the Accounting Standards
Codification to incorporate the SEC guidance.
Note 3 – Revision of Financial Statement
When
preparing the condensed consolidated financial statements for the
three and nine months ended December 31, 2017, management
determined that certain amounts included in the Company’s
March 31, 2017, consolidated financial statements required
revision, due to closing of the acquisition of Freedom RU on June
29, 2017, and Freedom CY on November 1, 2017, which were deemed to
be entities under common control with the Company. The previously
issued Consolidated Balance Sheet as of March 31, 2017, and
Condensed Consolidated Statement of Operations and Statements of
Other Comprehensive Income/(Loss) for the three-month and
nine-month periods ended December 31, 2016 have been revised as
follows:
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
BALANCE SHEETS (RECAST)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
51
|
$
22,565
|
$
22,616
|
Restricted
cash
|
8,534
|
4,215
|
12,749
|
Trading
securities
|
-
|
81,575
|
81,575
|
Available-for-sale
securities, at fair value
|
-
|
2
|
2
|
Brokerage
and other receivables
|
-
|
514
|
514
|
Loans
issued
|
-
|
65
|
65
|
Deferred
tax assets
|
-
|
1,026
|
1,026
|
Fixed
assets
|
2
|
1,094
|
1,096
|
Goodwill
|
-
|
981
|
981
|
Other
assets
|
-
|
739
|
739
|
TOTAL ASSETS
|
$
8,587
|
$
112,776
|
$
121,363
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
|
|
|
|
|
|
|
|
Derivative
liability
|
$
-
|
$
495
|
$
495
|
Debt
securities issued
|
-
|
3,459
|
3,459
|
Customer
liabilities
|
-
|
7,635
|
7,635
|
Current
income tax liability
|
-
|
149
|
149
|
Trade
payables
|
206
|
339
|
545
|
Deferred
distribution payments
|
8,534
|
-
|
8,534
|
Securities
repurchase agreement obligation
|
-
|
56,289
|
56,289
|
Other
liabilities
|
-
|
370
|
370
|
TOTAL LIABILITIES
|
8,740
|
68,736
|
77,476
|
|
|
|
|
STOCKHOLDERS’ EQUITY/(DEFICIT)
|
|
|
|
|
|
|
|
Preferred
Stock
|
-
|
-
|
-
|
Common
stock
|
280
|
(269
)
|
11
|
Additional
paid in capital
|
776
|
33,883
|
34,659
|
Retained
earnings/Accumulated deficit
|
(1,209
)
|
17,363
|
16,154
|
Accumulated
other comprehensive income
|
-
|
(6,937
)
|
(6,937
)
|
TOTAL STOCKHOLDERS’ EQUITY/(DEFICIT)
|
(153
)
|
44,040
|
43,887
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY/(DEFICIT)
|
$
8,587
|
$
112,776
|
$
121,363
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
For the three
months ended December 31, 2016
|
STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE
INCOME/(LOSS) (RECAST)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
Fee
and commission income
|
$
-
|
$
1,116
|
$
1,116
|
Net gain on trading
securities
|
-
|
1,164
|
1,164
|
Interest
income, net
|
1
|
723
|
724
|
Net
loss on foreign exchange operations
|
-
|
(138
)
|
(138
)
|
|
|
|
|
TOTAL REVENUE
|
1
|
2,865
|
2,866
|
|
|
|
|
Expense:
|
|
|
|
Interest
expense
|
-
|
1,120
|
1,120
|
Fee
and commission expense
|
-
|
129
|
129
|
Operating
expense
|
100
|
2,361
|
2,461
|
Other
expense, net
|
-
|
141
|
141
|
|
|
|
|
TOTAL EXPENSE
|
100
|
3,751
|
3,851
|
|
|
|
|
NET
LOSS BEFORE INCOME TAX
|
(99
)
|
(886
)
|
(985
)
|
|
|
|
|
Income
tax benefit
|
-
|
413
|
413
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS
|
$
(99
)
|
$
(473
)
|
$
(572
)
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
Change
in unrealized gain on investments
available-for-sale,
net of tax effect
|
-
|
(276
)
|
(276
)
|
Foreign
currency translation adjustments, net of
tax
|
-
|
453
|
453
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS
|
$
(99
)
|
$
(296
)
|
$
(395
)
|
|
|
|
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
For the nine
months ended December 31, 2016
|
STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE
INCOME/(LOSS) (RECAST)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
Fee
and commission income
|
$
-
|
$
2,462
|
$
2,462
|
Interest
income
|
3
|
1,707
|
1,710
|
Net
gain on trading securities
|
-
|
4,583
|
4,583
|
Net
gain on sale of fixed assets
|
-
|
28
|
28
|
Net
gain on foreign exchange operations
|
-
|
296
|
296
|
|
|
|
|
TOTAL REVENUE
|
3
|
9,076
|
9,079
|
|
|
|
|
Expense:
|
|
|
|
Interest
expense
|
-
|
2,472
|
2,472
|
Fee
and commission expense
|
-
|
216
|
216
|
Operating
expense
|
438
|
6,256
|
6,694
|
Other
expense, net
|
-
|
267
|
267
|
|
|
|
|
TOTAL EXPENSE
|
438
|
9,211
|
9,649
|
|
|
|
|
NET
LOSS BEFORE INCOME TAX
|
(435
)
|
(135
)
|
(570
)
|
|
|
|
|
Income
tax benefit
|
-
|
960
|
960
|
|
|
|
|
NET (LOSS)/INCOME BEFORE NONCONTROLLING INTERESTS
|
$
(435
)
|
$
825
|
$
390
|
|
|
|
|
Less:
Net income attributable to noncontrolling interest in
subsidiary
|
-
|
7
|
7
|
NET (LOSS)/INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS
|
(435
)
|
818
|
383
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
Change
in unrealized gain on investments available-for-sale, net of tax
effect
|
-
|
(270
)
|
(270
)
|
Foreign
currency translation adjustments, net of
tax
|
-
|
1,933
|
1,933
|
|
|
|
|
COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING
INTERESTS
|
(435
)
|
2,488
|
2,053
|
|
|
|
|
Less:
Comprehensive income attributable to noncontrolling interest in
subsidiary
|
-
|
7
|
7
|
|
|
|
|
COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS
|
$
(435
)
|
$
2,481
|
$
2,046
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Note 4 – Cash and Cash Equivalents
|
|
|
|
|
|
Securities
purchased under reverse repurchase agreements
|
$
21,674
|
$
8,376
|
Current account
with commercial banks
|
3,982
|
9,987
|
Current
account with Central Depository (Kazakhstan)
|
3,165
|
986
|
Brokerage
accounts
|
2,233
|
259
|
Petty
cash
|
1,414
|
1,476
|
Current account
with National Settlement Depository (Russia)
|
1,204
|
696
|
Current account
with Central Bank (Russia)
|
1,015
|
645
|
Current
account in clearing organizations
|
160
|
191
|
|
|
|
Total
cash and cash equivalents
|
$
34,847
|
$
22,616
|
As of
December 31, 2017 and March 31, 2017, cash and cash equivalents
were not insured. As of December 31, 2017 and March 31, 2017, the
cash and cash equivalents balance included collateralized
securities received under reverse repurchase agreements on the
terms presented below:
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
Securities
purchased under reverse repurchase agreements
|
|
|
|
|
Corporate
debt
|
10.29
%
|
$
1,505
|
$
-
|
$
1,505
|
Corporate
equity
|
11.91
%
|
14,154
|
6,015
|
20,169
|
|
|
|
|
|
Total
|
|
$
15,659
|
$
6,015
|
$
21,674
|
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
Securities
purchased under reverse repurchase agreements
|
|
|
|
|
Corporate
equity
|
19.56
%
|
$
8,346
|
$
25
|
$
8,371
|
Corporate
debt
|
24.00
%
|
5
|
-
|
5
|
|
|
|
|
|
Total
|
|
$
8,351
|
$
25
|
$
8,376
|
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, 2017 and March 31, 2017,
is $26,215 and $8,229, respectively.
Note 5 – Restricted Cash
As of
December 31, 2017 and March 31, 2017, 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
the 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 shareholder completing and submitting to the Company the
necessary documentation to claim his, her or its distribution
payments. The Company has no control over when, or if, an entitled
shareholder will submit the necessary documentation to claim his,
her, or its distribution payment. Restricted cash consists
of:
|
|
|
|
|
|
Deferred
distribution payments
|
$
8,534
|
$
8,534
|
Brokerage
customers’ cash
|
5,509
|
4,169
|
Reserve with
Central Bank
|
95
|
46
|
|
|
|
Total
restricted cash
|
$
14,138
|
$
12,749
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Note 6 – Trading Securities
As of
December 31, 2017 and March 31, 2017, trading securities consisted
of:
|
|
|
|
|
|
Equity
securities
|
$
164,853
|
$
71,697
|
Debt
securities
|
32,903
|
9,877
|
Depository
notes
|
1,192
|
-
|
Mutual investment
funds
|
259
|
1
|
Total
trading securities
|
$
199,207
|
$
81,575
|
|
|
|
The
following tables presents trading securities assets in the
condensed consolidated financial statements or disclosed in the
notes to the consolidated financial statements at fair value on a
recurring basis as of December 31, 2017 and March 31,
2017:
|
|
Fair Value Measurements at
|
|
|
|
|
|
Quoted Prices
in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
unobservable units
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
$
164,853
|
$
164,853
|
$
-
|
$
-
|
Debt
securities
|
32,903
|
32,715
|
188
|
-
|
Depository
notes
|
1,192
|
1,192
|
-
|
-
|
Mutual investment
funds
|
259
|
259
|
-
|
-
|
Total
trading securities
|
$
199,207
|
$
199,019
|
$
188
|
$
-
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
Quoted Prices
in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
unobservable units
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
$
71,697
|
$
71,697
|
$
-
|
$
-
|
Debt
securities
|
9,877
|
9,663
|
214
|
-
|
Mutual investment
funds
|
1
|
1
|
-
|
-
|
Total
trading securities
|
$
81,575
|
$
81,361
|
$
214
|
$
-
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Note 7 – Securities repurchase agreement
obligations
As of
December 31, 2017 and March 31, 2017, trading securities included
collateralized securities subject to repurchase agreements as
described in the following table:
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
|
|
|
|
Corporate
debt
|
10.25
%
|
$
-
|
$
21,343
|
$
637
|
$
21,980
|
Corporate
equity
|
12.62
%
|
-
|
112,064
|
1,116
|
113,180
|
Non-US sovereign
debt
|
9.59
%
|
-
|
2,276
|
-
|
2,276
|
Total
securities sold under repurchase agreements
|
|
$
-
|
$
135,683
|
$
1,753
|
$
137,436
|
|
|
|
Interest rate and remaining contractual maturity of the
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
|
|
|
|
Corporate
debt
|
11.83
%
|
$
14,484
|
$
10,923
|
$
-
|
$
25,407
|
Corporate
equity
|
13.08
%
|
-
|
29,926
|
956
|
30,882
|
Total
securities sold under repurchase agreements
|
|
$
14,484
|
$
40,849
|
$
956
|
$
56,289
|
The
fair value of collateral pledged under repurchase agreements as of
December 31, 2017 and March 31, 2017, is $188,096 and $68,025,
respectively.
Securities
pledged as collateral by the Company under repurchase agreements
are liquid trading securities with market quotes and significant
trading volume.
Note 8 – Deferred Tax Assets
FRHC
and FFIN are subject to taxation in the U.S. Freedom RU, FFIN Bank
and Freedom 24 are subject to taxation in the Russian Federation.
Freedom KZ and KZ Branch are subject to taxation in Kazakhstan.
Freedom CY is subject to taxation in Cyprus, Freedom UA is subject
to taxation in Ukraine.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Deferred
tax assets and liabilities of the Company are comprised of the
following:
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
Tax losses
carryforward
|
$
4,376
|
$
2,398
|
Accrued
liabilities
|
38
|
20
|
Revaluation on
trading securities
|
11
|
76
|
|
(2,495
)
|
(1,468
)
|
Deferred
tax assets
|
$
1,930
|
$
1,026
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Revaluation on
trading securities
|
$
1,605
|
$
-
|
|
|
|
|
1,605
|
-
|
Net
deferred tax assets
|
$
325
|
$
1,026
|
During
the nine months ended December 31, 2017 and 2016, the effective tax
rate was equal to 2.53% and (168.42%), respectively, primarily due
to non-taxable gains on trading securities in Freedom KZ in the
amounts of $26,010 and $10,389, respectively. During the
nine-months period ended December 31, 2017, the Company realized
net income before income tax of $23,114, primarily from non-taxable
revenues generated from the Company’s Freedom KZ’s
trading operations. This resulted in the Company realizing an
income tax expense during the nine months ended December 31, 2017
of $584. During the nine months ended December 31, 2016, the
Company realized a net loss before income tax of $570 primarily
from non-taxable revenues generated from Freedom KZ’s trading
operations resulting in an income tax benefit of $960. During the
nine months ended December 31, 2016, the Company did not recognize
tax loss carryforwards of $664 on operations of Freedom
KZ.
Note 9 – Derivative Liability
On
December 28, 2016, Freedom RU entered into a derivative instrument
agreement with a related party that included a call option feature
for the purchase of shares held by Freedom RU. This call option was
classified as a derivative liability in the Consolidated Balance
Sheets and measured at each reporting period using the
Black-Scholes Model. The gain associated with this derivative
instrument is recognized as gain on a derivative instrument in the
Consolidated Statements of Operations and Statements of Other
Comprehensive Income. In exchange for a $2,629 premium paid
upfront, this derivative instrument granted the holder the right to
purchase 11.8 million shares of a top rated Russian commercial bank
- Sberbank on June 14, 2017, at a strike price $3.10 per
share.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
Company recorded a derivative liability of $495 as of March 31,
2017. On June 14, 2017, the derivative instrument expired
unexercised by the option holder, and the Company recognized a gain
on the derivative instrument of $490.
The
Company uses foreign currency futures contracts to
minimize the risk caused by foreign currency fluctuation on its
foreign currency receivables and payables by purchasing futures
with financial institutions. The futures 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. During the nine months ended December 31, 2017,
Freedom KZ purchased foreign currency futures contracts to sell
$25,000 at the weighted average exchange rate of 345.63 Kazakhstani
Tenge per US dollar in December 2017 and March 2018. During the
nine months ended December 31, 2017, the Company realized a gain of
$155 on foreign currency futures contracts.
Note 10 – Debt Securities Issued
|
|
|
|
|
|
Debt securities
issued
|
$
18,719
|
$
9,530
|
Debt securities
repurchased
|
(8,534
)
|
(6,145
)
|
Accrued
interest
|
440
|
74
|
|
|
|
Total
|
$
10,625
|
$
3,459
|
As of
December 31, 2017 and March 31, 2017, the Company placed USD
indexed bonds of Freedom KZ issued under Kazakhstan law in the
amounts of $9,695 and $0, respectively. The bonds have an 8.00%
fixed annual coupon rate and a maturity date of June 27, 2020.
These bonds are actively traded on the Kazakhstan Stock Exchange.
According to the initial placement document (prospectus) the
Company has the right to repurchase and resell the Freedom KZ bonds
at market value. During the nine months ended December 31, 2017 and
2016, the Company made purchases of these redeemable debt
securities in the amounts of $2,225 and $0, respectively. During
the nine months ended December 31, 2017 and 2016, the Company sold
these repurchased debt securities in the amounts of $1,774 and $0,
respectively.
As of
December 31, 2017 and March 31, 2017, the Company placed tenge -
denominated bonds of Freedom KZ issued under Kazakhstan law in the
amount of $9,024 and $9,530, respectively. The bonds have an 11.50%
fixed annual coupon rate and a maturity date of January 21, 2019.
These bonds are actively traded on the Kazakhstan Stock Exchange.
According to the initial placement document (prospectus) the
Company has the right to repurchase and resell the Freedom KZ bonds
at market value. During the nine months ended December 31, 2017 and
2016, the Company made purchases of these redeemable debt
securities in the amounts of $ 2,858 and $0, respectively. During
the nine months ended December 31, 2017 and 2016, the Company sold
these repurchased debt securities in the amounts of $582 and $0,
respectively.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Debt
securities issued are initially recognized at the fair value of the
consideration received, less directly attributable transaction
costs. As of December 31, 2017 and March 31, 2017, the accrued
interest included in the balance of debt securities issued totaled
$440 and $74, respectively.
Note 11 – Customer Liabilities
The
Company recognizes customer liabilities associated with funds held
by our brokerage and bank customers. Customer liabilities consist
of:
|
|
|
|
|
|
Brokerage
customers
|
$
6,796
|
$
4,167
|
Banking
customers
|
7,115
|
3,468
|
Total
|
$
13,911
|
$
7,635
|
Note 12 –Related Party Transactions
On
December 28, 2016, Freedom RU entered into a derivative instrument
agreement with a related party which included a call option
feature. The gain or loss associated with this agreement is
recognized as gain on a derivative instrument in the Consolidated
Statements of Operations and Statements of Other Comprehensive
Income/(Loss). The Company recorded a derivative liability of $495
as of March 31, 2017. On June 14, 2017, the derivative instrument
expired unexercised by the holder, and the Company recognized a
gain on the derivative instrument of $490.
During
the nine months ended December 31, 2017 and 2016, the Company
earned commission income from related parties in the amounts of
$3,103 and $1,061, respectively. Commission income earned from
related parties is comprised primarily of brokerage commissions and
agency fees for referrals of new brokerage clients to other
brokers.
As of
December 31, 2017 and March 31, 2017, the Company had brokerage and
other receivables from related parties totaling $334 and $328,
respectively. Brokerage and other receivables from related parties
result principally from commissions receivable on the brokerage
operations of related parties.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
As of
December 31, 2017 and March 31, 2017, the Company had customer
liabilities on brokerage accounts and bank accounts of related
parties totaling $3,574 and $2,270, respectively. As of December
31, 2017 and March 31, 2017, the Company had restricted customer
cash on brokerage accounts and cash on bank accounts of related
parties totaling $2,185 and $2,270, respectively.
Note 13 – Stockholder’s Equity
During
the nine months ended December 31, 2017, Mr. Turlov made capital
contributions of $670 to the Company and $7,924 to Freedom RU. At
the time such contributions were made, Mr. Turlov was the Chief
Executive Officer, Chairman of the board, and majority shareholder
of the Company.
On June
29, 2017, the Company and Mr. Turlov agreed to close the
acquisition of Freedom RU. Pursuant to the terms of the Acquisition
Agreement, Mr. Turlov received a total of 24,465,024 shares of
restricted common stock in exchange for his 100% interest in
Freedom RU.
On
October 6, 2017, the Company awarded restricted stock grants
totaling 3,900,000 shares of its common stock to 16 employees and
awarded nonqualified stock options to purchase an aggregate of
360,000 shares of its common stock to two employees. Of the
3,900,000 shares awarded pursuant to the restricted stock grant
awards, 1,200,000 shares are subject to two-year vesting conditions
and 2,700,000 shares are subject to three-year vesting conditions.
All of the nonqualified stock options are subject to three-year
vesting conditions. The Company recorded stock based compensation
expense for restricted stock grants and stock options in the amount
of $792 during nine months ended December 31, 2017.
As
disclosed in Note 1 on November 10, 2017, FRHC issued 12,758,011
shares of restricted Company common stock in exchange for Mr.
Turlov 100% equity interest in Freedom CY and Freedom CY became a
wholly owned subsidiary of the Company.
As
disclosed in Note 1, on November 1, 2017, the Company entered into
a Share Exchange and Acquisition Agreement and agreed to issue
387,700 shares of restricted common stock to BusinessTrain Ltd. to
acquire 100% of the outstanding equity interest of Freedom
UA.
On
December 8, 2017, the Company completed a private placement of
3,681,667 shares of its restricted common stock in exchange for an
aggregate offering proceeds of $11,045,001. The shares of common
stock were sold to three non-U.S. persons pursuant to the exemption
from registration provided in Regulation S promulgated under
the Securities Act for offers and sales made outside the United
States. Arkady Rakhilkin, a Company director, purchased 348,333 of
the shares for $1,044,999.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Note 14 – Stock based compensation
As
disclosed in Note 13, on October 6, 2017, the Company issued
restricted stock awards totaling 3,900,000 shares of its common
stock to 16 employees and awarded nonqualified stock options to
purchase an aggregate of 360,000 shares of its common stock at a
strike price $1.98 per share to two employees. Shares of restricted
stock have the same dividend and voting rights as common stock
while options do not. All awards are issued at fair value of the
underlying shares at the grant date.
During
the nine months ended December 31, 2017, stock options covering a
total of 360,000 shares of common stock were granted. No options
were granted for the nine months ended December 31, 2016. Total
compensation expense related to options granted was $51 for the
nine months ended December 31, 2017 and $0 for the nine months
ended December 31, 2016. As of December 31, 2017, there was
total remaining compensation expense of $596 related to stock
options, which will be recorded over a weighted average period of
approximately 2.8 years.
During
the nine months ended December 31, 2017 a total of 3,900,000
restricted shares were awarded. During the nine months ended
December 31, 2016 no restricted shares were awarded. The
compensation expense related to restricted stock awards was $741
during the nine months ended December 31, 2017 and $0 during the
nine months ended December 31, 2016. As of December 31, 2017, there
was $7,447 of total unrecognized compensation cost related to
nonvested shares of restricted stock granted. The cost is expected
to be recognized over a weighted average period of 2.5
years.
Stock-based
compensation expense for the cost of the awards granted is based on
the grant-date fair value. For stock option awards, the fair value
is estimated at the date of grant using the Black-Scholes
option-pricing model. This model requires the input of highly
subjective assumptions, changes to which can materially affect the
fair value estimate. Additionally, there may be other factors that
would otherwise have a significant effect on the value of employee
stock options granted but are not considered by the
model. Accordingly, while management believes that the
Black-Scholes option-pricing model provides a reasonable estimate
of fair value, the model does not necessarily provide the best
single measure of fair value for the Company's employee
stock options.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
following is a summary of stock option activity for the nine months
ended December 31, 2017:
|
|
Weighted Average Exercise Price
|
Weighted
Average Remaining Contractual Term
(In Years)
|
Aggregate
Intrinsic Value
|
Outstanding,
beginning of year
|
-
|
$
-
|
-
|
$
-
|
Granted
|
360,000
|
1.98
|
2.76
|
1,577
|
Exercised
|
-
|
-
|
-
|
-
|
Forfeited/cancelled/expired
|
-
|
-
|
-
|
-
|
Outstanding,
at December 31, 2017
|
360,000
|
$
1.98
|
2.76
|
$
1,577
|
Exercisable
at December 31, 2017
|
-
|
$
-
|
-
|
$
-
|
The
table below summarizes the activity for the Company's restricted
stock outstanding during the nine months ended December 31,
2017:
|
|
Weighted Average Fair Value
|
Outstanding,
beginning of year
|
-
|
$
-
|
Granted
|
3,900,000
|
8,190
|
Vested
|
-
|
-
|
Forfeited/cancelled/expired
|
-
|
-
|
Outstanding,
at December 31, 2017
|
3,900,000
|
$
8,190
|
Note 15 – Acquisition
Acquisition of Freedom UA:
On
November 1, 2017 (the Acquisition Date), FRHC acquired 100% of the
outstanding common shares and voting interest in Freedom UA in
exchange for 387,700 shares of restricted common stock of the
Company with the fair market value of $1,485. FRHC acquired Freedom
UA to expand its existing securities brokerage business to the
Ukrainian securities brokerage market.
As of
the Acquisition Date, the fair value of Freedom UA was $589. For
the two months ended December 31, 2017, net income of Freedom UA
totaled $8.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
total purchase price was allocated as follows:
|
Purchase price
allocation
|
|
|
Assets:
|
|
Cash and cash
equivalents
|
$
354
|
Restricted
cash
|
78
|
Trading
securities
|
6
|
Fixed
assets
|
88
|
Brokerage and other
receivables
|
235
|
Other
assets
|
4
|
Total
assets
|
$
765
|
|
|
Liabilities:
|
|
Customer
liabilities
|
$
174
|
Trade
payables
|
1
|
Other
liabilities
|
1
|
Total
liabilities
|
176
|
|
|
Net assets
acquired
|
$
589
|
|
|
Goodwill
|
896
|
|
|
Total purchase
price
|
$
1,485
|
The
Group believes that cash equivalents, brokerage and other
receivables customer liabilities approximate fair value due to
relatively short-term maturity of these financial
instruments.
Acquisition of Freedom CY
The
Company agreed to acquire Freedom CY from Mr. Turlov on November
23, 2015, subject to certain closing conditions, including receipt
of all required regulatory approvals to transfer ownership of
Freedom CY. As disclosed in Note 1, the final condition to closing
was completed on November 1, 2017 and on November 10, 2017, the
Company issued 12,758,011 shares of restricted common stock to Mr.
Turlov in exchange for his 100% equity interest in Freedom CY and
the securities brokerage and financial services business conducted
by it in Cyprus, and Freedom CY became a wholly owned subsidiary of
the Company.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Note 16 – Reverse Stock Split
On
September 6, 2017, the Company effected a
one-share-for-twenty-five-shares reverse stock split of its common
stock. All share and earnings per share information has been
retroactively adjusted to reflect the stock split. The effect of
this stock split on the Company’s earnings per share is as
follows:
|
Three months
ended December 31,
|
Nine months
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
From continuing
operations
|
$
(13,126
)
|
$
(572
)
|
$
22,530
|
$
390
|
|
|
|
|
|
Net
income per common share - basic and diluted (in US
dollars)
|
$
(0.29
)
|
$
(0.05
)
|
$
0.86
|
$
0.03
|
Shares
used in the calculation of net income per common
share:
|
|
|
|
|
Basic and
diluted
|
45,018,578
|
11,213,926
|
26,341,542
|
11,213,926
|
Note 17 – Commitments and Contingent Liabilities
The
table below shows approximate lease commitments and other
contingent liabilities of the Company as of December 31,
2017:
Contractual
obligations
|
|
|
|
|
Office
lease
(1)
|
$
7,289
|
$
3,826
|
$
2,504
|
$
959
|
TOTAL
|
$
7,289
|
$
3,826
|
$
2,504
|
$
959
|
(1)
The Company has
number of lease agreements for office spaces in different
locations. In general, all agreements are made for a one year
period with extension or termination provisions, except two lease
agreements with longer lease terms.
The
Company’s rent expense for office space was $818 and $313 for
the three months ended December 31, 2017 and 2016, respectively.
The Company’s rent expense for office space was $1,647 and
$
917 for the nine months
ended December 31, 2017 and 2016, respectively.
Note 18 – Subsequent Events
The
Company evaluated all material events and transactions that
occurred after December 31, 2017 through February 14, 2018. Other
than as disclosed below, during this period the Company did not
have any additional material recognizable subsequent
events.
On
February 9, 2018, FRHC formed LLC Freedom Finance (“Freedom
UZ”) in Uzbekistan as a wholly owned subsidiary of FRHC.
Freedom UZ plans to apply to become a licensed securities broker
dealer in Uzbekistan.