NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 1 - DESCRIPTION OF BUSINESS
Overview
Freedom
Holding Corp. (the “Company” or “FRHC”) is
a corporation organized in the United States under the laws of the
State of Nevada that owns several operating subsidiaries that
engage in a broad range of activities in the financial services
industry, including retail securities brokerage, investment
education, securities trading, investment banking and market making
activities in Eastern Europe and Central Asia. The Company is
headquartered in Almaty, Kazakhstan, with supporting administrative
office locations in Russia, Cyprus and the United States. The
Company has retail locations in Russia, Kazakhstan, Ukraine,
Uzbekistan, Kyrgyzstan and Germany.
The
Company owns directly, or through subsidiaries, the following
companies: LLC Investment Company Freedom Finance, a Moscow,
Russia-based securities broker-dealer (“Freedom
RU”);LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN
Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based
securities broker-dealer (“Freedom KZ”);Freedom Finance
Cyprus Limited, a Limassol, Cyprus-based broker-dealer
(“Freedom CY”); Freedom Finance Germany TT GmbH
(“Freedom GE”), a Munich, Germany-based tied agent of
Freedom CY; LLC Freedom Finance Ukraine, a Kiev, Ukraine-based
broker-dealer (“Freedom UA”); LLC Freedom Finance
Uzbekistan, a Tashkent, Uzbekistan-based broker-dealer
(“Freedom UZ”); and FFIN Securities, Inc., a Nevada
corporation (“FFIN”).
The
Company’s subsidiaries are members on the Kazakhstan Stock
Exchange (KASE), Astana International Exchange (AIX), Moscow
Exchange (MOEX), Saint-Petersburg Exchange (SPB), Ukrainian
Exchange, and Republican Stock Exchange of Tashkent (UZSE). Freedom
CY serves to provide the Company’s clients with operations
support and access to the investment opportunities, relative
stability, and integrity of the U.S. and European securities
markets, which under the regulatory regimes of many jurisdictions
where the Company operates do not currently allow investors direct
access to international securities markets.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended December 31,
2018, are not necessarily indicative of the results that may be
expected for the fiscal year ended March 31, 2019.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
Condensed Consolidated Balance Sheet at March 31, 2018, has been
derived from the audited consolidated financial statements at that
date but does not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
The
Company’s Condensed Consolidated Financial Statements present
the consolidated accounts of FRHC, FFIN, Freedom RU, Freedom KZ,
FFIN Bank, Freedom CY, Freedom UA, Freedom UZ, Freedom GE and the
financial results of LLC First Stock Store
(“Freedom24”) up to the date of its disposal on
September 30, 2018. All significant inter-company balances and
transactions have been eliminated from the condensed consolidated
financial statements.
For
further information, refer to the consolidated financial statements
and footnotes included in the Company’s Annual Report on Form
10-K for the year ended March 31, 2018.
Use of estimates
The
preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Management believes that the estimates
utilized in preparing its financial statements are reasonable and
prudent. Actual results could differ from those
estimates.
Revenue recognition
Accounting
Standards Codification (“ASC”) Topic 606, Revenue from
Contracts with Customers (“ASC Topic 606”), establishes
principles for reporting information about the nature, amount,
timing and uncertainty of revenue and cash flows arising from the
entity’s contracts to provide goods or services to customers.
The core principle requires an entity to recognize revenue to
depict the transfer of goods or services promised to customers in
an amount that reflects the consideration that it expects to be
entitled to receive in exchange for those goods or services
recognized as performance obligations are satisfied. A significant
portion of the Company’s revenue-generating transactions are
not subject to ASC Topic 606, including revenue generated from
financial instruments, such as loans and investment securities, as
these activities are subject to other US GAAP guidance discussed
elsewhere within these disclosures. Descriptions of the
Company’s revenue-generating activities that are within the
scope of ASC Topic 606, which are presented in these income
statements as components of non-interest income are as
follows:
●
Commissions on
brokerage services;
●
Commissions on
banking services (money transfers, foreign exchange operations and
other); and
●
Commissions on
investment banking services (underwriting, market making, and
bondholders’ representation services).
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
Company adopted the new guidance on April 1, 2018. Under Topic 606,
the Company is required to recognize incentive fees when they are
probable and there is not a significant chance of reversal in the
future. For the brokerage commission, banking service
commission and investment banking services commission contracts in
place at the time of adoption, this change in policy did not result
in any actual change in revenue that had already been recognized
and therefore there was no transition adjustment
necessary. Based on a review of the Company’s brokerage
commission, banking service commission and investment banking
services commission contracts in place at the time of adoption, the
Company does not believe the actual timing of recognition of
incentive fees under future contracts will be materially
impacted in the future. However, the new policy may
result in incentive fees being recognized sooner in the future than
they would have been under the Company’s revenue recognition
policy in place prior to the adoption of Topic 606.
The
Company recognizes revenue when five basic criteria have been
met:
●
The parties to the
contract have approved the contract (in writing, orally, or in
accordance with other customary business practices) and are
committed to perform their respective obligations.
●
The entity can
identify each party’s rights regarding the goods or services
to be transferred.
●
The entity can
identify the payment terms for the goods or services to be
transferred.
●
The contract has
commercial substance (that is, the risk, timing, or amount of the
entity’s future cash flows is expected to change as a result
of the contract).
●
It is probable that
the entity will collect substantially all of the consideration to
which it will be entitled in exchange for the goods or services
that will be transferred to the customer.
Derivative financial instruments
In the
normal course of business, the Company invests in various
derivative financial contracts including futures. Derivatives are
initially recognized at fair value at the date a derivative
contract is entered into and are subsequently re-measured to their
fair value at each reporting date. The fair values are estimated
based on quoted market prices or pricing models that take into
account the current market and contractual prices of the underlying
instruments and other factors. Derivatives are carried as assets
when their fair value is positive and as liabilities when it is
negative. Derivatives are included in assets and liabilities at
fair value through profit or loss in the consolidated balance
sheet.
The
Company purchases foreign
currency futures contracts from financial
institutions to minimize the risk caused by foreign currency
fluctuation on its foreign currency receivables and payables and
also purchases foreign currency futures contracts for speculative
purposes. These futures contracts are traded on the Kazakhstan
Stock Exchange and represent commitments to purchase or sell a
particular foreign currency at a future date and at a specific
price.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
All
gains and losses on foreign currency contracts were realized during
the three and nine month periods ended December 31, 2018 and 2017,
and are included in net gain on derivatives in the Condensed
Consolidated Statements of Operations and Statements of Other
Comprehensive Income/(Loss).
Functional currency
Management
has adopted ASC 830, Foreign Currency Translation Matters as it
pertains to its foreign currency translation. The Company’s
functional currencies are the Russian ruble, European euro,
Ukrainian hryvnia, Uzbekistani som and Kazakhstani tenge, and its
reporting currency is the United States dollar. Monetary assets and
liabilities denominated in foreign currencies are translated into
United States dollars using the exchange rate prevailing at the
balance sheet date. Non-monetary assets and liabilities denominated
in foreign currencies are translated at rates of exchange in effect
at the date of the transaction. Average monthly rates are used to
translate revenues and expenses. Gains and losses arising on
translation or settlement of foreign currency denominated
transactions or balances are included in Other Comprehensive
Income/(Loss).
For
financial reporting purposes, foreign currencies are translated
into United States dollars as the reporting currency. Assets and
liabilities are translated at the exchange rate in effect at the
balance sheet dates. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period.
Translation adjustments arising from the use of different exchange
rates from period to period are included as a component of
stockholders’ equity as “Accumulated other
comprehensive loss”.
Cash and cash equivalents
Cash
and cash equivalents are generally comprised of certain highly
liquid investments with maturities of three months or less at the
date of purchase. Cash and cash equivalents include reverse
repurchase agreements which are recorded at the amounts at which
the securities were acquired or sold plus accrued
interest.
Securities reverse repurchase and repurchase
agreements
A
reverse repurchase agreement is a transaction in which the Company
purchases financial instruments from a seller, typically in
exchange for cash, and simultaneously enters into an agreement to
resell the same or substantially the same financial instruments to
the seller for an amount equal to the cash or other consideration
exchanged plus interest at a future date. Securities purchased
under reverse repurchase agreements are accounted for as
collateralized financing transactions and are recorded at the
contractual amount for which the securities will be resold,
including accrued interest. Financial instruments purchased under
reverse repurchase agreements are recorded in the financial
statements as cash placed on deposit collateralized by securities
and classified as cash and cash equivalents in the Condensed
Consolidated Balance Sheets.
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 and
repurchase agreements transactions to, among other things, acquire
securities to leverage and grow its proprietary trading portfolio,
cover short positions and settle other securities obligations, to
accommodate customers’ needs and to finance its inventory
positions.
The Company enters into these transactions in
accordance with normal market practice. Under standard terms for
repurchase transactions, the recipient of collateral has the right
to sell or repledge the collateral, subject to returning equivalent
securities on settlement of the transaction.
Available-for-sale securities
Financial
assets categorized as available-for-sale (“AFS”) are
non-derivatives that are either designated as available-for-sale or
not classified as (a) loans and receivables, (b) held to maturity
investments or (c) trading securities.
Listed
shares and listed redeemable notes held by the Company that are
traded in an active market are classified as AFS and are stated at
fair value. The Company has investments in unlisted shares that are
not traded in an active market but that are also classified as
investments AFS and stated at fair value (because Company
management considers that fair value can be reliably measured).
Gains and losses arising from changes in fair value are recognized
in other comprehensive income/(loss) and are accumulated in
Accumulated other comprehensive loss, with the exception of
other-than-temporary impairment losses, interest calculated using
the effective interest method, dividend income and foreign exchange
gains and losses, which are recognized in the Condensed
Consolidated Statements of Operations. Where the investment is
disposed of or is determined to be impaired, the cumulative gain or
loss previously accumulated in the investments’ revaluation
reserve is then reclassified to Condensed Consolidated Statements
of Operations.
Trading securities
Financial
assets are classified as trading securities if the financial asset
has been acquired principally for the purpose of selling it in the
near term.
Trading
securities are stated at fair value, with any gains or losses
arising on remeasurement recognized in revenue. Changes in fair
value are recognized in the Condensed Consolidated Statements of
Operations and Statements of Other Comprehensive Income/(Loss) and
included in net gain/(loss) on trading securities. Interest earned,
and dividend income are recognized in the Condensed Consolidated
Statements of Operations and Statements of Other Comprehensive
Income/(Loss) and are included in interest income, according to the
terms of the contract and when the right to receive the payment has
been established.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Investments in
nonconsolidated managed funds are accounted for at fair value based
on the net asset value (“NAV”) of the funds
provided by the fund managers with gains or losses included in net
gain on trading securities in the Condensed Consolidated Statements
of Operations and Statements of Other Comprehensive
Income/(Loss).
Debt securities issued
Debt
securities issued are initially recognized at the fair value of the
consideration received, less directly attributable transaction
costs. Subsequently, amounts due are stated at amortized cost and
any difference between net proceeds and the redemption value is
recognized over the period of the borrowings using the effective
interest method. If the Company purchases its own debt, it is
removed from the Condensed Consolidated Balance Sheets and the
difference between the carrying amount of the liability and the
consideration paid is recognized in the Condensed Consolidated
Statements of Operations and Statements of Other Comprehensive
Income/(Loss).
Brokerage and other receivables
Brokerage
and other receivables are comprised of commissions and receivables
related to the securities brokerage and banking activity of the
Company. At initial recognition, brokerage and other receivables
are recognized at fair value. Subsequently, brokerage and other
receivables are carried at cost net of any allowance for impairment
losses.
Derecognition of financial assets
A
financial asset (or, where applicable a part of a financial asset
or a part of a group of similar financial assets) is derecognized
where all of the following conditions are met:
●
The transferred
financial assets have been isolated from the Company - put
presumptively beyond the reach of the Company and its creditors,
even in bankruptcy or other receivership.
●
The transferee has
rights to pledge or exchange financial assets.
●
The Company or its
agents do not maintain effective control over the transferred
financial assets or third-party beneficial interests related to
those transferred assets.
Where
the Company has not met the asset derecognition conditions above,
it continues to recognize the asset to the extent of its continuing
involvement.
Impairment of long lived assets
In
accordance with the accounting guidance for the impairment or
disposal of long-lived assets, the Company periodically evaluates
the carrying value of long-lived assets to be held and used when
events and circumstances warrant such a review. The carrying value
of a long-lived asset is considered impaired when the fair value
from such asset is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value
exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows, discounted
at a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except
that fair values are reduced for the cost of disposal. As of
December 31, 2018 and March 31, 2018, the Company had not recorded
any charges for impairment of long-lived assets.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Impairment of goodwill
As of
December 31, 2018 and March 31, 2018, goodwill recorded in the
Company’s Condensed Consolidated Balance Sheets totaled
$2,862 and $3,288, respectively. The Company performs an impairment
review at least annually, unless indicators of impairment exist in
interim periods. The impairment test for goodwill uses a two-step
approach. Step one compares the estimated fair value of a reporting
unit with goodwill to its carrying value. If the carrying value
exceeds the estimated fair value, step two must be performed. Step
two compares the carrying value of the reporting unit to the fair
value of all of the assets and liabilities of the reporting unit as
if the reporting unit was acquired in a business combination. If
the carrying amount of a reporting unit's goodwill exceeds the
implied fair value of its goodwill, an impairment loss is
recognized in an amount equal to the excess. In its annual goodwill
impairment test, the Company estimated the fair value of the
reporting unit based on the income approach (also known as the
discounted cash flow method) and determined the fair value of the
Company’s goodwill exceeded the carrying amount of the
Company’s goodwill.
Income taxes
The
Company recognizes deferred tax liabilities and assets based on the
difference between the financial statements and tax basis of assets
and liabilities using the enacted tax rates in effect for the year
in which the differences are expected to reverse. The measurement
of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not
expected to be realized.
Current
income tax expenses are provided for in accordance with the laws of
the relevant taxing authorities. As part of the process of
preparing financial statements, the Company is required to estimate
its income taxes in each of the jurisdictions in which it operates.
The Company accounts for income taxes using the asset and liability
approach. Under this method, deferred income taxes are recognized
for tax consequences in future years based on differences between
the tax bases of assets and liabilities and their reported amounts
in the financial statements at each year-end and tax loss carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates applicable for the differences that are expected
to affect taxable income.
The
Company will include interest and penalties arising from the
underpayment of income taxes in the provision for income taxes. As
of December 31, 2018 and March 31, 2018, the Company had no accrued
interest or penalties related to uncertain tax
positions.
On
December 22, 2017, the U.S. bill commonly referred to as the Tax
Cuts and Jobs Act (“Tax Reform Act”) was enacted, which
significantly changed U.S. tax law by, among other things, lowering
corporate income tax rates, implementing a territorial tax system
and imposing a repatriation tax on deemed repatriated earnings of
foreign subsidiaries. The Tax Reform Act permanently reduces the
U.S. corporate income tax rate from a maximum of 35% to a flat 21%
rate, effective January 1, 2018. The Tax Reform Act also
provided for a one-time deemed repatriation of post-1986
undistributed foreign subsidiary earnings and profits
(“E&P”) through the year ended December 31, 2017.
The Global Intangible Low-Taxed Income ("GILTI") provisions of the
Tax Reform Act require the Company to include in its U.S. income
tax return foreign subsidiary earnings in excess of an allowable
return on the foreign subsidiary’s tangible assets. The
Company may be subject to incremental U.S. tax on GILTI starting
with the 2018 tax year, which began April 1, 2018, depending upon
expense allocations and the applicable U.S. foreign tax credit
rules. The Company has presented the deferred tax impacts of GILTI
tax in its consolidated financial statements for the three and nine
months ended December 31, 2018.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Financial instruments
Financial
instruments are carried at fair value as described
below.
Fair
value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either in the
principal market for the asset or liability, or in the absence of a
principal market, in the most advantageous market for the asset or
liability. Fair value is the current bid price for financial
assets, current ask price for financial liabilities and the average
of current bid and ask prices when the Company is both in short and
long positions for the financial instrument. A financial instrument
is regarded as quoted in an active market if quoted prices are
readily and regularly available from an exchange or other
institution and those prices represent actual and regularly
occurring market transactions on an arm’s length
basis.
Leases
Rent payable under operating leases is charged to expense on a
straight-line basis over the term of the relevant
lease.
Fixed assets
Fixed assets are carried at cost, net of accumulated depreciation.
Maintenance, repairs, and minor renewals are expensed as incurred.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range between three and
seven years.
Recent accounting pronouncements
ASU
2016-02, “Leases,” ASU 2018-01, “Land Easement
Practical Expedient for Transition to Topic 842,” ASU
2018-10, “Codification Improvements to Topic 842,
Leases” and ASU 2018-11, “Leases (Topic 842): Targeted
Improvements”: In February 2016, the FASB issued ASU 2016-02
which requires entities to include
substantially all leases on the balance sheet by
requiring the recognition of right-of-use assets and lease
liabilities for all leases. Entities may elect to exclude from the
balance sheet those leases with a maximum possible term of less
than 12 months. For lessees, a lease is classified as finance or
operating, and the asset and liability are initially measured at
the present value of the lease payments. For lessors, accounting
for leases is largely unchanged from previous provisions of U.S.
GAAP, other than certain changes to align lessor accounting to
specific changes made to lessee accounting and ASC 606. ASU 2016-02
also requires new qualitative and quantitative disclosures for both
lessees and lessors. In July 2018 the FASB adopted ASU 2018-10
which makes technical corrections and clarifications to the
accounting guidance in Topic 842.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
For public entities, ASU 2016-02, 2018-01, 2018-10 and 2018-11 are
effective for fiscal years beginning after December 15, 2018,
including interim periods therein, with early adoption permitted.
ASU 2016-02 requires lessees and lessors to recognize and measure
leases at the beginning of the earliest period presented using a
modified retrospective approach. ASU 2018-11 provides entities an
optional transition method to apply the new guidance as of the
adoption date, rather than as of the earliest period presented. In
transition, entities may elect certain practical expedients when
applying ASU 2016-02. These include a package of practical
expedients that must be applied in its entirety to all leases
commencing before the effective date, unless the lease is modified,
to not reassess (a) the existence of a lease, (b) lease
classification or (c) determination of initial direct costs, which
effectively allows entities to carryforward accounting conclusions
under previous U.S. GAAP. ASU 2016-02 also includes a practical
expedient to use hindsight in making judgments when determining the
lease term and any long-lived asset impairment. ASU 2018-01 allows
entities to elect a practical expedient that would exclude
application of ASU 2016-02 to land easements that existed prior to
its adoption, if they were not accounted for as leases under
previous U.S. GAAP. ASU 2018-11 provides a lessor practical
expedient for separating lease and non-lease components. The
Company plans to apply the practical expedients permitted
within the guidance, which allows the Company to carryforward its
historical lease classification, and to apply the transition option
which does not require application of the guidance to comparative
periods in the year of adoption. The adoption of this ASU will
result in the recognition of significant right-of-use assets and
lease liabilities in the Company’s Consolidated Balance
Sheets. The preparation for adoption is ongoing, including the
assessment of other potential impacts of this ASU, which includes
analysis of potential transitional adjustments to
Stockholders’ equity and impact of adoption on the
Consolidated Statements of Operations and the Consolidated
Statements of Cash Flows.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (Topic 820), Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. In March 2014,
the Board issued a proposed FASB Concepts Statement, Conceptual
Framework for Financial Reporting—Chapter 8: Notes to
Financial Statements, which the Board finalized on August 28, 2018.
The disclosure framework project’s objective and primary
focus are to improve the effectiveness of disclosures in the notes
to financial statements by facilitating clear communication of the
information required by generally accepted accounting principles
(GAAP). The amendments in this Update modify the disclosure
requirements on fair value measurements in Topic 820, Fair Value
Measurement, based on the concepts in the Concepts Statement,
including the consideration of costs and benefits. The amendments
in this Update apply to all entities that are required, under
existing GAAP, to make disclosures about recurring or nonrecurring
fair value measurements. The amendments in this Update are
effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. The
Company is currently evaluating the impact of the new guidance on
its condensed consolidated financial statements.
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 material impact from new guidance on its condensed
consolidated financial statements.
In
December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842),
Narrow-Scope Improvements for Lessors. On February 25, 2016, the
FASB issued Accounting Standards update No. 2016-02, Leases (Topic
842), to increase transparency and comparability among
organizations by recognizing lease assets and lease liabilities on
the balance sheet and disclosing key information about leasing
transactions. The FASB has been assisting stakeholders with
implementation questions and issues as organizations prepare to
adopt the new lease requirements. The amendments in this Update
affect the amendments in Update 2016-02, which are not yet
effective but can be early adopted. The effective date and
transition requirements for the amendments in this Update for
entities that have not adopted Topic 842 before the issuance of
this Update are the same as the effective date and transition
requirements in Update 2016-02 (for example, January 1, 2019, for
calendar-year-end public business entities). All entities,
including early adopters, must apply the amendments in this Update
to all new and existing leases. The Company is currently evaluating
the impact of the new guidance on its condensed consolidated
financial statements.
NOTE 3 – REVISION OF FINANCIAL STATEMENT
When
preparing the condensed consolidated financial statements as of
December 31, 2018, and for the three and nine months ended December
31, 2018, management determined that certain amounts included in
the Company’s consolidated financial statements as of March
31, 2018, and for the three and nine months ended December 31,
2017, required revision, due to the closing of the acquisition of
Freedom RU on June 29, 2017, the closing of the acquisition of
Freedom CY on November 1, 2017, and the completion of the mergers
of Nettrader LLC (“Nettrader”) in May 2018, and Asyl
Invest JSC (“Asyl”) in April 2018, which were deemed to
be entities under common control with the Company.
Certain
reclassifications also have been made to the prior year’s
consolidated financial statements to enhance comparability with the
current year’s condensed consolidated financial statements
following the increase in intangible assets of the Company related
to acquisition of the Tradernet trading platform. As a result,
certain line items have been amended in the Condensed Consolidated
Balance Sheets. Comparative figures have been adjusted to conform
to the current period’s presentation.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
previously issued Consolidated Balance Sheet as of March 31, 2018,
and Condensed Consolidated Statement of Operations and Statements
of Other Comprehensive Income/(Loss) for the three and nine months
ended December 31, 2017 have been revised as follows:
|
|
BALANCE SHEETS (RECAST)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
64,531
|
$
1,200
|
$
65,731
|
Restricted
cash
|
13,671
|
8,291
|
21,962
|
Trading
securities
|
212,319
|
276
|
212,595
|
Available-for-sale
securities, at fair value
|
2
|
238
|
240
|
Brokerage
and other receivables, net
|
21,109
|
3,776
|
24,885
|
Loans
issued
|
8,754
|
-
|
8,754
|
Deferred
tax assets
|
1,046
|
(274
)
|
772
|
Fixed
assets, net
|
2,362
|
209
|
2,571
|
Intangible
assets, net
|
-
|
5,531
|
5,531
|
Goodwill
|
1,798
|
1,490
|
3,288
|
Other
assets, net
|
4,494
|
79
|
4,573
|
TOTAL ASSETS
|
$
330,086
|
$
20,816
|
$
350,902
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Securities
sold, not yet purchased - at fair value
|
$
1,135
|
$
-
|
$
1,135
|
Loans
received
|
7,143
|
-
|
7,143
|
Debt
securities issued
|
10,840
|
382
|
11,222
|
Customer
liabilities
|
21,855
|
8,817
|
30,672
|
Trade
payables
|
8,998
|
15
|
9,013
|
Deferred
distribution payments
|
8,534
|
-
|
8,534
|
Securities
repurchase agreement obligation
|
154,775
|
-
|
154,775
|
Deferred
income tax liabilities
|
387
|
(387
)
|
-
|
Other
liabilities
|
1,319
|
57
|
1,376
|
TOTAL LIABILITIES
|
214,986
|
8,884
|
223,870
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Preferred
stock
|
-
|
-
|
-
|
Common
stock
|
58
|
-
|
58
|
Additional
paid in capital
|
87,049
|
13,131
|
100,180
|
Retained
earnings
|
35,387
|
(1,036
)
|
34,351
|
Accumulated
other comprehensive loss
|
(7,394
)
|
(163
)
|
(7,557
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
115,100
|
11,932
|
127,032
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
330,086
|
$
20,816
|
$
350,902
|
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, 2017
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF
OTHER COMPREHENSIVE INCOME/(LOSS) (RECAST)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
Fee
and commission income
|
$
1,999
|
$
455
|
$
2,454
|
Net gain/(loss) on
trading securities
|
(8,318
)
|
210
|
(8,108
)
|
Interest
income
|
2,853
|
138
|
2,991
|
Net gain on
derivatives
|
867
|
-
|
867
|
Net gain/(loss) on
sale of fixed assets
|
16
|
(16
)
|
-
|
Net
gain/(loss) on foreign exchange operations
|
424
|
(58
)
|
366
|
|
|
|
|
TOTAL REVENUE, NET
|
(2,159
)
|
729
|
(1,430
)
|
|
|
|
|
Expense:
|
|
|
|
Interest
expense
|
4,487
|
123
|
4,610
|
Fee
and commission expense
|
795
|
60
|
855
|
Operating
expense
|
5,983
|
713
|
6,696
|
Other
expense, net
|
105
|
185
|
290
|
|
|
|
|
TOTAL EXPENSE
|
11,370
|
1,081
|
12,451
|
|
|
|
|
NET
LOSS BEFORE INCOME TAX
|
(13,529
)
|
(352
)
|
(13,881
)
|
|
|
|
|
Income
tax benefit
|
403
|
10
|
413
|
|
|
|
|
NET LOSS
|
$
(13,126
)
|
$
(342
)
|
$
(13,468
)
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME/(LOSS)
|
|
|
|
Change
in unrealized gain on investments available-for-sale,
net
of
tax effect
|
$
-
|
$
(168
)
|
$
(168
)
|
Foreign
currency translation adjustments, net of tax effect
|
1,529
|
1,602
|
3,131
|
|
|
|
|
COMPREHENSIVE INCOME/(LOSS)
|
$
(11,597
)
|
$
1,092
|
$
(10,505
)
|
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, 2017
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF
OTHER COMPREHENSIVE INCOME (RECAST)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
Fee
and commission income
|
$
6,412
|
$
1,114
|
$
7,526
|
Net gain on trading
securities
|
30,825
|
583
|
31,408
|
Interest
income
|
6,442
|
336
|
6,778
|
Net gain on
derivatives
|
687
|
-
|
687
|
Net gain on sale of
fixed assets
|
8
|
(8
)
|
-
|
Net
gain on foreign exchange operations
|
1,957
|
32
|
1,989
|
|
|
|
|
TOTAL REVENUE, NET
|
46,331
|
2,057
|
48,388
|
|
|
|
|
Expense:
|
|
|
|
Interest
expense
|
9,499
|
326
|
9,825
|
Fee
and commission expense
|
1,474
|
173
|
1,647
|
Operating
expense
|
12,113
|
2,036
|
14,149
|
Other
expense, net
|
131
|
150
|
281
|
|
|
|
|
TOTAL EXPENSE
|
23,217
|
2,685
|
25,902
|
|
|
|
|
NET
INCOME BEFORE INCOME TAX
|
23,114
|
(628
)
|
22,486
|
|
|
|
|
Income
tax expense
|
(584
)
|
32
|
(552
)
|
|
|
|
|
NET INCOME
|
$
22,530
|
$
(596
)
|
$
21,934
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
Change
in unrealized gain on investments available-for-sale, net of tax
effect
|
$
-
|
$
(121
)
|
$
(121
)
|
Foreign
currency translation adjustments, net of tax effect
|
(2,809
)
|
(441
)
|
(3,250
)
|
|
|
|
|
COMPREHENSIVE INCOME
|
$
19,721
|
$
(1,158
)
|
$
18,563
|
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
|
$
11,466
|
$
27,389
|
Current
accounts with brokers
|
12,090
|
22,749
|
Current accounts
with commercial banks
|
4,148
|
9,032
|
Current account
with Central Bank (Russia)
|
3,151
|
980
|
Current
account with Central Depository (Kazakhstan)
|
2,564
|
1,280
|
Current account
with National Settlement Depository (Russia)
|
2,432
|
1,244
|
Petty
cash in bank vault and on hand
|
2,091
|
2,712
|
Accounts
with stock exchanges
|
1,882
|
214
|
Current
accounts in clearing organizations
|
1,601
|
131
|
Total
cash and cash equivalents
|
$
41,425
|
$
65,731
|
As of
December 31, 2018 and March 31, 2018, cash and cash equivalents
were not insured.
As of
December 31, 2018 and March 31, 2018, the cash and cash equivalents
balance included collateralized securities received under reverse
repurchase agreements on the terms presented below:
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
Securities
purchased under reverse repurchase agreements
|
|
|
|
|
Corporate
equity
|
10.16
%
|
$
7,960
|
$
791
|
$
8,751
|
Corporate
debt
|
14.00
%
|
115
|
-
|
115
|
Non-US sovereign
debt
|
8.25
%
|
2,600
|
-
|
2,600
|
Total
|
|
$
10,675
|
$
791
|
$
11,466
|
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
Securities
purchased under reverse repurchase agreements
|
|
|
|
|
Corporate
equity
|
14.99
%
|
$
11,095
|
$
15,572
|
$
26,667
|
Corporate
debt
|
14.96
%
|
521
|
201
|
722
|
Total
|
|
$
11,616
|
$
15,773
|
$
27,389
|
The
securities received by the Company as collateral under reverse
repurchase agreements are liquid trading securities with market
quotes and significant trading volume. The fair value of collateral
received by the Company under reverse repurchase agreements as of
December 31, 2018 and March 31, 2018, was $13,246 and $28,311,
respectively. For additional information please see Note 10 –
Securities sold, not yet purchased – at fair
value.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 5 – RESTRICTED CASH
As of
December 31, 2018 and March 31, 2018, the Company’s
restricted cash consisted of deferred distribution payments, cash
segregated in a special custody account for the exclusive benefit
of our brokerage customers and required reserves with the Central
Bank of the Russian Federation which represents cash on hand
balance requirements. The deferred distribution payment amount is a
reserve held for distribution to shareholders who have not yet
claimed their distributions from the 2011 sale of the
Company’s oil and gas exploration and production operations
of $8,534. This distribution is currently payable, subject to the
entitled shareholders completing and submitting to the Company the
necessary documentation to claim his, her or its distribution
payments. The Company has no control over when, or if, any entitled
shareholder will submit the necessary documentation to claim his,
her, or its distribution payment.
Restricted
cash consisted of:
|
|
|
|
|
|
Brokerage
customers’ cash
|
$
17,544
|
$
12,963
|
Deferred
distribution payments
|
8,534
|
8,534
|
Reserve with
Central Bank of Russia
|
673
|
115
|
Guaranty
deposits
|
352
|
350
|
Total
restricted cash
|
$
27,103
|
$
21,962
|
NOTE 6 – TRADING SECURITIES
As of
December 31, 2018, and March 31, 2018, trading securities consisted
of:
|
|
|
|
|
|
Equity
securities
|
$
96,778
|
$
177,339
|
Debt
securities
|
57,529
|
34,986
|
Mutual investment
funds
|
235
|
270
|
Total
trading securities
|
$
154,542
|
$
212,595
|
The
fair value of assets and liabilities is determined using observable
market data based on recent trading activity. Where observable
market data is unavailable due to a lack of trading activity, the
Company utilizes internally developed models to estimate fair value
and independent third parties to validate assumptions, when
appropriate. Estimating fair value requires significant management
judgment, including benchmarking to similar instruments with
observable market data and applying appropriate discounts that
reflect differences between the securities that the Company is
valuing and the selected benchmark. Depending on the type of
securities owned by the Company, other valuation methodologies may
be required.
Measurement
of fair value is classified within a hierarchy based upon the
transparency of inputs used in the valuation of an asset or
liability. Classification within the hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
valuation hierarchy contains three levels:
●
Level 1 - Valuation
inputs are unadjusted quoted market prices for identical assets or
liabilities in active markets.
●
Level 2 - Valuation
inputs are quoted market prices for identical assets or liabilities
in markets that are not active, quoted market prices for similar
assets and liabilities in active markets, and other observable
inputs directly or indirectly related to the asset or liability
being measured.
●
Level 3 - Valuation
inputs are unobservable and significant to the fair value
measurement.
There
was a transfer between Level 1 and Level 3 valuation techniques
during the three and nine months ended December 31, 2018, in the
amount of $508. This transfer is related to corporate bonds of one
issuer, which was made due to an absence of market prices from
stock exchanges. As of December 31, 2018, fair value of these bonds
was determined based on the discounted cash flows
methodology.
The
following tables present trading securities
assets in the condensed consolidated
financial
statements at fair value on a recurring basis as
of December 31, 2018 and March 31, 2018:
|
|
Fair Value Measurements at December 31, 2018
using
|
|
|
Quoted Prices in
Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
$
96,778
|
$
96,778
|
$
-
|
$
-
|
Debt
securities
|
57,529
|
57,021
|
-
|
508
|
Mutual investment
funds
|
235
|
235
|
-
|
-
|
Total
trading securities
|
$
154,542
|
$
154,034
|
$
-
|
$
508
|
|
|
Fair Value Measurements at
March 31, 2018 (Recast) using
|
|
|
Quoted Prices in
Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
$
177,339
|
$
177,339
|
$
-
|
$
-
|
Debt
securities
|
34,986
|
34,986
|
-
|
-
|
Mutual investment
funds
|
270
|
270
|
-
|
-
|
Total
trading securities
|
$
212,595
|
$
212,595
|
$
-
|
$
-
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 7 – BROKERAGE AND OTHER RECEIVABLES,
NET
|
|
|
|
|
|
Margin lending
receivables
|
$
26,533
|
$
17,276
|
Receivables from
the sale of securities
|
26,261
|
6,061
|
Receivables from
brokerage clients
|
421
|
738
|
Receivables for
underwriting and market-making services
|
92
|
79
|
Bank commissions
receivable
|
-
|
1,016
|
Bonds coupon
receivable
|
-
|
119
|
Other
receivables
|
200
|
20
|
Allowance for
receivables
|
(668
)
|
(424
)
|
Total
brokerage and other receivables, net
|
$
52,839
|
$
24,885
|
As of
December 31, 2018 and March 31, 2018, using historical and
statistical data, the Company recorded an allowance for brokerage
receivables in the amount of $668 and $424,
respectively.
NOTE 8 – LOANS ISSUED
Loans
issued as of December 31, 2018, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
brokerage loans
|
$
1,857
|
Dec.
2019
|
4.75
%
|
$
4,560
|
USD
|
Bank customer
loans
|
480
|
Feb. 2019- Sep. 2028
|
12.95
%
|
-
|
RUB
|
|
$
2,337
|
|
|
|
|
Loans
issued as of March 31, 2018, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
brokerage loans
|
$
5,371
|
Jan. 2019-Feb.
2019
|
3.00
%
|
$
6,992
|
USD
|
Uncollateralized
brokerage loan
|
2,832
|
Jan. 2019-Mar.
2019
|
0.00
%
|
-
|
KZT
|
Bank customer
loans
|
551
|
Nov. 2018-Feb.
2028
|
12.32
%
|
-
|
RUB
|
|
$
8,754
|
|
|
|
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 9 – DEFERRED TAX ASSETS
The
Company is subject to taxation in the Russian Federation,
Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan, Germany and
the United States of America.
The tax
rates used for deferred tax assets and liabilities for the nine
months ended December 31, 2018 and 2017, is 25% and 21%,
respectively for the US, 20% for the Russian Federation,
Kazakhstan, Kyrgyzstan, Ukraine and Uzbekistan, 31% for Germany and
12.5% for Cyprus.
Deferred
tax assets and liabilities of the Company are comprised of the
following:
|
|
|
|
|
|
Deferred tax assets:
|
|
|
Tax losses
carryforward
|
$
3,438
|
$
3,050
|
Accrued
liabilities
|
44
|
49
|
Revaluation on
trading securities
|
88
|
88
|
Stock compensation
expenses
|
-
|
405
|
Valuation
allowance
|
(1,924
)
|
(2,433
)
|
Deferred
tax assets
|
1,646
|
1,159
|
|
|
|
Deferred tax liabilities:
|
|
|
Revaluation on
trading securities
|
768
|
387
|
|
|
|
Deferred
tax liabilities
|
768
|
387
|
|
|
|
Net
deferred tax assets
|
$
878
|
$
772
|
During
the nine months ended December 31, 2018 and 2017, the effective tax
rate was equal to 19.09% and 2.45%, respectively. The change in
effective tax rate was primarily due to earned revenue from
commission income of Freedom CY, taxable in Cyprus at a tax rate of
12.5%, and due to unrecognized tax loss carryforwards on FRHC.
During the nine months ended December 31, 2017, the effective tax
rate was primarily impacted due to non-taxable gains on trading
securities in Freedom KZ in the amount of $26,010.
During
the nine months ended December 31, 2018, the Company realized net
gain before income tax of $5,285, primarily from earned revenue
from commission income of Freedom CY in the amount of $13,563,
taxable in Cyprus at a tax rate of 12.5%. This gain was offset by
operating expenses of Freedom KZ and FRHC that have unrecognized
tax losses carryforward. This resulted in the Company realizing an
income tax expense during the nine months ended December 31, 2018,
of $1,009. During the nine months ended December 31, 2017, the
Company realized net income before income tax of $22,486, primarily
from non-taxable revenues generated from Freedom KZ’s trading
operations.
During
the three months ended December 31, 2018 and 2017, the effective
tax rate was equal to 5.77% and 2.98%, respectively. The increase
in effective tax rate was primarily due to earned revenue from
commission income of Freedom CY, taxable in Cyprus at a tax rate of
12.5% and due to unrecognized tax loss carryforwards on
FRHC.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
During
the three-month period ended December 31, 2018, the Company
realized net gain before income tax of $9,445, primarily from
earned revenue from commission income of Freedom CY in the amount
of $5,900, taxable in Cyprus at a tax rate of 12.5% and from
non-taxable revenue generated from Freedom KZ trading operations.
These gains were offset by operating expenses of Freedom KZ and
FRHC that have unrecognized tax losses carryforward. This resulted
in the Company realizing an income tax expense during the three
months ended December 31, 2018, of $545. During the three months
period ended December 31, 2017, the Company realized net loss
before income tax of $13,881, primarily from non-taxable revenues
generated from Freedom KZ’s trading operations resulting in
an income tax benefit of $413.
NOTE 10 – SECURITIES SOLD, NOT YET PURCHASED – AT FAIR
VALUE
As of
December 31, 2018, and March 31, 2018, the Company’s
securities sold, not yet purchased – at fair value was $0 and
$1,135, respectively.
During
the nine months ended December 31, 2018, the Company sold shares
received as a pledge under reverse repurchase agreements and
recognized financial liabilities at fair value in the amount of
$7,951 and partially closed short positions in the amount of $7,880
by purchasing securities from third parties, reducing its financial
liability. During the nine months ended December 31, 2018, the
Company recognized a gain on the change in fair value of financial
liabilities at fair value in the Condensed Consolidated Statements
of Operations and Statements of Other Comprehensive Income/(Loss)
in the amount of $951 with foreign exchange translation gains of
$255.
A short
sale involves the sale of a security that is not owned by the
seller in the expectation of the seller purchasing the same
security (or a security exchangeable) at a later date at a lower
price. A short sale involves the risk of a theoretically unlimited
increase in the market price of the security that would result in a
theoretically unlimited loss.
NOTE 11 – DERIVATIVE LIABILITY
On
December 28, 2016, Freedom RU entered into a derivative instrument
agreement with a related party that included a call option feature
for the purchase of shares held by Freedom RU. This call option was
classified as a derivative liability in the Consolidated Balance
Sheets and measured at each reporting period using the
Black-Scholes model. The gain associated with this derivative
instrument is recognized as a gain on derivative instrument in the
condensed 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 June14, 2017, at a strike price $3.10 per
share.
The
Company recorded a derivative liability of $495 as of March 31,
2017, as a result of the fair value of the call option. On June 14,
2017, the derivative instrument expired, unexercised by the option
holder, and the Company recognized a gain on the derivative
instrument of $490.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 12 – LOANS RECEIVED
Borrower
|
|
|
|
|
|
|
Freedom Holding
Corp.
|
Non-Bank
|
$
3,875
|
$
-
|
3
%
|
3 month-1
year
|
03/29/2019-12/31/2019
|
Freedom Finance
Cyprus Limited
|
|
92
|
99
|
1
%
|
1
year
|
12/11/2019
|
JSC Freedom
Finance
|
|
-
|
7,044
|
7
%
|
1
year
|
2/5/2019
|
Total
|
|
$
3,967
|
$
7,143
|
|
|
|
As of
March 31, 2018, the Company had received United States dollar
denominated loans from JSC AsiaCredit Bank in the total amount of
$7,031, under a credit line agreement with $9,000 withdrawal limit.
During the nine months ended December 31, 2018, the Company fully
repaid the loan from JSC AsiaCredit Bank. Non-bank loans received
are unsecured. As of December 31, 2018 and March 31, 2018, accrued
interest on the loans totaled $28 and $16,
respectively.
NOTE 13 – DEBT SECURITIES ISSUED
|
|
|
|
|
|
Debt securities
issued denominated in USD
|
$
18,417
|
$
7,006
|
Debt securities
issued denominated in KZT
|
7,718
|
4,025
|
Accrued
interest
|
438
|
191
|
Total
|
$
26,573
|
$
11,222
|
As of
December 31, 2018 and March 31, 2018, the Company had outstanding
bonds of Freedom KZ under Kazakhstan law in the amount of $26,573
and $11,222, respectively. As of December 31, 2018, these bonds had
fixed annual coupon rates ranging from 8% to 11.5% and maturity
dates ranging from January 2019 to May 2021. As of March 31, 2018,
debt securities issued included Asyl bonds in the amount of $3,015
with an 8% fixed annual coupon rate and a maturity date of August
2018, which were fully redeemed in April 2018.
Debt
securities issued are initially recognized at the fair value of the
consideration received, less directly attributable transaction
costs. Debt securities issued as of December 31, 2018 and March 31,
2018, included $438 and $191 accrued interest, respectively. The
Freedom KZ bonds are actively traded on Kazakhstan Stock
Exchange.
NOTE 14 – CUSTOMER LIABILITIES
The
Company recognizes customer liabilities associated with funds held
by our brokerage and bank customers. Customer liabilities consist
of:
|
|
|
Banking
customers
|
$
32,541
|
$
9,305
|
Brokerage
customers
|
26,055
|
21,367
|
Total
|
$
58,596
|
$
30,672
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 15 – SECURITIES REPURCHASE AGREEMENT
OBLIGATIONS
As of
December 31, 2018 and March 31, 2018, trading securities included
collateralized securities subject to repurchase agreements as
described in the following table:
|
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
|
|
|
|
Corporate
equity
|
11.96
%
|
$
45,063
|
$
-
|
$
2,121
|
$
47,184
|
Corporate
debt
|
10.33
%
|
13,685
|
-
|
-
|
13,685
|
Non-US sovereign
debt
|
8.91
%
|
7,312
|
-
|
-
|
7,312
|
Total
securities sold under repurchase agreements
|
|
$
66,060
|
$
-
|
$
2,121
|
$
68,181
|
|
|
|
Interest rate and remaining contractual maturity of the
agreements
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
|
|
|
|
Corporate
equity
|
12.04
%
|
$
109,821
|
$
8,961
|
$
7,148
|
$
125,930
|
Corporate
debt
|
10.64
%
|
24,257
|
2,023
|
-
|
26,280
|
Non-US sovereign
debt
|
8.54
%
|
2,565
|
-
|
-
|
2,565
|
Total
securities sold under repurchase agreements
|
|
$
136,643
|
$
10,984
|
$
7,148
|
$
154,775
|
The
fair value of collateral pledged under repurchase agreements as of
December 31, 2018 and March 31, 2018, was $96,707 and $203,140,
respectively.
Securities
pledged as collateral by the Company under repurchase agreements
are liquid trading securities with market quotes and significant
trading volume.
NOTE 16 – 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 was
recognized as gain on a derivative instrument in the Condensed
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 for
the nine months ended December 31, 2017.
During the three months ended December 31, 2018 and 2017, the
Company earned commission income from related parties in the
amounts of $11,101 and $1,392 respectively.
During the nine months ended December 31, 2018 and 2017, the
Company earned commission income from related parties in the
amounts of $26,723 and $3,103, respectively.
Commission income earned from related parties is comprised
primarily of brokerage commissions and agency fees for referrals of
new brokerage clients to other brokers and commissions for money
transfers by brokerage clients.
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, 2018 and March 31, 2018, the Company had bank
commission receivables and receivables from brokerage clients from
related parties totaling $43 and $1,055, respectively. Brokerage
and other receivables from related parties result principally from
commissions on the brokerage operations of related
parties.
As of December 31, 2018 and March 31, 2018, the Company had cash
and cash equivalents with related parties totaling $8,400 and
$17,795, respectively.
As of December 31, 2018 and March 31, 2018, the Company had loans
issued to related parties totaling $20 and $1,748,
respectively.
As of December 31, 2018 and March 31, 2018, the Company had margin
lending receivables with related parties totaling $12,347 and
$8,748, respectively.
As of December 31, 2018 and March 31, 2018, the Company had
advances received for the sale of fixed assets from a related party
totaling $0 and $288, respectively.
As of December 31, 2018 and March 31, 2018, the Company had margin
lending payables due to related parties, totaling $0 and $81,
respectively.
As of December 31, 2018 and March 31, 2018, the Company had loans
received from a related party totaling $2,825 and $99,
respectively.
As of December 31, 2018 and March 31, 2018, the Company had
accounts payable due to a related party totaling $2,843 and $0,
respectively.
As of December 31, 2018 and March 31, 2018, the Company had
customer liabilities on brokerage accounts and bank accounts of
related parties totaling $7,953 and $3,402, respectively. As of
December 31, 2018 and March 31, 2018, the Company had restricted
customer cash on brokerage accounts of related parties totaling
$5,177 and $2,004, respectively.
NOTE 17 – STOCKHOLDERS’ EQUITY
During
the nine months ended December 31, 2018 and 2017, shareholders made
capital contributions of $245 and $8,594 to FRHC,
respectively.
On
October 6, 2017, the Company awarded restricted stock grants
totaling 3,900,000 shares of its common stock to 16 employees and
awarded nonqualified stock options to purchase an aggregate of
360,000 shares of its common stock to two employees. Of the
3,900,000 shares awarded pursuant to the restricted stock grant
awards, 1,200,000 shares are subject to two-year vesting conditions
and 2,700,000 shares are subject to three-year vesting conditions.
All of the nonqualified stock options are subject to three-year
vesting conditions. The Company recorded stock based compensation
expense for restricted stock grants and stock options in the amount
of $847 and $2,533 during the three and nine months ended December
31, 2018, respectively. The Company recorded stock based
compensation expense for restricted stock grants and stock options
in the amount of $792 during three and nine months ended December
31, 2017.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 18 – STOCK BASED COMPENSATION
As
disclosed in Note 17, 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 were issued at the fair value of
the underlying shares at the grant date.
During
the year ended March 31, 2018, stock options covering a total of
360,000 shares of common stock were granted. No options were
granted during the three and nine month periods ended December 31,
2018. Total compensation expense related to options granted was $54
for the three months ended December 31, 2018, and $51 for the three
months ended December 31, 2017. Total compensation expense related
to options granted for the nine months periods ended December 31,
2018 and 2017, was $162 and $51, respectively. As of December 31,
2018, there was total remaining compensation expense of $381
related to stock options, which will be recorded over a weighted
average period of approximately 1.76 years.
The
Company has determined the fair value of such stock options using
the Black-Scholes option valuation model based on the following key
assumptions:
Vesting
period (years)
|
3
|
Volatility
|
165.33%
|
Risk-free
rate
|
1.66%
|
During
the year ended March 31, 2018, a total of 3,900,000 shares of
common stock were awarded. During the three and nine months ended
December 31, 2018, no shares of common stock were awarded. The
compensation expense related to restricted stock grants was $793
during the three months ended December 31, 2018, and $741 during
the three months ended December 31, 2017. Total compensation
expense related to restricted stock grants was $2,371 and $741
during the nine months ended December 31, 2018 and 2017,
respectively. As of December 31, 2018, there was $4,298 of total
unrecognized compensation cost related to nonvested shares of
common stock granted. The cost is expected to be recognized over a
weighted average period of 1.54 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. During the
three months ended December 31, 2018, 10,000 stock options were
exercised.
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, 2018:
|
|
Weighted Average Exercise Price
|
Weighted
Average Remaining Contractual Term
(In Years)
|
Aggregate
Intrinsic Value
|
Outstanding, March
31, 2018
|
360,000
|
$
1.98
|
9.52
|
$
1,753
|
Granted
|
-
|
-
|
-
|
-
|
Exercised
|
(10,000
)
|
1.98
|
-
|
66
|
Forfeited/cancelled/expired
|
-
|
-
|
-
|
-
|
Outstanding, at
December 31, 2018
|
350,000
|
$
1.98
|
8.76
|
$
2,198
|
Exercisable,
at December 31, 2018
|
110,000
|
$
1.98
|
8.76
|
$
691
|
The
table below summarizes the activity for the Company's restricted
stock outstanding during the nine months ended December 31,
2018:
|
|
Weighted Average Fair Value
|
Outstanding,
March 31, 2018
|
3,900,000
|
$
8,190
|
Granted
|
-
|
-
|
Vested
|
1,500,000
|
3,150
|
Forfeited/cancelled/expired
|
-
|
-
|
Outstanding,
at December 31, 2018
|
2,400,000
|
$
5,040
|
NOTE 19 – ACQUISITIONS AND DISPOSAL OF
SUBSIDIARY
Acquisition of Asyl
On
April 12, 2018, we completed the acquisition and merger of Asyl
into the Company. This acquisition joined the two largest retail
brokerage firms in Kazakhstan and increased our client accounts in
Kazakhstan by 16,000 accounts. Asyl was formerly controlled by Mr.
Turlov since April 28, 2017. The Company agreed to acquire Asyl
from Mr. Turlov for approximately $2.2 million, which was equal to
the fair value of the net assets acquired by the
Company.
When
preparing the condensed consolidated financial statements for the
three and nine months ended December 31, 2018, management
determined that certain amounts included in the Company’s
consolidated financial statements as of March 31, 2018 and for the
three and nine months ended December 31, 2017, required revision,
due to completion of the merger of Asyl in April 2018, which was
deemed to be an entity under common control with the Company since
April 28, 2017.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Acquisition of Nettrader
On May
28, 2018, we completed the acquisition and merger of Nettrader.
This resulted in the acquisition of approximately 16,000 new
Russian client accounts. This acquisition also finalized our
acquisition of the Tradernet trading platform, a browser-based
application and in some countries a supporting mobile app to
facilitate our customers’ trading activities and ability to
monitor and manage all aspects of their personal accounts and
participate in our client social network. Nettrader was formerly
owned by Mr. Turlov since May 18, 2017. The Company acquired
Nettrader for approximately $3.8 million, which was equal to the
fair value of the net assets acquired by the Company.
When
preparing the condensed consolidated financial statements for the
three and nine months ended December 31, 2018, management
determined that certain amounts included in the Company’s
consolidated financial statements as of March 31, 2018 and for the
three and nine months ended December 31, 2017, required revision,
due to the completion of the merger of Nettrader in May 2018, which
was deemed to be an entity under common control with the Company
since May 18, 2017.
Disposal of First Stock Store
During
the nine months ended December 31, 2018, the Company fully disposed
of its subsidiary LLC First Stock Store. LLC First Stock Store
provided an online securities marketplace in Russia through a
project called Freedom24. LLC First Stock Store was disposed of for
$7, with net assets as of the date of disposal of $22. The
difference was recognized as loss on disposal of subsidiary in the
amount of $15. Prior to the disposal, Freedom24 and its employees
were transferred to Freedom RU.
NOTE 20 – COMMITMENTS AND CONTINGENT LIABILITIES
The
table below shows approximate lease commitments and other
contingent liabilities of the Company as of December 31,
2018:
|
|
|
|
|
|
|
|
Operating
Leases:
|
|
|
|
|
|
Office
Leases
(1)
|
$
6,654
|
$
3,882
|
$
2,772
|
$
-
|
$
-
|
Total
Operating Leases
|
$
6,654
|
$
3,882
|
$
2,772
|
$
-
|
$
-
|
(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 three lease
agreements with longer lease terms.
The
Company’s rent expense for office space was $1,474 and $818
for the three months ended December 31, 2018 and 2017,
respectively. The Company’s rent expense for office space was
$3,692 and $1,647 for the nine months ended December 31, 2018 and
2017, respectively.
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 21 – SUBSEQUENT EVENTS
The
Company evaluated all material events and transactions that
occurred after December 31, 2018 through February 12, 2019. Other
than as disclosed below, during this period the Company did not
have any additional material recognizable subsequent
events.
On
February 4, 2019, the board of directors approved the filing of
Restated Articles of Incorporation of Freedom Holding Corp
(“Restated Articles”) with the State of Nevada. No
amendments were made to the Company’s Articles of
Incorporation in connection with the restatement. The board of
directors also approved and adopted amended By-Laws of Freedom
Holding Corp (as amended through February 4, 2019)
(“By-Laws”).
On
February 4, 2019, the Company announced that its common stock had
been approved for listing on the Kazakhstan Stock Exchange (KASE)
Alternative Market. The KASE was established in 1993 and is
currently the leading stock exchange in the Central Asian region.
It operates under a license issued by the National Bank of the
Republic of Kazakhstan and is an affiliate member of the World
Federation of Exchanges and member of the Federation of Euro-Asian
Stock Exchanges. The KASE operates multiple financial markets
including an equity and corporate bond market, government
securities market, foreign exchange market, repo transaction market
and derivatives market.
On
January 23, 2019, the Company announced that it had retired debt
securities denominated in KZT which had a carrying value of $8,105
including interest accrued of $387 as of December 31,
2018.