UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2021

 

 

 

OR

 

 

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

 

For the transition period from ________ to _________

 

Commission File Number 001-33034

 

FREEDOM HOLDING CORP.

(Exact name of registrant as specified in its charter)

 

Nevada

 

30-0233726

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

“Esentai Tower” BC, Floor 7

77/7 Al Farabi Ave

Almaty, Kazakhstan

 

050040

(Address of principal executive offices)

 

(Zip Code)

 

+7 727 311 10 64

(Registrant's telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common

FRHC

The Nasdaq Capital Market

 

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

 

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

 

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

  

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

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

 

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

 

As of August 4, 2021, the registrant had 59,474,712 shares of common stock, par value $0.001, issued and outstanding.

 

 

 

 

FREEDOM HOLDING CORP.

FORM 10-Q

TABLE OF CONTENTS

 

 

Pages

PART I — FINANCIAL INFORMATION

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2021 and March 31, 2021

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income for the Three Months Ended June 30, 2021 and 2020

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2021 and 2020

5

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for The Three Months Ended June 30, 2021 and 2020

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 33

 

 

 

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

 48

 

 

 

Item 4.

Controls and Procedures

 51

 

 

 

PART II — OTHER INFORMATION

 52

 

 

 

Item 1.

Legal Proceedings

 52

 

 

 

Item 1A.

Risk Factors

 52

 

 

 

Item 6.

Exhibits

 53

 

 

Signatures

54

 

 
2

Table of Contents

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

 

 

 

June 30, 2021

 

 

March 31, 2021

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$674,076

 

 

$698,828

 

Restricted cash

 

 

419,046

 

 

 

437,958

 

Trading securities

 

 

825,364

 

 

 

736,188

 

Available-for-sale securities, at fair value

 

 

1

 

 

 

1

 

Brokerage and other receivables, net

 

 

121,450

 

 

 

64,801

 

Loans issued

 

 

13,385

 

 

 

11,667

 

Fixed assets, net

 

 

20,081

 

 

 

18,385

 

Intangible assets, net

 

 

9,487

 

 

 

9,785

 

Goodwill

 

 

7,891

 

 

 

7,868

 

Right-of-use asset

 

 

17,450

 

 

 

13,262

 

Other assets, net

 

 

19,112

 

 

 

19,902

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$2,127,343

 

 

$2,018,645

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Securities repurchase agreement obligations

 

$442,494

 

 

$426,715

 

Customer liabilities

 

 

1,067,864

 

 

 

1,163,697

 

Trade payables

 

 

150,673

 

 

 

22,304

 

Current income tax liability

 

 

21,362

 

 

 

14,843

 

Securities sold, not yet purchased – at fair value

 

 

14,753

 

 

 

8,592

 

Loans received

 

 

3,414

 

 

 

3,373

 

Debt securities issued

 

 

58,123

 

 

 

68,443

 

Lease liability

 

 

17,345

 

 

 

13,249

 

Deferred income tax liabilities

 

 

2,243

 

 

 

4,385

 

Deferred distribution payments

 

 

8,534

 

 

 

8,534

 

Other liabilities

 

 

7,697

 

 

 

8,839

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

$1,794,502

 

 

$1,742,974

 

 

 

 

 

 

 

 

 

 

Commitments and Contingent Liabilities (Note 19)

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock - $0.001 par value; 500,000,000 shares authorized; 59,474,712 and 58,443,212 shares issued and outstanding as of June 30, 2021 and March 31, 2021, respectively

 

 

58

 

 

 

58

 

Additional paid in capital

 

 

106,834

 

 

 

104,672

 

Retained earnings

 

 

260,388

 

 

 

208,628

 

Accumulated other comprehensive loss

 

 

(32,746)

 

 

(36,046)

 

 

 

 

 

 

 

 

 

TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY

 

 

334,534

 

 

 

277,312

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

(1,693)

 

 

(1,641)

TOTAL SHAREHOLDERS’ EQUITY

 

 

332,841

 

 

 

275,671

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$2,127,343

 

 

$2,018,645

 

 

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

 

 
3

Table of Contents

 

FREEDOM HOLDING CORP.

 

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

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

 

 

 

Three months ended June 30,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee and commission income

 

$97,406

 

 

$43,339

 

Interest income

 

 

18,077

 

 

 

4,249

 

Net gain on trading securities

 

 

9,900

 

 

 

9,084

 

Net loss on foreign exchange operations

 

 

(1,187)

 

 

(248)

Net loss on derivative

 

 

(59)

 

 

(9)

 

 

 

 

 

 

 

 

 

TOTAL REVENUE, NET

 

 

124,137

 

 

 

56,415

 

 

 

 

 

 

 

 

 

 

Expense:

 

 

 

 

 

 

 

 

Fee and commission expense

 

 

21,863

 

 

 

9,769

 

Interest expense

 

 

14,272

 

 

 

3,744

 

Operating expense

 

 

30,318

 

 

 

14,426

 

Provision for impairment losses/(recoveries)

 

 

293

 

 

 

(378)

Other expense/(income), net

 

 

14

 

 

 

(27)

 

 

 

 

 

 

 

 

 

TOTAL EXPENSE

 

 

66,760

 

 

 

27,534

 

NET INCOME BEFORE INCOME TAX

 

 

57,377

 

 

 

28,881

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(5,669)

 

 

(4,605)

 

 

 

 

 

 

 

 

 

NET INCOME

 

$51,708

 

 

$24,276

 

 

 

 

 

 

 

 

 

 

Less: Net (loss)/ income attributable to noncontrolling interest in subsidiary

 

 

(52)

 

 

423

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$51,760

 

 

$23,853

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect

 

 

-

 

 

 

71

 

Foreign currency translation adjustments, net of tax effect

 

 

3,300

 

 

 

8,633

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME BEFORE NONCONTROLLING INTERESTS

 

$55,008

 

 

$32,980

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive (loss)/income attributable to noncontrolling interest in subsidiary

 

 

(52)

 

 

423

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$55,060

 

 

$32,557

 

BASIC NET INCOME PER COMMON SHARE (In US Dollars)

 

 

0.87

 

 

 

0.42

 

DILUTED NET INCOME PER COMMON SHARE (In US Dollars)

 

 

0.87

 

 

 

0.42

 

Weighted average number of shares (basic)

 

 

59,474,712

 

 

 

58,358,212

 

Weighted average number of shares (diluted)

 

 

59,531,446

 

 

 

58,455,675

 

 

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

 

 
4

Table of Contents

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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

 

 

 

For The Three months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

 

 

 

 

 

Cash Flows (Used In)/From Operating Activities

 

 

 

 

 

 

Net income

 

$51,708

 

 

$24,276

 

Adjustments to reconcile net income from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,307

 

 

 

700

 

Noncash lease expense

 

 

1,854

 

 

 

1,606

 

Change in deferred taxes

 

 

(2,216)

 

 

943

 

Stock compensation expense

 

 

2,162

 

 

 

525

 

Unrealized (gain)/loss on trading securities

 

 

(4,583)

 

 

2,206

 

Net gain on derivatives

 

 

-

 

 

 

(2,312)

Net change in accrued interest

 

 

(4,054)

 

 

(1,230)

Allowances/(recovery) for receivables

 

 

293

 

 

 

(378)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Lease liabilities

 

 

(2,063)

 

 

(1,482)

Trading securities

 

 

(77,857)

 

 

(7,517)

Brokerage and other receivables

 

 

(54,152)

 

 

16,844

 

Loans issued

 

 

(1,968)

 

 

632

 

Other assets

 

 

2,431

 

 

 

128

 

Securities sold, not yet purchased – at fair value

 

 

6,467

 

 

 

-

 

Customer liabilities

 

 

(122,275)

 

 

621,166

 

Current income tax liability

 

 

5,007

 

 

 

3,130

 

Trade payables

 

 

128,260

 

 

 

30,321

 

Other liabilities

 

 

(1,262)

 

 

1,168

 

Net cash flows (used in)/from operating activities

 

 

(70,941)

 

 

690,726

 

 

 

 

 

 

 

 

 

 

Cash Flows (Used In)/From Investing Activities

 

 

 

 

 

 

 

 

Purchase of fixed assets

 

 

(2,762)

 

 

(1,488)

Proceeds from sale of fixed assets

 

 

179

 

 

 

214

 

Proceeds from sale of available-for-sale securities, at fair value

 

 

-

 

 

 

6,508

 

Net cash flows (used in)/from investing activities

 

 

(2,583)

 

 

5,234

 

 

 

 

 

 

 

 

 

 

Cash Flows From/(Used In) Financing Activities

 

 

 

 

 

 

 

 

Proceeds from securities repurchase agreement obligations

 

 

16,792

 

 

 

5,275

 

Proceeds from issuance of debt securities

 

 

-

 

 

 

1,045

 

Repurchase of debt securities

 

 

(10,105)

 

 

(7,300)

Net cash flows from/(used in) financing activities

 

 

6,687

 

 

 

(980)

 

 

 

 

 

 

 

 

 

Effect of changes in foreign exchange rates on cash and cash equivalents

 

 

23,173

 

 

 

13,890

 

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(43,664)

 

 

708,870

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

1,136,786

 

 

 

129,805

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD

 

$1,093,122

 

 

$838,675

 

 

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

 

 
5

Table of Contents

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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

 

 

 

For The Three months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$6,514

 

 

$2,602

 

Income tax paid

 

$2,824

 

 

$79

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash disclosures:

 

 

 

 

 

 

 

 

Operating lease right-of-use assets obtained/disposed of in exchange for operating lease obligations during the period, net

 

$5,705

 

 

$658

 

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows:

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$674,076

 

 

$199,303

 

Restricted cash

 

 

419,046

 

 

 

639,372

 

Total cash, cash equivalents and restricted cash shown as in the statement of cash flows

 

$1,093,122

 

 

$838,675

 

 

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

 

 
6

Table of Contents

 

FREEDOM HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

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

 

 

 

Common Stock

 

 

Additional paid

 

 

Retained

 

 

Accumulated other comprehensive

 

 

Non-controlling

 

 

 

 

 

 

Shares

 

 

Amount

 

 

in capital

 

 

earnings

 

 

loss

 

 

interest

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance As At March 31, 2020

 

 

58,358,212

 

 

$58

 

 

$102,890

 

 

$66,335

 

 

$(37,974)

 

$(2,272)

 

$129,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

525

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

525

 

Exercise of options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

71

 

 

 

-

 

 

 

71

 

Translation difference

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,633

 

 

 

-

 

 

 

8,633

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,853

 

 

 

-

 

 

 

423

 

 

 

24,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance As At June 30, 2020

 

 

58,358,212

 

 

$58

 

 

$103,415

 

 

$90,188

 

 

$(29,270)

 

$(1,849)

 

$162,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance As At March 31, 2021

 

 

58,443,212

 

 

$58

 

 

$104,672

 

 

$208,628

 

 

$(36,046)

 

$(1,641)

 

$275,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

1,031,500

 

 

 

-

 

 

 

2,162

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,162

 

Translation difference

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,300

 

 

 

-

 

 

 

3,300

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

51,760

 

 

 

-

 

 

 

(52)

 

 

51,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance As At June 30, 2021

 

$59,474,712

 

 

$58

 

 

$106,834

 

 

$260,388

 

 

$(32,746)

 

$(1,693)

 

$332,841

 

 

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

 

 
7

Table of Contents

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Overview

 

Freedom Holding Corp. (the “Company” or “FRHC”) is a corporation organized in the United States under the laws of the State of Nevada that through its operating subsidiaries provides financial services including retail securities brokerage, research, investment counseling, securities trading, market making, retail banking, corporate investment banking and underwriting services in Eurasia. 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, Azerbaijan and Germany. The Company also owns an agency only institutional broker dealer registered with the U.S. Securities and Exchange Commission (“SEC”). The Company’s common stock trades on the Nasdaq Capital Market.

 

The Company owns directly, or through subsidiaries, the following companies:

 

 

·

LLC Investment Company Freedom Finance, a Moscow, Russia-based securities broker-dealer (“Freedom RU”);

 

·

LLC FFIN Bank, a Moscow, Russia-based bank (“Freedom Bank RU”);

 

·

JSC Freedom Finance, an Almaty, Kazakhstan-based securities broker-dealer (“Freedom KZ”);

 

·

Freedom Finance Global, PLC, an Astana International Financial Centre-based securities broker-dealer, (“Freedom Global”);

 

·

Bank Freedom Finance Kazakhstan JSC, an Almaty, Kazakhstan-based bank (“Freedom Bank KZ”);

 

·

Freedom Finance Europe Limited, a Limassol, Cyprus-based broker-dealer (“Freedom EU”);

 

·

Freedom Finance Germany GmbH, a Berlin, Germany-based tied agent of Freedom EU (“Freedom GE”);

 

·

LLC Freedom Finance Uzbekistan, a Tashkent, Uzbekistan-based broker-dealer (“Freedom UZ”);

 

·

Prime Executions, Inc., a New York City, New York-based agency only institutional brokerage (“PrimeEx”);

 

·

Freedom Finance Technologies Ltd, a Limassol, Cyprus-based IT development company (“Freedom Technologies”);

 

·

LLC Freedom Finance Azerbaijan, an Azerbaijan-based financial educational center (“Freedom AZ”);

 

·

FFIN Securities, Inc., a Nevada corporation (“FFIN”); and

 

·

Freedom Finance Special Purpose Company LTD (“Freedom SPC”).

 

 
8

Table of Contents

 

FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

As of June 30, 2021, the Company also owned a 32.88% interest in LLC Freedom Finance Ukraine, a Kiev, Ukraine-based broker-dealer (“Freedom UA”). The remaining 67.12% interest in Freedom UA was owned by Askar Tashtitov, the Company’s president. However, due to recent amendments by regulators to further restrict foreign ownership of registered Ukrainian broker-dealers, in July 2021 the Company was required to sell an additional 23.88% of the outstanding equity interests in Freedom UA to Mr. Tashtitov, reducing its direct ownership interest in Freedom UA to 9%. In April 2019 the Company entered into a series of contractual arrangements with Freedom UA and Mr. Tashtitov that obligate the Company to guarantee the performance of all Freedom UA obligations and provide Freedom UA sufficient funding to cover all operating losses and net capital requirements, enable the Company to receive 90% of the net profits of Freedom UA after tax, and require the Company to provide Freedom UA the management competence, operational support, and ongoing access to the Company’s significant assets, necessary technology resources and expertise to conduct the business of Freedom UA. The Company accounts for Freedom UA as a variable interest entity (“VIE”) under the accounting standards of the Financial Accounting Standards Board (“FASB”). Accordingly, the financial statements of Freedom UA are consolidated into the financial statements of the Company.

 

The Company’s subsidiaries are participants on the Kazakhstan Stock Exchange (KASE), Astana Stock Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPBX), the Ukrainian Exchange (UX), the Republican Stock Exchange of Tashkent (UZSE), the Uzbek Republican Currency Exchange (UZCE) and are members of the New York Stock Exchange (NYSE) and Nasdaq Stock Exchange (Nasdaq).

 

Unless otherwise specifically indicated or as is otherwise contextually required, FRHC, Freedom RU, Freedom Bank RU, Freedom KZ, Freedom Global, Freedom Bank KZ, Freedom EU, Freedom GE, Freedom UZ, PrimeEx, Freedom Technologies, Freedom AZ, FFIN, Freedom SPC and Freedom UA 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 (U.S. GAAP).

 

These financial statements have been prepared on the accrual basis of accounting.

 

Basis of presentation and principles of consolidation

 

The Company’s consolidated financial statements present the consolidated accounts of FRHC, Freedom RU, Freedom Bank RU, Freedom KZ, Freedom Global, Freedom Bank KZ, Freedom EU, Freedom GE, Freedom UZ, PrimeEx, Freedom Technologies, Freedom AZ, Freedom UA, FFIN and Freedom SPC. All significant inter-company balances and transactions have been eliminated from the consolidated financial statements.

 

Consolidation of variable interest entities

 

In accordance with accounting standards regarding consolidation of variable interest entities (“VIEs”), VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. VIEs must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates 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 U.S. GAAP guidance discussed elsewhere within these disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC Topic 606, which are presented in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income 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).

  

Under Topic 606, the Company is required to recognize commission fees when they are probable and there is not a significant chance of reversal in the future. The Company recognizes revenue in accordance with this core principle by applying the following steps:

 

 

·

Step 1: Identify the contract(s) with a customer - A contract is an agreement between two or more parties that creates enforceable rights and obligations.

 

·

Step 2: Identify the performance obligations in the contract - A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

 

·

Step 3: Determine the transaction price - The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash. The transaction price also is adjusted for the effects of the time value of money if the contract includes a significant financing component and for any consideration payable to the customer. If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

 

 

 

·

Step 4: Allocate the transaction price to the performance obligations in the contract - An entity typically allocates the transaction price to each performance obligation on the basis of the relative standalone selling prices of each distinct good or service promised in the contract. If a standalone selling price is not observable, an entity estimates it. Sometimes, the transaction price includes a discount or a variable amount of consideration that relates entirely to a part of the contract.

 

 

 

 

·

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation - An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, an entity recognizes revenue over time by selecting an appropriate method for measuring the entity’s progress toward complete satisfaction of that performance obligation.

 

Derivative financial instruments

 

In the normal course of business, the Company invests in various derivative financial contracts including futures. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative.

 

Functional currency

 

Management has adopted ASC 830, Foreign Currency Translation Matters as it pertains to its foreign currency translation. The Company’s functional currencies are the Russian ruble, European euro, U.S. dollar, Ukrainian hryvnia, Uzbekistani som, Kazakhstani tenge, Kyrgyzstani som and the Azerbaijani manat, and its reporting currency is the U.S. dollar. For financial reporting purposes, foreign currencies are translated into U.S. dollars as the reporting currency. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. 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”.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

Cash and cash equivalents

 

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

 

Securities reverse repurchase and repurchase agreements

 

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

 

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

 

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

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

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 securities 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 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 are included in accumulated other comprehensive loss, with the exception of other-than-temporary impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses, which are recognized in the Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments’ revaluation reserve is then reclassified to Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investment revaluation reserve is reclassified to profit or loss.

 

Trading securities

 

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

 

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

 

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

 

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.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

Brokerage and other receivables

 

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

 

Derecognition of financial assets

 

A financial asset (or, where applicable a part of a financial asset or a part of a group of similar financial assets) is derecognized when 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 June 30, 2021, and March 31, 2021, the Company had not recorded any charges for impairment of long-lived assets.

 

 
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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 June 30, 2021, and March 31, 2021, goodwill recorded in the Company’s Consolidated Balance Sheets totaled $7,891 and $7,868, respectively. The Company performs an impairment review at least annually unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. In its annual goodwill impairment test, the Company estimated the fair value of the reporting unit based on the income approach (also known as the discounted cash flow method) and determined the fair value of the Company’s goodwill exceeded the carrying amount of the Company’s goodwill. The goodwill value as of June 30, 2021, increased compared to March 31, 2021, due to foreign exchange currency translation.

 

The changes in the carrying amount of goodwill as of March 31, 2021, and for the quarter June 30, 2021, were as follows:

 

Balance as of March 31, 2021

 

$7,868

 

 

 

 

 

 

Foreign currency translation

 

 

23

 

 

 

 

 

 

Balance as of June 30, 2021

 

$7,891

 

 

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 (if anticipated). As of June 30, 2021, and March 31, 2021, the Company had no accrued interest or penalties related to uncertain tax positions.

 
The Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has presented the deferred tax impacts of GILTI tax in its consolidated financial statements as of June 30, 2021 and 2020.

 

 
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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

 

The Company adopted ASU No. 2016-02, “Leases (Topic 842)”, which requires leases with durations greater than twelve months to be recognized on the balance sheet.

 

Operating lease assets and corresponding lease liabilities are recognized on the Company’s Consolidated Balance Sheets. Refer to Note 18 - Leases, within the notes to condensed consolidated financial statements for additional disclosure and significant accounting policies affecting leases.

 

Fixed assets

 

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

 

Segment information

 

The Company operates in a single operating segment offering financial services to its customers in a single geographic region covering Eurasia. The Company’s financial services business provides retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking, underwriting, complementary banking services and retail banking services to its customers. The Company generates revenue from customers primarily from fee and commission income and interest income. The Company does not use profitability reports or other information disaggregated on a regional, country or divisional basis for making business decisions.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

Recent accounting pronouncements

 

In June 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. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. The Board developed a philosophy to extend and simplify how effective dates are staggered between larger public companies (bucket one) and all other entities (bucket two). Those other entities include private companies, smaller public companies, not-for-profit organizations, and employee benefit plans. Under this philosophy, a major update would first be effective for bucket-one entities, that is, public business entities that are SEC filers, excluding entities eligible to be smaller reporting companies (SRCs) under the SEC’s definition. The Master Glossary of the Codification defines public business entities and SEC filers. All other entities, including SRCs, other public business entities, and nonpublic business entities (private companies, not-for-profit organizations, and employee benefit plans) would compose bucket two. For those entities, it is anticipated that the Board will consider requiring an effective date staggered at least two years after bucket one for major updates. The Company is currently an SRC and according to ASU 2019-10, qualifies for bucket two. Accordingly, ASU 2016-13 and ASU 2017-12 are effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact that ASU 2016-13 and 2017-12 will have on its consolidated financial statements and related disclosures.

 

In October 2020 the FASB issued Accounting Standards Update (ASU) No. 2020-09, Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762, which amends various paragraphs in the FASB Accounting Standards Codification based on the issuance of SEC Final Rulemaking Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities. Release No. 33-10762 amends Rules 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, and 3-16 of Regulation S-X, Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered, both of which apply mainly to specific types of registered debt offerings. The amendments, which are the result of the SEC’s ongoing, comprehensive evaluation of its existing disclosure requirements, are intended to (1) make the disclosures required by the rules more useful to investors and to simplify and streamline the disclosure obligations imposed on registrants; (2) encourage issuers to offer registered guaranteed or collateralized securities, thereby potentially providing investors protection they may not be afforded in offerings conducted on an unregistered basis; and (3) increase the number of registered offerings that include guarantees as credit enhancements, which could result in a lower cost of capital for issuers and an increased level of protection for investors. ASU 2020-09 is effective for fiscal years beginning after January 4, 2021. The Company does not expect that the new guidance will significantly impact its consolidated financial statements.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

In January 2021 the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Table of Contents link FASB Accounting Standards Codification (ASC) Topic 848, Reference Rate Reform, for contract modifications and hedge accounting apply as well to derivatives that are affected by the changes in interest rates used for margining, discounting or contract price alignment (i.e., the discounting transition). Examples of such use include (1) rates used in interest rate swaps to compute the cash flows for the swap’s variable leg, (2) interest rate indexes used to discount the future cash flows of a derivative instrument to determine its fair value, and (3) the compensation or the interest amount earned on margin payments (i.e., contract price alignment). The amended guidance in ASU No. 2021-01 is effective immediately for all entities. The guidance may be applied on (1) a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or (2) a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of ASU No. 2021-01 through the date that financial statements are available to be issued. If any of the amendments are applied for an eligible hedging relationship, adjustments resulting therefrom must be reflected as of the date that the election is applied. The Company is currently evaluating the impact that ASU 2021-01 will have on its consolidated financial statements and related disclosures.

 

In May 2021 the FASB issued Accounting Standards Update No. 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, a consensus of the Emerging Issues Task Force (EITF) , which amends the FASB Accounting Standards Codification (ASC or the “Codification”) to provide explicit guidance, and, thus, reduce diversity in practice, on accounting by issuers for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange. This amendment provides that for an entity that presents earnings per share (EPS) in accordance with Topic 260, the effects of a modification or an exchange of a freestanding equity-classified written call option that is recognized as a dividend should be an adjustment to net income (or net loss) in the basic EPS calculation. The amended guidance becomes mandatorily effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and should be applied prospectively to modifications or exchanges occurring on or after the effective date. The Company is currently evaluating the impact that ASU 2021-04 will have on its consolidated financial statements and related disclosures.

 

NOTE 3 – CASH AND CASH EQUIVALENTS

 

As of June 30, 2021, and March 31, 2021, cash and cash equivalents consisted of the following:

 

 

 

June 30, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

 

Securities purchased under reverse repurchase agreements

 

$174,936

 

 

$248,946

 

Accounts with stock exchanges

 

 

156,255

 

 

 

98,521

 

Current accounts with brokers

 

 

83,318

 

 

 

94,494

 

Current account with National Bank (Kazakhstan)

 

 

69,854

 

 

 

36,726

 

Current accounts with commercial banks

 

 

66,046

 

 

 

75,903

 

Current account with National Settlement Depository (Russia)

 

 

55,488

 

 

 

28,215

 

Current accounts in clearing organizations

 

 

35,898

 

 

 

83,194

 

Petty cash in bank vault and on hand

 

 

28,694

 

 

 

25,830

 

Current account with Central Bank (Russia)

 

 

3,119

 

 

 

6,930

 

Current account with Central Depository (Kazakhstan)

 

 

468

 

 

 

69

 

Total cash and cash equivalents

 

$674,076

 

 

$698,828

 

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

As of June 30, 2021, and March 31, 2021, with the exception of funds deposited with banks in the United States which may qualify for FDIC insurance up to $250,000, cash and cash equivalents were not insured.

 

As of June 30, 2021, and March 31, 2021, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:

 

 

 

June 30, 2021

 

 

 

Interest rates and remaining contractual maturity of the agreements

 

 

 

Average interest rate

 

 

Up to 30 days

 

 

30-90 days

 

 

Total

 

Securities purchased under reverse repurchase agreements

 

 

 

 

 

 

 

 

 

 

 

 

Corporate equity

 

 

2.04%

 

 

104,727

 

 

 

24

 

 

 

104,751

 

Non-US sovereign debt

 

 

0.51%

 

 

49,486

 

 

 

5

 

 

 

49,491

 

Corporate debt

 

 

2.40%

 

 

19,078

 

 

 

-

 

 

 

19,078

 

US sovereign debt

 

 

0.35%

 

 

1,616

 

 

 

-

 

 

 

1,616

 

Total securities sold under repurchase agreements

 

 

 

 

 

$174,907

 

 

$29

 

 

$174,936

 

 

 

 

March 31, 2021

 

 

 

Interest rates and remaining contractual maturity of the agreements

 

 

 

Average interest rate

 

 

Up to 30 days

 

 

30-90 days

 

 

Total

 

Securities purchased under reverse repurchase agreements

 

 

 

 

 

 

 

 

 

 

 

 

Non-US sovereign debt

 

 

1.07%

 

$101,258

 

 

$-

 

 

 

101,258

 

Corporate debt

 

 

4.42%

 

 

94,562

 

 

 

-

 

 

 

94,562

 

Corporate equity

 

 

2.76%

 

 

51,564

 

 

 

-

 

 

 

51,564

 

US sovereign debt

 

 

0.50%

 

 

1,562

 

 

 

-

 

 

 

1,562

 

Total securities sold under repurchase agreements

 

 

 

 

 

$248,946

 

 

$-

 

 

$248,946

 

 

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 June 30, 2021, and March 31, 2021, was $178,324 and $272,586, respectively.

 

NOTE 4 – RESTRICTED CASH

 

Restricted cash for the periods ended June 30, 2021, and March 31, 2021, consisted of:

 

 

 

June 30, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

 

Brokerage customers’ cash

 

$409,283

 

 

$427,233

 

Deferred distribution payments

 

 

8,534

 

 

 

8,534

 

Reserve with Central Bank of Russia

 

 

1,141

 

 

 

1,758

 

Guaranty deposits

 

 

88

 

 

 

433

 

Total restricted cash

 

$419,046

 

 

$437,958

 

 

 
19

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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

As of June 30, 2021, and March 31, 2021, the Company’s restricted cash included the cash portion of the funds segregated in a special custody account for the exclusive benefit of our brokerage customers, as well as required reserves with the Central Bank of the Russian Federation which represents cash on hand balance requirements. Restricted cash also included a deferred distribution payment amount, which 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, an entitled shareholder will submit the necessary documentation to claim their distribution payment. The entire deferred distribution payment amount was held in cash at June 30, 2021, and March 31, 2021. A Company shareholder entitled to a portion of the distribution amount died before claiming the distribution. As a result of disputes between the individual’s putative heirs and potential owners of an entity that also claimed through the shareholder, the Company has been unable to determine who is legally entitled to receive the distribution. The putative estate has asserted claims in Utah state court seeking payment of the distribution. The Company has counterclaimed for interpleader and other claims and is seeking a determination from the court as to who is rightfully entitled to receive the distribution payment.

 

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

 

As of June 30, 2021, and March 31, 2021, trading and available-for-sale securities consisted of:

 

 

 

June 30, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

 

Corporate debt

 

$447,283

 

 

$334,763

 

Non-US sovereign debt

 

 

302,086

 

 

 

333,619

 

Corporate equity

 

 

49,920

 

 

 

47,340

 

US sovereign debt

 

 

13,041

 

 

 

10,828

 

Exchange traded notes

 

 

13,034

 

 

 

9,638

 

Total trading securities

 

$825,364

 

 

$736,188

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$1

 

 

$-

 

Preferred shares

 

 

-

 

 

 

1

 

Total available-for-sale securities, at fair value

 

$1

 

 

$1

 

 

As of June 30, 2021, the Company held debt securities of two issuers which individually exceeded 10% of the Company’s total trading securities - the Kazakhstan Sustainability Fund JSC in the amount of $306,459 and Ministry of Finance of the Republic of Kazakhstan in the amount of $240,456. As of March 31, 2021, the Company held debt securities of two issuers which individually exceeded 10% of the Company’s total trading securities - the Ministry of Finance of the Republic of Kazakhstan and the Kazakhstan Sustainability Fund JSC in the amounts of $293,451 and $193,677, respectively.

 

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

 

The fair value of assets and liabilities is determined using observable market data based on recent trading activity. Where observable market data is unavailable due to a lack of trading activity, the Company utilizes internally developed models to estimate fair value and independent third parties to validate assumptions, when appropriate. Estimating fair value requires significant management judgment, including benchmarking to similar instruments with observable market data and applying appropriate discounts that reflect differences between the securities that the Company is valuing and the selected benchmark. Depending on the type of securities owned by the Company, other valuation methodologies may be required.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

Measurement of fair value is classified within a hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The valuation hierarchy contains three levels:

 

·

Level 1 - Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets.

·

Level 2 - Valuation inputs are quoted market prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured.

·

Level 3 - Valuation inputs are unobservable and significant to the fair value measurement.

   

The following tables present securities assets in the Condensed Consolidated Financial Statements or disclosed in the Notes to the Condensed Consolidated Financial Statements at fair value on a recurring basis as of June 30, 2021, and March 31, 2021:

 

 

 

 

 

 

 

Fair Value Measurements at

June 30, 2021 using

 

 

 

Weighted Average

 

 

 

 

Quoted Prices in

Active Markets

for Identical Assets

 

 

Significant

Other Observable Inputs

 

 

Significant Unobservable

Units

 

 

 

Interest Rate

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

 

8.71

%

 

$447,283

 

 

$446,913

 

 

$-

 

 

$370

 

Non-U.S. sovereign debt

 

 

7.03

%

 

 

302,086

 

 

 

300,181

 

 

 

-

 

 

 

1,905

 

Corporate equity

 

 

-

 

 

 

49,920

 

 

 

22,774

 

 

 

8,370

 

 

 

18,776

 

U.S. sovereign debt

 

 

1.38

%

 

 

13,041

 

 

 

13,041

 

 

 

-

 

 

 

-

 

Exchange traded notes

 

 

-

 

 

 

13,034

 

 

 

13,034

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total trading securities

 

 

 

 

 

$825,364

 

 

$795,943

 

 

$8,370

 

 

$21,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

-

 

 

$1

 

 

$-

 

 

$-

 

 

$

1

 

Total available-for-sale securities, at fair value

 

 

 

 

 

$1

 

 

$-

 

 

$-

 

 

$1

 

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited0

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

   

 

 

 

 

 

 

Fair Value Measurements at

March 31, 2021 using 

 

 

 

Weighted Average

 

 

 

 

Quoted Prices in Active Markets for Identical Assets

 

 

Significant Other Observable Inputs

 

 

Significant Unobservable Units

 

 

 

Interest Rate

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

 

9.22%

 

$334,763

 

 

$334,403

 

 

$-

 

 

$

360

 

Non-U.S. sovereign debt

 

 

8.06%

 

 

333,619

 

 

 

333,619

 

 

 

-

 

 

 

-

 

Corporate equity

 

 

-

 

 

 

47,340

 

 

 

28,630

 

 

 

1

 

 

 

18,709

 

U.S. sovereign debt

 

 

1.68%

 

 

10,828

 

 

 

10,828

 

 

 

-

 

 

 

-

 

Exchange traded notes

 

 

-

 

 

 

9,638

 

 

 

9,638

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total trading securities

 

 

 

 

 

$736,188

 

 

$717,118

 

 

$1

 

 

$19,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

-

 

 

$

1

 

 

$-

 

 

$

-

 

 

$1

 

Total available-for-sale securities, at fair value

 

 

 

 

 

$1

 

 

$-

 

 

$-

 

 

$1

 

 

The table below presents the valuation techniques and significant level 3 inputs used in the valuation as of June 30, 2021, and March 31, 2021. The table is not intended to be all inclusive, but instead captures the significant unobservable inputs relevant to determination of fair value.

 

Type

 

Valuation Technique

 

FV as of

June 30, 2021

 

 

FV as of

March 31, 2021

 

 

Significant Unobservable Inputs

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate equity

 

DCF

 

$18,411

 

 

$18,408

 

 

Discount rate

 

 

10.6%

 

 

 

 

 

 

 

 

 

 

 

 

Estimated number of years

 

9 years

 

Corporate debt

 

DCF

 

$370

 

 

$360

 

 

Discount rate

 

 

16.5%

 

 

 

 

 

 

 

 

 

 

 

 

Estimated number of years

 

9 years

 

Corporate equity

 

DCF

 

$365

 

 

$301

 

 

Discount rate

 

 

18.5%

 

 

 

 

 

 

 

 

 

 

 

 

 Estimated number of years

 

 

 9 years

 

Non-US sovereign debt

 

DCF

 

$

 1,000

 

 

 

-

 

 

 Discount rate

 

 

 13.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated number of years

 

6 months

 

Non-US sovereign debt

 

DCF

 

$

 905

 

 

 

-

 

 

 Discount rate

 

 

 13.81%

 

 

 

 

 

 

 

 

 

 

 

 

 

 Estimated number of years

 

 

1 year

 

Total

 

 

 

$21,051

 

 

$19,069

 

 

 

 

 

 

 

  

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended June 30, 2021, and the year ended March 31, 2021:

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

 

 

Trading

securities

 

 

Available-for-sale securities

 

Balance as of March 31, 2021

 

$19,069

 

 

$1

 

Purchase of investments that use Level 3 inputs

 

 

1,907

 

 

 

-

 

Revaluation of investments that use Level 3 inputs

 

 

75

 

 

 

-

 

Balance as of June 30, 2021

 

$21,051

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2020

 

$11,259

 

 

$1

 

Sale of investments that use Level 3 inputs

 

 

(2)

 

 

-

 

Purchase of investments that use Level 3 inputs

 

 

834

 

 

 

-

 

Revaluation of investments that use Level 3 inputs

 

 

6,978

 

 

 

-

 

Balance as of March 31, 2021

 

$19,069

 

 

$1

 

 

The table below presents the amortized cost, unrealized gains and losses accumulated in other comprehensive income, and fair value of available-for-sale securities as of June 30, 2021, and March 31, 2021:

 

 

 

June 30, 2021 

 

 

 

Assets measured at amortized cost

 

 

Unrealized loss accumulated in other comprehensive

income/(loss)

 

 

Assets

measured at

fair value

 

 

 

 

 

 

 

Equity securities

 

$1

 

 

$-

 

 

$1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2021

 

$1

 

 

$-

 

 

$1

 

 

 

 

March 31, 2021 

 

 

 

Assets measured at amortized cost

 

 

Unrealized loss accumulated in other comprehensive

income/(loss)

 

 

Assets

measured at

fair value

 

 

 

 

 

 

 

Equity securities

 

$1

 

 

$-

 

 

$1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2021

 

$1

 

 

$-

 

 

$1

 

 

NOTE 6 – BROKERAGE AND OTHER RECEIVABLES, NET

 

Brokerage and other receivables for the three months ended June 30, 2021, and March 31, 2021, consisted of:

 

 

 

June 30, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

 

Margin lending receivables

 

$112,972

 

 

$58,095

 

Receivables from brokerage clients

 

 

3,750

 

 

 

4,199

 

Bonds coupon receivable

 

 

1,791

 

 

 

-

 

Long-term installments receivables

 

 

1,162

 

 

 

1,280

 

Receivable for underwriting and market-making services

 

 

754

 

 

 

564

 

Receivable from sale of securities

 

 

472

 

 

 

484

 

Dividends accrued

 

 

444

 

 

 

1,392

 

Bank commissions receivable

 

 

230

 

 

 

767

 

Other receivables

 

 

1,857

 

 

 

56

 

 

 

 

 

 

 

 

 

 

Allowance for receivables

 

 

(1,982)

 

 

(2,036)

 

 

 

 

 

 

 

 

 

Total brokerage and other receivables, net

 

$121,450

 

 

$64,801

 

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

On June 30, 2021, and March 31, 2021, amounts due from a single related party customer were $25,606 and $8,948, respectively or 21% and 14% respectively, of total brokerage and other receivables, net. Based on historical data, the Company considers receivables due from related parties fully collectible. As of June 30, 2021 and March 31, 2021, using historical and statistical data, the Company recorded an allowance for brokerage receivables in the amounts of $1,982 and $2,036, respectively.

 

NOTE 7 – LOANS ISSUED

 

Loans issued as of June 30, 2021, consisted of the following:

 

 

 

Amount Outstanding

 

 

Due Dates

 

Average Interest Rate

 

 

Fair Value of Collateral

 

 

Loan Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank customer loans

 

$5,898

 

 

July 2021 - June 2036

 

 

12.17%

 

 

799

 

 

KZT

 

Subordinated loan

 

 

5,065

 

 

December 2022- April 2024

 

 

3.69%

 

 

-

 

 

USD

 

Subordinated loan

 

 

1,355

 

 

September 2029

 

 

7.00%

 

 

-

 

 

UAH

 

Bank customer loans

 

 

1,049

 

 

July 2021 - September 2045

 

 

10.00%

 

 

747

 

 

RUB

 

Uncollateralized non-bank loan

 

 

18

 

 

December 2021

 

 

2.00%

 

 

-

 

 

EUR

 

 

 

$13,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans issued as of March 31, 2021, consisted of the following:

 

 

 

Amount Outstanding

 

 

Due Dates

 

Average Interest Rate

 

 

Fair Value of Collateral

 

 

Loan Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinated loan

 

$5,033

 

 

December 2022-April 2024

 

 

3.69%

 

 

-

 

 

USD

 

Uncollateralized non-bank loan

 

 

2,382

 

 

January 2022 – February 2022

 

 

3.00%

 

 

-

 

 

USD

 

Uncollateralized non-bank loan

 

 

1,384

 

 

May 2021

 

 

13.00%

 

 

-

 

 

RUB

 

Subordinated loan

 

 

1,331

 

 

September 2029

 

 

7.00%

 

 

-

 

 

UAH

 

Bank customer loans

 

 

880

 

 

March 2024

 

 

15.41%

 

 

729

 

 

KZT

 

Bank customer loans

 

 

657

 

 

July 2021- September 2045

 

 

11.27%

 

 

611

 

 

RUB

 

 

 

$11,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 8 – DEFFERED TAXES LIABILITIES

 

The Company is subject to taxation in the Russian Federation, Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan, Germany, Azerbaijan and the United States of America.

 

 
24

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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

The tax rates used for deferred tax assets and liabilities as of June 30, 2021, and March 31, 2021, were 21% for the U.S., 20% for the Russian Federation, Kazakhstan, and Kyrgyzstan, 31% for Germany, 12.5% for Cyprus, 18% for Ukraine, 2% for Azerbaijan and 15% for Uzbekistan. Deferred tax assets and liabilities of the Company are comprised of the following:

 

 

 

June 30, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

 

Tax losses carryforward

 

$312

 

 

$316

 

Accrued liabilities

 

 

346

 

 

 

236

 

Depreciation

 

 

16

 

 

 

16

 

Revaluation on trading securities

 

 

92

 

 

 

-

 

Valuation allowance

 

 

(312)

 

 

(316)

Deferred tax assets

 

$454

 

 

$252

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Revaluation on trading securities

 

$451

 

 

$2,546

 

Fixed and Intangible Assets

 

 

1,733

 

 

 

1,568

 

Subordinated debt

 

 

513

 

 

 

523

 

Deferred tax liabilities

 

$2,697

 

 

$4,637

 

 

 

 

 

 

 

 

 

 

Net deferred tax liabilities

 

$(2,243)

 

$(4,385)

 

During the three months ended June 30, 2021, and 2020, the effective tax rate was equal to 9.88% and 15.94%, respectively.

 

Tax loss carryforwards as of June 30, 2021, and March 31, 2021, were $312 and $316, respectively, and are subject to income tax in the Ukraine and Uzbekistan.

 

NOTE 9 – SECURITIES REPURCHASE AGREEMENT OBLIGATIONS

 

As of June 30, 2021, and March 31, 2021, trading securities included collateralized securities subject to repurchase agreements as described in the following table:

 

 

 

June 30, 2021

 

 

 

Interest rates and remaining contractual maturity of the agreements

 

 

 

Average interest rate

 

 

Up to 30 days

 

 

30-90 days

 

 

Total

 

Securities sold under repurchase agreements

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. sovereign debt

 

 

8.21%

 

$199,339

 

 

$1,332

 

 

$200,671

 

Corporate debt

 

 

8.62%

 

 

234,322

 

 

 

-

 

 

 

234,322

 

US sovereign debt

 

 

0.35%

 

 

7,501

 

 

 

-

 

 

 

7,501

 

Total

 

 

 

 

 

$441,162

 

 

$1,332

 

 

$442,494

 

 

 

 

March 31, 2021

 

 

 

Interest rate and remaining contractual maturity of the agreements

 

 

 

Average interest rate

 

 

Up to 30 days

 

 

30-90 days

 

 

Total

 

Securities sold under repurchase agreements

 

 

 

 

 

 

 

 

 

 

 

 

Non-US sovereign debt

 

 

9.28%

 

$229,812

 

 

$-

 

 

$229,812

 

Corporate debt

 

 

9.27%

 

 

189,337

 

 

 

-

 

 

 

189,337

 

Corporate equity

 

 

3.78%

 

 

5,757

 

 

 

-

 

 

 

5,757

 

US sovereign debt

 

 

0.40%

 

 

1,809

 

 

 

-

 

 

 

1,809

 

Total securities sold under repurchase agreements

 

 

 

 

 

$426,715

 

 

$-

 

 

$426,715

 

 

 
25

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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

The fair value of collateral pledged under repurchase agreements as of June 30, 2021, and March 31, 2021, was $460,492 and $426,669, respectively.

 

Securities pledged as collateral by the Company under repurchase agreements are liquid trading securities with market quotes and significant trading volume.

 

NOTE 10 – CUSTOMER LIABILITIES

 

The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:

 

 

 

June 30, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

 

Brokerage customers

 

$845,705

 

 

$938,086

 

Banking customers

 

 

222,159

 

 

 

225,611

 

Total

 

$1,067,864

 

 

$1,163,697

 

 

As of June 30, 2021, banking customer liabilities consisted of current accounts and deposits of $200,698 and $21,461, respectively. As of March 31, 2021, banking customer liabilities consisted of current accounts and deposits of $133,493 and $92,118, respectively.

 

NOTE 11 – TRADE PAYABLES

 

Trade payables of the Company is comprised of the following:

 

 

 

June 30, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

 

Margin lending payable

 

$147,433

 

 

$20,120

 

Payables to suppliers of goods and services

 

 

2,604

 

 

 

1,708

 

Trade payable for securities purchased

 

 

384

 

 

 

264

 

Other

 

 

252

 

 

 

212

 

Total

 

$150,673

 

 

$22,304

 

 

On June 30, 2021, and March 31, 2021, trade payables due to a single related party were $97,677 or 65% and $13,810 or 62%, respectively.

 

NOTE 12 – SECURITIES SOLD, NOT YET PURCHASED – AT FAIR VALUE

 

As of June 30, 2021, and March 31, 2021, the Company’s securities sold, not yet purchased at fair value was $14,753 and $8,592, respectively.

 

During the three months ended June 30, 2021, the Company sold shares that were not owned by it in the amount of $5,878 and closed short positions in the amount of $23. During the three months ended June 30, 2021, the Company recognized a loss on the change in the fair value of financial liabilities in the amount of $306 in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income.

 

 
26

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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

A short sale involves the sale of a security that is not owned in the expectation of purchasing the same security (or a security exchangeable) at a later date at a lower price. A short sale involves the risk of a theoretically unlimited increase in the market price of the security that would result in a theoretically unlimited loss.

 

NOTE 13 – LOANS RECEIVED

 

Loans received by the Company includes:

 

Company

 

Lender

 

June 30, 2021

 

 

March 31, 2021

 

 

Interest Rate

 

 

Term

 

Maturity dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freedom Holding Corp.

 

Non-Bank

 

$3,414

 

 

$3,373

 

 

 

5.00%

 

14 months

 

12/31/21

 

Total

 

 

 

$3,414

 

 

$3,373

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2021, non-bank loans received were unsecured. As of June 30, 2021, and March 31, 2021, accrued interest on the loans totaled $114 and $73, respectively.

 

NOTE 14 – DEBT SECURITIES ISSUED

 

Outstanding debt securities of the Company include the following:

 

 

 

June 30, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

 

Debt securities issued denominated in USD

 

$50,540

 

 

$60,743

 

Debt securities issued denominated in RUB

 

 

6,909

 

 

 

6,605

 

Accrued interest

 

 

674

 

 

 

1,095

 

Total

 

$58,123

 

 

$68,443

 

 

As of June 30, 2021, and March 2021, the Company’s outstanding debt securities had fixed annual coupon rates ranging from 6.5% to 12% and maturity dates ranging from February 2022 to January 2023. The Company’s debt securities include bonds of Freedom RU issued under Russian Federation law, which trade on the MOEX. The Company’s debt securities also include $20,496 in notes of FRHC issued from December 2019 to February 2020. The FRHC notes are denominated in U.S. dollars, bear interest at an annual rate of 7% and are due in December 2022. The FRHC notes were issued under Astana International Financial Centre law and trade on the AIX. In May 2021 the Company retired U.S. dollar denominated 8% Freedom KZ bonds that had a carrying value of $10,477 including interest accrued of $274 as of March 31, 2021.

 

Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

  

NOTE 15 – RELATED PARTY TRANSACTIONS

 

During the three months ended June 30, 2021, and 2020, the Company earned commission income from related parties in the amounts of $65,972 and $30,790, respectively. Commission income earned from related parties is comprised primarily of brokerage commissions and commissions for money transfers by brokerage clients.

 

During the three months ended June 30, 2021, and 2020, the Company paid commission expense to related parties in the amount of $5,282 and $2,445, respectively.

 

During the three months ended June 30, 2021, and 2020, the Company recorded stock-based compensation expense for restricted stock grants to related parties in the amount of $180 and $0, respectively.

 

As of June 30, 2021, and March 31, 2021, the Company had cash and cash equivalents held in brokerage accounts of related parties totaling $17,915 and $12,256, respectively.

 

As of June 30, 2021, and March 31, 2021, the Company had bank commission receivables and receivables from brokerage clients from related parties totaling $232 and $962, respectively. Brokerage and other receivables from related parties result principally from commissions receivable on the brokerage operations of related parties.

 

As of June 30, 2021, and March 31, 2021, the Company had margin lending receivables with related parties totaling $26,518 and $9,886, respectively.

 

As of June 30, 2021, and March 31, 2021, the Company had margin lending payables to related parties, totaling $103,264 and $13,810, respectively.

 

As of June 30, 2021, and March 31, 2021, the Company had accounts payable due to a related party totaling $715 and $339, respectively.

 

As of June 30, 2021, and March 31, 2021, the Company had financial liability with related parties totaling $1,801 and $1,707, respectively.

 

As of June 30, 2021, and March 31, 2021, the Company had customer liabilities to related parties totaling $346,166 and $327,610, respectively.

 

As of June 30, 2021, and March 31, 2021, the Company had restricted customer cash deposited in current and brokerage accounts with related parties in the amounts of $8,375 and $156,878.

 

Brokerage and related banking services, including margin lending, were provided to related parties pursuant to standard client account agreements and at standard market rates.

 

NOTE 16 – STOCKHOLDERS’ EQUITY

 

During the three months ended June 30, 2021 and 2020, no outstanding nonqualified stock options were exercised.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

On May 18, 2021, the Company awarded restricted stock grants totaling 1,031,500 shares of its common stock to 56 employees and consultants of the Company, including two executive officers of the Company. Of the 1,031,500 shares awarded pursuant to the restricted stock grant awards, 200,942 shares are subject to one-year vesting schedule, 211,658 shares are subject to two-year vesting schedule, 206,300 shares per year are subject to three, four and five-year vesting schedule.

 

On December 30, 2020, the Company awarded restricted stock grants in the amount of 15,000 shares of its common stock to three employees. Of the 15,000 shares awarded pursuant to the restricted stock grant awards, 4,500 shares are subject to one-year vesting conditions, 4,500 shares are subject to two-year vesting conditions and 6,000 shares 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 $2,162 during the three months ended June 30, 2021. During the three months ended June 30, 2020, the Company recorded stock-based compensation expense for restricted stock grants and stock options in the amount of $525.

 

NOTE 17 – STOCK BASED COMPENSATION

 

During the three months ended June 30, 2021, a total of 1,031,500 restricted shares were awarded. The compensation expense related to restricted stock grants was $2,162 during the three months ended June 30, 2021, and $471 during three months ended June 30, 2020. As of June 30, 2021, there was $38,020 of total unrecognized compensation cost related to non-vested shares of common stock granted. The cost is expected to be recognized over a weighted average period of 4.84 years.

 

The Company has determined the fair value of restricted shares awarded during the three months ended June 30, 2021 using the Monte Carlo valuation model based on the following key assumptions:

 

Term (years)

 

 

5

 

Volatility

 

 

41.5%

Risk-free rate

 

 

0.06%

 

The table below summarizes the activity for the Company’s restricted stock outstanding during the three months ended June 30, 2021:

 

 

 

Shares

 

 

Weighted

Average

Fair Value

 

Outstanding, at March 31, 2021

 

 

15,000

 

 

$775

 

Granted

 

 

1,031,500

 

 

 

39,465

 

Vested

 

 

-

 

 

 

-

 

Forfeited/cancelled/expired

 

 

-

 

 

 

-

 

Outstanding, at June 30, 2021

 

 

1,046,500

 

 

$40,240

 

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

During the three months ended June 30, 2021 and 2020, no stock options were awarded. Total compensation expense related to outstanding options was $0 for the three months ended June 30, 2021, and $54 for the three months ended June 30, 2020.

 

The Company has determined the fair value of such stock options using the Black Scholes option valuation model based on the following key assumptions:

 

Term (years)

 

 

3

 

Volatility

 

 

165.33%

Risk-free rate

 

 

1.66

 

 

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.

 

The following is a summary of stock option activity for the three months ended June 30, 2021:

 

 

 

Shares

 

 

Weighted Average Exercise Price

 

 

Weighted

Average Remaining Contractual Term

(In Years)

 

 

Aggregate

Intrinsic Value

 

Outstanding, March 31, 2021

 

 

60,000

 

 

$1.98

 

 

 

6.52

 

 

$3,083

 

Granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

 -

 

 

 

-

 

Forfeited/cancelled/expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding, at June 30, 2021

 

 

60,000

 

 

1.98

 

 

 

6.27

 

 

$3,790

 

Exercisable, at June 30, 2021

 

 

60,000

 

 

$1.98

 

 

 

6.27

 

 

$3,790

 

 

NOTE 18 – LEASES

 

The Company determines whether a contract contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets as of June 30, 2021:

 

 

 

Classification on Balance Sheet

 

June 30, 2021

 

Assets

 

 

 

 

 

Operating lease assets

 

Right-of-use assets

 

$17,450

 

Total lease assets

 

 

 

$17,450

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Operating lease liability

 

Operating lease obligations

 

$17,345

 

Total lease liability

 

 

 

$

17,345

 

 

Lease obligations at June 30, 2021, consisted of the following:

 

Twelve months ending March 31,

 

 

 

2022

 

$6,289

 

2023

 

 

7,398

 

2024

 

 

3,353

 

2025

 

 

2,020

 

2026

 

 

1,245

 

Thereafter

 

 

301

 

Total payments

 

 

20,615

 

Less: amounts representing interest

 

 

(3,270)

Lease liability, net

 

$17,345

 

Weighted average remaining lease term (in months)

 

 

27

 

Weighted average discount rate

 

 

12%

 

Lease commitments for short term operating leases as of June 30, 2021, are approximately $646. The Company’s rent expense for office space was $116 and $101 for the three months ended June 30, 2021, and June 30, 2020, respectively.

 

NOTE 19 – COMMITMENTS AND CONTINGENCIES

 

Freedom Bank KZ is a party to certain off-balance sheet financial instruments. These financial instruments include guarantees and unfunded commitments under existing lines of credit. These commitments expose the Company to varying degrees of credit and market risk which are essentially the same as those involved in extending loans to customers, and are subject to the same credit policies used in underwriting loans. Collateral may be obtained based on the Company’s credit evaluation of the counterparty. The Company’s maximum exposure to credit loss is represented by the contractual amount of these commitments.

 

Unfunded commitments under lines of credit

 

Unfunded commitments under lines of credit include commercial, commercial real estate, home equity and consumer lines of credit to existing customers. These commitments may mature without being fully funded.

 

Bank guarantees

 

Bank guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing guarantees is essentially the same as that involved in extending loan facilities to customers. A significant portion of the issued guarantees are collateralized by cash. Total lending related commitments outstanding at June 30, 2021, were as follows:

 

 
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FREEDOM HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

   

 

 

As of June 30, 2021

 

Bank guarantees

 

$6,853

 

Unfunded commitments under lines of credit

 

 

3,487

 

 

 

$10,340

 

 

NOTE 20 – SUBSEQUENT EVENTS

 

The Company has performed an evaluation of subsequent events through the time of filing this quarterly report on Form 10-Q with the SEC. Other than as disclosed below, during this period the Company did not have any additional material recognizable subsequent events.

 

In July 2021, as a result of further restrictions in Ukraine on foreign ownership of Ukrainian broker-dealers, the Company transferred an additional 23.88% of its interest in Freedom UA to Askar Tashtitov, the Company's president.

 

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our unaudited condensed consolidated financial statements and the accompanying notes included in this quarterly report on Form 10-Q contain additional information that should be referred to when reviewing this material and this document should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the SEC including our annual report on Form 10-K filed with the SEC on June 15, 2021.

 

Special Note About Forward-Looking Information

 

Certain information included herein and the documents incorporated by reference in this quarterly report on Form 10-Q, if any, contain statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that could be forward-looking. You can recognize these statements through our use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “strategy,” “forecast,” “potential,” “future,” “predict,” “project,” “likely,” “should,” “will,” “would,” other similar expressions and their negatives.

 

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors, many of which may be beyond our control, that could cause actual results to differ materially from any future results, expressed or implied, in forward looking statements. Such factors include but are not limited to, the following:

 

 

·

general economic and political conditions globally and in the particular markets where we operate;

 

·

declines in global financial markets;

 

·

the impacts of the COVID-19 pandemic, including viral variants, future outbreaks and the effectiveness of measures implemented to contain its spread;

 

·

a lack of liquidity, e.g., access to funds or funds at reasonable rates for use in our businesses;

 

·

the inability to meet regulatory capital or liquidity requirements;

 

·

increased competition, including downward pressures on commissions and fees;

 

·

risks inherent to the electronic brokerage, banking and market making businesses;

 

·

fluctuations in interest rates and foreign currency exchange rates;

 

·

failure to protect or enforce our intellectual property rights in our proprietary technology;

 

·

risks associated with being a “controlled company” within the meaning of the rules of Nasdaq;

 

·

the loss of key executives or failure to recruit and retain personnel;

 

·

our ability to keep up with rapid technological change;

 

·

information technology, trading platform and other system failures, cyber security threats and other disruptions;

 

·

losses caused by non-performance by third parties;

 

 
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·

losses (whether realized or unrealized) on our investments;

 

·

our inability to integrate any businesses we acquire or otherwise adapt to expansion and rapid growth in our business;

 

·

risks inherent in doing business in Russia and the other developing markets in which we do business;

 

·

the impact of tax laws and regulations, and their changes, in any of the jurisdictions in which we operate;

 

·

non-compliance with laws and regulations in each of the jurisdictions in which we operate, particularly those relating to the securities and banking industries;

 

·

the creditworthiness of our trading counterparties, and banking and margin customers;

 

·

litigation and regulatory liability;

 

·

unforeseen or catastrophic events, including the emergence of pandemics, terrorist attacks, extreme weather events or other natural disasters, military conflict and political discord; and

 

·

other factors discussed in this report, as well as in our annual report on Form 10-K for the year ended March 31, 2021.

  

Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

You should not place undue reliance on forward-looking statements. The forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management and apply only as of the date of this report or the respective dates of the documents from which they incorporate by reference. Neither we nor any other person assumes any responsibility for the accuracy or completeness of forward-looking statements. Further, except to the extent required by law, we undertake no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

Overview

 

Freedom Holding Corp. is a holding company. Our operating subsidiaries provide financial services including full-service retail securities brokerage, complementary banking services, investment education, securities trading, investment banking, retail banking, underwriting services and market making activities in Eurasia. We are headquartered in Almaty, Kazakhstan, with supporting administrative offices in Russia, Cyprus and the United States of America.

 

Our subsidiaries are participants on the Kazakhstan Stock Exchange (KASE), Astana Stock Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPBX), the Ukrainian Exchange (UX), the Republican Stock Exchange of Tashkent (UZSE), the Uzbek Republican Currency Exchange (UZCE) and are members of the New York Stock Exchange (NYSE) and Nasdaq Stock Exchange (Nasdaq). Our Cyprus office provides our clients with operations support and access to the investment opportunities, relative stability, and integrity of the U.S., European and Asian securities markets, which under the regulatory regimes of many jurisdictions where we operate, provide only limited or no direct investor access to international securities markets.

 

 
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Our business is directed toward providing an array of financial services to our target retail audience which is individuals, businesses and financial institutions, including other broker-dealers, seeking to diversify their investment portfolios to manage economic risk associated with political, regulatory, currency, banking, and national uncertainties. Clients are provided online tools and retail locations to establish accounts and conduct securities trading on transaction-based pricing. We market to our customer demographic through a number of channels, including telemarketing, training seminars and investment conferences, print and online advertising, using social media, our mobile app and search engine optimization activities.

  

Executive Summary

 

Customer Base

 

We serviced more than 330,000 client accounts of which more than 66% carried positive cash or asset account balances as of June 30, 2021. Internally, we designate “active accounts” as those in which at least one transaction occurs per quarter. For the three months ended June 30, 2021, we had approximately 100,000 active accounts.

 

In addition to organic customer acquisition, we have accelerated our growth through several strategic acquisitions which has enabled us to expand our market reach, increase our client base and provide our clientele the convenience of both a state-of-the-art proprietary electronic trading platform, Tradernet, and 96 retail brokerage and financial services offices located across Kazakhstan (27), Kyrgyzstan (1), Russia (40), Uzbekistan (8), Ukraine (14), Cyprus (2), Germany (2), Azerbaijan (1) and USA (1) that provide an array of financial services, and investment consulting and education. In Russia, 29 of our brokerage and financial services offices also provide banking services to firm customers.

 

Significant events

 

In May 2021 we retired U.S. dollar denominated 8% Freedom KZ bonds that had a carrying value of $10,477 including interest accrued of $274 as of March 31, 2021.

 

S&P Rating

 

            In June 2021 S&P Global Ratings (“S&P”) raised its long-term issuer credit ratings on Company subsidiaries Freedom KZ and Freedom RU to “B” from 'B-' accompanied by stable outlooks. At the same time, S&P affirmed its 'B' short-term issuer credit ratings on both entities and raised its Kazakhstan national scale rating on Freedom KZ to 'kzBB+' from 'kzBB'. S&P also affirmed its 'B-/B' long- and short-term issuer credit ratings and 'kzBB' Kazakhstan national scale rating on Freedom Bank KZ, accompanied by a positive outlook on the long-term rating.

 

 
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Impact of COVID-19

 

The COVID-19 pandemic has affected the global financial markets. The pandemic has resulted in unprecedented global market conditions that has led to significant growth in customer accounts, as well as increased activity from existing customers, resulting in higher fee and commission income. These market conditions have also resulted in significant gains in our investment portfolio.

 

We continue to monitor conditions surrounding COVID-19, as well as economic and capital market conditions. We continue to follow the enhanced cleaning practices and other measures employed in our offices and retail locations in response to local health mandates. We have limited essential business travel and implemented practices to ensure that exposed employees, or those displaying symptoms of COVID-19, self-quarantine. In spring 2020, we transitioned the vast majority of our workforce to work remotely, with only essential employees working in the office. Where dictated by local health mandates, or as seems prudent to local management, this practice continues. There have been no material disruptions to our business or processes to date as a result of these changes.

 

While the overall impact of COVID-19 was largely positive for our business during the quarters ended June 30, 2021 and 2020, its future impacts on our business, operational and financial performance is uncertain. Developments such as the duration and severity of future outbreaks of the same or a different strain of the disease, such as the delta variant, the effectiveness of vaccines, new or additional measures implemented by governments, might impact our customers and employees, the financial markets, the global economy and the economies of the countries in which we operate. Because of these uncertainties, we cannot determine the future impacts of the pandemic on our business.

 

Financial Results

 

During the three months ended June 30, 2021, we realized net income of approximately $51.7 million and basic and diluted earnings per share of $0.87. During the three months ended June 30, 2020, we realized net income of approximately $24.3 million and basic and diluted earnings per share of $0.42.

 

All dollar amounts reflected under the headings “Results of Operations”, “Liquidity and Capital Resources,” and “Cash Flows” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are presented in thousands of U.S. dollars unless the context indicates otherwise.

 

Results of Operations

 

Three months ended June 30, 2021, compared to the three months ended June 30, 2020

 

The following first fiscal quarter to first fiscal quarter comparison of our financial results is not necessarily indicative of future results.

 

 
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Three months ended

 

 

Three months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

Amount

 

 

%*

 

 

Amount

 

 

%*

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Fee and commission income

 

$97,406

 

 

 

78%

 

$43,339

 

 

 

77%

Interest income

 

 

18,077

 

 

 

15%

 

 

4,249

 

 

 

8%

Net gain on trading securities

 

 

9,900

 

 

 

8%

 

 

9,084

 

 

 

16%

Net loss on foreign exchange operations

 

 

(1,187)

 

(1

%) 

 

 

(248)

 

 

0%

Net loss on derivative

 

 

(59)

 

 

0%

 

 

(9)

 

 

0%

Total revenue, net

 

 

124,137

 

 

 

100%

 

 

56,415

 

 

 

100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee and commission expense

 

 

21,863

 

 

 

18%

 

 

9,769

 

 

 

17%

Interest expense

 

 

14,272

 

 

 

11%

 

 

3,744

 

 

 

7%

Operating expense

 

 

30,318

 

 

 

24%

 

 

14,426

 

 

 

26%

Provision for impairment losses/(recoveries)

 

 

293

 

 

 

0%

 

 

(378)

 

(1

%) 

Other expense/(income), net

 

 

14

 

 

 

0%

 

 

(27)

 

 

0%

Total expense

 

 

66,760

 

 

 

54%

 

 

27,534

 

 

 

49%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before income taxes

 

 

57,377

 

 

 

46%

 

 

28,881

 

 

 

51%

Income tax expense

 

 

(5,669)

 

(5

%) 

 

 

(4,605)

 

(8

%) 

Net income

 

$51,708

 

 

 

42%

 

$24,276

 

 

 

43%