FREEDOM HOLDING CORP.
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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For the quarterly period ended
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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
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| (Exact name of registrant as specified in its charter) | ||||||||
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(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
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| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(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 | ||||||
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The
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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
x
No
o
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
x
No
o
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.
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x | Accelerated filer | o | |||||||||||
| Non-accelerated filer | o | Smaller reporting company |
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| Emerging growth company |
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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.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes
☐
No
x
As of August 6, 2024, the registrant had
60,745,658
shares of common stock, par value $0.001, issued and outstanding.
FREEDOM HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
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Condensed Consolidated Balance Sheets as of
June 30, 2024, and March 31, 2024
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Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income for the Three
Months Ended June 30, 2024
and 202
3
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Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2024
and 202
3
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Condensed Consolidated Statements of Shareholders’ Equity for the Three
Months Ended June 30, 2024
and 202
3
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2
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FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
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June 30, 2024
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March 31, 2024
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| ASSETS | |||||||||||
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Cash and cash equivalents (including $
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$ |
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$ |
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Restricted cash (including $
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Trading securities (including $
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| Available-for-sale securities, at fair value |
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Margin lending, brokerage and other receivables, net (including $
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Loans issued (including $
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| Fixed assets, net |
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| Intangible assets, net |
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| Goodwill |
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| Right-of-use asset |
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| Insurance contract assets |
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Other assets, net (including $
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| TOTAL ASSETS | $ |
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$ |
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Securities repurchase agreement obligations | $ |
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$ |
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Customer liabilities (including $
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Margin lending and trade payables (including $
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Liabilities from insurance activity (including $
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| Current income tax liability |
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| Debt securities issued |
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| Lease liability |
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| Liability arising from continuing involvement |
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Other liabilities (including $
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| TOTAL LIABILITIES | $ |
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$ |
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Commitments and Contingent Liabilities (Note 22)
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| SHAREHOLDERS’ EQUITY | |||||||||||
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Preferred stock - $
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Common stock - $
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| Additional paid in capital |
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| Retained earnings |
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| Accumulated other comprehensive loss |
(
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(
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| TOTAL FRHC SHAREHOLDERS’ EQUITY | $ |
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$ |
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| Non-controlling interest |
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| TOTAL SHAREHOLDERS’ EQUITY | $ |
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$ |
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| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements
3
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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)
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| Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenue: | |||||||||||
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Fee and commission income (including $
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$ |
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$ |
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| Net (loss)/gain on trading securities |
(
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Interest income (including $
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| Insurance underwriting income |
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| Net gain on foreign exchange operations |
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| Net gain/(loss) on derivative |
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(
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Other income
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| TOTAL REVENUE, NET | $ |
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$ |
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| Expense: | |||||||||||
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Fee and commission expense (including $
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$ |
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$ |
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Interest expense (including $
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| Insurance claims incurred, net of reinsurance |
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| Payroll and bonuses |
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| Professional services |
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| Stock compensation expense |
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| Advertising expense |
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General and administrative expense (including $
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(Recovery of)/provision for allowance for expected credit losses
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(
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| TOTAL EXPENSE | $ |
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$ |
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| INCOME BEFORE INCOME TAX |
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| Income tax expense |
(
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(
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| NET INCOME | $ |
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$ |
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| Less: Net loss attributable to non-controlling interest in subsidiary |
(
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(
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| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ |
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$ |
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| OTHER COMPREHENSIVE INCOME | |||||||||||
| Change in unrealized gain on investments available-for-sale, net of tax effect |
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| Reclassification adjustment for net realized loss on available-for-sale investments disposed of in the period, net of tax effect |
(
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(
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| Foreign currency translation adjustments |
(
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(
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| OTHER COMPREHENSIVE LOSS |
(
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(
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| COMPREHENSIVE (LOSS)/INCOME BEFORE NON-CONTROLLING INTERESTS | $ |
(
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$ |
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| Less: Comprehensive loss attributable to non-controlling interest in subsidiary |
(
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(
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4
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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)
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| COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ |
(
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$ |
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EARNINGS PER COMMON SHARE (In U.S. dollars):
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| Earnings per common share - basic |
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| Earnings per common share - diluted |
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| Weighted average number of shares (basic) |
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| Weighted average number of shares (diluted) |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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FREEDOM HOLDING CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
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For the Three Months Ended June 30,
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| 2024 | 2023 | ||||||||||
| Cash Flows From Operating Activities | |||||||||||
| Net income | $ |
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$ |
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| Adjustments to reconcile net income used in operating activities: | |||||||||||
| Depreciation and amortization |
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| Amortization of deferred acquisition costs |
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| Noncash lease expense |
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| Change in deferred taxes |
(
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| Stock compensation expense |
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Unrealized loss/(gain) on trading securities
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(
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Unrealized (gain)/loss on derivatives
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(
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Net realized gain on available-for-sale securities
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(
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(
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| Net change in accrued interest |
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(
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Revaluation of purchase price of previously held interest in Arbuz
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(
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Gain from sale of ITS tech
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(
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| Change in insurance reserves |
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| Change in unused vacation reserves |
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(Recovery of)/provision for allowance for expected credit losses
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(
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| Changes in operating assets and liabilities: | |||||||||||
| Trading securities |
(
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(
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Margin lending, brokerage and other receivables (including $(
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(
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| Insurance contract assets |
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| Other assets |
(
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(
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Brokerage customer liabilities (including $(
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| Current income tax liability |
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Margin lending and trade payables (including $
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| Lease liabilities |
(
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(
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| Liabilities from insurance activity |
(
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| Other liabilities |
(
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Net cash flows from/(used in) operating activities
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(
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| Cash Flows Used In Investing Activities | |||||||||||
| Purchase of fixed assets |
(
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(
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| Net change in loans issued to customers |
(
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(
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| Purchase of available-for-sale securities, at fair value |
(
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(
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| Proceeds from sale of available-for-sale securities, at fair value |
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Consideration paid for Arbuz
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(
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Consideration paid for Internet Tourism
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(
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Consideration paid for Aviata
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(
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Consideration paid for Ticketon
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(
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| Cash, cash equivalents and restricted cash disposed as a result of deconsolidation of Freedom UA |
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(
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| Cash, cash equivalents and restricted cash received from acquisitions |
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Capital contribution to investment in associate
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(
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Cash, cash equivalents disposed from sale of ITS Tech
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(
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| Prepayment on acquisitions |
(
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6
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FREEDOM HOLDING CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
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| Net cash flows used in investing activities |
(
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(
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| Cash Flows From Financing Activities | |||||||||||
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(Reimbursement)/proceeds from securities repurchase agreement obligations
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(
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| Proceeds from issuance of debt securities |
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| Repurchase of debt securities |
(
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(
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| Repurchase of mortgage loans under the State Program |
(
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(
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| Funds received under state program for financing of mortgage loans |
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| Net change in bank customer deposits |
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Purchase of non-controlling interest in Arbuz
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(
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(Repayment of)/proceeds from loans received
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(
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| Net cash flows from financing activities |
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| Effect of changes in foreign exchange rates on cash and cash equivalents |
(
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(
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| Effect of expected credit losses on cash and cash equivalents and restricted cash |
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| NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
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| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD |
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| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ |
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$ |
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For The Three Months Ended June 30,
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| 2024 | 2023 | ||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ |
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$ |
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| Income tax paid | $ |
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$ |
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| Supplemental non-cash disclosures: | |||||||||||
| Operating lease right-of-use assets obtained/disposed of in exchange for operating lease obligations during the period, net | $ |
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$ |
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The following table provides a reconciliation of cash and 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:
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June 30, 2024
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June 30, 2023
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| Cash and cash equivalents | $ |
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$ |
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| Restricted cash |
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| Total cash, cash equivalents and restricted cash shown as in the statement of cash flows | $ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
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| Common Stock |
Additional
paid in capital |
Retained
earnings |
Accumulated
other comprehensive loss |
Total equity attributable to the shareholders' |
Non-
controlling
interest
|
Total | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
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At March 31, 2023
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
(
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$ |
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| — | — | — |
(
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— |
(
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— |
(
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| Stock based compensation | — | — |
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— | — |
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— |
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| Disposal of FF Ukraine | — | — | — |
(
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— |
(
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| Purchase of Arbuz shares | — | — | — |
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— |
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| Foreign currency translation adjustments, net of tax effect | — | — | — | — |
(
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(
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— |
(
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| Other comprehensive income | — | — | — | — |
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— |
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| Net income/(loss) | — | — | — |
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— |
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(
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| At June 30, 2023 |
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$ |
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$ |
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(
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0 | $ |
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0 |
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0 | $ |
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| At March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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Delivered stock awards from previous year
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— | — |
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— | — |
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— |
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| Stock based compensation | — | — |
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— | — |
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— |
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| Foreign currency translation adjustments, net of tax effect | — | — | — | — |
(
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(
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— |
(
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| Other comprehensive income | — | — | — | — |
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— |
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| Net income/(loss) | — | — | — |
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— |
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(
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| At June 30, 2024 |
|
$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
|
||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
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FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
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NOTE 1 –
DESCRIPTION OF BUSINESS
Overview
Freedom Holding Corp. (the "Company" or "FRHC" and, together with its subsidiaries, the "Group") is a corporation organized in the United States under the laws of the State of Nevada that through its operating subsidiaries provides securities brokerage, securities dealing for customers and for our own account, market making activities, investment research, investment counseling, investment banking services, retail and commercial banking, insurance products, payment services, and information processing services. The Company also owns several ancillary businesses which complement its core financial services businesses, including telecommunications and media businesses in Kazakhstan that are in a developmental stage. The Company is the holding company of subsidiaries incorporated in Kazakhstan, Cyprus, the United States, the United Kingdom, Armenia, the United Arab Emirates, Uzbekistan, Kyrgyzstan, Tajikistan, Azerbaijan, and Turkey, and also has a presence in Austria, Belgium, Bulgaria, France, Germany, Greece, Italy, Lithuania, The Netherlands, Poland and Spain. The Company's subsidiaries in the United States include a broker-dealer that is registered with the United States Securities and Exchange Commission ("SEC") and the Financial Industry Regulatory Authority ("FINRA"). The Company's common stock trades on the Nasdaq Capital Market, the Kazakhstan Stock Exchange ("KASE"), and the Astana International Exchange ("AIX").
As of June 30, 2024, the Company owned, directly or indirectly, the following companies:
9
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FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
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| Name of subsidiary | Jurisdiction of Incorporation | Number of subsidiaries | Business Area | ||||||||||||||
| Brokerage Segment | |||||||||||||||||
|
Freedom Finance JSC ("Freedom KZ")
|
Kazakhstan |
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Securities broker-dealer
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Freedom Finance Global PLC ("Freedom Global")
|
Kazakhstan |
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Securities broker-dealer
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Freedom Finance Europe Limited ("Freedom EU")
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Cyprus |
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Securities broker-dealer
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Freedom Finance Armenia LLC ("Freedom AR")
|
Armenia |
|
Securities broker-dealer
|
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Prime Executions, Inc. ("PrimeEx")
|
USA |
|
Securities broker-dealer | ||||||||||||||
|
Foreign Enterprise LLC Freedom Finance
|
Uzbekistan |
|
Securities broker-dealer
|
||||||||||||||
| Banking Segment | |||||||||||||||||
|
Freedom Bank Kazakhstan JSC ("Freedom Bank KZ")
|
Kazakhstan |
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Commercial bank | ||||||||||||||
| Insurance Segment | |||||||||||||||||
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Freedom Finance Life JSC ("Freedom Life")
|
Kazakhstan |
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Life/health insurance | ||||||||||||||
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Freedom Finance Insurance JSC ("Freedom Insurance")
|
Kazakhstan |
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General insurance | ||||||||||||||
| Other Segment | |||||||||||||||||
|
Ticketon Events LLP ("Ticketon")
|
Kazakhstan |
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Online ticket sales | ||||||||||||||
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Freedom Finance Special Purpose Company LTD ("Freedom SPC")
|
Kazakhstan |
|
Issuance of debt securities | ||||||||||||||
|
Freedom Finance Commercial LLP
|
Kazakhstan |
|
Sales consulting | ||||||||||||||
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Freedom Technologies LLP ("Paybox")
|
Kazakhstan |
|
Payment services | ||||||||||||||
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Aviata LLP ("Aviata")
|
Kazakhstan |
|
Online travel ticket aggregator | ||||||||||||||
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Internet-Tourism LLP ("Internet Tourism")
|
Kazakhstan |
|
Online travel ticket aggregator | ||||||||||||||
|
Arbuz Group LLP ("Arbuz")
|
Kazakhstan |
|
Online retail trade and e-commerce | ||||||||||||||
|
Comrun LLP ("ReKassa")
|
Kazakhstan |
|
Mobile and web application | ||||||||||||||
|
Freedom Telecom Holding Limited ("Freedom Telecom")
|
Kazakhstan |
|
Telecommunications | ||||||||||||||
|
Freedom Kazakhstan PC Ltd
|
Kazakhstan |
|
Holding company | ||||||||||||||
|
Freedom Advertising Ltd
|
Kazakhstan |
|
Advertising | ||||||||||||||
|
Freedom Shapagat Corporate Fund
|
Kazakhstan |
|
Non-profit | ||||||||||||||
|
FRHC Fractional SPC LTD
|
Kazakhstan |
|
Issuance of debt securities | ||||||||||||||
| Freedom Holding Operations LLP | Kazakhstan |
|
Hiring and recruitment | ||||||||||||||
| Freedom Horizons LLP | Kazakhstan |
|
Business consulting and services | ||||||||||||||
|
Freedom Finance Azerbaijan LLC
|
Azerbaijan |
|
Financial educational center | ||||||||||||||
|
Freedom Finance FZE.
|
UAE |
|
Consulting | ||||||||||||||
|
Freedom Management Ltd.
|
UAE |
|
Consulting | ||||||||||||||
|
Freedom Finance Turkey LLC
|
Turkey |
|
Financial consulting | ||||||||||||||
|
Freedom Finance Technologies Ltd
|
Cyprus |
|
IT development | ||||||||||||||
|
Freedom Prime UK Limited ("Prime UK")
|
UK |
|
Management consulting | ||||||||||||||
|
Freedom Structured Products PLC
|
Cyprus |
|
Financial services | ||||||||||||||
|
FFIN Securities, Inc.
|
USA |
|
Dormant | ||||||||||||||
|
Freedom U.S. Market LLC
|
USA |
|
Management company | ||||||||||||||
|
LD Micro ("LD Micro")
|
USA |
|
Event platform | ||||||||||||||
Through its subsidiaries, the Company is a professional participant, with a license to provide one or more types of services, on a number of stock exchanges, including the Kazakhstan Stock Exchange (KASE), the Astana International Exchange (AIX), the Republican Stock Exchange of Tashkent (UZSE) and the Uzbek Republican Currency Exchange (UZCE) and is a member of the New York Stock Exchange (NYSE) and the Nasdaq Stock Exchange (Nasdaq). The Company also owns a
10
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting principles
The Group's accounting policies and accompanying consolidated financial statements conform to accounting principles generally accepted in the United States of America (U.S. GAAP).
Basis of presentation and principles of consolidation
The consolidated financial statements present the consolidated accounts of FRHC and its consolidated subsidiaries. All inter-company balances and transactions have been eliminated from the consolidated financial statements.
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, of the Group’s 2024 Annual Report on Form 10-K. Note 2 to the consolidated financial statements in Group’s 2024 Annual Report on Form 10-K contains a summary of all of Group’s significant accounting policies, except following amendments:
Non-Consolidation of Freedom Securities Trading Inc.
Freedom Securities Trading Inc. (formerly known as FFIN Brokerage Services, Inc.) ("FST Belize") is solely owned by Mr. Turlov since July 2014. The Company does not consolidate FST Belize under any of the primary consolidation methods - variable interest entity (“VIE”) accounting method and the voting interest method ("VOE") as (i) FST Belize is not a VIE due to the fact it has sufficient equity at risk to finance its activities without additional financial support and the control over its significant activities is held by its sole shareholder, Mr. Turlov, and (ii) Mr. Turlov has a controlling interest in FST Belize such that under the VOE model FRHC is not required to consolidate FST Belize. Except for Mr. Turlov, there are no other shareholders at FST Belize or parties with participating rights or the ability to remove Mr. Turlov from his ownership position or to make all decisions in respect of FST Belize. While prior to the end of the fiscal 2024 we had omnibus brokerage relationship with FST Belize, such relationship had been terminated as of March 31, 2024.
Deconsolidation of Freedom Finance Ukraine LLC
As at June 30, 2024, the Company owns a
9
% interest in Freedom Finance Ukraine LLC ("Freedom UA"), a Kyiv, Ukraine-based broker-dealer. The remaining
91
% interest in Freedom UA is controlled by Askar Tashtitov, the Company's president. The Company entered into a series of contractual arrangements with Freedom UA and Mr. Tashtitov, including a consulting services agreement, an operating agreement and an option agreement. Through March 31, 2023, the Company had consolidated Freedom UA into the financial statements of the Company. On October 19, 2022, Freedom UA was added to the Ukrainian government's sanctioned entities list, resulting in suspension of its brokerage license. Given the ongoing uncertainty surrounding the situation in Ukraine and based on the Company's management's belief that the Company does not maintain effective control over Freedom UA, the Company has accounted for the deconsolidation of Freedom UA since April 1, 2023 (the date of loss of control).
Concentrations of Revenue
Revenues from one customer of the Group’s Brokerage segment represents the following amount of the Group’s consolidated revenues:
|
Three Months Ended
June 30, 2024
|
Three Months Ended
June 30, 2023
|
||||||||||
|
Single non-related party
|
$ |
|
$ |
|
|||||||
11
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
Impairment of goodwill
Goodwill is allocated to reporting units, which are identified as the operating segments or one level below operating segments that generate separate financial information regularly reviewed by management. The assignment of goodwill to reporting units allows for the assessment of potential impairment at the appropriate level within the organization.
The Group has identified its reporting units based on its organizational and operational structure, as well as the level at which internal financial information is reviewed by management to make strategic decisions. In line with this, the reporting units have been established as follows:
Brokerage Reporting Unit: This reporting unit represents the Group's operations in brokerage business. The management team responsible for the brokerage business regularly reviews financial information specific to this reporting unit, including revenue, expenses, and key performance indicators.
Bank Reporting Unit: This reporting unit comprises the Group's operations in bank business. The management team responsible for the bank business reviews financial information related to this reporting unit, including revenue, expenses, and market trends.
Insurance Reporting Unit: This reporting unit comprises the Group's operations in insurance business. The management team responsible for the insurance business reviews financial information related to this reporting unit, including revenue, expenses, and market trends.
Other Reporting Unit: This reporting unit represents the Group's various businesses operations. The management team responsible for the Group's various businesses reviews financial information related to this reporting unit, including revenue, expenses, and market trends.
Goodwill has been allocated to each reporting unit based on its relative fair value at the time of acquisition or significant triggering events. The fair value allocation of goodwill to reporting units is periodically reassessed to ensure alignment with the Group's evolving organizational structure and operational dynamics.
The Group conducts impairment testing on an annual basis or whenever indicators of potential impairment arise. The impairment testing involves comparing the carrying amount of each subsidiary, including its allocated goodwill, to its fair value. If the carrying amount exceeds the fair value, an impairment loss is recognized.
Further details regarding the measurement of goodwill impairment and the results of impairment tests for each reporting unit are provided below.
The Group discloses information about the reporting units, the carrying amounts of goodwill allocated to each reporting unit, and the impairment losses recognized. The allocation of goodwill to reporting units ensures a focused evaluation of each unit's financial performance and facilitates the identification of potential impairment, enhancing the transparency and reliability of the Company's financial reporting.
As of June 30, 2024 and March 31, 2024, goodwill recorded in the Company's Condensed Consolidated Balance Sheets totaled $
50,591
and $
52,648
respectively. The Group performs an impairment review at least annually unless indicators of impairment exist in interim periods. The entity compares the fair value of a reporting unit with its carrying amount. The goodwill impairment charge is recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. If fair value exceeds the carrying amount, no impairment is recorded.
The goodwill value at June 30, 2024 decreased compared to March 31, 2024, as a result of foreign exchange currency translation.
The changes in the carrying amount of goodwill for three months ended June 30, 2024 and 2023, were as follows:
| Brokerage |
Bank
|
Insurance | Other | Total | |||||||||||||||||||||||||
| Goodwill, gross | |||||||||||||||||||||||||||||
12
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
| Balance as of March 31, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Write-off due to deconsolidation of Freedom UA |
|
|
|
(
|
(
|
||||||||||||||||||||||||
| Foreign currency translation difference |
(
|
|
|
|
(
|
||||||||||||||||||||||||
| Acquired |
|
|
|
|
|
||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Balance as of March 31, 2024 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Forex |
(
|
(
|
(
|
(
|
(
|
||||||||||||||||||||||||
| Acquired |
|
|
|
|
|
||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Accumulated impairment | |||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Impairment expense |
|
|
|
|
|
||||||||||||||||||||||||
| Write-off due to deconsolidation of Freedom UA |
|
|
|
(
|
(
|
||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Balance as of March 31, 2024 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Impairment expense |
|
|
|
|
|
||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Goodwill, net of impairment | |||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Balance as of March 31, 2024 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Balance as of June 30, 2024 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
Recent accounting pronouncements
In August 2018, the FASB issued ASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, as clarified and amended by (i) ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date, and (ii) ASU 2020-11, Financial Services - Insurance (Topic 944): Effective Date and Early Application (collectively referred to herein as ASU 2018-12). ASU 2018-12 changed existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts. ASU 2018-12 includes: (1) a requirement to review and, if there is a change, update cash flow assumptions used to measure the liability for future policy benefits (LFPB) at least annually, and to update the discount rate assumption quarterly, (2) a requirement to account for market risk benefits (MRBs) at fair value, (3) simplified amortization for deferred policy acquisition costs (DAC), and (4) enhanced financial statement presentation and disclosures. The amendments are now effective for SEC filers that are not small reporting companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. For all other entities the effective date is now for fiscal years beginning after December 15, 2024, or interim periods after December 15, 2025. As of November 15, 2019, the Company met the definition of a smaller reporting company.
In March 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-02, “Investments-Equity method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method” (“ASU 2023-02”). These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years and early adoption is permitted. We do not expect ASU 2023-02 to have an impact to our consolidated financial statements.
13
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
In August 2023, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2023-05, Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, which clarifies the business combination accounting for joint venture formations. The amendments in the ASU seek to reduce diversity in practice that has resulted from a lack of authoritative guidance regarding the accounting for the formation of joint ventures in separate financial statements. The amendments also seek to clarify the initial measurement of joint venture net assets, including businesses contributed to a joint venture. The guidance is applicable to all entities involved in the formation of a joint venture. The amendments are effective for all joint venture formations with a formation date on or after January 1, 2025. Early adoption and retrospective application of the amendments are permitted. We do not expect adoption of the new guidance to have a material impact on our consolidated financial statements and disclosures.
In October 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2023-06 (“ASU 2023-06”), Disclosure Improvements - Codification Amendment in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU modified the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations. The amendments to the various topics should be applied prospectively, and the effective date will be determined for each individual disclosure based on the effective date of the SEC’s removal of the related disclosure. If the SEC has not removed the applicable requirements from Regulation S-X or Regulation S-K by June 30, 2027, then this ASU will not become effective. Early adoption is prohibited. While the Company is currently evaluating the effect that implementation of this update will have on its consolidated financial statements, no material impact is anticipated.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which enhances reporting requirements under Topic 280. The enhanced disclosure requirements include: title and position of the Chief Operating Decision Maker (CODM), significant segment expenses provided to the CODM, extending certain annual disclosures to interim periods, clarifying single reportable segment entities must apply ASC 280 in its entirety, and permitting more than one measure of segment profit or loss to be reported under certain circumstances. This change is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. This change will apply retrospectively to all periods presented. The Company is currently evaluating the impact ASU No 2024-02 will have on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets. The amendments in ASU No. 2023-08 are intended to improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period. The amendments are effective for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued (or made available for issuance). If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. ASU No. 2023-08 requires a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets) as of the beginning of the annual reporting period in which an entity adopts the amendments. The Company is currently evaluating the impact ASU No 2024-02 will have on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which would require additional transparency for income tax disclosures, including the income tax rate reconciliation table and cash taxes paid both in the United States and foreign jurisdictions. This standard is effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact ASU No 2024-02 will have on its consolidated financial statements and related disclosures.
In March 2024, the FASB issued ASU 2024-01, Compensation - Stock Compensation (Topic 718), Scope Application of Profits Interest and Similar Awards. This standard provides clarity regarding whether profits interest and similar awards are within the scope of Topic 718 of the Accounting Standards Codification. This standard is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact ASU No 2024-02 will have on its consolidated financial statements and related disclosures.
14
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
NOTE 3 –
CASH AND CASH EQUIVALENTS
As of June 30, 2024, and March 31, 2024, cash and cash equivalents consisted of the following:
|
June 30, 2024
|
March 31, 2024
|
||||||||||
| Short term deposits in National Bank (Kazakhstan) | $ |
|
$ |
|
|||||||
| Short term deposits in commercial banks |
|
|
|||||||||
| Securities purchased under reverse repurchase agreements |
|
|
|||||||||
| Petty cash in bank vault and on hand |
|
|
|||||||||
| Overnight deposits |
|
|
|||||||||
| Cash in transit |
|
|
|||||||||
| Short term deposits in stock exchanges |
|
|
|||||||||
| Short term deposits on brokerage accounts |
|
|
|||||||||
| Short term deposits in the Central Depository (Kazakhstan) |
|
|
|||||||||
| Allowance for Cash and cash equivalents |
(
|
(
|
|||||||||
| Total cash and cash equivalents | $ |
|
$ |
|
|||||||
As of
June 30, 2024,
and
March 31, 2024, cash and cash equivalents balance included short-term collateralized securities received under reverse repurchase agreements which the Group concludes mainly on KASE. KASE, in turn, guarantees payments to the counterparty.
The terms of the short-term collateralized securities received under reverse repurchase agreements as of June 30, 2024, and March 31, 2024 are presented below:
|
June 30, 2024
|
|||||||||||||||||
| Interest rates and remaining contractual maturity of the agreements | |||||||||||||||||
|
Average interest rate
|
Up to 30 days | Total | |||||||||||||||
|
Securities purchased under reverse repurchase agreements
|
|||||||||||||||||
| Corporate equity |
|
% |
|
|
|||||||||||||
| Corporate debt |
|
% |
|
|
|||||||||||||
| US sovereign debt |
|
% |
|
|
|||||||||||||
| Non-US sovereign debt |
|
% |
|
$ |
|
||||||||||||
| Total | $ |
|
$ |
|
|||||||||||||
15
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
|
March 31, 2024
|
||||||||||||||||||||
| Interest rates and remaining contractual maturity of the agreements | ||||||||||||||||||||
|
Average interest rate
|
Up to 30 days | Total | ||||||||||||||||||
| Securities purchased under reverse repurchase agreements | ||||||||||||||||||||
| Corporate equity |
|
% | $ |
|
$ |
|
||||||||||||||
| US sovereign debt |
|
% |
|
|
||||||||||||||||
| Non-US sovereign debt |
|
% |
|
|
||||||||||||||||
| Corporate debt |
|
% |
|
|
||||||||||||||||
| Total | $ |
|
$ |
|
||||||||||||||||
The securities received by the Group 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 Group under reverse repurchase agreements as of June 30, 2024 and March 31, 2024, was $
150,886
and $
133,380
, respectively.
As of
June 30, 2024 and March 31, 2024
, securities purchased under reverse repurchase agreements included accrued interest in the amount of $
132
and $
106
, with a weighted average maturity of
2
days
and
3
days, respectively.
All securities repurchase agreements transactions were executed through the KASE.
NOTE 4 –
RESTRICTED CASH
As of June 30, 2024, and March 31, 2024, restricted cash consisted of the following::
|
June 30, 2024
|
March 31, 2024
|
||||||||||
| Brokerage customers’ cash | $ |
|
$ |
|
|||||||
| Guaranty deposits |
|
|
|||||||||
| Restricted bank accounts |
|
|
|||||||||
| Due from banks |
|
|
|||||||||
| Deferred distribution payment |
|
|
|||||||||
| Allowance for restricted cash |
(
|
(
|
|||||||||
| Total restricted cash | $ |
|
$ |
|
|||||||
As of June 30, 2024, and March 31, 2024, part of the Group’s restricted cash was segregated in a special custody account for the exclusive benefit of the relevant brokerage customers.
NOTE 5 –
TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE
As of June 30, 2024, and March 31, 2024, trading and available-for-sale securities consisted of:
| June 30, 2024 | March 31, 2024 | ||||||||||
| Non-U.S. sovereign debt | $ |
|
$ |
|
|||||||
| Corporate debt |
|
|
|||||||||
| Corporate equity |
|
|
|||||||||
| U.S. sovereign debt |
|
|
|||||||||
| Exchange traded notes |
|
|
|||||||||
| Total trading securities | $ |
|
$ |
|
|||||||
16
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
| June 30, 2024 | March 31, 2024 | ||||||||||
| Corporate debt | $ |
|
$ |
|
|||||||
| Non-U.S. sovereign debt |
|
|
|||||||||
| U.S. sovereign debt |
|
|
|||||||||
| Total available-for-sale securities, at fair value | $ |
|
$ |
|
|||||||
The following tables present maturity analysis for available-for-sale securities as of June 30, 2024, and March 31, 2024:
| June 30, 2024 | |||||||||||||||||||||||||||||
| Remaining contractual maturity of the agreements | |||||||||||||||||||||||||||||
| Up to 1 year | 1-5 years | 5-10 years | More than 10 years | Total | |||||||||||||||||||||||||
| Corporate debt |
|
|
|
|
|
||||||||||||||||||||||||
| Non-US sovereign debt |
|
|
|
|
|
||||||||||||||||||||||||
| US sovereign debt |
|
|
|
|
|
||||||||||||||||||||||||
| Total available-for-sale securities, at fair value | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
|
March 31, 2024
|
|||||||||||||||||||||||||||||
| Remaining contractual maturity of the agreements | |||||||||||||||||||||||||||||
| Up to 1 year | 1-5 years | 5-10 years | More than 10 years | Total | |||||||||||||||||||||||||
| Corporate debt |
|
|
|
|
|
||||||||||||||||||||||||
| Non-US sovereign debt |
|
|
|
|
|
||||||||||||||||||||||||
| US sovereign debt |
|
|
|
|
|
||||||||||||||||||||||||
| Total available-for-sale securities, at fair value | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
As of June 30, 2024, the
Group
held debt securities of
two
issuers each of which individually exceeded
10
% of the Group’s total trading and available-for-sale securities - the Ministry of Finance of the Republic of Kazakhstan
(Fitch: BBB credit rating) in the amount of
$
2,175,004
a
nd Kazakhstan Sustainability Fund JSC (Fitch: BBB credit rating) in t
he amount of $
726,402
.
As of March 31, 2024, the
Group
held debt securities of
two
issuers each of which individually exceeded
10
% of the Group’s total trading securities and available-for-sale securities - the Ministry of Finance of the Republic of Kazakhstan (Fitch: BBB credit rating) in the amounts of $
2,420,855
and the Kazakhstan Sustainability Fund JSC (Fitch: BBB credit rating) in the amount of $
727,440
, respectively. The debt securities issued by the Ministry of Finance of the Republic of Kazakhstan and Kazakhstan Sustainability Fund JSC are categorized as non-US sovereign debt and corporate debt, respectively.
As of the
June 30, 2024 and March 31, 2024, the Gr
oup reco
gnized $
363
and
$
413
other-than-temporary
impairment in accumulated other comprehensive loss.
The fair value of securities 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 Group 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 Group is valuing and the selected benchmark. Depending on the type of securities owned by the Group, other valuation methodologies may be required.
17
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, 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 Сondensed Сonsolidated Balance Sheets or disclosed in the Notes to the condensed consolidated financial statements at fair value on a recurring basis as of June 30, 2024, and March 31, 2024:
|
Weighted Average
Interest Rate |
Total |
Fair Value Measurements as of June 30, 2024 using
|
|||||||||||||||||||||||||||
|
Quoted Prices in
Active Markets for Identical Assets |
Significant
Other Observable Inputs |
Significant Unobservable
Units |
|||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||||||
| Non-U.S. sovereign debt |
|
% | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Corporate debt |
|
% |
|
|
|
|
|||||||||||||||||||||||
| Corporate equity |
|
|
|
|
|
||||||||||||||||||||||||
| U.S. sovereign debt |
|
% |
|
|
|
|
|||||||||||||||||||||||
| Exchange traded notes |
|
|
|
|
|
||||||||||||||||||||||||
| Total trading securities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||
| Corporate debt |
|
% | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Non-US sovereign debt |
|
% |
|
|
|
|
|||||||||||||||||||||||
| US sovereign debt |
|
% |
|
|
|
|
|||||||||||||||||||||||
| Total available-for-sale securities, at fair value | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||
18
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
|
Weighted Average
Interest Rate
|
Total |
Fair Value Measurements as of March 31, 2024 using
|
|||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Units | |||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||||||
| Non-U.S. sovereign debt |
|
% | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Corporate debt |
|
% |
|
|
|
|
|||||||||||||||||||||||
| Corporate equity |
|
|
|
|
|
||||||||||||||||||||||||
| U.S. sovereign debt |
|
% |
|
|
|
|
|||||||||||||||||||||||
| Exchange traded notes |
|
|
|
|
|
||||||||||||||||||||||||
| Total trading securities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||
| Corporate debt |
|
% | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Non-U.S. sovereign debt |
|
% |
|
|
|
|
|||||||||||||||||||||||
| U.S. sovereign debt |
|
% |
|
|
|
|
|||||||||||||||||||||||
| Total available-for-sale securities, at fair value | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||
The tables below present the valuation techniques and significant level 3 inputs used in the valuation as of June 30, 2024, and March 31, 2024. The tables are not intended to be all inclusive, but instead capture the significant unobservable inputs relevant to determination of fair value.
| Type | Valuation Technique | FV as of June 30, 2024 | Significant Unobservable Inputs | % | ||||||||||||||||||||||
| Corporate debt | DCF |
|
Discount rate |
|
||||||||||||||||||||||
| Estimated number of years |
|
|||||||||||||||||||||||||
| Corporate equity | DCF |
|
Discount rate |
|
||||||||||||||||||||||
| Estimated number of years |
|
|||||||||||||||||||||||||
| Termination multiplier |
|
|||||||||||||||||||||||||
| Corporate equity | DCF |
|
Discount rate |
|
||||||||||||||||||||||
| Estimated number of years |
|
|||||||||||||||||||||||||
| Total | $ |
|
||||||||||||||||||||||||
19
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
| Type | Valuation Technique | FV as of March 31, 2024 | Significant Unobservable Inputs | % | ||||||||||||||||||||||
| Corporate debt | DCF | $ |
|
Discount rate |
|
|||||||||||||||||||||
| Estimated number of years |
|
|||||||||||||||||||||||||
| Corporate equity | DCF |
|
Discount rate |
|
||||||||||||||||||||||
| Estimated number of years |
|
|||||||||||||||||||||||||
| Termination multiplier |
|
|||||||||||||||||||||||||
| Corporate equity | DCF |
|
Discount rate |
|
||||||||||||||||||||||
| Estimated number of years |
|
|||||||||||||||||||||||||
| Total | $ |
|
||||||||||||||||||||||||
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, 2024, and the year ended March 31, 2024:
| Trading securities | ||||||||
| Balance as of March 31, 2023 | $ |
|
||||||
| Reclassification to Level 2 | $ |
(
|
||||||
| Deconsolidation of Freedom UA securities |
(
|
|||||||
| Sale of investments that use Level 3 inputs |
(
|
|||||||
| Purchase of investments that use Level 3 inputs |
|
|||||||
| Revaluation of investments that use Level 3 inputs |
(
|
|||||||
| Reclassification to investment in associate |
(
|
|||||||
| Balance as of March 31, 2024 | $ |
|
||||||
| Reclassification to level 2 |
|
|||||||
| Sale of investments that use Level 3 inputs |
|
|||||||
| Purchase of investments that use Level 3 inputs |
|
|||||||
| Revaluation of investments that use Level 3 inputs |
(
|
|||||||
| Balance as of June 30, 2024 | $ |
|
||||||
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, 2024, and March 31, 2024:
|
June 30, 2024
|
||||||||||||||||||||||||||||||||
| Assets measured at amortized cost |
Accumulated impairment loss
|
Unrealized loss accumulated in other comprehensive
income/(loss) |
Assets
measured at fair value |
Maturity Date | ||||||||||||||||||||||||||||
| Corporate debt | $ |
|
$ |
(
|
$ |
|
$ |
|
2024-2039 | |||||||||||||||||||||||
| Non-US sovereign debt |
|
(
|
(
|
|
2024-indefinite | |||||||||||||||||||||||||||
| U.S. sovereign debt |
|
|
(
|
|
2027-2044 | |||||||||||||||||||||||||||
| Total available-for-sale securities, at fair value | $ |
|
$ |
(
|
(
|
$ |
|
|||||||||||||||||||||||||
20
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
|
March 31, 2024
|
||||||||||||||||||||||||||||||||
| Assets measured at amortized cost |
Accumulated impairment loss
|
Unrealized loss accumulated in other comprehensive
income/(loss) |
Assets
measured at fair value |
Maturity Date | ||||||||||||||||||||||||||||
| Corporate debt | $ |
|
$ |
(
|
$ |
|
$ |
|
2024-2039 | |||||||||||||||||||||||
| Non-U.S. sovereign debt |
|
(
|
$ |
(
|
|
2024-indefinite | ||||||||||||||||||||||||||
| U.S. sovereign debt |
|
|
$ |
(
|
|
2027-2044 | ||||||||||||||||||||||||||
| Total available-for-sale securities, at fair value | $ |
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||||||||
NOTE 6 –
MARGIN LENDING, BROKERAGE AND OTHER RECEIVABLES, NET
Margin lending, brokerage and other receivables as of June 30, 2024, and March 31, 2024, consisted of:
| June 30, 2024 |
March 31, 2024
|
||||||||||
| Margin lending receivables | $ |
|
$ |
|
|||||||
| Receivables from payment processing services |
|
|
|||||||||
| Bank commissions receivable |
|
|
|||||||||
| Bond coupon receivable and dividends accrued |
|
|
|||||||||
| Receivables from brokerage clients |
|
|
|||||||||
| Other receivables |
|
|
|||||||||
| Allowance for receivables |
(
|
(
|
|||||||||
| Total margin lending, brokerage and other receivables, net | $ |
|
$ |
|
|||||||
Margin lending receivables are amounts owed to the
Group
from customers as a result of borrowings by such customers against the value of qualifying securities, primarily for the purpose of purchasing additional securities. Amounts may fluctuate from period to period as overall client balances change as a result of market levels, client positioning and leverage. Credit exposures arising from margin lending activities are generally mitigated by their short-term nature, the value of collateral held and the
Group
's right to call for margin when collateral values decline.
The fair value of collateral received by the Group under margin loans as of June 30, 2024, and March 31, 2024 were $
6,687,324
and $
7,579,057
, respectively. As of June 30, 2024, and March 31, 2024, collateral from single counterparty comprised $
2,479,045
and $
2,516,108
,
37
% and
33
% of the total collateral value, respectively. At the same time margin lending receivable from single counterparty comprised $
862,986
and $
399,196
, respectively.
For both individual and institutional brokerage clients, the Group may enter into arrangements for securities financing transactions in respect of financial instruments held by the Group on behalf of the client or may use such financial instruments for our own account or the account of another client. The Group maintain omnibus brokerage accounts for certain institutional brokerage clients, in which transactions of the underlying clients of such institutional clients are combined in a single account with us. As noted above,
the Group may use the assets within the omnibus accounts to finance, lend, provide credit or provide debt financing or otherwise use and direct the order or manner of assets for financing of other clients of ours.
As of June 30, 2024, and March 31, 2024, using historical and statistical data, the Group
recorded an allowance for brokerage receivables in the amounts of
$
13,237
and
$
11,990
, respectively.
21
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
NOTE 7 –
LOANS ISSUED
Loans issued as of June 30, 2024, consisted of the following:
| Amount Outstanding | Due Dates | Average Interest Rate |
Fair Value of
Collateral |
Loan Currency | |||||||||||||||||||||||||
| Mortgage loans | $ |
|
July 2024 - June 2049 |
|
$ |
|
KZT | ||||||||||||||||||||||
| Car loans |
|
July 2024 - April 2032 |
|
|
KZT | ||||||||||||||||||||||||
| Uncollateralized bank customer loans |
|
July 2024 - June 2044 |
|
|
KZT | ||||||||||||||||||||||||
| Right of claim for purchased retail loans |
|
July 2024 - August 2029 |
|
|
KZT | ||||||||||||||||||||||||
| Collateralized bank customer loans |
|
July 2024 - July 2043 |
|
|
KZT | ||||||||||||||||||||||||
| Subordinated loan |
|
December 2025 |
|
|
USD | ||||||||||||||||||||||||
| Other |
|
August 2024 - January 2029 |
|
|
KZT/USD/EUR
|
||||||||||||||||||||||||
| Allowance for loans issued |
(
|
||||||||||||||||||||||||||||
| Total loans issued | $ |
|
|||||||||||||||||||||||||||
The Group provides mortgage loans to borrowers on behalf of the JSC Kazakhstan Sustainability Fund ("Program Operator") related to the state mortgage program "7-20-25" and transfers the rights of claim on the mortgage loans to the Program Operator. The proceeds received from these transfers are presented within funds received under state program for financing of mortgage loans in the Condensed Consolidated Statements of Cash Flows. Under this program, borrowers can receive a mortgage at an interest rate of
7
% for
20
years, and the interest payments received by the Group are recognized as interest income in the Group’s Consolidated Statements of Operations and Statements of Other Comprehensive Income. In accordance with the program and trust management agreement for the program, Group services the transferred loans and remits all repayments of principal it receives plus
4
% of the
7
% interest received to the Program Operator. The interest paid to the Program Operator is recognized as interest expense in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income. The remaining
3
% of the
7
% interest is retained by Group. Under the program and trust management agreement, Group is required to repurchase the rights to make claims on the transferred loans when either loan principal repayments or interest payments are overdue 90 days or more. The repurchase of overdue loans is performed at the loans’ nominal value and is presented within repurchase of mortgage loans under the State Program in the Condensed Consolidated Statements of Cash Flows.
Since the Group transfers the rights to make claims on the loans with recourse for loans that are more than 90 days past due, retains part of the interest received on the loans and agrees to service the loans after the sale of the loans to the Program Operator, the Group has determined that it retains control over the loans transferred and continues recognizing the loans, which are accounted for as secured borrowings of the Group in accordance with ASC 860, Transfers and Servicing. As the Group continues to recognize the loans as assets, it also recognizes the associated liability equal to the proceeds received from the Program Operator, which is presented separately as liability arising from continuing involvement in the Condensed Consolidated Balance Sheets. This liability accrues
4
% interest annually as described above. As of June 30, 2024
and
March 31, 2024
,
the corresponding liability amounte
d to $
505,659
and
$
521,885
, respectively.
22
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
As of
June 30, 2024
and
March 31, 2024
,
mortgage loans include loans under the state mortgage program "7-20-25" with an aggregate principal amount of $
519,016
and
$
532,389
, respectively
, were presented within loans issued in the Condensed Consolidated Balance Sheets.
The Group has an agreement with FFIN Credit, a company established and controlled by FRHC's controlling shareholder, chairman and chief executive officer, Timur Turlov, to purchase uncollateralized retail loans. FFIN Credit is a non-bank credit institution that issues loans in Kazakhstan under simplified lending procedures. FFIN Credit was created as a pilot project to test and improve the scoring models used for qualifying and issuing loans. The principal operation of FFIN Credit is to provide loans to customers online using biometric identification and its proprietary scoring process. After completion of the pilot launch, it is anticipated that the ownership of FFIN Credit will be sold by Mr. Turlov to the Company. The bank has legal ownership over purchase from FFIN Credit uncollateralized retail loans, however, in accordance with U.S. GAAP requirements, the Group does not recognize those loans, since effective control over the transferred loans are maintained by FFIN Credit. Instead, the Group recognizes the loans receivable from FFIN Credit presented on the Consolidated Balance Sheets within the loans issued. As of June 30, 2024
and
March 31, 2024, right of claims for purchased retail loans amounted to $
134,333
and $
146,152
, respectively.
The total accrued interest for loans issued amounted to $
8,277
as of June 30, 2024
and
$
8,327
as of
March 31, 2024
.
Loans issued as of March 31, 2024, consisted of the following:
| Amount Outstanding | Due Dates | Average Interest Rate |
Fair Value of
Collateral |
Loan Currency | |||||||||||||||||||||||||
| Mortgage loans | $ |
|
April, 2024 - March, 2049 |
|
$ |
|
KZT | ||||||||||||||||||||||
| Car loans |
|
April, 2024 - March, 2031 |
|
|
KZT | ||||||||||||||||||||||||
| Uncollateralized bank customer loans |
|
April, 2024 - March, 2044 |
|
|
KZT | ||||||||||||||||||||||||
| Right of claim for purchased retail loans |
|
April, 2024 - March, 2029 |
|
|
KZT | ||||||||||||||||||||||||
| Collateralized bank customer loans |
|
June, 2024 - July, 2043 |
|
|
KZT | ||||||||||||||||||||||||
| Subordinated loan |
|
December, 2025 |
|
|
USD | ||||||||||||||||||||||||
| Other |
|
April, 2024 - January, 2029 |
|
|
KZT/USD/EUR
|
||||||||||||||||||||||||
| Allowance for loans issued |
(
|
||||||||||||||||||||||||||||
| Total loans issued | $ |
|
|||||||||||||||||||||||||||
Credit quality indicators
Freedom Bank KZ uses a loan portfolio quality classification system that indicates signs of a significant increase in credit risk and contractual impairment, depending on the analysis of reasonable and supportable information available at the reporting date. The loan portfolio is classified into “not credit impaired”, “with significant increase in credit risk” and “credit impaired” agreements.
23
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
Loans “not credit impaired” under the agreement are serviced as usual, there are no primary signs of an increase in credit risk. Agreements classified as “with significant increase in credit risk” represent loans for which there is an increase in the credit risk expected over the life of the agreement compared to the initial risk at the date of recognition of the loan. In practice, the presence of overdue debt on principal and interest for a period of more than 30 days or the absolute probability of default threshold PD exceeds 20%. Agreements classified as “credit impaired” represent loans for which at the reporting date there are signs of impairment, the borrower has been in default for 90 or more days for individuals and 60 or more days for legal entities, the borrower for the last 6 months for individuals and 12 months for legal entities restructured the contract due to the deterioration of the financial condition, the borrower is recognized as credit impaired, the presence of a sign of default, a sign of bankruptcy, the deterioration of the financial performance of the borrower, the presence of other information indicating the presence of a high credit risk.
The table below presents the Group's loan portfolio by credit quality classification and origination year as of June 30, 2024. Current vintage disclosure is the requirement due to first adoption of ASC 326.
24
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
| Term Loans by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2022 | 2021 | Prior | Revolving loans | Total | ||||||||||||||||||||||||||||||||||||||||
| Mortgage loans | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Car loans |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Uncollateralized bank customer loans |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Right of claim for purchased retail loans |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Collateralized bank customer loans |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Subordinated loan |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Other |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
25
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
The table below presents the Group's loan portfolio by credit quality classification as of March 31, 2024.
| Term Loans by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving loans | Total | ||||||||||||||||||||||||||||||||||||||||
| Mortgage loans | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Car loans |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Uncollateralized bank customer loans |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Right of claim for purchased retail loans |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Collateralized bank customer loans |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Subordinated loan |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Other |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are not credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| with significant increase in credit risk |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| that are credit impaired |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
26
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
Aging analysis of past due loans as of June 30, 2024
and
March 31, 2024, is as follows:
|
June 30, 2024
|
|||||||||||||||||||||||||||||
| Loans 30-59 Days past due | Loans 60-89 days past due | Loans 90 days or more past due and still accruing | Current loans | Total | |||||||||||||||||||||||||
| Mortgage loans | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Car loans |
|
|
|
|
|
||||||||||||||||||||||||
| Uncollateralized bank customer loans |
|
|
|
|
|
||||||||||||||||||||||||
| Right of claim for purchased retail loans |
|
|
|
|
|
||||||||||||||||||||||||
| Collateralized bank customer loans |
|
|
|
|
|
||||||||||||||||||||||||
| Subordinated loan |
|
|
|
|
|
||||||||||||||||||||||||
| Other |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
|
March 31, 2024
|
|||||||||||||||||||||||||||||
| Loans 30-59 Days past due | Loans 60-89 days past due | Loans 90 days or more past due and still accruing | Current loans | Total | |||||||||||||||||||||||||
| Mortgage loans | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Car loans |
|
|
|
|
|
||||||||||||||||||||||||
| Uncollateralized bank customer loans |
|
|
|
|
|
||||||||||||||||||||||||
| Right of claim for purchased retail loans |
|
|
|
|
|
||||||||||||||||||||||||
| Collateralized bank customer loans |
|
|
|
|
|
||||||||||||||||||||||||
| Subordinated loan |
|
|
|
|
|
||||||||||||||||||||||||
| Other |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
The activity in the allowance for credit losses for the three months ended June 30, 2024 and 2023 is summarized in the following tables.
27
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
| Allowance for credit losses | |||||||||||||||||||||||||||||||||||||||||
| Mortgage loan | Uncollateralized bank customer loans | Collateralized bank customer loans | Car loans | Right of claim for purchased retail loans | Other | Total | |||||||||||||||||||||||||||||||||||
|
March 31, 2024
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||||||
| Charges |
(
|
(
|
(
|
(
|
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Write off |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Forex |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
|
June 30, 2024
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||||||
| Allowance for credit losses | |||||||||||||||||||||||||||||||||||||||||
| Mortgage loan | Uncollateralized bank customer loans | Collateralized bank customer loans | Car loans | Right of claim for purchased retail loans | Other | Total | |||||||||||||||||||||||||||||||||||
|
March 31, 2023
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||||||||||||||
| Adjustment to allowance for adoption of ASU 2016-13 |
(
|
(
|
(
|
(
|
(
|
|
(
|
||||||||||||||||||||||||||||||||||
| Charges |
|
(
|
(
|
(
|
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Forex |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
|
June 30, 2023
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||||||
28
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
NOTE 8 –
PROVISION FOR INCOME TAXES
The Group is subject to taxation in Kazakhstan, Kyrgyzstan, Cyprus, Uzbekistan, Germany and the United States of America.
The tax rates used for deferred tax assets and liabilities as of June 30, 2024, and March 31, 2024, were
21
% for the United States,
20
% for Kazakhstan and Azerbaijan,
10
% for Kyrgyzstan,
15
% for Germany,
12.5
% for Cyprus,
25
% for United Kingdom,
18
% for Armenia and
15
% for Uzbekistan.
During the three months ended June 30, 2024, and 2023, the effective tax rate was equal to
17.6
% and
19.7
%, respectively.
NOTE 9 –
SECURITIES REPURCHASE AGREEMENT OBLIGATIONS
As of June 30, 2024, and March 31, 2024, trading securities included collateralized securities subject to repurchase agreements as described in the following table:
|
June 30, 2024
|
|||||||||||||||||||||||
| 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-US sovereign debt |
|
% |
|
|
|
||||||||||||||||||
| Corporate debt |
|
% |
|
|
|
||||||||||||||||||
| US sovereign debt |
|
% |
|
|
|
||||||||||||||||||
| Total securities sold under repurchase agreements | $ |
|
$ |
|
$ |
|
|||||||||||||||||
|
March 31, 2024
|
|||||||||||||||||||||||
| 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 |
|
% | $ |
|
$ |
|
$ |
|
|||||||||||||||
| Corporate debt |
|
% |
|
|
|
||||||||||||||||||
| US sovereign debt |
|
% |
|
|
|
||||||||||||||||||
| Total securities sold under repurchase agreements | $ |
|
$ |
|
$ |
|
|||||||||||||||||
The fair value of collateral pledged under repurchase agreements as of June 30, 2024, and March 31, 2024, was $
2,572,331
and $
2,753,601
, respectively.
Securities pledged as collateral by the Group under repurchase agreements are liquid trading securities with market quotes and significant trading volume.
As of June 30, 2024 and March 31, 2024, securities repurchase agreement obligations included accrued interest in the amount of $
9,565
and $
11,684
, with a weighted average maturity of
14
days and
12
days, respectively. All securities repurchase agreements transactions were executed through the Kazakhstan Stock Exchange.
29
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
NOTE 10 –
CUSTOMER LIABILITIES
The Group recognizes customer liabilities associated with deposit funds of its brokerage and bank customers. As of
June 30, 2024, and March 31, 2024
, customer liabilities consisted of:
|
June 30, 2024
|
March 31, 2024
|
||||||||||||||||||||||
| Amount | Interest | Amount | Interest | ||||||||||||||||||||
| Interest bearing deposits: | |||||||||||||||||||||||
| Term deposits | $ |
|
|
$ |
|
|
|||||||||||||||||
| Total Interest bearing deposits | $ |
|
$ |
|
|||||||||||||||||||
| Non-interest-bearing deposits: | |||||||||||||||||||||||
| Brokerage customers | $ |
|
$ |
|
|||||||||||||||||||
| Current customer accounts |
|
|
|||||||||||||||||||||
| Total non-interest-bearing accounts | $ |
|
$ |
|
|||||||||||||||||||
| Total customer liabilities | $ |
|
$ |
|
|||||||||||||||||||
In accordance with Kazakhstan law requirements, commercial banks conclude agreements with JSC Kazakhstan Deposit Insurance Fund ("KDIF"), under which banks have to pay commissions to KDIF on a recurring basis, the amount of which depends on the term and demand deposits received by banks from the customers. Under the agreement, KDIF insures the term and demand deposits up to $
42
to each customer. As at June 30, 2024, and March 31, 2024, respectively, the Group had total amounts in excess of insured bank time deposits of $
616,746
and $
600,972
for all customers.
NOTE 11 –
MARGIN LENDING AND TRADE PAYABLES
As of
June 30, 2024, and March 31, 2024
, margin lending and trade payables of the Group were comprised of the following:
|
June 30, 2024
|
March 31, 2024
|
||||||||||
| Margin lending payable | $ |
|
$ |
|
|||||||
| Payables to merchants |
|
|
|||||||||
| Payables to suppliers of goods and services |
|
|
|||||||||
| Trade payable for securities purchased |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total margin lending and trade payables | $ |
|
$ |
|
|||||||
The fair value of collateral by the
Group
under margin loans as of June 30, 2024, and March 31, 2024 was
$
2,564,790
and
$
2,400,361
, respectively.
30
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
NOTE 12 –
DEBT SECURITIES ISSUED
As of June 30, 2024, and March 31, 2024, outstanding debt securities issued by the Group included the following:
|
Debt securities issued by:
|
June 30, 2024
|
March 31, 2024
|
Interest rate | Issue date | Maturity date | |||||||||||||||||||||||||||
| Freedom SPC bonds due 2028 | $ |
|
$ |
|
|
December, 2023 | December, 2028 | |||||||||||||||||||||||||
| Freedom SPC bonds due 2026 |
|
|
|
October, 2021 | October, 2026 | |||||||||||||||||||||||||||
| Accrued interest |
|
|
||||||||||||||||||||||||||||||
| Total debt securities issued | $ |
|
$ |
|
||||||||||||||||||||||||||||
As of June 30, 2024 the carrying value of the Group’s debt securities issued was $
64,610
Freedom SPC bonds due 2026 and $
200,366
Freedom SPC bonds due 2028, respectively. The Freedom SPC bonds are denominated in U.S. dollars and were issued under Astana International Financial Centre ("AIFC") law and trade on the AIX. The Company is a guarantor of the Freedom SPC bonds.
The Freedom SPC bonds due 2026 bear interest at an annual rate of
5.5
% and mature in October 2026. Interest is paid semi-annually in April and October. The proceeds from the issuance of such bonds were loaned to the Company pursuant to a loan agreement dated November 22, 2021. The loan has the same interest rate and maturity date as the bonds.
For the first two years of Freedom SPC bonds due 2028, the annual interest rate is
12
%, and for subsequent years the interest rate will be fixed and set as the sum of Effective Federal Funds Rate (EFFR) as of December 10, 2025 and a margin of
6.5
%. Interest is paid on a monthly basis. The bondholders have a right of early redemption after
two years
at nominal value plus accrued interest. After
two years
, the issuer has the option to redeem the bonds in full or in part at nominal value plus accrued interest.
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs.
The
Group
has no covenants to comply with in its debt securities.
NOTE 13 –
INSURANCE CONTRACTS ASSETS AND LIABILITIES FROM INSURANCE ACTIVITIES
As of June 30, 2024, and March 31, 2024, insurance and reinsurance receivables of the Group was comprised of the following:
|
June 30, 2024
|
March 31, 2024
|
||||||||||
| Assets: | |||||||||||
| Amounts due from policyholders | $ |
|
$ |
|
|||||||
| Amounts due from reinsured |
|
|
|||||||||
| Advances received from agent |
|
|
|||||||||
| Claims receivable from reinsurance |
|
|
|||||||||
| Allowance for estimated uncollectible reinsurance |
(
|
(
|
|||||||||
| Insurance and reinsurance receivables: |
|
|
|||||||||
| Unearned premium reserve, reinsurers’ share |
|
|
|||||||||
| Reserves for claims and claims’ adjustment expenses, reinsurers’ share |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
31
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
|
||
As of June 30, 2024, and March 31, 2024, insurance and reinsurance payable of the Group was comprised of the following:
|
June 30, 2024
|
March 31, 2024
|
||||||||||
| Liabilities: | |||||||||||
| Amounts payable to agents and brokers | $ |
|
$ |
|
|||||||
|
Amounts payable to insurers
|
|
|
|||||||||
|
Amounts payable to reinsured
|
|
|
|||||||||
| Insurance and reinsurance payables: |
|
|
|||||||||
| Unearned premium reserve |
|
|
|||||||||
| Reserves for claims and claims’ adjustment expenses |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
As of June 30, 2024, and March 31, 2024, liabilities from insurance activity mainly changed due to the increase of reserves for claims and claim's adjustment expenses, unearned premium reserve as a result of the expansion of operations.
32
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 14 –
FEE AND COMMISSION INCOME
Fee and commission income is recognized when, or as, the Group satisfies its performance obligations by transferring the promised services to the customers. A service is transferred to a customer when, or as, the customer obtains control of that service. A performance obligation may be satisfied at a point in time or over time. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Group determines the customer obtains control over the promised service. Revenue from a performance obligation satisfied over time is recognized by measuring the Group’s progress in satisfying the performance obligation in a manner that depicts the transfer of the services to the customer. The amount of revenue recognized reflects the consideration the Group expects to receive in exchange for those promised services (i.e., the “transaction price”). In determining the transaction price, the Group considers multiple factors, including the effects of variable consideration, if any.
The Company’s revenues from contracts with customers are recognized when the performance obligations are satisfied at an amount that reflects the consideration expected to be received in exchange for such services. The majority of the Group’s performance obligations are satisfied at a point in time and are typically collected from customers by debiting their brokerage account with the Group.
Brokerage Services
Commissions from brokerage services — The Group earns commission revenue by executing, settling and clearing transactions with clients primarily in exchange-traded and over-the-counter corporate equity and debt securities, money market instruments and exchange-traded options and futures contracts. Trade execution and clearing services, when provided together, represent a single performance obligation, as the services are not separately identifiable in the context of the contract. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, are recognized at a point in time on trade date when the performance obligation is satisfied.
Commission revenue is generally paid on settlement date, which is generally two business days after trade date for equity securities and corporate bond transactions and one day for government securities, options and commodities transactions. The Group records a receivable on the trade date and receives a payment on the settlement date.
Bank Services
The Group earns revenue from two primary streams related to commissions from bank services:
•
The Group earns bank commissions by executing client order for money transfer, purchase and sale of foreign currency, and other bank services. A substantial portion of the Group's revenue is derived from commissions from private clients through accounts with transaction-based pricing. Commission revenue is collected and recognized by the Company at a point in time at the execution of the order.
•
Interchange — The Group acts as an agent between customers and international payment systems, such as VISA and MasterCard. When using third-party payment platforms or networks, the Group is an agent for the payment processing services to retail customers and. therefore, revenue is recognized on a net basis, as the Group is not primarily responsible for fulfilling the payment processing on third parties' payment platforms/networks and has no discretion in establishing the selling price of the payment processing service to the retail customer on third party payment platforms/networks. Fees from customers using third-party payment platform are earned for processing debit card transactions.
Payment Processing
33
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
The Group earns revenue from two primary streams related to payment processing:
•
Commissions from payment processing services, which include activities such as authorization, clearing, and settlement of electronic payments. The Company recognizes revenue at the time when the payment card transaction is completed. These services are typically provided under a commission rate from amounts of transactions. Fees are typically billed and paid monthly.
•
Provision of IT infrastructure to merchants to facilitate payments. The Company recognizes revenue at the time when the performance obligation is satisfied – as soon as payments are facilitated. These services are typically provided under a commission rate from amounts of facilitated payments. Fees are typically billed and paid monthly.
Underwriting and market-making services
The Group earns underwriting revenues by providing capital raising solutions for corporate clients through initial public offerings, follow-on offerings, equity-linked offerings, private investments in public entities, and private placements. Underwriting revenues are recognized at a point in time on placement date, as the client obtains the control and benefit of the capital markets offering at that point. These fees are generally received within 90 days after the placement date. Transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction, are included in underwriting revenues. These costs are deferred and recognized in the same period as the related investment banking transaction revenue. However, if the transaction is abandoned and does not close, the accounting treatment for the transaction-related costs may differ. In such cases, the accounting principles typically require the immediate recognition of the transaction-related expenses as an expense in the period in which the decision to abandon the transaction is made. This ensures that the costs associated with the abandoned transaction are recognized and reflected accurately in the financial statements of the entity.
Receivables and Contract Balances
Receivables arise when the Group has an unconditional right to receive payment under a contract with a customer and are derecognized when the cash is received. Margin lending, brokerage and other receivables are disclosed in Note 6 in the notes to condensed consolidated financial statements.
Contract assets arise when the revenue associated with the contract is recognized before the Group’s unconditional right to receive payment under a contract with a customer (i.e., unbilled receivable) and are derecognized when either it becomes a receivable or the cash is received. As of June 30, 2024 and March 31, 2024, contract asset balances were not material.
Contract liabilities arise when customers remit contractual cash payments in advance of the Group satisfying its performance obligations under the contract and are derecognized when the revenue associated with the contract is recognized either when a milestone is met triggering the contractual right to bill the customer or when the performance obligation is satisfied. As of June 30, 2024 and March 31, 2024, contract liability balances were not material.
34
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
During the three months ended June 30, 2024, and June 30, 2023, fee and commission income was comprised of:
|
Three months ended June 30, 2024
|
|||||||||||||||||||||||||||||
| Brokerage |
Banking
|
Insurance | Other | Total | |||||||||||||||||||||||||
| Brokerage services | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Commission income from payment processing |
|
|
|
|
|
||||||||||||||||||||||||
| Underwriting and market-making services |
|
|
|
|
|
||||||||||||||||||||||||
| Bank services |
|
|
|
|
|
||||||||||||||||||||||||
| Other fee and commission income |
|
|
|
|
|
||||||||||||||||||||||||
| Total fee and commission income | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
|
Three months ended June 30, 2023
|
|||||||||||||||||||||||||||||
| Brokerage |
Banking
|
Insurance | Other | Total | |||||||||||||||||||||||||
| Brokerage service | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Commission income from payment processing |
|
|
|
|
|
||||||||||||||||||||||||
| Bank services |
|
|
|
|
|
||||||||||||||||||||||||
| Underwriting and market-making services |
|
|
|
|
|
||||||||||||||||||||||||
| Other fee and commission income |
|
|
|
|
|
||||||||||||||||||||||||
| Total fee and commission income | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
35
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 15 –
NET (LOSS)/GAIN ON TRADING SECURITIES
During the three months ended June 30, 2024, and June 30, 2023, net (loss)/gain on trading securities was comprised of:
|
Three Months Ended
June 30, 2024
|
Three Months Ended
June 30, 2023
|
||||||||||
| Net unrealized (loss)/gain recognized during the reporting period on trading securities still held at the reporting date | $ |
(
|
$ |
|
|||||||
| Net gain recognized during the period on trading securities sold during the period |
|
|
|||||||||
| Net (loss)/gain recognized during the period on trading securities | $ |
(
|
$ |
|
|||||||
36
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 16 -
NET INTEREST INCOME/EXPENSE
Net interest income/expense for the three months ended June 30, 2024, and June 30, 2023 includes:
| Three months ended June 30, 2024 | Three months ended June 30, 2023 | ||||||||||
| Interest income: | |||||||||||
| Interest income on trading securities |
|
$ |
|
||||||||
| Interest income on loans to customers |
|
|
|||||||||
| Interest income on margin loans to customers |
|
|
|||||||||
| Interest income on securities available-for-sale |
|
|
|||||||||
| Interest income on reverse repurchase agreements and amounts due from banks |
|
|
|||||||||
| Other interest income |
|
|
|||||||||
| Total interest income | $ |
|
$ |
|
|||||||
| Interest expense: | |||||||||||
| Interest expense on securities repurchase agreement obligations | $ |
|
$ |
|
|||||||
| Interest expense on customer accounts and deposits |
|
|
|||||||||
| Interest expense on margin lending payable |
|
|
|||||||||
| Interest expense on debt securities issued |
|
|
|||||||||
| Interest expense on loans received |
|
|
|||||||||
| Other interest expense |
|
|
|||||||||
| Total interest expense | $ |
|
$ |
|
|||||||
| Net interest income | $ |
|
$ |
|
|||||||
37
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 17 -
NET GAIN/(LOSS) ON DERIVATIVES
| Three months ended June 30, 2024 | Three months ended June 30, 2023 | ||||||||||
| Net realized gain/(loss) on derivatives | $ |
|
$ |
(
|
|||||||
| Net unrealized gain/(loss) on derivatives |
|
(
|
|||||||||
| Total net gain/(loss) on derivatives | $ |
|
$ |
(
|
|||||||
38
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 18 –
RELATED PARTY TRANSACTIONS
| June 30, 2024 | March 31, 2024 | ||||||||||||||||||||||
| Related party balances | Total category as per financial statements captions | Related party balances | Total category as per financial statements captions | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
| Restricted cash | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
|
Other
|
|
|
|||||||||||||||||||||
| Trading securities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
|
Margin lending, brokerage and other receivables, net
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
| Loans issued | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
| Other assets, net | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
| LIABILITIES | |||||||||||||||||||||||
| Customer liabilities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
|
Other
|
|
|
|||||||||||||||||||||
| Other liabilities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
39
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
|
Other
|
|
|
|||||||||||||||||||||
| Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | ||||||||||||||||||||||
| Related party amounts | Total category as per financial statements captions | Related party amounts | Total category as per financial statements captions | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Fee and commission income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
|
Other
|
|
|
|||||||||||||||||||||
| Interest income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
| Expense: | |||||||||||||||||||||||
| General and administrative expenses | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Management |
|
|
|||||||||||||||||||||
|
Companies controlled by management
|
|
|
|||||||||||||||||||||
During the three months ended June 30, 2023, the Group engaged in various related party transactions, a substantial amount of which were conducted with FST Belize, a Belize company which is wholly owned personally by the Company’s chief executive officer, chairman and majority shareholder, Timur Turlov, and is not part of the FRHC group of companies. FST Belize has its own brokerage customers, which include individuals and market-maker institution and conducted business with the Group through a client omnibus accounts at Freedom EU. The Group has terminated these operations with FST Belize before the end of fiscal 2024, leading to a decrease in related party transactions during three months ended June 30, 2024 and projected to be the main reason for a decrease in related party transactions moving forward.
As of June 30, 2024, and March 31, 2024 the Group had loans issued which included uncollateralized bank customer loans purchased from a related party, FFIN Credit a company outside of the FRHC group which is controlled by Timur Turlov.
NOTE 19 –
STOCKHOLDERS’ EQUITY
During the three months ended June 30, 2024 the Company awarded stock grants totaling
186,967
shares,
42,597
of which were vested on the date of the award.
The table below presents Stock Incentive Plan awards granted.
40
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
|
Stock awards granted on:
|
Units
|
|||||||
|
October 6, 2022
|
|
|||||||
|
May 18, 2021
|
|
|||||||
|
March 1, 2024 immediate stock awards
|
|
|||||||
|
March 1, 2024
|
|
|||||||
|
April 1, 2024 immediate stock grants
|
|
|||||||
|
April 1, 2024
|
|
|||||||
|
April 23, 2024 immediate stock awards
|
|
|||||||
|
April 23, 2024
|
|
|||||||
|
June 7, 2024 immediate stock awards
|
|
|||||||
|
June 24, 2024 immediate stock awards
|
|
|||||||
|
June 24, 2024
|
|
|||||||
NOTE 20 –
STOCK BASED COMPENSATION
The compensation expense related to restricted and non-restricted stock grants was $
10,615
during the three months ended June 30, 2024, and $
1,233
during the three months ended June 30, 2023. As of June 30, 2024 there was $
49,256
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
3.48
years. The compensation expense related to stock awards, which vested on the date of the award was $
3,230
and $
0
during the three months ended June 30, 2024 and June 30, 2023.
The Company has determined the fair value of shares awarded during the three months ended June 30, 2024, using the Monte Carlo valuation model based on the following key assumptions:
| Stock awards granted | Term (years) | Volatility | Risk-free rate | ||||||||
| April 1, 2024 |
|
|
% |
|
% | ||||||
| April 23, 2024 |
|
|
% |
|
% | ||||||
| June 24, 2024 |
|
|
% |
|
% | ||||||
The table below summarizes the activity for the Company's stock awards outstanding during the three months ended June 30, 2024:
| Shares |
Weighted
Average Fair Value |
||||||||||
|
Outstanding, at March 31, 2024
|
|
|
|||||||||
| Granted |
|
|
|||||||||
| Vested |
(
|
(
|
|||||||||
| Forfeited/cancelled/expired |
|
|
|||||||||
|
Outstanding, at June 30, 2024
|
|
|
|||||||||
41
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 21 –
LEASES
At June 30, 2024, the Group was obligated under a number of noncancellable leases, predominantly operating leases of office space, which expire at various dates through 2033. The Group's primary involvement with leases is in the capacity as a lessee where a Group lease premises to support its business.
The Group determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. Operating lease liabilities and right-of-use (ROU) assets are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term. The future lease payments are discounted at a rate that estimates the Company’s collateralized borrowing rate for financing instruments of a similar term and are included in accounts payable and other liabilities. The operating lease ROU asset, included in premises and equipment, also includes any lease prepayments made, plus initial direct costs incurred, less any lease incentives received. The Company recognizes fixed lease costs on a straight-line basis throughout the lease term in the Consolidated Statement of Income. Certain of these leases also have extension or termination options, and the Company assess the likelihood of exercising such options. If it is reasonably certain that the Group will exercise the options to extend, then we include the impact in the measurement of our right-of-use assets and lease liabilities.
When readily determinable, the Company uses the rate implicit in the lease to discount lease payments to present value; however, the rate implicit on most of the Group's leases are not readily determinable. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.
The table below presents the lease related assets and liabilities recorded on the Company's Condensed Consolidated Balance Sheets as of June 30, 2024:
| Classification on Balance Sheet |
June 30, 2024
|
March 31, 2024 | |||||||||||||||
| Assets | |||||||||||||||||
| Operating lease assets | Right-of-use asset | $ |
|
$ |
|
||||||||||||
| Total lease assets | $ |
|
$ |
|
|||||||||||||
| Liabilities | |||||||||||||||||
| Operating lease liability | Lease liability | $ |
|
$ |
|
||||||||||||
| Total lease liability | $ |
|
$ |
|
|||||||||||||
The following table presents as of June 30, 2024, the maturities of the lease liabilities:
|
Leases maturing during the period ended March 31,
|
||||||||
| 2025 | $ |
|
||||||
| 2026 |
|
|||||||
| 2027 |
|
|||||||
| 2028 |
|
|||||||
| 2029 |
|
|||||||
| Thereafter |
|
|||||||
| Total payments |
|
|||||||
| Less: amounts representing interest |
(
|
|||||||
| Lease liability, net | $ |
|
||||||
| Weighted average remaining lease term (in months) |
|
|||||||
| Weighted average discount rate |
|
% | ||||||
Lease commitments for short-term operating leases as of June 30, 2024 and June 30, 2023 was a
pproximately $
1,896
and $
152
, respectively. The Group's rent expense for office space was $
2,154
for the three months ended June 30, 2024, $
860
for the three months ended June 30, 2023.
42
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
The Group has leases that involve variable payments tied to an index, which are considered in the measurement of operating lease right-of-use (ROU) assets and operating lease liabilities.
NOTE 22 –
COMMITMENTS AND CONTINGENCIES
Legal, Regulatory and Governmental Matters
We are involved in various claims and legal proceedings that arise in the normal course of business. We recognize a liability when a loss is considered probable and the amount can be reasonably estimated. If a material loss contingency is reasonably possible but not probable, we do not record a liability but disclose the nature and amount of the claim, as well as an estimate of the potential loss, if such an estimate can be determined. Legal fees are recorded as expenses when incurred. While we do not anticipate that the resolution of any current claims or proceedings (except for the specific matters detailed below, if resolved unfavorably) will significantly impact our financial position, an adverse outcome in some or all of these cases could materially affect our results of operations or cash flows for specific periods. This assessment is based on our current understanding of relevant facts and circumstances, and our perspective on these matters may evolve with future developments.
The Company accounts for potential losses related to litigation in accordance with FASB ASC Topic 450, “Contingencies.” As of June 30, 2024 and March 31, 2024, accruals for potential losses related to legal, regulatory and governmental actions and proceedings were not material.
Settlement of the Estate of Toleush Tolmakov Case
The Estate of Toleush Tolmakov (the “Estate”) commenced a legal action against Freedom Holding Corp., and our subsidiary FFIN Securities, Inc. in the Third Judicial District Court of Salt Lake County, State of Utah in December 2021. This proceeding relates to cash distributions arising from the 2011 sale of a subsidiary of BMB Munai, Inc. (the predecessor to Freedom Holding Corp.) and shares of common stock of the Company belonging to Toleush Tolmakov, who was a shareholder of the Company at the time he died in 2011, and a now defunct British Virgin Islands corporation, in which Mr. Tolmakov may have had an interest. The Company has held the relevant assets since Mr. Tolmakov's death because it does not know to whom they should be distributed and no party has yet established legal right of ownership of the assets. On October 21, 2022, in accordance with an order entered into by the Third Judicial District Court of Salt Lake County, we deposited an amount of $
8.4
million into the registry of the court, representing the amount of cash distributions claimed by the Estate. We have recently formalized the settlement with the Estate which was approved by the Third Judicial District Court of Salt Lake County on July 24, 2024. All relevant legal claims between the parties have been dismissed or are in the process of being dismissed with prejudice under the relevant motions filed with the court. The outcome of this litigation was not material to the Company's financial condition.
Off-balance sheet financial instruments
Freedom Bank KZ is a party to certain off-balance sheet financial instruments. These financial instruments include guarantees and unused 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 Freedom Bank KZ's credit evaluation of the counterparty. The Company's maximum exposure to credit loss is represented by the contractual amount of these commitments.
Unused commitments under lines of credit
Unused 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.
43
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
Unused commitments under guarantees
Unused commitments under guarantees are conditional commitments issued by Freedom Bank KZ to provide bank guarantees to customers. These commitments may mature without being fully funded.
Bank guarantees
Bank guarantees are conditional commitments issued by Freedom Bank KZ 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 as of June 30, 2024, and March 31, 2024, were as follows:
|
As of June 30, 2024
|
As of March 31, 2024 | ||||||||||
| Unused commitments under lines of credits and guarantees | $ |
|
$ |
|
|||||||
| Bank guarantees |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
44
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 23 –
SEGMENT REPORTING
The following tables summarize the Group's Statement of Operations by its reportable segments. There are no revenues from transactions between the segments and intercompany balances have been eliminated for separate disclosure:
|
Three months ended June 30, 2024
|
|||||||||||||||||||||||||||||
|
STATEMENTS OF OPERATIONS
|
Brokerage | Banking | Insurance | Other | Total | ||||||||||||||||||||||||
|
Fee and commission income
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Net gain/(loss) on trading securities |
|
(
|
|
(
|
(
|
||||||||||||||||||||||||
| Interest income |
|
|
|
|
|
||||||||||||||||||||||||
| Insurance underwriting income |
|
|
|
|
|
||||||||||||||||||||||||
| Net gain/(loss) on foreign exchange operations |
|
(
|
|
|
|
||||||||||||||||||||||||
| Net gain on derivative |
|
|
|
|
|
||||||||||||||||||||||||
|
Other income, net
|
|
|
|
|
|
||||||||||||||||||||||||
| TOTAL REVENUE, NET |
|
|
|
|
|
||||||||||||||||||||||||
| Fee and commission expense |
|
|
|
|
|
||||||||||||||||||||||||
| Interest expense |
|
|
|
|
|
||||||||||||||||||||||||
| Insurance claims incurred, net of reinsurance |
|
|
|
|
|
||||||||||||||||||||||||
| Payroll and bonuses |
|
|
|
|
|
||||||||||||||||||||||||
| Professional services |
|
|
|
|
|
||||||||||||||||||||||||
| Stock compensation expense |
|
|
|
|
|
||||||||||||||||||||||||
| Advertising expense |
|
|
|
|
|
||||||||||||||||||||||||
| General and administrative expense |
|
|
|
|
|
||||||||||||||||||||||||
|
(Recovery of)/provision for allowance for expected credit losses
|
(
|
(
|
|
(
|
(
|
||||||||||||||||||||||||
| TOTAL EXPENSE |
|
|
|
|
|
||||||||||||||||||||||||
| INCOME BEFORE INCOME TAX | $ |
|
$ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
| Income tax (expense)/benefit |
(
|
|
(
|
|
(
|
||||||||||||||||||||||||
|
NET INCOME
|
$ |
|
$ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
45
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
|
Three months ended June 30, 2023
|
|||||||||||||||||||||||||||||
|
STATEMENTS OF OPERATIONS
|
Brokerage | Banking | Insurance | Other | Total | ||||||||||||||||||||||||
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Fee and commission income
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$ |
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$ |
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$ |
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$ |
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$ |
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| Net gain/(loss) on trading securities |
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(
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| Interest income |
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| Insurance underwriting income |
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| Net gain/(loss) on foreign exchange operations |
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(
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(
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| Net (loss)/gain on derivative |
(
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(
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(
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| Other income/(expense), net |
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(
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| TOTAL REVENUE, NET |
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| Fee and commission expense |
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| Interest expense |
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| Insurance claims incurred, net of reinsurance |
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| Payroll and bonuses |
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| Professional services |
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| Stock compensation expense |
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| Advertising expense |
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| General and administrative expense |
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Provision for allowance for expected credit losses
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| TOTAL EXPENSE |
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||||||||||||||||||||||||
| INCOME BEFORE INCOME TAX | $ |
|
$ |
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$ |
|
$ |
(
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$ |
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| Income tax (expense)/benefit |
(
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(
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(
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||||||||||||||||||||||||
|
NET INCOME
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
46
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
The following tables summarize the Company's total assets and total liabilities by its business segments. Intercompany balances have been eliminated for separate disclosure:
|
June 30, 2024
|
|||||||||||||||||||||||||||||
| Brokerage | Banking | Insurance | Other | Total | |||||||||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
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$ |
|
|||||||||||||||||||
| Total liabilities |
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|
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||||||||||||||||||||||||
| Net assets | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
|
March 31, 2024
|
|||||||||||||||||||||||||||||
| Brokerage | Banking | Insurance | Other | Total | |||||||||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Total liabilities |
|
|
|
|
|
||||||||||||||||||||||||
| Net assets | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
Brokerage
Companies in the Brokerage segment offer securities brokerage, securities dealing for customers and for our own account, market making activities, investment research, investment counseling, underwriting and market-making services to a global client base of corporations, investors, financial institutions, merchants, government and municipal entities. Companies in the Brokerage segment also conduct proprietary securities trading.
The Group's services in this segment include providing clients with access to the world's largest stock exchanges and a gateway to global investment opportunities. Additionally, the Group's offerings in this segment include professional securities analytics, empowering clients with valuable insights and market intelligence to make informed investment decisions. To ensure a seamless experience, the Group provides user-friendly trading applications that offer convenience and flexibility.
Banking
Company in the Banking segment generates banking service fees by providing services that include lending, deposit services, payment card services, money transfers, correspondent accounts, supporting both individual and corporate clients with innovative digital financial solutions. To ensure a seamless experience, it provides user-friendly trading applications that offer convenience and flexibility. Companies in the Banking segment also conduct proprietary securities trading activities.
Insurance
Companies in the Insurance segment offer products including life insurance, obligatory insurance, tourist medical health insurance and auto insurance. These insurance products are designed to offer comprehensive coverage and tailored solutions to protect individuals, property, auto and businesses in the event of unforeseen events or risks. Companies in the Insurance segment also conduct proprietary securities trading activities.
Other
Activities of companies in the Other segment include provision of payment processing services, financial educational center services, financial intermediary center services, financial consulting services, administrative management services, telecommunication services information processing services, entertainment ticketing sales, online air and railway ticket purchase aggregation and an online retail trade and e-commerce application. The Other segment also includes transactions conducted by the Company in connection with repurchase agreements.
47
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 24 -
STATUTORY CAPITAL REQUIREMENTS
The Company has
two
insurance subsidiaries operating in Kazakhstan: Freedom Life (a regulated life insurer) and Freedom Insurance (a regulated property and casualty insurance entity). The Law of the Republic of Kazakhstan No. 126-II "On Insurance Activities" (the "Insurance Law") is the main law regulating the insurance sector in Kazakhstan. It establishes a framework for insurance activities, registration and licensing of insurance companies and regulation of insurance activities by the Agency of the Republic of Kazakhstan for Regulation and Development of Financial Market (“ARDFM”).
Freedom Life and Freedom Insurance are required to notify and receive verbal approval from the ARDFM of any proposals to declare or pay a dividend on its share capital. The amount of dividends these subsidiaries are permitted to declare is limited to the relevant subsidiary’s realized retained earnings and dividends can only be paid to the extent they will not cause a breach to the minimum solvency and capital requirements of the relevant subsidiary. As of June 30, 2024 and March 31, 2024, Freedom Life and Freedom Insurance were in compliance with the ARDFM dividend, minimum solvency and minimum capital requirements. Freedom KZ in its capacity of an insurance holding is also limited in declaration and payment of dividends if such payment leads to breach of capital ratios applicable to insurance companies Freedom Life and Freedom Insurance.
There are no significant differences between the statutory accounting practices and statements prepared in accordance with U.S. GAAP for the insurance subsidiaries.
In addition, our subsidiaries operate under various securities brokerage, banking and financial services regulations and must maintain such licenses in order to conduct their operations. As of June 30, 2024 and March 31, 2024, we, through our subsidiaries, held: (a) brokerage licenses (i) in Kazakhstan issued by ARDFM and the Astana Financial Services Authority (the "AFSA"), (ii) in Cyprus issued by the Cyprus Securities and Exchange Commission ("CySEC"), (iii) in the United States issued by FINRA, (iv) in Armenia issued by the Central Bank of Armenia, and (v) in Uzbekistan issued by the Ministry of Finance of the Republic of Uzbekistan; (b) a banking license for foreign currency operations license in Kazakhstan issued by the ARDFM; (c) a banking license for corporate and retail banking services in Kazakhstan issued by the ARDFM (including for currency exchange operations); and (d) payment service provider in Kazakhstan is specially registered in such capacity with National Bank of the Republic of Kazakhstan, payment services providers in Uzbekistan and Kyrgyzstan hold licenses from the National Bank of the Kyrgyz Republic and the Central Bank of Uzbekistan, respectively.
The table below presents net capital/eligible equity, required minimum capital, excess regulatory capital and retained earnings as of June 30, 2024 for each of the regulated entities that is material for our condensed consolidated financial statements.
| (amounts in thousands) | Regulated activities | Net Capital/Eligible Equity | Required Minimum capital/solvency | Excess regulatory capital | Retained earnings | |||||||||||||||||||||||||||
| Freedom KZ | Brokerage | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
|
Freedom Bank KZ
|
Bank |
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| Freedom Life | Life Insurance |
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| Freedom EU | Brokerage |
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| Freedom Insurance | Property and Casual Insurance |
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| Freedom Global | Brokerage |
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| Freedom Armenia ("Freedom AR") | Brokerage |
|
|
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| Other regulated operating subsidiaries | Other |
|
|
|
(
|
|||||||||||||||||||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||
48
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
According to the requirements of National Bank of Republic of Kazakhstan, the regulator of Freedom KZ and Freedom Life, capital is adjusted through subtraction of non-liquid assets. Consequently, it may result that net capital for regulatory purposes may be lower than retained earnings balances. As per capital requirements Freedom EU regulated by The Cyprus Securities and Exchange Commission and Freedom Global regulated by Astana Financial Services Authority, current year profit is not included within net capital for regulatory purposes, as profits can only be included in net capital after a statutory audit is completed.
The table below presents net capital/eligible equity, required minimum capital, excess regulatory capital and retained earnings as of March 31, 2024 for each of the regulated entities that is material for our condensed consolidated financial statements.
| (amounts in thousands) | Regulated activities | Net Capital/Eligible Equity | Required Minimum capital/solvency | Excess regulatory capital | Retained earnings | |||||||||||||||||||||||||||
| Freedom KZ | Brokerage | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
|
Freedom Bank KZ
|
Bank |
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|
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| Freedom Life | Life Insurance |
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|
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| Freedom EU | Brokerage |
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| Freedom Insurance | Property and Casual Insurance |
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| Freedom Global | Brokerage |
|
|
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| Freedom Armenia ("Freedom AR") | Brokerage |
|
|
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| Other regulated operating subsidiaries | Other |
|
|
|
(
|
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| $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||
49
|
FREEDOM HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts in thousands of United States dollars, except share data, unless otherwise stated) |
||
NOTE 25 –
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.
50
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis presents management’s perspective on financial condition and results of operations of Freedom Holding Corp. ("FRHC") and its consolidated subsidiaries. Except where the context otherwise requires or where otherwise indicated, references herein to the "Company," "Freedom," "we," "our," and "us") mean Freedom Holding Corp. together with its consolidated subsidiaries. References to "fiscal year(s)" means the 12-month periods ended March 31 for the referenced year. The following discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this quarterly report on Form 10-Q, and it should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included in this quarterly report on Form 10-Q and the discussion under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the fiscal year ended March 31, 2024, filed with the Securities Exchange Commission ("SEC") on June 14, 2024 (the “2024 Form 10-K”).
Special Note About Forward-Looking Information
All statements other than statements of historical fact included herein and in the documents incorporated by reference in this quarterly report on Form 10-Q, if any, including without limitation, statements regarding our future financial position, business strategy, potential acquisitions or divestitures, budgets, projected costs, and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “strategy,” “will,” “ would,” and other similar expressions and their negatives.
Forward-looking statements are not guarantees of future performance and involve known and unknown risks and uncertainties, many of which may be beyond our control. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and actual results could differ materially as a result of various factors. The following include some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:
•
economic and political conditions in the regions where we operate or in which we have customers;
•
current and future conditions in the global financial markets, including fluctuations in interest rates and foreign currency exchange rates;
•
the direct and indirect effects on our business stemming from Russia's large-scale military action against Ukraine;
•
economic sanctions and countersanctions that limit movement of funds, restrict access to capital markets or curtail our ability to service existing or potential new customers;
•
the impact of legal and regulatory actions, investigations and disputes;
•
the policies and actions of regulatory authorities in the jurisdictions in which we have operations, as well as the degree and pace of regulatory changes and new government initiatives generally;
•
our ability to manage our growth effectively;
•
our ability to complete planned acquisitions or successfully integrate businesses we acquire;
•
our ability to successfully execute our strategy for entry into new business areas, including among others the telecommunications and media sectors in Kazakhstan;
•
the availability of funds, or funds at reasonable rates, for use in our businesses, including for executing our growth strategy;
•
the impact of competition, including downward pressures on fees and commissions;
•
our ability to meet regulatory capital adequacy or liquidity requirements, or prudential norms;
•
our ability to protect or enforce our intellectual property rights in our brands or proprietary technology;
•
our ability to retain key executives and recruit and retain personnel;
•
the impact of rapid technological change;
•
information technology, trading platform and other system failures, cybersecurity threats and other disruptions;
•
market risks affecting the value of our proprietary investments;
•
risks of non-performance by third parties with whom we have business relationships;
•
the creditworthiness of our trading counterparties, and banking and brokerage customers;
•
the impact of tax laws and regulations, and their changes, in any of the jurisdictions in which we operate;
•
compliance with laws and regulations in each of the jurisdictions in which we operate, particularly those relating to the brokerage, banking and insurance industries;
51
•
the impact of armed conflict in Israel and Gaza and any possible escalation of such conflict or contagion to neighboring countries or regions;
•
unforeseen or catastrophic events, including the emergence of pandemics, terrorist attacks, extreme weather events or other natural disasters, political discord or armed conflict; and
•
other factors discussed in this quarterly report, as well as in the 2024 Form 10-K, including those listed under Part I, Item 1A. “Risk Factors” of the 2024 Form 10-K.
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. 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 quarterly 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. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, made by us or on our behalf, are also expressly qualified by these cautionary statements.
OVERVIEW
Our Business
Freedom Holding Corp. ("FRHC") is organized under the laws of the State of Nevada and acts as a holding company for all of our operating subsidiaries. Our subsidiaries engage in a broad range of activities including securities brokerage, securities dealing for customers and for our own account, market making activities, investment research, investment counseling, investment banking services, retail and commercial banking, insurance products, payment services, and information processing services. We also own several ancillary businesses which complement our core financial services businesses, including telecommunications and media businesses in Kazakhstan that are in a developmental stage.
Our business was founded in order to provide access to the international capital markets for retail brokerage clients. Our business has grown rapidly in recent years. We are pursuing a strategy to become a leader in the financial services industry, serving individuals and institutions desiring enhanced market access to international capital markets using state of the art technology platforms for their brokerage and banking needs.We are committed to further developing our digital fintech ecosystem by integrating our core financial services businesses with our ancillary business offerings. Our strategic objective is to provide customers with a comprehensive and user-centric digital experience, offering them convenient access to a wide array of products and services through a single platform. By leveraging cutting-edge technology and fostering continuous innovation, we strive to enhance our digital offering and meet the evolving needs of our diverse customer base.
The main market of our operations is Kazakhstan. Our operating subsidiaries are located in Kazakhstan, Cyprus, the United States, Armenia, the United Arab Emirates, Uzbekistan, and Turkey, and we also have a presence in Austria, Azerbaijan, Belgium, Bulgaria, France, Germany, Greece, Italy, Kyrgyzstan, Lithuania, The Netherlands, Poland, Spain and the United Kingdom. We divested our Russian subsidiaries in February 2023. Our subsidiaries in the United States include an SEC- and FINRA-registered broker dealer. As of June 30, 2024, we had 6,819 employees, 132 offices (of which 49 offered brokerage services, 60 offered insurance services, 20 offered banking services and 47 offered other financial and non-financial services).
Change in Reportable Segments
Effective from the beginning of fiscal 2024, we underwent a strategic realignment in our business management and reporting structure. Our Chief Executive Officer, Chief Financial Officer and President, collectively acting as the Chief Operating Decision Maker (CODM), have initiated a new approach to managing our operations. This approach is based on a segmented analysis based on our business activities, allowing for more precise operating decisions and performance evaluations. All prior period segment information has been recast to reflect this change in reportable segments.
52
Products and Services
Our business is organized into four segments: Brokerage, Banking, Insurance, and Other. Additional information regarding our segments can be found in the narrative and tabular descriptions of segments and operating results under this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this quarterly report; and Note 23 "
Segment Reporting
" of the notes to our condensed consolidated financial statements included in Item 1 of this quarterly report.
Our Brokerage segment primarily focuses on retail brokerage and investment banking. Our Banking segment encompasses lending, deposit services, payment card services, money transfers, and correspondent accounts, supporting both individual and corporate clients with innovative digital financial solutions. Our Insurance segment offers life and general insurance services. Our Other segment includes payment processing services, online ticket sales, and new business areas including telecommunications and media services. We also engage in proprietary securities trading activities through each of our four segments.
The expansion of our retail clients’ activity has been a major driver of our growth, particularly in Kazakhstan, Europe and other Central Asian jurisdictions. Over recent years, we have observed a significant increase in retail clients’ activity across these key markets, which has been instrumental in scaling our business. Below is the table with number of our customer for our key segments:
|
|
Number of clients as of June 30, 2024
|
Number of clients as of March 31, 2024
|
|||||||||
|
Brokerage
|
532,000 | 530,000 | |||||||||
|
Banking
|
1,055,000 | 904,000 | |||||||||
|
Insurance
|
692,000 | 534,000 | |||||||||
|
Other
|
330,000 | 320,000 | |||||||||
Brokerage Segment
As of June 30, 2024, in our Brokerage business segment we had 49 offices that provided brokerage and financial services, investment consulting and education, including offices in Kazakhstan, Cyprus, Armenia, United States, Uzbekistan and Kyrgyzstan and representative offices in a number of other European countries. We provide a comprehensive range of securities brokerage services to individuals, businesses and financial institutions. Depending on the region, our brokerage services may include securities trading and margin lending. Our investment banking business consists of investment banking professionals in Kazakhstan, Uzbekistan and the United States who provide strategic advisory services and capital markets products.
Freedom KZ and Freedom Global are professional participants on the KASE and the AIX. Foreign Enterprise LLC Freedom Finance ("Freedom UZ") is a professional participant on the Republican Stock Exchange of Tashkent ("UZSE") and the Uzbek Republican Currency Exchange ("UZCE").
Freedom EU oversees our European region operations (including Austria, Belgium, Bulgaria, Cyprus, France, Germany, Greece, Italy, Poland, Lithuania and Spain). In Cyprus, it is licensed to receive, transmit and execute customer orders, establish custodial accounts, engage in foreign currency exchange services and margin lending, and trade our own investment portfolio. Freedom EU serves as a hub for our Group's brokerage operations, providing transaction processing and intermediary services to our regional customers and to institutional customers that may seek access to the securities markets in the United States and Europe.
PrimeEx is a New York corporation that is a registered agency-only execution broker-dealer on the floor of the New York Stock Exchange ("NYSE"). PrimeEx is a member of the NYSE, Nasdaq, FINRA and the Securities Investor Protection Corp ("SIPC"). PrimeEx conducts investment banking and equity capital markets business under the name Freedom Capital Markets ("FCM").
As of June 30, 2024, we had 1,510 employees in our Brokerage segment, including 1,219 full-time employees and 291 part-time employees.
Banking Segment
53
Our Banking segment consists of the operations of Freedom Bank KZ which is a pioneer in digital retail and commercial banking services in Kazakhstan, offering a large variety of deposit, debit and credit cards allowing its customers to make purchases around the world in multiple different currencies, pay in installments or on credit, save their funds, manage their investment accounts, or get an increased cashback that is transferred to the International Fund for the Salvation of the Aral Sea. Freedom Bank KZ provides digital mortgages, digital car loans, digital business loans, and payment acquiring services for individual entrepreneurs.
As of June 30, 2024, Freedom Bank KZ's assets decreased by 3%, its loan portfolio decreased by 5%, its deposit portfolio increased by 11% and its trading portfolio decreased by 8%, in each case in comparison with March 31, 2024. During the three months ended June 30, 2024, the banking segment continued to exhibit growth. In particular, interest income increased in comparison to the three months ended June 30, 2023. However in the three months ended June 30, 2024, the trading portfolio in the banking segment deteriorated to the negative revaluation of quasi-governmental bonds which were stipulated by current temporary market conditions.
We have 20 office locations in Kazakhstan that provide banking services to our customers. As of June 30, 2024, we had 2,309 employees in our Banking segment, all of which were full-time employees.
Insurance Segment
We have two insurance companies in Kazakhstan, a life insurance company, Freedom Life, and a direct insurance carrier, excluding life, health and medical, Freedom Insurance.
Freedom Life provides a range of health and life insurance products to individuals and businesses, including life insurance, health insurance, annuity insurance, accident insurance, obligatory worker emergency insurance, travel insurance and reinsurance. As of June 30, 2024, Freedom Life had 888,787 active contracts, as compared to 616,301 active contracts as of March 31, 2024. As of June 30, 2024, Freedom Life had total assets of approximately $389.8 million and total liabilities of approximately $304.9 million, as compared to total assets of approximately $371.5 million and total liabilities of approximately $290.0 million as of March 31, 2024.
Freedom Insurance operates in the "general insurance" industry and is the leader in online insurance in Kazakhstan and offers various general insurance products in property (including automobile), casualty, civil liability, personal insurance and reinsurance. As of June 30, 2024, Freedom Insurance had 276,234 active contracts, as compared to 190,872 active contracts as of March 31, 2024. As of June 30, 2024, Freedom Insurance had total assets of approximately $156.1 million and total liabilities of approximately $106.4 million, as compared to total assets of approximately $158.0 million and total liabilities of approximately $112.8 million as of March 31, 2024.
As of June 30, 2024, we had 60 offices and 944 employees
, i
ncluding 920 full-time employees and 24 part-time employees, providing consumer life and general insurance services in Kazakhstan.
Other Segment
As of June 30, 2024, in our Other segment we had 47 offices and 2,056 employees
, i
ncluding 1,908 full-time employees and 148 part-time employees, providing a range of services including payment processing, entertainment ticketing sales, online air and railway ticket purchase aggregation and an online retail trade and e-commerce services. In addition, we have recently established subsidiaries in Kazakhstan with a view to launching a telecommunications business and a media business, respectively, each of which is in the developmental stage. This revenue of this segment is currently mainly derived from provision of payment processing services, retail online ticket sales and online aggregation of purchasing air and railway tickets.
Digital Fintech Ecosystem and Product Expansion
Operating under the "Freedom" brand, our comprehensive suite of digital products and services enables our customers to engage in electronic trading and to monitor their accounts. Our flagship online trading platform Tradernet is designed for a wide range of investors featuring a comprehensive and user-friendly interface and secure infrastructure. The platform allows users to trade a diverse array of financial instruments, including stocks, options, and ETFs from major global exchanges such as KASE, AIX, NYSE, Nasdaq, ATHEX, the London Stock Exchange, the Chicago Mercantile Exchange, the Hong Kong Stock Exchange and Deutsche Börse.
In addition to trading capabilities, we have expanded our digital solutions to include mortgages, auto loans, and insurance products. We also operate Ticketon Events LLP ("Ticketon"), the largest online ticket sales company in
54
Kazakhstan and Paybox platform, the digital payment aggregator which enables our customers to accept payments from buyers using a wide range of payment methods, including bank cards, online banking, electronic money, and more.
In April 2024, Freedom Bank KZ launched its mobile application, SuperApp, marking a significant milestone in the Kazakhstan financial technology sector. This innovative app consolidates all essential financial services into one platform, offering clients a seamless and convenient way to manage their finances. With SuperApp, clients can easily check their account balances, review transaction histories, make transfers and payments, open and manage deposits, and obtain and repay loans. The app also provides real-time portfolio monitoring, along with access to analytical reports and recommendations, empowering users to make well-informed investment decisions. SuperApp's payment services enable users to pay utility and internet bills, mobile phone charges, and other expenses effortlessly. SuperApp not only enhances the user experience but also aligns with our strategic goals. Customer satisfaction is improved through easy access to all banking and investment services in a single app, coupled with an intuitive interface and personalized recommendations.
Going forward, we prioritize further expanding our digital fintech ecosystem by integrating our online and mobile brokerage services, banking offerings, insurance products, payment processing systems, and online commercial ticketing services. Our strategic objective is to provide customers with a comprehensive and user-centric digital experience, offering them convenient access to a wide array of financial products and services through a single platform. When achieving our strategic objectives, we rely heavily on information technology and its continuous development and innovation to offer our users a seamless customer interaction, meet their diverse needs, and ensure stringent adherence to regulatory requirements and information security standards.
In alignment with our digital fintech ecosystem strategy, we plan to expand our business by entering the telecommunications market in Kazakhstan and regional media industry. We seek to establish a new independent telecommunications operator in Kazakhstan to provide a diverse range of telecommunications and telecommunications-related services to customers which may include, among others, high-quality internet connectivity, mobile virtual network operator (MVNO) services, WiFi access, over-the-top (OTT) streaming, internet protocol television (IPTV), traffic transit for operators and cloud solutions, subject to obtaining applicable licenses, acquisitions of telecom assets or entering into partnerships where required. Our new telecommunications business will be operated by Freedom Telecom, a wholly-owned subsidiary of Freedom Holding Corp. incorporated under the laws of the AIFC. Our strategy and budget for Freedom Telecom are currently being reassessed and are subject to revisions, which may be material. During fiscal 2024, we established Freedom Media LLP ("Freedom Media") as a subsidiary of Freedom Telecom that is intended to become a national media platform in Kazakhstan offering tailored streaming services to the Kazakhstan and Central Asia market. This platform is expected to provide unlimited access to a diverse collection of TV shows, movies, documentaries, and exclusive content across multiple genres.
Changes in Credit Ratings
On June 28, 2024, S&P Global Ratings affirmed the long-term credit rating of Freedom Holding Corp. at the "B-" level and long-term and short-term credit ratings of Freedom KZ, Freedom EU, Freedom Global and Freedom Bank KZ at the "B/B" level. The ratings of Freedom KZ and Freedom Bank KZ on the national scale were increased from "kzBB+" to "kzBBВ-", and S&P Global Ratings revised the outlook on Freedom Holding Corp. from negative to stable and the outlook on its core subsidiaries from negative to positive. The positive outlooks on the Freedom Holding Corp.'s subsidiaries reflect S&P's view that easing financial system risk in Kazakhstan and a further strengthening of the Group's risk management and capitalization could support its franchise over the next 12 months. The stable outlook on Freedom Holding Corp. reflects S&P's expectation that an upgrade on the holding company is unlikely even if it views the Group's creditworthiness overall as having strengthened.
On July 2, 2024, S&P Global Ratings revised its ratings outlook on Freedom Life to stable from negative. At the same time, S&P Global Ratings affirmed their 'BB' long-term issuer credit and financial strength ratings on Freedom Life. S&P Global Ratings also raised the Kazakhstan national scale rating on Freedom Life to 'kzAA-' from 'kzA+'. S&P Global Ratings consider that Freedom Life remains a strategically important subsidiary of the Group. This is based on Freedom Life's increasing importance to the Group's operations and track record of collaboration with other Group members. S&P Global Ratings continue to view Freedom Life as an insulated entity due to strong regulatory oversight and its operational independence from the parent.
Key F
actors Affecting Our Results of Operations
Our operations have been, and may continue to be, affected by certain key factors as well as certain historical events. For additional information on these factors and other risks that may affect our financial condition and results of operations, see
“Management's Discussion and Analysis of Financial Condition and Results of Operations”
in Part II Item 7 of the 2024 Form 10-K and “
Risk Factors
” in Part I, Item 1A, of the 2024 Form 10-K.
55
FINANCIAL HIGHLIGHTS
The highlights of our consolidated results for the three months ended June 30, 2024 are as follows:
We had total revenues, net of $450.7 million for the three months ended June 30, 2024, as compared to $316.2 million for the three months ended June 30, 2023. The increase between the two quarters was primarily attributable to the following:
•
Our interest income for the three month ended June 30, 2024 was $226.0 million, representing an increase of $76.7 million, or 51%, compared to the three months ended June 30, 2023. The increase in interest income was primarily attributable to increases in interest income on margin loans to customers, loans to customers and trading securities.
•
Our insurance underwriting income for the three months ended June 30, 2024 was $129.4 million, an increase of $84.5 million or 188%, compared to the three months ended June 30, 2023. The increase was driven by the expansion of our insurance operations such as pension annuity and accident insurance classes between the two quarters.
•
Our fee and commission income for the three months ended June 30, 2024 was $115.5 million, an increase of $16.8 million, or 17%, compared to the three months ended June 30, 2023. The increase was mainly attributable to an increase in fee and commission income from brokerage services, which increase was offset in part by decreases in fee and commission income from bank services, payment processing and underwriting and market-making services.
•
We had a net gain on derivatives for the three months ended June 30, 2024 in the amount of $12.5 million, an increase of $43.1 million, or 141%, compared to the three months ended June 30, 2023. This increase was due to revaluation of currency swaps.
•
We had a net loss on trading securities of $52.1 million for the three months ended June 30, 2024, as compared to a net gain on trading securities of $31.8 million for the three months ended June 30, 2023. The majority of the net loss for the three months ended June 30, 2024 was attributable to declines in the market prices of Kazakhstan sovereign bonds held in our proprietary portfolio during the quarter.
We had total expense of of $409.1 million, for the three months ended June 30, 2024, as compared to $231.6 million for the three months ended June 30, 2023. The increase was mainly attributable to increases in interest expense, payroll and bonuses, fee and commission expense, general and administrative expense and insurance claims incurred, net of reinsurance.
We had net income of $34.4 million for the three months ended June 30, 2024, as compared to $68.1 million for the three months ended June 30, 2023.
Our total assets stayed relatively constant at $8.5 billion as of June 30, 2024 as compared to $8.3 billion as of March 31, 2024.
We had approximately 532,000 total retail brokerage customers as of June 30, 2024 as compared to approximately 530,000 as of March 31, 2024. We had approximately 1,000,000 banking customers at our Freedom Bank KZ subsidiary as of June 30, 2024 as compared to approximately 900,000 as of March 31, 2024.
The operating results for any period are not necessarily indicative of the results that may be expected for any future period.
56
RESULTS OF OPERATIONS
Comparison of the Three-month Periods Ended June 30, 2024 and 2023
The following comparison of our financial results for the three-month periods ended June 30, 2024 and 2023 is not necessarily indicative of future results.
Revenue
The following table sets out information or our total revenue, net for the periods presented.
|
Three months ended June 30, 2024
|
Three months ended June 30, 2023
|
Change | |||||||||||||||||||||||||||||||||
|
(amounts in thousands)
|
Amount | %* | Amount | %* | Amount | % | |||||||||||||||||||||||||||||
| Fee and commission income | $ | 115,489 | 25.6 | % | $ | 98,703 | 31.2 | % | $ | 16,786 | 17 | % | |||||||||||||||||||||||
| Net (loss)/gain on trading securities | (52,102) | (11.6) | % | 31,816 | 10.1 | % | (83,918) | (264) | % | ||||||||||||||||||||||||||
| Interest income | 226,004 | 50.1 | % | 149,349 | 47.2 | % | 76,655 | 51 | % | ||||||||||||||||||||||||||
| Insurance underwriting income | 129,408 | 28.7 | % | 44,889 | 14.2 | % | 84,519 | 188 | % | ||||||||||||||||||||||||||
| Net gain on foreign exchange operations | 8,089 | 1.8 | % | 19,301 | 6.1 | % | (11,212) | (58) | % | ||||||||||||||||||||||||||
| Net gain/(loss) on derivative | 12,494 | 2.8 | % | (30,605) | (9.7) | % | 43,099 | (141) | % | ||||||||||||||||||||||||||
|
Other income
|
11,333 | 2.5 | % | 2,757 | 0.9 | % | 8,576 | 311 | % | ||||||||||||||||||||||||||
| Total revenue, net | $ | 450,715 | 100 | % | $ | 316,210 | 100 | % | $ | 134,505 | 43 | % | |||||||||||||||||||||||
*
Percentage of total revenue, net.
Fee and commission income
The following table sets forth information regarding our fee and commission income for the periods presented.
|
Three months ended June 30,
|
|||||||||||||||||||||||
|
(amounts in thousands)
|
2024 | 2023 | Amount Change | % Change | |||||||||||||||||||
| Brokerage services | $ | 93,167 | $ | 55,082 | $ | 38,085 | 69 | % | |||||||||||||||
|
Commission income from payment processing
|
8,563 | 18,042 | (9,479) | (53) | % | ||||||||||||||||||
| Underwriting and market-making services | 4,702 | 8,831 | (4,129) | (47) | % | ||||||||||||||||||
| Bank services | 2,516 | 12,841 | (10,325) | (80) | % | ||||||||||||||||||
| Other fee and commission income | 6,541 | 3,907 | 2,634 | 67 | % | ||||||||||||||||||
| Total fee and commission income | $ | 115,489 | $ | 98,703 | $ | 16,786 | 17 | % | |||||||||||||||
The following table sets out the components of our fee and commission income as a percentage of total fee and commission income, net for the periods presented.
|
Three months ended June 30,
|
|||||||||||
| 2024 | 2023 | ||||||||||
|
(as a % of total fee and commission income)
|
|||||||||||
| Brokerage services | 81 | % | 56 | % | |||||||
|
Commission income from payment processing
|
7 | % | 18 | % | |||||||
| Bank services | 2 | % | 13 | % | |||||||
| Underwriting and market-making services | 4 | % | 9 | % | |||||||
| Other fee and commission income | 6 | % | 4 | % | |||||||
|
Total fee and commission income
|
100 | % | 100 | % | |||||||
57
For the three months ended June 30, 2024, total fee and commission income was $115.5 million, an increase of $16.8 million, or 17%, as compared to fee and commission income of $98.7 million for the three months ended June 30, 2023.
Fee and commission income from brokerage services for the three months ended June 30, 2024 was $93.2 million, representing a 69% increase as compared to $55.1 million for the three months ended June 30, 2023. This increase was primarily due to an increase in the number of retail brokerage customers from 399,000 as of June 30, 2023 to 532,000 as of June 30, 2024. The increase in the number of customers was attributable in part to the migration of customers from FST Belize to brokerage companies within our Group between the two quarters. The increase was offset in part by a decrease in fee and commission income from brokerage services generated from FST Belize between the two quarters, as our omnibus brokerage arrangement with FST Belize was wound down and customers of FST Belize closed their accounts at FST Belize and opened accounts with brokerage companies within our Group. During the three months ended June 30, 2024, we earned fee and commission income from a market maker customer at our Freedom Global subsidiary in an amount of $64.9 million, representing 56% of our total fee and commission income for that quarter.
Fee and commission income from payment processing decreased to $8.6 million for the three months ended June 30, 2024 from $18.0 million for the three months ended June 30, 2023. The $9.5 million decrease is attributable to a significant reduction in transaction volumes between the two quarters, which was in turn due to the cessation of operations of one of our counterparties, which previously contributed a substantial transaction volume.
Fee and commission income from banking services decreased by $10.3 million or 80% to $2.5 million in the three months ended June 30, 2024 from $12.8 million in the three months ended June 30, 2023. The decrease in fee and commission income from banking services was primarily due to a $9.6 million decrease in commissions generated on transfer and payment processing, which was a result of a lower volume of transfer and payment processing transactions between the two quarters.
Fee and commission income from underwriting and market-making activities decreased by 47% to $4.7 million, driven by a lower volume of underwriting transactions for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.
Other fee and commission income increased by 67% to $6.5 million for the three months ended
June 30, 2024
as compared to $3.9 million for the three months ended
June 30, 2023
, largely due to an increase in agency fees generated by our online travel ticket aggregator subsidiary between the two quarters, which was in turn due to an increase in usage and demand of such services.
Net (loss)/gain on trading securities
We had a net loss on trading securities of $52.1 million for the three months ended June 30, 2024, a decrease of $83.9 million as compared to a net gain of $31.8 million or the three months ended June 30, 2023. The following table sets forth information regarding our net gains and losses on trading activities during the three months ended June 30, 2024 and 2023:
|
(amounts in thousands)
|
Realized Net Gain | Unrealized Net (Loss)/Gain | Net (Loss)/Gain | ||||||||||||||
|
Three months ended June 30, 2024
|
$ | 12,841 | $ | (64,943) | $ | (52,102) | |||||||||||
|
Three months ended June 30, 2023
|
$ | 10,865 | $ | 20,951 | $ | 31,816 | |||||||||||
During the three months ended June 30, 2024, we had a realized gain on trading securities of $12.8 million, which is attributable to Kazakhstan sovereign bonds sold during the three months ended June 30, 2024. However, we also incurred an unrealized net loss of $64.9 million during the same period due to the decline in the value of securities positions we held as of June 30, 2024. The majority of the unrealized net loss is attributable to Kazakhstan sovereign bonds, as a consequence of market price declines.
During the three months ended June 30, 2023, we had a realized gain on trading securities of $10.9 million, which is attributable to Kazakhstan sovereign bonds sold during three months ended June 30, 2023. We had an unrealized net gain in the three months ended June 30, 2023, due to securities positions we continued to hold at June 30, 2023, having appreciated by $21.0 million. The majority of the unrealized net gain is attributable to appreciation in the value of debt securities issued by the Ministry of Finance of the Republic of Kazakhstan. The appreciation can be primarily attributed to increased demand for government securities issued by Kazakhstan during the three months ended June 30, 2023.
58
Interest
income
The following tables set forth information regarding our revenue from interest income for the periods presented.
|
Three months ended June 30,
|
|||||||||||||||||||||||
|
(amounts in thousands)
|
2024 | 2023 | Amount Change |
%
Change |
|||||||||||||||||||
| Interest income on trading securities | $ | 107,128 | $ | 86,840 | $ | 20,288 | 23 | % | |||||||||||||||
| Interest income on loans to customers | 52,367 | 31,333 | 21,034 | 67 | % | ||||||||||||||||||
| Interest income on margin loans to customers | 51,067 | 17,180 | 33,887 | 197 | % | ||||||||||||||||||
| Interest income on securities available-for-sale | 8,400 | 8,345 | 55 | 1 | % | ||||||||||||||||||
| Interest income on reverse repurchase agreements and amounts due from banks | 7,042 | 3,057 | 3,985 | 130 | % | ||||||||||||||||||
| Other interest income | — | 2,594 | (2,594) | (100) | % | ||||||||||||||||||
| Total interest income | $ | 226,004 | $ | 149,349 | $ | 76,655 | 51 | % | |||||||||||||||
|
Three months ended June 30,
|
|||||||||||
| 2024 | 2023 | ||||||||||
| (as a % of total interest income) | |||||||||||
| Interest income on trading securities | 47 | % | 58 | % | |||||||
| Interest income on loans to customers | 23 | % | 21 | % | |||||||
| Interest income on margin loans to customers | 23 | % | 12 | % | |||||||
| Interest income on securities available-for-sale | 4 | % | 6 | % | |||||||
| Interest income on reverse repurchase agreements and amounts due from banks | 3 | % | 2 | % | |||||||
| Other interest income | — | % | 1 | % | |||||||
| Total interest income | 100 | % | 100 | % | |||||||
For the three months ended June 30, 2024, we had interest income of $226.0 million, representing an increase of $76.7 million, or 51%, compared to the three months ended June 30, 2023. The increase in interest income was primarily attributable to increases in interest income on margin loans to customers, loans to customers and trading securities. Interest income on trading securities increased by $20.3 million, or 23%, as a result of an increase in the total size of our trading portfolio and an increase in the amount of bonds we held as a percentage of our total trading portfolio between the two periods. Interest income on loans to customers increased by $21.0 million, or 67%, compared to the quarter ending June 30, 2023 due to the growth of Freedom Bank KZ's customer loan portfolio between the two quarters. Interest income on margin loans to customers increased by $33.9 million, or 197%, compared to the three months ended June 30, 2023, due to an increase in the usage of margin loans for trades by our clients between the two quarters. For the three months ended June 30,
59
2024, we earned interest income from margin lending from a market maker customer at our Freedom Global subsidiary in an amount of approximately $19.4 million, representing 9% of our total interest income from margin lending for that quarter.
The following table provides a summary of the monthly average balances and average interest rates for the major categories of our interest-earning assets for the three months ended June 30, 2024 and 2023.
|
Three months ended June 30,
|
|||||||||||
| 2024 | 2023 | ||||||||||
|
(amounts in thousands)
|
Average balance | ||||||||||
| Interest-earning assets | |||||||||||
| Trading securities | $ | 3,304,839 | $ | 2,759,974 | |||||||
| Loans issued | 1,390,244 | 977,317 | |||||||||
| Margin lending, brokerage and other receivables, net | 1,486,110 | 432,214 | |||||||||
| Available for sale securities, at fair value | 251,677 | 231,448 | |||||||||
| Average yields | |||||||||||
| Trading securities | 13.6 | % | 13.2 | % | |||||||
| Loans issued | 15.9 | % | 13.5 | % | |||||||
| Margin lending, brokerage and other receivables, net | 9.0 | % | 6.7 | % | |||||||
| Available- for- sale securities, at fair value | 14.0 | % | 15.2 | % | |||||||
| Interest income | |||||||||||
| Interest income on trading securities | $ | 107,128 | $ | 86,840 | |||||||
| Interest income on loans to customers | 52,367 | 31,333 | |||||||||
| Interest income on margin loans to customers | 32,197 | 7,065 | |||||||||
| Interest income on available- for- sale securities | 8,400 | 8,345 | |||||||||
| Other interest income | 7,042 | 5,651 | |||||||||
| Total interest income | $ | 207,134 | $ | 139,234 | |||||||
Interest income on margin loans to customers includes income accrued on off-balance sheet arrangements, the monthly average balance of which is not included in the table above. These off-balance sheet arrangements mainly included repurchase agreements of our brokerage clients. As of June 30, 2024 and 2023, the monthly average balance of off-balance sheet arrangements were $962.7 million
and $404.6 million, respectively, and the weighted average interest rate was 8.1%, and 10.4%, respectively.
The following table sets forth the effects of changing rates and volumes on interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate), The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on changes due to rate and the changes due to volume.
60
|
Three months ended June 30,
|
|||||||||||||||||
| 2024 vs 2023 | |||||||||||||||||
| Increase/ (decrease) due to change in | |||||||||||||||||
|
(amounts in thousands)
|
Rate | Volume | Net | ||||||||||||||
| Interest income | |||||||||||||||||
|
Interest income on trading securities
|
$ | 2,695 | 17,593 | $ | 20,288 | ||||||||||||
|
Interest income on loans to customers
|
6,158 | 14,876 | 21,034 | ||||||||||||||
|
Interest income on margin loans to customers
|
2,960 | 22,173 | 25,133 | ||||||||||||||
| Interest income on available-for-sale securities | (312) | 367 | 55 | ||||||||||||||
| Other interest income | — | — | 1,391 | ||||||||||||||
| Total interest income | $ | 11,500 | $ | 55,009 | $ | 67,901 | |||||||||||
Net gain on foreign exchange operations
For the three months ended June 30, 2024, we realized a net gain on foreign exchange operations of $8.1 million compared to a net gain of $19.3 million for the three months ended June 30, 2023. The decrease in net gain can be attributed to a 5.5% depreciation of the Kazakhstan tenge against U.S. dollar during the three months ended June 30, 2024 as a result of which we had a net loss of $19.7 million at our subsidiary Freedom Bank KZ in the three months ended June 30, 2024 due to translation difference loss. The net loss was offset by a net gain of $17.0 million by FRHC and a $9.8 million net gain by Freedom Global in the three months ended June 30, 2024, as both companies conduct business in U.S. dollars.
Net gain on derivatives
For the three months ended June 30, 2024, we had net gain on derivatives of $12.5 million compared to a net loss of $30.6 million for the three months ended June 30, 2023. The change was primarily attributable to our subsidiary, Freedom Bank KZ, which had an unrealized net gain of $8.2 million for the three months ended June 30, 2024 due to a positive revaluation of currency swaps, as compared to a realized net loss of $27.5 million for the three months ended June 30, 2023 due to a negative revaluation of currency swaps. Freedom Bank KZ engages in currency swaps to diversify its funding sources.
Insurance underwriting income
For the three months ended June 30, 2024, we had insurance underwriting income of $129.4 million, an increase of $84.5 million, or 188%, as compared to the three months ended June 30, 2023. The increase was primarily attributable to a $93.8 million, or 175%, increase in insurance underwriting income from written insurance premiums for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, due to the expansion of our insurance operations such as pension annuity and accident insurance classes between the two quarters. This increase in income from written insurance premiums was partially offset by a $1.0 million increase in reinsurance premiums ceded for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The following table sets out information on our insurance underwriting income for the periods presented.
|
Three months ended June 30,
|
|||||||||||||||||||||||
|
(amounts in thousands)
|
2024 | 2023 | Amount Change |
%
Change |
|||||||||||||||||||
| Written insurance premiums | $ | 147,444 | $ | 53,648 | $ | 93,796 | 175 | % | |||||||||||||||
| Reinsurance premiums ceded | (4,180) | (3,155) | (1,025) | 32 | % | ||||||||||||||||||
| Change in unearned premium reserve, net | (13,856) | (5,604) | (8,252) | 147 | % | ||||||||||||||||||
| Insurance underwriting income | $ | 129,408 | $ | 44,889 | $ | 84,519 | 188 | % | |||||||||||||||
61
Expense
The following table sets out information on our total expense for the periods presented.
|
Three months ended June 30, 2024
|
Three months ended June 30, 2023
|
Change | |||||||||||||||||||||||||||||||||
|
(amounts in thousands)
|
Amount | %* | Amount | Amount | % | ||||||||||||||||||||||||||||||
| Fee and commission expense | $ | 80,147 | 20 | % | $ | 28,684 | 12 | % | $ | 51,463 | 179 | % | |||||||||||||||||||||||
| Interest expense | 145,718 | 36 | % | 95,046 | 41 | % | 50,672 | 53 | % | ||||||||||||||||||||||||||
| Insurance claims incurred, net of reinsurance | 47,309 | 12 | % | 21,514 | 9 | % | 25,795 | 120 | % | ||||||||||||||||||||||||||
| Payroll and bonuses | 57,524 | 14 | % | 31,630 | 14 | % | 25,894 | 82 | % | ||||||||||||||||||||||||||
| Professional services | 7,268 | 2 | % | 6,625 | 3 | % | 643 | 10 | % | ||||||||||||||||||||||||||
| Stock compensation expense | 10,615 | 3 | % | 1,233 | 1 | % | 9,382 | 761 | % | ||||||||||||||||||||||||||
| Advertising expense | 17,201 | 4 | % | 8,100 | 3 | % | 9,101 | 112 | % | ||||||||||||||||||||||||||
| General and administrative expense | 45,105 | 11 | % | 24,475 | 11 | % | 20,630 | 84 | % | ||||||||||||||||||||||||||
| (Recovery of)/provision for allowance for expected credit losses | (1,770) | — | % | 14,326 | 6 | % | (16,096) | (112) | % | ||||||||||||||||||||||||||
| Total expense | $ | 409,117 | 100 | % | $ | 231,633 | 100 | % | $ | 177,484 | 77 | % | |||||||||||||||||||||||
* Percentage of total expense.
Fee and commission expense
The following table sets forth information regarding our fee and commission expense for the periods presented.
|
Three months ended June 30,
|
|||||||||||||||||||||||
|
(amounts in thousands)
|
2024
|
2023
|
Amount Change |
%
Change
|
|||||||||||||||||||
| Agency fees expense | $ | 64,816 | $ | 18,389 | $ | 46,427 | 252 | % | |||||||||||||||
| Bank services | 3,643 | 4,749 | (1,106) | (23) | % | ||||||||||||||||||
| Brokerage services | 3,304 | 4,010 | (706) | (18) | % | ||||||||||||||||||
| Exchange services | 541 | 884 | (343) | (39) | % | ||||||||||||||||||
| Central Depository services | 208 | 102 | 106 | 104 | % | ||||||||||||||||||
| Other commission expenses | 7,635 | 550 | 7,085 | 1288 | % | ||||||||||||||||||
| Total fee and commission expense | $ | 80,147 | $ | 28,684 | $ | 51,463 | 179 | % | |||||||||||||||
The following table sets out the components of our fee and commission expense as a percentage of total fee and commission expense, net for the periods presented.
|
Three months ended June 30,
|
||||||||||||||
| 2024 | 2023 | |||||||||||||
|
(as a % of total fee and commission expense)
|
||||||||||||||
| Agency fees expense | 81 | % | 64 | % | ||||||||||
| Bank services | 5 | % | 17 | % | ||||||||||
| Brokerage services | 4 | % | 14 | % | ||||||||||
|
Exchange services
|
1 | % | 3 | % | ||||||||||
| Central Depository services | — | % | — | % | ||||||||||
|
Other commission expenses
|
10 | % | 2 | % | ||||||||||
| Total fee and commission expense | 100 | % | 100 | % | ||||||||||
62
Fee and commission expense increased by $51.5 million or 179% in the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The increase is mainly attributable to an increase of agency fees expense of $46.4 million or 252% compared to the three months ended June 30, 2023 and other commission expenses of $7.1 million, compared to the three months ended June 30, 2023. The increase in agency fees expenses was due to an increase in insurance products sales by Freedom Life, which are outsourced to outside agents. The increase in other commission expenses is attributable to increased commissions paid associated with Paybox consistent with the growth of its business activities between the two quarters, following our acquisition of it in the fourth quarter of fiscal 2023.
Interest expense
During the three months ended June 30, 2024, we had a $50.7 million, or 53%, increase in interest expense as compared to the three months ended June 30, 2023. The increase in interest expense was primarily attributable to a $17.0 million, or 22%, increase in interest expense on short-term financing through securities repurchase agreements due to an increase in the volume of such financing, and a $7.5 million, or 48%, increase in interest expense on customer deposits. Compared to the three months ended June 30, 2023, we increased our volume of short-term financing through securities repurchase agreements primarily in order to fund our investment portfolio. The increase in interest on customer deposits was a result of growth of our banking client base due to the expansion of the operations of Freedom Bank KZ between the two periods.
The following table provides a summary of the monthly average balances and average interest rates for the major categories of interest-bearing liabilities for the three months ended June 30, 2024 and 2023.
|
Three months ended June 30,
|
|||||||||||
| 2024 | 2023 | ||||||||||
|
(amounts in thousands)
|
Average balance | ||||||||||
| Interest-bearing liabilities | |||||||||||
| Securities repurchase agreement obligations | $ | 2,616,105 | $ | 2,100,552 | |||||||
|
Customer liabilities
(1)
|
688,617 | 930,644 | |||||||||
| Debt securities issued | 176,561 | 63,611 | |||||||||
| Average rates | |||||||||||
| Securities repurchase agreement obligations | 14.9 | % | 15.2 | % | |||||||
|
Customer liabilities
(1)
|
14.1 | % | 6.9 | % | |||||||
| Debt securities issued | 16.7 | % | 6.0 | % | |||||||
|
Interest expense
|
|||||||||||
| Interest expense on securities repurchase agreement obligations | $ | 92,407 | $ | 75,455 | |||||||
| Interest expense on customer accounts and deposits | 23,127 | 15,603 | |||||||||
| Interest expense on debt securities issued | 6,969 | 935 | |||||||||
| Other interest expense | 23,215 | 3,053 | |||||||||
| Total interest expense | $ | 145,718 | $ | 95,046 | |||||||
(
1
)
Average balance, average rates, and interest expense relates to interest-bearing deposits.
The following table sets forth the effects of changing rates and volumes on interest. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on changes due to rate and the changes due to volume.
63
|
Three months ended June 30,
|
|||||||||||||||||
| 2024 vs 2023 | |||||||||||||||||
| Increase/ (decrease) due to change in | |||||||||||||||||
|
(amounts in thousands)
|
Rate | Volume | Net | ||||||||||||||
| Interest expense | |||||||||||||||||
| Interest expense on securities repurchase agreement obligations | $ | (1,236) | $ | 18,188 | $ | 16,952 | |||||||||||
| Interest expense on customer accounts and deposits | 10,157 | (2,633) | 7,524 | ||||||||||||||
| Interest expense on debt securities issued | 2,938 | 3,096 | 6,034 | ||||||||||||||
| Other interest expense | — | — | 20,162 | ||||||||||||||
| Total | $ | 11,859 | $ | 18,651 | $ | 50,672 | |||||||||||
Insurance claims incurred, net of reinsurance
For the three months ended June 30, 2024, we had a $25.8 million, or 120%, increase in insurance claims incurred, net of reinsurance, as compared to the three months ended June 30, 2023. The increase was primarily attributable to the general expansion of our insurance operations between the two quarters.
Payroll and bonuses
For the three months ended June 30, 2024, we had payroll and bonuses expense of $57.5 million, representing an increase of $25.9 million or 82% compared to payroll and bonuses expense of $31.6 million for the three months ended June 30, 2023. The increase in payroll and bonus expenses is primarily attributable to increased salary and bonus amounts between the two quarters. The increase was also due to the expansion of our workforce through acquisitions, establishment of new subsidiaries and hiring.
Professional services
For the three months ended June 30, 2024, our professional services expense was $7.3 million, representing an increase by $0.6 million or 10% compared to $6.6 million for the three months ended June 30, 2023. The increase was attributable to an overall growth of our company organically and through acquisitions resulting in an increased need of professional services including consulting and legal services.
Stock compensation expense
For the three months ended June 30, 2024, our stock compensation expense was $10.6 million, representing a increase of $9.4 million or 761% compared to stock compensation expense of $1.2 million for the three months ended June 30, 2023. The increase is attributable to new stock grants the majority of which vested on the date of issuance during the three months ended June 30, 2024 and the partial amortization of stock grants which were granted in March 2024.
Advertising expense
Advertising expense for the three months ended June 30, 2024, was $17.2 million, representing an increase of $9.1 million or 112% compared to $8.1 million for the three months ended June 30, 2023. The increase is primarily attributable to an increase in advertising expenses by Freedom Europe of $6.4 million attributable to marketing campaigns that were initiated during fiscal 2024 and continued in the three months ended June 30, 2024. This increase consisted of an increase of approximately $3.4 million on advertising and an increase of $3.0 million on influencer and affiliates advertising. There was also an increase of $0.8 million attributable to Aviata, an online ticket aggregator that continuously promotes its services through advertising, and an increase of $0.9 million from Freedom Advertising, a subsidiary which is an advertising and marketing agency.
General and administrative expense
General and administrative expense for the three months ended June 30, 2024, was $45.1 million, representing an increase of $20.6 million or 84% compared to general and administrative expense of $24.5 million for the three months ended June 30, 2023. This increase is attributable to the general expansion and development of our business between the two quarters. The main factors contributing to the increase were increases in other operating expenses, charity and sponsorship, software support, depreciation and amortization expense. Other operating expenses increased by $5.3 million mainly due to an increase of other operating expenses at Freedom Bank KZ from banking and other overhead costs. Our charity and
64
sponsorship expense increased by $4.3 million due to several charitable contributions through our subsidiaries during the three months ended June 30, 2024. The most significant contributions were made to the Kazakhstan Chess Federation, Sport Programming Federation and construction work in Konayev city. Software support expenses increased by $2.6 million mainly due to the support of licensed software fee and other software systems. The increases of $1.5 million in depreciation and amortization expense and $1.3 million in rent expense were driven by the addition of new subsidiaries between the two quarters and the overall growth of our operations. The integration of new subsidiaries required substantial investments in new technology and infrastructure, leading to higher depreciation and amortization costs. Taxes, other than income tax, increased by $1.3 million mainly due to the general growth of the Group, including the addition of new subsidiaries. The expansion of our business operations resulted in higher tax liabilities, reflecting our broader market presence and increased operational scale. Business travel expenses increased by $0.9 million, reflecting more frequent business traveling as a result of the growth of our operations in Kazakhstan and other regions and our expanded geographic footprint.
(Recovery of)/provision for allowance for expected credit losses
We recognized allowance for credit losses in the amount of $1.8 million for the three months ended June 30, 2024, as compared to allowance for credit losses of $14.3 million for the three months ended June 30, 2023. As of June 30, 2024, the allowance for credit losses was $40.1 million, compared to $43.6 million as of March 31, 2024. The decrease is attributable to provisions for car loans. The decrease in provisions for car loans is primarily attributable to a change in estimates related to input data obtained from the National Bank of Kazakhstan.
Income tax expense
We had income before income tax of $41.6 million and $84.6 million for the three months ended June 30, 2024, and June 30, 2023, respectively. Income tax expense for the three months ended June 30, 2024, and June 30, 2023 was $7.3 million and $16.7 million, respectively. The decrease was primarily due to a decrease in our income before income tax between the two quarters. In addition, our effective tax rate during the three months ended June 30, 2024, decreased to 17.6%, from 19.7% during the three months ended June 30, 2023, as a result of changes in the composition of the revenues we realized from our operating activities, the tax treatment of those revenues in the various jurisdictions where our subsidiaries operate, and the incremental U.S. GILTI tax.
Net income
As a result of the foregoing factors, for the three months ended June 30, 2024, we had net income of $34.3 million compared to $67.9 million for the three months ended June 30, 2023, a decrease of 50%.
Non-controlling interest
As of June 30, 2024, FRHC hel
d a 94.81%
ownership interest in Arbuz and a 90.0% ownership interest in ReKassa. The remaining 5.19% of the ownership interest in Arbuz and 10.0% of the ownership interest in ReKassa are recognized as non-controlling interests in our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income, Condensed Consolidated Statements of Shareholders’ Equity and Condensed Consolidated Statements of Cash Flows.
Net loss attributable to non-controlling interest was $0.1 million and $0.2 million for the three months ended June 30, 2024 and June 30, 2023, respectively.
Foreign currency translation adjustments, net of tax
Due to a 5.5% depreciation of the Kazakhstan tenge against the U.S. dollar during the three months ended June 30, 2024, we realized a foreign currency translation loss of $65.8 million for the quarter ended June 30, 2024 since most of our Group's companies use the Kazakhstan tenge as their functional currency, as compared to a foreign currency translation loss of $1.8 million for the quarter ended June 30, 2023.
65
Segment Results of Operations
Business Segment Operations
We report our results of operations through the following four business segments: Brokerage, Banking, Insurance, and Other. These operating segments are based on how our CODM will be making decisions about allocating resources and assessing performance. The total revenue, net associated with our segments is summarized in the following table:
| Three months ended June 30, | ||||||||||||||||||||||||||
|
(amounts in thousands)
|
2024
|
2023
|
Amount Change |
%
Change |
||||||||||||||||||||||
|
Brokerage
|
$ | 174,916 | $ | 106,070 | $ | 68,846 | 65 | % | ||||||||||||||||||
|
Banking
|
91,202 | 115,654 | (24,452) | (21) | % | |||||||||||||||||||||
|
Insurance
|
147,263 | 70,377 | 76,886 | 109 | % | |||||||||||||||||||||
|
Other
|
37,334 | 24,109 | 13,225 | 55 | % | |||||||||||||||||||||
| Total revenue, net | $ | 450,715 | $ | 316,210 | $ | 134,505 | 43 | % | ||||||||||||||||||
For the three months ended June 30, 2024, total revenue, net increased in the Brokerage, Insurance and Other segments but decreased in the Banking segment, in each case compared to the three months ended June 30, 2023.
Brokerage Segment
In the three months ended June 30, 2024, in our Brokerage segment we had a significant increase in total revenue, net, primarily driven by an increase in interest income. This was largely due to increases in interest accrued on securities held in our trading portfolio and in interest accrued on margin loans to customers within this segment. Fee and commission income in this segment also increased, primarily due to a general increase in brokerage activity between the two quarters. Additionally, there was an increase in net gain on foreign exchange operations and other income. These revenue increases were partially offset by a decrease in net gain on trading securities.
Banking Segment
In the three months ended June 30, 2024, total revenue, net in the Banking segment decreased as compared to the three months ended June 30, 2024, mainly attributable to net losses on trading securities and on foreign exchange in this segment in the three months ended June 30, 2024. In addition, fee and commission income from banking operations decreased between the two quarters due to a decrease in commissions generated on transfer and payment processing. These decreases were partially offset by the effects of a net gain on derivatives in this segment in the three months ended June 30, 2024, as compared to a net loss in the three months ended June 30, 2023, and an increase in interest income on loans to customers.
Insurance Segment
In the three months ended June 30, 2024, total revenue, net in the Insurance segment increased mainly due to an increase in insurance underwriting income, reflecting the overall growth of our insurance operations between the two quarters.
Other Segment
In the three months ended June 30, 2024, total revenue, net in the Other segment increased mainly due to an increase of $16.9 million i
n net gain on foreign exchange operations from FRHC, which was attributable to an appreciation of the U.S. dollar against the Kazakhstan tenge between the two quarters and $4.2 million revenue received in the three months ended June 30, 2024 from our disposition of ITS Tech Limited, our former subsidiary providing IT support services. These increases were partially offset by a $6.9 million decrease in fee and commission income attributable to a decrease in Paybox's transaction volumes due to the cessation of operation of a counterparty that contributed significantly to its transaction volume.
The total expenses associated with our segments are summarized in the following table:
66
| Three months ended June 30, | ||||||||||||||||||||||||||
|
(amounts in thousands)
|
2024
|
2023
|
Amount Change |
%
Change |
||||||||||||||||||||||
|
Brokerage
|
$ | 95,081 | $ | 56,196 | $ | 38,885 | 69 | % | ||||||||||||||||||
|
Banking
|
122,910 | 96,054 | 26,856 | 28 | % | |||||||||||||||||||||
|
Insurance
|
129,985 | 53,462 | 76,523 | 143 | % | |||||||||||||||||||||
|
Other
|
61,141 | 25,921 | 35,220 | 136 | % | |||||||||||||||||||||
| Total expense, net | $ | 409,117 | $ | 231,633 | $ | 177,484 | 77 | % | ||||||||||||||||||
For the three months ended June 30, 2024, total expenses, net increased across each of our business segments compared to the three months ended June 30, 2023.
Brokerage Segment
In the three months ended June 30, 2024, total expenses, net in our Brokerage segment increased primarily due to an increase in interest expense, which was in turn mainly due to interest paid on securities repurchase agreements. Additionally, there was an increase in payroll and bonuses, reflecting our efforts to attract and retain top talent. Advertising expenses in this segment also increased as we intensified our marketing efforts to expand our client base. General and administrative expenses increased due to the overall growth of our operations. These increases were partially offset by decreases in provision for impairment and fee and commission expense from brokerage services.
Banking Segment
In the three months ended June 30, 2024, total expenses, net in our Banking segment increased primarily due to a $25.7 million increase in interest expense on securities repurchase agreements within this segment, and a $11.2 million increase in interest expense on customer deposits. General and administrative expenses in this segment increased by $6.2 million, reflecting the general growth of Freedom Bank KZ's operations between the two quarters.
Insurance Segment
In the three months ended June 30, 2024, total expenses, net in our Insurance segment increased mainly due to an increase in fee and commission expense from agency fees, attributable to the overall growth of our insurance operations between the two quarters.
Other Segment
In the three months ended June 30, 2024, total expenses, net in our Other segment increase was driven by increases in payroll and bonuses, general and administrative expenses, fee and commission expense and interest expense. There was a $13.0 million increase in payroll and bonuses in the Other segment which is mostly attributable to the overall growth of our operations as well as the addition of new subsidiaries. In particular, $5.8 million of the increase in payroll and bonuses expense can be attributed to the addition of our Freedom Telecom and Freedom Management subsidiaries, which occurred after June 30, 2023. The increase of $8.9 million in general and administrative expense in the Other segment was also mainly attributable to our overall growth and the addition of new subsidiaries. In particular, $7.5 million of such increase was attributable to our Freedom Telecom and Shapagat subsidiaries. There was an increase of $5.6 million in fee and commission expense in the Other segment, which is mostly attributable to increased bank commission expense for payment services due to an increase of payment processing operations at certain Paybox subsidiaries, which increase was offset in part by the effects of a decrease in the volume of transactions by Paybox between the two quarters. Interest expense in the Other segment increased by $4.6 million, mainly attributable to an increase in interest expense on loans received by FRHC.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes. During the periods covered in this quarterly report our operations were primarily funded through a combination of existing cash on hand, cash generated from operations, returns generated from our proprietary trading and proceeds from the sale of bonds and other borrowings.
We regularly monitor and manage our leverage and liquidity risk through various committees and processes we have established to maintain compliance with net capital and capital adequacy requirements imposed on securities brokerages and banks in jurisdictions where we do business. We assess our leverage and liquidity risk based on considerations and assumptions of market factors, as well as other factors, including the amount of available liquid capital
67
(i.e., the amount of cash and cash equivalents not invested in our operating business). While we are confident in the risk management monitoring and processes we have in place, a significant portion of our trading securities and cash and cash equivalents are subject to collateralization agreements. This significantly enhances our risk of loss in the event financial markets move against our positions. When this occurs our liquidity, capitalization and business can be negatively impacted. Certain market conditions can impact the liquidity of our assets, potentially requiring us to hold positions longer than anticipated. Our liquidity, capitalization, projected return on investment and results of operations can be significantly impacted by market events over which we have no control, and which can result in disruptions to our investment strategy for our assets.
We maintain a majority of our tangible assets in cash and securities that are readily convertible to cash, including governmental and quasi-governmental debt and highly liquid corporate equities and debt. Our financial instruments and other asset positions are stated at fair value and should generally be readily marketable in most market conditions. The following table sets out certain information regarding our assets as of the dates presented:
| June 30, 2024 | March 31, 2024 | ||||||||||
|
(amounts in thousands)
|
|||||||||||
|
Cash and cash equivalents
(1)
|
$ | 718,678 | $ | 545,084 | |||||||
|
Restricted cash
(2)
|
$ | 1,179,510 | $ | 462,637 | |||||||
| Trading securities | $ | 3,393,936 | $ | 3,688,620 | |||||||
| Total assets | $ | 8,483,560 | $ | 8,301,930 | |||||||
|
Net liquid assets
(3)
|
$ | 2,771,705 | $ | 3,137,383 | |||||||
(1)
Of the $718.7 million in cash and cash equivalents we held at June 30, 2024, $151.0 million, or approximately 21%, was subject to reverse repurchase agreements. By comparison, at March 31, 2024, we had cash and cash equivalents of $545.1 million, of which $135.0 million, or approximately 25%, was subject to reverse repurchase agreements. The amount of cash and cash equivalents we hold is subject to minimum levels set by regulatory bodies to comply with required rules and regulations, including adequate capital and liquidity levels for each entity.
(2)
Principally consists of cash of our brokerage customers which are segregated in a special custody
accounts for the exclusive benefit of our brokerage customers.
(3)
Consists of cash and cash equivalents, trading securities, and margin lending, brokerage and other
receivables, net of securities repurchase agreement obligations. It includes liquid assets possessed after deducting securities repurchase agreement obligations.
As of June 30, 2024, and March 31, 2024, we had total liabilities of $7.3 billion and $7.1 billion, respectively, including customer liabilities of $2.7 billion and $2.3 billion, respectively.
We finance our assets primarily from revenue-generating activities and short-term and long-term financing arrangements.
CASH FLOWS
The following table presents information from our statement of cash flows for the periods indicated. Our cash and cash equivalents include restricted cash, which principally consists of cash of our brokerage customers which are segregated in a special custody accounts for the exclusive benefit of our brokerage customers.
|
Three Months Ended
June 30, 2024 |
Three Months Ended
June 30, 2023 |
||||||||||
| (amounts in thousands) | |||||||||||
| Net cash flows from/(used in) operating activities | $ | 854,066 | $ | (914,134) | |||||||
| Net cash flows used in investing activities | (94,685) | (269,518) | |||||||||
| Net cash flows from financing activities | 245,534 | 1,258,533 | |||||||||
| Effect of changes in foreign exchange rates on cash and cash equivalents | (114,815) | (2,575) | |||||||||
| Effect of expected credit losses on cash and cash equivalents and restricted cash | 367 | — | |||||||||
| NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | $ | 890,467 | $ | 72,306 | |||||||
68
Net Cash Flows Used In Operating Activities
Net cash used in operating activities during the three months ended June 30, 2024, was comprised of net change in operating assets and liabilities and net income adjusted for non-cash movements (changes in deferred taxes, unrealized gain on trading securities, net change in accrued interest, change in insurance reserves, and allowance for receivables). Net cash used in operating activities resulted primarily from changes in operating assets and liabilities. Such changes included those set out in the following table.
|
Three Months Ended
June 30, 2024
|
Three Months Ended
June 30, 2023
|
||||||||||
|
(amounts in thousands)
|
|||||||||||
|
Increases in trading securities
(1)
|
$ | (24,454) |
|
$ | (933,290) | ||||||
|
Increases in brokerage customer liabilities
(2)
|
$ | 260,972 |
|
$ | 29,037 | ||||||
| Decrease/(increases) in margin lending, brokerage and other receivables | $ | 399,425 |
(3)
|
$ | (147,366) | ||||||
|
Increases in margin lending and trade payables
(4)
|
$ | 26,888 |
|
$ | 55,045 | ||||||
______________
(1)
Resulted from increased purchases of securities held in our proprietary account.
(2)
Resulted from increased funds in brokerage accounts from new and existing customers.
(3)
Resulted primarily from decreased volume of margin lending receivables.
(4)
Resulted primarily from increased volume of margin lending payables.
Net cash flows used in operating activities in the three months ended June 30, 2024, were primarily attributable to net cash outflows attributable to increases in trading securities and increases in margin lending, brokerage and other receivables, which changes were offset in part by an increase in customer liabilities over that quarter, which resulted from the increase of customer accounts in our Freedom Global subsidiary.
Net Cash Flows Used In Investing Activities
During the three months ended June 30, 2024, net cash used in investing activities was $94.7 million compared to net cash used in investing activities of $269.5 million during the three months ended June 30, 2023. During the three months ended June 30, 2024, cash used in investing activities was used for the issuance of loans, net of repayment by customers, in the amount of $2.6 million, the purchase of fixed assets in the amount of $24.2 million, and purchase of available-for-sale securities, net of proceeds, in the amount of $55.6 million. During the three months ended June 30, 2024 cash used for the issuance of loans, net of repayment decreased by $260.8 million compared to the three months June 30, 2023 due to a decrease in volume of loans issued in Freedom Bank KZ during the three months ended June 30, 2024 as compared to significant growth of the loan portfolio during the three months ended June 30, 2023.
Net Cash Flows From Financing Activities
Net cash flows from financing activities for the three months ended June 30, 2024, consisted principally of bank customer deposits received in the amount of $293.4 million due to the growth of our banking activity and mortgage loans sold to JSC Kazakhstan Sustainability Fund as the Program Operator, net of repurchase, under the state mortgage program "7-20-25" in the amount of $7.5 million. These cash inflows were offset in part by a cash outflow for securities repurchase agreement obligations in the amount of $54.9 million. The significant decrease in net cash flows from financing activities from the three months ended June 30, 2023 to the three months ended June 30, 2024 was primarily attributable to a $1.1 billion change in reimbursement/proceeds from securities repurchase agreement obligations between the two quarters. This change is attributable to proceeds from securities repurchase agreement obligations during the three months ended June 30, 2023, driven by an increase in trading securities during that quarter, as compared to the net repayment of previously borrowed funds under securities repurchase agreements during the three months ended June 30, 2024.
CAPITAL EXPENDITURES
On May 10, 2023, our subsidiary Freedom EU signed a contract for the construction of Elysium Tower, a building in Limassol, Cyprus. The building is planned to be a new office building for our Freedom EU subsidiary. The contract implies approximate capital expenditures in the amount of $7.5 million, of which approximately $1.7 million was incurred
69
in fiscal 2024 and of which approximately $4.4 million is planned to be incurred in fiscal 2025. We are financing this construction project primarily using our own funds.
On November 27, 2023, our Board of Directors approved a strategic plan to expand our business by entering the telecommunications market in Kazakhstan through our Freedom Telecom subsidiary. Execution of the new plan is expected to require significant capital expenditure, the specific amount of which is currently uncertain. Total capital expenditures for the development of this business area are currently expected to be required for, among other things, construction of network infrastructure, including a backbone network, obtaining frequency licenses or other rights to provide services where required and acquisitions of smaller companies in the sector. Our strategy and budget for Freedom Telecom are currently being reassessed and are subject to revisions, which may be material. We currently plan to finance our capital expenditures for this business area with a combination of own funds and borrowings, including vendor financing, including the proceeds of a $200 million U.S. dollar domestic bond placement on the AIX that we completed on December 19, 2023. For further information, see "Indebtedness - Long-term" below.
As a further step in implementing our strategy to build a digital fintech ecosystem, on January 25, 2024, Freedom Telecom established a subsidiary, Freedom Media, in Kazakhstan for the purposes of providing media content to customers in Kazakhstan. Total capital expenditures required in connection with Freedom Media over the next five years are currently estimated to be approximately $54 million. We will finance our capital expenditures related to Freedom Media primarily using our own funds.
DIVIDENDS
Any payment of cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual and legal restrictions and other factors deemed relevant by our Board of Directors. We currently intend to retain any future earnings to fund the operation, development and expansion of our business, and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We did not declare or pay a cash dividend on our common stock during the three months ended June 30, 2024. Any payment of cash dividends on stock in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual and legal restrictions and other factors deemed relevant by our Board of Directors. We currently intend to retain any future earnings to fund the operation, development and expansion of our business, and therefore we do not anticipate paying any cash dividends on common stock in the foreseeable future.
INDEBTEDNESS
Short-term
Our short-term financing is primarily obtained through securities repurchase arrangements conducted through stock exchanges. We use repurchase arrangements, among other things, to finance our liquidity positions. As of June 30, 2024, $2.6 billion, or 76% of the trading securities held in our proprietary trading account were subject to securities repurchase obligations compared to $2.8 billion, or 75% as of March 31, 2024. The securities we pledge as collateral under repurchase agreements are liquid trading securities with market quotes and significant trading volume. For additional information regarding our securities repurchase agreement obligations see Note 9
Securities Repurchase Agreement Obligations
to the condensed consolidated financial statements included in this quarterly report on Form 10-Q.
Long-term
On October 21, 2021, our subsidiary Freedom SPC issued U.S. dollar-denominated bonds due 2026, in an aggregate principal amount up to $66 million, which are listed on the A
IX
. The annual interest rate for such bonds is 5.5%. The bonds are guaranteed by FRHC.
As of
June 30, 2024
, there was
$64.6 million
of such bonds
outstanding.
On December 19, 2023, Freedom SPC issued U.S. dollar-denominated bonds due 2028, in an aggregate principal amount of $200 million, for the purpose of raising funds to finance the development of the Freedom Telecom business. The bonds are guaranteed by FRHC and are listed on the AIX.
For the first and second years, the annual interest rate for such bonds is 12%, and for subsequent years the interest rate will be fixed and set as the sum of the effective federal funds rate as of December 10, 2025 and a margin of 6.5%.
As of
June 30, 2024
, there was
$200.4 million
i
n principal amount of such bonds outstanding.
70
The aggregate accrued interest as of June 30, 2024 on the Freedom SPC bonds due 2026 and the Freedom SPC bonds due 2028 combined was $1.4 million.
NET CAPITAL AND CAPITAL ADEQUACY
A number of our subsidiaries are required to satisfy minimum net capital and capital adequacy requirements to conduct their brokerage, banking and insurance operations in the jurisdictions in which they operate. This is partially maintained by retaining cash and cash equivalent investments in those subsidiaries or jurisdictions. As a result, such subsidiaries may be restricted in their ability to transfer cash between different jurisdictions and to FRHC. Additionally, transfers of cash between international jurisdictions may have adverse tax consequences that could discourage such transfers.
At June 30, 2024, these minimum net capital and capital adequacy requirements ranged from appro
ximately
$0.2 million
to $180.6 million and fluctuate depending on various factors. At June 30, 2024, the aggregate net capital and ca
pital adequacy requirements of our subsidiaries was approximately $239.0 million. Each of our subsidiaries that are subject to net capital or capital adequacy requirements exceeded the minimum required amount at June 30, 2024.
Although we operate with levels of net capital and capital adequacy substantially greater than the minimum established thresholds, in the event we fail to maintain minimum net capital or capital adequacy, we may be subject to fines and penalties, suspension of operations, revocation of licensure and disqualification of our management from working in the industry. Our subsidiaries are also subject to various other rules and regulations, including liquidity and capital adequacy ratios. Our operations that require the intensive use of capital are limited to the extent necessary to meet our regulatory requirements.
Over the past several years, we have pursued an aggressive growth strategy both through acquisitions and organic growth efforts. While our active growth strategy has led to revenue growth it also results in increased expenses and greater need for capital resources. Additional growth and expansion may require greater capital resources than we currently possess, which could require us to pursue additional equity or debt financing from outside sources. We cannot assure that such financing will be available to us on acceptable terms, or at all, at the time it is needed.
We believe that our current cash and cash equivalents, cash expected to be generated from operating activities, and forecasted returns from our proprietary trading, combined with our ability to raise additional capital will be sufficient to meet our present and anticipated financing needs.
Critical Accounting Policies and 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Following are the accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results.
Allowance for credit losses
The Company has recently adopted a new accounting standard, ASC 326 - Current Expected Credit Losses (CECL), effective April 1, 2023. This standard has introduced significant changes to how we estimate and recognize credit losses for our financial assets. Management estimates and recognizes the CECL as an allowance for lifetime expected credit losses for loans issued. This is different compared to the previous practice of recognizing allowances based on probable incurred losses.
Under CECL, the allowance for credit losses (ACL) primarily consists of two components:
Collective CECL Component: This component is used for estimating expected credit losses for pools of loans that share common risk characteristics.
Individual CECL Component: This component is applied to loans that do not share common risk characteristics and require individual assessment.
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The ACL is a valuation account that is subtracted from the amortized cost of total loans and available-for-sale securities to reflect the net amount expected to be collected. Our methodology for establishing the allowance for loan losses is based on a comprehensive assessment that considers relevant and available information from internal and external sources. This assessment takes into account past events, including historical trends in loan delinquencies and charge-offs, current economic conditions, and reasonable and supportable forecasts.
Goodwill
We have accounted for our acquisitions using the acquisition method of accounting. The acquisition method requires us to make significant estimates and assumptions, especially at the acquisition date as we allocate the purchase price to the estimated fair values of acquired tangible and intangible assets and the liabilities assumed. We also use our best estimates to determine the useful lives of the tangible and definite-lived intangible assets, which impact the periods over which depreciation and amortization of those assets are recognized. These best estimates and assumptions are inherently uncertain as they pertain to forward looking views of our businesses, customer behavior, and market conditions. In our acquisitions, we have also recognized goodwill at the amount by which the purchase price paid exceeds the fair value of the net assets acquired.
Our ongoing accounting for goodwill and the tangible and intangible assets acquired requires us to make significant estimates and assumptions as we exercise judgement to evaluate these assets for impairment. Our processes and accounting policies for evaluating impairments are further described in
Note 2
Summary of Significant Accounting Policies
to the condensed consolidated financial statements included in this quarterly report on Form 10-Q . As of June 30, 2024, we had goodwill of $50.6 million.
Income taxes
We are subject to income taxes in both the United States and numerous foreign jurisdictions. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, actual future tax consequences relating to uncertain tax positions may be materially different than our determinations or estimates.
We recognize deferred tax liabilities and assets based on the difference between the Condensed Consolidated Balance Sheet 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.
Income taxes are determined in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We account 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 to the differences that are expected to affect taxable income.
We periodically evaluate and establish the likelihood of tax assessments based on current and prior years' examinations, and unrecognized tax benefits related to potential losses that may arise from tax audits in accordance with the relevant accounting guidance. Once established, unrecognized tax benefits are adjusted when there is more information available or when an event occurs requiring a change.
Legal contingencies
We review outstanding legal matters at each reporting date, in order to assess the need for provisions and disclosures in our financial statements. Among the factors considered in making decisions on provisions are the nature of the matter, the legal process and potential legal exposure in the relevant jurisdiction, the progress of the matter (including the progress after the date of the financial statements but before those statements are issued), the opinions or views of our legal advisers, experiences on similar cases and any decision of our management as to how we will respond to the matter.
Non-consolidation of FST Belize
Based on our assessment, we do not consolidate our affiliate FST Belize. See "
Non-Consolidation of Freedom Securities Trading Inc.
"
in Note 2 "
Summary of Significant Accounting Policies
" in the notes to our condensed consolidated financial statements included in this quarterly report on Form 10-Q.
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RECENT ACCOUNTING PRONOUNCEMENTS
For details of applicable new accounting standards, see "
Recent accounting pronouncements
"
in
Note 2
"
Summary of Significant Accounting Policies
" in the notes to our condensed consolidated financial statements included in this quarterly report on Form 10-Q.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Market Risk
The following information, together with information included in "
Overview
"
in
"
Management's Discussion and Analysis of Financial Condition and Results of
Operations
"
in Part I Item 2, describes our primary market risk exposures. Market risk is the risk of economic loss arising from the adverse impact of market changes to the market value of our trading and investment positions. We are exposed to a variety of market risks, including interest rate risk, foreign currency exchange risk and equity price risk.
Interest Rate Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio and outstanding debt. While we are exposed to global interest rate fluctuations, we are most sensitive to fluctuations in Kazakhstan interest rates. Changes in Kazakhstan interest rates may have significant effect on the fair value of our securities.
Our investment policies and strategies are focused on preservation of capital and supporting our liquidity requirements. We typically invest in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. Our investment policies generally require securities to be investment grade and limit the amount of credit exposure to any one issuer (other than government and quasi-government securities). To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel sh
ift in the
yield curve. Based on investment positions as of June 30, 2024, and March 31, 2024 (not including assets held for sale), a hypothetical 100 basis point increase in interest rates across all maturities would have resulted in $135.9 million and $128.9 million incremental decline in the fair market value of the portfolio, respectively. Such losses would only be realized if we sold the investments prior to maturity. A hypothetical 100 basis point decrease in inter
est rates across all maturities would have resulted in a $132.3 million and $138.3 million incremental rise in the fair market value of the portfolio (not including assets held for sale), respectively.
Foreign Currency Exchange Risk
We have a presence in Armenia, Austria, Azerbaijan, Belgium, Bulgaria, Cyprus, France, Germany, Greece, Italy, Kazakhstan, Kyrgyzstan, Lithuania, Netherlands, Poland, Spain, Turkey, the United Arab Emirates, the United Kingdom, the United States and Uzbekistan. The activities and accumulated earnings in our non-U.S. subsidiaries are exposed to fluctuations in foreign exchange rate between our functional currencies and our reporting currency, which is the U.S. dollar.
In accordance with our risk management policies, we manage foreign currency exchange risk on financial assets by holding or creating financial liabilities in the same currency, maturity and interest rate profile. This foreign exchange risk is calculated on a net foreign exchange basis for individual currencies. We may also enter into foreign currency forward, swap and option contracts with financial institutions to mitigate foreign currency exposures associated with certain existing assets and liabilities, firmly committed transactions and forecasted future cash flows.
The main market of our operations is Kazakhstan. Because Kazakhstan's economy is highly dependent on oil exports, any significant decrease in oil prices lead to a devaluation of local currency, which can lose up to 17% quarterly (during COVID-19 outbreak) of its value relative to the U.S. dollar.
An analysis of our June 30, 2024, and March 31, 2024 (not including assets held for sale), balance sheets estimates the net impact of a 10% adverse change in the value of the U.S. dollar relative to all other currencies, would have resulted in a decrease of income before income tax in the amount of $3.1 million, and in the decrease in the amount of $121.5 million, respectively.
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Equity Price Risk
Our equity investments are susceptible to market price risk arising from uncertainties about future values of such investment securities. Equity price risk results from fluctuations in price and level of the equity securities or instruments we hold. We also have equity investments in entities where the investment is denominated in a foreign currency, or where the investment is denominated in U.S. dollars but the investee primarily makes investments in foreign currencies. The fair values of these investments are subject to change at the spot foreign exchange rate between these currencies and our functional currency fluctuates. We attempt to manage the risk of loss inherent in our equity securities portfolio through diversification and by placing limits on individual and total equity instruments we hold. Reports on our equity portfolio are submitted to our management on a regular basis.
As of June 30, 2024, and March 31, 2024, our exposure to equity investments at fair value was $123.5 million and $126.1 million, respectively. Based on an analysis of the June 30, 2024, and March 31, 2024 (not including assets held for sale), balance sheets, we estimate that a decrease of 10% in the equity price would have reduced the value of the equity securities or instruments we held by approximately $12.4 million and $12.6 million, respectively.
Credit Risk
Credit risk refers to the risk of loss arising when a borrower or counterparty does not meet its financial obligations to us. We are primarily exposed to credit risk from institutions and individuals through the brokerage and banking services we offer. We incur credit risk in a number of areas, including margin lending and loans issued.
Margin lending receivables risk
We extend margin loans to our customers. Margin lending is subject to various regulatory requirements of MiFID and of the AFSA and the NBK. Margin loans are collateralized by cash and securities in the customers' accounts. The risks associated with margin lending increase during periods of fast market movements, or in cases where collateral is concentrated and market movements occur. During such times, customers who utilize margin loans and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of a liquidation. We are also exposed to credit risk when our customers execute transactions, such as short sales of options and equities that can expose them to risk beyond their invested capital.
We expect this kind of exposure to increase with the growth of our overall business. Because we indemnify and hold harmless our clearing houses and counterparties from certain liabilities or claims, the use of margin loans and short sales may expose us to significant off-balance-sheet risk in the event that collateral requirements are not sufficient to fully cover losses that customers may incur and those customers fail to satisfy their obligations. As of June 30, 2024, we had
$1.2 billion
in margin lending receivables from our customers. The amount of risk to which we are exposed from the margin lending we extend to our customers and from short sale transactions by our customers is unlimited and not quantifiable as the risk is dependent upon analysis of a potential significant and undeterminable rise or fall in stock prices. As a matter of practice, we enforce real-time margin compliance monitoring and liquidate customers' positions if their equity falls below required margin requirements.
We have a comprehensive policy implemented in accordance with regulatory standards to assess and monitor the suitability of investors to engage in various trading activities. To mitigate our risk, we also continuously monitor customer accounts to detect excessive concentration, large orders or positions, patterns of day trading and other activities that indicate increased risk to us.
Our credit exposure is to a great extent mitigated by our policy of automatically evaluating each account throughout the trading day and closing out positions automatically for accounts that are found to be under-margined. While this methodology is effective in most situations, it may not be effective in situations where no liquid market exists for the relevant securities or commodities or where, for any reason, automatic liquidation for certain accounts has been disabled. We continually monitor and evaluate our risk management policies, including the implementation of policies and procedures to enhance the detection and prevention of potential events to mitigate margin loan losses.
Risk related to banking loans recoverability
Our loan portfolio may be impacted by global, regional and local macroeconomic and market dynamics, including prolonged weakness in GDP, reductions in consumer spending, decreases in property values or market corrections, growing levels of consumer debt, rising or high unemployment rates, changes in foreign exchange or interest rates, widespread health crises or pandemics, severe weather conditions, and the effects of climate change. Economic or market
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stresses generally have negative effect on the business landscape and financial markets. Decreases in property values or market adjustments may increase the likelihood of borrowers or counterparties failing to meet their obligations to us, potentially leading to an increase in credit losses.
The main share of our customer loan portfolio is represented by digital mortgage loans issued within the framework of state support programs, funded from the funds of quasi state organizations. We participate in the government mortgage program in which the Kazakhstan government provides funding in the amount of approved mortgages and buys out the mortgages after disbursement with a recourse to the bank in case of default by a borrower. We mitigate our credit risk exposure in this case by our security interest in the financed real estate property. As such, significant rate of mortgage defaults in Kazakhstan could adversely affect our banking operations and the ultimate success of our digital mortgage product.
We reserve for potential credit losses in the future by recording a provision for credit losses through our earnings. This includes the allowance for credit losses based on management’s estimates of current expected credit losses over the life of the respective credit exposures. These estimates are based on a review of past events, current conditions, and reasonable forecasts of future economic situations that might influence the recoverability of our loans. Our approach to determining these allowances involves both quantitative methods and a qualitative framework. Within this framework, management uses its judgment to evaluate internal and external risk factors. However, such judgments are inherently subject to the risk of misjudging these factors or misestimating their effects. We cannot guarantee that charge-offs related to our credit exposures will not happen in the future. Market and economic changes could lead to higher default and delinquency rates, adversely affecting our loan portfolio's quality and potentially resulting in higher charge-offs. While our estimates account for current conditions and anticipated changes during the portfolio's lifetime, actual outcomes could be worse than expected, significantly impacting our financial results, condition and cash flows.
For description of credit quality of the loans and other details please see "Note 7 - Loans Issued" in the notes to the condensed consolidated financial statements.
Operational Risk
Operational risk generally refers to the risk of loss, or damage to our reputation, resulting from inadequate or failed operations or external events, including, but not limited to, business disruptions, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems and inadequacies or breaches in our control processes including cyber security incidents.
For a description of related risks, see the information under the heading "
Risks Related to Information Technology and Cybersecurity
" in "
Risk Factors
" in Part I Item 1A of the 2024 Form 10-K.
To mitigate and control operational risk, we have developed and continue to enhance policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization and within such departments. We also have business continuity plans in place that we believe will cover critical processes on a company-wide basis, and redundancies are built into our systems as we have deemed appropriate. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits.
Legal and Compliance Risk
We operate in a number of jurisdictions, each with its own legal and regulatory structure that is unique and different from the other. Legal and regulatory risk includes the risk of non-compliance with applicable legal and regulatory requirements and damage to our reputation as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. Such non-compliance could result in the imposition of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of compliance failures. These risks include contractual and commercial risk, such as the risk that a counterparty's performance obligations will be unenforceable. It also includes compliance with AML, terrorist financing, anti-corruption and sanctions rules and regulations.
We have established and continue to enhance procedures designed to ensure compliance with applicable statutory and regulatory requirements, such as public company reporting obligations, regulatory net capital and capital adequacy requirements, sales and trading practices, potential conflicts of interest, anti-money laundering, privacy, sanctions and recordkeeping. The legal and regulatory focus on the financial services industry presents a continuing business challenge for us.
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Our business also subjects us to the complex income tax laws of the jurisdictions in which we operate, and these tax laws may be subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. We must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes.
Country Risk
The Russia-Ukraine conflict has led to disruptions in financial markets that has negatively impacted the global economy and created significant uncertainty. The Russia-Ukraine conflict has resulted in the imposition by many countries of economic sanctions and export controls against certain Russian industries, companies and individuals. In response, Russia has implemented its own countermeasures against countries, businesses and investors deemed "unfriendly." Partly as a result of the effects of the Russia-Ukraine conflict, businesses worldwide have experienced shortages in materials and increased costs for transportation, energy and raw materials. The continuation or escalation of the Russia-Ukraine conflict or other hostilities presents heightened risks relating to cyberattacks, supply chain disruptions, higher interest rates and greater frequency and volume of failures to settle securities transactions, as well as increase financial market volatility. The extent and duration of the war, sanctions and resulting market disruptions, as well as the potential adverse consequences for our business, liquidity and results of operations, are difficult to predict.
Effects of Inflation
Because our assets are primarily short-term and liquid in nature, they are generally not significantly impacted by inflation. The rate of inflation does, however, affect our expenses, including employee compensation, communications and information processing and office leasing costs, which may not be readily recoverable from our customers. To the extent inflation results in rising interest rates and has adverse impacts upon securities markets, it may adversely affect our results of operations and financial condition.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2024 our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
During the quarter ended on June 30, 2024, there was
no change in internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be set forth under this heading is incorporated by reference from Note 22, Commitments and Contingencies, to the interim Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
We believe that there have been no material changes from the risk factors previously disclosed in “Risk Factors” in our 2024 Form 10-K.
Item 5. Other Information
During the period covered by this quarterly report, none of the Company’s directors or executive officers has
adopted
or
terminated
a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K under the Securities Exchange Act of 1934).
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Item 6. Exhibits
The following exhibits are filed or furnished, as applicable:
| Exhibit No. | Exhibit Description | |||||||
| 10.01 | ||||||||
| 10.02 | ||||||||
| 10.03 | ||||||||
| 10.04 | ||||||||
| 10.05 | ||||||||
| 10.06 | ||||||||
| 10.07 | ||||||||
| 10.08 | ||||||||
| 10.09 | ||||||||
| 10.10 | ||||||||
| 10.11 | ||||||||
| 10.12 | ||||||||
| 10.13 | ||||||||
| 10.14 | ||||||||
| 10.15 | ||||||||
| 10.16 | ||||||||
| 10.17 | ||||||||
| 31.01 | ||||||||
| 31.02 | ||||||||
| 32.01 | ||||||||
| 101 |
The following Freedom Holding Corp. financial information for the periods ended June 30, 2024, formatted in inline XBRL (eXtensive Business Reporting Language): (i) the Cover Page; (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements.*
|
|||||||
| 104 | Cover page formatted in inline XBRL (included in Exhibit 101). * | |||||||
*
Filed herewith.
† Certain portions of this document that constitute confidential information have been redacted in accordance with Item 601(a)(6) and Item 601(b)(10) of Regulation S-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FREEDOM HOLDING CORP. | ||||||||
|
Date: August 9, 2024
|
/s/ Timur Turlov | |||||||
|
Timur Turlov
Chief Executive Officer |
||||||||
|
Date: August 9, 2024
|
/s/ Evgeniy Ler | |||||||
|
Evgeniy Ler
Chief Financial Officer |
||||||||
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TABLE OF CONTENTS
Note 1 Description Of BusinessprintNote 2 Summary Of Significant Accounting PoliciesprintNote 3 Cash and Cash EquivalentsprintNote 4 Restricted CashprintNote 5 Trading and Available-for-sale Securities At Fair ValueprintNote 6 Margin Lending, Brokerage and Other Receivables, NetprintNote 7 Loans IssuedprintNote 8 Provision For Income TaxesprintNote 9 Securities Repurchase Agreement ObligationsprintNote 10 Customer LiabilitiesprintNote 11 Margin Lending and Trade PayablesprintNote 12 Debt Securities IssuedprintNote 13 Insurance Contracts Assets and Liabilities From Insurance ActivitiesprintNote 14 Fee and Commission IncomeprintNote 15 Net (loss)/gain on Trading SecuritiesprintNote 16 - Net Interest Income/expenseprintNote 17 - Net Gain/(loss) on DerivativesprintNote 18 Related Party TransactionsprintNote 19 Stockholders EquityprintNote 20 Stock Based CompensationprintNote 21 LeasesprintNote 22 Commitments and ContingenciesprintNote 23 Segment ReportingprintNote 24 - Statutory Capital RequirementsprintNote 25 Subsequent EventsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Qualitative and Quantitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II - Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 5. Other InformationprintItem 6. Exhibitsprint