Freedom Holding Corp. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended September 30, 2022. The unaudited statements are in U.S. dollars; amounts below are rounded to millions. Comparative 2021 results were recast, and some prior cash-flow statements are subject to restatement.
Business context
Freedom Holding provides brokerage, banking, investment banking, and insurance services across Eurasia, Europe, and the United States. During the period, it expanded insurance operations through acquisitions and classified its Russian brokerage and banking operations as discontinued operations in connection with an agreed sale.
Key financial results
| Metric | Three months ended Sep. 30, 2022 | Six months ended Sep. 30, 2022 |
|---|---|---|
| Net revenue | $180.3m, down 43% year over year | $352.3m, down 20% |
| Continuing-operations income | $49.2m, versus $209.0m | $92.4m, versus $261.7m |
| Net income, including discontinued operations | $27.2m, versus $206.7m | $86.3m, versus $262.1m |
| Net income attributable to common shareholders | $26.3m | $87.3m |
| Basic EPS | $0.45 total | $1.49 total |
Quarterly net revenue fell mainly because trading-securities gains declined to $9.0m from $181.6m; the prior-year comparison included a substantial SPBX-related gain. Higher interest income ($49.0m, up 101%) and insurance underwriting income ($26.2m, up 64%) partly offset the decline. Fee and commission income was $93.1m, down 2%. Six-month fee and commission income increased 7% to $187.5m, while trading gains fell to $13.4m from $190.3m.
Quarterly expenses rose 55% to $118.5m, including interest expense of $40.9m (up 144%) and operating expenses of $37.8m (up 73%). For six months, expenses increased 67% to $238.4m. Management cited greater repo financing and customer deposits, business expansion, higher staffing and administrative costs, insurance growth, and Ukraine-related charitable support. The filing does not present a conventional operating-margin measure.
Cash, liquidity, debt, and balance sheet
- At September 30, total assets were $4.78bn and total liabilities $4.16bn; shareholders’ equity was $621.3m. These balances include the Russian disposal group held for sale.
- Continuing-operations cash and cash equivalents were $790.4m, with restricted cash of $440.0m. The cash-flow statement reports $1.96bn of cash, cash equivalents, and restricted cash including discontinued operations; $731.2m of that total was in the Russian disposal group.
- Customer liabilities increased to $1.57bn from $765.6m at March 31. Securities repurchase obligations rose to $981.2m from $840.2m; approximately 73% of continuing trading securities were subject to repo obligations.
- Debt securities issued were $51.8m, including FRHC notes due December 2022 and Freedom SPC bonds due October 2026. The filing says there are no covenants on these debt securities. Total reported contractual obligations were $99.1m, including leases and bonds/notes.
- Six-month cash flows: operating activities +$124.2m; investing activities −$323.2m; financing activities +$746.1m; and reported net increase in cash, cash equivalents, and restricted cash of $731.3m. Financing inflows included $513.5m of bank customer deposits and $168.6m from repo obligations.
- Management reported that subsidiaries subject to regulatory capital requirements exceeded minimums at period-end; aggregate minimum requirements were approximately $32.0m. Management believes available cash, operating cash flows, trading returns, and potential capital-raising capacity will meet anticipated needs, while noting additional growth or the Russian sale could require more capital.
Material changes, outlook, and risks
- Russian divestiture: The company agreed to sell its Russian segment for consideration structured around assignment of an approximately $115m deferred payment obligation and cash consideration calculated against $140m. The transaction required Russian Central Bank approval and was expected to close in the following fiscal quarter. A $41.5m non-cash impairment charge reduced discontinued-operations results. Completion and the expected benefits are uncertain.
- Other acquisitions: The company acquired London Almaty and Ticketon during the period. It also acquired two insurance companies, Freedom Life and Freedom Insurance, from CEO and controlling shareholder Timur Turlov for $26.6m, payable by December 31, 2022. Comparative periods were recast for the common-control insurance acquisitions.
- Ukraine: On October 19, 2022, Ukrainian authorities suspended Freedom UA’s brokerage license for five years and froze its assets following its inclusion on a sanctions list. The company said it was appealing the decision.
- Related-party exposure: The filing reports that commission income from CEO-owned FFIN Brokerage represented approximately 38% of total revenue for the quarter and 42% for the six months. Margin receivables were also highly concentrated in related parties; management considers them collectible based on historical data.
- Financial reporting controls: Management concluded disclosure controls were ineffective at September 30 because of a material weakness in controls over cash-flow classification. The company restated comparative cash flows and said it would amend previously filed annual and quarterly reports; it reported no impact on operating performance or per-share amounts from the identified classification errors. Remediation was not yet complete.
- Market and operating risks: The filing highlights geopolitical sanctions and countersanctions, market and trading volatility, foreign-exchange and interest-rate exposure, margin-lending and counterparty credit risk, insurance reserving and reinsurance collectability, regulatory and liquidity requirements, and technology/cybersecurity risks. Management provided no numerical earnings or revenue guidance and does not anticipate cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether the Russian sale received required approvals, closed on the stated terms, and produced proceeds consistent with the reported impairment valuation.
- Progress on restating the specified prior filings and remediation and testing of the material weakness in cash-flow controls.
- Developments in the Ukraine sanctions matter and any resulting financial or regulatory effects.
- Credit quality and recoverability of concentrated related-party margin receivables, and ongoing revenue dependence on FFIN Brokerage.
- Liquidity and collateral headroom as repo financing, customer deposits, and lending activity grow; confirm continuing versus discontinued cash figures are compared consistently.
- Actual insurance underwriting performance, reserve adequacy, and reinsurance recoverability following acquisitions and expansion.