Freedom Holding Corp. — Form 10-Q Summary
Business context and reporting period. The filing covers the three months ended June 30, 2019, the first quarter of Freedom Holding’s fiscal year ending March 31, 2020. The company provides brokerage, banking, investment, trading and related financial services across Eastern Europe and Central Asia. Unless otherwise noted, financial amounts below are in thousands of U.S. dollars.
Financial results and position
| Metric | Three months ended June 30, 2019 | Comparable 2018 period |
|---|---|---|
| Net revenue | $29,249 | $7,402 |
| Net income (loss) | $8,214 | $(6,883) |
| Basic and diluted EPS | $0.14 | $(0.12) |
| Comprehensive income (loss) | $8,857 | $(13,559) |
| Operating cash flow | $113,566 | $1,420 |
| Investing cash flow | $(714) | $(2,203) |
| Financing cash flow | $(19,551) | $(13,167) |
- Net revenue increased 295% year over year. Fee and commission income rose to $22,592 from $5,428; trading securities produced a $2,562 gain versus a $3,288 loss; and foreign-exchange losses narrowed to $36 from $2,110. Interest income fell to $4,131 from $7,372.
- Total expenses increased 35% to $19,559. Operating expenses rose 39% to $12,685, and fee and commission expense increased to $4,031 from $764. Interest expense declined 22% to $3,608. A $1,073 impairment recovery benefited the quarter, including a disclosed $1,417 recovery of a prior-period impairment; management said that recovery was a one-time event.
- Net income was 28% of net revenue, compared with a loss in the prior-year quarter. Income tax expense was $1,476, versus a $150 benefit in 2018. Foreign-currency translation contributed $643 to other comprehensive income, compared with a $6,698 loss.
- Cash and cash equivalents were $141,900 at June 30, up from $49,960 at March 31; restricted cash was an additional $42,437. Total assets were $429,101, liabilities $303,286, and stockholders’ equity $125,815. Management reported net liquid assets of $355,966.
- Operating cash flow included substantial working-capital movements, notably an $88,453 increase in customer liabilities and a $34,222 decrease in brokerage and other receivables. The filing’s MD&A elsewhere reports operating cash flow as $113,556, differing by $10 from the cash-flow statement; verify the correct amount.
- At June 30, trading securities totaled $161,021. Bonds issued totaled $29,772, with coupon rates of 8%–12% and maturities from June 2020 through February 2022. Securities repurchase obligations were $56,566; related collateral had a reported fair value of $75,621. Customer liabilities were $174,143 and should be distinguished from corporate borrowings.
Material changes and management commentary
- Management attributed the revenue improvement mainly to brokerage growth, higher client trading activity, a trading gain rather than a loss, and lower foreign-exchange losses. It cited acquisitions and expansion of its branch network, advisers and research offering.
- The company reported more than 121,000 client accounts, with approximately 27,000 active accounts during the quarter, and 78 retail offices across its listed markets.
- Operating expenses reflected business expansion, including higher payroll, professional services and advertising. Adoption of the lease standard on April 1, 2019 added $14,281 of right-of-use assets and $15,856 of lease obligations at quarter-end; the adoption also reduced retained earnings by $1,511.
- Management said existing cash, expected operating cash generation and forecast proprietary-trading returns should meet working-capital needs for the next 12 months. No quantitative earnings or revenue guidance was provided.
- In May 2019, Freedom KZ acted as sole book runner for approximately $132 million of tenge-denominated Eurasian Development Bank bonds. In July 2019, S&P assigned Freedom KZ and Freedom RU ratings of B-/stable/B; Freedom KZ also received a KzBB- national-scale rating.
Risks, contingencies and unusual items
- Trading concentration and leverage: Approximately $56.8 million, or 35% of the proprietary portfolio, was invested in one company’s securities; management stated the position was highly leveraged and remained open at the report date. It warned that an adverse investment outcome or inability to liquidate could materially harm liquidity, capitalization and results.
- Collateral and liquidity: Management said significant portions of cash and trading securities are subject to collateralization agreements. Market moves against positions could affect liquidity and capital. Cash and cash equivalents were reported as uninsured.
- Related parties: Related-party commissions were $19,826, about 88% of total fee and commission income of $22,592. A single related-party customer accounted for $17,090, or 40%, of brokerage and other receivables. Verify the nature, terms and collectability of these exposures.
- Growth and regulation: The company cited expansion-related capital needs, competition, regulatory compliance across multiple jurisdictions, currency and market volatility, key-personnel risks, and controlling-shareholder influence. It said additional financing might be needed and could be unavailable on acceptable terms.
- Routine legal proceedings and regulatory inquiries arise in the ordinary course; management did not expect them to have a material adverse effect but could not estimate future legal fees. The company reported no off-balance-sheet financing arrangements and no additions to the risk factors in its latest Form 10-K.
- Management concluded disclosure controls were effective as of June 30, 2019. The company did not provide the market-risk disclosures required of larger filers.
Important facts for investors to verify
- Reconcile the $10 discrepancy in reported operating cash flow between the cash-flow statement and MD&A.
- Review the single-company proprietary position’s valuation, leverage, collateral terms and liquidity, including any developments after quarter-end.
- Assess the related-party commission concentration and receivable exposure, including the company’s basis for considering related-party receivables collectible.
- Examine the drivers and sustainability of the sharp commission growth, the higher transaction-related expenses, and the reported one-time impairment recovery.
- Confirm liquidity and regulatory capital headroom after customer deposits, repurchase obligations, lease commitments and bond maturities are considered.