Freedom Holding Corp. — FY2019 Form 10-K Summary
Business context and reporting period
This is an annual report for the fiscal year ended March 31, 2019, not a standalone 2018 fourth-quarter report. Freedom Holding is a financial-services holding company operating primarily in Eastern Europe and Central Asia, with brokerage, banking, trading, investment banking and underwriting businesses. Financial statement amounts below are in U.S. dollars; amounts are shown in millions unless stated otherwise.
The company reported more than 115,000 client accounts, approximately $1.3 billion in client assets, over $59 billion in annual client transaction volume, and about 7 million transactions. It operated 76 offices. The FY2018 comparative figures were recast, in part to reflect acquisitions of entities under common control.
Financial performance and position
| Metric | FY2019 / March 31, 2019 | FY2018 / March 31, 2018 (recast) |
|---|---|---|
| Net revenue | $74.3 million | $57.8 million |
| Net income | $7.1 million | $18.2 million |
| Basic / diluted EPS | $0.12 / $0.12 | $0.55 / $0.54 |
| Net income as a share of net revenue | 9.6% | 31.5% |
| Net income before tax | $8.5 million | $18.6 million |
| Comprehensive income (loss) | $(8.3) million | $17.6 million |
| Cash and cash equivalents | $50.0 million | $65.7 million |
| Operating cash flow | $58.5 million | $(117.2) million |
| Total assets / liabilities | $350.9 million / $233.3 million | $350.9 million / $223.9 million |
| Net liquid assets, as defined by management | $295.9 million | $308.0 million |
Net revenue increased 29%, led by fee and commission income, up 264% to $44.3 million, and interest income, up 58% to $13.9 million. Net gains on trading securities fell 41% to $20.2 million; foreign-exchange operations swung from a $1.9 million gain to a $4.1 million loss. Total expenses rose 68% to $65.8 million, including operating expenses of $43.1 million, nearly double the prior year. Net income declined 61%.
Operating cash flow improved from a use of $117.2 million to generation of $58.5 million. The 2019 result included significant working-capital movements, including increases in customer liabilities and trade payables, as well as higher brokerage receivables. Investing activities used $6.7 million, principally for acquisitions and fixed assets; financing activities used $42.3 million, mainly reflecting repayment of repurchase-agreement funding.
At year-end, securities repurchase agreement obligations were $73.6 million, down from $154.8 million; issued debt securities were $28.5 million, up from $11.2 million; and loans received were $4.0 million, down from $7.1 million. The company held $167.9 million of proprietary trading securities, down from $212.6 million. About $101.1 million of those securities were subject to repurchase obligations. Restricted cash was $38.5 million and should not be treated as freely available liquidity.
Material changes and unusual items
- Brokerage and related banking growth increased fee income; customer accounts grew by approximately 54,000 during the year, through acquisitions and organic growth.
- Operating costs increased with expansion, including higher payroll, advertising, rent and equity compensation. Impairment provision rose to $1.5 million from $0.4 million, reflecting larger unsettled securities-sale receivables at year-end.
- Currency movements materially affected results: the tenge weakened about 19% and the ruble about 13% against the U.S. dollar. The company recorded a $15.5 million translation loss in other comprehensive income and a $4.1 million foreign-exchange loss in revenue.
- About $60 million, or 36% of the proprietary portfolio, was invested in one company. Management said the position remained open and acknowledged that its size and leverage could materially harm liquidity, capitalization and results if the investment thesis or market liquidity proved wrong.
- FY2018 figures were recast following the treatment of Asyl and Nettrader as common-control transactions, as well as presentation changes. Comparisons should use the recast figures, not previously reported amounts.
- In FY2019 the company completed the Asyl and Nettrader mergers, issued bonds, and disposed of a subsidiary for a $15,000 loss. Shares began trading on OTCQX and were approved for listing on the KASE Alternative Market. After year-end, Freedom KZ received a foreign-currency exchange license; the filing also reports a May 2019 bond placement by Freedom KZ for a third-party issuer.
Outlook, risks and contingencies
Management expected cash on hand, operating cash generation and forecast proprietary-trading returns to cover working-capital needs for the next 12 months. It also anticipated continued regional expansion, which could require additional debt or equity financing; availability and terms were not assured. No numerical earnings or revenue guidance was provided.
Key risks include leveraged proprietary trading and concentration in one investment; market, counterparty, collateral and securities-lending exposures; foreign-currency volatility; changing regulation and capital requirements across several jurisdictions; cybersecurity and operational disruption; and the risk that subsidiaries cannot freely transfer funds to the holding company. The filing also highlights reliance on CEO and majority shareholder Timur Turlov, who beneficially owned approximately 73% of outstanding common stock, and related-party transactions. One related-party customer accounted for $31.8 million, or 43%, of brokerage and other receivables at year-end; management considered these receivables fully collectible.
The company reported $11.9 million of operating-lease commitments, including $5.6 million due within one year. It disclosed routine legal and regulatory matters and stated management did not expect them to have a material adverse effect, while noting that future legal costs could not be estimated. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective as of March 31, 2019.
Important facts for investors to verify
- How the concentrated, leveraged $60 million proprietary investment performed after year-end, and the collateral, financing and liquidation terms supporting it.
- Whether reported operating cash flow is sustainable given the sharp rise in receivables, customer liabilities and trade payables.
- The collectability and terms of significant related-party receivables, margin lending and other transactions.
- How currency movements and any new regulatory or capital requirements affect subsidiary liquidity and the ability to upstream cash.
- The effect of expansion costs, lease commitments and financing needs on future profitability and available liquidity; management provided no quantified forecast.
- The impact of the FY2018 recast when comparing historical performance, and the company’s limited OTCQX public market and controlled-company governance structure.