Freedom Holding Corp. quarterly report, Q1 FY2017

Business context and reporting period

This is BMB Munai, Inc.’s unaudited Form 10-Q for the three months ended June 30, 2016, its fiscal first quarter. The filing is not submitted under the name Freedom Holding Corp.; it describes BMB Munai’s acquisition of FFIN Securities, Inc. and its proposed expansion through possible acquisitions of the Freedom businesses in Russia, Kazakhstan, and Cyprus.

BMB Munai reported no revenue and was developing a U.S. brokerage operation. FFIN withdrew its FINRA membership and SEC broker-dealer application in June 2016 to gather requested information and assess whether to reapply. The company said it anticipated a new application before the end of calendar 2016 if it decided to proceed; reapplication was not assured.

Financial results and position

At June 30, 2016, total assets were $8.71 million, including $169,066 of cash and cash equivalents and $8.53 million of restricted cash. The restricted balance corresponds to an equal deferred distribution liability and is not ordinary available liquidity. Current liabilities were $8.77 million, shareholders’ deficit was $60,144, and accumulated deficit was $880,932. The filing reports no debt balance. No gross or operating margins are meaningful because the company had no revenue.

Operating cash use was offset by $85,000 of financing from a capital contribution by CEO, Chairman, and majority shareholder Timur Turlov. Cash and cash equivalents increased by $69,388 during the quarter. The balance sheet reports $169,066 of cash and equivalents at quarter-end; the cash-flow statement’s $8.70 million ending cash figure includes restricted cash.

Material changes versus the prior period

Operating expenses rose 67% to $251,278. Professional fees increased by $69,917, primarily from accounting and audit costs; general and administrative expenses increased by $30,641, attributed to payroll, rent, and office expenses. Net loss widened by $99,555. Operating cash use declined, but management attributed the improvement largely to higher accounts payable, rather than a change in the revenue outlook. The company received the $85,000 related-party contribution, compared with no financing cash flow in the 2015 quarter.

Outlook, risks, and unusual items

• Going concern: The filing states that recurring losses and anticipated further losses raise substantial doubt about the company’s ability to continue as a going concern. Management planned to fund the next 12 months with existing cash, further contributions from Mr. Turlov, and/or a private placement; none of the additional funding sources was assured.
• Acquisition and licensing uncertainty: Proposed acquisitions of Freedom RU and Freedom CY remained subject to audited U.S. GAAP financial statements, regulatory approvals, and other closing conditions. The company could abandon either acquisition if not completed by December 31, 2016. The filing also describes Freedom KZ as part of the proposed expansion.
• Distribution obligations: The company reported $8.53 million of deferred shareholder distributions, payable when eligible shareholders submit required documentation. The timing, or whether all claims will be made, is outside the company’s control.
• Other commitments and risks: Contractual obligations totaled $8.56 million, predominantly the shareholder distributions; office lease commitments were $28,747. Cash deposits exceeded FDIC insurance limits by $8.45 million. The filing reported no off-balance-sheet financing arrangements and no material subsequent events through August 15, 2016.
• Controls: Management concluded disclosure controls were effective as of June 30, 2016 and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Confirm the issuer and filing identity: the supplied filing is for BMB Munai, Inc., while the request identifies Freedom Holding Corp.
• Track whether FFIN refiled for FINRA membership and SEC and state broker-dealer registration, and whether it obtained approval.
• Verify the status, regulatory approvals, audited financial statements, and closing terms for any proposed Freedom company acquisitions.
• Assess available unrestricted liquidity, the ability to secure additional funding, and progress toward revenue-generating operations.
• Monitor the $8.53 million restricted cash and matching distribution obligation, including claims submitted and payments made.
• Note that the filing’s MD&A contains an apparent period-labeling error in its discussion of other income; the financial statements show $979 for 2016 and $22 for 2015.