Business context and reporting period
This is BMB Munai, Inc.’s Form 10-K for the fiscal year ended March 31, 2017—not a quarterly report. The filing identifies BMB Munai as the registrant; it does not identify the issuer as Freedom Holding Corp. At year-end, BMB Munai’s reported financial statements principally reflect the pre-acquisition company and FFIN Securities, not the subsequently acquired Freedom RU operations.
BMB Munai closed its acquisition of Freedom RU and subsidiaries on June 29, 2017, after the reporting period. The acquired businesses include brokerage and financial services in Russia and Kazakhstan, a Russian bank, and an online securities marketplace. Acquisition of Cyprus-based Freedom CY remained subject to regulatory approval.
Financial results and position
| Metric | FY ended Mar. 31, 2017 | FY ended Mar. 31, 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses / operating loss | $581,974 | $493,834 |
| Net loss | $578,139 | $491,999 |
| Operating cash used | $369,141 | $538,629 |
| Financing cash provided | $320,000 | $180,000 |
At March 31, 2017, unrestricted cash and cash equivalents were $50,537, versus $99,678 a year earlier. The balance sheet also reported $8,533,566 of restricted cash matched by a deferred distribution liability for legacy shareholder distributions. Excluding those matched amounts, the company reported a $155,084 working-capital deficit, compared with $99,724 of working capital in 2016. Shareholders’ equity moved from $105,155 to a deficit of $152,984. No gross margin is applicable to the reported zero-revenue business; the filing does not provide a consolidated debt total for the acquired operating group in these statements.
Separately, the filing reports that Freedom RU and subsidiaries had approximately $19.4 million of revenue and $7.3 million of profit for FY2017, compared with $17.3 million and $9.2 million, respectively, in FY2016. Their reported assets rose to approximately $111.7 million from $39.1 million. These figures are for the operating group and were not included in BMB Munai’s year-end consolidated results. Freedom KZ issued $9.53 million of bonds at an 11.5% fixed coupon, repurchased $6.145 million during the year, and the remaining stated face amount would be approximately $3.385 million if those figures represent the same issuance; the bonds mature January 21, 2019.
Material changes versus prior period
- BMB Munai’s net loss increased by approximately $86,000, mainly as professional fees rose to $364,334 from $222,511, including costs related to the planned acquisitions and FFIN’s FINRA application.
- Operating cash use declined year over year, partly because accounts payable increased. The company relied on CEO and controlling shareholder Timur Turlov for $320,000 of FY2017 capital contributions, compared with $180,000 in FY2016.
- The operating group’s revenue increased, but its profit declined; its reported assets increased substantially, including in connection with business growth and acquisitions.
- Following the June 2017 Freedom RU acquisition, Turlov held approximately 88.6% of BMB Munai’s shares, with further issuance contemplated under the acquisition agreement and ownership potentially rising to approximately 95% after the planned reverse split and other transactions.
Outlook, risks and unusual items
Management anticipated that Freedom RU revenue would begin contributing in FY2018’s second quarter, that operating gains could begin in upcoming periods from that quarter, and that acquired-business revenue would be sufficient to meet liquidity needs. These are forward-looking expectations, not reported results. Management also anticipated higher FY2018 operating expenses and continued expansion, which could require additional capital. No institutional financing source was in place, and future debt or equity financing was not assured.
- Freedom CY’s ownership transfer required CySEC approval; timing and ultimate approval were uncertain. BMB Munai also needed a reverse split and recapitalization to issue the remaining acquisition consideration and complete the proposed Cyprus acquisition.
- FFIN withdrew its FINRA membership application in 2016 and had not resubmitted it by the filing date. U.S. broker-dealer licensure remained under evaluation.
- Key risks include extensive and changing regulation across Russia, Kazakhstan, Cyprus and the United States; capital and liquidity requirements; currency and geopolitical exposure; customer and counterparty credit risk, including margin and securities lending; reliance on clearing and banking arrangements; and operational, cybersecurity and management-concentration risks.
- The $8.53 million legacy distribution liability remained payable to eligible former shareholders upon submission of required documentation, with matching restricted cash. Management stated that it had no control over when or whether claims would be submitted.
- The auditor issued an unqualified opinion on the financial statements. Management reported disclosure controls and internal control over financial reporting effective at a reasonable-assurance level; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Confirm the registrant’s identity and the reporting-period scope: the filing is for BMB Munai’s fiscal year ended March 31, 2017, and excludes Freedom RU results from the year-end consolidated statements.
- Review the June 29, 2017 acquisition closing, consideration mechanics, planned reverse split, and any later share issuances or change in control.
- Verify current CySEC approval and ownership status of Freedom CY, and the status of any U.S. broker-dealer/FINRA application.
- Reconcile the operating group’s reported revenue and profit with audited statements and assess the acquired group’s debt, liquidity, regulatory capital and cash-flow position; these details are not fully presented in the excerpted parent-company statements.
- Assess the restricted cash and $8.53 million legacy distribution liability, the status of shareholder claims, and the effect of related obligations on available liquidity.
- Check whether management’s FY2018 revenue, liquidity and profitability expectations were achieved, and whether expansion required additional financing.