Freedom Holding Corp. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018; comparisons are to the three months ended June 30, 2017, unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in thousands. The company provides brokerage, banking, trading, investment-banking and related services, principally in Central Asia.
Financial performance and position
| Metric | June 2018 quarter / June 30, 2018 | Comparable period / March 31, 2018 |
|---|---|---|
| Net revenue | $7.402 million | $13.984 million |
| Net income (loss) | $(6.883) million | $7.990 million |
| Basic and diluted earnings (loss) per share | $(0.12) | $0.71 |
| Comprehensive income (loss) | $(13.559) million | $5.762 million |
| Operating cash flow | $(29.016) million | $8.795 million |
| Investing cash flow | $(2.203) million | $(1.913) million |
| Financing cash flow | $17.269 million | $11.645 million |
| Cash, cash equivalents and restricted cash | $69.859 million | $87.693 million at March 31, 2018 |
| Total assets | $329.229 million | $350.871 million at March 31, 2018 |
| Total liabilities / stockholders’ equity | $216.964 million / $112.265 million | $223.870 million / $127.001 million at March 31, 2018 |
| Working capital | $79.482 million | $95.345 million at March 31, 2018 |
Net loss equaled approximately 93% of net revenue; the filing does not present a gross margin measure. No EBITDA figure is provided. Cash and cash equivalents were $45.057 million, of which $19.514 million was subject to reverse repurchase agreements; restricted cash was $24.802 million.
At June 30, 2018, reported funding obligations included $114.572 million of repurchase-agreement obligations, $19.969 million of issued debt securities, and $13.977 million of loans received. These are distinct balance-sheet categories, not a company-reported total-debt measure. Lease commitments were $8.609 million, including $5.568 million due in less than one year.
Material changes and operating developments
- Net revenue declined 47% year over year. Fee and commission income rose 78% to $5.428 million, and interest income rose 179% to $7.372 million, but trading securities shifted from a $7.131 million gain to a $3.288 million loss, while foreign-exchange operations shifted from a $0.659 million gain to a $2.110 million loss.
- Trading results included $5.094 million of realized gains and $8.382 million of unrealized losses. Management attributed a significant loss to a decline in Kcell’s share price; gains on Kazakhtelecom shares partly offset it. The filing also cites tenge depreciation of approximately 7% against the U.S. dollar and reports a $6.698 million foreign-currency translation loss.
- Total expenses rose 140% to $14.435 million. Operating expenses increased to $9.111 million, including higher payroll, equity compensation, rent, advertising and professional-services costs. Interest expense increased 127% to $4.614 million, primarily with increased short-term repo financing.
- The company completed the Asyl acquisition in April for approximately $2.2 million and the Nettrader acquisition in May for approximately $3.8 million. Management said the transactions added approximately 16,000 client accounts each; Nettrader also completed the acquisition of the Tradernet platform. These acquisitions were from entities formerly controlled or owned by CEO and controlling shareholder Timur Turlov.
- The company reported more than 81,000 client accounts, including approximately 34,000 from the Asyl and Nettrader acquisitions; over 3,000 accounts opened during the quarter, and transaction volume exceeded $8 billion. It issued approximately $9.7 million of Freedom KZ bonds during the quarter.
- Comparative financial statements were recast for common-control acquisitions and presentation changes. The company adopted ASC Topic 606 on April 1, 2018, with no transition adjustment reported.
Liquidity, outlook, risks and other items
- Management stated that cash and cash equivalents, expected operating cash generation and forecast trading returns should fund working-capital needs for the next 12 months. This is an expectation, not quantified guidance, and the quarter had negative operating cash flow.
- Management disclosed an approximately $90 million position in securities of a single company, described as highly leveraged and still open at the report date. The filing warns that adverse investment or market developments, or difficulty liquidating the position, could materially harm liquidity, capitalization and results. The cited passage does not clearly identify the company.
- Management highlighted market and currency volatility, leverage, collateralization of trading securities and cash, regulatory requirements across multiple jurisdictions, competition, key-personnel needs, and potential need for additional financing. It cautioned that financing may not be available on acceptable terms or at all.
- Legal matters were described as routine; management did not expect them to have a material adverse effect, but could not estimate future legal fees. No off-balance-sheet financing arrangements were reported. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- After quarter-end, the company’s stock began trading on OTCQX on July 18, 2018. The filing reported no other material recognizable subsequent events through August 14, 2018.
Important facts for investors to verify
- Identify the approximately $90 million concentrated, leveraged position; verify its collateral, financing terms, valuation and current status.
- Review the drivers and sustainability of trading and foreign-exchange losses, including the Kcell exposure and sensitivity to local-currency movements.
- Assess liquidity under stress: operating cash outflow, encumbered cash and securities, repo maturities, and ability to roll over or repay funding.
- Confirm acquisition accounting and related-party terms for Asyl and Nettrader, and evaluate integration costs and realized client-account growth.
- Reconcile the recast comparative figures and monitor expense growth, bond and loan obligations, and the basis for management’s 12-month liquidity assessment.