Business context and reporting period
Freedom Holding Corp. is a financial-services group focused on securities brokerage, trading, banking, investment banking and related services in Eastern Europe and Central Asia. This unaudited Form 10-Q covers the three and six months ended September 30, 2019 (fiscal Q2 and first half of fiscal 2020). Amounts below are in U.S. dollars; financial-statement figures are converted from thousands to millions where shown.
The company reported more than 127,000 client accounts, with approximately 29,000 active accounts in the quarter. Its common stock began trading on Nasdaq on October 15, 2019, after the reporting-period end.
Financial performance and position
- Quarter revenue: $32.99 million, up 89% from $17.44 million a year earlier. Fee and commission income rose 106% to $26.36 million; trading gains were $3.95 million, interest income $1.81 million, and foreign-exchange gains $0.88 million.
- Quarter earnings: Net income attributable to common shareholders was $8.77 million versus $1.72 million; diluted EPS was $0.15 versus $0.03. Net margin was approximately 26%.
- First-half revenue and earnings: Revenue was $62.24 million, up 145%; net income attributable to common shareholders was $16.98 million versus a $4.62 million loss. Diluted EPS was $0.29 versus a loss of $0.08. Net margin was approximately 27%.
- Costs and comprehensive income: First-half expenses rose 39% to $41.05 million, including a 393% increase in fee and commission expense and a 39% increase in operating expense. First-half comprehensive income attributable to common shareholders was $15.57 million, including a $1.43 million foreign-currency translation loss.
- Cash flow: First-half operating cash flow was $62.51 million, investing cash outflow $10.22 million, and financing cash outflow $6.76 million. Cash, cash equivalents and restricted cash increased $43.63 million to $132.05 million. The operating cash inflow included a $69.95 million increase in customer liabilities.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $80.88 million and restricted cash $51.18 million; total assets were $425.64 million, liabilities $291.52 million, and stockholders’ equity $134.12 million. Management reported company-defined net liquid assets of $331.31 million.
- Debt and funding: Debt securities issued totaled $26.78 million, down from $28.54 million at March 31, with fixed coupons of 8%–12% and maturities from June 2020 to February 2022. Securities repurchase obligations were $70.72 million. Customer liabilities rose to $150.62 million from $82.03 million.
Material changes versus prior comparable period
- Revenue growth was driven chiefly by brokerage and related commission income, which management attributed to client growth, a larger branch network and increased customer trading activity. First-half trading gains also increased, while interest income declined 33% to $5.94 million.
- First-half income before tax improved from a $4.16 million loss to $21.19 million of income. The effective tax rate was 20.5%, versus 11.2% a year earlier; management cited the mix and tax treatment of earnings across jurisdictions and U.S. GILTI taxes.
- Operating expenses grew with business expansion, including higher payroll and professional-services costs. Adoption of the lease standard on April 1, 2019 added lease right-of-use assets of $14.47 million and lease obligations of $15.98 million at period end.
- Cash and cash equivalents increased from $49.96 million at March 31, while trading securities decreased from $167.95 million to $163.82 million. The company repaid loans and repurchased debt securities during the first half.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or revenue guidance. It said cash, expected operating cash generation and forecast proprietary-trading returns should meet working-capital needs for the next 12 months, while noting that expansion may require outside financing that may not be available on acceptable terms.
- Management identified risks from market volatility, foreign-currency movements, regulation across multiple jurisdictions, competition, key-personnel retention, proprietary-trading leverage and collateralized positions. It warned that adverse market moves could affect liquidity, capitalization and results. Approximately 59% of proprietary trading securities were subject to repurchase obligations at September 30.
- Related-party concentration is notable: related parties generated $43.17 million of first-half commission income, compared with total fee and commission income of $48.96 million. A single related-party customer represented $55.49 million, or 72%, of net brokerage and other receivables; management considered these receivables fully collectible.
- In August 2019, the company sold 67.12% of Freedom UA to its president for $100 to address Ukrainian ownership restrictions, retained 32.88%, and entered into agreements that provide funding and operational support and entitle the company to 90% of Freedom UA’s after-tax net profits. It continued consolidating Freedom UA as a variable interest entity.
- The company recognized a $1.47 million first-half recovery of impairment losses, including a $2.23 million recovery of previously impaired receivables, partly offset by new provisions. Management characterized the recovery as a one-time event. The company also reported $3.63 million of securities sold short at period end and disclosed the potential for theoretically unlimited losses on short positions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported routine legal and regulatory matters, but said their outcomes were not expected to materially affect financial condition or operations. No additional material subsequent events were reported.
Important facts for investors to verify
- How much brokerage growth and related-party commission revenue are recurring, and what are the terms and independence safeguards for related-party transactions?
- What supports the collectability of the concentrated related-party receivable exposure, and how has it changed after September 30?
- How customer-liability growth, collateralized trading positions, repurchase funding and short positions affect liquidity and regulatory capital under stressed market conditions.
- Whether earnings remain strong after excluding the one-time impairment recovery and considering higher operating and commission costs, taxes and foreign-currency effects.
- Whether management’s 12-month liquidity assessment and planned expansion can be sustained without additional financing, and whether any regulatory or legal matters have developed since filing.