Freedom Holding Corp. (then BMB Munai, Inc.) — Form 10-Q summary
Reporting period: Three months ended June 30, 2017, the first quarter of fiscal 2018. The filing is unaudited and reports in thousands of U.S. dollars. The company operated brokerage, financial-services and banking businesses in Russia and Kazakhstan. It closed its acquisition of Freedom RU and subsidiaries on June 29, 2017; the filing recast comparative financial statements because the entities were considered under common control. The company planned to change its name to Freedom Holding Corp.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Total revenue | $13,555 | $1,041 |
| Net income (loss) attributable to common shareholders | $8,372 | ($1,242) |
| Basic and diluted earnings (loss) per share | $0.03 | ($0.00) |
| Net cash from operating activities | $6,824 | $2,226 |
| Net cash used in investing activities | ($484) | ($2,832) |
| Net cash from financing activities | $8,828 | $4,508 |
- Revenue included $7,009 net trading gains, $2,855 fee and commission income, $2,584 interest income, $617 foreign-exchange gains and a $490 derivative gain. Net income was approximately 61.8% of revenue; the filing does not present a conventional operating-margin measure.
- Expenses totaled $5,214: interest expense $1,987, operating expense $2,911, fee and commission expense $238, and other expense $78. Income tax benefit was $31.
- Comprehensive income attributable to common shareholders was $6,614, after a $1,758 foreign-currency translation loss.
- At June 30, cash and cash equivalents were $34,161 and restricted cash was $14,544. Total assets were $164,596; total liabilities were $106,582; stockholders’ equity was $58,014. MD&A reported working capital of $52,004, excluding restricted cash and deferred distribution payments.
- Short-term funding included $70,833 of securities repurchase-agreement obligations. Debt securities issued, net of repurchases and including accrued interest, were $3,956. Customer liabilities were $15,714.
Changes, outlook and risks
- Revenue rose substantially and the company moved from a prior-year loss to profit. Management attributed much of the improvement to Astana Bank underwriting and trading activity, including $8,800 of income from selling Astana Bank shares; this was partly offset by an $891 unrealized loss on JSC Kcell shares. Banking activity and brokerage customer growth also contributed.
- Management cautioned that the exceptional year-over-year growth was not expected to continue. It said it had no underwriting engagements currently scheduled for upcoming periods, anticipated lower fee and commission income until further offerings, and did not expect to repeat the Astana Bank trading gain. It expected interest income and operating expenses to remain fairly consistent quarter to quarter.
- Operating cash flow benefited from increases in repurchase obligations, customer liabilities and trade payables, alongside increases in trading securities and brokerage receivables. The reported cash-flow ending balance of $48,705 equals balance-sheet cash plus restricted cash, rather than unrestricted cash alone.
- The CEO and chairman contributed $8,164 during the quarter. Management expected subsidiary revenues after the acquisition to meet liquidity needs, but noted no commitment for further contributions from the controlling shareholder. Expansion may require more capital than the company has; future debt or equity financing was uncertain and not assured on favorable terms or at all.
- Risks include market and currency volatility, regulatory and minimum-capital requirements, the need to retain qualified personnel, and pending regulatory approval to transfer ownership of Freedom CY. The company reported no off-balance-sheet financing arrangements. Management said ordinary-course legal matters were not expected to have a material effect.
- Related-party exposures increased: receivables from related parties were $8,462, including $7,965 related to securities sales; related-party customer liabilities were $8,046; and trade payables to related parties were $3,536.
- Subsequent actions approved included a proposed 1-for-25 reverse stock split, a company name change, and adoption of an equity incentive plan. The company anticipated these actions during its second fiscal quarter. It also disclosed that, following the reverse split, additional shares were expected to be issued to Timur Turlov to bring his ownership to 93%.
Important facts for investors to verify
- How much of quarterly earnings and revenue was recurring, versus tied to the Astana Bank offering, proprietary trading and the derivative expiration.
- The nature, collectability and settlement timing of the substantial brokerage receivables, including related-party balances.
- The liquidity and collateral terms of repurchase agreements, and the distinction between unrestricted and restricted cash.
- The final accounting and operating effects of the common-control acquisition, planned reverse split, name change, and shares to be issued to the controlling shareholder.
- Whether the company obtained Freedom CY regulatory approval and maintained required regulatory capital and U.S. clearing arrangements.