Business context and reporting period
This unaudited Form 10-Q is filed by BMB Munai, Inc., not Freedom Holding Corp. The period ended December 31, 2015 (fiscal third quarter; fiscal year ended March 31). The company had acquired FFIN Securities, Inc. in November 2015 and accounted for the transaction as a reverse merger, with FFIN as the accounting acquirer. Thus, the statements principally continue FFIN’s history; they do not reflect completed acquisitions of the other Freedom businesses.
The company’s stated strategy was to build a financial-services business serving investors in Russia and Kazakhstan. FFIN had applied for FINRA membership and SEC broker-dealer registration. Potential acquisitions of Freedom Finance businesses in Russia, Kazakhstan, and Cyprus remained subject to closing conditions.
Financial results and position
| Metric | Reported amount |
|---|---|
| Revenue, three and nine months ended December 31, 2015 | $0 |
| Operating expenses, three months / nine months | $102,595 / $386,558 |
| Net loss, three months / nine months | $104,908 / $389,233 |
| Net loss per share | $0.00, rounded; basic and diluted |
| Operating cash flow, nine months | $(403,757) |
| Investing cash flow, nine months | $8,586,624 provided, primarily cash acquired with FFIN |
| Financing cash flow, nine months | $50,000 provided through a related-party capital contribution |
| Total assets at December 31, 2015 | $8,641,862 |
| Cash and cash equivalents at December 31, 2015 | $8,635,585, including $8,533,566 restricted |
| Shareholders’ equity | $(72,604), a deficit |
Unrestricted cash was $102,019. Excluding restricted cash and the corresponding deferred distribution liability, management reported a $76,294 working-capital deficit. The balance sheet lists $8,711,886 of current liabilities, of which $8,533,566 is deferred shareholder distributions, plus $2,580 of long-term deferred tax liabilities. No borrowing or interest expense is reported. Future minimum office lease payments were $41,852.
Changes versus prior periods
For the quarter, operating expenses rose from $77,822 to $102,595 and net loss increased from $77,822 to $104,908 year over year. Higher general and administrative costs, including payroll, rent, and office expenses, were partly offset by lower professional fees. For the nine-month period, expenses and net loss were $386,558 and $389,233, respectively; the comparison is with the shorter period from inception on August 25, 2014 through December 31, 2014, so it is not like-for-like. Cash and cash equivalents increased from $402,718 at March 31, 2015, largely because of cash acquired in the transaction, while most of the reported cash at December 31 was restricted for shareholder distributions.
Outlook, risks, and unusual items
- Management expected continued losses and no revenue until FFIN obtained required U.S. regulatory approvals and began operations, or one or more proposed Freedom acquisitions closed. The company gave no quantified revenue, earnings, or cash-flow guidance.
- Management stated that substantial doubt existed about the company’s ability to continue as a going concern. Continued operations depended on generating revenue or obtaining funding; the company could not assure regulatory approval, completion of acquisitions, or additional funding.
- Management anticipated FINRA review would take at least six months and could take longer; state securities licenses would also be required. Proposed acquisitions required, among other conditions, audited U.S.-GAAP financial statements and regulatory approvals, and could be abandoned if not completed by December 31, 2016.
- The $8,533,566 restricted cash balance corresponds to deferred distributions to former shareholders whose claims were pending receipt of required ownership documentation. The company stated it had no control over when, or whether, claims would be submitted.
- CEO and Chairman Timur Turlov received approximately 80.1% of the company’s shares in the FFIN transaction and contributed $50,000 during the quarter and $60,000 in January 2016. Further contributions were not committed. His ownership could rise to as much as 95% if proposed acquisitions closed, giving him control over shareholder votes and key decisions.
- The filing reports SEC comments and subsequent correspondence on the November 2015 Form 8-K; one comment remained unresolved as of the filing date. Management did not expect proposed revisions to materially affect the financial information or disclosures in that 8-K.
- Cash deposits exceeded FDIC insurance limits by $8,385,585 at December 31, 2015. A related-party legal firm provided services associated with $56,098 of legal expenses; the filing notes a board member’s employment relationship with that firm and resignation from the FFIN board in June 2015.
Most important facts to verify
- Confirm the filing identity and issuer: the supplied filing is for BMB Munai, Inc., although the request metadata names Freedom Holding Corp.
- Verify the status and timing of FINRA, SEC, and state broker-dealer approvals, and whether FFIN commenced revenue-generating operations.
- Check whether the proposed Freedom company acquisitions closed, and whether required audited financial statements and regulatory approvals were obtained.
- Assess liquidity using unrestricted cash, distribution obligations, operating cash burn, and the absence of committed future funding.
- Review the documentation and payment status of the restricted shareholder distributions, and any outcome from the unresolved SEC comment.