Freedom Holding Corp. annual report, FY2012

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Filing summary

Entity and period: The supplied filing is BMB Munai, Inc.’s Form 10-K for the fiscal year ended March 31, 2012, filed June 25, 2012. It is not a Freedom Holding Corp. filing, and the period is not identified as “2011 Q4.” Figures below summarize the filing as provided.

Business context

BMB sold its wholly owned Kazakhstan oil-and-gas subsidiary, Emir Oil, on September 19, 2011. Following the sale, the company had no oil-and-gas properties and its continuing activities were mainly post-closing obligations, responding to potential indemnification claims, and exploring new opportunities. Continuing operations generated no revenue in fiscal 2012 or 2011. Management said it did not expect revenue until it found and pursued new business opportunities.

Financial results and position

  • Continuing operations: Revenue was $0 in both fiscal years. Fiscal 2012 operating expenses were $23.96 million, including $20.31 million of general and administrative expense and $3.55 million of interest expense. Loss from continuing operations was $23.97 million, versus $15.13 million in fiscal 2011.
  • Discontinued operations and sale: Emir Oil generated fiscal 2012 revenue of $41.63 million and income of $11.90 million before the sale-related loss. The sale produced a reported loss of $127.15 million. Net loss for fiscal 2012 was $139.22 million, or $2.50 per share, compared with net income of $4.88 million, or $0.09 per share, in fiscal 2011.
  • Cash flow: Consolidated net cash provided by operating activities was $15.28 million in fiscal 2012, versus $35.78 million in fiscal 2011. Investing activities provided $136.26 million, primarily reflecting $159.60 million of sale proceeds; financing activities used $109.27 million, including debt redemption and shareholder distributions. Cash increased by $42.26 million.
  • Liquidity and balance sheet: At March 31, 2012, cash and cash equivalents were $39.37 million, of which $36.00 million was restricted escrow; unrestricted cash was $3.37 million. Total assets were $41.42 million, current liabilities $20.05 million, and shareholders’ equity $21.38 million. The filing reported no outstanding convertible notes at year-end.
  • Debt and distributions: The company redeemed $61.4 million principal amount of 10.75% convertible notes in September 2011, paying $62.65 million including accrued interest. It made an initial distribution of $1.04 per share, totaling approximately $58.02 million; a second distribution was contemplated but not assured.
  • Margins: The filing provides revenue and operating results for discontinued operations but does not provide a clear continuing-operations revenue base from which to assess ongoing margins.

Material changes versus prior year

  • The Emir Oil sale transformed BMB from an oil-and-gas operator into a company with limited continuing operations and no ongoing operating revenue.
  • General and administrative expense more than doubled, to $20.31 million, primarily due to a $5.00 million extraordinary-event payment accrual for the board chair and $3.99 million of sale expenses. Interest expense declined 41% after the notes were redeemed.
  • Fiscal 2012 results included the one-time $127.15 million sale loss; Emir Oil’s revenue and operating results were presented as discontinued operations.
  • Total assets fell from $320.53 million to $41.42 million, while equity fell from $218.61 million to $21.38 million, reflecting the sale, distribution, and net loss.

Outlook, risks, and unusual items

  • Management anticipated significantly lower expenses and losses in future periods, but provided no quantified guidance and no assurance of new business or revenue.
  • The filing and auditor’s report state that substantial doubt exists about BMB’s ability to continue as a going concern because it has limited capital, no revenue-producing continuing operations, and no positive continuing operating cash flow.
  • The $36 million escrow was held for a 12-month indemnification period; maximum indemnification was generally capped at $39 million, subject to exceptions for fraud or criminal misconduct. Claims, costs, and payments due before any shareholder distribution could reduce or eliminate funds available for a second distribution, which management said could be up to $0.30 per share.
  • A deferred $5 million extraordinary-event payment to board chair Boris Cherdabayev is payable, if funds remain, before escrow funds are distributed to shareholders. Two significant shareholders deferred approximately $13 million of initial distributions into escrow.
  • The company disclosed a $1.95 million related-party services agreement with Lakeview International, controlled by a former director, for services through December 31, 2012. It also disclosed a $220,875 promissory note receivable, including accrued interest; a $150,000 advance plus interest was in default and collection timing was uncertain.
  • The stock was delisted from NYSE Amex and quoted on OTCQB as BMBM. Management also identified risks tied to potential liquidation, limited access to capital, escrow claims, and stock-price volatility.
  • The independent auditor issued an unqualified opinion on the financial statements while highlighting the going-concern uncertainty. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.

Important facts for investors to verify

  1. Confirm the issuer and reporting period: the supplied document is BMB Munai’s FY2012 10-K, not a Freedom Holding Corp. filing.
  2. Check the final escrow release, indemnification claims, and any payments made to the buyer or to the board chair before determining whether a second shareholder distribution occurred and its amount.
  3. Verify BMB’s unrestricted cash, outstanding liabilities, and subsequent operating or liquidation status; reported year-end cash included $36 million of restricted funds.
  4. Review whether the defaulted promissory note was collected and whether Lakeview’s prepaid service funds were fully used or returned.
  5. Assess whether the company identified a revenue-generating business, obtained new capital, or proceeded toward liquidation after the reporting date.