Freedom Holding Corp. — Form 10-Q summary
Business context and period. The filing covers the three and nine months ended December 31, 2019, the third quarter and first nine months of fiscal 2020. Freedom Holding provides brokerage, banking, trading, investment banking and related financial services, principally in Eastern Europe and Central Asia. All amounts below are U.S. dollars; financial statement amounts are in millions unless noted otherwise.
Financial results and position
- Revenue: Q3 net revenue was $29.57 million, up 12% year over year; nine-month revenue was $91.81 million, up 77%. Fee and commission income rose to $20.58 million for Q3 and $69.54 million year to date.
- Profit and earnings: Q3 net income was $4.05 million versus $8.90 million a year earlier; net income attributable to common shareholders was $5.04 million, reflecting a $0.99 million loss attributable to noncontrolling interests. Nine-month net income was $20.90 million versus $4.28 million; income attributable to common shareholders was $22.02 million. Basic and diluted EPS were $0.07 for Q3 and $0.36 for nine months.
- Margins: The filing does not present a conventional gross margin. Net income as a share of net revenue was approximately 13.7% in Q3 versus 33.7% a year earlier, and 22.8% for nine months versus 8.3%.
- Cash flow: Nine-month operating cash flow was $68.65 million, investing cash outflow $10.60 million, and financing cash outflow $8.37 million. Cash, cash equivalents and restricted cash ended at $143.38 million, up from $88.42 million at the start of the period. Operating cash flow included a $105.56 million increase in customer liabilities, partly offset by an $80.42 million increase in brokerage and other receivables.
- Liquidity and assets: Cash and cash equivalents were $93.65 million and restricted cash $49.73 million. Total assets were $523.24 million, liabilities $381.33 million, and stockholders’ equity $141.91 million. Management reported $425.21 million of “net liquid assets,” using its stated definition.
- Debt and obligations: Debt securities issued totaled $39.15 million, including $14.5 million of FRHC notes issued in December at 7% due 2022. Securities repurchase obligations were $57.88 million; operating lease obligations were $17.27 million. The filing reports no loans received outstanding at quarter-end.
Material changes versus the comparable period
- Revenue growth was driven chiefly by commissions, which increased 124% for nine months, with management citing a larger client base, expanded branches and advisers, and more client trading. The company reported over 133,000 client accounts and approximately 37,000 active accounts in Q3.
- Q3 profit declined despite higher revenue: net trading gains fell 45% to $6.45 million, while total expenses rose 51% to $25.57 million. Fee and commission expense increased to $5.53 million, and operating expense rose to $16.61 million.
- Nine-month profit improved substantially alongside revenue growth, lower foreign-exchange losses and a $1.32 million impairment recovery, compared with a $0.36 million impairment provision in the prior-year period. Management said $2.26 million of the recovery related to previously impaired receivables and was not expected to recur.
- Balance-sheet expansion included brokerage and other receivables rising to $157.22 million from $73.84 million, largely margin lending receivables, and customer liabilities rising to $192.75 million from $82.03 million.
- The company adopted lease accounting on April 1, 2019, recognizing right-of-use assets and lease liabilities. It also uplisted its common stock to Nasdaq in October 2019 and acquired an approximately 13% interest in the Saint-Petersburg Exchange for about $10.5 million in December.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided. Management expects cash on hand, operating cash generation and forecast proprietary-trading returns to meet working-capital needs for the next 12 months, while noting that continued growth may require external financing that may not be available on acceptable terms.
- Management identifies risks from market and currency volatility, leveraged proprietary trading, collateralization of trading assets and cash, regulatory requirements across multiple jurisdictions, competition, and reliance on key personnel. Short selling can expose the company to theoretically unlimited losses.
- Related-party exposure is significant: one related-party customer accounted for $135.41 million, or 86%, of net brokerage and other receivables at December 31. Nine-month commissions from related parties were $60.24 million, compared with total fee and commission income of $69.54 million.
- Freedom UA’s 67.12% interest was sold to the company president for $100 to comply with foreign ownership restrictions, but contractual arrangements led the company to continue consolidating it as a variable interest entity. The company guarantees its obligations and provides operating support; it is entitled to 90% of its after-tax net profits. A noncontrolling-interest loss is reflected in results.
- Currency translation increased comprehensive income by $2.84 million in Q3 and $1.41 million for nine months. The filing describes routine legal and regulatory matters but says management does not expect them to materially affect the company; it also reports no material recognizable subsequent events through filing and no off-balance-sheet financing arrangements.
Important facts for investors to verify
- Whether the unusually high related-party receivable concentration and related-party commission activity are fully understood, collectible and conducted on appropriate terms.
- How much reported operating cash flow is sustainable given its dependence on rising customer balances and payables, alongside growth in margin receivables.
- The risk, valuation assumptions and potential liquidity effects of proprietary trading positions, including the $10.47 million Level 3 trading equity security and collateralized repo activity.
- The terms, maturity profile and use of proceeds for the FRHC notes, and the company’s capacity to meet debt, repo, lease and regulatory-capital requirements.
- The continuing consolidation, guarantees and economic exposure associated with Freedom UA following the ownership transfer, and the strategic and financial impact of the Saint-Petersburg Exchange investment.