Filing summary
Important identity and period note: The supplied filing is BMB Munai, Inc.’s Form 10-K for the fiscal year ended March 31, 2016, filed July 13, 2016. It is not identified in the filing as a Freedom Holding Corp. report, and it does not provide standalone 2015 fourth-quarter results. The summary below reflects the filing text provided.
Business context and reporting period
BMB Munai had previously sold its Kazakhstan oil and gas business in 2011. In November 2015, it acquired FFIN Securities, Inc. by issuing 224.6 million shares to Timur Turlov, giving him approximately 80.1% ownership. The company planned to build an international brokerage business serving investors in Russia and Kazakhstan, including through proposed acquisitions of Freedom Finance LLC and its Kazakhstan subsidiary, and a Cyprus affiliate. Those acquisitions remained conditional and were not reflected as completed operating businesses in the audited financial results.
The financial statements are presented as a continuation of FFIN following reverse-merger accounting. The comparison is fiscal 2016 versus the period from FFIN’s inception on August 25, 2014 through March 31, 2015, a shorter period rather than a full prior fiscal year.
Financial performance and position
| Metric | FY ended March 31, 2016 | Prior inception period |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $493,834 | $138,296 |
| Operating loss | $493,834 | $138,296 |
| Net loss | $491,999 | $138,634 |
| Net loss per share | $0.00 | $0.01 |
| Net cash used in operating activities | $538,629 | $88,467 |
Revenue and operating margins are not meaningful because the company had no revenue. Operating expenses comprised $222,511 in professional fees, $268,018 in general and administrative expenses, and $3,305 in depreciation. Management attributed higher expenses and losses principally to the longer reporting period.
At March 31, 2016, total assets were $8.69 million, including $99,678 of cash and cash equivalents and $8.53 million of restricted cash. Total liabilities were $8.58 million, primarily an equal $8.53 million obligation for unclaimed shareholder distributions from the former oil and gas business. Shareholders’ equity was $105,155. The filing reports no debt balance.
Cash provided by investing activities was $8.59 million, largely reflecting cash acquired with BMB Munai; the restricted portion was held to fund the deferred distributions. Turlov contributed $180,000 during the year and a further $85,000 in June 2016. The filing’s cash flow statement reports ending cash and cash equivalents of $8.63 million, while the balance sheet presents $99,678 as cash and separately classifies $8.53 million as restricted cash.
Separately, the filing gives unaudited, adjustment-subject figures for Freedom RU and Freedom KZ together: approximately $14.4 million of revenue, $11.3 million of profit, and $40.1 million of assets for the year ended March 31, 2016. These figures are not the reported results of BMB Munai’s audited consolidated statements.
Changes, outlook, risks, and unusual items
- The company reported no operating revenue in either presented period; the loss increased from the shorter inception period to FY2016.
- FFIN had applied for U.S. broker-dealer registration and FINRA membership, then withdrew its applications to address additional information requests and consider whether to reapply. Management anticipated a possible reapplication before the end of calendar 2016, but approval was not assured. A clearing arrangement and applicable state licenses would also be needed before U.S. brokerage operations could begin.
- Acquisitions of Freedom RU, Freedom KZ through Freedom RU, and Freedom CY depended on audited U.S.-GAAP financial statements, regulatory approvals, and other closing conditions. The company could abandon unclosed acquisitions after December 31, 2016. A reverse split and potentially an increase in authorized shares might be needed to complete the transactions; Turlov’s ownership could rise to approximately 95%.
- Management expected operating expenses and losses to remain near FY2016 levels until acquisitions closed and/or FFIN obtained licenses and commenced operations. It anticipated funding near-term costs from cash on hand, further Turlov contributions, and/or a private stock placement, but had no commitment for additional funding.
- The auditor’s report included a going-concern paragraph stating that substantial doubt existed about the company’s ability to continue as a going concern, principally because it had no revenue-generating operations and anticipated further losses. The financial statements contain no adjustments for the outcome of that uncertainty.
- Key risks include licensing and acquisition execution, funding needs, dilution, dependence on Turlov, conflicts of interest, foreign regulatory and political changes, currency movements, anti-money-laundering and other compliance obligations, and the limited trading market for the company’s shares.
- The company had $8.53 million of restricted cash matched by a deferred distribution liability for former shareholders who had not completed the documentation needed to claim their distributions. The filing says payment timing depends on those claimants.
Important facts for investors to verify
- Confirm the issuer and reporting period: the supplied document is BMB Munai, Inc.’s FY2016 10-K, not a filing identified as Freedom Holding Corp. or a 2015 Q4 report.
- Check subsequent filings for whether FFIN reapplied for and received FINRA, SEC, and state approvals, and secured a clearing arrangement.
- Verify whether the proposed Freedom company acquisitions closed, which entities were acquired, and whether their audited U.S.-GAAP financials reconciled with the unaudited figures quoted here.
- Reconcile reported cash presentation: $99,678 of unrestricted cash versus $8.53 million of restricted cash, and the cash flow statement’s $8.63 million ending balance.
- Assess the company’s ability to fund ongoing losses and settle the $8.53 million distribution liability, including any subsequent financing or Turlov contributions.
- Review the proposed recapitalization, potential dilution and Turlov’s control, as well as related-party transactions and governance disclosures.