Filing summary
Issuer and period: The supplied filing is BMB Munai, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2016, covering fiscal Q2 and the six months ended that date. It is not filed under the name Freedom Holding Corp. The company reports FFIN Securities, Inc. as its operating subsidiary and, following a reverse merger, presents FFIN’s historical financial statements.
Financial performance and position
| Metric | Three months ended Sept. 30, 2016 | Six months ended Sept. 30, 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $86,457 | $337,736 |
| Operating loss | $86,457 | $337,736 |
| Net loss | $85,460 | $335,760 |
| Net interest income | $997 | $1,976 |
| Operating cash flow | Not presented for the quarter | $(90,127) |
For the six months, operating expenses rose from $283,963 to $337,736 year over year, principally because professional fees increased by $43,518 and general and administrative expenses by $10,255. Net loss increased from $284,325 to $335,760. For the quarter, expenses declined year over year, primarily due to lower legal fees and payroll and general office costs; quarterly net loss narrowed from $133,581 to $85,460.
At September 30, 2016, total assets were $8.679 million, including $139,551 of unrestricted cash and $8.534 million of restricted cash. Current liabilities were $8.779 million, including $8.534 million of deferred shareholder distributions and $238,783 of accounts payable. The company reported a shareholders’ deficit of $100,605. No borrowings or interest expense are reported; debt is not identified as a material funding source.
Six-month investing cash flow was zero; financing cash flow was $130,000, from a capital contribution by CEO and majority shareholder Timur Turlov. Cash and cash equivalents increased by $39,873 to $8.673 million, a total that includes restricted cash. The filing separately reports unrestricted cash of $139,551 on the balance sheet. The reported basic and diluted loss per share is $0.00, rounded as presented.
Business context, outlook, and risks
The company’s stated strategy is to develop a financial services and brokerage business serving investors in Russia and Kazakhstan seeking access to U.S. markets. FFIN was evaluating whether to submit a new FINRA application to become a U.S. registered broker-dealer; management said a new application, if pursued, was anticipated before March 31, 2017, but gave no assurance it would be submitted or approved. The company reported no revenue and expected continuing losses until planned operations generate revenue.
The acquisition agreement also contemplated possible acquisitions of Freedom RU, Freedom KZ, and Freedom CY, subject to conditions including audited U.S. GAAP financial statements and regulatory approvals. The filing says the company continued to work toward acquisitions of Freedom RU and Freedom CY; either could be abandoned if not completed by December 31, 2016. FFIN’s U.S. licensing decision was separate from those acquisitions.
Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing accumulated losses and anticipated further losses. It planned to fund the next 12 months with existing cash, possible additional contributions from Mr. Turlov, and/or a private placement, while acknowledging that additional funding was not guaranteed. Mr. Turlov contributed a further $70,000 on November 7, 2016.
Other notable exposures include $8.534 million of unpaid distributions from the 2011 sale of the former oil and gas business, payable when eligible shareholders complete required documentation. The corresponding cash is restricted. The company also disclosed that cash deposits exceeded FDIC insurance limits by $8.423 million. It reported no off-balance-sheet financing arrangements and no additions to the risk factors in its prior annual report. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter.
Most important facts to verify
- Confirm the issuer identity: this text is BMB Munai, Inc.’s 2016 10-Q, not a filing naming Freedom Holding Corp.
- Check whether FFIN submitted a new FINRA application and whether it obtained required U.S. broker-dealer approvals.
- Verify the status and completion conditions of the proposed Freedom RU, Freedom KZ, and Freedom CY acquisitions.
- Assess funding needs and the availability of further shareholder contributions or equity financing in light of the going-concern warning and absence of revenue.
- Confirm the restricted-cash balance and timing of the $8.534 million in deferred shareholder distributions, as well as uninsured bank-deposit exposure.
- Reconcile the balance-sheet presentation of unrestricted and restricted cash with the cash-flow statement’s ending cash total, which includes restricted cash.