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EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Freedom Holding Corp.frhc_ex311.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - Freedom Holding Corp.frhc_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Freedom Holding Corp.frhc_ex312.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
X
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended December 31, 2017
 
 
 
 
 
 
 
OR
 
 
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from ________ to _________
 
Commission File Number 001-33034
 
FREEDOM HOLDING CORP.
(Exact name of registrant as specified in its charter)
 
Nevada
 
30-0233726
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
Office 1704, 4B Building
“Nurly Tau” BC
17 Al Farabi Ave
 
 
Almaty, Kazakhstan
 
050059
(Address of principal executive offices)
 
(Zip Code)
 
 
 
  (801) 355-2227
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes
 
No

 
 
 
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
 
No
 ☐
 
 
 
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if smaller reporting company)
Smaller reporting company ☑
Emerging growth company ☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.)
Yes
 ☐
 
No
 
 
 
 
 
 
As of February 14, 2018, the registrant had 52,606,600 shares of common stock, par value $0.001, issued and outstanding.


 
 
FREEDOM HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
 
 
PART I — FINANCIAL INFORMATION
Page
 
 
Item 1. Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
Condensed Consolidated Balance Sheets as of December 31, 2017 and March 31, 2017
3
 
 
 
 
Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) for the Three and Nine Months Ended December 31, 2017 and 2016
4
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2017 and 2016
5
 
 
 
 
Notes to Condensed Consolidated Financial Statements
7
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
 
 
Item 3. Qualitative and Quantitative Disclosures About Market Risk
45
 
 
Item 4. Controls and Procedures
45
 
 
PART II — OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
45
 
 
Item 1A. Risk Factors
45
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
46
 
 
Item 6. Exhibits
46
 
 
Signatures
47
 
 
 
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Condensed Consolidated Financial Statements
 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
December 31,
2017
 
 
March 31,
2017*
 
 
 
 
 
 
(Recast)
 
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
 $34,847 
 $22,616 
Restricted cash
  14,138 
  12,749 
Trading securities
  199,207 
  81,575 
Available-for-sale securities, at fair value
  2 
  2 
Brokerage and other receivables
  2,922 
  514 
Loans issued
  250 
  65 
Deferred tax assets
  325 
  1,026 
Fixed assets
  2,028 
  1,096 
Goodwill
  1,856 
  981 
Other assets
  3,271 
  739 
 
    
    
TOTAL ASSETS
 $258,846 
 $121,363 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
 
    
    
Derivative liability
 $- 
 $495 
Debt securities issued
  10,625 
  3,459 
Customer liabilities
  13,911 
  7,635 
Current income tax liability
  - 
  149 
Trade payables
  2,218 
  545 
Deferred distribution payments
  8,534 
  8,534 
Securities repurchase agreement obligation
  137,436 
  56,289 
Other liabilities
  599 
  370 
TOTAL LIABILITIES
  173,323 
  77,476 
 
    
    
Commitments and Contingencies (Note 17)
  - 
  - 
 
    
    
STOCKHOLDERS’ EQUITY
    
    
 
    
    
Preferred stock - $0.001 par value; 20,000,000 shares authorized, no shares issued or outstanding
  - 
  - 
Common stock - $0.001 par value; 500,000,000 shares authorized; 52,606,600 shares outstanding as of December 31, 2017 and 11,213,926 shares outstanding as of March 31, 2017, respectively
  52 
  11 
Additional paid in capital
  56,533 
  34,659 
Retained earnings
  38,684 
  16,154 
Accumulated other comprehensive loss
  (9,746)
  (6,937)
TOTAL STOCKHOLDERS’ EQUITY
  85,523 
  43,887 
 
    
    
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $258,846 
 $121,363 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
* See Notes 1 and 3 for information regarding recast amounts and basis of financial statement presentation.
 
 
 
3
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
 
 
Three months ended December 31,
 
 
Nine months ended December 31,
 
 
 
2017
 
 
2016*
 
 
2017
 
 
2016*
 
Revenue:
 
 
 
 
(Recast)
 
 
 
 
 
(Recast)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fee and commission income
 $1,999 
 $1,116 
 $6,412 
 $2,462 
Net gain/(loss) on trading securities
  (8,318)
  1,164 
  30,825 
  4,583 
Interest income
  2,853 
  724 
  6,442 
  1,710 
Net gain on derivatives
  867 
  - 
  687 
  - 
Net gain on sale of fixed assets
  16 
  - 
  8 
  28 
Net gain/(loss) on foreign exchange operations
  424 
  (138)
  1,957 
  296 
 
    
    
    
    
TOTAL REVENUE, NET
  (2,159)
  2,866 
  46,331 
  9,079 
 
    
    
    
    
Expense:
    
    
    
    
Interest expense
  4,487 
  1,120 
  9,499 
  2,472 
Fee and commission expense
  795 
  129 
  1,474 
  216 
Operating expense
  5,983 
  2,461 
  12,113 
  6,694 
Other expense, net
  105 
  141 
  131 
  267 
 
    
    
    
    
TOTAL EXPENSE
  11,370 
  3,851 
  23,217 
  9,649 
 
NET INCOME/(LOSS) BEFORE INCOME TAX
  (13,529)
  (985)
  23,114 
  (570)
 
    
    
    
    
Income tax (expense)/benefit
  403 
  413 
  (584)
  960 
 
    
    
    
    
NET INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS
 $(13,126)
 $(572)
 $22,530 
 $390 
 
    
    
    
    
Less: Net income attributable to noncontrolling interest in subsidiary
  - 
  - 
  - 
  7 
NET INCOME/(LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS
  (13,126)
  (572)
  22,530 
  383 
 
    
    
    
    
OTHER COMPREHENSIVE INCOME
    
    
    
    
    Change in unrealized gain on investments available-for-sale,
    net of tax effect
  - 
  (276)
  - 
  (270)
    Foreign currency translation adjustments, net of tax
  1,529 
  453 
  (2,809)
  1,933 
 
    
    
    
    
COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS
 $(11,597)
 $(395)
 $19,721 
 $2,053 
 
    
    
    
    
Less: Comprehensive income attributable to noncontrolling interest in subsidiary
  - 
  - 
  - 
  7 
 
    
    
    
    
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
 $(11,597)
 $(395)
 $19,721 
 $2,046 
 
BASIC AND DILUTED NET INCOME/(LOSS) PER COMMON SHARE (In US Dollars)
 $(0.29)
 $(0.05)
 $0.86 
 $0.03 
Weighted average shares outstanding
  45,018,578 
  11,213,926 
  26,341,542 
  11,213,926 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
* See Notes 1 and 3 for information regarding recast amounts and basis of financial statement presentation.
 
4
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
 
 
For the nine months ended
 
 
 
December 31,
2017
 
 
December 31,
2016*
 
 
 
 
 
 
(Recast)
 
Cash Flows From Operating Activities
 
 
 
 
 
 
Net income
 $22,530 
 $390 
 
    
    
Adjustments to reconcile net income used in operating activities:
    
    
Depreciation and amortization
  198 
  156 
Change in deferred taxes
  672 
  (974)
Stock compensation expense
  792 
  - 
Unrealized gain on trading securities
  (19,542)
  (2,837)
Net gain on derivative
  (490)
  - 
Changes in operating assets and liabilities:
    
    
Trading securities
  (105,258)
  (32,179)
Brokerage and other receivables
  (2,161)
  (236)
Loans issued
  (185)
  21 
Other assets
  (2,532)
  (7)
Customer liabilities
  6,215 
  2,278 
Current income tax liability
  (144)
  (50)
Trade payables
  1,381 
  64 
Securities repurchase agreement obligation
  85,814 
  27,121 
Other liabilities
  602 
  (91)
 
    
    
Net cash flows used in operating activities
  (12,108)
  (6,344)
 
    
    
Cash Flows From Investing Activities
    
    
Purchase of fixed assets
  (1,125)
  (145)
Acquisition of Freedom UA, net of cash received
  432 
  - 
Proceeds from sale of fixed assets
  8 
  13 
Acquisition of FFIN Bank
  - 
  (2,771)
Proceeds on sale of investments available-for-sale
  - 
  140 
Net cash flows used in investing activities
  (685)
  (2,763)
Cash Flows From Financing Activities
 
 
 
 
 
 
Proceeds from issuance of debt securities
  9,853 
  6,618 
Repurchase of debt securities
  (2,449)
  (2,425)
Proceeds from issuance of common stock
  - 
  6,574 
Proceeds from private placement
  11,045 
  - 
Capital contributions
  8,594 
  368 
 
    
    
Net cash flows from financing activities
  27,043 
  11,135 
Effect of changes in foreign exchange rates on cash and cash equivalents
  (630)
  2,182 
 
    
    
NET CHANGE IN CASH AND CASH EQUIVALENTS
  13,620 
  4,210 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
  35,365 
  19,380 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 $48,985 
 $23,590 
 
 
5
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
 
 
 
For the nine months ended
 
 
 
December 31,
2017
 
 
December 31,
2016*
 
 
 
 
 
 
(Recast)
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid for interest
 $8,467 
 $2,287 
Income tax paid
 $583 
 $124 
 
Non-cash investing and financing activities:
 
Common stock issued for acquisition of Freedom UA
 $1,485 
 $- 
Assets received from acquisition of Freedom UA
 $1,229 
 $- 
Liabilities assumed from acquisition of Freedom UA
 $176 
 $- 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
* See Notes 1 and 3 for information regarding recast amounts and basis of financial statement presentation.
 
 
6
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Note 1 – Description of Business
 
Overview
 
Freedom Holding Corp. is a Nevada corporation (“FRHC”). In 2015, FRHC entered into a Share Exchange and Acquisition Agreement with Timur Turlov (the “Acquisition Agreement”) to acquire several businesses owned by Timur Turlov in exchange for controlling interest in FRHC. As the acquisitions are completed these businesses have become operating subsidiaries of FRHC. FRHC is building an international brokerage, banking, and financial services firm to meet the demand of a growing number of investors in Russia, Kazakhstan, Ukraine, Kyrgyzstan and Cyprus that desire financial services integration and greater access to the financial opportunities, relative stability, and integrity of the U.S. securities markets.
 
Pursuant to the Acquisition Agreement, FRHC acquired FFIN Securities, Inc., a Nevada corporation, (“FFIN”) from Timur Turlov and controlling interest in FRHC was transferred to him. FFIN was established to create or acquire a registered broker-dealer in the United States. At the same time, FRHC began upgrading the financial reporting capabilities of its foreign acquisition candidates to meet the regulatory standards imposed upon FRHC as an SEC registrant and pursuing the governmental approvals to permit FRHC ownership of the acquisition candidates.
 
In June 2017, FRHC closed the acquisition of LLC Investment Company Freedom Finance, a Russian limited liability company (“Freedom RU”) as a wholly owned subsidiary. This acquisition included the acquisition of three wholly owned operating subsidiaries of Freedom RU, including JSC Freedom Finance, a Kazakhstan joint stock company (“Freedom KZ”), LLC First Stock Store, a Russian limited liability company (“Freedom 24”) and LLC FFIN Bank, a Russian limited liability company (“FFIN Bank”). Freedom RU also maintains a representative office in Kazakhstan, referred to herein as “KZ Branch.”
 
 
7
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
On November 1, 2017, FRHC received notification from the Cyprus Securities and Exchange Commission (“CySEC”) that it had granted final regulatory approval to allow Timur Turlov to transfer ownership of Freedom CY and the securities brokerage and financial services business conducted by it in Cyprus to FRHC. Receipt of CySEC approval was the final condition necessary to close the acquisition of Freedom CY and the parties closed the acquisition of Freedom CY on November 10, 2017. In exchange for his 100% equity interest in Freedom CY and the securities brokerage and financial services business conducted by it in Cyprus, Mr Turlov was issued 12,758,011 shares of FRHC common stock at the closing of the acquisition and Freedom CY became a wholly owned subsidiary of FRHC.
 
On November 1, 2017, FRHC entered into a Share Exchange and Acquisition Agreement with BusinessTrain Ltd. to acquire 100% of the outstanding equity interest of LLC Freedom Finance Ukraine, a Ukrainian limited liability company, formerly known as FC Ukranet LLC, (“Freedom UA”) and the securities brokerage business conducted by it in Ukraine in exchange for 387,700 shares of restricted common stock of FRHC. Completion of the acquisition required approval of the National Securities and Stock Market Commission of Ukraine, which was received on January 30, 2018.
 
Freedom RU provides brokerage and financial services in the capital markets in Russia, including maintaining customer accounts, managing investment portfolios, providing financial consulting and engaging in market making activities. Freedom KZ is licensed to provide brokerage and financial services in the capital markets of Kazakhstan, including the right to maintain customer accounts, manage investment portfolios, provide financial consulting, provide underwriting services and engage in market making activities. We formed Freedom 24, as a startup to build and manage the first online securities marketplace for retail customers in Russia. Freedom 24 attracts new brokerage clients to Freedom RU through a proprietary platform and internet portal for individual investors in Russia to establish a brokerage account and buy securities. FFIN Bank is licensed to engage in consumer banking operations in the Russian Federation and focuses on provided banking services to the customers of the Company’s subsidiaries. Freedom CY is licensed in Cyprus to provide brokerage and financial services in Cyprus including receiving, transmitting and executing customer orders, establishing custodial accounts, engaging in foreign currency exchange services and margin lending, and trading its own investment portfolio. Freedom UA is licensed to provide securities brokerage and depository services in Ukraine.
 
Unless otherwise specifically indicated or as is otherwise contextually required, FRHC, FFIN, Freedom RU, Freedom KZ, FFIN Bank, Freedom CY, Freedom UA, Freedom 24 and KZ Branch are collectively referred to herein as the “Company”.
 
Note 2 – Summary of Significant Accounting Policies
 
Accounting principles
 
The Company’s accounting policies and accompanying condensed consolidated financial statements conform to accounting principles generally accepted in the United States of America (US GAAP).
 
These financial statements have been prepared on the accrual basis of accounting.
 
 
8
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Basis of presentation
 
The Company’s condensed consolidated financial statements present the consolidated accounts of FRHC, FFIN, Freedom RU, Freedom KZ, Freedom 24, FFIN Bank, Freedom CY, Freedom UA and KZ Branch. All significant inter-company balances and transactions have been eliminated from the condensed consolidated financial statements.
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
 
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report on Form 10-K for the year ended March 31, 2017, which was filed with the Securities and Exchange Commission (the “Commission”) on June 30, 2017. The condensed consolidated financial information as of March 31, 2017, has been derived from the audited consolidated financial statements not included herein. Operating results for the nine-month period ended December 31, 2017 are not necessarily indicative of the results that may be expected for the year ending March 31, 2018.
 
Use of estimates
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from those estimates.
 
Revenue and expense recognition
 
The Company earns interest and noninterest income from its proprietary trading accounts from various sources, including:
 
● 
Securities, derivatives and foreign exchange activities;
● 
Reverse repurchase agreements; and
● 
Bank deposits.
 
 
9
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Revenue earned on interest-earning assets, including unearned income and the amortization/ accretion of premiums or discounts recognized on debt securities, bank deposits and loans issued is recognized based on the constant effective yield of the financial instrument or based on other applicable accounting guidance.
 
Gains and losses on the sale of securities and certain derivatives are recognized on a trade-date basis.
 
The Company earns fees and commissions from its customers from:
 
● 
Providing brokerage services;
● 
Providing banking services (money transfers, foreign exchange operations and other); and
● 
Agency fees.
 
The Company also earns revenues from investment banking, underwriting, market making, and bondholders’ representation services.
 
Service charges on brokerage, banking, agency, investment banking and market making services, are recognized when earned. Brokerage fees are recognized on a trade-date basis.
 
The Company recognizes revenue when four basic criteria have been met:
 
● 
Existence of persuasive evidence that an arrangement exists;
● 
Delivery has occurred or services have been rendered;
● 
The seller’s price to the buyer is fixed and determinable; and
● 
Collectability is reasonably assured.
 
Derivative financial instruments
 
In the normal course of business, the Company invests in various derivative financial contracts including futures. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Derivatives are included in assets and liabilities at fair value through profit or loss in the condensed consolidated balance sheet.
 
 
10
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The Company purchases foreign currency futures contracts from financial institutions to minimize the risk caused by foreign currency fluctuation on its foreign currency receivables and payables and also purchases foreign currency futures contracts for speculative purposes. Futures are traded on the Kazakhstan Stock Exchange and represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price.
 
All gains and losses on foreign currency contracts were realized during nine months ended December 31, 2017 and are included in net gain on derivatives in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss). The contracts have varying maturities of less than one year.
 
Functional currency
 
Management has adopted ASC 830, Foreign Currency Translation Matters as it pertains to its foreign currency translation. The Company’s functional currencies are the Russian ruble, Euro, Ukrainian hryvnia and Kazakhstani tenge, and its reporting currency is the US dollar. Monetary assets and liabilities denominated in foreign currencies are translated into US dollars using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in revenue.
 
Cash and cash equivalents
 
Cash and cash equivalents are generally comprised of certain highly liquid investments with maturities of three months or less at the date of purchase. Cash and cash equivalents include reverse repurchase agreements which are recorded at the amounts at which the securities were acquired or sold plus accrued interest.
 
Securities reverse repurchase and repurchase agreements
 
A reverse repurchase agreement is a transaction in which the Company purchases financial instruments from a seller, typically in exchange for cash, and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller for an amount equal to the cash or other consideration exchanged plus interest at a future date. Securities purchased under reverse repurchase agreements are accounted for as collateralized financing transactions and are recorded at the contractual amount for which the securities will be resold, including accrued interest. Financial instruments purchased under reverse repurchase agreements are recorded in the financial statements as cash placed on deposit collateralized by securities and classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.
 
 
11
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
A repurchase agreement is a transaction in which the Company sells financial instruments to another party, typically in exchange for cash, and simultaneously enters into an agreement to reacquire the same or substantially the same financial instruments from the buyer for an amount equal to the cash or other consideration exchanged plus interest at a future date. These agreements are accounted for as collateralized financing transactions. The Company retains the financial instruments sold under repurchase agreements and classifies them as trading securities in the Condensed Consolidated Balance Sheets. The consideration received under repurchase agreements is classified as securities repurchase agreement obligations in the Condensed Consolidated Balance Sheets.
 
The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. The Company enters into these transactions in accordance with normal market practice. Under standard terms for repurchase transactions, the recipient of collateral has the right to sell or repledge the collateral, subject to returning equivalent securities on settlement of the transaction.
 
Available-for-sale securities
 
Financial assets categorized as available-for-sale (“AFS”) are non-derivatives that are either designated as available-for-sale or not classified as (a) loans and receivables, (b) held to maturity investments or (c) trading securities.
 
Listed shares and listed redeemable notes held by the Company that are traded in an active market are classified as AFS and are stated at fair value. The Company has investments in unlisted shares that are not traded in an active market but that are also classified as investments AFS and stated at fair value (because Company management considers that fair value can be reliably measured). Gains and losses arising from changes in fair value are recognized in other comprehensive income and accumulated in the investments revaluation reserve, with the exception of other-than-temporary impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses on monetary assets, which are recognized in the Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss). Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.
 
 
12
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Trading securities
 
Financial assets are classified as trading securities if the financial asset has been acquired principally for the purpose of selling it in the near term.
 
Trading securities are stated at fair value, with any gains or losses arising on remeasurement recognized in revenue. Changes in fair value are recognized in the Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss) and included in net gain/(loss) on trading securities. Interest earned and dividend income are recognized in the Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss) and included in interest income, according to the terms of the contract and when the right to receive the payment has been established.
 
Investments in nonconsolidated managed funds are accounted for at fair value based on the net asset value (“NAV”) of the funds provided by the fund managers with gains or losses included in net gain on trading securities in the Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss).
 
Debt securities issued
 
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized over the period of the borrowings using the effective interest method. If the Company purchases its own debt, it is removed from the Condensed Consolidated Balance Sheets and the difference between the carrying amount of the liability and the consideration paid is recognized.
 
Brokerage and other receivables
 
Brokerage and other receivables comprise commissions and receivables related to the securities brokerage and banking activity of the Company. At initial recognition, brokerage and other receivables are recognized at fair value. Subsequently, brokerage and other receivables are carried at cost net of any allowance for impairment losses.
 
 
13
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Impairment of long lived assets
 
In accordance with the accounting guidance for the impairment or disposal of long-lived assets, the Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the fair value from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. As of December 31, 2017 and March 31, 2017, the Company had not recorded any charges for impairment of long-lived assets.
 
Impairment of goodwill
 
As of December 31, 2017, and March 31, 2017, goodwill recorded in the Company’s Condensed Consolidated Balance Sheets totaled $1,856 and $981, respectively. The Company performs an impairment review at least annually, unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. In its annual goodwill impairment test, the Company estimated the fair value of the reporting unit based on the income approach (also known as the discounted cash flow method) and determined the fair value of the Company’s goodwill exceeded the carrying amount of the Company’s goodwill.
 
Income taxes
 
The Company recognizes deferred tax liabilities and assets based on the difference between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
 
Current income tax expenses are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the asset and liability approach. Under this method, deferred income taxes are recognized for tax consequences in future years based on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income.
 
The Company will include interest and penalties arising from the underpayment of income taxes in the provision for income taxes. As of December 31, 2017 and March 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions.
 
 
14
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted, which significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Tax Reform Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company may be subject to incremental U.S. tax on GILTI income beginning in 2018, depending upon expense allocations and the applicable U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its condensed consolidated financial statements for the periods ended December 31, 2017.
 
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has considered the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities, on its consolidated financial statements for the periods ended December 31, 2017. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. In accordance with SAB 118 the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018.
 
Financial instruments  
 
Financial instruments are carried at fair value as described below.
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. Fair value is the current bid price for financial assets, current ask price for financial liabilities and the average of current bid and ask prices when the Company is both in short and long positions for the financial instrument. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
 
15
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Leases
 
Rent payable under operating leases is charged to expense on a straight-line basis over the term of the relevant lease.
 
Recent accounting pronouncements
 
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260)-Distinguishing Liabilities from Equity (Topic 480)-Derivatives and Hedging (Topic 815)”. This ASU addresses narrow issues identified as a result of the complexity associated with applying US GAAP for certain financial instruments with characteristics of liabilities and equity. The amendments in Part I of this update that relate to liability or equity classification of financial instruments (or embedded features) affect all entities that issue financial instruments (for example, warrants or convertible instruments) that include down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. For public business entities, the amendments in Part I of this ASU No. 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
 
 
16
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update apply to any entity that elects to apply hedge accounting in accordance with current GAAP. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
 
In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). ASU 2017-13 essentially delays the effective date of the revenue recognition and leases standards for a subset of public entities. A public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC would be permitted to adopt (1) ASC Topic 606 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, and (2) ASC Topic 842, Leases for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Such an entity would also be permitted to adopt ASC Topic 606 and ASC Topic 842 according to the public business entity effective dates.
 
In November 2017, the FASB issued ASU No. 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). A new Accounting Standards Update (“ASU”) features amendments to select Securities and Exchange Commission (“SEC”) paragraphs under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Issued as ASU No. 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606), the standard amends the Accounting Standards Codification to incorporate the SEC guidance.
 
Note 3 – Revision of Financial Statement
 
When preparing the condensed consolidated financial statements for the three and nine months ended December 31, 2017, management determined that certain amounts included in the Company’s March 31, 2017, consolidated financial statements required revision, due to closing of the acquisition of Freedom RU on June 29, 2017, and Freedom CY on November 1, 2017, which were deemed to be entities under common control with the Company. The previously issued Consolidated Balance Sheet as of March 31, 2017, and Condensed Consolidated Statement of Operations and Statements of Other Comprehensive Income/(Loss) for the three-month and nine-month periods ended December 31, 2016 have been revised as follows:
 
 
17
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
 
March 31, 2017
 
 BALANCE SHEETS (RECAST)
 
As previously reported
 
 
Recast
 
 
As recasted
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $51 
 $22,565 
 $22,616 
Restricted cash
  8,534 
  4,215 
  12,749 
Trading securities
  - 
  81,575 
  81,575 
Available-for-sale securities, at fair value
  - 
  2 
  2 
Brokerage and other receivables
  - 
  514 
  514 
Loans issued
  - 
  65 
  65 
Deferred tax assets
  - 
  1,026 
  1,026 
Fixed assets
  2 
  1,094 
  1,096 
Goodwill
  - 
  981 
  981 
Other assets
  - 
  739 
  739 
TOTAL ASSETS
 $8,587 
 $112,776 
 $121,363 
 
    
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
    
    
    
 
    
    
    
Derivative liability
 $- 
 $495 
 $495 
Debt securities issued
  - 
  3,459 
  3,459 
Customer liabilities
  - 
  7,635 
  7,635 
Current income tax liability
  - 
  149 
  149 
Trade payables
  206 
  339 
  545 
Deferred distribution payments
  8,534 
  - 
  8,534 
Securities repurchase agreement obligation
  - 
  56,289 
  56,289 
Other liabilities
  - 
  370 
  370 
TOTAL LIABILITIES
  8,740 
  68,736 
  77,476 
 
    
    
    
STOCKHOLDERS’ EQUITY/(DEFICIT)
    
    
    
 
    
    
    
Preferred Stock
  - 
  - 
  - 
Common stock
  280 
  (269)
  11 
Additional paid in capital
  776 
  33,883 
  34,659 
Retained earnings/Accumulated deficit
  (1,209)
  17,363 
  16,154 
Accumulated other comprehensive income
  - 
  (6,937)
  (6,937)
TOTAL STOCKHOLDERS’ EQUITY/(DEFICIT)
  (153)
  44,040 
  43,887 
 
    
    
    
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
 $8,587 
 $112,776 
 $121,363 
 
 
18
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
 
For the three months ended December 31, 2016
 
STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) (RECAST)
 
As previously reported
 
 
Recast
 
 
As recasted
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Fee and commission income
 $- 
 $1,116 
 $1,116 
Net gain on trading securities
  - 
  1,164 
  1,164 
Interest income, net
  1 
  723 
  724 
Net loss on foreign exchange operations
  - 
  (138)
  (138)
 
    
    
    
TOTAL REVENUE
  1 
  2,865 
  2,866 
 
    
    
    
Expense:
    
    
    
Interest expense
  - 
  1,120 
  1,120 
Fee and commission expense
  - 
  129 
  129 
Operating expense
  100 
  2,361 
  2,461 
Other expense, net
  - 
  141 
  141 
 
    
    
    
TOTAL EXPENSE
  100 
  3,751 
  3,851 
 
    
    
    
NET LOSS BEFORE INCOME TAX
  (99)
  (886)
  (985)
 
    
    
    
Income tax benefit
  - 
  413 
  413 
 
    
    
    
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
 $(99)
 $(473)
 $(572)
 
    
    
    
OTHER COMPREHENSIVE INCOME
    
    
    
Change in unrealized gain on investments available-for-sale, net of tax effect
  - 
  (276)
  (276)
Foreign currency translation adjustments, net of tax
  - 
  453 
  453 
COMPREHENSIVE LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
 $(99)
 $(296)
 $(395)
 
    
    
    
 
 
19
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
 
For the nine months ended December 31, 2016
 
STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) (RECAST)
 
As previously reported
 
 
Recast
 
 
As recasted
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Fee and commission income
 $- 
 $2,462 
 $2,462 
Interest income
  3 
  1,707 
  1,710 
Net gain on trading securities
  - 
  4,583 
  4,583 
Net gain on sale of fixed assets
  - 
  28 
  28 
Net gain on foreign exchange operations
  - 
  296 
  296 
 
    
    
    
TOTAL REVENUE
  3 
  9,076 
  9,079 
 
    
    
    
Expense:
    
    
    
Interest expense
  - 
  2,472 
  2,472 
Fee and commission expense
  - 
  216 
  216 
Operating expense
  438 
  6,256 
  6,694 
Other expense, net
  - 
  267 
  267 
 
    
    
    
TOTAL EXPENSE
  438 
  9,211 
  9,649 
 
    
    
    
NET LOSS BEFORE INCOME TAX
  (435)
  (135)
  (570)
 
    
    
    
Income tax benefit
  - 
  960 
  960 
 
    
    
    
NET (LOSS)/INCOME BEFORE NONCONTROLLING INTERESTS
 $(435)
 $825 
 $390 
 
    
    
    
Less: Net income attributable to noncontrolling interest in subsidiary
  - 
  7 
  7 
NET (LOSS)/INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
  (435)
  818 
  383 
 
    
    
    
OTHER COMPREHENSIVE INCOME
    
    
    
Change in unrealized gain on investments available-for-sale, net of tax effect
  - 
  (270)
  (270)
Foreign currency translation adjustments, net of tax
  - 
  1,933 
  1,933 
 
    
    
    
COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS
  (435)
  2,488 
  2,053 
 
    
    
    
Less: Comprehensive income attributable to noncontrolling interest in subsidiary
  - 
  7 
  7 
 
    
    
    
COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
 $(435)
 $2,481 
 $2,046 
 
 
20
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Note 4 – Cash and Cash Equivalents
 
 
 
December 31, 2017
 
 
March 31, 2017 (Recast)
 
 
 
 
 
 
 
 
Securities purchased under reverse repurchase agreements
 $21,674 
 $8,376 
Current account with commercial banks
  3,982 
  9,987 
Current account with Central Depository (Kazakhstan)
  3,165 
  986 
Brokerage accounts
  2,233 
  259 
Petty cash
  1,414 
  1,476 
Current account with National Settlement Depository (Russia)
  1,204 
  696 
Current account with Central Bank (Russia)
  1,015 
  645 
Current account in clearing organizations
  160 
  191 
 
    
    
Total cash and cash equivalents
 $34,847 
 $22,616 
 
As of December 31, 2017 and March 31, 2017, cash and cash equivalents were not insured. As of December 31, 2017 and March 31, 2017, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:
 
 
21
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
 
December 31, 2017
 
 
 
Interest rates and remaining contractual maturity of the agreements
 
 
 
Average Interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
Total
 
Securities purchased under reverse repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
  10.29%
 $1,505 
 $- 
 $1,505 
Corporate equity
  11.91%
  14,154 
  6,015 
  20,169 
 
    
    
    
    
Total
    
 $15,659 
 $6,015 
 $21,674 
 
 
 
 
March 31, 2017 (Recast)
 
 
 
Interest rates and remaining contractual maturity of the agreements
 
 
 
Average Interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
Total
 
Securities purchased under reverse repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  19.56%
 $8,346 
 $25 
 $8,371 
Corporate debt
  24.00%
  5 
  - 
  5 
 
    
    
    
    
Total
    
 $8,351 
 $25 
 $8,376 
 
The securities received by the Company as collateral under reverse repurchase agreements are liquid trading securities with market quotes and significant trading volume.
 
The fair value of collateral received by the Company under reverse repurchase agreements as of December 31, 2017 and March 31, 2017, is $26,215 and $8,229, respectively.
 
Note 5 – Restricted Cash
 
As of December 31, 2017 and March 31, 2017, the Company’s restricted cash consisted of deferred distribution payments, cash segregated in a special custody account for the exclusive benefit of our brokerage customers and required reserves with the Central Bank of the Russian Federation which represents cash on hand balance requirements. The deferred distribution payment amount is the reserve held for distribution to shareholders who have not yet claimed their distributions from the 2011 sale of the Company’s oil and gas exploration and production operations of $8,534. This distribution is currently payable, subject to the entitled shareholder completing and submitting to the Company the necessary documentation to claim his, her or its distribution payments. The Company has no control over when, or if, an entitled shareholder will submit the necessary documentation to claim his, her, or its distribution payment. Restricted cash consists of:
 
 
 
December 31,
2017
 
 
March 31, 2017 (Recast)
 
 
 
 
 
 
 
 
Deferred distribution payments
 $8,534 
 $8,534 
Brokerage customers’ cash
  5,509 
  4,169 
Reserve with Central Bank
  95 
  46 
 
    
    
Total restricted cash
 $14,138 
 $12,749 
 
 
22
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Note 6 – Trading Securities
 
As of December 31, 2017 and March 31, 2017, trading securities consisted of:
 
 
 
December 31,
2017
 
 
March 31, 2017 (Recast)
 
 
 
 
 
 
 
 
Equity securities
 $164,853 
 $71,697 
Debt securities
  32,903 
  9,877 
Depository notes
  1,192
 
  -
 
Mutual investment funds
  259 
  1 
Total trading securities
 $199,207 
 $81,575 
 
    
    
The following tables presents trading securities assets in the condensed consolidated financial statements or disclosed in the notes to the consolidated financial statements at fair value on a recurring basis as of December 31, 2017 and March 31, 2017:
 
 
 
 
 
 
Fair Value Measurements at
 
 
 
 
 
 
December 31, 2017 using
 
 
 
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant unobservable units
 
 
 
December 31, 2017
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 $164,853 
 $164,853 
 $- 
 $- 
Debt securities
  32,903 
  32,715 
  188 
  - 
Depository notes
  1,192 
  1,192 
  - 
  - 
Mutual investment funds
  259 
  259 
  - 
  - 
Total trading securities
 $199,207 
 $199,019 
 $188 
 $- 
 
 
 
 
 
 
Fair Value Measurements at
 
 
 
 
 
 
March 31, 2017 using
 
 
 
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant unobservable units
 
 
 
March 31, 2017 (Recast)
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 $71,697 
 $71,697 
 $- 
 $- 
Debt securities
  9,877 
  9,663 
  214 
  - 
Mutual investment funds
  1 
  1 
  - 
  - 
Total trading securities
 $81,575 
 $81,361 
 $214 
 $- 

 
23
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Note 7 – Securities repurchase agreement obligations
 
As of December 31, 2017 and March 31, 2017, trading securities included collateralized securities subject to repurchase agreements as described in the following table:
 
 
 
December 31, 2017
 
 
 
Interest rates and remaining contractual maturity of the agreements
 
 
 
Average interest rate
 
 
Overnight and continuous
 
 
Up to 30 days
 
 
30-90 days
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
  10.25%
 $- 
 $21,343 
 $637 
 $21,980 
Corporate equity
  12.62%
  - 
  112,064 
  1,116 
  113,180 
Non-US sovereign debt
  9.59%
  - 
  2,276 
  - 
  2,276 
Total securities sold under repurchase agreements
    
 $- 
 $135,683 
 $1,753 
 $137,436 
 
 
 
 
March 31, 2017 (Recast)
 
 
 
Interest rate and remaining contractual maturity of the agreements
 
 
 
Average interest rate
 
 
Overnight and continuous
 
 
Up to 30 days
 
 
30-90 days
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
  11.83%
 $14,484 
 $10,923 
 $- 
 $25,407 
Corporate equity
  13.08%
  - 
  29,926 
  956 
  30,882 
Total securities sold under repurchase agreements
    
 $14,484 
 $40,849 
 $956 
 $56,289 
 
The fair value of collateral pledged under repurchase agreements as of December 31, 2017 and March 31, 2017, is $188,096 and $68,025, respectively.
 
Securities pledged as collateral by the Company under repurchase agreements are liquid trading securities with market quotes and significant trading volume.
 
Note 8 – Deferred Tax Assets
 
FRHC and FFIN are subject to taxation in the U.S. Freedom RU, FFIN Bank and Freedom 24 are subject to taxation in the Russian Federation. Freedom KZ and KZ Branch are subject to taxation in Kazakhstan. Freedom CY is subject to taxation in Cyprus, Freedom UA is subject to taxation in Ukraine.
 
 
24
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Deferred tax assets and liabilities of the Company are comprised of the following:
 
 
 
December 31,
2017
 
 
March 31,
2017 (Recast)
 
 
 
 
 
 
 
 
Deferred tax assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax losses carryforward
 $4,376 
 $2,398 
Accrued liabilities
  38 
  20 
Revaluation on trading securities
  11 
  76 
Valuation allowance
  (2,495)
  (1,468)
Deferred tax assets
 $1,930 
 $1,026 
 
    
    
Deferred tax liabilities:
    
    
 
    
    
Revaluation on trading securities
 $1,605 
 $- 
 
    
    
Deferred tax liabilities
  1,605 
  - 
Net deferred tax assets
 $325 
 $1,026 
 
During the nine months ended December 31, 2017 and 2016, the effective tax rate was equal to 2.53% and (168.42%), respectively, primarily due to non-taxable gains on trading securities in Freedom KZ in the amounts of $26,010 and $10,389, respectively. During the nine-months period ended December 31, 2017, the Company realized net income before income tax of $23,114, primarily from non-taxable revenues generated from the Company’s Freedom KZ’s trading operations. This resulted in the Company realizing an income tax expense during the nine months ended December 31, 2017 of $584. During the nine months ended December 31, 2016, the Company realized a net loss before income tax of $570 primarily from non-taxable revenues generated from Freedom KZ’s trading operations resulting in an income tax benefit of $960. During the nine months ended December 31, 2016, the Company did not recognize tax loss carryforwards of $664 on operations of Freedom KZ.
 
Note 9 – Derivative Liability
 
On December 28, 2016, Freedom RU entered into a derivative instrument agreement with a related party that included a call option feature for the purchase of shares held by Freedom RU. This call option was classified as a derivative liability in the Consolidated Balance Sheets and measured at each reporting period using the Black-Scholes Model. The gain associated with this derivative instrument is recognized as gain on a derivative instrument in the Consolidated Statements of Operations and Statements of Other Comprehensive Income. In exchange for a $2,629 premium paid upfront, this derivative instrument granted the holder the right to purchase 11.8 million shares of a top rated Russian commercial bank - Sberbank on June 14, 2017, at a strike price $3.10 per share.
 
 
25
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The Company recorded a derivative liability of $495 as of March 31, 2017. On June 14, 2017, the derivative instrument expired unexercised by the option holder, and the Company recognized a gain on the derivative instrument of $490.
 
The Company uses foreign currency futures contracts to minimize the risk caused by foreign currency fluctuation on its foreign currency receivables and payables by purchasing futures with financial institutions. The futures are traded on the Kazakhstan Stock Exchange and represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price. During the nine months ended December 31, 2017, Freedom KZ purchased foreign currency futures contracts to sell $25,000 at the weighted average exchange rate of 345.63 Kazakhstani Tenge per US dollar in December 2017 and March 2018. During the nine months ended December 31, 2017, the Company realized a gain of $155 on foreign currency futures contracts.
 
Note 10 – Debt Securities Issued
 
 
 
December 31,
2017
 
 
March 31,
2017
 
 
 
 
 
 
(Recast)
 
Debt securities issued
 $18,719 
 $9,530 
Debt securities repurchased
  (8,534)
  (6,145)
Accrued interest
  440 
  74 
 
    
    
Total
 $10,625 
 $3,459 
 
As of December 31, 2017 and March 31, 2017, the Company placed USD indexed bonds of Freedom KZ issued under Kazakhstan law in the amounts of $9,695 and $0, respectively. The bonds have an 8.00% fixed annual coupon rate and a maturity date of June 27, 2020. These bonds are actively traded on the Kazakhstan Stock Exchange. According to the initial placement document (prospectus) the Company has the right to repurchase and resell the Freedom KZ bonds at market value. During the nine months ended December 31, 2017 and 2016, the Company made purchases of these redeemable debt securities in the amounts of $2,225 and $0, respectively. During the nine months ended December 31, 2017 and 2016, the Company sold these repurchased debt securities in the amounts of $1,774 and $0, respectively.
 
As of December 31, 2017 and March 31, 2017, the Company placed tenge - denominated bonds of Freedom KZ issued under Kazakhstan law in the amount of $9,024 and $9,530, respectively. The bonds have an 11.50% fixed annual coupon rate and a maturity date of January 21, 2019. These bonds are actively traded on the Kazakhstan Stock Exchange. According to the initial placement document (prospectus) the Company has the right to repurchase and resell the Freedom KZ bonds at market value. During the nine months ended December 31, 2017 and 2016, the Company made purchases of these redeemable debt securities in the amounts of $ 2,858 and $0, respectively. During the nine months ended December 31, 2017 and 2016, the Company sold these repurchased debt securities in the amounts of $582 and $0, respectively.
 
 
26
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. As of December 31, 2017 and March 31, 2017, the accrued interest included in the balance of debt securities issued totaled $440 and $74, respectively.
 
Note 11 – Customer Liabilities
 
The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:
 
 
 
December 31,
2017
 
 
March 31,
2017 (Recast)
 
 
 
 
 
 
 
 
Brokerage customers
 $6,796 
 $4,167 
Banking customers
  7,115 
  3,468 
Total
 $13,911 
 $7,635 
 
Note 12 –Related Party Transactions
 
On December 28, 2016, Freedom RU entered into a derivative instrument agreement with a related party which included a call option feature. The gain or loss associated with this agreement is recognized as gain on a derivative instrument in the Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss). The Company recorded a derivative liability of $495 as of March 31, 2017. On June 14, 2017, the derivative instrument expired unexercised by the holder, and the Company recognized a gain on the derivative instrument of $490.
 
During the nine months ended December 31, 2017 and 2016, the Company earned commission income from related parties in the amounts of $3,103 and $1,061, respectively. Commission income earned from related parties is comprised primarily of brokerage commissions and agency fees for referrals of new brokerage clients to other brokers.
 
As of December 31, 2017 and March 31, 2017, the Company had brokerage and other receivables from related parties totaling $334 and $328, respectively. Brokerage and other receivables from related parties result principally from commissions receivable on the brokerage operations of related parties.
 
 
27
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 

As of December 31, 2017 and March 31, 2017, the Company had customer liabilities on brokerage accounts and bank accounts of related parties totaling $3,574 and $2,270, respectively. As of December 31, 2017 and March 31, 2017, the Company had restricted customer cash on brokerage accounts and cash on bank accounts of related parties totaling $2,185 and $2,270, respectively.
 
Note 13 – Stockholder’s Equity
 
During the nine months ended December 31, 2017, Mr. Turlov made capital contributions of $670 to the Company and $7,924 to Freedom RU. At the time such contributions were made, Mr. Turlov was the Chief Executive Officer, Chairman of the board, and majority shareholder of the Company.
 
On June 29, 2017, the Company and Mr. Turlov agreed to close the acquisition of Freedom RU. Pursuant to the terms of the Acquisition Agreement, Mr. Turlov received a total of 24,465,024 shares of restricted common stock in exchange for his 100% interest in Freedom RU.
 
On October 6, 2017, the Company awarded restricted stock grants totaling 3,900,000 shares of its common stock to 16 employees and awarded nonqualified stock options to purchase an aggregate of 360,000 shares of its common stock to two employees. Of the 3,900,000 shares awarded pursuant to the restricted stock grant awards, 1,200,000 shares are subject to two-year vesting conditions and 2,700,000 shares are subject to three-year vesting conditions. All of the nonqualified stock options are subject to three-year vesting conditions. The Company recorded stock based compensation expense for restricted stock grants and stock options in the amount of $792 during nine months ended December 31, 2017.
 
As disclosed in Note 1 on November 10, 2017, FRHC issued 12,758,011 shares of restricted Company common stock in exchange for Mr. Turlov 100% equity interest in Freedom CY and Freedom CY became a wholly owned subsidiary of the Company.
 
As disclosed in Note 1, on November 1, 2017, the Company entered into a Share Exchange and Acquisition Agreement and agreed to issue 387,700 shares of restricted common stock to BusinessTrain Ltd. to acquire 100% of the outstanding equity interest of Freedom UA.
 
On December 8, 2017, the Company completed a private placement of 3,681,667 shares of its restricted common stock in exchange for an aggregate offering proceeds of $11,045,001. The shares of common stock were sold to three non-U.S. persons pursuant to the exemption from registration provided in Regulation S promulgated under the Securities Act for offers and sales made outside the United States. Arkady Rakhilkin, a Company director, purchased 348,333 of the shares for $1,044,999.
 
 
28
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Note 14 – Stock based compensation
 
As disclosed in Note 13, on October 6, 2017, the Company issued restricted stock awards totaling 3,900,000 shares of its common stock to 16 employees and awarded nonqualified stock options to purchase an aggregate of 360,000 shares of its common stock at a strike price $1.98 per share to two employees. Shares of restricted stock have the same dividend and voting rights as common stock while options do not. All awards are issued at fair value of the underlying shares at the grant date.
 
During the nine months ended December 31, 2017, stock options covering a total of 360,000 shares of common stock were granted. No options were granted for the nine months ended December 31, 2016. Total compensation expense related to options granted was $51 for the nine months ended December 31, 2017 and $0 for the nine months ended December 31, 2016. As of December 31, 2017, there was total remaining compensation expense of $596 related to stock options, which will be recorded over a weighted average period of approximately 2.8 years.
 
During the nine months ended December 31, 2017 a total of 3,900,000 restricted shares were awarded. During the nine months ended December 31, 2016 no restricted shares were awarded. The compensation expense related to restricted stock awards was $741 during the nine months ended December 31, 2017 and $0 during the nine months ended December 31, 2016. As of December 31, 2017, there was $7,447 of total unrecognized compensation cost related to nonvested shares of restricted stock granted. The cost is expected to be recognized over a weighted average period of 2.5 years.
 
Stock-based compensation expense for the cost of the awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee   stock   options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company's employee   stock   options.
 
 
29
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The following is a summary of stock option activity for the nine months ended December 31, 2017:
 
 
 
Shares
 
 
Weighted Average Exercise Price
 
 
Weighted
Average Remaining Contractual Term
(In Years)
 
 
Aggregate
Intrinsic Value
 
Outstanding, beginning of year
  - 
 $- 
  - 
 $- 
Granted
  360,000 
  1.98 
  2.76 
  1,577 
Exercised
  - 
  - 
  - 
  - 
Forfeited/cancelled/expired
  - 
  - 
  - 
  - 
Outstanding, at December 31, 2017
  360,000 
 $1.98 
  2.76 
 $1,577 
Exercisable at December 31, 2017
  - 
 $- 
  - 
 $- 
 
The table below summarizes the activity for the Company's restricted stock outstanding during the nine months ended December 31, 2017:
 
 
 
Shares
 
 
Weighted Average Fair Value
 
Outstanding, beginning of year
  - 
 $- 
Granted
  3,900,000 
  8,190 
Vested
  - 
  - 
Forfeited/cancelled/expired
  - 
  - 
Outstanding, at December 31, 2017
  3,900,000 
 $8,190 
 
Note 15 – Acquisition
 
Acquisition of Freedom UA:
 
On November 1, 2017 (the Acquisition Date), FRHC acquired 100% of the outstanding common shares and voting interest in Freedom UA in exchange for 387,700 shares of restricted common stock of the Company with the fair market value of $1,485. FRHC acquired Freedom UA to expand its existing securities brokerage business to the Ukrainian securities brokerage market.
 
As of the Acquisition Date, the fair value of Freedom UA was $589. For the two months ended December 31, 2017, net income of Freedom UA totaled $8.
 
 
30
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
The total purchase price was allocated as follows:
 
 
 
Purchase price allocation
 
 
 
As of November 1, 2017
 
Assets:
 
 
 
Cash and cash equivalents
 $354 
Restricted cash
  78 
Trading securities
  6 
Fixed assets
  88 
Brokerage and other receivables
  235 
Other assets
  4 
Total assets
 $765 
 
    
Liabilities:
    
Customer liabilities
 $174 
Trade payables
  1 
Other liabilities
  1 
Total liabilities
  176 
 
    
Net assets acquired
 $589 
 
    
Goodwill
  896 
 
    
Total purchase price
 $1,485 
 
The Group believes that cash equivalents, brokerage and other receivables customer liabilities approximate fair value due to relatively short-term maturity of these financial instruments.
 
Acquisition of Freedom CY
 
The Company agreed to acquire Freedom CY from Mr. Turlov on November 23, 2015, subject to certain closing conditions, including receipt of all required regulatory approvals to transfer ownership of Freedom CY. As disclosed in Note 1, the final condition to closing was completed on November 1, 2017 and on November 10, 2017, the Company issued 12,758,011 shares of restricted common stock to Mr. Turlov in exchange for his 100% equity interest in Freedom CY and the securities brokerage and financial services business conducted by it in Cyprus, and Freedom CY became a wholly owned subsidiary of the Company.
 
 
31
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
Note 16 – Reverse Stock Split
 
On September 6, 2017, the Company effected a one-share-for-twenty-five-shares reverse stock split of its common stock. All share and earnings per share information has been retroactively adjusted to reflect the stock split. The effect of this stock split on the Company’s earnings per share is as follows:
 
 
 
Three months ended December 31,
 
 
Nine months ended December 31,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016*
 
 
 
 
 
 
(Recast)
 
 
 
 
 
(Recast)
 
Basic and diluted net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
From continuing operations
 $(13,126)
 $(572)
 $22,530 
 $390 
 
    
    
    
    
Net income per common share - basic and diluted (in US dollars)
 $(0.29)
 $(0.05)
 $0.86 
 $0.03 
Shares used in the calculation of net income per common share:
    
    
    
    
Basic and diluted
  45,018,578 
  11,213,926 
  26,341,542 
  11,213,926 
 
Note 17 – Commitments and Contingent Liabilities
 
The table below shows approximate lease commitments and other contingent liabilities of the Company as of December 31, 2017:
 
Contractual obligations