Freedom Holding Corp. - FORM 10-Q

Attached files

file	filename
EX-32.01 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - Freedom Holding Corp.	frhc_ex3201.htm
EX-31.02 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Freedom Holding Corp.	frhc_ex3102.htm
EX-31.01 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Freedom Holding Corp.	frhc_ex3101.htm
EX-4.1 - INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES INSTRU - Freedom Holding Corp.	frhc_ex401.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2019

☐

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 incorporation or organization)		(I.R.S. Employer Identification No.)

“Esentai Tower” BC, Floor 7 77/7 Al Farabi Ave
Almaty, Kazakhstan		050040
(Address of principal executive offices)		(Zip Code)

+7 727 311 10 64

(Registrant's telephone number, including area code)

Securities registered under Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common		FRHC		The Nasdaq Capital Market

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	☐	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 10, 2020, the registrant had 58,343,212 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		3

	Condensed Consolidated Balance Sheets as of December 31, 2019 and March 31, 2019	3

	Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) for the Three Months and Nine Months Ended December 31, 2019 and 2018	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2019 and 2018	5

	Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended December 31, 2019 and 2018	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3. Qualitative and Quantitative Disclosures About Market Risk		50

Item 4. Controls and Procedures		50

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		51

Item 1A. Risk Factors		51

Item 6. Exhibits		52

Signatures		53

FREEDOM HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

	December 31, 2019	March 31, 2019
ASSETS
Cash and cash equivalents	$93,653	$49,960
Restricted cash	49,726	38,460
Trading securities	164,145	167,949
Available-for-sale securities, at fair value	7,483	2
Brokerage and other receivables, net	157,217	73,836
Loans issued	10,775	2,525
Deferred tax assets	281	1,265
Derivative assets	242	-
Fixed assets, net	6,619	5,563
Intangible assets, net	4,430	4,226
Goodwill	2,969	2,936
Operating lease right-of-use assets	15,748	-
Other assets, net	9,953	4,189

TOTAL ASSETS	$523,241	$350,911

LIABILITIES AND STOCKHOLDERS’ EQUITY

Securities sold, not yet purchased – at fair value	$4,385	$-
Loans received	-	4,008
Debt securities issued	39,150	28,538
Customer liabilities	192,754	82,032
Trade payables	56,130	32,695
Deferred distribution payments	8,534	8,534
Securities repurchase agreement obligations	57,875	73,621
Current income tax liability	165	754
Operating lease obligations	17,270	-
Other liabilities	5,067	3,132
TOTAL LIABILITIES	381,330	233,314

Commitments and Contingent Liabilities	-	-

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; 58,343,212 and 58,043,212 shares issued and outstanding as of December 31, 2019 and March 31, 2019, respectively	58	58
Additional paid in capital	102,149	99,093
Retained earnings	62,007	41,498
Accumulated other comprehensive loss	(21,618)	(23,052)
TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY	142,596	117,597

Noncontrolling interest	(685)	-
TOTAL STOCKHOLDERS’ EQUITY	141,911	117,597

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$523,241	$350,911

The accompanying notes are an integral part of these condensed consolidated financial statements

FREEDOM HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) (Unaudited)

(All amounts in thousands of United States dollars, except share data, unless otherwise stated)

	Three months ended December 31,		Nine months ended December 31,
	2019	2018	2019	2018
Revenue:
Fee and commission income	$20,583	$12,274	$69,538	$31,033
Net gain on trading securities	6,448	11,641	12,957	12,669
Interest income	3,063	2,976	8,999	11,823
Net loss on foreign exchange operations	(1,080)	(498)	(241)	(3,746)
Net gain on derivatives	556	-	556	-

TOTAL REVENUE, NET	29,570	26,393	91,809	51,779

Expense:
Interest expense	3,167	3,180	9,976	11,471
Fee and commission expense	5,525	1,422	14,068	3,155
Operating expense	16,608	12,117	43,214	31,272
Provision /(recovery) for impairment losses	152	243	(1,316)	358
Other expense/(income), net	118	(14)	675	223
Loss from disposal of subsidiary	-	-	-	15
TOTAL EXPENSE	25,570	16,948	66,617	46,494
NET INCOME BEFORE INCOME TAX	4,000	9,445	25,192	5,285

Income tax benefit/(expense)	50	(545)	(4,292)	(1,009)

NET INCOME	$4,050	$8,900	$20,900	$4,276

Less: Net loss attributable to noncontrolling interest in subsidiary	(991)	-	(1,120)	-
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$5,041	$8,900	$22,020	$4,276

OTHER COMPREHENSIVE INCOME/(LOSS)
Change in unrealized gain on available-for-sale securities, net of tax effect	$(1)	$-	$26	$-
Reclassification adjustment relating to available-for-sale securities disposed of in the period, net of tax effect	-	-	-	22
Foreign currency translation adjustments, net of tax effect	2,841	(5,596)	1,408	(17,836)

COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS	$6,890	$3,304	$22,334	$(13,538)

Less: Comprehensive loss attributable to noncontrolling interest in subsidiary	(991)	-	(1,120)	-

COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$7,881	$3,304	23,454	$(13,538)
BASIC NET INCOME PER COMMON SHARE	$0.07	$0.15	$0.36	$0.07
DILUTED NET INCOME PER COMMON SHARE	$0.07	$0.15	$0.36	$0.07
Weighted average number of shares (basic)	58,158,864	58,038,864	58,116,825	58,035,103
Weighted average number of shares (diluted)	58,391,547	58,248,924	58,335,749	58,225,549

The accompanying notes are an integral part of these condensed consolidated financial statements.

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, 2019	December 31, 2018

Cash Flows From Operating Activities
Net income	$20,900	$4,276
Adjustments to reconcile net income from operating activities:
Depreciation and amortization	1,925	1,503
Depreciation of lease assets	3,322	-
Loss on sale of fixed assets	202	31
Change in deferred taxes	1,001	(260)
Stock compensation expense	2,100	2,533
Share based payment	836	-
Unrealized loss on trading securities	5,251	9,623
Unrealized gain on derivative asset	(233)	-
Net change in accrued interest	610	75
Allowance for receivables	(1,316)	350
Changes in operating assets and liabilities:
Changes in lease liabilities	(4,733)	-
Trading securities	(59)	14,277
Brokerage and other receivables	(80,423)	(28,968)
Loans issued	(8,180)	5,644
Other assets	(5,763)	(292)
Customer liabilities	105,560	32,620
Current income tax liability	(593)	81
Trade payables	22,069	4,931
Securities sold, not yet purchased	4,385	(1,071)
Other liabilities	1,784	526
Net cash flows from operating activities	68,645	45,879

Cash Flows From Investing Activities
Purchase of fixed assets	(3,608)	(4,311)
Proceeds from sale of fixed assets	468	268
Proceeds from sale/(purchase) of available-for-sale securities, at fair value, net	(7,455)	235
Consideration paid for Asyl Invest	-	(2,240)
Net cash flows used in investing activities	(10,595)	(6,048)

Cash Flows From Financing Activities
Repurchase of securities repurchase agreement obligations	(15,285)	(65,238)
Proceeds from issuance of debt securities	17,722	22,059
Repurchase of debt securities	(7,256)	(3,346)
Proceeds from loans received	-	5,615
Repayment of loans received	(4,008)	(8,143)
Exercise of options	455	-
Capital contributions	-	245
Net cash flows used in financing activities	(8,372)	(48,808)

Effect of changes in foreign exchange rates on cash and cash equivalents	5,281	(10,188)

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	54,959	(19,165)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	88,420	87,693
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$143,379	$68,528

FREEDOM HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

	For the nine months ended
	December 31, 2019	December 31, 2018

Supplemental disclosure of cash flow information:
Cash paid for interest	$7,686	$10,654
Income tax paid	$5,094	$417

Supplemental non-cash disclosures:
Operating lease right-of-use assets obtained in exchange for operating lease obligations	$14,960	$-
Lease obligations obtained on adoption of new lease standard	$16,471	$-

The accompanying notes are an integral part of these condensed consolidated financial statements.

FREEDOM HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(All amounts in thousands of United States dollars, except share data, unless otherwise stated)

	Common Stock
	Shares	Amount	Additional paid in capital	Retained earnings	Accumulated other comprehensive loss	Noncontrolling interest	Total
At March 31, 2018	58,033,212	$58	$100,180	$34,352	$(7,557)	$-	$127,033

Capital contributions	10,000	-	245	-	-	-	245
Acquisition of Asyl Invest	-	-	(2,240)	-	-	-	(2,240)
Acquisition of Nettrader	-	-	(2,590)	-	-	-	(2,590)
Stock based compensation	-	-	2,533	-	-	-	2,533
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect	-	-	-	-	22	-	22
Translation difference	-	-	-	-	(17,836)	-	(17,836)
Net income	-	-	-	4,276	-	-	4,276
At December 31, 2018	58,043,212	$58	$98,128	$38,628	$(25,371)	$-	$111,443

At March 31, 2019	58,043,212	$58	$99,093	$41,498	$(23,052)	$-	$117,597

Cumulative-effect adjustment due to adoption of ASU 2016-02(1)	-	-	-	(1,511)	-	-	(1,511)
Exercise of options	230,000	-	455	-	-	-	455
Stock based compensation	-	-	2,100	-	-	-	2,100
Share based payment	70,000	-	836	-	-	-	836
Sale of Freedom UA shares	-	-	(335)	-	-	435	100
Change in unrealized gain on available-for-sale securities, net of tax effect	-	-	-	-	26	-	26
Translation difference	-	-	-	-	1,408	-	1,408
Net income/(loss)	-	-	-	22,020	-	(1,120)	20,900
At December 31, 2019	58,343,212	$58	$102,149	$62,007	$(21,618)	$(685)	$141,911

(1) Cumulative-effect adjustment to beginning retained earnings related to the recognition of pre-existing lease liabilities and operating lease right-of-use assets in accordance with ASU 2016-02, adopted as of April 1, 2019.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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. (the “Company” or “FRHC”) is a corporation organized in the United States under the laws of the State of Nevada that through its operating subsidiaries provides financial services including retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking and underwriting services in Eastern Europe and Central Asia. The Company is headquartered in Almaty, Kazakhstan, with supporting administrative office locations in Russia, Cyprus and the United States. The Company has retail locations in Russia, Kazakhstan, Ukraine, Uzbekistan, Kyrgyzstan and Germany. The Company’s common stock was uplisted from the OTCQX Best Market and began trading on the Nasdaq Capital Market on October 15, 2019.

The Company owns directly, or through subsidiaries, the following companies: LLC Investment Company Freedom Finance, a Moscow, Russia-based securities broker-dealer (“Freedom RU”); LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based securities broker-dealer (“Freedom KZ”); Freedom Finance Cyprus Limited, a Limassol, Cyprus-based broker-dealer (“Freedom CY”); Freedom Finance Germany TT GmbH (“Freedom GE”), a Munich, Germany-based tied agent of Freedom CY; LLC Freedom Finance Uzbekistan, a Tashkent, Uzbekistan-based broker-dealer (“Freedom UZ”); and FFIN Securities, Inc., a Nevada corporation (“FFIN”).

To comply with certain foreign ownership restrictions relating to registered Ukrainian broker-dealers, on August 24, 2019, the Company sold 67.12% of the outstanding equity interest of LLC Freedom Finance Ukraine, a Kiev, Ukraine-based broker-dealer (“Freedom UA”) to Askar Tashtitov, the Company’s president. The Company retained the remaining 32.88% of the outstanding equity interests in Freedom UA. On August 24, 2019, the Company also entered into a series of contractual arrangements with Freedom UA and Mr. Tashtitov, including a consulting services agreement, an operating agreement and an option agreement. Because such agreements obligate the Company to guarantee the performance of all Freedom UA obligations and provide Freedom UA sufficient funding to cover all Freedom UA operating losses and net capital requirements, enable the Company to receive 90% of the net profits of Freedom UA after tax, and require the Company to provide Freedom UA the management competence, operational support, and ongoing access to the Company’s significant assets, technology resources and expertise to necessary to conduct the business of Freedom UA, the Company accounts for Freedom UA as a variable interest entity (“VIE”) under the accounting standards of the Financial Accounting Standards Board (“FASB”). Accordingly, the financial statements of Freedom UA are consolidated into the financial statements of the Company.

The Company’s subsidiaries are participants on the Kazakhstan Stock Exchange (KASE), Astana International Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPBX), Ukrainian Exchange (UX), and Republican Stock Exchange of Tashkent (UZSE). Freedom CY serves to provide the Company’s clients with operations support and access to the investment opportunities, relative stability, and integrity of the U.S. and European securities markets, which under the regulatory regimes of a number of jurisdictions where the Company operates do not currently allow investors direct access to international securities markets.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

Unless otherwise specifically indicated or as is otherwise contextually required, FRHC, Freedom RU, FFIN Bank, Freedom KZ, Freedom CY, Freedom GE, Freedom UA, Freedom UZ and FFIN are collectively referred to herein as the “Company”.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended December 31, 2019, are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2020.

The Condensed Consolidated Balance Sheet at March 31, 2019, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.

The Company’s unaudited condensed consolidated financial statements present the consolidated accounts of FRHC, Freedom RU, Freedom KZ, FFIN Bank, Freedom CY, Freedom UA, Freedom UZ, Freedom GE and FFIN. All significant inter-company balances and transactions have been eliminated from the unaudited condensed consolidated financial statements.

For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019.

Consolidation of variable interest entities

In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. VIEs must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

Use of estimates

The preparation of financial statements in conformity with U.S. 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 used in preparing its financial statements are reasonable and prudent. Actual results could differ from those estimates.

Revenue recognition

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services promised to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. A significant portion of the Company’s revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans and investment securities, as these activities are subject to other U.S. GAAP guidance discussed elsewhere within these disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC Topic 606, which are presented in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) as components of non-interest income are as follows:

●

Commissions on brokerage services;

●

Commissions on banking services (money transfers, foreign exchange operations and other); and

●

Commissions on investment banking services (underwriting, market making, and bondholders’ representation services).

The Company adopted the guidance on April 1, 2018. Under Topic 606, the Company is required to recognize incentive fees when they are probable and there is not a significant chance of reversal in the future. For the brokerage commission, banking service commission and investment banking services commission contracts in place at the time of adoption, this change in policy did not result in any actual change in revenue that had already been recognized and therefore there was no transition adjustment necessary.

The Company recognizes revenue when five basic criteria have been met:

●

The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations;

●

The entity can identify each party’s rights regarding the goods or services to be transferred;

●

The entity can identify the payment terms for the goods or services to be transferred;

●

The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract); and

●

It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

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.

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, European euro, Ukrainian hryvnia, Uzbekistani som and Kazakhstani tenge, and its reporting currency is the United States dollar. For financial reporting purposes, foreign currencies are translated into U.S. dollars as the reporting currency. Monetary assets and liabilities denominated in foreign currencies are translated into United States 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. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive loss”.

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.

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, repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to leverage and grow its proprietary trading portfolio, 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/(loss) and are accumulated in accumulated other comprehensive loss, with the exception of other-than-temporary impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses, 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 then reclassified to Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).

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.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

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 are 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 in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).

Brokerage and other receivables

Brokerage and other receivables are comprised of 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.

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or a part of a group of similar financial assets) is derecognized where all of the following conditions are met:

●

The transferred financial asset has been isolated from the Company - put presumptively beyond the reach of the Company and its creditors, even in bankruptcy or other receivership.

●

The transferee has rights to pledge or exchange the financial asset.

●

The Company or its agents do not maintain effective control over the transferred financial asset or third-party beneficial interests related to the transferred asset.

Where the Company has not met the asset derecognition conditions above, it continues to recognize the asset to the extent of its continuing involvement.

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, 2019 and March 31, 2019, the Company had not recorded any charges for impairment of long-lived assets.

Impairment of goodwill

As of December 31, 2019 and March 31, 2019, goodwill recorded in the Company’s Condensed Consolidated Balance Sheets totaled $2,969 and $2,936, 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 reporting unit exceeded the carrying amount of the Company’s goodwill.

The changes in the carrying amount of goodwill as of March 31, 2019 and for the nine months ended December 31, 2019 were as follows:

Balance as of March 31, 2019	$2,936

Foreign currency translation	33

Balance as of December 31, 2019	$2,969

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.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

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 fines arising from the underpayment of income taxes in the provision for income taxes (if any anticipated). As of December 31, 2019, and March 31, 2019, the Company had no accrued interest or fines related to uncertain tax positions.

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 has presented the deferred tax impacts of GILTI tax in its condensed consolidated financial statements as of December 31, 2019 and March 31, 2019.

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.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases have been classified as either finance or operating, with classification affecting the pattern of expense recognition in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss). The new standard also requires disclosures that provide additional information on recorded lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases –Targeted Improvements, which provides an optional transition method that allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

The Company adopted the provisions of ASU 2018-11, including the optional transition method, on April 1, 2019. Operating lease assets and corresponding lease liabilities were recognized on the Company’s unaudited condensed consolidated balance sheets. Refer to Note 18 - Leases, within the notes to the unaudited condensed consolidated financial statements for additional disclosure and significant accounting policies affecting leases.

Fixed assets

Fixed assets are carried at cost, net of accumulated depreciation. Maintenance, repairs, and minor renewals are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range between three and seven years.

Segment information

The Company operates in a single operating segment offering financial services to its customers in a single geographic region covering Central Asia and Eastern Europe. The Company’s financial services business provides retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking and underwriting services to its customers. The Company generates revenue from customers primarily from fee and commission income and interest income. The Company does not use profitability reports or other information disaggregated on a regional, country or divisional basis for making business decisions.

Recent accounting pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. In March 2014, the Board issued a proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this Update apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology replaces the probable, incurred loss model for those assets. Through that Update, the Board added Topic 326 and made several consequential amendments to the FASB Accounting Standards Codification. The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The effective date and transition requirements for the amendments in this Update are the same as the effective dates and transition requirements in Update 2016-13, as amended by this Update. The Company does not expect a material impact from the new guidance on its condensed consolidated financial statements.

In April 2019, FASB also issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and in May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326). The ASU 2019-04 amendments affect a variety of Topics in the Codification and is part of the Board’s ongoing project on Codification improvement. The FASB received several agenda request letters asking that the Board consider amending the transition guidance for Update 2016-13. ASU 2019-05 addresses stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. For entities that have not yet adopted the amendments in Update 2016-13, the effective dates and transition requirements for the amendments related to ASU 2019-04 are the same as the effective dates and transition requirements in Update 2016-13. ASU 2019-05 is effective for entities that have adopted the amendments in Update 2016-13 for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of this Update as long as an entity has adopted the amendments in Update 2016-13. The Company is currently evaluating the impact from new guidance on its condensed consolidated financial statements.

In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. One of the changes in the ASU requires a presentation of changes in stockholders’ equity in the form of a reconciliation, either as a separate financial statement or in the notes to the financial statements, for the current and comparative year-to-date interim periods. The Company presented changes in stockholders' equity as separate financial statements for the current and comparative year-to-date interim periods beginning on April 1, 2019. The additional elements of the ASU did not have a material impact on the Company's condensed consolidated financial statements. This guidance was effective immediately upon issuance.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

In November 2019, the FASB issued ASU 2019-10 Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). On the basis of feedback obtained from outreach with stakeholders and monitoring of implementation, the Board has gained a greater understanding about the implementation challenges encountered by all types of entities when adopting a major Update. The Board developed a philosophy to extend and simplify how effective dates are staggered between larger public companies (bucket one) and all other entities (bucket two). Those other entities include private companies, smaller public companies, not-for-profit organizations, and employee benefit plans. Under this philosophy, a major Update would first be effective for bucket-one entities, that is, public business entities that are Securities and Exchange Commission (SEC) filers, excluding entities eligible to be smaller reporting companies (SRCs) under the SEC's definition. The Master Glossary of the Codification defines public business entities and SEC filers. All other entities, including SRCs, other public business entities, and nonpublic business entities (private companies, not-for-profit organizations, and employee benefit plans) would compose bucket two. For those entities, it is anticipated that the Board will consider requiring an effective date staggered at least two years after bucket one for major Updates. The Company is currently an SRC and according to the ASU 2019-10, for bucket two, ASU 2016-13, ASU 2017-12 and ASU 2016-02 is effective for fiscal years beginning after December 15, 2022. ASU 2016-02, Leases (Topic 842) was adopted by the Company beginning April 1, 2019. The Company is currently evaluating the impact that ASU 2019-10 will have on its financial statements and related disclosures.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. That model replaces the probable, incurred loss model for those assets. Through the amendments in that Update, the Board added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. ASU 2019-11 is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impacts of the provisions of ASU 2019-12 on our financial condition, results of operations, and cash flows.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

NOTE 3 – CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

	December 31, 2019	March 31, 2019

Securities purchased under reverse repurchase agreements	$21,578	$7,887
Accounts with stock exchanges	21,062	10,507
Current accounts with commercial banks	17,689	6,656
Current accounts in clearing organizations	14,088	5,887
Petty cash in bank vault and on hand	6,802	2,674
Current account with Central Bank (Russia)	5,948	2,161
Current account with Central Depository (Kazakhstan)	2,834	2,693
Current accounts with brokers	1,862	10,220
Current account with National Settlement Depository (Russia)	1,790	1,275
Total cash and cash equivalents	$93,653	$49,960

As of December 31, 2019 and March 31, 2019, cash and cash equivalents were not insured.

As of December 31, 2019 and March 31, 2019, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

	December 31, 2019
	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	12.95%	$20,006	$-	$20,006
Non-US sovereign debt	9.96%	1,336	-	1,336
Corporate debt	10.50%	236	-	236
Total		$21,578	$-	$21,578

	March 31, 2019
	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	11.90%	$4,328	$804	$5,132
Corporate debt	14.00%	120	-	120
Non-U.S. sovereign debt	8.25%	2,635	-	2,635
Total		$7,083	$804	$7,887

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, 2019 and March 31, 2019, was $23,600 and $8,472, respectively.

NOTE 4 – RESTRICTED CASH

As of December 31, 2019 and March 31, 2019, the Company’s restricted cash consisted of the cash portion of the funds allocated for 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. In June 2019 the Company invested a portion of the deferred distribution payments into certain financial instruments. For additional information regarding that portion of the funds held for deferred distribution payments that have been invested into certain financial instruments, see Note 5 - Trading and Available-For-Sale Securities at Fair Value.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

Restricted cash consisted of:

	December 31, 2019	March 31, 2019

Brokerage customers’ cash	$43,495	$28,931
Guaranty deposits	4,642	732
Deferred distribution payments	1,053	8,534
Reserve with Central Bank of Russia	536	263
Total restricted cash	$49,726	$38,460

NOTE 5 – TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE

As of December 31, 2019 and March 31, 2019, trading and available-for-sale securities consisted of:

	December 31, 2019	March 31, 2019

Debt securities	$85,233	$62,691
Equity securities	78,912	105,017
Mutual investment funds	-	241
Total trading securities	$164,145	$167,949

Certificates of deposit	$6,018	$-
Mutual investment funds	696	-
Debt securities	455	-
Preferred shares	312	-
Equity securities	2	2
Total available-for-sale securities, at fair value	$7,483	$2

The Company recognized no other-than-temporary impairment in accumulated other comprehensive income.

The fair value of assets and liabilities is determined using observable market data based on recent trading activity. Where observable market data is unavailable due to a lack of trading activity, the Company utilizes internally developed models to estimate fair value and independent third parties to validate assumptions, when appropriate. Estimating fair value requires significant management judgment, including benchmarking to similar instruments with observable market data and applying appropriate discounts that reflect differences between the securities that the Company is valuing and the selected benchmark. Depending on the type of securities owned by the Company, other valuation methodologies may be required.

Measurement of fair value is classified within a hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The valuation hierarchy contains three levels:

●

Level 1 - Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets.

●

Level 2 - Valuation inputs are quoted market prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured.

●

Level 3 - Valuation inputs are unobservable and significant to the fair value measurement.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

The following tables present trading and available-for-sale securities assets in the condensed consolidated financial statements at fair value on a recurring basis as of December 31, 2019 and March 31, 2019:

		Fair Value Measurements at
		December 31, 2019 using
		Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
	December 31, 2019	(Level 1)	(Level 2)	(Level 3)

Debt securities	$85,233	$85,233	$-	$-
Equity securities	78,912	68,446	-	10,466
Total trading securities	$164,145	$153,679	$-	$10,466

Certificates of deposit	$6,018	$-	$6,018	$-
Mutual investment funds	696	696	-	-
Debt securities	455	-	455	-
Preferred shares	312	-	312	-
Equity securities	2	-	-	2
Total available-for-sale securities, at fair value	$7,483	$696	$6,785	$2

		Fair Value Measurements at March 31, 2019 using
		Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
	March 31, 2019	(Level 1)	(Level 2)	(Level 3)

Equity securities	$105,017	$105,017	$-	$-
Debt securities	62,691	62,187	-	504
Mutual investment funds	241	241	-	-
Total trading securities	$167,949	$167,445	$-	$504

Equity securities	$2	$-	$-	$2
Total available-for-sale securities, at fair value	$2	$-	$-	$2

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

The table below presents the Valuation Techniques and Significant Level 3 Inputs used in the valuation as of December 31, 2019 and March 31, 2019. The table is not intended to be all inclusive, but instead captures the significant unobservable inputs relevant to determination of fair value.

Type	Valuation Technique	FV as of December 31, 2019	FV as of March 31, 2019	Significant Unobservable Inputs	Input

Corporate bonds	DCF	$-	$504	Discount rate	11.3%
Equity security	DCF	10,466	-	Discount rate	9.8%
				Estimated number of years	9 years

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended December 31, 2019:

	Trading securities	Available for sale securities
Balance as of March 31, 2019	$504	$2

Sale of investments that use Level 3 inputs	(497)	-
Purchase of investments that use Level 3 inputs	10,430	-
Foreign currency translation	29	-
Balance as of December 31, 2019	$10,466	$2

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

		December 31, 2019
	Assets measured at amortized cost	Unrealized gain accumulated in other comprehensive income/(loss)	Assets measured at fair value

Certificates of deposit	$6,005	$13	$6,018
Mutual investment funds	691	5	696
Debt securities	455	-	455
Preferred shares	304	8	312
Equity securities	2	-	2
Available-for-sale securities, at fair value	$7,457	$26	$7,483

		March 31, 2019
	Assets measured at amortized cost	Unrealized gain accumulated in other comprehensive income/(loss)	Assets measured at fair value

Equity securities	$1	$1	$2

Available-for-sale securities, at fair value	$1	$1	$2

Of the available-for-sale securities, at fair value, the total amount less the amount of Equity securities, together with the amount identified as “deferred distribution payments” in Note 4 – Restricted Cash is held as a reserve 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. These funds are currently payable, subject to the entitled shareholders 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, any entitled shareholder will submit the necessary documentation to claim his, her, or its distribution payment.

NOTE 6 – BROKERAGE AND OTHER RECEIVABLES, NET

	December 31, 2019	March 31, 2019

Margin lending receivables	$155,058	$46,716
Receivables from brokerage clients	1,175	824
Receivables from sale of securities	1,037	27,684
Bank commissions receivable	74	-
Receivable for underwriting and market-making services	65	-
Dividends accrued	1	108
Other receivables	47	130

Allowance for receivables	(240)	(1,626)
Total brokerage and other receivables, net	$157,217	$73,836

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

On December 31, 2019 and March 31, 2019, amounts due from a single related party customer were $135,414 and $31,792, respectively or 86% and 43%, respectively of total brokerage and other receivables, net. Based on experience, the Company considers receivables due from related parties as fully collectible. As of December 31, 2019 and March 31, 2019, using historical and statistical data, the Company recorded an allowance for brokerage receivables in the amount of $240 and $1,626, respectively.

NOTE 7 – LOANS ISSUED

Loans issued as of December 31, 2019, consisted of the following:

	Amount Outstanding	Due Dates	Average Interest Rate	Fair Value of Collateral	Loan Currency
Subordinated loan	$5,023	Dec. 2022 - Apr. 2024	4.89%	$-	USD
Uncollateralized non-bank loan	3,101	Sep. 2020	2.00%	-	USD
Subordinated loan	1,568	Sep. 2029	12.00%	-	UAH
Bank customer loans	578	Jul. 2020 - May 2044	13.10%	324	RUB
Uncollateralized non-bank loan	505	Nov. 2020	6.50%	-	RUB
	$10,775			$324

Loans issued as of March 31, 2019, consisted of the following:

	Amount Outstanding	Due Dates	Average Interest Rate	Fair Value of Collateral	Loan Currency

Collateralized brokerage loans	$1,888	Dec. 2019	4.75%	$4,718	USD
Bank customer loans	637	May 2019 – Jan. 2039	13.34%	-	RUB
	$2,525			$4,718

NOTE 8 – DEFERRED TAX ASSETS

The Company is subject to taxation in the Russian Federation, Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan, Germany and the United States of America.

The tax rates used for deferred tax assets and liabilities as of December 31, 2019 and March 31, 2019 is 21% for the U.S., 20% for the Russian Federation and Kazakhstan, 31% for Germany, 12.5% for Cyprus, 18% for Ukraine, 12% for Uzbekistan and 10% for Kyrgyzstan.

Deferred tax assets and liabilities of the Company are comprised of the following:

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

	December 31, 2019	March 31, 2019

Deferred tax assets:
Tax losses carryforward	$2,246	$2,376
Revaluation on trading securities	-	2,095
Accrued liabilities	75	35
Valuation allowance	(1,538)	(3,241)
Deferred tax assets	$783	$1,265

Deferred tax liabilities:
Revaluation on trading securities	$502	$-

Deferred tax liabilities	$502	$-

Net deferred tax assets	$281	$1,265

During the nine months ended December 31, 2019 and 2018, the Company’s effective tax rate was equal to 17.03% and 19.09%, respectively.

NOTE 9 – SECURITIES SOLD, NOT YET PURCHASED – AT FAIR VALUE

As of December 31, 2019 and March 31, 2019, the Company’s securities sold, not yet purchased – at fair value was $4,385 and $0, respectively.

During the nine months ended December 31, 2019, the Company sold shares received as a pledge under reverse repurchase agreements and recognized relevant financial liabilities at fair value in the amount of $3,073 and closed short positions in the amount of $3,052 by purchasing securities from third parties, reducing its financial liability. During the nine months ended December 31, 2019, the Company recognized a gain on the change in fair value of financial liabilities at fair value in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) in the amount of $21 with no foreign exchange translation gain/(loss).

During the nine months ended December 31, 2019, the Company sold shares that are not owned by the Company and recognized relevant financial liabilities at fair value in the amount of $3,550. During the nine months ended December 31, 2019, the Company recognized a loss on the change in fair value of financial liabilities at fair value in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) in the amount of $835 with no foreign exchange translation gain/(loss).

A short sale involves the sale of a security that is not owned by the seller in the expectation of the seller purchasing the same security (or a security exchangeable) at a later date at a lower price. A short sale involves the risk of a theoretically unlimited increase in the market price of the security that would result in a theoretically unlimited loss.

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

NOTE 10 – LOANS RECEIVED

Loans received as of December 31, 2019, consisted of the following:

Borrower	Lender	December 31, 2019	March 31, 2019	Interest rate	Term	Maturity date
Freedom Holding Corp.	Non-Bank	$-	$3,917	3%	1-2 years	April, 2019 - December, 2019
Freedom Finance Cyprus Limited	Non-Bank	-	91	1%	2 years	November, 2019
Total		$-	$4,008

Non-bank loans received are unsecured. As of December 31, 2019 and March 31, 2019, accrued interest on the loans totaled $0 and $52, respectively.

NOTE 11 – DEBT SECURITIES ISSUED

	December 31, 2019	March 31, 2019

Debt securities issued denominated in USD	$30,630	$20,265
Debt securities issued denominated in RUB	8,077	7,724
Accrued interest	443	549
Total	$39,150	$28,538

As of December 31, 2019, and March 31, 2019, the Company had debt securities issued in the amount of $39,150 and $28,538 respectively. As of December 31, 2019, the Company’s outstanding debt securities had fixed annual coupon rates ranging from 7% to 12% and maturity dates ranging from June 2020 to December 2022. The Company’s debt securities include bonds of Freedom KZ and RU issued under Kazakhstani and Russian Federation law, which trade on the Kazakhstan Stock Exchange and the Moscow Exchange, respectively. The Company’s debt securities also include $14,500 in the aggregate amount of notes of FRHC issued in December 2019. The FRHC issued notes, denominated in USD, have minimum denominations of $100,000, bear interest at an annual rate of 7% and are due in 2022. The FRHC notes were sold only in Kazakhstan to non-U.S. persons in compliance with Astana International Financial Centre law and trade on the Astana International Exchange.

Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. Debt securities issued as of December 31, 2019 and March 31, 2019 included $443 and $549 of accrued interest, respectively.

NOTE 12 – CUSTOMER LIABILITIES

The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

	December 31, 2019	March 31, 2019

Brokerage customers	$126,974	$47,686
Banking customers	65,780	34,346
Total	$192,754	$82,032

As of December 31, 2019, banking customer liabilities consisted of current accounts and deposits of $42,297 and $23,483, respectively. As of March 31, 2019, banking customer liabilities consisted of current accounts and deposits of $12,383 and $21,963, respectively.

NOTE 13 – TRADE PAYABLES

	December 31, 2019	March 31, 2019

Margin lending payable	$41,823	$29,081
Trade payable for securities purchased	13,499	2,939
Payables to suppliers of goods and services	343	555
Coupons payable	283	-
Other payables	182	120
Total	$56,130	$32,695

On December 31, 2019 and March 31, 2019, trade payables due to a single related party were $3,850 or 7% and $938 or 3%, respectively.

NOTE 14 – SECURITIES REPURCHASE AGREEMENT OBLIGATIONS

As of December 31, 2019 and March 31, 2019, trading securities included collateralized securities subject to repurchase agreements as described in the following table:

	December 31, 2019
	Interest rates and remaining contractual maturity of the agreements
	Average interest rate	Up to 30 days	30-90 days	Over 90 days	Total
Securities sold under repurchase agreements
Corporate equity	12.30%	$25,271	$-	$-	$25,271
Corporate debt	10.34%	18,298	-	-	18,298
Non-U.S. sovereign debt	9.69%	14,306	-	-	14,306
Total securities sold under repurchase agreements		$57,875	$-	$-	$57,875

FREEDOM HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(All amounts in thousands of United States dollars, unless otherwise stated)

	March 31, 2019
	Interest rate and remaining contractual maturity of the agreements
	Average interest rate	Up to 30 days	30-90 days	Over 90 days	Total

Securities sold under repurchase agreements
Corporate equity	12.06%	$49,048	$-	$2,146	$51,194
Corporate debt	10.38%	13,548	-	-	13,548
Non-U.S. sovereign debt	8.62%	8,879	-	-	8,879
Total securities sold under repurchase agreements		$71,475	$-	$2,146	$73,621

The fair value of collateral pledged under repurchase agreements as of December 31, 2019 and March 31, 2019, was $72,861 and $105,842, respectively.

Securities pledged as collateral by the Company under repurchase agreements are liquid trading securities with market quotes and significant trading volume.

NOTE 15 – RELATED PARTY TRANSACTIONS

During the three months ended December 31, 2019 and 2018, the Company earned commission income from related parties in the amount of $17,067 and $11,101 respectively. During the nine months ended December 31, 2019 and 2018, the Company earned commission income from related parties in the amount of $60,241 and $26,723, respectively. Commission income earned from related parties is comprised primarily of brok

Freedom Holding Corp. - FORM 10-Q - February 10, 2020

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