Freedom (FRHC) - 2021 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements The unaudited consolidated financial statements present Freedom Holding Corp.'s financial position, operations, and cash flows, showing significant growth driven by customer activity and acquisitions Condensed Consolidated Balance Sheets Total assets significantly increased to $1.47 billion, driven by cash and trading securities, while liabilities surged due to customer deposits, leading to a 75% rise in equity Condensed Consolidated Balance Sheet Highlights (in thousands of USD) | Account | Dec 31, 2020 | March 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $1,473,654 | $453,523 | +225% | | Cash and cash equivalents | $624,572 | $63,208 | +888% | | Restricted cash | $368,344 | $66,597 | +453% | | Trading securities | $345,313 | $156,544 | +121% | | Total Liabilities | $1,248,096 | $324,486 | +285% | | Customer liabilities | $967,256 | $168,432 | +474% | | Securities repurchase agreement obligations | $144,402 | $48,204 | +199% | | Total Stockholders' Equity | $225,558 | $129,037 | +75% | Condensed Consolidated Statements of Operations Net revenue for the nine months ended December 31, 2020, surged 147% to $226.4 million, driven by fee and commission income, resulting in a 308% increase in net income to $89.9 million Statement of Operations Summary (in thousands of USD, except per share data) | Metric | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Fee and commission income | $171,949 | $69,538 | +147% | | Total Revenue, Net | $226,358 | $91,809 | +147% | | Total Expense | $119,298 | $66,617 | +79% | | Net Income | $90,160 | $20,900 | +331% | | Net Income Attributable to Common Stockholders | $89,917 | $22,020 | +308% | | Diluted EPS | $1.54 | $0.36 | +328% | Quarterly Performance (Q3 2020 vs Q3 2019, in thousands of USD) | Metric | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue, Net | $100,233 | $29,570 | +239% | | Net Income | $42,321 | $4,050 | +945% | | Diluted EPS | $0.72 | $0.07 | +929% | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $699.0 million, primarily due to higher net income and increased customer liabilities, while investing activities turned positive due to acquisitions Cash Flow Summary (in thousands of USD) | Cash Flow Activity | Nine Months Ended Dec 31, 2020 | Nine Months Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net cash flows from operating activities | $698,954 | $68,645 | | Net cash flows from/(used in) investing activities | $98,418 | $(10,595) | | Net cash flows from/(used in) financing activities | $61,952 | $(8,372) | | Net Change in Cash, Cash Equivalents, and Restricted Cash | $863,111 | $54,959 | - The primary driver for the increase in operating cash flow was a $647.0 million increase in customer liabilities[14] - Investing activities were significantly impacted by cash received from acquisitions ($157.5 million), offset by cash paid for acquisitions of Zerich ($7.1 million), Prime Executions ($2.5 million), and Freedom Bank KZ ($53.1 million)[14] Notes to Condensed Consolidated Financial Statements These notes detail the company's financial services in Eurasia, significant acquisitions, financial instrument composition, and related party transactions, providing context for the consolidated statements - The company provides financial services including retail securities brokerage, research, investment counseling, securities trading, market making, and corporate investment banking in Eurasia, with headquarters in Almaty, Kazakhstan[20] - The company completed three key acquisitions: Zerich Capital Management in July 2020 for $7.1 million, Prime Executions in December 2020 for $2.5 million, and Freedom Bank KZ in December 2020 for $53.1 million[24][128][131][132] - As of December 31, 2020, related parties accounted for a significant portion of business, including 35% of margin lending receivables ($20.8 million), 51% of trade payables ($9.7 million), and substantial commission income ($128.2 million for the nine months)[90][103][108] - The company's trading securities portfolio increased to $345.3 million, with 83% in debt securities, including Level 3 assets valued at $18.7 million using a Discounted Cash Flow (DCF) model[79][84][86] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes significant revenue and net income growth to increased customer trading, organic expansion, and strategic acquisitions, while maintaining strong liquidity despite acknowledging unique market conditions Executive Summary and Significant Events The company serviced over 229,000 client accounts and completed key acquisitions of Freedom Bank KZ and Prime Executions, expanding services and entering the U.S. market, while S&P revised subsidiary ratings outlooks to positive - Serviced more than 229,000 client accounts as of December 31, 2020, with about 68,000 considered active during the quarter[145] - Acquired Freedom Bank KZ for $53.1 million on December 28, 2020, to expand banking services in Kazakhstan[147] - Acquired Prime Executions, a NYSE floor broker, for $2.5 million on December 29, 2020, to enter the U.S. market and provide an additional execution avenue for clients[150][152] - On November 30, 2020, S&P revised the ratings outlook of subsidiaries Freedom KZ and Freedom RU from 'stable' to 'positive'[154] Results of Operations Net revenue for the nine months ended December 31, 2020, increased 147% to $226.4 million, driven by higher fee and commission income, resulting in a 331% increase in net income to $90.2 million Revenue Comparison (Nine Months Ended Dec 31, in thousands of USD) | Revenue Source | 2020 | 2019 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Fee and commission income | $171,949 | $69,538 | +$102,411 | +147% | | Net gain on trading securities | $36,330 | $12,957 | +$23,373 | +180% | | Interest income | $16,571 | $8,999 | +$7,572 | +84% | | Total revenue, net | $226,358 | $91,809 | +$134,549 | +147% | Expense Comparison (Nine Months Ended Dec 31, in thousands of USD) | Expense Category | 2020 | 2019 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Fee and commission expense | $50,068 | $14,068 | +$36,000 | +256% | | Operating expense | $52,214 | $44,576 | +$7,638 | +17% | | Interest expense | $15,092 | $8,614 | +$6,478 | +75% | | Total expense | $119,298 | $66,617 | +$52,681 | +79% | - The increase in fee and commission income was attributed to significantly increased trading volume and customer activity, as well as ongoing efforts to expand the customer base organically and through acquisitions[190] Liquidity and Capital Resources Liquidity significantly strengthened with cash and equivalents rising to $624.6 million, driven by increased customer deposits, supporting an aggressive growth strategy while management deems current resources sufficient for the next 12 months - As of Dec 31, 2020, cash and cash equivalents were $624.6 million and restricted cash was $368.3 million, a substantial increase from March 31, 2020[209] - The trading securities portfolio grew to $345.3 million, with 83% in debt securities, of which $144.7 million (42%) was subject to securities repurchase obligations[210][211] - The company has pursued an aggressive growth strategy and anticipates continuing to expand via future acquisitions, which may require additional equity or debt financing[217] - Management believes current cash, expected cash from operations, and returns from proprietary trading will be sufficient to meet working capital needs for the next 12 months[219] Qualitative and Quantitative Disclosures About Market Risk The company, as a smaller reporting company, is not required to provide the information for this item - As a smaller reporting company, Freedom Holding Corp. is not required to provide qualitative and quantitative disclosures about market risk[226] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2020, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective[227] - No material changes to internal control over financial reporting occurred during the quarter ended December 31, 2020[228] PART II — OTHER INFORMATION Legal Proceedings The company and its subsidiaries are party to various routine legal proceedings, claims, and regulatory inquiries arising from the ordinary course of business - The company is subject to routine legal proceedings and regulatory inquiries inherent in the highly regulated financial services industry[229] - Management believes that the results of these routine matters will not have a material adverse effect on the company's financial condition or operations[230] Risk Factors There are no additions to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended March 31, 2020, and the Quarterly Report on Form 10-Q for the period ended September 30, 2020 - No new risk factors have been added since the company's previous 10-K and 10-Q filings[231] Exhibits This section lists exhibits filed, including acquisition agreements and officer certifications required by the Sarbanes-Oxley Act - Exhibits filed include agreements for the acquisitions of Bank Kassa Nova JSC (now Freedom Bank KZ) and related subordinated loans[232] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[232]