Freedom (US:FRHC)2022-02-08 16:00PART I — FINANCIAL INFORMATION Financial Statements The unaudited condensed consolidated financial statements for the period ended December 31, 2021, reflect significant growth in assets, liabilities, and equity, with substantial increases in total revenue and net income, though operating cash flow turned negative Condensed Consolidated Balance Sheets Total assets increased to $2.68 billion by December 31, 2021, primarily due to a rise in trading securities, while total shareholders' equity more than doubled to $591.5 million Condensed Consolidated Balance Sheet Highlights (in thousands USD) | Balance Sheet Item | Dec 31, 2021 | Mar 31, 2021 | | :--- | :--- | :--- | | Total Assets | $2,679,951 | $2,018,645 | | Cash and cash equivalents | $493,263 | $698,828 | | Trading securities | $1,348,656 | $736,188 | | Total Liabilities | $2,088,461 | $1,742,974 | | Securities repurchase agreement obligations | $710,284 | $426,715 | | Customer liabilities | $1,145,070 | $1,163,697 | | Total Shareholders' Equity | $591,490 | $275,671 | Condensed Consolidated Statements of Operations For the nine months ended December 31, 2021, total net revenue surged 157% to $582.6 million and net income increased 241% to $307.1 million, driven by strong fee and commission income and trading gains Financial Performance Summary (in thousands USD) | Period | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended Dec 31 | Total Revenue, Net | $145,684 | $100,233 | 45% | | | Net Income | $50,886 | $42,321 | 20% | | | Diluted EPS | $0.85 | $0.72 | 18% | | Nine Months Ended Dec 31 | Total Revenue, Net | $582,635 | $226,358 | 157% | | | Net Income | $307,107 | $90,160 | 241% | | | Diluted EPS | $5.18 | $1.54 | 236% | Condensed Consolidated Statements of Cash Flows Operating activities resulted in a net cash outflow of $582.1 million for the nine months ended December 31, 2021, a reversal from the prior year's inflow, primarily due to increased trading securities and receivables Cash Flow Summary (Nine Months Ended Dec 31, in thousands USD) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net cash flows (used in)/from operating activities | $(582,080) | $698,954 | | Net cash flows (used in)/from investing activities | $(6,110) | $98,418 | | Net cash flows from financing activities | $338,792 | $61,952 | | Net Change in Cash, Cash Equivalents and Restricted Cash | $(238,805) | $863,111 | Notes to Condensed Consolidated Financial Statements Notes detail business operations, accounting policies, and financial item breakdowns, including trading securities, fair value, debt, and significant related party transactions for the Eurasian financial services provider - The company provides a wide range of financial services, including retail securities brokerage, investment banking, and banking services, primarily across Eurasia with headquarters in Almaty, Kazakhstan19 Trading Securities Composition (in thousands USD) | Security Type | Dec 31, 2021 | Mar 31, 2021 | | :--- | :--- | :--- | | Corporate debt | $624,247 | $334,763 | | Non-US sovereign debt | $451,437 | $333,619 | | Corporate equity | $161,550 | $47,340 | | Exchange traded notes | $104,462 | $9,638 | | US sovereign debt | $6,960 | $10,828 | | Total | $1,348,656 | $736,188 | - For the nine months ended December 31, 2021, the company earned commission income of $234.2 million from related parties, primarily from brokerage services. Margin lending receivables with related parties also increased significantly to $159.0 million119123 Management's Discussion and Analysis (MD&A) Management attributes rapid growth to retail brokerage expansion, COVID-19 market volatility, and acquisitions, detailing significant revenue and net income increases, while also discussing liquidity, repurchase agreement reliance, and capital requirements Overview and Key Factors The company experienced rapid expansion, growing client accounts to 370,000 by December 2021, driven by retail investment market growth, increased client activity during the pandemic, and strategic acquisitions - The company's client base has grown rapidly, increasing from ~290,000 accounts as of March 31, 2021, to ~370,000 as of December 31, 2021161 - Key growth drivers identified by management include: - Rapid growth of retail brokerage activity in Russia and Kazakhstan - Increased client trading volume and account openings during the COVID-19 pandemic - A strategy of pursuing inorganic growth through mergers and acquisitions162164167170 Results of Operations Detailed financial results show nine-month revenue grew 157% to $582.6 million, driven by fee and commission income and trading gains, with total expenses rising 99% due to business growth Revenue Breakdown (Nine Months Ended Dec 31, in thousands USD) | Revenue Source | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Fee and commission income | $336,178 | $171,949 | 96% | | Net gain on trading securities | $185,554 | $36,330 | 411% | | Interest income | $61,047 | $16,571 | 268% | | Total revenue, net | $582,635 | $226,358 | 157% | - The significant increase in net gain on trading securities was primarily due to the sale of SPBX stock and SPBX ETF units, which management does not consider to be indicative of a future trend206208 Expense Breakdown (Nine Months Ended Dec 31, in thousands USD) | Expense Category | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Fee and commission expense | $67,547 | $50,068 | 35% | | Interest expense | $51,256 | $15,092 | 240% | | Operating expense | $117,384 | $52,214 | 125% | | Total expense | $237,491 | $119,298 | 99% | Liquidity and Capital Resources Liquidity is supported by cash and operations, with $493.3 million in cash and equivalents, while short-term financing heavily relies on $710.3 million in repurchase agreements, and regulated subsidiaries met their $29.3 million capital requirements - Short-term financing is primarily obtained through securities repurchase arrangements, with obligations totaling $710.3 million as of December 31, 2021, collateralized by trading securities231 - The company's regulated subsidiaries must maintain minimum net capital, with an aggregate requirement of approximately $29.3 million as of December 31, 2021, which was exceeded238 Market Risk Disclosures Primary market risks include interest rate, foreign currency, and equity price risks, with a 100 basis point interest rate increase potentially causing a $47.8 million portfolio decline, alongside significant credit risk from $291.2 million in margin lending receivables - A hypothetical 100 basis point increase in interest rates would result in a $47.8 million decline in the fair market value of the company's investment portfolio as of December 31, 2021257 - A 10% adverse change in the value of the U.S. dollar against other currencies would have increased net income before tax by $16.5 million as of December 31, 2021258 - The company faces significant credit risk from its margin lending activities, with margin lending receivables totaling $291.2 million as of December 31, 2021263 Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021271 PART II — OTHER INFORMATION Legal Proceedings The company is involved in a legal dispute with the Estate of Toleush Tolmakov regarding the distribution of at least $8.38 million in cash and 250,079 shares of company stock - The company is in a legal dispute with the Estate of Toleush Tolmakov over the distribution of assets, including no less than $8.38 million in cash and 250,079 shares of common stock275 Risk Factors No material changes were reported from the risk factors previously disclosed in the company's annual and prior quarterly reports - There have been no material changes from the risk factors previously disclosed in the company's annual and prior quarterly reports276 Exhibits This section lists exhibits filed with the quarterly report, including offering documents for bond issuances and CEO/CFO certifications - The report includes exhibits such as offering terms for bonds due in 2026, CEO/CFO certifications, and financial statements formatted in inline XBRL277