Freedom (FRHC) - 2024 Q4 - Annual Report

PART I Business Freedom Holding Corp. offers brokerage, banking, and insurance services, primarily in Kazakhstan and Europe, leveraging a digital fintech ecosystem and strategic acquisitions - The company has realigned its business into four new reportable segments starting in calendar 2024: Brokerage, Banking, Insurance, and Other[22] Company Snapshot (as of March 31, 2024) | Metric | Value | | :--- | :--- | | Employees | 6,197 | | Total Offices | 161 | | - Brokerage Offices | 46 | | - Insurance Offices | 52 | | - Banking Offices | 20 | | Retail Brokerage Customer Accounts | 530,000 | - FRHC's business strategy focuses on opportunistic acquisitions, creating an integrated digital fintech ecosystem, continued organic growth into new countries, adhering to conservative risk management, and aspiring to excellence in governance and compliance[31][32][36] - The company is expanding its digital fintech ecosystem by entering the telecommunications market in Kazakhstan through its subsidiary, Freedom Telecom, and the media market through Freedom Media[61][62][63] Products and Services The company operates through Brokerage, Banking, Insurance, and Other segments, offering diverse financial and ancillary digital services Brokerage Customer Account Growth | Date | Total Accounts | Active Accounts | | :--- | :--- | :--- | | March 31, 2024 | 530,000 | 96,000 | | March 31, 2023 | 370,000 | 52,000 | | March 31, 2022 | 250,000 | 53,000 | Freedom Bank KZ Key Metrics (YoY Change as of March 31, 2024) | Metric | YoY Growth | | :--- | :--- | | Assets | +52% | | Loan Portfolio | +68% | | Deposit Portfolio | +47% | | Trading Portfolio | +69% | - Freedom Bank KZ is a leader in digital banking in Kazakhstan, offering innovative products like digital mortgages (7,747 issued in FY2024) and digital car loans (14,202 issued in FY2024)[47][50] - The Insurance segment, consisting of Freedom Life and Freedom Insurance, was acquired in May 2022 from the company's CEO, Timur Turlov. In FY2024, Freedom Life's gross premiums grew 121% and Freedom Insurance's written premiums grew 84%[52][54] Regulation The company operates under extensive financial regulations across multiple jurisdictions, maintaining significant excess regulatory capital and robust AML/KYC compliance Regulatory Capital (as of March 31, 2024) | Metric | Amount (USD) | | :--- | :--- | | Aggregate Net Capital Requirements | ~$245.9 million | | Aggregate Excess Regulatory Capital | $573.3 million | - The company holds brokerage, banking, and insurance licenses in various jurisdictions, including Kazakhstan (ARDFM, AFSA), Cyprus (CySEC), and the U.S. (FINRA)[103] - As of March 31, 2024, customer liabilities related to sanctioned individuals and entities represented approximately 3.4% of total customer liabilities, primarily consisting of cash in blocked accounts[134] - The company has implemented the Sum and Substance KYC/AML compliance suite across key subsidiaries to enhance customer verification and screening processes[135] Risk Factors The company faces diverse material risks including operational, credit, related party, geopolitical, regulatory, and cybersecurity vulnerabilities - A significant portion of fee and commission income has historically been derived from transactions with FST Belize, an affiliate controlled by the CEO. In fiscal years 2024, 2023, and 2022, approximately 14%, 60%, and 82% of fee and commission income, respectively, came from this relationship, which was terminated as of March 31, 2024[161] - The company faces revenue concentration risk, with a significant portion of trading income derived from Kazakhstan government or quasi-government debt securities (93% in FY2024) and fee income from specific institutional market maker customers[181] - The ongoing Russia-Ukraine conflict poses significant risks, including potential secondary sanctions, impacts on relationships with counterparties, and sanctions imposed by Ukraine on the CEO, Timur Turlov[220][221][222] - The company's new telecommunications (Freedom Telecom) and media businesses are expected to incur losses in their initial years, which will adversely affect consolidated net income[166] - In the past, material weaknesses in internal control over financial reporting were identified, related to a lack of sufficient qualified accounting personnel and control design. These were reported as remediated as of March 31, 2024[306][308][309] Unresolved Staff Comments The company reports no unresolved staff comments - None[321] Cybersecurity Cybersecurity risk management, led by the CTO, employs a three-lines-of-defense model, with no material adverse incidents reported - The cybersecurity risk governance model consists of three lines of defense: 1) CTO and IT/cybersecurity teams, 2) Chief Risk Officer and Risk Committee, and 3) Controlling Department and Audit Committee[326] - The company maintains an IT and cybersecurity incident management process for responding to threats and reporting material incidents to senior management and the board[325] - The company does not maintain insurance policies to mitigate cybersecurity risks, as it may not be available or may be more expensive than the perceived benefit[332] Properties The company operates from 265 leased facilities and 20 owned buildings across its business segments, including its principal executive offices Property Overview | Type | Count/Area | | :--- | :--- | | Leased Facilities | 265 offices (~562,380 sq ft) | | Owned Buildings | 20 buildings (~287,913 sq ft) | Legal Proceedings The company faces routine legal proceedings, including an ongoing case with the Estate of Toleush Tolmakov for which $8.4 million has been deposited - The company is in litigation with the Estate of Toleush Tolmakov regarding assets from the company's predecessor, BMB Munai, Inc. An amount of $8.4 million has been deposited with the court in relation to this matter[342] Mine Safety Disclosures This item is not applicable to the company - Not applicable[343] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq and KASE, with no dividends paid or anticipated, and no equity repurchases in fiscal 2024 - The company's common stock (FRHC) trades on both the Nasdaq Capital Market and the Kazakhstan Stock Exchange (KASE)[346] - No cash dividends have been declared or paid for the past two fiscal years, and the company does not anticipate paying dividends in the foreseeable future[348] - The company did not sell any unregistered equity securities or repurchase any of its equity securities during fiscal 2024[354][355] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2024 saw significant financial growth, with total net revenues reaching $1.635 billion and net income $375.0 million, driven by strong interest, fee, and insurance income Fiscal 2024 Financial Highlights vs. Fiscal 2023 | Metric | FY 2024 | FY 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues, Net | $1,635.1M | $795.7M | +$839.4M | +105% | | Interest Income | $828.2M | $294.7M | +$533.5M | +181% | | Fee and Commission Income | $440.3M | $327.2M | +$113.1M | +35% | | Insurance Underwriting Income | $264.2M | $115.4M | +$148.8M | +129% | | Net Income | $375.0M | $205.6M | +$169.4M | +82% | | Total Assets | $8.3B | $5.1B | +$3.2B | +63% | - The company adopted the new CECL accounting standard (ASC 326) for credit losses on April 1, 2023, which changes the methodology from an incurred loss model to a lifetime expected credit loss model[364][533] - Key factors affecting results include market conditions, significant growth in retail brokerage customers (from 370,000 to 530,000 YoY), the divestiture of Russian subsidiaries, strategic acquisitions, and expansion into new business areas like telecommunications[367][371] - The omnibus brokerage relationship with related party FST Belize was terminated as of March 31, 2024. This relationship contributed 14% of fee and commission income in FY2024, down from 60% in FY2023 and 82% in FY2022[387][389] Results of Operations Fiscal 2024 total revenue doubled to $1.635 billion, driven by significant growth in interest, fee, and insurance income, alongside a proportional increase in expenses Revenue Breakdown (FY2024 vs FY2023) | Revenue Source | FY 2024 ($M) | FY 2023 ($M) | % Change | | :--- | :--- | :--- | :--- | | Fee and commission income | 440.3 | 327.2 | +35% | | Net gain on trading securities | 133.9 | 71.1 | +88% | | Interest income | 828.2 | 294.7 | +181% | | Insurance underwriting income | 264.2 | 115.4 | +129% | | Total Revenue, Net | 1,635.1 | 795.7 | +105% | Expense Breakdown (FY2024 vs FY2023) | Expense Category | FY 2024 ($M) | FY 2023 ($M) | % Change | | :--- | :--- | :--- | :--- | | Fee and commission expense | 154.4 | 65.7 | +135% | | Interest expense | 501.1 | 208.9 | +140% | | Insurance claims incurred, net | 139.6 | 77.3 | +80% | | Payroll and bonuses | 181.0 | 81.8 | +121% | | Total Expense | 1,199.7 | 559.8 | +114% | - The increase in fee and commission income was driven by a 16% rise in brokerage services income and a 552% increase in payment processing commissions, the latter due to the acquisition of Paybox[425][426] - The 140% surge in interest expense was primarily due to a $244.1 million increase in interest on securities repurchase agreements used to finance the investment portfolio[457] Liquidity and Capital Resources Liquidity is driven by operations and debt, with total assets at $8.3 billion and significant capital expenditures for new business ventures Key Balance Sheet and Liquidity Metrics (as of March 31) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $545.1M | $581.4M | | Trading securities | $3,688.6M | $2,412.6M | | Total assets | $8,301.9M | $5,084.6M | | Total liabilities | $7,135.0M | $4,313.8M | | Net cash used in operating activities | ($1,064.4M) | ($951.7M) | - Short-term financing is primarily obtained through securities repurchase agreements. As of March 31, 2024, $2.8 billion (75%) of the trading securities portfolio was subject to repurchase obligations[522] - The company issued $200 million in bonds due 2028 in December 2023 to help finance the development of its Freedom Telecom business[524] - As of March 31, 2024, all regulated subsidiaries exceeded their minimum net capital and capital adequacy requirements, with aggregate excess regulatory capital of $573.3 million[527] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks including interest rate, foreign currency, equity price, and significant credit risk from its proprietary portfolio and margin lending - A hypothetical 100 basis point increase in interest rates would decrease the fair market value of the investment portfolio by an estimated $128.9 million as of March 31, 2024[549] - A 10% adverse change in the U.S. dollar's value against all other currencies would result in an estimated increase in income before tax of $121.5 million as of March 31, 2024[553] Proprietary Portfolio Credit Quality (March 31, 2024) | Rating | Value (in thousands USD) | | :--- | :--- | | >BB | $3,519,719 | | <BB | $109,740 | | Not rated | $59,161 | | Total | $3,688,620 | - Margin lending receivables increased to $1.635 billion as of March 31, 2024. This credit risk is mitigated by real-time margin compliance monitoring and collateralization[558] Financial Statements and Supplementary Data This section presents audited financial statements with an unqualified opinion from Deloitte LLP, highlighting critical audit matters including related party transactions and credit loss allowance - The independent auditor, Deloitte LLP, issued an unqualified opinion on the financial statements for fiscal years 2024 and 2023, and on the effectiveness of internal control over financial reporting as of March 31, 2024[577][579] - Critical Audit Matters identified by the auditor include: 1) Revenue from related party FST Belize due to the use of omnibus accounts and the magnitude of revenues; 2) Revenue recognition for payment processing IT infrastructure due to high automation and complexity; 3) The allowance for credit losses due to the significant management judgments required after adopting the new CECL standard (ASC 326)[585][588][593] Consolidated Balance Sheet Summary (in thousands USD) | Account | March 31, 2024 | March 31, 2023 | | :--- | :--- | :--- | | Total Assets | $8,301,930 | $5,084,558 | | Cash and cash equivalents | $545,084 | $581,417 | | Trading securities | $3,688,620 | $2,412,556 | | Loans issued | $1,381,715 | $826,258 | | Total Liabilities | $7,134,972 | $4,313,822 | | Securities repurchase agreement obligations | $2,756,596 | $1,517,416 | | Customer liabilities | $2,273,830 | $1,925,247 | | Total Shareholders' Equity | $1,166,958 | $770,736 | Consolidated Statement of Operations Summary (in thousands USD) | Account | Year Ended March 31, 2024 | Year Ended March 31, 2023 | | :--- | :--- | :--- | | Total Revenue, Net | $1,635,080 | $795,693 | | Total Expense | $1,199,709 | $559,755 | | Income from Continuing Operations | $374,952 | $193,162 | | Net Income | $374,952 | $205,586 | | Net Income Attributable to Controlling Interest | $375,540 | $205,140 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure - None[934] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2024, with prior material weaknesses remediated - Management concluded that disclosure controls and procedures were effective as of March 31, 2024[935] - Previously reported material weaknesses in internal control over financial reporting, related to a lack of sufficient qualified technical accounting personnel and control design, have been remediated as of March 31, 2024[936][938] - Management concluded that internal control over financial reporting was effective as of March 31, 2024, based on the COSO framework[942] Other Information No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or executive officers during the reporting period - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or executive officers during the reporting period[945] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including insider trading policies, is incorporated by reference from the 2024 proxy statement - The company's Board of Directors has adopted insider trading policies and procedures to promote compliance with insider trading laws[951] Executive Compensation Executive compensation information is incorporated by reference from the company's definitive 2024 proxy statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the 2024 proxy statement Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2024 proxy statement Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the company's definitive 2024 proxy statement PART IV Exhibits, Financial Statement Schedules This section lists financial statements and exhibits, including corporate governance documents and material contracts, filed as part of the annual report Form 10-K Summary No Form 10-K summary is provided - None[963]