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FREEDOM HOLDING CORP. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist you in understanding the results of operations and present financial condition ofFreedom Holding Corp (referred to herein as the "Company," "FRHC," "we," "our," and "us"). References to "fiscal year(s)" means the 12-month periods endedMarch 31 for the referenced year. Our unaudited condensed consolidated financial statements and the accompanying notes included in this quarterly report on Form 10-Q contain additional information that should be referred to when reviewing this material and this document should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with theSecurities Exchange Commission ("SEC") including our annual report on Form 10-K for the fiscal year endedMarch 31, 2022 , filed with theSEC onMay 31, 2022 .
Special Note About Forward-Looking Information
All statements other than statements of historical fact included herein and in the documents incorporated by reference in this quarterly report on Form 10-Q, if any, including without limitation, statements regarding our future financial position, business strategy, potential acquisitions or divestitures, budgets, projected costs, and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "future," "intend," "likely," "may," "might," "plan," "potential," "predict," "project," "should," "strategy," "will," "would," and other similar expressions and their negatives. Forward-looking statements are not guarantees of future performance and involve known and unknown risks and uncertainties, many of which may be beyond our control. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and actual results could differ materially as a result of various factors. The following include some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events: •economic sanctions imposed by theU.S. ,UK , EU and other countries againstRussia in response to the ongoing large-scale Russian military action againstUkraine ("Russia /Ukraine Conflict"), as well as, Russian countersanctions enacted in response to such economic sanctions; •a failure to successfully complete the sale of our Russian subsidiaries or to achieve the intended effects of such sale; •general economic and political conditions globally and in the particular markets where we operate; •declines in global financial markets; •trading volumes and demand for brokerage services in our key markets; •changes in our relationships or arrangements with related parties and third party service providers; •the continuing impacts of the COVID-19 pandemic, including viral variants, future outbreaks and the effectiveness of measures implemented to contain its spread; •a lack of liquidity, e.g., access to funds or funds at reasonable rates for use in our businesses; •the inability to meet regulatory capital or liquidity requirements; •increased competition, including downward pressures on commissions and fees; •risks inherent to brokerage, market making, banking and insurance businesses; •fluctuations in interest rates and foreign currency exchange rates; •failure to protect or enforce our intellectual property rights in our proprietary technology; •risks associated with being a "controlled company" within the meaning of the rules of Nasdaq; •the loss of key executives or failure to recruit and retain personnel; •our ability to keep up with rapid technological change; •information technology, trading platform and other electronic system failures, cyber security breaches and other disruptions; •losses caused by non-performance by third parties; •decreased profitability if loan payment delinquencies in our lending portfolio increase; •losses (whether realized or unrealized) on our investments; •our inability to integrate any businesses we acquire or otherwise adapt to expansion and rapid growth in our business; •risks inherent in doing business inRussia and the other developing markets in which we do business; •the impact of tax laws and regulations, and their changes, in any of the jurisdictions in which we operate; •non-compliance with laws and regulations in each of the jurisdictions in which we operate, particularly those relating to the securities and banking industries; 65 -------------------------------------------------------------------------------- Table of Contents •the creditworthiness of our trading counterparties, and banking and margin customers; •litigation and regulatory liability; •unforeseen or catastrophic events, including the emergence of pandemics, terrorist attacks, extreme weather events or other natural disasters, military conflict, political discord and social unrest; •risks associated with our insurance businesses, such as inaccuracies in our modeling and risk assumptions, or inability to obtain or collect on reinsurance; and •other factors discussed in this report, as well as in our annual report on Form 10-K for the fiscal year endedMarch 31, 2022 , filed with theSEC onMay 31, 2022 . Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. You should not place undue reliance on forward-looking statements. Forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management and apply only as of the date of this report or the respective dates of the documents from which they incorporate by reference. Neither we nor any other person assumes any responsibility for the accuracy or completeness of forward-looking statements. Further, except to the extent required by law, we undertake no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, made by us or on our behalf, are also expressly qualified by these cautionary statements.
OVERVIEW
Our Business
Freedom Holding Corp. (referred to herein as the "Company, " "FRHC," "we," "our," and "us") is a holding company that operates internationally through our diversified financial services subsidiary businesses. Our subsidiaries engage in a broad range of activities, including securities dealing, market making, retail securities brokerage, investment research, investment counseling, investment banking and underwriting services, commercial banking and insurance. Our principal executive office is inAlmaty, Kazakhstan and we have regional administrative offices inthe United States ("U.S."),Europe , andRussia . OnOctober 19, 2022 , we announced that we had entered into an agreement to sell our three Russian subsidiaries. Our securities brokerage subsidiaries are professional participants on theKazakhstan Stock Exchange (KASE), Astana International Exchange (AIX),Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPBX), the Ukrainian Exchange (UX), theRepublican Stock Exchange of Tashkent (UZSE), the Uzbek Republican Currency Exchange (UZCE) and a member of theNew York Stock Exchange (NYSE) andNasdaq Stock Exchange (Nasdaq). All of our securities broker dealer activities are subject to extensive regulation in the various jurisdiction where they conduct business. Our target retail customers include individuals and small and medium-sized enterprises seeking to diversify their investment portfolios to manage economic risk associated with political, regulatory, currency, banking, and national uncertainties. We also provide broker dealer services to other financial institutions. We provide online tools and retail locations for our customers to establish accounts and conduct securities trading on transaction-based pricing, to engage in banking activities and to purchase insurance products. We market our products and services through a number of channels, including telemarketing, training seminars and investment conferences, print and online advertising using social media, our mobile app and search engine optimization activities. 66
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Regional Segments
Recently our chief operating decision maker ("CODM"), who is our CEO,
restructured the way he views our business from a single operating segment to
five geographic regional segments: Central Asia , Europe , the U.S. , Russia and
Middle East /Caucasus.
Central Asia Segment
Our Central Asia segment comprises our Kazakhstan headquarters and our
operations in Kazakhstan (including the AIFC), Kyrgyzstan , Uzbekistan , Ukraine
and Turkey . As of September 30, 2022 , our Central Asia segment had 49 securities
brokerage offices, including offices in Kazakhstan , Ukraine , Uzbekistan and
Kyrgyzstan , that provide brokerage and financial services and investment
consulting and education. As of September 30, 2022 , our Central Asia segment had
11 bank offices, all in Kazakhstan , that provide commercial banking services.
During the six months ended September 30, 2022 , we completed the acquisition of
three insurance companies with a total of 55 insurance offices in Kazakhstan .
The insurance companies provide consumer life and general insurance services
including life insurance, health insurance, annuity insurance, accident
insurance, obligatory worker emergency insurance, travel insurance, and general
insurance products in property (including automobile), casualty, civil
liability, personal insurance and reinsurance.
Freedom KZ and Freedom Bank KZ are members of the Association of Financiers of
Kazakhstan . Freedom UA is a member of the Professional Association of Capital
Market participants and Derivatives ("PARD") in Ukraine .
On October 19, 2022 , Freedom UA's brokerage license was suspended for a period
of five years and its assets frozen by the Ukrainian authorities following its
inclusion on a sanctions list of the Ukrainian government. We believe that the
decision to include Freedom UA on such list was erroneous and we are in the
process of appealing such decision.
The Central Asia segment accounted for approximately $113.4 million , or 62.9%,
of our total revenue, net and approximately $89.4 million , or 75.5% of our total
expense, during the three months ended September 30, 2022 .
Europe Segment
OurCyprus securities brokerage firm, Freedom EU, oversees ourEurope segment operations (consisting of operations inCyprus , theUK ,Germany ,Spain ,Greece , andFrance ). Freedom EU is licensed to receive, transmit and execute customer orders, establish custodial accounts, engage in foreign currency exchange services and margin lending. Through ourCyprus subsidiary we provide transaction processing and intermediary services to our non-U.S. segment customers and to institutional customers seeking access to securities markets in theU.S. andEurope . All trading ofU.S. and European exchange traded and OTC securities by our brokerage firms, excluding ourU.S. subsidiary, PrimeEx, are routed to and executed through Freedom EU. Freedom EU is a member of theAssociation for Financial Markets inEurope ("AFME"). As ofSeptember 30, 2022 , ourEurope segment had seven brokerage offices, including offices inCyprus , theUK ,Germany ,France ,Spain andGreece , that provide securities broker dealer and financial services and investment consulting and education. During the three months endedSeptember 30, 2022 , ourEurope segment generated approximately$63.6 million , or 35%, of our total revenue, net and approximately$20.1 million , or 17%, of our total expense.
OurU.S. segment currently consists of FRHC and our PrimeEx subsidiary. PrimeEx is a registered agency-only execution broker-dealer on the floor of the NYSE. PrimeEx is a member of the NYSE, Nasdaq, theFinancial Industry Regulatory Authority ("FINRA") and theSecurities Investor Protection Corporation ("SIPC"). InJanuary 2022 , PrimeEx received regulatory approval fromFINRA to establish an investment banking and equity capital markets arm, which does business asFreedom Capital Markets ("FCM"). FCM is authorized to provide its corporate and institutional customers with a full array of investment banking, corporate finance, and capital markets advisory services, with capabilities including initial and follow-on offerings, PIPEs (Private Investment in Public Equity), SPACs (Special Purpose Acquisition Company ), private placements, convertible issues, debt capital, mergers and acquisitions, corporate access, and corporate restructuring. During the three months endedSeptember 30, 2022 , theU.S. segment generated approximately$3.3 million , or 0.00%, of our total revenue, net and approximately$8.6 million , or 7.2%, of our total expense.
67 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2022 , ourMiddle East /Caucasus region consisted of three offices, inAzerbaijan ,Armenia and theUnited Arab Emirates , that provide brokerage and investment education services. We entered into the Caucasus market during fiscal year 2022 by establishing subsidiaries inAzerbaijan andArmenia , and inApril 2022 we entered into theMiddle East market by establishing a subsidiary in theUnited Arab Emirates . TheMiddle East /Caucasus region generated minimal revenue and incurred minimal expense during the three months endedSeptember 30, 2022 , as we are still in the process of setting up our operations in these three locations.
Russia Segment
OurRussia segment includes our securities brokerage subsidiary Freedom RU, its subsidiary Freedom Bank RU, which provides complementary banking operations and Freedom Auto,that provides car loans . As ofSeptember 30, 2022 , ourRussia segment had 41 offices and branches. Freedom RU is a member of theRussian National Association of Securities Market Participants ("NAUFOR"), a statutory self-regulatory organization with wide responsibility in regulation, supervision and enforcement of its broker-dealer, investment banking, commercial banking and other member firms inRussia . Freedom Bank RU is a member of theNational Financial Association inRussia . During the three months endedSeptember 30, 2022 , theRussia segment generated approximately$56.8 million or 31% of our total revenue, net and approximately$75.1 million , or 63% of total expense, net. Although we currently continue to operate our Russian segment, we have agreed to sell our three Russian subsidiaries and accordingly this segment is accounted for as discontinued operations. See "Sale of Russian Subsidiaries and Corporate Restructuring" below.
Sale of Russian Subsidiaries
OnOctober 19, 2022 , we announced that we had entered into an agreement to sell our two Russian subsidiaries. The transaction is subject to the approval of theCentral Bank of theRussian Federation and is expected to close in the coming months. Until such time as the sale is completed, in a manner consistent withU.S. sanctions, we intend to provide financial support only for "maintenance" of our investment in our Russian subsidiaries consistent with our previously established practices and in support of pre-existing projects and operations in conformity with OFAC guidance concerning such activities. We do not intend to engage in funding of new projects or expansion of pre-existing projects of our Russian subsidiaries. Because the Russian subsidiaries met the held for sale criteria as ofSeptember 30, 2022 , we have classified them as discontinued operations as ofSeptember 30, 2022 and for the three and six months endedSeptember 30, 2022 , in accordance with ASC 205 and 360.
Corporate Restructuring
In conjunction with the sale of our Russian subsidiaries, we are in the process of undertaking a corporate restructuring which will result in Freedom KZ (together with its wholly owned subsidiaries Freedom Bank KZ, FreedomLife and Freedom Insurance ) being wholly owned by FRHC directly. Currently, Freedom RU owns approximately 90% of of Freedom KZ, with the remaining interest being owned by FRHC directly. The transfer of ownership from Freedom RU to FRHC has been approved by theKazakhstan financial sector regulator, and completion of the transfer is expected to occur prior to the closing of the sale of our Russian subsidiaries.
Acquisitions
Historically we have been active in pursuing inorganic growth through mergers
and acquisitions. We expect this trend to continue in the future.
We continue to pursue our previously disclosed planned acquisition of each of the following companies:Paybox Technologies LLP and its subsidiaries ("Paybox"); and the company that developed and owns the ReKassa PCI Reader ("ReKassa").Paybox developed and owns the Paybox Payment Platform, which is a dynamically developing project in the field of aggregation of payment systems services.Paybox is widely used inKazakhstan and is actively developing a market inKyrgyzstan . The ReKassa PCI Reader is a mobile and web application that replaces traditional cash registers. The ReKassa PCI Reader is currently available inKazakhstan . While we believe that it is probable that the above planned acquisitions will be completed in the near future, there can be no assurance that this will be the case. We do not consider the acquisitions ofPaybox and ReKassa to be material in the context of our overall operations.
Credit Ratings
InJune 2022 ,S&P Global Ratings ("S&P") affirmed its "B-/B" rating of FRHC and its brokerage and banking subsidiaries Freedom KZ, Freedom Bank KZ, FreedomEurope and Freedom Global and removed them from CreditWatch negative. The outlook on FRHC is stable and the outlooks for the aforementioned subsidiaries are positive. S&P also raised 68 -------------------------------------------------------------------------------- Table of Contents theKazakhstan national scale ratings of Freedom KZ and Freedom Bank KZ to "kzBB" from "kzBB-".Freedom Life has an S&P Global Rating of "B" on the international scale and long-term rating on the national scale of "kzBBB-" with a positive outlook.Freedom Insurance has been assigned a "B" rating by S&P and a "kzBB+" national scale rating and a stable outlook. As a result of theRussia /Ukraine Conflict, S&P is no longer rating Russian entities, including our Russian subsidiaries.
Key Factors Affecting Our Results of Operations
Our operations have been, and may continue to be, affected by certain key factors as well as certain historical events and actions. The key factors affecting our business and results of operations include: the business environment in which we operate, the growth of retail brokerage activity in our key markets, theRussia /Ukraine Conflict (including but not limited to related sanctions and countersanctions), our decision to sell our Russian subsidiaries, relationships with related parties, governmental polices and the impact of COVID-19, as discussed below.
Business Environment
Financial services industry performance is closely correlated to economic conditions and financial market activity. TheRussia /Ukraine Conflict which began inFebruary 2022 has caused significant disruption in the currency and securities markets, affected interest rates, and negatively impacted Russian and Ukrainian customer confidence. Additionally, general market conditions and investor activity are products of many factors, most of which are generally beyond our control and unpredictable, and which may affect our clients' financial and investing decisions and resulting use of our services.
Growth of Retail Brokerage Activity In Our Key Markets
The retail brokerage markets inKazakhstan andRussia have grown rapidly in recent years. This growth has had a significant positive effect on our results of operations. According to data from the KASE, the number of active accounts of retail investors on the KASE equity market increased from approximately 150.2 thousand inMarch 31, 2021 to 218.3 thousand inMarch 31, 2022 . According to data provided by theRussian National Association of Securities Market Participants ("NAUFOR"), the number of retail customer accounts on the MOEX increased from approximately 11.1 million as ofMarch 31, 2021 to 16.8 million as ofMarch 31, 2022 . There is no assurance that such growth rates will continue in future periods. The growth in these retail markets has contributed to growth in the number of our customer accounts. Our number of total customer accounts increased from approximately 170,000 as ofMarch 31, 2021 , to approximately 250,000 as ofMarch 31, 2022 , to approximately 310,000 as ofSeptember 30, 2022 . As ofSeptember 30, 2022 , more than 53% of those customer accounts carried positive cash or asset account balances. Internally, we designate "active accounts" as those in which at least one transaction occurs per quarter. For the three months endedSeptember 30, 2022 , we had approximately 44,000 active accounts. The increases in the number of our customer accounts have in turn contributed to increases in our customer liabilities over these periods.
Effect of the
InFebruary 2022 , without provocation,Russia invadedUkraine . The war has lasted longer than previously anticipated, and it seems likely will last for an extended period of time as the Ukrainians continue to be more successful than initially expected at turning back Russian forces and asNATO countries supply the Ukrainians with armaments and supplies. TheEuropean Union andthe United States have imposed broad-based sanctions and impounded financial assets ofRussia , its companies and various notable Russian individuals. The impact of the sanctions has led to the increase of the price of hydrocarbons and the costs of various agricultural products produced by bothRussia andUkraine to disrupt supplies for those products, which has further increased inflationary pressures inEurope as well as the rest of the world. It has also had the indirect effect of lowering consumer confidence and consumer spending, all of which could have an adverse impact on financial markets and thus on our business.
Planned Divestiture of Russian Subsidiaries
In our 10-K report for the fiscal year endedMarch 31, 2022 , the Company announced its plans for divesting its interests in its Russian securities brokerage and complementary banking operations inRussia ("Russian Segment"). OnOctober 17, 2022 , the Company entered into an agreement with Maxim Povalishin for the sale of 100% of the share capital of its Russian segment. The transaction is subject to the approval of theCentral Bank of theRussian Federation and is expected to be completed within the next fiscal quarter. Because the assets and liabilities to be disposed of in connection with this transaction met the held for sale criteria as ofSeptember 30, 2022 , in accordance with ASC 205 and 360 our 69 -------------------------------------------------------------------------------- Table of Contents Russian subsidiaries are presented as discontinued operations in the condensed consolidated financial statements as of and for the three and six months endedSeptember 30, 2022 and in the corresponding periods of 2021 for comparative purposes. Following our planned divestiture of our Russian subsidiaries, the scale of our operations will contract significantly. As ofSeptember 30, 2022 , our Russian subsidiaries had 41 offices and branches and 1,941 employees. We expect that the sale of our Russian subsidiaries will reduce our exposure to the current challenging geopolitical circumstances and will enable us to accelerate growth in other markets. We also expect that, following the completion of the sale of the Russian Subsidiaries, a number of existing clients of our Russian subsidiaries will invest in the non-Russian international capital markets going forward through accounts at other companies within our group, subject to appropriate on-boarding for compliance purposes. However, these matters are subject to uncertainty and changes in circumstances. A failure by us to achieve the intended effects of the sale of our Russian subsidiaries could have a material adverse effect on our results of operations in future periods.
Relationships with Related Parties
Freedom Securities Trading Inc. (formerly known asFFIN Brokerage Services, Inc. ) ("FFIN Brokerage") is a corporation registered in and licensed as a broker dealer inBelize to service the investment needs of customers desiring broader investments options in international securities markets. FFIN Brokerage was formed in 2014 and is owned personally by the Company's controlling shareholder, chairman and chief executive officer, Timur Turlov. FFIN Brokerage is not part of our group of companies. FFIN Brokerage has its own brokerage customers, which include individuals, some entities and three institutional market-makers. FFIN Brokerage holds four transparent omnibus brokerage accounts with Freedom EU. The majority of the order flow from FFIN Brokerage relates to customer activities within FFIN Brokerage's omnibus accounts. We estimate that more than 40% of FFIN Brokerage's customers also hold brokerage accounts with us through our brokerage subsidiaries. Our cross border agreement with FFIN Brokerage requires FFIN Brokerage to conduct AML/CTF and sanctions screening on its individual and business entity customers permitted to trade through its omnibus accounts at Freedom EU. Our relationship with FFIN Brokerage has also provided us and our customers with a substantial liquidity pool for trading. We expect FFIN Brokerage will continue to process brokerage transactions for its customers through us for the foreseeable future, subject to our standard compliance requirements. Fee and commission income generated from FFIN Brokerage accounted for approximately 38% and 42% of our total revenue for the three and six months endedSeptember 30, 2022 , respectively, and approximately 25% of our total revenue for the three months endedSeptember 30, 2021 . For additional information regarding our transactions with FFIN Brokerage, see Note 20 Related Party Transactions to the condensed consolidated financial statements included in this quarterly report on Form 10-Q. Our transactions with FFIN Brokerage were performed in the ordinary course of our brokerage and banking businesses and such transactions were made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with similarly situated unaffiliated third parties. Governmental Policies Our earnings are and will be affected by the monetary and fiscal policies of the governments of the countries in which we operate, including among othersKazakhstan ,Cyprus andthe United States . The monetary policies of these countries may have a significant effect upon our operating results. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
Impact of COVID-19
We continue to monitor conditions surrounding COVID-19, as well as economic and capital market conditions and their potential impact on our employees, business and operations. The extent to which developments (such as the duration and severity of future outbreaks of the same or new strains or variants of the disease, the effectiveness of vaccines, or new or additional measures implemented by governments) might impact our customers, employees, business, the general financial markets, the global economy and the economies of the countries in which we operate is highly uncertain and cannot be predicted. For further information on the possible future impact of the COVID-19 pandemic on our business, results of operations and financial condition, see Part 1A - Risk Factors of our annual report on Form 10-K for the fiscal year endedMarch 31, 2022 , filed with theSEC onMay 31, 2022 . 70
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Key Income Statement Line Items
Revenue
We derive revenue primarily from fee and commission income earned from our retail brokerage and banking customers and investment banking services, net gains from our proprietary trading activities, interest income and insurance underwriting premiums. Fee and commission income as a percentage of our total revenue was 52% and 30% in the three months endedSeptember 30, 2022 and 2021, 53% and 39% in the six months endedSeptember 30, 2022 and 2021, respectively.
Fee and Commission Income
Fee and commission income consists principally of retail brokerage fees from
customer trading, including fees charged for providing margin lending and
related banking services, and fees for underwriting, market making and
consulting services.
A substantial portion of our revenue is derived from commissions from customers through accounts with transaction-based pricing. Brokerage commissions are charged on investment products in accordance with a schedule we have formulated that aligns with local practice in the relevant market. Retail brokerage service fee and commission income as a percentage of our total fee and commission income was 92% and 96% in the three month endedSeptember 30, 2022 and 2021.
Net gain on trading securities reflects the change in value of the securities held in our proprietary trading portfolio in the relevant period. A net gain or loss is comprised of both realized and unrealized gains and losses during the period being presented. Realized gains or losses are recognized when we close an open position in a security and recognize a gain or a loss on that position.U.S. GAAP requires that we also reflect in our Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income any unrealized gain or loss on each open securities positions as of the end of each period based on whether the value of the open position is higher or lower at the period end than it was at either: (i) the beginning of the period, if the position was held for the full period; or (ii) at the time the position was opened, if the position was opened during the period. Fluctuations in unrealized gains or losses from one period to another can occur as a result of factors beyond our control, such as fluctuations in the market prices of the open securities positions we hold or the short or long term halting of trading in certain markets, either of which may result from unpredictable factors such as significant market volatility stemming from market and economic uncertainty related to global or local events. Fluctuations might also result from factors within our control, such as when we elect to close an open securities position, which would have the effect of reducing our open positions and, thereby potentially reducing or increasing the amount of unrealized gains or losses we might recognize in a period. These fluctuations can adversely affect the ultimate value we realize from our proprietary trading activities. Unrealized gains or losses in a particular period may or may not be indicative of the gain or loss we will ultimately realize on a securities position when the position is closed. As a result, we might realize significant fluctuations in net gains and losses realized on our trading securities year-over-year or from one quarter to the next.
Interest Income
We earn interest income from trading securities, reverse repurchase transactions
and loans to customers. Interest income on trading securities consists of
interest earned from investments in debt securities and dividends earned on
equity securities held in our proprietary trading account.
Insurance Underwriting Income
Life insurance premiums are recognized as revenue when due; accident and health insurance premiums are recognized as revenue over the premium paying period and property and casualty insurance premiums are recognized as revenue over the period of the contract in proportion to the amount of insurance protection provided.
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Net gain on foreign exchange operations reflects the net gain from: (i) the change in value resulting from currency fluctuations of monetary assets and liabilities denominated in any currency other than the functional currency of the entity holding such asset or liability; and (ii) purchases and sales of foreign currency. UnderU.S. GAAP, we are required to revalue assets and liabilities denominated in foreign currencies into our reporting currency, theU.S. dollar, which can result in gains or losses on foreign exchange operations. Fluctuations in foreign currency exchange rates are beyond the Company's control, and the Company may suffer losses as a result of such fluctuations.
Fee and Commission Expense
We incur fee and commission expense in our brokerage, banking, and insurance
activities. Fee and commission expense consists of expenses related to
brokerage, banking, stock exchange, clearing, depository and agent services.
Generally, we expect fee and commission expense from brokerage and banking
activities to increase and decrease corresponding to increases and decreases in
fee and commission income. For our insurance operations, fee and commission
expense arises from the deferral and subsequent amortization of the costs of
acquiring business, which are referred to as "deferred acquisition costs"
(principally commissions, and other incremental direct costs of issuing
policies). Deferred acquisition costs ("DAC") are amortized over the estimated
premium-paying period of the related policies. DAC for property insurance,
accident insurance and health insurance is amortized over the effective period
of the related insurance policies. Acquisition costs for life insurance
policies, except for accident insurance and health insurance, are not
capitalized in DAC, and recognized as they arise and are included in commission
expense.
Interest Expense
Interest expense includes the expenses associated with our short-term and
long-term financing, which consist of interest on securities repurchase
agreement obligations, customer accounts and deposits, debt securities issued
and loans received.
Operating Expense
Operating expense includes payroll and bonuses, advertising expenses, lease
cost, professional expenses, depreciation and amortization, communication
services, software support, stock compensation expense, representative expenses,
business trip expenses, utilities, charity and other expenses.
Insurance Claims Incurred, Net of Reinsurance
Insurance claims incurred are expenses directly associated with our insurance activity, and represent actual amounts paid or to be paid to policyholders when insurable events occur, minus any amounts we receive from reinsurers related to the insurable event. This amount is adjusted for changes in loss reserves, including claims reported but not settled (RBNS), claims incurred but not reported (IBNR) and not incurred claims reserve (NIC).
Foreign Currency Translation Adjustments, Net of Tax
The functional currencies of our operating subsidiaries are theKazakhstan tenge, Russian ruble, European euro,U.S. dollar, Ukrainian hryvnia,Uzbekistan sum, Kyrgyzstani som, Azerbaijani manat, Armenian dram, British pound sterling andUnited Arab Emirates dirham. Our reporting currency is theU.S. dollar. Pursuant toU.S. GAAP we are required to revalue our assets from our functional currencies to our reporting currency for financial reporting purposes.
Net Income/(Loss) Attributable to Non-controlling Interest
Net income/(loss) attributable to non-controlling interest includes our net income/(loss) attributable to our non-controlling interest in Freedom UA. We own a 9% interest in Freedom UA, with the remaining 91% interest controlled byAskar Tashtitov , the president of our Company. Through a series of agreements entered into with Freedom UA that obligate us to guarantee the performance of all Freedom UA obligations, provide Freedom UA adequate funding to cover its operating losses and net capital requirements, provide the management competence and operational support and ongoing access to our significant assets, technology resources and expertise in exchange for 90% of all net profits of Freedom UA after tax, we account for Freedom UA as a variable interest entity. 72
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AllU.S. dollar amounts reflected in "Results of Operations", "Liquidity and Capital Resources", "Contractual Obligations" and "Critical Accounting Policies" of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are presented in thousands ofU.S. dollars unless the context indicates otherwise.
RESULTS OF OPERATIONS
Comparison of the Three-month Periods Ended
The following comparison of our financial results for the three-month periods
ended
results.
Revenue
The following table sets out information or our total revenue, net for the
periods presented.
Three months ended September 30, 2022 Three months ended September 30, 2021 Change
(Recasted)
Amount %* Amount %* Amount %
Fee and commission income $ 93,123 51 % $ 95,215 30 % $ (2,092) (2) %
Net gain on trading securities 9,005 5 % 181,603 57 % (172,598) (95) %
Net realized gain/(loss) on
investments available for sale 716 - % (622) - % 1,338 (215) %
Interest income 49,033 27 % 24,429 8 % 24,604 101 %
Insurance underwriting income 26,200 15 % 16,022 5 % 10,178 64 %
Net gain on foreign exchange
operations 4,555 3 % 1,508 - % 3,047 202 %
Net loss on derivative (2,320) (1) % (656) - % (1,664) 254 %
Total revenue, net $ 180,312 100 % $ 317,499 100 % $ (137,187) (43) %
* Percentage of total revenue, net.
For the three months endedSeptember 30, 2022 , we realized total revenue, net of$180,312 , a$137,187 decrease compared to three months endedSeptember 30, 2021 . Revenue during the three months endedSeptember 30, 2022 , was significantly lower than the three months endedSeptember 30, 2021 , primarily due to a 95% decrease in net gain on trading securities between the two periods. This decrease was offset in part by increases in interest income and insurance underwriting income. Fee and commission income decreased by 2% between the two periods. Fee and commission income
The following table presents our fee and commission income as a percentage of
our total revenue by type for the periods presented.
Three
months ended
2022 2021 (Recasted) Amount Change % Change
Retail brokerage fee and commission
(7) %
income
Commission income from bank services 5,779 1,029 4,750 462 % Investment banking fee and commission 1,587 1,780 (193) (11) %
income
Other fee and commission income 448 903 (455) (50) %
Total fee and commission income
(2) %
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Three months ended September 30,
2022 2021 (Recasted)
(as a % of total revenue)
Retail brokerage fee and commission income 92 % 96 %
Commission from bank services 6 % 1 %
Investment banking fee and commission income 2 % 2 %
Other fee and commission income - % 1 %
Total fee and commission income as a percentage of
total revenue
100 % 100 % During the three months endedSeptember 30, 2022 , fee and commission income was$93,123 , a decrease of$2,092 , or 2%, as compared to fee and commission income of$95,215 for the three months endedSeptember 30, 2021 . This decrease in fee and commission income was primarily attributable to the decrease of fee and commission income from retail brokerage services of$6,194 . The decrease in fee and commission income from retail brokerage services was attributable to lower volume of trades by clients in comparison with three months endedSeptember 30, 2021 . The decrease was offset in part by an increase in fee and commission income from bank services by$4,750 due to the expansion of Freedom Bank KZ and the growing activity of its clients between the two periods.
Net gain on trading securities
Net gain on trading securities was$9,005 for the three months endedSeptember 30, 2022 , a decrease of$172,598 as compared to$181,603 for the three months endedSeptember 30, 2021 . See the following table for information regarding our net gains and losses during the three months endedSeptember 30, 2022 and 2021: Realized Net Unrealized Net Gain Gain Net Gain Three months ended September 30, 2022$ 5,507
Three months ended
During the three months endedSeptember 30, 2022 , we sold securities for a realized gain of$5,507 . Similarly, securities positions we continued to hold atSeptember 30, 2022 , had appreciated by$11,201 as compared toJune 30, 2022 . This unrealized gain was partially offset by an unrealized net loss on SPBX ETF units held in our portfolio atSeptember 30, 2022 , in the amount of$7,703 , resulting in an unrealized net gain of$3,498 for such three month period. During the quarter endedSeptember 30, 2021 , we exchanged approximately 11,500 shares of stock in the SPBX we held in our proprietary trading account for units in the SPBX ETF. The main contributing factors to the increase in net gain on trading securities during the three months endedSeptember 30, 2021 , were the sale of those SPBX ETF units and an increase in unrealized net gain resulting from the revaluation of securities held in our proprietary trading account atSeptember 30, 2021 . We do not consider the significant increases in realized and unrealized net gain on trading securities to be indicative of a trend toward higher net gains on trading securities in the future. 74 -------------------------------------------------------------------------------- Table of Contents Interest income
The following tables set forth information regarding our revenue from interest
income for the periods presented.
Three months ended
%
2022 2021 (Recasted) Amount Change Change
Interest income on trading securities
21,132$ 12,655 60 % Interest income on loans to customers 7,203 798 6,405 803 % Interest income on available-for-sale 195 % securities 6,553 2,221 4,332 Interest income on reverse repurchase 1,349 234 1,115 476 % agreements and amounts due from banks Interest income from dividends 141 44 97 220 % Total interest income$ 49,033 $ 24,429$ 24,604 101 %
Three months ended
2022 2021 (Recasted)
(as a % of total interest income)
Interest income on reverse repurchase agreements and 3 % 1 %
amounts due from banks
Interest income on available-for-sale securities 13 % 9 %
Interest income on loans to customers 15 % 3 %
Interest income on trading securities 69 % 87 %
Interest income from dividends - % - %
Total interest income as a percentage of total revenue 100 % 100 %
During the three months ended September 30, 2022 , interest income was $49,033 ,
an increase of $24,604 , or 101%, compared to the three months ended September
30, 2021 . The increase in interest income was primarily attributable to a
$12,655 , or 60%, increase in interest income from trading securities between the
two periods, which increase was in turn the result of an increase in the total
size of our trading portfolio and an increase in the amount of bonds we held as
a percentage of our total trading portfolio between the two periods. In
addition, we recognized a $6,405 , or 803%, increase in interest income from new
loans issued to customers due to the expansion of the operations of Freedom Bank
KZ between the two periods. We also recognized a $4,332 , or 195%, increase in
interest income from available-for-sale securities.
Net gain on foreign exchange operations
UnderU.S. GAAP, we are required to revalue assets and liabilities denominated in any currency other than the functional currency of the entity holding such asset or liability to the functional currency of that entity. During the three months endedSeptember 30, 2022 , we had a net gain on foreign exchange operations of$4,555 , compared to a net gain of$1,508 during the three months endedSeptember 30, 2021 . The increase was primarily due to a net gain of$7,687 in the three months endedSeptember 30, 2022 from the purchase and sale of foreign currency by our subsidiary Freedom Bank KZ, which conducted a higher volume of currency transactions in the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This net gain was offset in part by a net loss on foreign exchange operations of$2,512 in the three months endedSeptember 30, 2022 due to the large amount of Ukrainian hryvnia (UAH) assets held by our subsidiary Freedom EU. During the three months endedSeptember 30, 2022 , the value of the UAH depreciated by approximately 25% relative to theU.S. dollar.
Insurance underwriting income
During the three months endedSeptember 30, 2022 , we had insurance underwriting income of$26,200 , an increase of$10,178 , or 64%, as compared to the three months endedSeptember 30, 2021 . The increase was primarily attributable to a$10,794 , or 60%, increase in insurance underwriting income from written insurance premiums for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , due to the expansion of our insurance operations between the two periods. This increase in income from written insurance premiums was partially offset by a$639 , or 645%, decrease in income from insurance activities due to the reinsurance premiums ceded for the 75
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three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 . The following table sets out information on our insurance underwriting income for the periods presented. Three months ended September 30, 2022 2021 (Recasted) Written insurance premiums $ 28,664 $ 17,870 Reinsurance premiums ceded (738) (99) Change in unearned premium reserve, net (1,726) (1,749) Insurance underwriting income $ 26,200 $ 16,022 Expense
The following table sets out information on our total expense for the periods
presented.
Three months ended September 30, 2022 Three months ended September 30, 2021 Change
(Recasted)
Amount %* Amount Amount %
Fee and commission expense $ 18,439 16 % $ 22,651 31 % $ (4,212) (19) %
Interest expense 40,863 34 % 16,716 23 % 24,147 144 %
Insurance claims incurred, net of
reinsurance 17,475 15 % 13,513 18 % 3,962 29 %
Operating expense 37,760 32 % 21,770 28 % 15,990 73 %
Provision for impairment losses 3,726 3 % 978 1 % 2,748 281 %
Other (income)/expense, net 192 - % 786 1 % (594) (76) %
Total expense $ 118,455 100 % $ 76,414 100 % $ 42,041 55 %
______________
* Percentage of total expense.
For the three months endedSeptember 30, 2022 , we incurred total expense of$118,455 , a$42,041 , or 55%, increase as compared to the three months endedSeptember 30, 2021 . The increase was mainly attributable to an increase in interest expense. Also contributing to the increase was an increase in operating expense, which was in turn largely attributable to the growth of our business primarily in connection with increases in administrative costs and fees from the growth in our revenue generating activities and integrating our acquisition targets. The increases were offset in part by a 19% decrease in fee and commission expense between the two periods.
Fee and commission expense
Fee and commission expense decreased by$4,212 , or 19%, for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 . The decrease was primarily attributable to a decrease in brokerage services fees of$13,429 due to us using a new prime broker, as a result of which we had a different composition of order flow transactions, which were charged at lower rates. The decrease was offset in part by increase of bank services fees of$4,872 due to the expansion of the operations ofFreedom Bank KZ between the two periods and increases in agency fee from insurance activities of$4,113 due to the expansion of our insurance operations between the two periods.
Interest expense
During the three months endedSeptember 30, 2022 , we had a$24,147 , or 144%, increase in interest expense as compared to the three months endedSeptember 30, 2021 . The increase in interest expense was primarily attributable to a$19,676 , or 156%, increase in interest expense on short-term financing through securities repurchase agreements due to an increase in the volume of such financing, and a$4,010 , or 113%, increase in interest on customer deposits. During the three months endedSeptember 30, 2022 , we increased our volume of short-term financing through securities repurchase agreements primarily in order to fund our investment portfolio. The increase in interest on customer deposits was a result of growth of our banking client base due to the expansion of the operations of Freedom Bank KZ between the two periods. As ofSeptember 30, 2022 andMarch 31, 2022 , banking customer liabilities of Freedom Bank KZ were$719,941 and$246,284 , respectively. 76
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Insurance claims incurred, net of reinsurance
During the three months endedSeptember 30, 2022 , we had a$3,962 , or 29%, increase in insurance claims incurred, net of reinsurance, as compared to the three months endedSeptember 30, 2021 . The increase was primarily attributable to a$4,149 or 173%, increase in other expenses and a$1,802 or 77%, increase in expenses for claims for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , in each case due to the expansion of our insurance operations between the two periods. The increases were offset in part by a$1,988 , or 14%, decrease in expenses for insurance reserve between the two periods. Operating expenses Operating expenses during the three months endedSeptember 30, 2022 were$37,760 , which increased by$15,990 , or 73%, compared to operating expenses of$21,770 in the three months endedSeptember 30, 2021 . This increase was primarily attributable to the following increases:$8,056 in payroll and bonus expense as a result expansion of our workforce through hiring;$3,405 in charity and sponsorship expense due to humanitarian aid to theUkraine -based charitable fund in connection with the geopolitical and economic situation;$1,879 in professional services expense;$992 in software support expense and a$2,226 increase in other operating expenses. During the three months endedSeptember 30, 2022 , we recognized a$568 decrease in stock based compensation expense. Income tax expenses We recognized income before income tax of$61,857 and$241,085 during the three months endedSeptember 30, 2022 , andSeptember 30, 2021 , respectively. Our effective tax rate during the three months endedSeptember 30, 2022 , increased to 20.4%, from 13.3% during the three months endedSeptember 30, 2021 , as a result of changes in the composition of the revenues we realized from our operating activities, the tax treatment of those revenues in the various jurisdictions where our subsidiaries operate, and the incrementalU.S. GILTI tax.
Net income from continuing operations
As a result of the foregoing factors, for the three months endedSeptember 30, 2022 , and the three months endedSeptember 30, 2021 , we recognized net income from continuing operations of$49,238 and$208,991 , respectively.
Net income/(loss) from discontinued operation
Net income/(loss) from discontinued operation represents the net income or
loss from our subsidiaries in
operations. Net loss from discontinued operations was
months ended
operations of
The increase was primarily due to our subsidiary Freedom RU entering into a non-deliverable currency forward contracts with a client of FFIN Brokerage with an aggregate face value of 3,450,000 Chinese yuan. The parties shall compensate each other the spread between Russian ruble and Chinese yuan exchange rate at the end of each month. Due to the depreciation of Chinese yuan against Russian ruble by 7%, our subsidiary recognized a$37,547 gain on currency forwards. However, this gain was offset in part by a loss on foreign exchange operations on dealing operations of$19,927 , resulting in a net gain of$19,989 for the period. Additional, as presented in Note 24 we recognized provision for impairment of discontinued operation in the amount of$41,464 .
Net income
As a result of the foregoing factors, for the three months ended
2022
months ended
Non-controlling interest
We reflectMr. Tashtitov ownership of Freedom UA as a non-controlling interest in our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income, Condensed Consolidated Statements of Shareholders' Equity and Condensed Consolidated Statements of Cash Flows. We recognized a net gain attributable to non-controlling interest of$950 for the three months endedSeptember 30, 2022 , as 77
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compared to a net loss attributable to non-controlling interest of$20 for the three months endedSeptember 30, 2021 . This change was largely a result of the recovery of trading positions of Freedom UA after the impact ofRussia /Ukraine Conflict.
Foreign currency translation adjustments, net of tax
Due to an approximately 9% depreciation of the Russian ruble and an approximately 3% depreciation of theKazakhstan tenge against theU.S. dollar during the three months endedSeptember 30, 2022 , we realized a foreign currency translation loss of$16,663 for the three months endedSeptember 30, 2022 , as compared to a foreign currency translation gain of$1,181 for the three months endedSeptember 30, 2021 .
Comparison of the Six-month Periods Ended
The following comparison of our financial results for the six-month periods
ended
results.
Revenue
The following table sets out information or our total revenue, net for the
periods presented.
Six Months Ended September 30, 2022 Six Months Ended September 30, 2021 Change
(Recasted)
Amount %* Amount %* Amount %
Fee and commission income $ 187,483 53 % $ 174,431 39 % $ 13,052 7 %
Net gain on trading securities 13,439 4 % 190,285 43 % (176,846) (93) %
Net realized gain/(loss) on
investments available for sale 123 - % (653) - % 776 (119) %
Interest income 92,682 26 % 45,566 10 % 47,116 103 %
Insurance underwriting income 50,440 14 % 30,098 7 % 20,342 68 %
Net gain on foreign exchange
operations 9,148 3 % 2,716 1 % 6,432 237 %
Net loss on derivative (1,054) - % (715) - % (339) 47 %
Total revenue, net $ 352,261 100 % $ 441,728 100 % $ (89,467) (20 %)
______________
* Percentage of total revenue, net.
During the six months endedSeptember 30, 2022 , we realized total net revenue of$352,261 , a 20% decrease compared to six months endedSeptember 30, 2021 . As discussed in more detail below under "Net Gain onTrading Securities "$190,285 of total revenue, net during the six months endedSeptember 30, 2021 , was realized from the sale of certain securities held in our proprietary trading portfolio and from revaluation of securities we continued to hold in our portfolio atSeptember 30, 2021 . We considered the sale of securities during the three months endedSeptember 30, 2021 from our own portfolio as an extraordinary event that we did not believe to be indicative of a trend in future periods.
Fee and commission income
The following table presents our fee and commission income as a percentage of
our total revenue by type for the periods presented.
Six
months ended
2022 2021 (Recasted) Amount Change % Change
Retail brokerage fee and commission $ 173,823 $ 165,839 $ 7,984 5 %
income
Commission income from bank services 3,230 4,004 (774) (19) % Investment banking fee and commission 9,592 1,733 7,859 453 %
income
Other fee and commission income 838 2,855 (2,017) (71) % Total fee and commission income$ 187,483 $ 174,431 $ 13,052 59 % 78
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Six months ended September 30,
2022 2021 (Recasted)
(as a % of total revenue)
Retail brokerage fee and commission income 93 % 95 %
Commission from bank services 2 % 2 %
Investment banking fee and commission income 5 % 1 %
Other fee and commission income - % 2 %
Total fee and commission income as a percentage of
total revenue
100 % 100 % During the six months endedSeptember 30, 2022 , fee and commission income increased by$13,052 , or 7%, as compared to the six months endedSeptember 30, 2021 . This increase was primarily attributable to a$7,984 increase in fee and commission income from brokerage services. The increase in fee and commission income from brokerage services was attributable to growth in client accounts through organic efforts including expansion of fee and commission generating activities such as an increase in the number of clients, an increase in number of active clients, and more trades by clients.
Net gain on trading securities
The following table sets out information regarding our net gains on trading
securities during the six months ended
Realized Net
Unrealized Net
Gain Gain/(Loss) Net Gain
Six months ended September 30, 2022 $ 21,671 $ (8,232) $ 13,439
Six months ended September 30, 2021 $ 148,319 $
41,966
During the six months endedSeptember 30, 2022 , we sold securities for a realized net gain of$21,671 . This net gain was offset in part by an unrealized net loss of$8,232 , which was attributable to an unrealized net loss on SPBX shares held in our portfolio atSeptember 30, 2022 , in the amount of$22,373 , which was offset in part by an unrealized net gain of$14,140 due to appreciation of securities positions we continued to hold atSeptember 30, 2022 . The primary contributing factors to the increase in net gain on trading securities during the six months endedSeptember 30, 2021 , were the sale of SPBX ETF units we held in our proprietary trading account and higher unrealized net gain as a result of revaluation of securities we continued to hold in our proprietary accounts atSeptember 30, 2021 . As noted above, we do not consider the significant increase in realized net gain on trading securities resulting from the sale of SPBX ETF units and the increase in unrealized net gain from revaluation of securities held in our portfolio atSeptember 30, 2021 , to be indicative of a trend toward higher net gains on trading securities in the future.
Interest income
The following tables set forth information regarding our revenue from interest
income for the periods presented.
Six months ended
%
2022 2021 (Recasted) Amount Change Change
Interest income on reverse repurchase $ 2,136 $ 608 $ 1,528 251 %
agreements and amounts due from banks
Interest income on available-for-sale 102 %
securities 13,231 6,542 6,689
Interest income on loans to customers 11,830 964 10,866 1127 %
Interest income on trading securities 65,302 37,144 28,158 76 %
Interest income from dividends 183 308 (125) (41) %
Total interest income $ 92,682 $ 45,566 $ 47,116 103 %
Six months ended September 30,
2022 2021 (Recasted)
(as a % of total interest income)
79
-------------------------------------------------------------------------------- Table of Contents Interest income on reverse repurchase agreements and 2 % 1 % amounts due from banks Interest income on available-for-sale securities 14 % 14 % Interest income on loans to customers 13 % 2 % Interest income on trading securities 71 % 82 % Interest income from dividends - % 1 % Total interest income as a percentage of total revenue 100 % 100 % During the six months endedSeptember 30, 2022 , andSeptember 30, 2021 , we recognized a$47,116 , or 103% increase in interest income. We earned interest income from trading securities, reverse repurchase transactions and loans to customers and amounts due from banks. Interest income on trading securities consists of interest earned from investments in debt securities and dividends earned on equity securities held in our proprietary trading account. We recognized a$28,158 , or 76% increase in interest income from trading securities during the six months endedSeptember 30, 2022 because we increased (i) the total size of our trading portfolio and (ii) the percentage of our investments in bonds.
We recognized a
repurchase transactions because we engaged in a larger volume of such
transactions during the six months ended
We also recognized a
to customers as a result of new loans issued by Freedom Bank KZ.
We also realized a$850 , or 578% increase in interest income of due from banks as a result of new deposit accounts placed during the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 .
In addition, we recognized a
available-for-sale securities.
Net gain on foreign exchange operations
During the six months ended
foreign exchange operations of
the six months ended
During the six months endedSeptember 30, 2022 , the value of the Ukranian hryvnia (UAH) depreciated by approximately 25%. Due to the large amounts of UAH assets in our subsidiary Freedom EU, it recognized a net loss on foreign exchange operations of$2,357 from the total of$2,385 . Further, we realized a net gain on foreign exchange operations affected by the purchase and sale of foreign currency in our subsidiary Freedom Bank KZ of$11,609 from the total of$11,476 as a result of higher volume of currency exchange transactions.
Insurance underwriting income
During the six months endedSeptember 30, 2022 , we recognized a$20,342 , or 68%, increase in insurance underwriting income as compared to the six months endedSeptember 30, 2021 . We recognized a$25,533 , or 85%, increase in insurance underwriting income from written insurance premiums for the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 , due to the expansion of operations. This increase in income from written insurance premiums was partially offset by a$2,891 , or 110%, decrease in income from insurance activities due to the unearned premium reserve for the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 . 80
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Expense
The following table sets out the information on our total expense for the
periods presented.
Six Months Ended September 30, 2022 Six Months Ended September 30, 2021 Change
(Recasted)
Amount %* Amount %* Amount %*
Fee and commission expense $ 41,754 18 % $ 43,844 31 % $ (2,090) (5) %
Interest expense 80,934 34 % 30,962 22 % 49,972 161 %
Insurance claims incurred, net of
reinsurance 34,167 14 % 24,809 17 % 9,358 38 %
Operating expense 75,759 32 % 41,191 29 % 34,568 84 %
Provision for impairment losses 6,154 3 % 1,245 1 % 4,909 394 %
Other (expense)/income, net (368) - % 795 1 % (1,163) (146) %
Total expense $ 238,400 100 % $ 142,846 100 % $ 95,554 67 %
______________
* Percentage of total expense.
During the six months endedSeptember 30, 2022 , we incurred total expenses of$238,400 , a 67% increase compared to the six months endedSeptember 30, 2021 . Expenses increased with the growth of our business primarily in connection with increases in interest expenses and administrative costs and fees from the growth in our revenue generating activities and integrating our acquisition targets.
Fee and commission expense
Fee and commission expense decreased by$2,090 , a 5% decrease, during the six months endedSeptember 30, 2021 , as compared to the six months endedSeptember 30, 2021 . The decrease was attributable to a decrease in brokerage commissions by$19,563 due to us using a new prime broker, as a result of which we had a different composition of order flow transactions, which were charged at lower rates, which decrease was offset in part by increases of commissions paid to bank services of$6,954 , agency fee expenses of$6,641 and agency fee from insurance activities of$3,392 . These increases were the result of both growth in our customer base and increased transaction volume from our customers. Generally, we expect fee and commission expense to increase and decrease in correspondence with increases and decreases in fee and commission income.
Interest expense
During the six months endedSeptember 30, 2022 , we incurred a 161% increase in interest expense. The increased expense was primarily attributable to a$42,632 increase in volume of short-term financing through securities repurchase agreements and a$6,720 increase in interest on customer deposits. We increased our volume of short-term financing through securities repurchase agreements primarily in order to fund our investment portfolio. The increase in interest on customer deposits and loans received was a result of a growth of client base.
Insurance claims incurred, net of reinsurance
During the six months endedSeptember 30, 2022 , we recognized a$9,358 , or 38%, increase in expenses from insurance activities as compared to the six months endedSeptember 30, 2021 . We recognized a$976 or 6%, increase in expenses for insurance reserve, a$3,670 or 89%, increase in expenses for claims, and a$6,379 or 208%, increase in other expenses for the six months endedSeptember 30, 2022 , as compared to the six months endedSeptember 30, 2021 , due to the expansion of operations of our insurance companies.
Operating expenses
Operating expenses during the six months endedSeptember 30, 2022 , totaled$75,759 , a$34,568 increase compared to the six months endedSeptember 30, 2021 . This increase was primarily attributable to a$15,855 increase in payroll and bonus expense as a result expansion of our workforce through acquisition and hiring,$7,285 increase in charity 81
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and sponsorship expense due to humanitarian aid to theUkraine -based charitable fund in connection with the geopolitical and economic situation,$3,443 increase in professional services expense,$2,485 increase in software support expense due to the growth of our business, as well as$879 increase in business trip expense and a$4,622 increase in other operating expense.
Income tax expense
We recognized income before income tax of$113,861 and$298,882 during the six months endedSeptember 30, 2022 , and the six months endedSeptember 30, 2021 , respectively. Our effective tax rate during the six months endedSeptember 30, 2022 , decreased to 18.9%, from 12.5% during the six months endedSeptember 30, 2021 , as a result of changes in the composition of the revenues we realized from our operating activities, the tax treatment of those revenues in the various foreign jurisdictions where our subsidiaries operate, and the incrementalU.S. GILTI tax.
Net income from continuing operations
As a result of the foregoing factors, for the six months endedSeptember 30, 2022 , and the six months endedSeptember 30, 2021 , we recognized net income from continuing operations of$92,363 and$261,662 , respectively.
Net income/(loss) from discontinued operation
Net income/(loss) from discontinued operation represents the net income or loss from our subsidiaries inRussia , which are classified as discontinued operations. Net loss from discontinued operations was$6,080 for the six months endedSeptember 30, 2022 , as compared to net income from discontinued operations of$449 for the six months endedSeptember 30, 2021 . The increase in net income from discontinued operation between the two periods was mainly attributable to our subsidiary Freedom RU having entered into non-deliverable currency forward contracts with a client of FFIN Brokerage with an aggregate face value of 3,450,000 Chinese yuan during the six months endedSeptember 30, 2022 . Under the contracts, the parties must compensate each other for the spread between the Russian ruble and the Chinese yuan exchange rate at the end of each month. Due to the depreciation of Chinese yuan against Russian ruble by 7%, our subsidiary recognized a$37,547 gain on currency forwards for the six months endedSeptember 30, 2022 . This gain was offset in part by a recognized a loss on foreign exchange operations on dealing operations of$19,927 during such period. Additional, as presented in Note 24 we recognized provision for impairment of discontinued operation in the amount of$41,464 .
Net income
As a result of the foregoing factors, for the six months endedSeptember 30, 2022 , we realized net income of$86,283 compared to$262,111 for the six months endedSeptember 30, 2021 , an decrease of 67%.
Non-controlling interest
We reflect our ownership of Freedom UA as a non-controlling interest in our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income, Condensed Consolidated Statements of Shareholders' Equity and Condensed Consolidated Statements of Cash Flows. We recognized a net loss attributable to non-controlling interest of$1,044 for the six months endedSeptember 30,2022 , as compared to a net loss attributable to non-controlling interest of$72 for the six months endedSeptember 30, 2021 . This change was largely as a result of theRussia /Ukraine Conflict and its impacts on the securities markets where Freedom UA held most of its open securities positions. We recognized an unrealized net loss on open trading positions of$1,800 in Freedom UA during the first fiscal quarter 2023.
Foreign currency translation adjustments, net of tax
The functional currencies of our operating subsidiaries are the Kazakhstani tenge, Russian ruble, European euro,U.S. dollar, Ukrainian hryvnia, Uzbekistani som, Kyrgyzstani som,UK pound sterling, Turkish lira and Azerbaijani manat. Our reporting currency is the U. S. dollar. Pursuant toU.S. GAAP we are required to revalue our assets from our functional currencies to our reporting currency for financial reporting purposes. Due to the appreciation of the value of Russian ruble by nearly 31% and depreciation onKazakhstan tenge by nearly 2%, respectively against theU.S. dollar during the six 82
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months endedSeptember 30, 2022 , we realized a foreign currency translation gain of$5,316 , as compared to a foreign currency translation gain of$4,203 during the six months endedSeptember 30, 2021 .
Segment Results of Operations
We have organized our operations geographically into five regional segments:Central Asia ,Europe ,United States andMiddle East /Caucasus. The results of our Russian subsidiaries are presented as discontinued operations in the condensed consolidated financial statements as of and for the three and six months endedSeptember 30, 2022 and in the corresponding periods of 2021 for comparative purposes.
The following table sets out total revenue, net by segment for the three month
periods presented (not including discontinued operations):
Three months ended September 30,
2022 2021 (Recasted) Amount Change % Change
Central Asia $ 113,367 $ 48,276 $ 65,091 135 %
Europe 63,607 268,111 (204,504) (76) %
U.S. 3,319 1,112 2,207 198 %
Middle East/Caucasus 19 - 19 (100) %
Total revenue, net $ 180,312 $ 317,499 $ (137,187) (43) %
During the three months ended September 30, 2022 , total revenue, net increased
across each of our regional operating segments, except Europe . The changes in
total net revenue, net for the three months ended September 30, 2022 , compared
to the three months ended September 30, 2021 , were driven by the following:
•Total revenue, net in our Central Asia segment increased 135% for the three
months ended September 30, 2022 as compared to the three months ended September
30, 2021 . This increase was driven by an increase in interest income, as a
result of growth in interest received from securities held in our trading
portfolio and an increase in interest accrued from loans issued. This segment
was also significantly affected by an increase in income from insurance
activities, caused by expansion of our insurance business. The increase of
revenue was also due to a rise in net gain on trading securities, related to
growth of our trading portfolio and an increase in interest income from
securities held in our trading portfolio. Moreover, this segment was
significantly affected by the increase in commission fees from brokerage and
banking services during the period caused by the expansion of our brokerage and
banking business.
•Total revenue, net in our Europe segment decreased 76% for the quarter ended
September 30, 2022 . This decrease was driven by a decrease in net gain on
trading securities due to a large net gain on trading securities in the three
month ended September 30, 2021 due to the revaluation of our trading portfolio.
In addition fee and commission income from the Europe segment decreased by 17.8%
in the three months ended September 30 , 202 as compared to the three months
ended September 30, 2021 , due to a decrease of client trading activities between
the two periods.
•Total revenue, net in our U.S. segment increased by 198% during the three
months ended September 30, 2022 as compared to the three months ended September
30, 2021 . This increase was driven mainly by the growth of interest income on
the bonds in our trading portfolio.
•The amount of revenue recognized by our Middle East /Caucasus segment was
immaterial during the three months ended September 30, 2022 and the three months
ended September 30, 2021 , as our Azerbaijani, Armenian and UAE subsidiaries are
newly-established and still in setting up operations.
The following table sets out total expense, net by segment for the three month
periods presented (not including discontinued operations):
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Three months ended September 30,
2022 2021 (Recasted) Amount Change % Change
Central Asia 89,390 44,104 $ 45,286 103 %
Europe 20,072 27,109 (7,037) (26) %
U.S. 8,566 5,172 3,394 66 %
Middle East/Caucasus 427 29 398 1,372 %
Total expense, net $ 118,455 $ 76,414 $ 42,041 55 %
During the three months ended September 30, 2022 , total expense increased across
each of our regional operating segments, except Europe , compared to the three
months ended September 30, 2021 . The changes in total expenses for the three
months ended September 30, 2022 , were driven by the following:
•Total expense in our Central Asia segment increased by 103% for the three
months ended September 30, 2022 . This increase was primarily recognized by
Freedom Bank KZ and was driven by an increase in interest expense primarily from
growth in interest paid on securities repurchase agreements and growth in
customer deposits. This segment also experienced an increase in operating
expenses due to growth in payroll and bonuses.
•Total expense in our Europe segment decreased 26% for the quarter ended
September 30, 2022 . This decrease was driven by the lower commission expense due
to change of our prime broker and different composition of order flow
transactions, which were charged at lower rates. This decrease was partially
offset mainly due to growth of operating expense, mainly due to charity and
sponsorship, software support and payroll and bonuses.
•Total expense in our U.S. segment increased by 66% during the three months
ended September 30, 2022 . This increase was driven by the growth of interest
expense on securities repurchase agreement obligations.
•The amount of expense incurred by our Middle East /Caucasus segment was
immaterial during the three months ended September 30, 2022 and the three months
ended September 30, 2021 , as our Azerbaijani, Armenian and UAE subsidiaries are
newly-established and still in the process of setting up operations.
The following table presents total revenue, net for the six month periods
presented (not including discontinued operations):
Six months ended September 30,
2022 2021 (Recasted) Amount Change % Change
Central Asia $ 212,239 $ 99,759 $ 112,480 113 %
Europe 133,084 340,179 (207,095) (61) %
U.S. 6,930 1,790 5,140 287 %
Middle East/Caucasus 8 - 8 100 %
Total revenue, net $ 352,261 $ 441,728 $ (89,467) (20) %
During the six months ended September 30, 2022 , total revenue, net increased
across each of our regional operating segments, except Europe . The changes in
total net revenues for the six months ended September 30, 2022 , compared to the
six months ended September 30, 2021 , were driven by the following:
•Total revenue, net in our Central Asia segment increased 113% for the six
months ended September 30, 2022 . This increase was driven by an increase in
interest income, as a result of growth in interest received from securities held
in our trading portfolio and an increase in interest accrued from loans issued.
This segment was also significantly affected by an increase in income from
insurance activities, caused by expansion of our insurance business. The
increase of revenue was also due to a rise in net gain on trading securities,
related to growth of our trading portfolio and an increase in interest income
from securities held in our trading portfolio. Moreover, this segment was
significantly affected by the increase in commission fees from brokerage and
banking services during the year caused by the expansion of our brokerage and
banking business.
•Total revenue, net in our
trading securities due to the revaluation of our trading portfolio.
•Total revenue, net in our
ended
interest income on the bonds in our trading portfolio.
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•We generated minimal revenue in our
months ended
subsidiaries are relatively new.
The following table sets out total expenses associated with our segments for the
six month periods presented (not including discontinued operations):
Six months ended September 30,
2022 2021 (Recasted) Amount Change % Change
Central Asia $ 171,463 $ 81,335 $ 90,128 111 %
Europe 46,755 52,094 (5,339) (10) %
U.S. 19,385 9,423 9,962 106 %
Middle East/Caucasus 797 (6) 803 (13,383) %
Total expense, net $ 238,400 $ 142,846 $ 95,554 67 %
During the six months ended
each of our regional operating segments, except
months ended
months ended
•Total expense in ourCentral Asia segment increased by 111% for the six months endedSeptember 30,2022 . This increase was primarily recognized byFreedom Bank KZ and was driven by an increase in interest expense primarily from growth in interest paid on securities repurchase agreements and growth in customer deposits. •Total expense in ourEurope segment decreased 10% for the six months endedSeptember 30, 2022 . This decrease was driven by the lower commission expense due to change of our prime broker and different composition of order flow transactions, which were charged at lower rates. This decrease was partially offset mainly due to growth of operating expense, mainly due to charity and sponsorship, software support and payroll and bonuses. •Total expense in ourU.S. segment increased by 106% during the six months endedSeptember 30, 2022 . This increase was driven by the growth of interest expense on securities repurchase agreement obligations. •Total expense in ourMiddle East /Caucasus segment increased by 13,383% during the six months endedSeptember 30, 2022 , mainly due to the growth of operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measurement of our ability to meet our potential cash
requirements for general business purposes. During the period covered in this
report our operations were primarily funded through a combination of existing
cash on hand, cash generated from operations, returns generated from our
proprietary trading and proceeds from the sale of bonds and other borrowings.
We regularly monitor and manage our leverage and liquidity risk through various
committees and processes we have established to maintain compliance with net
capital and capital adequacy requirements imposed on securities brokerages,
banks and insurance companies in the jurisdictions where we do business. We
assess our leverage and liquidity risk based on considerations and assumptions
of market factors, as well as other factors, including the amount of available
liquid capital (i.e., the amount of cash and cash equivalents not invested in
our operating business). While we are confident in the risk management
monitoring and processes we have in place, a significant portion of our trading
securities and cash and cash equivalents are subject to collateralization
agreements. This significantly enhances our risk of loss in the event financial
markets move against our positions. When this occurs our liquidity,
capitalization and business can be negatively impacted. Certain market
conditions can impact the liquidity of our assets, potentially requiring us to
hold positions longer than anticipated. Our liquidity, capitalization, projected
return on investment and results of operations can be significantly impacted by
market events over which we have no control, and which can result in disruptions
to our investment strategy for our assets.
We maintain a majority of our tangible assets in cash and securities that are
readily convertible to cash, including governmental and quasi-governmental debt
and highly liquid corporate equities and debt. Our financial instruments and
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other inventory positions are stated at fair value and should generally be
readily marketable in most market conditions. The following sets out certain
information on our assets as of the dates presented:
September 30, 2022 March 31, 2022
(Restated)
Cash and cash equivalents(1) $ 790,390 $ 225,464
Trading securities $ 1,359,544 $ 1,158,377
Total assets $ 4,784,365 $ 3,227,750
Net liquid assets(2) $ 2,620,145 $ 1,557,636
______________
(1)Of the $790,390 in cash and cash equivalents we held at September 30, 2022 ,
$47,049 , or approximately 6%, was subject to reverse repurchase agreements. By
comparison, at March 31, 2022 , we had cash and cash equivalents of $225,464 , of
which $19,947 , or approximately 9%, was subject to reverse repurchase
agreements. The amount of cash and cash equivalents we hold is subject to
minimum levels set by regulatory bodies in relation to compliance with
applicable rules and regulations, including capital adequacy and liquidity
requirements for each entity.
(2)Consists of cash and cash equivalents, trading securities, brokerage and
other receivable and other assets.
As of
We finance our operating activities primarily from cash flows from operations
and short-term and long-term financing arrangements.
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