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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. and its consolidated subsidiaries (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 (the "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; •an 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 in the 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; 68 -------------------------------------------------------------------------------- Table of Contents •the creditworthiness of our trading counterparties, and banking and margin lending 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. (together with its consolidated subsidiaries, 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 two Russian subsidiaries. The sale of these subsidiaries was approved by theCentral Bank of theRussian Federation onFebruary 10, 2023 , and the sale is expected to be completed before the end ofFebruary 2023 . Our securities brokerage subsidiaries are professional participants on theKazakhstan Stock Exchange (KASE), the Astana International Exchange (AIX), the Moscow Exchange (MOEX), the Saint-Petersburg Exchange (SPBX), the Ukrainian Exchange (UX), theRepublican Stock Exchange of Tashkent (UZSE) and the Uzbek Republican Currency Exchange (UZCE) and a member of theNew York Stock Exchange (NYSE) and theNasdaq Stock Exchange (Nasdaq). 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. 69
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Regional Segments
Our chief operating decision maker ("CODM"), who is our CEO, views our business
as 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 December 31, 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 December 31, 2022 , our Central Asia segment had
14 bank offices, all in Kazakhstan , that provide commercial banking services.
During the nine months ended December 31, 2022 , we completed the acquisition of
three insurance companies with a total of 51 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 $153.1 million , or 71% of
our total revenue, net and approximately $113.3 million , or 69.5% of our total
expense, during the three months ended December 31, 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 Freedom EU, 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 . A significant amount of the brokerage business conducted by Freedom EU has historically, and is currently, provided to FFIN Brokerage, an affiliate of the Company incorporated inBelize , pursuant to an omnibus brokerage agreement. 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 ofDecember 31, 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 endedDecember 31, 2022 , ourEurope segment generated approximately$61.0 million , or 28%, of our total revenue, net and approximately$36.6 million , or 22%, 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 70 -------------------------------------------------------------------------------- Table of Contents restructuring. During the three months endedDecember 31, 2022 , theU.S. segment generated approximately$0.4 million , or 0.00%, of our total revenue, net and approximately$12.5 million , or 7.7%, of our total expense.
As ofDecember 31, 2022 , ourMiddle East /Caucasus region consisted of four 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 endedDecember 31, 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 ofDecember 31, 2022 , ourRussia segment had 44 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 endedDecember 31, 2022 , theRussia segment generated approximately$52.6 million of total revenue and approximately$38.9 million of total expense. Although we currently continue to operate ourRussia 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 sale of these subsidiaries was approved by theCentral Bank of theRussian Federation onFebruary 10, 2023 , and the sale is expected to be completed before the end ofFebruary 2023 . 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 ofDecember 31, 2022 , we have classified them as discontinued operations as ofDecember 31, 2022 and for the three and nine months endedDecember 31, 2022 , in accordance with ASC 205 and 360. OnNovember 11, 2022 , the Company has finalized transaction for purchase of 90.43% of the share capital of Freedom KZ (with its subsidiaries) from Freedom RU as part of a corporate restructuring, as a result of which the Company became the 100% direct owner of Freedom KZ. The transaction was finalized after receipt of the regulatory approval inKazakhstan . In addition, inJuly 2022 , Freedom RU established a subsidiaryFreedom Finance Auto LLC . InJanuary 2023 , Freedom RU concluded an agreement with Mr. Povalishin to sell this new subsidiary forRUB 50 million (approximately$695 based on the applicable currency exchange rate on the reporting date). OnFebruary 7, 2023 , the sale ofFreedom Finance Auto LLC was completed.
Corporate Restructuring
In conjunction with the sale of our Russian subsidiaries, we completed a corporate restructuring during the three months endedDecember 31, 2022 , which resulted in Freedom KZ (together with its wholly owned subsidiariesFreedom Bank KZ,Freedom Life andFreedom Insurance ), which had previously been directly owned by Freedom RU, being owned by FRHC directly. As a result of such corporate restructuring, FRHC now directly owns 100% of Freedom KZ.
Acquisitions
Historically we have been active in pursuing inorganic growth through mergers
and acquisitions. We expect this trend to continue in the future.
Credit Ratings
71 -------------------------------------------------------------------------------- Table of Contents 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 theKazakhstan national scale ratings of Freedom KZ and Freedom Bank KZ to "kzBB" from "kzBB-". InSeptember 2022 ,S&P Global Ratings raised the internation scale ofFreedom Life to "B+" with a stable outlook andKazakhstan national scale to "kzBBB" from "kzBBB-". On December, 2022, the international rating agencyS&P Global Ratings also announced an increase of credit rating and the financial stability rating ofFreedom Insurance from "B" to "B+", national scale has also changed from "kzBBB-" to "kzBBB" and the outlook for the ratings is stable. 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 in the regions in which we operate have grown rapidly in recent years. This growth has had a significant positive effect on our results of operations, which 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 350,000 as ofDecember 31, 2022 . As ofDecember 31, 2022 , more than 56% 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 endedDecember 31, 2022 , we had approximately 56,000 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 and various Russian companies and 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 , we announced our plans for divesting our interests in our Russian securities brokerage and complementary banking operations inRussia (the "Russia Segment"). OnOctober 19, 2022 , we entered into an agreement with Maxim Povalishin for the sale of 100% of the share capital of the companies comprising the Russia Segment. The sale of these subsidiaries was approved by theCentral Bank of theRussian Federation onFebruary 10, 2023 , and the sale is expected to be completed before the end ofFebruary 2023 . Because the assets and liabilities to be disposed of in connection with this transaction met the held for sale criteria as ofDecember 31, 2022 , in accordance with ASC 205 and 360 our Russian subsidiaries are presented as discontinued operations in the condensed consolidated financial statements as of and for the three and nine months endedDecember 31, 2022 and in the corresponding periods of 2021 for comparative purposes. 72
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Following our planned divestiture of our Russian subsidiaries, the scale of our operations will contract significantly. As ofDecember 31, 2022 , our Russian subsidiaries had 44 offices and branches and 2,611 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
During the three and nine months endedDecember 31, 2022 and 2021, the Company engaged in various related party transactions, a substantial amount of which were conducted withFreedom Securities Trading Inc. (formerly known asFFIN Brokerage Services, Inc. ) ("FFIN Brokerage"), a corporation registered in and licensed as a broker dealer inBelize . FFIN Brokerage was formed in 2014 and is owned 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 omnibus brokerage accounts with Freedom EU. The majority of the order flow from FFIN Brokerage to Freedom EU represents transactions of customers of FFIN Brokerage, which are executed by FFIN Brokerage through its omnibus accounts with Freedom EU. Our omnibus brokerage 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. In accordance with our Audit Committee Charter, our audit committee, all members of which are independent, is responsible for reviewing, approving and overseeing any transaction between the Company, including its subsidiaries, and any related person and any other potential conflict of interest situations on an ongoing basis. Our arrangement with FFIN Brokerage dates from the time of the establishment of our company and we plan to reduce the volume of business we conduct involving FFIN Brokerage over time. Fee and commission income generated from FFIN Brokerage accounted for approximately 54% and 67% of our total fee and commission income for the three and nine months endedDecember 31, 2022 , respectively, and approximately 83% and 84% of our total fee and commission income for the three and nine months endedDecember 31, 2021 . Interest income generated from FFIN Brokerage accounted for approximately 13% and 11% of the Company's total interest income for the three months endedDecember 31, 2022 , and 2021, respectively, as well as 12% and 5% of the Company's total interest income for the nine months endedDecember 31, 2022 and 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,
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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 . 74
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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 Fee and commission income consists principally of retail brokerage fees from customer trading and related banking services, fees for customers' outstanding short positions, fees for underwriting, market making and consulting services. Fee and commission income as a percentage of our total revenue was 38% and 59% in the three months endedDecember 31, 2022 and 2021, 45% and 44% in the nine months endedDecember 31, 2022 and 2021, respectively. 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 schedules we have formulated that align 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 85% and 95% in the three months endedDecember 31, 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, interest on margin lending to customers secured by marketable securities these customers hold with us, 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, the Russian ruble, the euro, theU.S. dollar, the Ukrainian hryvnia, theUzbekistan som, Kyrgyzstani som, the Azerbaijani manat, the Armenian dram, the British pound sterling and theUnited 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. 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 76
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Financial Condition and Results of Operations ("MD&A") are presented in
thousands of
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 December 31, 2022 Three months ended December 31, 2021 Change
(Restated)
Amount %* Amount %* Amount %
Fee and commission income $ 80,883 37 % $ 91,408 59 % $ (10,525) (12) %
Net gain on trading securities 25,456 12 % 7,663 5 % 17,793 232 %
Interest income 80,255 37 % 33,657 22 % 46,598 138 %
Insurance underwriting income 28,557 13 % 21,394 14 % 7,163 33 %
Net gain on foreign exchange
operations 20,866 10 % 1,361 1 % 19,505 1,433 %
Net loss on derivative (21,469) (10) % (314) - % (21,155) 6,737 %
Total revenue, net $ 214,548 100 % $ 155,169 100 % $ 59,379 38 %
* Percentage of total revenue, net.
For the three months endedDecember 31, 2022 , we realized total revenue, net of$214,548 , a$59,379 increase compared to three months endedDecember 31, 2021 . Revenue during the three months endedDecember 31, 2022 , was significantly higher than the three months endedDecember 31, 2021 , primarily due to increases in interest income and net gain on foreign exchange operations between the two periods. These increases were offset in part by an increase in net loss on derivative. During the course of the Company's preparation of its quarterly report on Form 10-Q for the three months endedDecember 31, 2022 , it was determined that there was an error in the Company's quarterly report on Form 10-Q for the three months endedDecember 31, 2021 related to the classification of interest income on margin lending on the Company's Condensed Consolidated Statement of Operations. This classification has been corrected in the foregoing table. Please see Note 4 Restatement to the condensed consolidated financial statements included in this quarterly report on Form 10-Q for more information.
Fee and commission income
The following table presents our fee and commission income as a percentage of
our total revenue by type for the periods presented.
Three
months ended
2022 2021 (Restated) Amount Change % Change Brokerage services$ 68,532 $ 86,700$ (18,168) (21) % Bank services 5,507 2,295 3,212 140 % Underwriting and market-making 4,778 1,828 2,950 161 %
services
Other fee and commission income 2,066 585 1,481 253 % Total fee and commission income$ 80,883 $ 91,408$ (10,525) (12) % 77
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Three months ended December 31,
2022 2021 (Restated)
(as a % of total revenue)
Brokerage services 85 % 95 %
Bank services 7 % 3 %
Underwriting and market-making services 6 % 2 %
Other fee and commission income 3 % 1 %
Total fee and commission income as a percentage of
total revenue
100 % 100 % For the three months endedDecember 31, 2022 , fee and commission income was$80,883 , a decrease of$10,525 , or 12%, as compared to fee and commission income of$91,408 for the three months endedDecember 31, 2021 . This decrease in fee and commission income was primarily attributable to a decrease in fee and commission income from retail brokerage services of$18,168 . The decrease in fee and commission income from retail brokerage services was attributable to lower volume of trades by clients in comparison with the three months endedDecember 31, 2021 . We believe that decrease is not indicative of a broader trend, and is instead largely attributable to the high volatility on the capital markets and the geopolitical and economic situation in the world over the relevant periods. The decrease was offset in part by an increase in fee and commission income from bank services by$3,212 due to the expansion of the operations 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$25,456 for the three months endedDecember 31, 2022 , an increase of$17,793 as compared to$7,663 for the three months endedDecember 31, 2021 . See the following table for information regarding our net gains and losses on trading activities during the three months endedDecember 31, 2022 and 2021: Realized Net
Unrealized Net
(Loss)/Gain Gain/(Loss) Net Gain
Three months ended December 31, 2022 $ (47,801)
Three months ended
During the three months endedDecember 31, 2022 , we had a realized loss on trading securities of$51,240 , which is attributable to SPBX shares sold during the three months endedDecember 31, 2022 . This loss was offset in part by a realized net gain of$3,439 from the sale of securities during this period, resulting in a realized net loss of$47,801 . We had an unrealized net gain in the three months endedDecember 31, 2022 , due to securities positions we continued to hold atDecember 31, 2022 , having appreciated by$21,185 as compared toSeptember 30, 2022 . In addition to this unrealized gain,we reclassified an unrealized loss of$52,072 of SPBX shares which was recognized during previous periods to a realized net loss during the three months endedDecember 31, 2022 , resulting in an unrealized net gain of$73,257 for the three months endedDecember 31, 2022 . During the three months endedDecember 31, 2021 , we exchanged approximately 1,000,000 shares of stock in the SPBX we held in our proprietary trading account for units in the SPBX ETF. As a result, for the three months endedDecember 31, 2021 , we recognized net gain on trading securities sold of$39,658 , which included$36,079 of unrealized net gain recognized during previous periods that was reclassified to realized net gain during the quarter endedDecember 31, 2021 . 78 -------------------------------------------------------------------------------- Table of Contents Interest income
The following tables set forth information regarding our revenue from interest
income for the periods presented.
Three months ended December 31,
%
2022 2021 (Restated) Amount Change Change
Interest income on margin loans to customers $ 12,379 $ 4,921 $ 7,458 152 %
Interest income on trading securities 44,760 20,745 24,015 116 %
Interest income on loans to customers 12,327 1,241 11,086 893 %
Interest income on available-for-sale 4 %
securities 6,727 6,470 257
Interest income on reverse repurchase 4,062 280 3,782 1351 %
agreements and amounts due from banks
Total interest income $ 80,255 $ 33,657 $ 46,598 138 %
Three months ended
2022 2021 (Restated)
(as a % of total interest income)
Interest income on margin loans to customers 15 % 15 %
Interest income on trading securities 56 % 62 %
Interest income on loans to customers 15 % 4 %
Interest income on available-for-sale securities 8 % 19 %
Interest income on reverse repurchase agreements and amounts 5 % 1 %
due from banks
Total interest income as a percentage of total revenue 100 % 100 %
For the three months ended December 31, 2022 , interest income was $80,255 ,
representing an increase of $46,598 , or 138%, compared to the three months ended
December 31, 2021 . The increase in interest income was primarily attributable to
a $24,015 , or 116%, increase in interest income from trading securities between
the two periods, as 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. Moreover, we recognized a
$7,458 , or 152%, increase in interest income on margin loans to customers,
resulting from a higher usage of margin loans for trades by our clients,
including our affiliate FFIN Brokerage. In addition, we recognized a $11,086 , or
893%, increase in interest income on loans to customers between the two periods,
which is mainly attributable to the issuing of mortgage loans and the purchase
of uncollateralized bank customer loans from our affiliate FFIN Credit.
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 endedDecember 31, 2022 , we realized a net gain on foreign exchange operations of$20,866 compared to a net gain of$1,361 during the three months endedDecember 31, 2021 . The increase was primarily due to a net gain of$19,439 by our subsidiary Freedom Bank KZ in the three months endedDecember 31, 2022 from the purchase and sale of foreign currency, as the volume of currency transactions conducted by such subsidiary increased by 92% in the three months endedDecember 31, 2022 as compared to the three months endedDecember 31, 2021 . This gain was primarily the result of the appreciation of the Kazakhstani tenge against the Russian ruble by approximately 25% and appreciation ofU.S dollar against the Kazakhstani tenge by 3%.
Insurance underwriting income
During the three months endedDecember 31, 2022 , we had insurance underwriting income of$28,557 , an increase of$7,163 , or 33%, as compared to the three months endedDecember 31, 2021 . The increase was primarily attributable to a$8,852 , or 40%, increase in insurance underwriting income from written insurance premiums for the three months endedDecember 31, 2022 , as compared to the three months endedDecember 31, 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$2,577 , or 8313%, increase in income from insurance activities due to the reinsurance premiums ceded for the 79
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three months ended
underwriting income for the periods presented.
Three months ended December 31,
2022 2021 (Restated)
Written insurance premiums $ 30,718 $ 21,866
Reinsurance premiums ceded (2,608) (31)
Change in unearned premium reserve, net 447 (441)
Insurance underwriting income $ 28,557 $ 21,394
Expense
The following table sets out information on our total expense for the periods
presented.
Three months ended December 31,
Three months ended December 31, 2022 2021 Change
(Recasted)
Amount %* Amount Amount %
Fee and commission expense $ 18,314 11 % $ 24,782 26 % $ (6,468) (26) %
Interest expense 52,037 32 % 21,890 23 % 30,147 138 %
Insurance claims incurred, net of
reinsurance 17,419 11 % 16,286 17 % 1,133 7 %
Operating expense 50,608 31 % 31,581 33 % 19,027 60 %
(Recovery of provision)/provision for
impairment losses 24,140 15 % (333) - % 24,473 (7349) %
Other (income)/expense, net 570 - % 979 1 % (409) (42) %
Total expense $ 163,088 100 % $ 95,185 100 % $ 67,903 71 %
______________
* Percentage of total expense.
For the three months ended
interest expense and provision for impairment losses. 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. Fee and
commission expense decreased by 26% between the two periods.
Fee and commission expense
Fee and commission expense decreased by$6,468 , or 26%, for the three months endedDecember 31, 2022 , as compared to the three months endedDecember 31, 2021 . The decrease was primarily attributable to a decrease in brokerage services fees of$10,230 due to 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 also offset by the effect of increase in the bank services fees of$1,024 due to the expansion of the operations ofFreedom Bank KZ between the two periods and an increase in agency fee from insurance activities of$2,214 due to the expansion of our insurance operations between the two periods. Interest expense During the three months endedDecember 31, 2022 , we had a$30,147 , or 138%, increase in interest expense as compared to the three months endedDecember 31, 2021 . The increase in interest expense was primarily attributable to a$24,287 , or 155%, increase in interest expense on short-term financing through securities repurchase agreements due to an increase in the volume of such financing, and a$5,417 , or 95%, increase in interest on customer deposits. During the three months endedDecember 31, 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 ofDecember 31, 2022 andMarch 31, 2022 , banking customer liabilities of Freedom Bank KZ were$1,026,605 and$246,284 , respectively. 80
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Insurance claims incurred, net of reinsurance
During the three months endedDecember 31, 2022 , we had a$1,133 , or 7%, increase in insurance claims incurred, net of reinsurance, as compared to the three months endedDecember 31, 2021 . The increase was primarily attributable to a$3,883 or 59%, increase in other expenses and a$3,227 or 99%, increase in expenses for claims for the three months endedDecember 31, 2022 , as compared to the three months endedDecember 31, 2021 , in each case due to the expansion of our insurance operations between the two periods. The increases were offset in part by a$5,977 , or 92%, decrease in expenses for insurance reserve between the two periods. Operating expenses Operating expenses during the three months endedDecember 31, 2022 were$50,608 , which increased by$19,027 , or 60%, compared to operating expenses of$31,581 in the three months endedDecember 31, 2021 . This increase was primarily attributable to the following increases:$7,528 in payroll and bonus expense as a result expansion of our workforce through hiring;$2,169 in fines, penalties and forfeit primarily due to penalties imposed in the three months endedDecember 31, 2022 on a subsidiary of the Company by a local regulator for regulatory noncompliance;$1,758 in charity and sponsorship expense due to humanitarian aid to theUkraine -based charitable fund in connection with the geopolitical and economic situation;$667 decrease in stock based compensation expense due to the separation between continued and discontinued operations;$1,128 in rent expense;$796 in software support expense and a$5,766 increase in other operating expenses. We had 3,116 employees as ofDecember 31, 2022 as compared to 1,540 employees as ofDecember 31, 2021 , in each case excluding employees from discontinued operations. The increase in the number of our employees was primarily due to the opening of new branches of Freedom Bank KZ and the acquisitions ofFreedom Life andFreedom Insurance , in each case during the 2022 calendar year.
Provision for impairment losses
We recognized provision for impairment losses in the amount of$24,140 for the three months endedDecember 31, 2022 , as compared to recovery for impairment losses of$333 for the three months endedDecember 31, 2021 . The increase was primarily attributable to growth of the loan portfolio of Freedom Bank KZ, as the majority of provisions is accrued on loan products. In addition, the Company accrued a one-off provision expense for restricted brokerage customers' cash which was held withLek Securities Limited and a one-off provision expense for loans issued by a Ukrainian bank due to theRussia /Ukraine Conflict.
Income tax expense
We recognized income before income tax of$51,460 and$59,984 during the three months endedDecember 31, 2022 , andDecember 31, 2021 , respectively. Income tax expense for the three months endedDecember 31, 2022 , andDecember 31, 2021 was$5,069 and$1,806 , respectively. Our effective tax rate during the three months endedDecember 31, 2022 , increased to 9.9%, from 3.0% during the three months endedDecember 31, 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 endedDecember 31, 2022 , and the three months endedDecember 31, 2021 , we recognized net income from continuing operations of$46,391 and$58,178 , 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 income from discontinued operations was$16,009 for the three months endedDecember 31, 2022 , as compared to net loss from discontinued operations of$4,105 for the three months endedDecember 31, 2021 . The change from a net loss to net income was primarily due to the presence of a significant net asset position in Chinese yuan by Freedom RU starting fromJune 2022 . The exchange rate of the Chinese yuan against the Russian ruble increased by 24% during the three months endedDecember 31, 2022 , as a result of which theRussia segment recognized a gain on foreign exchange operations on dealing operations of$14,431 during the three months endedDecember 31, 2022 , 81
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and Freedom RU recognized a$5,340 foreign exchange gain in the three months endedDecember 31, 2022 . This gain was partially offset by the accrual of an additional provision for impairment of discontinued operations in an amount of$2,509 . Net income As a result of the foregoing factors, for the three months endedDecember 31, 2022 , we realized net income of$62,400 compared to$54,073 for the three months endedDecember 31, 2021 , an increase of 15%.
Non-controlling interest
We reflectMr. Tashtitov's 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$464 for the three months endedDecember 31, 2022 , as compared to a net loss attributable to non-controlling interest of$343 for the three months endedDecember 31, 2021 . This change was largely a result of the deterioration of trading positions of Freedom UA after the impact of theRussia /Ukraine Conflict.
Foreign currency translation adjustments, net of tax
Due to an approximately 25% depreciation of the Russian ruble and an approximately 3% depreciation of theKazakhstan tenge each against theU.S. dollar during the three months endedDecember 31, 2022 , we realized a foreign currency translation loss of$5,611 for the three months endedDecember 31, 2022 , as compared to a foreign currency translation loss of$8,650 for the three months endedDecember 31, 2021 .
Comparison of the Nine-month Periods Ended
The following comparison of our financial results for the nine-month periods
ended
results.
Revenue
The following table sets out information or our total revenue, net for the
periods presented.
Nine Months Ended December 31, 2022 Nine Months Ended December 31, 2021 Change
(Restated)
Amount %* Amount %* Amount %
Fee and commission income $ 253,486 45 % $ 262,549 44 % $ (9,063) (3) %
Net gain on trading securities 38,894 7 % 197,947 33 % (159,053) (80) %
Interest income 187,817 33 % 82,514 14 % 105,303 128 %
Insurance underwriting income 78,998 14 % 51,491 9 % 27,507 53 %
Net gain on foreign exchange
operations 30,014 5 % 4,076 1 % 25,938 636 %
Net loss on derivative (22,523) (4) % (1,028) - % (21,495) 2091 %
Total revenue, net $ 566,686 100 % $ 597,549 100 % $ (30,863) (5 %)
______________
* Percentage of total revenue, net.
For the nine months endedDecember 31, 2022 , we realized total net revenue of$566,686 , a 5% decrease compared to the nine months endedDecember 31, 2021 . The decrease was primarily attributable to a decrease in net gain on trading securities in the amount of$159,053 , which was offset in part by an increase in interest income. We consider the net gain on trading securities during the three months endedDecember 31, 2021 as an extraordinary event that we do not believe to be indicative of a trend in future periods. During the course of the Company's preparation of its quarterly report on Form 10-Q for the nine months endedDecember 31, 2022 , it was determined that there was an error in the Company's quarterly report on Form 10-Q for the nine months endedDecember 31, 2021 related to the classification of interest income on margin lending on the Company's 82
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Condensed Consolidated Statement of Operations. This classification has been corrected in the foregoing table. Please see Note 4 Restatement to the condensed consolidated financial statements included in this quarterly report on Form 10-Q for more information. Fee and commission income
The following table presents our fee and commission income as a percentage of
our total revenue by type for the periods presented.
Nine
months ended
2022 2021 (Restated) Amount Change % Change Brokerage services$ 227,476 $ 249,249 $ (21,773) (9) % Bank services 15,100 4,027 11,073 275 % Underwriting and market-making 8,008 5,832 2,176 37 %
services
Other fee and commission income 2,902 3,441 (539) (16) % Total fee and commission income$ 253,486 $ 262,549 $ (9,063) (3) % Nine months ended December 31, 2022 2021 (Restated) (as a % of total revenue) Brokerage services 90 % 95 % Bank services 6 % 2 % Underwriting and market-making services 3 % 2 % Other fee and commission income 1 % 1 %
Total fee and commission income as a percentage of
total revenue
100 % 100 % For the nine months endedDecember 31, 2022 , fee and commission income was$253,486 , a decrease of$9,063 , or 3%%, as compared to fee and commission income of$262,549 for the nine months endedDecember 31, 2021 . This decrease in fee and commission income was primarily attributable to a decrease in fee and commission income from retail brokerage services of$21,773 . The decrease in fee and commission income from retail brokerage services was attributable to a decrease in the volume of trades by clients in comparison with the nine months endedDecember 31, 2021 . We believe that decrease is not indicative of a broader trend, and is instead largely attributable to the high volatility on the capital markets and the geopolitical and economic situation in the world over the relevant periods. The decrease was offset in part by an increase in fee and commission income from bank services by$11,073 due to the expansion of the operations of Freedom Bank KZ and the growing activity of its clients between the two periods.
Net gain on trading securities
The following table sets out information regarding our net gains on trading
securities during the nine months ended
Realized Net
Unrealized Net
(Loss)/Gain Gain Net Gain
Nine months ended December 31, 2022 $ (26,790) $ 65,684 $ 38,894
Nine months ended December 31, 2021 $ 190,044 $
7,903
During the nine months endedDecember 31, 2022 , we sold securities for a realized net gain of$24,450 . This realized gain was offset by realized loss of$51,240 , which is attributable to SPBX shares sold during the nine months endedDecember 31, 2022 , resulting in realized net loss of$26,790 . Similarly, securities positions we continued to hold atDecember 31, 2022 , had appreciated by$35,985 as compared toMarch 31, 2022 . In addition to this unrealized gain, unrealized loss of$29,699 of SPBX shares which was recognized during previous periods was reclassified to realized net loss during the three months endedDecember 31, 2022 , resulting in an unrealized net gain of$65,684 for such nine month period. 83
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The primary contributing factors to the increase in net gain on trading securities during the nine months endedDecember 31, 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 atDecember 31, 2021 . 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 atDecember 31, 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.
Nine months ended
%
2022 2021 (Restated) Amount Change Change
Interest income on margin lending $ 27,259 $ 8,212 $ 19,047 232 %
Interest income on trading securities 116,922 54,966 61,956 113 %
Interest income on loans to customers 24,158 2,205 21,953 996 %
Interest income on available-for-sale
securities 13,280 16,244 (2,964) (18) %
Interest income on reverse repurchase 6,198 887 5,311 599 %
agreements and amounts due from banks
Total interest income $ 187,817 $ 82,514 $ 105,303 128 %
Nine months ended
2022 2021 (Restated)
(as a % of total interest income)
Interest income on margin lending 15 % 10 %
Interest income on trading securities 62 % 67 %
Interest income on loans to customers 13 % 3 %
Interest income on available-for-sale securities 7 % 20 %
Interest income on reverse repurchase agreements and amounts 3 % 1 %
due from banks
Total interest income as a percentage of total revenue 100 % 100 %
Interest income increased by
31, 2022
interest income from margin lending to clients, trading securities, reverse
repurchase transactions and loans to customers and amounts due from banks.
The Company recognized a
between the two nine month periods, as a result of a higher usage of margin
loans for trades by our clients, including our affiliate FFIN Brokerage.
Interest income on trading securities consists of interest earned from investments in debt securities held in our proprietary trading account. We recognized a$61,956 , or 113% increase in interest income from trading securities during the nine months endedDecember 31, 2022 due to an increase in the total size of our trading portfolio and an increase in the percentage of our investments in bonds as compared to other securities. We also recognized a$21,953 , or 996% increase in interest income from loans to customers between the two nine month periods as a result of issuing of mortgage loans in connection with the expansion of the operations of Freedom Bank KZ and the purchase of uncollateralized bank customer loans from our affiliate FFIN Credit. We recognized a$5,311 increase in interest income from reverse repurchase transactions and due from banks because we engaged in a larger volume of such transactions during the nine months endedDecember 31, 2022 .
Net gain on foreign exchange operations
During the nine months endedDecember 31, 2022 , we realized a net gain on foreign exchange operations of$30,014 compared to a net gain of$4,076 during the nine months endedDecember 31, 2021 . The increase was primarily due to a net gain of$30,986 in the nine months endedDecember 31, 2022 by our subsidiary Freedom Bank KZ due to 84
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purchase and sale of foreign currency, as the volume of currency transactions
conducted by such subsidiary increased by 165% in the nine months ended
Insurance underwriting income
During the nine months endedDecember 31, 2022 , we recognized a$27,507 , or 53%, increase in insurance underwriting income as compared to the nine months endedDecember 31, 2021 . We recognized a$32,424 , or 59%, increase in insurance underwriting income from written insurance premiums for the nine months endedDecember 31, 2022 , as compared to the nine months endedDecember 31, 2021 , due to the expansion of our insurance operations. This increase in income from written insurance premiums was partially offset by a$3,096 , or 1005%, decrease in income from insurance activities due to the reinsurance premiums ceded and$1,822 , or 56%, decrease in income from insurance activities due to the unearned premium reserve for the nine months endedDecember 31, 2022 , as compared to the nine months endedDecember 31, 2021 .
Expense
The following table sets out the information on our total expense for the
periods presented.
Nine Months Ended December 31, 2022 Nine Months Ended December 31, 2021 Change
(Recasted)
Amount %* Amount %* Amount %*
Fee and commission expense $ 60,068 15 % $ 68,626 29 % $ (8,558) (12) %
Interest expense 132,971 33 % 52,852 22 % 80,119 152 %
Insurance claims incurred, net of
reinsurance 51,586 13 % 41,096 17 % 10,490 26 %
Operating expense 126,367 31 % 72,772 30 % 53,595 74 %
Provision for impairment losses 30,294 8 % 911 - % 29,383 3225 %
Other (expense)/income, net 79 - % 2,426 1 % (2,347) (97) %
Total expense $ 401,365 100 % $ 238,683 100 % $ 162,682 68 %
______________
* Percentage of total expense.
During the nine months endedDecember 31, 2022 , we incurred total expenses of$401,365 , a 68% increase compared to the nine months endedDecember 31, 2021 . Expenses increased with the growth of our business primarily in connection with increases in interest expense 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 was essentially constant at$60,068 for the nine months endedDecember 31, 2022 and$68,626 the nine months endedDecember 31, 2021 . There were increases of commissions paid to bank services of$7,979 , other commission expenses of$5,414 and agency fee expenses of$7,018 , which increases were offset by a decrease in brokerage commissions by$29,792 due to 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. Additionally these decrease in expense of brokerage commissions were the result of decrease of commission income from retail brokerage services in comparison with nine months endedDecember 31, 2021 . 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 nine months endedDecember 31, 2022 , we incurred a 152% increase in interest expense. The increased expense was primarily attributable to a$66,918 increase in the volume of short-term financing through securities repurchase agreements and a$12,135 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. 85
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Insurance claims incurred, net of reinsurance
During the nine months endedDecember 31, 2022 , we recognized a$10,490 , or 26%, increase in expenses from insurance activities as compared to the nine months endedDecember 31, 2021 . We recognized a$5,945 or 26%, increase in expenses for insurance reserve, a$6,423 or 74%, decrease in expenses for claims, and a$10,012 or 102%, increase in other expenses for the nine months endedDecember 31, 2022 , as compared to the nine months endedDecember 31, 2021 , due to the expansion of operations of our insurance companies.
Operating expenses
We recognized a$53,595 , or 74%, increase in operating expenses during the nine months endedDecember 31, 2022 compared with the nine months endedDecember 31, 2021 . The increase was primarily attributable to the following increases: a$23,384 , or 44% in payroll and bonus expense as a result expansion of our workforce through hiring;$9,043 in charity and sponsorship expense due to humanitarian aid to theUkraine -based charitable fund in connection with the geopolitical and economic situation;$4,712 in professional services;$2,628 in software support;$2,383 in fines, penalties and forfeit primarily due to penalties imposed in the nine months endedDecember 31, 2022 , on a subsidiary of the Company by a local regulator for regulatory noncompliance;$882 in stock based compensation expense;$1,753 in rent expenses; and a$9,133 increase in other operating expenses. During the nine months endedDecember 31, 2022 we had 2,529 employees, as compared to 1,356 employees for nine months endedDecember 31, 2021 in each case excluding employees from discontinued operations. The increase in the number of our employees was primarily due to the opening of new branches of Bank Freedom Finance Kazakhstan and the acquisitions ofFreedom Finance Insurance and Freedom Finance Life, in each case during the nine months endedDecember 31, 2022 .
Provision for impairment losses
We recognized provision for impairment losses in the amount of$30,294 for the nine months endedDecember 31, 2022 , as compared to provision for impairment losses of$911 for the nine months endedDecember 31, 2021 . The increase was primarily attributable to growth of the loan portfolio of Freedom Bank KZ, as the majority of provisions is accrued on loan products. In addition, the Company accrued a one-off provision expense for restricted brokerage customers cash which was held withLek Securities Limited and a one-off provision expense for loans issued by a Ukrainian bank due to theRussia /Ukraine Conflict.
Income tax expense
We recognized income before income tax of$165,321 and$358,866 during the nine months endedDecember 31, 2022 , and the nine months endedDecember 31, 2021 , respectively. Income tax expense for the nine months endedDecember 31, 2022 , and the nine months endedDecember 31, 2021 were$26,567 and$39,026 , respectively. Our effective tax rate during the nine months endedDecember 31, 2022 , increased to 16.1%, from 10.9% during the nine months endedDecember 31, 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 nine months endedDecember 31, 2022 , and the nine months endedDecember 31, 2021 , we recognized net income from continuing operations of$138,754 and$319,840 , 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 income from discontinued operations was
months ended
operations of
The change from a net loss to net income was primarily due to the presence of a significant net asset position in Chinese yuan by Freedom RU starting fromJune 2022 . The exchange rate of the Chinese yuan against the Russian ruble increased by 29% during the six months endedDecember 31, 2022 . For this reason, the Russia Segment recognized a gain on foreign exchange operations on dealing operations of$37,848 for the nine months endedDecember 31, 2022 . Interest 86
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income increased by$31,886 due to increased interest income generated on margin loans to customers, resulting from a higher usage of margin loans for trades by clients. Net gain on trading securities increased by$23,614 , mainly due to gain from the sale of securities. Operating expenses increased by$29,538 primarily due to an increase in payroll expenses as a result of a 40% increase in the average number of employees between the two periods. In addition, as presented in Note 25 to the condensed consolidated financial statements included in this quarterly report on Form 10-Q we recognized provision for impairment of discontinued operations in the amount of$43,973 .
Net income
As a result of the foregoing factors, for the nine months ended
2022
months ended
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$1,508 for the nine months endedDecember 31,2022 , as compared to a net loss attributable to non-controlling interest of$415 for the nine months endedDecember 31, 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 14% and appreciation onKazakhstan tenge by nearly 2%, respectively against theU.S. dollar during the nine months endedDecember 31, 2022 , we realized a foreign currency translation loss of$301 , as compared to a foreign currency translation loss of$4,447 during the nine months endedDecember 31, 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 endedDecember 31, 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 December 31,
2022 2021 (Restated) Amount Change % Change
Central Asia $ 153,142 $ 65,856 $ 87,286 133 %
Europe 61,035 88,146 (27,111) (31) %
U.S. 358 1,162 (804) (69) %
Middle East/Caucasus 13 5 8 160 %
Total revenue, net $ 214,548 $ 155,169 $ 59,379 38 %
During the three months ended December 31, 2022 , total revenue, net increased
across each of our regional operating segments, except Europe and U.S. The
changes in total net revenue, net for the three months ended December 31, 2022 ,
compared to the three months ended December 31, 2021 , were driven by the
following:
•Total revenue, net in our
months ended
87 -------------------------------------------------------------------------------- Table of Contents income, as a result of an increase in interest received on securities held in our trading portfolio and an increase in interest accrued on 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 an increase in net gain on trading securities, related to growth of our trading portfolio and an increase in net gain on foreign exchange operations, which was mainly driven by an increase in foreign exchange dealing operations. The increase in revenue was also attributable to an increase in commission fees from brokerage and banking services due to an increase in brokerage activity in theCentral Asia segment. The increase in total revenue was partially offset by a net loss on derivative. •Total revenue, net in ourEurope segment decreased by 31% for the quarter endedDecember 31, 2022 . This decrease was mainly driven by a decrease in fee and commission income from theEurope segment, which decreased by 41.7% in the three months endedDecember 31, 2022 as compared to the three months endedDecember 31, 2021 , due to a decrease of client trading activities between the two periods. This decrease was partially offset by an increase in interest income from margin lending between the two three month periods by 37%, resulting from a higher usage of margin loans for trades by our clients. •Total revenue, net in ourU.S. segment decreased by 69% during the three months endedDecember 31, 2022 as compared to the three months endedDecember 31, 2021 . This decrease was driven mainly by a net loss on trading securities, which was partially offset by increased interest income on bonds in our trading portfolio.
The following table sets out total expense, net by segment for the three month
periods presented (not including discontinued operations):
Three months ended December 31,
2022 2021 (Restated) Amount Change % Change
Central Asia 113,316 56,234 $ 57,082 102 %
Europe 36,637 32,529 4,108 13 %
U.S. 12,487 6,506 5,981 92 %
Middle East/Caucasus 648 (84) 732 (871) %
Total expense, net $ 163,088 $ 95,185 $ 67,903 71 %
During the three months ended December 31, 2022 , total expense increased across
each of our regional operating segments, except Europe , compared to the three
months ended December 31, 2021 . The changes in total expense, net, for the three
months ended December 31, 2022 , were driven by the following:
•Total expense, net, in our Central Asia segment increased by 102% for the three
months ended December 31, 2022 . This increase was primarily recognized by
Freedom Bank KZ and was driven by an increase in interest expense primarily from
an increase in interest on securities repurchase agreements obligations and
growth in customer deposits, and an increase in provision for impairment losses
which was driven by an increase in loans issued. In addition, there was an
increase of fee and commission expense by 26% during three months ended December
31, 2022 , in comparison with the three months ended December 31, 2021 , which was
mainly attributable to an increase of execution of client trading orders within
the Central Asia segment. This segment also experienced an increase in operating
expenses which is mainly affected by an increase in payroll and bonuses,
resulting from an increase of employees approximately by 42%.
•Total expense in our Europe segment increased by 13% for the quarter ended
December 31, 2022 . This increase was mainly due to an increase in interest
expense primarily from growth in interest paid on securities repurchase
agreements and growth in customer deposits and an increase in operating
expenses, mainly due to charity and sponsorship, software support and payroll
and bonuses. This increase was partially offset by a decrease in fee and
commission expense which was driven by the lower commission expense due to a
change of our prime broker and a different composition of order flow
transactions, which were charged at lower rates.
•Total expense in our U.S. segment increased by 92% during the three months
ended December 31, 2022 . This increase was driven by an increase in interest
expense on securities repurchase agreement obligations.
The following table presents total revenue, net for the nine month periods
presented (not including discontinued operations):
88
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Nine months ended December 31,
2022 2021 (Restated) Amount Change % Change
Central Asia $ 365,257 $ 166,534 $ 198,723 119 %
Europe 194,121 428,057 (233,936) (55) %
U.S. 7,286 2,953 4,333 147 %
Middle East/Caucasus 22 5 17 340 %
Total revenue, net $ 566,686 $ 597,549 $ (30,863) (5) %
For the nine months ended December 31, 2022 , total revenue, net increased across
each of our regional operating segments, except Europe . The changes in total net
revenues for the nine months ended December 31, 2022 , compared to the nine
months ended December 31, 2021 , were driven by the following:
•Total revenue, net in our Central Asia segment increased by 119% for the nine
months ended December 31, 2022 . This increase was driven by an increase in
interest income, as a result of an increase in interest received from securities
held in our trading portfolio and an increase in interest accrued on 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 net gain on
foreign exchange operations, which was mainly driven by an increase in foreign
exchange dealing operations. The increase in total revenue was partially offset
by a net loss on derivative.
•Total revenue, net in our Europe segment decreased by 55% for the nine months
ended December 31, 2022 . This decrease was primarily driven by a decrease in fee
and commission income and by a decrease in net gain on trading securities due to
the revaluation of our trading portfolio. These decreases were partially offset
by an increase in interest income from margin lending during the nine months
ended December 31, 2021 , resulting from a higher usage of margin loans for
trades by our clients.
•Total revenue, net in our
ended
interest income from the bonds in our trading portfolio. The increase was
partially offset by a net loss on trading securities.
The following table sets out total expenses associated with our segments for the
nine month periods presented (not including discontinued operations):
Nine months ended December 31,
2022 2021 (Restated) Amount Change % Change
Central Asia $ 284,654 $ 138,228 $ 146,426 106 %
Europe 83,401 84,447 (1,046) (1) %
U.S. 31,871 15,929 15,942 100 %
Middle East/Caucasus 1,439 79 1,360 1,722 %
Total expense, net $ 401,365 $ 238,683 $ 162,682 68 %
For the nine months ended December 31, 2022 , total expense increased across each
of our regional operating segments, except Europe , compared to the nine months
ended December 31, 2021 . The changes in total expenses for the nine months ended
December 31, 2022 , were driven by the following:
•Total expense in our Central Asia segment increased by 106% for the nine months
ended December 31, 2022 . This increase was primarily recognized by Freedom Bank
KZ and was driven by an increase in interest expense primarily from an increase
in interest paid on securities repurchase agreements and growth in customer
deposits, and an increase in provision for impairment losses which was driven by
an increase in loans issued. In addition, fee and commission expense increased
by 192.01% during the nine months ended December 31, 2022 , in comparison with
the nine months ended December 31, 2021 , mainly due to an increase in the volume
of client trading orders within the Central Asia segment. This segment also
experienced an increase in operating expenses primarily due to growth in payroll
and bonuses, resulting from an increase of employees approximately by 42%.
•Total expense in our Europe segment decreased by 1% for the nine months ended
December 31, 2022 . This decrease was driven by lower commission expense due to a
change of our prime broker and by a different composition of order flow
transactions, which were charged at lower rates. This decrease was partially
offset
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mainly by increased operating expenses, mainly due to charity and sponsorship,
software support and payroll and bonuses.
•Total expense in our U.S. segment increased by 100% during the nine months
ended December 31, 2022 . This increase was driven by increased interest expense
on securities repurchase agreement obligations.
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
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:
December 31, 2022 March 31, 2022
(Restated)
Cash and cash equivalents(1) $ 664,095 $ 225,464
Trading securities $ 1,929,840 $ 1,158,377
Total assets $ 5,368,134 $ 3,227,750
Net liquid assets(2) $ 3,045,257 $ 1,558,544
______________
(1)Of the $664,095 in cash and cash equivalents we held at December 31, 2022 ,
$129,955 , or approximately 20%, 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; margin lending,
brokerage and other receivables; 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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