FREEDOM HOLDING CORP. Management report and analysis of the financial position and operating results (Form 10-Q)
The following discussion is intended to assist you in understanding our results of operations and our present financial condition. 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 theSEC including our annual report on Form 10-K filed with theSEC onJune 15, 2021 .
Special note on forward-looking information
Certain information included here in and the documents incorporated by reference in this quarterly report on Form 10-Q, if any, contain statements within the meaning of the safe harbor provisions of theU.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that could be forward-looking. You can recognize these statements through our use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "future," "intend," "likely," "may," "might," "plan," "potential," "predict," "project," "should," "strategy," "will," "would," other similar expressions and their negatives. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors, many of which may be beyond our control, that could cause actual results to differ materially from any future results, expressed or implied, in forward looking statements. Such factors include but are not limited to, the following:
General economic and political conditions globally and in the
markets where we operate;
· declines in global financial markets;
· the 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;
· Failure to meet regulatory capital or liquidity requirements;
Increased competition, including downward pressure on commissions and
costs;
Risks inherent in electronic brokerage, banking and market making
companies;
· Fluctuations in interest rates and foreign currency exchange rates;
Failure to protect or enforce our intellectual property rights in our
proprietary technology;
· The risks associated with being a “controlled company” within the meaning of
the rules of the Nasdaq;
· Loss of key management or inability to recruit and retain staff;
· Our ability to keep up with rapid technological change;
Information technology, trading platform and other system failures, cyber
security threats and other disruptions;
· losses caused by non-performance by third parties;
37
Table of Contents
Decrease in profitability in the event of loan default in our loans
portfolio increase;
· Losses (realized or unrealized) on our investments;
Our inability to integrate businesses we acquire or otherwise adapt to
the expansion and rapid growth of our business;
The risks inherent in the conduct of business in
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
that we operate, in particular those relating to securities and
banking sectors;
The solvency of our commercial, banking and margin counterparties
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 and political discord; and
Other factors discussed in this report, as well as in our annual report on
Form 10-K filed with theSEC onJune 15, 2021 . 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. OverviewFreedom Holding Corp. is a holding company. Our operating subsidiaries provide financial services including full-service retail securities brokerage, banking services, investment education, securities trading, investment banking, retail banking, underwriting services and market making activities in Eurasia. We are headquartered inAlmaty, Kazakhstan , with supporting administrative offices inRussia ,Cyprus andthe United States of America . 38 Table of Contents
Our subsidiaries are participants on theKazakhstan Stock Exchange (KASE),Astana Stock 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 are members of theNew York Stock Exchange (NYSE) andNasdaq Stock Exchange (Nasdaq). OurCyprus office provides our clients with operations support and access to the investment opportunities, relative stability, and integrity of theU.S. , European and Asian securities markets, which under the regulatory regimes of many jurisdictions where we operate, provide only limited or no direct investor access to international securities markets. Our business is directed toward providing an array of financial services to our target retail audience which is individuals, businesses and financial institutions, including other broker-dealers, seeking to diversify their investment portfolios to manage economic risk associated with political, regulatory, currency, banking, and national uncertainties. Clients are provided online tools and retail locations to establish accounts and conduct securities trading on transaction-based pricing. We market to our customer demographic through a number of channels, including telemarketing, training seminars and investment conferences, print and online advertising, social media, our mobile app and search engine optimization.
All dollar amounts reflected under the headings “executive summary”, “results of operations”, “cash and capital resources” and “cash flow” in this MD&A on financial condition and results of operations (“MD&A”) are presented in thousands of
Executive Summary Customer Base We service more than 340,000 client accounts. As ofSeptember 30, 2021 , more than 60% of those client 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, 2021 , we had approximately 100,000 active accounts. In addition to organic customer acquisition, we have accelerated our growth through several strategic acquisitions which has enabled us to expand our market reach, increase our client base and provide our clientele the convenience of both a state-of-the-art proprietary electronic trading platform, Tradernet, and 103 retail brokerage and financial services offices located acrossKazakhstan (32),Kyrgyzstan (1),Russia (43),Uzbekistan (8),Ukraine (14),Cyprus (1),Germany (2),Azerbaijan (1),UK (1) andUSA (1) that provide an array of financial services, and investment consulting and education. InRussia , 30 of our brokerage and financial services offices also provide banking services
to firm customers. Significant events 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 closed-end unit investment combined fund "SPB fund" (the "SPBX ETF"). InSeptember 2021 we sold all our SPBX ETF units to approximately 15,000 investors for total consideration of$155,673 . S&P Rating OnAugust 2, 2021 ,S&P Global Ratings ("S&P") assigned its "B/Stable/B" issuer credit rating to each of Freedom EU and Freedom Global and onOctober 29, 2021 , S&P upgraded to "B/Stable/B" from "B-/Stable/B" its issuer credit rating to Freedom Bank KZ and upgraded itsKazakhstan national scale rating of Freedom Bank KZ to "kzBB+" from "kzBB". 39 Table of Contents New Banking Products Digital mortgage
Digital mortgage is a new product launched by Freedom Bank KZ inJuly 2021 , that allows customers inKazakhstan to apply for and complete the residential mortgage loan process online. This service significantly speeds up the mortgage registration process. Moreover, there is no cost to the customer to complete the initial online assessment. As ofSeptember 30, 2021 , 312 digital mortgage loans have been approved and issued in the aggregate amount of$11,079 . Approval of all loans is carried out by the Freedom Bank KZ. Since the launch of the digital mortgage product, nearly 12,000 online assessments have been submitted through theFreedom Bank KZ's digital mortgage portal. Invest card Freedom Bank KZ continues to develop its Invest card and has issued more than 3,000 limited cards for testing to select customer. Invest cards offer features unique to the Kazakhstani market, including the ability to quickly and conveniently transfer money to and from a customer's investment accounts, around-the-clock access to the customer's brokerage accounts, instant card issuance upon approval, instant replenishment and payment for purchases without commissions, and daily interest of up to 3% per annum inU.S. dollars on the outstanding balance on the card. Impact of COVID-19 The COVID-19 pandemic has affected the global financial markets. The pandemic has resulted in unprecedented global market conditions that has led to significant growth in our customer accounts, as well as increased activity from our existing customers, resulting in higher fee and commission income. These market conditions have also resulted in significant gains in our investment portfolio. We continue to monitor conditions surrounding COVID-19, as well as economic and capital market conditions. We continue to follow the enhanced cleaning practices and other measures employed in our offices and retail locations in response to local health mandates. We have limited essential business travel and implemented practices to ensure that exposed employees, or those displaying symptoms of COVID-19, self-quarantine. In spring 2020, we transitioned the vast majority of our workforce to work remotely, with only essential employees working in the office. Where dictated by local health mandates, or as seems prudent to local management, this practice continues. There have been no material disruptions to our business or processes to date as a result of these changes. While the overall impact of COVID-19 was largely positive for our business during the quarters endedSeptember 30, 2021 and 2020, its future impacts on our business, operational and financial performance is uncertain. Developments such as the duration and severity of future outbreaks of the same or different strains of the disease, such as the delta variant, the effectiveness of vaccines or new or additional measures implemented by governments, might impact our customers and employees, the financial markets, the global economy and the economies of the countries in which we operate. Because of these uncertainties, we cannot determine the future impacts of the pandemic on our business. Financial Results
During the three months endedSeptember 30, 2021 , we realized net income of approximately$204.5 million and basic and diluted earnings per share of$3.44 . During the six months endedSeptember 30, 2021 , we realized net income of approximately$256.2 million and basic and diluted earnings per share of$4.33 . During the three months endedSeptember 30, 2020 , we realized net income of approximately$23.6 million and basic and diluted earnings per share of$0.40 . During the six months endedSeptember 30, 2020 , we realized net income of approximately$47.8 million and basic and diluted earnings per share of$0.82 . 40 Table of Contents Results of Operations
Three months ended
The following comparison of our fiscal second quarter to fiscal second quarter financial results is not necessarily indicative of future results.
Three months ended Three months ended
September 30, 2021 September 30, 2020
Amount %* Amount %*
Revenues:
Fee and commission income $ 116,534 37 % $ 54,277 78 %
Net gain on trading securities 175,252 56 % 8,302 12 %
Interest income 20,063 6 % 4,948 7 %
Net gain on foreign exchange
operations 1,622 1 % 3,020 4 %
Net loss on derivative (656 ) 0 % (837 ) (1 %)
Total revenue, net 312,815 100 % 69,710 100 %
Expenses:
Fee and commission expense 22,968 7 % 20,001 29 %
Interest expense 16,185 5 % 4,699 7 %
Operating expense 36,569 12 % 15,867 23 %
Provision for impairment
losses 366 0 % 1,044 1 %
Other expense/(income), net 653 0 % (68 ) 0 %
Total expense 76,741 24 % 41,563 60 %
Net income before income taxes 236,074 76 % 28,147 40 %
Income tax expense (31,562 ) (10 %) (4,584 ) (7 %)
Net income $ 204,512 66 % $ 23,563 34 %
Less: Net loss attributable to
non-controlling interest in
subsidiary (20 ) 0 % (127 ) 0 %
Net income attributable to
common shareholders $ 204,532 66 % $ 23,690 34 %
Other comprehensive income
Foreign currency translation (16
adjustments, net of tax effect 930 0 % (10,919 ) %)
Comprehensive income before
non-controlling interests 205,442 66 % 12,644 18 %
Less: Comprehensive loss
attributable to
non-controlling interest in
subsidiary (20 ) 0 % (127 ) 0 %
Comprehensive income
attributable to common
shareholders $ 205,462 66 % $ 12,771 18 %
* Reflects the percentage of total revenue, net.
Revenue
We earn income primarily from fees and commissions received from our retail brokerage and banking and investment banking clients, interest income and proprietary trading activities.
Three months ended Three months ended
September 30, 2021 September 30, 2020 Change
Amount % Amount % Amount %
Fee and
commission income $ 116,534 37 % $ 54,277 78 % $ 62,257 115 %
Net gain on
trading 2,011 %
securities 175,252 56 % 8,302 12 % 166,950
Interest income 20,063 6 % 4,948 7 % 15,115 305 %
Net gain on
foreign exchange (46 %)
operations 1,622 1 % 3,020 4 % (1,398 )
Net loss on (1 %)
derivatives (656 ) 0 % (837 ) 181 22 %
Total revenue,
net $ 312,815 100 % $ 69,710 100 % $ 243,105 349 %
41
Table of Contents
During the three months ended
As discussed in more detail below under "Net Gain onTrading Securities "$175,252 of total revenue, net during the three 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 consider the sale of securities from our own portfolio as an extraordinary event that we do not believe to be indicative
of a trend in future periods.
Fee and commission income. Fee and commission income consisted principally of broker fees from customer trading, related banking services, underwriting and market making and consulting services. During the three months endedSeptember 30, 2021 , fee and commission income increased by$62,257 , a 115% increase over the three months endedSeptember 30, 2020 . This increase was primarily attributable to a$57,318 increase in fees and commission from brokerage services and related banking services.
The growth in fees and commissions for brokerage and related banking services is mainly attributable to growth in accounts receivable through acquisitions and organic growth, increased brokerage and banking activity of customer base, the expansion of our retail financial advisors and the increase in the volume of analyst reports written. available to our customers.
Net gain on trading securities. Net gain on trading securities reflects the gains and losses from trading activities in our proprietary trading account. Net gains or losses are comprised of realized and unrealized gains and losses. Gains or losses are realized when we close a position in a security and realize a gain or a loss on that position. Accounting principles generally accepted inthe United States ("U.S. GAAP") require that we reflect in our financial statements unrealized gains and losses on all our securities trading positions that remain open as of the end of each period. Fluctuations in unrealized gains or losses from one period to another may 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 in a period. Changes in unrealized gains and losses from period to period may also occur as a result of factors beyond our control, such as fluctuations in the market prices of the open securities positions we hold. This may adversely affect the ultimate value we realize from these investments. Unrealized gains or losses in a particular period may or may not be indicative of the gain or loss we will realize on a securities position when the position is closed. As a result, we may realize significant swings in gains and losses realized on our trading securities year-over-year and quarter-to-quarter. You should not assume that a gain or loss in any particular period is indicative of a trend or of the gain or loss we may ultimately realize when we close a position.
See the following table for more information on our net gains and losses during the three months ended
Realized Unrealized
Net Gain Net Gain Net Gain
Quarter ended September 30, 2021 $ 143,724 $ 31,528 $ 175,252
Quarter ended September 30, 2020 $ 5,883 $ 2,419 $ 8,302
42
Table of Contents
As described above, during the quarter ended September 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 ended
September 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 at September 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.
Interest income. During the three months ended
Interest income on trading securities consisted of interest earned from investments in debt securities and dividends earned on equity securities held in our proprietary trading account. We recognized a$14,017 , or 316% increase in interest income from trading securities during the three months endedSeptember 30, 2021 , because we increased (i) the total size of our trading portfolio and (ii) the percentage of our investments in bonds.
We realised
We also recognized a
Net loss on foreign exchange operations. 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. During the three months endedSeptember 30, 2021 , we realized a net gain on foreign exchange operations of$1,622 compared to a net gain of$3,020 during the three months endedSeptember 30, 2020 . During the three months endedSeptember 30, 2021 , the value of the Russian ruble appreciated by 1% and Kazakhstani tenge depreciated by 1% against theU.S. dollar, respectively. We realized a net gain on foreign exchange operations affected by the purchase and sale of foreign currency of$1,686 as a result of higher volume of currency exchange transactions. Expense Three months ended Three months ended September 30, 2021 September 30, 2020 Change Amount %* Amount %* Amount %* Fee and commission expense 22,968 30 % 20,001 48 % 2,947 15 % Interest expense 16,185 21 % 4,699 11 % 11,486 244 % Operating expense 36,569 48 % 15,867 38 % 20,702 130 % Provision for (65 impairment losses 366 0 % 1,044 3 % (678 ) %) Other expense/(income), net 653 1 % (68 ) 0 % 721 1,060 % Total expense$ 76,741 100 %$ 41,563 100 %$ 35,178 85 %
* Reflects the percentage of total expenses, net.
43
Table of Contents
During the three months ended September 30, 2021 , we incurred total expenses of
$76,741 , an 85% increase compared to three months ended September 30, 2020 .
Expenses increased with the increase of interest expense and 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. Fee and commission expense increased by $2,947 , or
15%, during the three months ended September 30, 2021 . This included increases
in brokerage commissions to our prime brokers of $1,571 , commissions paid for
bank services of $946 , and exchange and clearing services of $521 .
The increases in fees and commissions are the result of both the growth of our customer base and the increase in the transaction volume of our customers. In general, we expect fees and commissions to increase and decrease with increases and decreases in fee and commission income.
Interest expense. During the three months endedSeptember 30, 2021 , we incurred a 244% increase in interest expense. The increased expense is primarily attributable to an$8,691 increase in volume of short-term financing through securities repurchase agreements, and a$2,704 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 customer deposits. The increase was partially offset by a decrease in interest expense on debt securities issued totaling$135 . Operating expenses. Operating expenses during the three months endedSeptember 30, 2021 , totaled$36,569 , a$20,702 increase compared to the three months endedSeptember 30, 2020 . This increase was primarily attributable to a$7,953 increase in payroll and bonus expense as a result expansion of our workforce through acquisition and hiring, a$4,031 increase in stock compensation expense resulting from issuing restricted stock grants to key employees inMay 2021 , a$2,497 increase in advertising expenses, and a$1,352 increase in professional services as a result of expansion of our business. Income tax expense We recognized net income before income tax of$236,074 and$28,147 during the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. Our effective tax rate during the three months endedSeptember 30, 2021 , decreased to 13.4%, from 16.3% during the three months endedSeptember 30, 2020 , 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. 44 Table of Contents Noncontrolling interest As ofSeptember 30, 2021 , we owned a 9% interest in Freedom UA, the remaining 91% interest is owned byAskar Tashtitov , our president. InJuly 2021 , as a result of further restrictions inUkraine on foreign ownership of Ukrainian broker-dealers, we transferred an additional 23.88% of our interest in Freedom UA toMr. Tashtitov . Through a series of agreements entered into with Freedom UA andMr. Tashtitov inFebruary 2019 , we are obligated to guarantee the performance of all Freedom UA obligations, provide Freedom UA adequate funding to cover its operating losses and net capital requirements, provide 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. We reflect our ownership of Freedom UA as a noncontrolling interest in our consolidated statements of financial condition, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows. As a result, we recognized net loss attributable to noncontrolling interest of$20 during three months endedSeptember 30, 2021 , compared to a net loss attributable to noncontrolling interest of$127 duringSeptember 30, 2020 . Comprehensive income The functional currencies of our operating subsidiaries are the Russian ruble, Kazakhstani tenge, European euro,U.S. dollar, Ukrainian hryvnia, Uzbekistani som, Kyrgyzstani som,UK pound sterling and Azerbaijani manat. 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. Due to the depreciation of the value of Russian ruble by nearly 1% and appreciation on Kazakhstani tenge by nearly 1%, respectively against theU.S. dollar during the periods covered in this report, we realized a foreign currency translation gain of$930 during the three months endedSeptember 30, 2021 , compared to a foreign currency translation loss of$10,919 during the three months endedSeptember 30, 2020 .
Six months ended
The following comparison of our fiscal second quarter to fiscal second quarter financial results is not necessarily indicative of future results.
Six months ended Six months ended
September 30, 2021 September 30, 2020
Amount %* Amount %*
Revenues:
Fee and commission income $ 213,940 49 % $ 97,616 77 %
Net gain on trading securities 185,152 42 % 17,386 14 %
Interest income 38,140 9 % 9,197 7 %
Net gain on foreign exchange
operations 434 0 % 2,772 2 %
Net loss on derivative (715 ) 0 % (846 ) 0 %
Total revenue, net $ 436,951 100 % $ 126,125 100 %
Expenses:
Fee and commission expense 44,832 10 % 29,790 24 %
Interest expense 30,457 7 % 8,443 7 %
Operating expense 66,888 15 % 30,293 24 %
Provision for impairment
losses 659 0 % 666 1 %
Other expense/(income), net 664 0 % (95 ) 0 %
Total expense 143,500 33 % 69,097 55 %
Net income before income taxes 293,451 67 % 57,028 45 %
Income tax expense (37,231 ) (8 %) (9,189 ) (7 %)
Net income 256,220 (59 %) 47,839 38 %
Less: Net loss attributable to
non-controlling interest in
subsidiary (72 ) 0 % 296 0 %
Net income attributable to
common shareholders 256,292 59 % 47,543 38 %
Other comprehensive income
Reclassification adjustment
relating to available-for-sale
securities disposed of in the
period, net of tax effect - 0 % 71 0 %
Foreign currency translation (2
adjustments, net of tax effect 4,230 1 % (2,286 ) %)
Comprehensive income before
non-controlling interests 260,450 60 % 45,624 36 %
Less: Comprehensive loss
attributable to
non-controlling interest in
subsidiary (72 ) 0 % 296 0 %
Comprehensive income
attributable to common
shareholders 260,522 60 % 45,328 36 %
45
Table of Contents
Revenue
We derive income primarily from fees and commissions received by our retail and banking brokerage and investment banking clients, interest income and proprietary trading activities.
Six months ended Six months ended
September 30, 2021 September 30, 2020 Change
Amount % Amount % Amount %
Fee and commission
income $ 213,940 49 % $ 97,616 77 % $ 116,324 119 %
Net gain on trading
securities 185,152 42 % 17,386 14 % 167,766 965 %
Interest income 38,140 9 % 9,197 7 % 28,943 315 %
Net gain on foreign (84 %)
exchange operations 434 0 % 2,772 2 % (2,338 )
Net loss on
derivatives (715 ) 0 % (846 )
0% 131 15% Total turnover, net
During the six months endedSeptember 30, 2021 , we realized total net revenue of$436,951 , a 246% increase compared to six months endedSeptember 30, 2020 . As discussed in more detail below under "Net Gain onTrading Securities "$185,152 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 consider the sale of securities from our own portfolio as an extraordinary event that we do not believe to be indicative
of a trend in future periods. Fee and commission income. Fee and commission income consisted principally of broker fees from customer trading, related banking services, underwriting and market making and consulting services. During the six months endedSeptember 30, 2021 , fee and commission income increased by$116,324 , a 119% increase over the six months endedSeptember 30, 2020 . This increase was primarily attributable to a$107,986 increase in fees and commission from brokerage services and related banking services. 46 Table of Contents
The growth in fees and commissions for brokerage and related banking services is primarily attributable to growth in accounts receivable through the acquisitions and expansion of our retail financial advisors and an increase in the volume of analytical reports. made available to our customers.
Net gain on trading securities. Net gain on trading securities reflects the gains and losses from trading activities in our proprietary trading account. Net gains or losses are comprised of realized and unrealized gains and losses. Gains or losses are realized when we close a position in a security and realize a gain or a loss on that position.U.S. GAAP require that we reflect in our financial statements unrealized gains and losses on all our securities trading positions that remain open as of the end of each period. Fluctuations in unrealized gains or losses from one period to another may 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 in a period. Changes in unrealized gains and losses from period to period may also occur as a result of factors beyond our control, such as fluctuations in the market prices of the open securities positions we hold. This may adversely affect the ultimate value we realize from these investments. Unrealized gains or losses in a particular period may or may not be indicative of the gain or loss we will realize on a securities position when the position is closed. As a result, we may realize significant swings in gains and losses realized on our trading securities year-over-year and quarter-to-quarter. You should not assume that a gain or loss in any particular period is indicative of a trend or of the gain or loss we may ultimately realize when we close a position.
See the following table for more information on our net gains and losses during the six months ended.
Realized Unrealized Net
Net Gain Gain Net Gain
Quarter ended
Quarter ended
263$ 17,386 The primary contributing factors to the increase in net gain on trading securities during the six months endedSeptember 30, 2021 , was 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. During the six months endedSeptember 30, 2021 , andSeptember 30, 2020 , we recognized a$28,943 , or 315% increase in interest income. We earned interest income from trading securities, reverse repurchase transactions and loans to customers. 47 Table of Contents 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$27,079 , or 328% increase in interest income from trading securities during the six months endedSeptember 30, 2021 because we increased (i) the total size of our trading portfolio and (ii) the percentage of our investments in bonds.
We recognized a
We also recognized a
Net loss on foreign exchange operations. 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. During the six months endedSeptember 30, 2021 , we realized a net gain on foreign exchange operations of$434 compared to a net gain of$2,772 during the six months endedSeptember 30, 2020 . During the six months endedSeptember 30, 2021 , the value of the Russian ruble appreciated nearly by 4% against theU.S. dollar. The value of Kazakhstani tenge depreciated by approximately 0.2% against theU.S. dollar. Due to a large balance of USD denominated net assets held in our subsidiary Freedom RU, we recognized a net loss on foreign exchange operations of$1,726 . Our subsidiary Freedom KZ also recognized a foreign currency exchange loss on USD denominated trading securities in the amount of$547 . Further, due to higher volume of cash operations, we recognized a$2,641 gain on purchases and sales of foreign currency. Expense Six months ended Six months ended September 30, 2021 September 30, 2020 Change Amount % * Amount % * Amount % * Fee and commission expense$ 44,832 31 %$ 29,790 43 %$ 15,042 50 % Interest expense 30,457 21 % 8,443 12 % 22,014 261 % Operating expense 66,888 47 % 30,293 44 % 36,595 121 % Provision for (1 impairment losses 659 0 % 666 1 % (7 ) %) Other (798 expense/(income),net 664 0 % (95 )
0 % 759 %) Total expense$ 143,500 100 %$ 69,097 100 %$ 74,403 108 %
* Reflects the percentage of total expenses, net.
During the six months endedSeptember 30, 2021 , we incurred total expenses of$143,500 , a 108% increase compared to the six months endedSeptember 30, 2020 . Expenses increased with 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. Fee and commission expense increased by$15,042 , a 50% increase, during the six months endedSeptember 30, 2021 . This included increases in brokerage commissions to our prime brokers of$11,190 , commissions paid to bank services of$2,321 and exchange and clearing services of$1,395 . 48 Table of Contents
The increases in fees and commissions are the result of both the growth of our customer base and the increase in the transaction volume of our customers. In general, we expect fees and commissions to increase and decrease with increases and decreases in fee and commission income.
Interest expense. During the six months endedSeptember 30, 2021 , we incurred a 261% increase in interest expense. The increased expense was primarily attributable to a$16,389 increase in volume of short-term financing through securities repurchase agreements and a$5,415 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 customer deposits. Operating expenses. Operating expenses during the six months endedSeptember 30, 2021 , totaled$66,888 , a$36,595 increase compared to the six months endedSeptember 30, 2020 . This increase was primarily attributable to a$15,117 increase in payroll and bonus expense as a result expansion of our workforce through acquisition and hiring, a$5,668 increase in stock compensation expense resulting from issuing restricted stock grants to key employees inMay 2021 , an increase of$4,511 in advertising expenses and a$3,017 increase in professional services expense due to the growth of our business. Income tax expense. We recognized net income before income tax of$293,451 and$57,028 during the six months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. Our effective tax rate during the six months endedSeptember 30, 2021 , decreased to 12.7%, from 16.1% during the six months endedSeptember 30, 2020 , 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. Comprehensive income. The functional currencies of our operating subsidiaries are the Russian ruble, Kazakhstani tenge, European euro,U.S. dollar, Ukrainian hryvnia, Uzbekistani som, Kyrgyzstani som,UK pound sterling and Azerbaijani manat. 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. Due to the depreciation of the value of Russian ruble by nearly 4% and depreciation on Kazakhstani tenge by nearly 0.2%, respectively against theU.S. dollar during the periods covered in this report, we realized a foreign currency translation gain of$4,230 during the six months endedSeptember 30, 2021 , compared to a foreign currency translation loss of$2,286 during the six months endedSeptember 30, 2020 .
Liquidity and capital resources
Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes. During the three months endedSeptember 30, 2021 and 2020, 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.
49
Table of Contents
We regularly monitor and manage our leverage and liquidity risk through various
committees and processes we have established. 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. As ofSeptember 30, 2021 , and
March 31, 2021 , we had: As of September 30, March 31, 2021 2021 Cash and cash equivalents(1)$ 740,425 $ 698,828 Trading securities$ 974,481 $ 736,188 Total assets$ 2,500,459 $ 2,018,645 Net liquid assets(2)$ 2,054,096 $ 1,519,719 _________
(1) From the
$164,240 , or approximately 22%, were subject to reverse repurchase agreements. By comparison, atMarch 31, 2021 , we had cash and cash equivalents of$698,828 , of which$248,946 , or approximately 36%, were subject to reverse repurchase agreements. The amount of cash and cash
equivalents is subject to minimum levels set by regulatory bodies to comply
with the required rules and regulations, including adequate capital and liquidity
level for each entity. (2) Includes cash and cash equivalents, trading securities, brokerage fees and
other receivable and other assets.
From
We have funded our operating activities primarily from operating cash flows and from short and long term financing arrangements.
© Edgar online, source
