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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2024
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 001-33034
FREEDOM HOLDING CORP.
(Exact name of registrant as specified in its charter)
Nevada
30-0233726
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
“Esentai Tower” BC, Floor 7
77/7 Al Farabi Ave
Almaty, Kazakhstan
050040
(Address of principal executive offices)
(Zip Code)
+7 727 311 10 64
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
FRHC
The Nasdaq Capital Market
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes x No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity last sold as of the
last business day of the registrant’s most recently completed second fiscal quarter was $1,394,433,335.
As of June 7, 2024, the registrant had 60,626,345 shares of common stock, par value $0.001, outstanding.
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PART I
Page
Item 1.
Business
5
Item 1A.
Risk Factors
25
Item 1B.
Unresolved Staff Comments
52
Item 1C.
Cybersecurity
52
Item 2.
Properties
53
Item 3.
Legal Proceedings
53
Item 4.
Mine Safety Disclosures
54
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
55
Item 6.
[Reserved]
56
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
56
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
87
Item 8.
Financial Statements and Supplementary Data
86
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
173
Item 9A.
Controls and Procedures
173
Item 9B.
Other Information
174
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
174
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
175
Item 11.
Executive Compensation
175
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
175
Item 13.
Certain Relationships and Related Transactions, and Director Independence
175
Item 14.
Principal Accounting Fees and Services
175
PART IV
Item 15.
Exhibits, Financial Statement Schedules
176
Item 16.
Form 10-K Summary
178
SIGNATURES
179
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FREEDOM HOLDING CORP.
Except where the context otherwise requires or where otherwise indicated, references herein to the "Company," "we," "our," "us," "our company," "our business" and
"Freedom" mean Freedom Holding Corp. together with its consolidated subsidiaries. References to "fiscal 2024," "fiscal 2023" and "fiscal 2022" (or similar references to a
respective "fiscal year") mean the 12-month period ended March 31 of the relevant year.
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 annual report on Form 10-K, 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 and political conditions in the regions where we operate or in which we have customers;
•
current and future conditions in the global financial markets, including fluctuations in interest rates and foreign currency exchange rates;
•
the direct and indirect effects on our business stemming from Russia's large-scale military action against Ukraine (the "Russia-Ukraine conflict");
•
economic sanctions and countersanctions that limit movement of funds, restrict access to capital markets or curtail our ability to service existing or potential new
customers;
•
the impact of legal and regulatory actions, investigations and disputes;
•
the policies and actions of regulatory authorities in the jurisdictions in which we have operations, as well as the degree and pace of regulatory changes and new
government initiatives generally;
•
our ability to manage our growth effectively;
•
our ability to complete planned acquisitions or successfully integrate businesses we acquire;
•
our ability to successfully execute our strategy for entry into new business areas, including among others the telecommunications and media sectors in Kazakhstan;
•
the availability of funds, or funds at reasonable rates, for use in our businesses, including for executing our growth strategy;
•
the impact of competition, including downward pressures on fees and commissions;
•
our ability to meet regulatory capital adequacy or liquidity requirements, or prudential norms;
•
our ability to protect or enforce our intellectual property rights in our brands or proprietary technology;
•
our ability to retain key executives and recruit and retain personnel;
•
the impact of rapid technological change;
•
information technology, trading platform and other system failures, cybersecurity threats and other disruptions;
•
market risks affecting the value of our proprietary investments;
•
risks of non-performance by third parties with whom we have business relationships;
•
the creditworthiness of our trading counterparties, and banking and brokerage customers;
•
the impact of tax laws and regulations, and their changes, in any of the jurisdictions in which we operate;
•
compliance with laws and regulations in each of the jurisdictions in which we operate, particularly those relating to the brokerage, banking and insurance industries;
•
the impact of armed conflict in Israel and Gaza and any possible escalation of such conflict or contagion to neighboring countries or regions;
•
unforeseen or catastrophic events, including the emergence of pandemics, terrorist attacks, extreme weather events or other natural disasters, political discord or armed
conflict; and
•
other factors discussed under "Risk Factors" in Part 1 Item 1A of this annual report.
Moreover, we operate in a 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
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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 are incorporated 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.
The following discussion should be read carefully together with our audited consolidated financial statements and the related notes contained in Part II Item 8 of our
annual report and in our other filings with the U.S. Securities and Exchange Commission ("SEC"). All references to our "consolidated financial statements" are to "Financial
Statements and Supplementary Data" contained in Item 8 of Part II of this annual report.
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PART I
Item 1. Business
OVERVIEW
Freedom Holding Corp. ("FRHC") is organized under the laws of the State of Nevada and acts as a holding company for all of our operating subsidiaries. Our subsidiaries
engage in a broad range of activities including securities brokerage, securities dealing for customers and for our own account, market making activities, investment research,
investment counseling, investment banking services, retail and commercial banking, insurance products, payment services, and information processing services. We also own
several ancillary businesses which complement our core financial services businesses, including telecommunications and media businesses in Kazakhstan that are in a
developmental stage.
Our business was founded in order to provide access to the international capital markets for retail brokerage clients in our core markets. Our business has grown rapidly in
recent years. We are pursuing a strategy to become a leader in the financial services industry, serving individuals and institutions desiring enhanced market access to international
capital markets using state of the art technology platforms for their brokerage and other financial services needs. We are committed to further developing our digital fintech
ecosystem going forward by integrating our core financial services businesses with our ancillary business offerings. Our strategic objective is to provide customers with a
comprehensive and user-centric digital experience, offering them convenient access to a wide array of products and services through a single platform. By leveraging cutting-edge
technology and fostering continuous innovation, we strive to enhance our digital offering and meet the evolving needs of our diverse customer base.
Our principal executive office is in Almaty, Kazakhstan. We have a presence in Armenia, Austria, Azerbaijan, Belgium, Bulgaria, Cyprus, France, Germany, Greece, Italy,
Kazakhstan, Kyrgyzstan, Netherlands, Poland, Spain, the United Arab Emirates, the United Kingdom, the United States, Turkey and Uzbekistan. Our subsidiaries in the United
States include a broker-dealer that is registered with the SEC and the Financial Industry Regulatory Authority ("FINRA"). As of March 31, 2024, we had 6,197 employees, 161
offices (of which 46 offered brokerage services, 52 offered insurance services offices, 20 offered banking services and 43 offered other financial and non-financial services) and
530,000 retail brokerage customer accounts.
From the beginning of calendar 2024, our Chief Executive Officer, Chief Financial Officer and President, who collectively act as our chief operating decision maker
(CODM), began to manage our business, make operating decisions, and evaluate operating performance on the basis of a new segmental structure. As a result, we have realigned
our reportable segments into the following four segments: Brokerage, Banking, Insurance, and Other. All prior period segment information has been recast to reflect this change in
reportable segments.
Financial information concerning us, our business segments for each of the years ended March 31, 2024, 2023 and 2022 is included in Part II Item 8 "Financial Statements
and Supplementary Data" of this Report.
Our Corporate History
Reverse Acquisition Transaction
We were originally incorporated in the State of Utah in July 1981. In December 2004 we redomiciled to the State of Nevada. In November 2015, we entered into a reverse
acquisition agreement with Timur Turlov whereby we agreed to change our name from BMB Munai, Inc. to Freedom Holding Corp. and to acquire from him 100% ownership
interests in FFIN Securities, Inc. (now a dormant company), Freedom Finance Europe Limited ("Freedom EU"), and LLC Investment Company Freedom Finance (“Freedom RU”)
and its wholly owned subsidiary, Freedom Finance JSC ("Freedom KZ"). These acquisitions closed in several stages from November 2015 to November 2017 as required audits and
regulatory approvals were received. At the completion of the acquisitions, Timur Turlov was our controlling shareholder.
Legacy Operations
Our legacy brokerage operations were acquired and developed by Timur Turlov. He acquired Beliy Gorod Ltd. in Moscow, Russia, in 2010 and renamed it LLC
Investment Company Freedom Finance (“Freedom RU”) in 2011. In 2013 Freedom RU acquired Freedom KZ from unrelated third parties. In 2014, Freedom KZ rolled out a
branch office network of 14 offices across Kazakhstan and opened 20,000 customer brokerage accounts. Freedom EU was organized in August 2013 and completed its regulatory
licensing in May 2015.
In July 2014, prior to our acquisition from him of FFIN Securities, Inc., Freedom EU, and Freedom RU and Freedom KZ, Timur Turlov established Freedom Securities
Trading Inc. (formerly FFIN Brokerage Services, Inc.) ("FST
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Belize"), a corporation registered in and licensed as a broker dealer in Belize, to provide brokerage services to customers seeking to purchase or trade securities in the international
securities markets. FST Belize is 100% owned by Timur Turlov and is not part of our group of companies. Historically, we engaged in a significant volume of transactions with
FST Belize through an omnibus brokerage arrangement, but the extent of this arrangement was actively scaled down in recent periods and the omnibus brokerage arrangement had
been terminated as of March 31, 2024. For more information regarding our transactions with FST Belize, see "Related Party Transactions" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II Item 7 of this annual report.
Significant Historical Milestones
On September 26, 2019 FRHC's shares were approved for listing on Nasdaq and the shares began trading on Nasdaq on October 15, 2019.
In December 2020 we completed the acquisition of JSC Kassa Nova Bank, a Kazakhstan consumer bank with 10 branch offices across Kazakhstan, which we subsequently
renamed Bank Freedom Finance Kazakhstan JSC and which, in May 2024, we subsequently renamed to Freedom Bank Kazakhstan JSC ("Freedom Bank KZ").
In December 2020 we completed the acquisition of Prime Executions, Inc. ("PrimeEx"), a registered agency-only execution broker-dealer on the floor of the New York
Stock Exchange, which represented our initial entry into the U.S. market. In January 2022, PrimeEx received regulatory approval from FINRA to conduct investment banking and
equity capital markets business.
On May 17, 2022 we completed the acquisition of two insurance companies, Freedom Finance Life JSC ("Freedom Life") and Freedom Finance Insurance JSC ("Freedom
Insurance"). These two companies had been 100% controlled by the Company's chief executive officer, chairman and majority shareholder, Timur Turlov, at the time of the
acquisition.
In February 2023 we completed the divestiture of our Russian subsidiaries.
Our Business Strategy
Our focus has been to establish ourselves as a leader in the financial services industry, serving individuals and institutions by offering them efficient access to international
capital markets and market-leading financial services. Our strategy is based on the following key objectives:
•
Expand through acquisitions on an opportunistic basis. Historically we have been active in pursuing non-organic growth through acquisitions. This has allowed us to
accelerate our growth through the acquisition of talented and experienced personnel and essential technology assets. We anticipate that we will continue to acquire financial
services-related companies, complementary businesses and financial and complementary technologies on an opportunistic basis. Our acquisition strategy includes a focus on
expanding our presence in the U.S. market.
•
Create digital fintech ecosystem. In Kazakhstan, we have introduced innovative, integrated financial technologies that we intend to expand to other markets and, eventually,
globally. For example, our digital mortgage is our flagship digital product in Kazakhstan. It interfaces with government databases to efficiently access relevant information
for qualifying customers for state-sponsored mortgage programs and other lending programs we offer. Our technology platform integrates many of our services into a suite
of complementary services that are easy to access and qualify for. For example, in Kazakhstan we have acquired two insurance companies, an online ticket sales company, a
payment system services company, and an online travel agency. Offering complementary services increases our brand loyalty and opportunities to cross-sell the variety of
services we offer. Because these services are all digitally accessed and performed, we are able to market and scale the services into new regions on a cost-effective basis. As
we continue to add complementary services through acquisitions or internal development, we plan to expand this platform into additional markets as regulatory and market
conditions dictate. During fiscal 2024, we began the implementation of our plan to enter the telecommunications market in Kazakhstan, as a part of our strategy to build a
digital fintech ecosystem. As part of our strategy, we seek to establish a new independent telecommunications operator in Kazakhstan to provide a diverse range of
telecommunications and telecommunications-related services to customers which may include, among others, high-quality internet connectivity, mobile virtual network
operator (MVNO) services, WiFi access, over-the-top (OTT) streaming, internet protocol television (IPTV), traffic transit for operators and cloud solutions, subject to
obtaining applicable licenses or entering into partnerships where required.
•
Continue to grow organically. We continue to grow organically, benefiting from favorable market and economic conditions in many of the regions where we operate. Our
recent organic growth has been driven by expansion of
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our network of retail financial advisers and increases in the volume of analysts' reports made available to our customer base, as well as significantly increased trading volume
and customer activity stemming from government and bank interventions that have resulted in increased market volatility and economic uncertainty. In addition to
expansion of our business in our core markets, we have recently expanded our area of operations to include new countries including Armenia, Austria, Azerbaijan, Belgium,
Bulgaria, France, Germany, Greece, Italy, Netherlands, Poland, Spain, the UAE, the United Kingdom and Uzbekistan. We seek to continue to continue to grow organically,
including expanding into additional countries.
•
Adhere to conservative risk management principles. Our investment policies and strategies are primarily focused on preservation of capital and supporting our liquidity
requirements. In our proprietary trading, we typically invest in investment grade securities, with the primary objective of minimizing the potential risk of loss of principal.
Our investment policies generally require that the securities we acquire are investment grade and limit the amount of our credit exposure to any one issuer or customer.
•
Aspire to excellence in governance, transparency and regulatory compliance. In addition to complying with local requirements in each market in which we operate, we
believe we have a competitive advantage with our clients in many regions because we are a U.S. corporation subject to the governance and disclosure requirements
applicable to SEC-registered companies trading on the Nasdaq Capital Market. Our operations are subject to substantial regulatory oversight by various regulatory bodies,
and we strive to be a trusted participant in the regulatory framework in each jurisdiction in which we operate. We have a group-wide compliance department that oversees
compliance for our group of companies. The department is responsible for establishing compliance controls, policies and procedures to support subsidiary compliance
officers and their staff and in-house attorneys in various jurisdictions to discharge our obligations under local regulatory requirements. Our compliance begins with customer
onboarding where we employ robust know-your-customer, anti-money-laundering and countering terrorist financing (AML/CTF) and sanctions screening platforms using
various world-class third-party data providers in a system that is integrated with our trading platform. Customer sanctions screening is done daily and individual financial
transactions are reviewed according to multiple risk parameters. Additionally, we have internal policies, procedures and systems in place for possible compliance-related
matters related to whistleblowing, improper trading patterns, tax reporting obligations, and other internal policies (e.g., trading our own stock or the stock of our customers).
We focus on the development of our compliance control, operations, and internal audit activities to ensure each compliance activity meets our risk management standards
and industry standards.
PRODUCTS AND SERVICES
Our business is organized into four segments: Brokerage, Banking, Insurance and Other. Additional information regarding our segments can be found in the narrative and
tabular descriptions of segments and operating results under Item 7. Management’s discussion and analysis of results of operations and financial condition of this Report; and Note
30 Segments of business of the notes to consolidated financial statements included in Item 8 of this Report.
Our Brokerage segment primarily focuses on retail brokerage and investment banking. Our Banking segment encompasses lending, deposit services, payment card
services, money transfers, and correspondent accounts, supporting both individual and corporate clients with innovative digital financial solutions. Our Insurance segment offers life
and general insurance services. Our Other segment includes payment processing services, online ticket sales, and new business areas including telecommunications and media
services.
We also engage in proprietary securities trading activities through each of our four segments. We facilitate repurchase and reverse repurchase agreements, both to support
the funding of our proprietary investments and acting as an intermediary between third party purchasers and sellers. The size of our securities positions varies substantially based
upon economic and market conditions, allocations of capital, underwriting commitments and trading volume of an individual issuer's securities. Also, the aggregate value of
securities which we may carry is limited by the net capital and capital adequacy rules in effect in the jurisdictions where we conduct business. See "Regulatory Oversight" in Part I
Item 1 and "Liquidity and Capital Resources" in Part II Item 7 of this annual report.
We conduct our business through a number of subsidiaries. For more information regarding our subsidiaries, see Note 1 "Description of Business" in the notes to our
consolidated financial statements contained in Part II Item 8 of this annual report:
Brokerage Segment
As of March 31, 2024, in our Brokerage business segment we had 46 offices that provided brokerage and financial services, investment consulting and education,
including offices in Kazakhstan, Europe, Armenia, United States,
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Uzbekistan and Kyrgyzstan. Freedom KZ and Freedom Finance Global PLC ("Freedom Global") are professional participants on the KASE and the Astana International Exchange
("AIX"). Foreign Enterprise LLC Freedom Finance ("Freedom UZ") is a professional participant on the Republican Stock Exchange of Tashkent ("UZSE") and the Uzbek
Republican Currency Exchange ("UZCE"). PrimeEx is a professional participant on the New York Stock Exchange ("NYSE").
Freedom EU oversees our European region operations (including Austria, Belgium, Bulgaria, Cyprus, France, Germany, Greece, Italy, Poland and Spain). In Cyprus, we
are licensed to receive, transmit and execute customer orders, establish custodial accounts, engage in foreign currency exchange services and margin lending, and trade our own
investment portfolio. Through Freedom EU we provide transaction processing and intermediary services to our regional customers and to institutional customers that may seek
access to the securities markets in the United States and Europe. All trading of United States and European exchange traded and over-the-counter ("OTC") securities by all Freedom
group securities brokerage firms, excluding PrimeEx, are also routed to and executed through Freedom EU. Historically, FST Belize’s customers executed brokerage transactions
indirectly through Freedom EU via several omnibus accounts held by FST Belize with Freedom EU. As of March 31, 2024, we had terminated our omnibus brokerage arrangement
with FST Belize.
We entered the U.S. market in December 2020 with the acquisition of PrimeEx, a New York corporation that is a registered agency-only execution broker-dealer on the
floor of the New York Stock Exchange ("NYSE"). PrimeEx is a member of the NYSE, Nasdaq, FINRA and the Securities Investor Protection Corp ("SIPC"). PrimeEx conducts
investment banking and equity capital markets business under the name Freedom Capital Markets ("FCM"). FCM provides its corporate and institutional customers with a full array
of investment banking, corporate finance, and capital markets advisory services.
As of March 31, 2024, we had 1,404 employees in our Brokerage segment, including 1,402 full-time employees and 2 part-time employees.
•
Securities brokerage services. We provide a comprehensive range of securities brokerage services to individuals, businesses and financial institutions. Depending on the
region, our brokerage services may include securities trading and margin lending. Customers can establish accounts and conduct securities trading with transaction-based
pricing both through on-line tools and at retail locations. We market our brokerage services through a number of channels, including telemarketing, training seminars and
investment conferences, print and online advertising using social media, mobile app and search engine optimization activities. We offer full-service retail brokerage services
covering a broad array of investment alternatives including exchange-traded and over-the-counter corporate equity and debt securities, money market instruments,
derivatives, government bonds, and mutual funds. A substantial portion of our revenue is derived from commissions from customers through accounts with transaction-
based pricing. Brokerage commissions are charged on investment products in accordance with a schedule that aligns with local practices. We provide our brokerage
customers with access to the U.S. stock markets, and a significant amount of our brokerage business relates to trading in U.S.-exchange listed and OTC securities by our
brokerage customers.
A majority of the trades we execute for our brokerage customers are done on an "over-the-counter" basis with counterparties outside the United States, including institutional
market maker customers who hold accounts with us or, previously, with our FST Belize affiliate, from whom we earn commissions. We use the services of third-party U.S.-
registered securities broker dealer and clearing firms to execute substantially all of our trades that are executed directly in the U.S. market.
For both individual and institutional brokerage clients, we may enter into arrangements for securities financing transactions in respect of financial instruments held by us on
behalf of the client or may use such financial instruments for our own account or the account of another client. We maintain omnibus brokerage accounts for certain
institutional brokerage clients, in which transactions of the underlying clients of such institutional clients are combined in a single account with us. We may use the assets
within the omnibus accounts to finance, lend, provide credit or provide debt financing or otherwise use and direct the order or manner of assets for financing of other clients
of ours. See "Margin Lending" below.
•
Margin lending. We grant margin loans to our brokerage customers, collateralized by securities and cash in the customer's account, for application to a portion of the
purchase price of securities, and we receive income from interest charged on such margin loans.
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•
Investment banking. Our investment banking business consists of investment banking professionals in Kazakhstan, Uzbekistan and the United States who provide strategic
advisory services and capital markets products. Our investment banking team focuses on multiple sectors including consumer and business services, energy, financial
institutions, real estate, technology, media and communications. In Kazakhstan and Uzbekistan, commercial banks are currently focusing their financing activities on large
or state-owned enterprises, and commercial lending sources impose loan structures and debt covenants that preclude many companies from obtaining such lending. This has
created growing interest in and demand for our investment banking services in those countries. In the United States, our investment banking activities include, among others,
underwriting of debt and equity offerings on both a "best efforts" and a firm commitment basis. In the equity capital markets area, we provide capital raising solutions for
corporate customers through initial public offerings and follow-on offerings, including listings of companies on stock exchanges. We focus on companies in growth
industries and participate as market makers in our underwritten securities offerings after the initial placements of shares. In the debt capital markets area, we offer a range of
debt capital markets solutions for emerging growth and small market companies. We focus on structuring and distributing private and public debt for various purposes
including buyouts, acquisitions, growth capital financings, and recapitalizations. In addition, we participate in bond financings for both sovereign and corporate issuers in the
emerging markets.
In our Brokerage segment we also conduct proprietary securities trading activities.
As of March 31, 2024, 2023 and 2022, respectively, we had approximately 530,000, 370,000 and 250,000 total brokerage customer accounts, of which more than 58%,
56% and 58% had positive cash or asset account balances. As of March 31, 2024, we had approximately 96,000 active accounts, as compared to 52,000 and 53,000 active accounts
as of March 31, 2023 and 2022, respectively. We define "active accounts" as those from which at least one transaction occurred in the quarter prior to the date of calculation. The
increases in the number of brokerage customer accounts during the fiscal years ended March 31, 2024, 2023 and 2022 were due to both organic growth and the migration to our
brokerage companies of certain former customers of our former Russian brokerage subsidiary and of FST Belize.
Banking Segment
In our Banking segment we offer a range of retail and commercial banking products and services in Kazakhstan. With total assets exceeding $4.9 billion as of March 31,
2024, Freedom Bank KZ has positioned itself as a leader in asset growth in Kazakhstan’s banking sector and is ranked among the top eight banks in the country based on total assets
as of April 1, 2024, according to National Bank of Kazakhstan (the "NBK").
Freedom Bank KZ was established in 2021 following the acquisition of Kassa Nova from ForteBank and has since expanded its operations to cater to over 903,500 clients
in 2024 from 546,000 in 2023. Freedom Bank KZ has shown a notable increase in its financial standing, largely due to a significant growth rate in assets, deposits, and its securities
and loan portfolio.
As of March 31, 2024, Freedom Bank KZ assets increased by 52%, loan portfolio by 68%, deposit portfolio by 47% and trading portfolio by 69% in comparison with
March 31, 2023,
Freedom Bank KZ is a pioneer in digital banking services in Kazakhstan, having granted 7,747 digital mortgage loans and 14,202 digital car loans to individuals, alongside
a substantial amount of lending to small and medium-sized enterprises. Freedom Bank KZ also actively participates in the Kazakhstan national housing program, holding a
prominent position in the mortgage market. Additionally, Freedom Bank KZ has implemented Visa B2B Connect to facilitate secure and fast international payments for Kazakhstan
businesses, marking its foray into enhancing digital banking services in Central Asia.
In our Banking segment we also conduct proprietary securities trading activities.
We have 20 office locations in Kazakhstan that provide banking services to our customers. As of March 31, 2024, we had 2,090 employees in our Banking segment, all of
which were full-time employees.
In Kazakhstan, the Kazakhstan Deposit Insurance Fund ("KDIC") administers the deposit insurance system. The KDIC insures deposits in the case of liquidation of a
bank-member of the KDIC fund. Deposits are insured up to 20 million Kazakhstan tenge (approximately $45 as of March 31, 2024) per customer.
•
Payment Cards. We are a key participant in the international payment systems Visa and MasterCard in the regions in which we operate. We issue both single and multi-
currency cards, which allow purchases to be made in
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multiple different currencies with the use of a single card. We provide internet banking and mobile applications for Android/iOS for companies and individuals. In addition,
we offer customers several investment and structured banking products (insured deposits with option features and currency risk hedging products as permitted by local
laws). The following is a description of our principal payment cards:
◦
Invest card. The Invest card allows our customers the ability to manage their investment accounts both online and in branches of our bank and is the only card of its kind
available in the Kazakhstan market. The card is associated with a brokerage account that may be opened with any broker in Kazakhstan that meets the applicable legal
requirements. Freedom Bank KZ partners with the relevant broker. The broker has the ability to issue a card in a few minutes through Freedom Bank KZ's remote channels.
The Invest card offers features unique to the Kazakhstan market including: integration with the customer's brokerage accounts to allow for convenient instant money
transfers to and from the customer's brokerage account; no fee interbank and peer-to-peer transfers and replenishment of the card in any currency; daily interest payments in
U.S. dollars on the outstanding balance on a savings account; and the ability to remotely open bank accounts by means of biometric identification and remote execution of
account opening documents. At the customer's election the Invest card can be a digital card or a plastic card. During fiscal 2024 approximately 24,141 new Invest cards were
issued to customers.
◦
Deposit card. The deposit card combines the features of deposit and debit cards. The card is tied to a deposit account, and when debit transactions are made the money is
debited from the deposit account. Clients have the opportunity to save simultaneously in seven currencies. During fiscal 2024, 182,583 new deposit cards were issued.
◦
Freepay. Freepay is a card with a credit limit of the equivalent of approximately $3,300, which can be used by customers for personal expenses including making purchases
in installments or on credit. For installment or credit purchases, the client does not have to obtain a card in advance, but instead the card is issued automatically when a
purchase is made through our partner network. During fiscal 2024, 139,549 new Freepay cards were issued.
◦
Freedom card. The Freedom card is a multi-currency payment card for any purchases around the world. Clients can hold money under the card in seven different currencies.
During fiscal 2024, 36,907 new Freedom cards were issued.
◦
Araldy Saqta, Araldy Saqta is a deposit card with an increased cashback of up to 10%, and the cashback amount is transferred to the International Fund for the Salvation of
the Aral Sea in Kazakhstan.
•
Digital Mortgages. In July 2021, Freedom Bank KZ launched a highly digitized mortgage product, which allows for the obtaining of a mortgage loan through an online
process. The bank's internal process interacts with many government services, which significantly speeds up the process of obtaining a mortgage. The client submits an
application in his or her personal account, passes the scoring and online assessment of the selected property, and signs all the necessary documents using an electronic digital
signature. The pledge is registered using blockchain technology, and the decision to issue a loan is made through an automatic system. Our digital mortgage product has
enabled Freedom Bank KZ to become the leading mortgage lender in the Kazakhstan market, with a market share of 19.4% as of March 31, 2024. In the 2022 calendar year,
Freedom Bank KZ was the leader in issuing mortgage loans under the Kazakhstan state program for financing of mortgage loans “7-20-25”. During fiscal 2024, we issued
7,747 digital mortgage loans.
•
Digital Car Loans. In June 2022, Freedom Bank KZ launched a unique digital product that allows an auto loan to be obtained through an entirely online process. The
platform has made the auto buying process more transparent and streamlined and has created safeguards to limit the risk of financial fraud or identity theft. Like a digital
mortgage, a digital auto loan allows a new or used car to be purchased in as little as one day and without physically visiting the bank, and all documents are signed using
biometrics. In addition, customers do not need to purchase additional auto insurance, which is included in the registration process and is provided by Freedom Insurance. As
of March 31, 2024, more than 305 car dealerships cooperated with Freedom Bank KZ in offering digital auto loans. Some of them allow cars to be purchased in installments.
During fiscal 2024, 14,202 digital auto loans were issued. As of March 31, 2024, Freedom Bank's share in the total Kazakhstan's digital auto loans market amounted 9.3%,
according to the First Credit Bureau of the Republic of Kazakhstan.
•
Digital Business Loans. Freedom Bank KZ seeks to provide a high level of service to legal entities and to provide support for entrepreneurial activities in the market. At the
beginning of the 2024 calendar year, we launched the digital business loan, which allows small businesses to obtain a loan in as little as one day and without physical
delivery of documents. All documents are signed using biometrics, without the need for an electronic digital signature, and the loan proceeds are transferred to a corporate
card, which is automatically opened in the name of
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the client during the loan process. Freedom Bank KZ is a member of the Damu Fund, a Kazakhstan state program, which provides entrepreneurs with the opportunity to
receive a loan to develop their business at a reduced rate, and such loans can be applied for online with our digital business loan. During fiscal 2024, 20,153 digital business
loans were issued. As of March 31, 2024, Freedom Bank's share in the total Kazakhstan's digital business loans market amounted 21.3%, according to the First Credit Bureau
of the Republic of Kazakhstan.
•
Freedom Box. Freedom Box is a package of payment acquiring services for individual entrepreneurs whereby the entrepreneurs do not need to bring documents to our bank
in order obtain the package of services. The package includes an installment plan for clients purchasing the acquiring services, a free POS terminal, an overdraft facility and
an entrepreneur's card. After the client applies and is approved for Freedom Box, it can start using Freedom Box online, and the card and POS-terminal will subsequently be
delivered. During fiscal 2024, 3,804 clients subscribed to the Freedom Box service package.
Insurance Segment
On May 17, 2022, we acquired two insurance companies in Kazakhstan, a life insurance company, Freedom Life, and a direct insurance carrier, excluding life, health and
medical, Freedom Insurance. Prior to our acquiring these companies, each was wholly owned by our controlling shareholder, chairman and chief executive officer, Timur Turlov.
We acquired these companies from him at the historical cost paid by him plus amounts he had contributed as additional paid in capital since his purchase. These companies were
not initially acquired directly by us because at the time they were put on the market for sale by their prior owner they did not have audit reports conforming to U.S. GAAP standards
and had not demonstrated sustained profitability. The purchase price for Freedom Insurance was $12.4 million and the purchase price for Freedom Life was $12.1 million.
We believe incorporating the offerings of these insurance companies with our existing brokerage and banking product and service lines, along with our developing fintech
ecosystem in Kazakhstan, will allow us to create a significant sustainable competitive advantage in Kazakhstan as an integrated, efficient and convenient single source for financial
services.
•
Freedom Life. Freedom Life was established in 2014. Since 2018 the Company has been operating under the Freedom Finance brand. Freedom Life provides a range of
health and life insurance products to individuals and businesses, including life insurance, health insurance, annuity insurance, accident insurance, obligatory worker
emergency insurance, travel insurance and reinsurance. Freedom Life has an S&P Global Rating of "BB" on the international scale and long-term rating on the national scale
of "kzA+" with a "Negative" outlook. As of March 31, 2024, Freedom Life had 387,103 clients and 616,301 active contracts. As of March 31, 2024, Freedom Life had total
assets of approximately $372.2 million and total liabilities of approximately $290.2 million. During the fiscal year ended March 31, 2024, Freedom Life experienced a 121%
increase in gross insurance premiums written and recognized a net profit of approximately $23.5 million. As of March 31, 2024, Freedom Life's market share in the
Kazakhstan life insurance market was 12% based on gross written premiums for life insurance, and it held an approximately 56% market share in the Kazakhstan voluntary
life-related accident insurance market, in each case according to the NBK.
•
Freedom Insurance. Freedom Insurance operates in the "general insurance" industry and is the leader in online insurance in Kazakhstan and offers various general insurance
products in property (including automobile), casualty, civil liability, personal insurance and reinsurance. Freedom Insurance has been assigned "B+" rating by S&P Global
Ratings and "kzBBB" national scale rating: Outlook - "Stable." Freedom Insurance distributes its products and services through different channels such as the internet,
payment terminals and a call center. By utilizing its digital solutions, Freedom Insurance's customers can purchase Freedom Insurance products within five minutes and have
a personal account for managing policies. As of March 31, 2024, Freedom Insurance had 146,466 clients and 190,872 active contracts. As of March 31, 2024, Freedom
Insurance had total assets of approximately $163.1 million and total liabilities of approximately $112.9 million. During the fiscal year ended March 31, 2024, Freedom
Insurance had an 84% increase in written insurance premiums received as compared to fiscal 2023 and recognized net profit of approximately $16 million. According to the
NBK, as of March 31, 2024, Freedom Insurance had an approximately 7% share of the total Kazakhstan general insurance market based on total assets and had an
approximately 3% share of the Kazakhstan car owners liability insurance market based on insurance premiums received. On August 27, 2022, we acquired 100% of JSC
Insurance Company "London-Almaty" ("London-Almaty"), a Kazakhstan insurance company, and on December 19, 2022, this company was merged into Freedom
Insurance.
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In our Insurance segment we also conduct proprietary securities trading activities.
As of March 31, 2024, we had 52 offices and 855 employees, including 848 full-time employees and 7 part-time employees, providing consumer life and general
insurance services in Kazakhstan.
Other Segment
As of March 31, 2024, in our Other segment we had 43 offices and 1,848 employees, including 1,792 full-time employees and 56 part-time employees, providing a range
of services including payment processing, entertainment ticketing sales, online air and railway ticket purchase aggregation and an online retail trade and e-commerce services. In
addition, we have recently established subsidiaries in Kazakhstan with a view to launching a telecommunications business and a media business, respectively, each of which is in
the developmental stage. In our Other segment we also conduct proprietary securities trading activities, which are mainly conducted by FRHC. The Other segment accounted for
$62.5 million, or 4%, of our total revenue, net for the fiscal year ended March 31, 2024. This revenue was mainly derived from provision of payment processing services, retail
online ticket sales and online aggregation of purchasing air and railway tickets.
Digital Fintech Ecosystem and Product Expansion
Operating under the "Freedom" brand, our comprehensive suite of digital products and services enables our customers to engage in electronic trading and to monitor their
accounts. In addition to trading capabilities, we have expanded our digital solutions to include mortgages, auto loans, and insurance products. Through our online platform,
customers can conveniently apply for and manage mortgages, track auto loans, and access a range of insurance options. We prioritize delivering a seamless and integrated digital
experience across all our products, ensuring user-friendly interfaces, robust security measures, and efficient workflows.
See "Information Technology" below for a description of our Technology Development and Ecosystem Growth strategy and our Tradernet software platform, which is our
flagship technology product.
We have recently expanded our digital product portfolio with the acquisition of Ticketon Events LLP ("Ticketon"), the largest online ticket sales company in Kazakhstan,
actively working to create an e-commerce infrastructure in the field of culture and sports. The acquisition of Ticketon, which we believe is the market leader in providing online
tickets sales for cultural events in Kazakhstan, gives us greater access to middle class customers that are potential clients of our core financial services businesses. Ticketon's service
focuses on promoting the cultural life of Kazakhstan and introducing modern promotion technologies. Ticketon offers convenient ways to buy tickets, expands sales channels for
organizers and venues, and provides effective ticket promotion and distribution services. This acquisition further strengthens our digital offerings and enhances our ability to serve
customers in the entertainment industry.
One of our key digital products is the Paybox payment platform, which we acquired as part of our acquisition of Paybox Technologies LLP (now called Freedom
Technologies LLP) and its subsidiaries in February 2023. The Paybox platform is a dynamic payment system services project. By connecting to the Paybox platform digital
payment aggregator, customers can accept payments from buyers using a wide range of payment methods, including bank cards, online banking, electronic money, and more.
Paybox also develops customized solutions for banks, catering to their specific needs and expanding our network of partners. According to Global Data, for the calendar year 2022,
Freedom Technologies' share of electronic payments in the Kazakhstan market was 30%. This acquisition allowed our bank to become the largest acquiring bank in Kazakhstan,
enhances our product offering and expands our geographic footprint.
On November 27, 2023, our Board of Directors approved a plan to expand our business by entering the telecommunications market in Kazakhstan, pursuant to our
strategy to build a digital fintech ecosystem. We seek to establish a new independent telecommunications operator in Kazakhstan to provide a diverse range of telecommunications
and telecommunications-related services to customers which may include, among others, high-quality internet connectivity, mobile virtual network operator (MVNO) services,
WiFi access, over-the-top (OTT) streaming, internet protocol television (IPTV), traffic transit for operators and cloud solutions, subject to obtaining applicable licenses or entering
into partnerships where required. Our new telecommunications business will be operated by Freedom Telecom Holding Limited (“Freedom Telecom”), a wholly-owned subsidiary
of Freedom Holding Corp. incorporated under the laws of the Astana International Financial Center. An experienced core management team has been appointed to Freedom
Telecom, and a broader team of specialists with experience in creating successful technology projects in Kazakhstan is currently being assembled. Our Chairman and CEO, Timur
Turlov, served as a member of the board of directors of Kcell, one of the leading providers of mobile telecommunications services in Kazakhstan, from 2019 until October 2023.
Based on Mr. Turlov’s experience and knowledge of the market, he and the other members of the Board believe that there is currently an attractive opportunity for a new entrant in
the Kazakhstan telecommunications market and that the formation of an
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ecosystem combining financial services and telecommunications in Kazakhstan, if successfully implemented, will create significant synergies for us and significant growth in our
customer base. Our strategy and budget for Freedom Telecom are currently being reassessed and are subject to revisions, which may be material.
In alignment with our digital fintech ecosystem strategy, during fiscal 2024 we established Freedom Media LLP ("Freedom Media") as a subsidiary of Freedom Telecom.
We intend for Freedom Media to become a national media platform in Kazakhstan offering media content to customers. Our establishment of Freedom Media marks a significant
milestone in our endeavor to diversify our product and service offering and to offer tailored streaming services to the Kazakhstan and Central Asia market. This platform is expected
to provide unlimited access to a diverse collection of TV shows, movies, documentaries, and exclusive content across multiple genres. In addition to streaming, Freedom Media will
enable content downloads for offline viewing, catering to the convenience of our users.
We are committed to further expanding our digital fintech ecosystem going forward by integrating our online and mobile brokerage services, banking offerings, insurance
products, payment processing systems, and online commercial ticketing services. Our strategic objective is to provide customers with a comprehensive and user-centric digital
experience, offering them convenient access to a wide array of financial products and services through a single platform. By leveraging cutting-edge technology and fostering
continuous innovation, we strive to enhance our digital offerings and meet the evolving needs of our diverse customer base.
In April 2024, Freedom Finance Bank launched its mobile application, SuperApp, marking a significant milestone in the Kazakhstan financial technology sector. This
innovative app consolidates all essential financial services into one platform, offering clients a seamless and convenient way to manage their finances without the need for multiple
apps and services. With SuperApp, clients can easily check their account balances, review transaction histories, make transfers and payments, open and manage deposits, and obtain
and repay loans. The app also provides real-time portfolio monitoring, along with access to analytical reports and recommendations, empowers users to make well-informed
investment decisions. SuperApp's payment services enable users to pay utility bills, mobile phone charges, internet fees, and other expenses effortlessly. The app supports setting up
recurring payments and auto-payments, making the payment process quick and easy. SuperApp not only enhances the user experience but also aligns with our strategic goals.
Customer satisfaction is improved through easy access to all banking and investment services in a single app, coupled with an intuitive interface and personalized recommendations.
We believe SuperApp will strengthen our competitive position in the market by implementing advanced security and convenience technologies and continuously improving and
updating functionalities based on user feedback and market analysis.
INFORMATION TECHNOLOGY
Our business model places heavy reliance on information technology to offer customers a seamless digital experience, meet their diverse needs, and ensure stringent
adherence to regulatory requirements and information security standards. To support sustainable development and growth of a digital fintech ecosystem, we focus on the continuous
development of our information technology systems in order to empower business users with accelerated time-to-market for digital products while enhancing predictability. We
seek to harmonize technology governance approaches across all of our businesses and centralize key IT processes.
We have implemented a Technology Development and Ecosystem Growth strategy centered on building a robust technological infrastructure, fostering innovation, and
enhancing user experiences. This strategy is designed to leverage technology as a key driver of success within our group. We are continuously adapting to the rapidly evolving
digital landscape and aligning our technological capabilities with the changing needs of our customers and stakeholders. By fostering innovation, enhancing collaboration, and
prioritizing business continuity and growth, we aim to establish a strong technological foundation that supports our strategic objectives. See "Digital Fintech Ecosystem and
Product Expansion" above.
Tradernet Platform
Tradernet is our flagship online trading platform designed for a wide range of investors, offering a comprehensive and user-friendly trading experience. The platform
allows users to trade a diverse array of financial instruments, including stocks, options, and ETFs from major global exchanges such as KASE, AIX, NYSE, Nasdaq, ATHEX, the
London Stock Exchange, the Chicago Mercantile Exchange, the Hong Kong Stock Exchange and Deutsche Börse.
•
Accessibility and User Interface. Accessible via both web and mobile platforms, Tradernet ensures that users can monitor and manage their investments in real-time from
any location with internet connectivity. The platform's interface is designed to be intuitive and customizable, offering tools for technical analysis, portfolio management, and
market monitoring. These features cater to both beginner traders, who benefit from the platform's simplicity, and advanced traders, who appreciate its sophisticated
analytical tools.
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•
Data Platform and Operational Efficiency. Tradernet features an advanced order routing system that ensures trades are executed at the best possible prices by directing
orders to the most favorable markets. At the heart of Tradernet is a robust data platform that provides real-time market data and analytics. This platform supports various
trading activities by offering comprehensive data on securities, enabling users to make informed decisions. The back-end infrastructure of Tradernet is designed to handle
high volumes of transactions securely and efficiently, ensuring the platform's reliability and performance even during peak trading times. Tradernet back office solutions
automate many administrative processes, reducing the need for manual intervention and minimizing errors. The back-office system handles transaction processing,
compliance checks, and real-time account monitoring, ensuring smooth and efficient operations. The integration of Tradernet's back-office system with the trading platform
allows for the efficient management of trading accounts and commissions, ensuring accurate reporting and payment processing. Compliance and risk management are
integral parts of Tradernet's back-office solutions. The system includes advanced compliance features to ensure all trading activities adhere to relevant regulations, which is
crucial for maintaining the platform's integrity. Additionally, risk management tools help monitor client positions, margins, and overall exposure, providing timely alerts and
advice to manage risks effectively.
•
Education and Support. Tradernet places a strong emphasis on education and support, providing extensive resources such as tutorials, webinars and market analysis reports.
This ensures that users can make informed trading decisions. The platform also offers robust customer support to assist users with any issues they may encounter.
COMPETITION
We face intense competition in each of the markets where we offer our services. We compete with international, regional and local brokerage, banking, and financial
services firms that offer an array of financial products and services. The brokerage and financial service firms which we currently regard as our principal competitors include:
Halyk Finance, BCC Invest and First Heartland Securities in Kazakhstan; and eToro and Interactive Brokers in Europe. We consider Freedom Bank KZ's principal banking
competitors to be Halyk Bank, Kaspi Bank and Bank CenterCredit. In the United States, we expect to compete with, among others, Needham & Company, Craig-Hallum Capital
Group and Oppenheimer & Co. In addition, as part of our strategy to enter the telecommunications and media markets in Kazakhstan, we will compete with various
telecommunications operators and other participants in the telecommunications market and with various media providers, respectively.
Many of the firms with which we compete are larger, provide additional and more diversified services and products, provide access to more international markets, and
have greater technical, and financial resources. We seek to compete by leveraging the competitive advantages we have developed, including our extensive experience in providing
investors in our core markets with access to the U.S. and European securities markets, our ability to deliver high quality analytical information and our focus on providing
convenient, high tech user-friendly access to our services and the markets. We have also been an active participant in various privatization programs, which has allowed us to
develop expertise and a prominent reputation in the public placement of securities of local issuers in the regions where we operate.
BUSINESS CONTINUITY PLAN
We seek to ensure our ability to continue the delivery of services to our customers, employees and various business partners and counterparties at acceptable predefined
levels following a disruption that may occur in one or more business activities and/or in one or more operating locations due to local, national, regional or worldwide disasters,
including pandemics, such as Covid-19, and social unrest and wars, such as the Russia-Ukraine conflict, or due to failure of one or more components of information technology
infrastructure, including proprietary or self-developed information systems, databases, software and hardware that we operate to provide such services.
Since our operations are conducted through our subsidiary companies in different geographic locations, our business continuity plans are developed, tested and managed
locally by our subsidiaries to cover key business areas, and to provide contingency plans for IT infrastructure and communication to employees, customers and counterparties. The
type, maturity, and formalization of plans in our subsidiaries is informed by the level of anticipated threats and their impacts associated with each organization.
Our operating subsidiaries in each geographical location rely on local public utilities for electric power with additional electric generator back up (if available). For
telephone and internet services we engage, where available, back up providers. All of these service providers have assured management of our subsidiary companies that they have
plans for providing continued service in the case of an unexpected event that might disrupt their services. At the same time, our
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business continuity plans may be insufficient if a failure occurs from disruption of third-party service providers that cannot be replaced in a reasonable time by another provider due
to uniqueness or special services, such as stock exchanges, depositories, clearing houses, clearing firms or other financial intermediaries used to facilitate our securities transactions,
as well as identity verification and KYC service providers. For this purpose, our subsidiaries have established continuous communication with the service providers to ensure timely
receipt of data about their planned and actual activities. We are continuing to implement increased uniformity across our subsidiaries to address business operations continuity and
expertise by pursuing business continuity efforts consistent with the standards of ISO 22301 Societal security – Business continuity management systems.
HUMAN CAPITAL
Our multinational operations, particularly in countries with integrated multi-ethnic cultures, create a naturally ethnically diverse workforce. We employ a diverse and
talented team spanning 20 countries. We have well-educated and experienced employees who seek to uphold high business and ethics standards. As of March 31, 2024, we had
6,197 (6,132 full-time and 65 part-time) employees in the following regions: Central Asia - 5,685, Europe - 261, Middle East - 198, USA - 53). As of March 31, 2024, our
workforce was approximately 3,122 women and 3,075 men. We abide by applicable employment laws across all jurisdictions where we have offices.
We believe our employees are our most important investment, and we are committed to providing them:
•
a safe and positive work environment;
•
opportunities to learn, grow, and advance in their careers;
•
clear instructions of our expectations and the right tools so they achieve success; and
•
fair compensation, benefits and recognition for their work.
Employee Recruitment and Development
We seek talent through careful recruitment and use specifically crafted qualification requirements and skills maps for each position we seek to fill. Our hiring decisions
focus on candidate motivation, professionalism, and experience.
We invest in our employees through our employee development programs. These programs facilitate employee movement both vertically and horizontally within our
company, as well as enable employees to participate in cross-department projects, working groups, competitions, conferences, and other collective events that expose employees to
other departmental functions.
We teach practical job skills with a view to providing job satisfaction for our employees, and by extension, strong company performance. We provide internal mentoring
and training programs to enable new hires to quickly adapt to our work culture and demands. Our mentorship program helps foster relationships within our companies that engender
loyalty and unity in our work.
We provide continuous, systematic core educational opportunities and many advanced trainings to enable our employees to continue their professional growth, which
contributes to higher standards of knowledge and skill sets of our employees. Advanced individual programs are provided based on an array of topics to meet the dynamic interests
of our teams.
Compensation and Benefits
We provide compensation packages that include competitive pay, bonuses, paid time off (PTO) and benefits with a focus on a performance-based system of incentives and
recognition. Salary increases are determined based on the performance of the employee, length of service, as well as market pay rates and other parameters.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)
Today, ESG principles are fundamental in determining the direction of development of companies that are committed to a responsible approach to the impact of their
activities on the environment, society, and economy. Freedom Holding Corp. is among them, and we have been working extensively in this direction.
In December 2023, we published our first Sustainability Report, in respect of fiscal year 2023. The Sustainability Report was prepared with reference to the standards of
the Global Reporting Initiative (Consolidated Set of the GRI Standards 2021), and it emphasizes our dedication to ESG principles, covering personnel care, community impact,
corporate governance, and key environmental data.
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Social
We place strong emphasis on having a favorable working environment and supporting our employees and serving the communities in the regions where we operate.
Employee Development and Corporate Activities
We recognize that success is inextricably linked to well-developed human capital and we seek to attract the best experts in their fields. We constantly invest in the
enhancement of professional knowledge, skills and abilities of employees at all stages of their careers by allocating funds for training as well as implement corporate free
educational activities available in online format.
We adhere to the principles of ethical behavior that are contained in our Code of Ethics and Business Conduct. This code is a fundamental document that defines the
norms and standards to which all employees of our company must adhere. We pay attention to the personal and career development of our personnel.
In addition, our subsidiaries have a range of benefits packages which include corporate communications, gym membership subsidies, and benefits related to obtaining the
relevant company's banking and insurance products. We also strive to create an environment that maintains a healthy work-life balance for employees. We support corporate events,
holidays, team building activities and sports tournaments in chess, football and running for our employees.
Shapagat Corporate Fund
Our Freedom Shapagat Corporate Fund subsidiary (hereinafter “Fund”), founded in August 2023, is a non-profit charitable fund that prioritizes environmental, social, and
governance (ESG) factors as the primary criteria guiding its investment focus and strategy. These principles heavily influence the Fund's project selection process.
The Fund’s objectives include managing its project portfolio based on the UN Sustainable Development Goals and financial factors, and centralizing the sponsorship and
charitable activities of Freedom Holding Corp.
Through strategic investments and partnerships with various organizations, we aim to not only strengthen our position as a socially responsible company, but also make a
significant contribution to the development of local communities.
External Social Projects
We endeavor to support and contribute to sports, culture, and education in the communities in which we operate through various forms of financing, including charity and
sponsorship activities. We recognize the social responsibility of businesses and seek to create a positive impact on the regions where we operate. In fiscal year 2024 the following
support was provided (the list below is not exhaustive; more information will be provided in the Sustainability Report for fiscal year 2024):
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We continue supporting the development of chess in Kazakhstan. During the reporting period, the Fund has made financial contributions to the Kazakhstan Chess Federation
to support the preparation and holding of championships, tournaments, training camps and other events. Furthermore, a sponsorship agreement was signed by Freedom
Finance Global PLC through the Fund for the development of chess among children in the city of Almaty.
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The Fund has provided financial support to The International Collegiate Programming Contest (ICPC) aimed at the preparation and holding of the 2024 ICPC World Finals
in Astana in 2024.
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The Fund has provided sponsorship aimed at construction of a new educational building in SDU University in Almaty in 2024. The new university building will serve as a
hub for conducting research in the field of fintech innovations and other related areas, as well as for organizing thematic events, conferences, and seminars on various topics.
•
The Fund has provided funding for the design and construction of a sports hall for persons with disabilities in Uralsk. The completion of the construction is scheduled for the
end of 2024.
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During the reporting period, a new campus of the IQanat school opened in Kazakhstan. The construction of the new campus was partially financed by the Fund, along with
contributions of Mr. Turlov.
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The Fund has provided financial support to the “Teach for Qazaqstan” initiative aimed at covering operational costs and holding educational events.
Freedom Academy provides online and in person training courses and webinars in financial literacy to the public. The goal of this program is to generally expand knowledge about
financial literacy and teach the basics of exchange trading so that participants can more knowledgeably trade and reduce the risk of financial mistakes in the future.
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Environment
In fiscal year 2024, we continued carrying out ESG diagnostics, to identify key opportunities and recommendations on increasing the efficiency of our activities in the
environmental sphere. We intend to gradually strengthen our focus on assessing the environmental impact of our assets, internal and external financial operations, and lending
activities in future.
Despite the lack of direct significant environmental impact being generated by the financial industry, we take a precautionary approach to environmental issues. In June
2023, we carried out an inventory of greenhouse gas emission sources for our major subsidiaries. Our management is aware of the importance of combating climate change, and in
the future, we plan to increase the detail, accuracy and expand the perimeter of the encompassing data. One of the next areas of focus will be Scope 3 and climate risk assessments,
which will allow us to proactively address climate-related issues and seize opportunities, thereby creating a more resilient financial sector in our countries of operation.
External Environmental Projects
We support external environmental projects, an example of which was the signing of a Memorandum on cooperation by the Fund and the Executive Directorate of the
International Fund for Saving the Aral Sea in the Republic of Kazakhstan (IFAS International Fund in the Republic of Kazakhstan) in 2024. The signing of the memorandum is
aimed at establishing partnership relations and developing long-term, effective and mutually beneficial cooperation aimed at implementing joint projects in the Kazakh part of the
Aral Sea region. Within the framework of cooperation, planting of black saxaul is planned on the dried bottom of the Aral Sea in Kyzylorda Region.
Detailed information on Freedom Holding Corp.'s contributions to the development of local communities and regions of operation will be presented in Freedom Holding
Corp.'s upcoming Sustainability Report for fiscal year 2024.
Green Bonds and Social Bonds Underwriting
In June 2023 Freedom KZ underwrote a placement of two-year gender ESG bonds issued by MFO OnlineKazFinance JSC (Solva) listed on the KASE in the total amount
of the equivalent of $14 million (based on the exchange rate as of the date of issuance). The proceeds from the placement of these bonds are being used to actively support women
in the business environment, aiming to expand their opportunities and reduce gender inequality. The MFO produces digital loan products that finance micro and small businesses of
women entrepreneurs.
In November 2023, Freedom KZ placed three-year "green" bonds of Black Biotechnology LLP (BBT) in the amount of 1.5 billion tenge on the KASE with a yield to
maturity of 21.5% per annum. These securities belong to ESG bonds due to their compliance with the Principles of Green Bonds of the International Association of Capital Markets
(ICMA), which is confirmed by an independent assessment of Green Investment Group at the level of "High/Great."
INFORMATION SECURITY
Information security, with a particular focus on cybersecurity, is a high priority for us. We have and continue to develop and implement safeguards, policies and
technology designed to protect the information provided to us by our customers and our own information from cyber attacks and other misappropriation, corruption or loss. We also
consult advisory organizations and follow regulatory requirements regarding information security. For additional information regarding information security see "Risks Related to
Information Technology and Cybersecurity" in "Risk Factors" in Part I Item 1A, and "Regulation" in "Business" in Part I Item 1 of this annual report.
INTELLECTUAL PROPERTY
We rely principally on a combination of trademark, copyright, related rights and trade secret laws in the jurisdictions in which we operate as well as confidentiality
procedures and contractual provisions to protect our proprietary technology and our brands. We enter into confidentiality agreements with our employees and consultants and
confidentiality agreements with other third parties, and we rigorously control access to our proprietary technology.
We generally obtain trademark protection and often seek to register trademarks for the brand names and images under which we market our services. As of March 31,
2024, we owned approximately 15 registered trademarks in Cyprus, 13 in Kazakhstan, seven in the United Kingdom, seven in Germany, two in Azerbaijan and one in Uzbekistan.
Our flagship technology product is our proprietary Tradernet software platform. We also believe the value associated with our "Freedom" and other brands contributes to
the appeal and success of our services. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain and use our
brands and technology. In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our
intellectual property rights. Effective intellectual property protection may not be
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available in all jurisdictions in which we offer our services. Further, we may be unable to obtain protection for our intellectual property in the future, which could materially harm
our business, financial condition, results of operations and prospects.
REGULATION
We operate in highly regulated industries across a number of legal jurisdictions. The securities, banking, payment services and insurance business activities of our
subsidiaries are subject to extensive regulation and oversight by the stock exchanges, central/national banks, governmental and self-regulatory authorities in the foreign jurisdictions
where we conduct business activities. We expect that the regulatory environment will continue to raise standards and impose new regulations with which we will be required to
comply in a timely manner.
We operate under various securities, banking and insurance licenses and must maintain our licenses in order to conduct our operations. As of March 31, 2024, we, through
our subsidiaries, held: brokerage licenses in Kazakhstan issued by the Agency of the Republic of Kazakhstan for Regulation and Development of Financial Market (the "ARDFM")
and the Astana Financial Services Authority (the "AFSA"), in Cyprus issued by the Cyprus Securities and Exchange Commission ("CySEC"), in the United States issued by
FINRA, in Armenia issued by the Central Bank of Armenia, and in Uzbekistan issued by the Ministry of Finance of the Republic of Uzbekistan; a foreign currency operations
license in Kazakhstan issued by the ARDFM; a banking license in Kazakhstan issued by the ARDFM; insurance licenses (general and life) in Kazakhstan issued by the ARDFM;
and payment services licenses in Kazakhstan, Uzbekistan and Kyrgyzstan.
In the jurisdictions where we conduct business, we are subject to often overlapping schemes of regulation that govern all aspects of our relationships with our customers.
These regulations cover a broad range of practices and procedures, including but not limited to:
•
minimum net capital and capital adequacy requirements;
•
the use and safekeeping of customers' funds and securities;
•
recordkeeping and reporting requirements;
•
customer identification, clearance and monitoring to identify and prevent money laundering and funding of terrorism, U.S. Department of Treasury's Office of Foreign
Assets Control ("OFAC") and other non-U.S. sanctions violations, to follow FATF recommendations;
•
tax reporting obligations under QI, FATCA and CRS regulations;
•
supervisory and organizational procedures intended to monitor and assure compliance with relevant laws and regulations and to prevent improper trading practices;
•
employee-related matters, including qualification and certification of personnel;
•
provision of investment and ancillary services, clearance, and settlement procedures;
•
maximum loan and bank guarantees concentration issued to shareholders;
•
credit risk requirements;
•
liquidity risk requirements;
•
acquisitions;
•
qualification of firm management;
•
cybersecurity and personal data protection;
•
risk detection, management, and correction; and
•
various shareholders' capacity requirements required for obtainment of a regulatory status (banking holding, major shareholder, insurance holding, etc.).
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The regulatory authorities in each jurisdiction where we are regulated establish minimum net capital and capital adequacy requirements which currently range from
approximately $2,000 to approximately $22 million and fluctuate depending on various factors. As of March 31, 2024, the aggregate net capital requirements of our subsidiaries
was approximately $245.9 million. As of March 31, 2024, aggregate excess regulatory capital for all of the operating subsidiaries was $573.3 million. Our regulated insurance
subsidiaries are subject to regulations and standards in their respective jurisdictions, which require these subsidiaries to maintain specified levels of statutory capital, as defined by
each jurisdiction, and restrict the timing and amount of dividends and other distributions which may be paid to their parent company. There were no state-prescribed or permitted
regulatory accounting practices for any of our insurance or reinsurance entities which is materially different from that which would have been reported under the prescribed
practices of the respective regulatory authorities. For the year ended March 31, 2024, our insurance subsidiaries have not paid dividends to their parent companies. For the year
ended March 31, 2023, our insurance subsidiaries paid their parent company dividends of $15.2 million. In the event one or more of our subsidiaries fails to maintain
minimum/adequate net capital, we may be subject to fines and penalties, suspension of operations, and disqualification of our management from working in the relevant industry.
Our subsidiaries are also subject to rules and regulations regarding liquidity ratios. Compliance with minimum capital requirements could limit our expansion into activities and
operations that require significant capital. Minimum capital requirements could also restrict the ability of our subsidiaries to transfer funds among themselves and FRHC. For more
details please refer to Note 31 Statutory Capital Requirements in the notes to our consolidated financial statements in Part II Item 8 of this annual report.
We spend considerable resources in our general efforts to comply with the various regulations to which we are subject, and we expect this burden to continue in the future.
Violations of securities, banking, sanctions, anti-money laundering and financing of terrorism laws, rules and regulations could subject us and our employees to a broad
range of disciplinary actions including imposition of fines and sanctions, other remedial actions, such as cease and desist orders, removal from managerial positions, loss of
licensing, and civil and criminal proceedings.
Kazakhstan Regulation
Kazakhstan Securities Market Regulation
The Kazakhstan brokerage sector is highly regulated. The securities market in Kazakhstan is regulated in accordance with Kazakhstan law and the by-laws of the ARDFM.
The Law of the Republic of Kazakhstan No. 461-II "On the Securities Market", dated 2 July 2003 (the "Securities Market Law") is the main law regulating the brokerage and dealer
activities in the securities market and portfolio management activities in Kazakhstan. It establishes a framework for brokers and dealers, portfolio management activities,
registration and licensing requirements, and regulation of such activities by the ARDFM.
Under the Securities Market Law, broker-dealer and portfolio management activities in the securities market are carried out on the basis of a license to carry out such
activities issued by the ARDFM. A license for broker and dealer activities may include the right to maintain customer accounts as a nominal holder or may not include the right to
keep customer accounts. A license for portfolio management can be with or without the right to attract voluntary pension contributions.
Freedom KZ currently holds the following licenses:
•
No. 3.2.238/15 dated October 2, 2018 (initially issued on March 21, 2007) for performance of activity on the securities market, particularly (i) broker-dealer activity with the
right to maintain customer accounts as a nominal holder, and (ii) portfolio management without the right to attract voluntary pension contributions; and
•
Banking license No. 4.3.12 dated February 4, 2020 (initially issued on April 4, 2019) for performance of exchange operations with foreign currency, except for exchange
operations with foreign cash.
Under the Securities Market Law (and the relevant ARDFM regulations), the following prudential standards are applicable to brokers and dealers and portfolio
management companies, among others: the capital adequacy ratio, which daily indicator must be at least 1; and the liquidity ratio, which daily indicator must be not less than 1.4.
Under the Securities Market Law (and relevant subordinate ARDFM regulations), compliance with the prudential standards is measured based on the following indicators: (i) highly
liquid and liquid assets; (ii) balance sheet liabilities; and (iii) minimum amount of equity capital, taking into account the capital adequacy ratio.
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Based on the AIFC Framework Law dated December 7, 2015, as well as amendments to the Constitution of the Republic of Kazakhstan made in March 2017, a special
legal regime for the financial sector, including the securities market, was established in the Astana International Financial Center (the "AIFC"). The current law of the AIFC consists
of: (i) the AIFC Framework Law; (ii) AIFC acts that do not contradict the AIFC Framework Law and which may be based on the principles, norms and precedents of the law of
England and Wales and/or the standards of the world's leading financial centers; and (iii) current Kazakhstan law, which is applied to the extent not regulated by the AIFC
Framework Law and acts of the AIFC. The AIFC Acts establish the requirements for carrying out activities in the securities market in the AIFC and, in particular, the requirements
for licensing regulated activities, which are carried out on the basis of a relevant license issued by the AFSA. Our Freedom Global subsidiary is a member of the AIFC and has
License No. AFSA-A-LA-2020-0019 issued by the AFSA on May 20, 2020 to carry out the following major regulated activities:
•
dealing in investments as principal;
•
dealing in investments as agent;
•
managing investments;
•
advising on investments; and
•
arranging deals in investments.
In their activities, AIFC participants operating in the securities market are guided, among other things, by the provisions of the AIFC General Rules, the AIFC Conduct of
Business Rules and other acts of the AIFC.
Kazakhstan Banking Regulation
Banks in Kazakhstan are subject to numerous laws and regulations governing banking activities as well as a number of laws and regulations that regulate, among other
matters, payment services, anti-money laundering, data protection and information security. Kazakhstan has a two-tier banking system, with the NBK comprising the first tier and
all other commercial banks comprising the second tier (with the exception of the Development Bank of Kazakhstan, which as a state development bank has a special status and
belongs to neither tier and Eurasian Development Bank which is an intergovernmental bank). Generally, all financial institutions in Kazakhstan are required to be licensed and
regulated by the ARDFM. From 2004 to April 2011, licensing and regulation functions were carried out by the Agency of the Republic of Kazakhstan for Regulation and
Supervision of the Financial Market and Financial Organizations (including its respective successors). The respective functions had been carried out by the NBK from April 2011
until the end of 2019. Starting January 1, 2020 these functions have been carried out by the ARDFM. As a central bank, the NBK has retained its role in developing monetary credit
policy, currency regulation and control and payment systems.
The Law of the Republic of Kazakhstan No. 2444 "On Banks and Banking Activity in the Republic of Kazakhstan", dated August 31, 1995 (as amended) (the "Banking
Law"), is the main law regulating the banking sector in Kazakhstan. It establishes a framework for banking activities, registration and licensing of banks and regulation of banking
activities by the ARDFM. The Banking Law provides for a list of banking operations that cannot be conducted without an appropriate license from the ARDFM (its predecessor)
and sets forth a list of activities permitted for banks. Freedom Bank KZ holds License No.1.2.108/43/250 dated February 1, 2023 for performing banking and other operations.
Kazakhstan Insurance Regulation
Insurance companies in Kazakhstan are subject to numerous laws and regulations governing general and life insurance activities as well as a number of laws and
regulations that regulate particular types of insurance activities (e.g., mandatory liability insurance of vehicle owners), anti-money laundering, data protection and information
security. Generally, all financial institutions (including companies performing insurance activities) in Kazakhstan are required to be licensed and are then regulated by the ARDFM.
The Law of the Republic of Kazakhstan No. 126-II "On Insurance Activities", dated December 18, 2000 (as amended) (the "Insurance Law"), is the main law regulating
the insurance sector in Kazakhstan. It establishes a framework for insurance activities, registration and licensing of insurance companies and regulation of insurance activities by the
ARDFM. The Insurance Law provides for a list of insurance operations that cannot be conducted without an appropriate license from the ARDFM (its predecessor) and sets forth a
list of activities permitted for insurance companies. Freedom Insurance holds unlimited license No. 2.1.16 dated November 24, 2022 for performing general insurance (reinsurance)
activities. Freedom Life holds unlimited license No.2.2.14 dated December 28, 2022 for performing life insurance (reinsurance activities).
Payment Services Regulation
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Payment services in Kazakhstan are mainly regulated by the Kazakhstan Law "On Payments and Payment Systems" dated July 26, 2016 (the "Law on Payments"). A
"payment organization" is defined by the Law on Payments Kazakhstan limited liability partnership which is registered as a payment organization with the NBK and which
activities are associated with rendering payment services. We provide payment services in Kazakhstan through Freedom Pay LLP and its subsidiaries under the brand "Freedom
Pay." Freedom Pay LLP is registered with the NBK to provide the following payment services, among others: electronic money disposal, acceptance and transmission of payments
made with electronic money and payment processing services. We also provide payment services in Uzbekistan and Kyrgyzstan, where our services are provided through Freedom
Payments LLC IC (Uzbekistan) and Freedom Pay Kyrgyzstan LLC, each of which is registered and operates under licenses with the respective local regulators.
Cypriot Investment Firms and Regulatory Legislation
Freedom EU is a Cypriot Investment Firm ("CIF") registered with the Registrar of Companies of Cyprus under number HE 324220 and regulated by CySEC under license
number 275/15 and is under obligation to cooperate with the Cyprus Unit for Combating Money Laundering (MOKAS).
Freedom EU complies with the requirements and/or obligations implemented by the following laws and regulations under the applicable legal framework:
•
Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014 on Markets in Financial Instruments and amending Directive 2002/92/EC and
Directive 2011/61/EU.
•
Cyprus Investment Services and Activities and Regulated Markets Law of 2017 (The Law 87(I)/2017) regarding the provision of investment services, the exercise of
investment activities and the operation of regulated markets (the “Investment Services and Activities and Regulated Markets Law 2017”).
•
Directive of 2020 of CySEC for the Prevention and Suppression of Money Laundering and Terrorist Financing
•
ESMA Final Report (ESMA35-42-1227) on the European Commission mandate on certain aspects relating to retail investor protection as of April 29, 2022.
Freedom EU follows the European Securities and Markets Authority (ESMA), European Union Directive 2014/65/EU (the Markets in Financial Instruments Directive or
"MiFID II"), European Commission, European Central Bank, Central Bank of Cyprus and CySEC circulars requirements to ensure its compliance with the foregoing regulatory
acts.
Our Cyprus operations are conducted in Limassol, Cyprus where we are licensed to receive, transmit and execute customer orders, provide investment advice and portfolio
management services, establish custodial accounts, engage in foreign currency exchange services and margin lending, and trade our own investment portfolio. The brokerage sector
in Cyprus is highly regulated and companies must be authorized by CySEC in order to be able to provide investment services.
The Law of the Republic of Cyprus L. 87(I)/2017 regarding the provision of investment services, the exercise of investment activities and the operation of regulated
markets (as amended) (the "Cyprus Securities Market Law") is the main law regulating broker dealer, portfolio management activities in Cyprus. The Cyprus Securities Market Law
is a local implementation of MiFID II in Cyprus. It establishes a framework for MiFID II investment services such as broker dealer, investment advice, portfolio management
activities, dealing on own account, CIF registration and licensing requirements, and the regulation of such activities by CySEC.
Under the Cyprus Securities Market Law, investment activities in the securities market are carried out on the basis of a license to carry out such activities issued by CySEC.
A license for broker and dealer activities includes the right to maintain customer accounts for the purposes of providing services bestowed under the license.
Freedom EU currently holds licenses in Cyprus and the EU for conducting investment services, including:
•
reception and transmission of orders in relation to one or more financial instruments indicated in our license;
•
execution of orders on behalf of clients;
•
dealing on own account;
•
provision of investment advice; and
•
provision of portfolio management services,
as well as the following ancillary services:
•
safekeeping and administration of financial instruments, including custodianship and related services;
•
granting credits or loans to one or more financial instruments, where the firm granting the credit or loan is involved in the transaction;
•
foreign exchange services where these are connected to the provision of investment services; and
•
investment research and financial analysis or other forms.
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U.S. Regulation
U.S. Securities Market Regulation
Our U.S. subsidiary PrimeEx is registered as a securities broker dealer with the SEC, is a member of various self-regulatory organizations ("SROs") and securities
exchanges, including being a "Blue Line" broker dealer on the floor of the NYSE. In 2007, the National Association of Securities Dealers and the member regulation, enforcement
and arbitration functions of the NYSE consolidated to form FINRA, which now serves as the primary SRO of PrimeEx, although the NYSE continues to have oversight over
NYSE-related market activities. FINRA regulates many aspects of PrimeEx's business, including registration, education and conduct of its broker dealer employees, examinations,
rulemaking, enforcement of these rules and the federal securities laws, trade reporting and the administration of dispute resolution between investors and registered firms. PrimeEx
has agreed to abide by the rules of FINRA (as well as those of the NYSE and other SROs), and FINRA has the power to expel, fine and otherwise discipline PrimeEx and its
officers, directors and employees. Among the rules that apply to PrimeEx are the uniform net capital rule of the SEC (Rule 15c3-1) and the net capital rule of FINRA. Both rules set
a minimum level of net capital a broker dealer must maintain and also require that a portion of the broker dealer's assets be relatively liquid. FINRA may prohibit a member firm
from expanding its business or paying cash dividends if resulting net capital falls below FINRA requirements. In addition, PrimeEx is subject to certain notification requirements
related to withdrawals of excess net capital. As a result of these rules, our ability to make withdrawals of capital from PrimeEx may be limited. In addition, PrimeEx is licensed as a
broker dealer in six U.S. states, requiring it to comply with applicable laws, rules and regulations of each of those states. A state regulator may revoke a license to conduct securities
business in its state and fine or otherwise discipline broker dealers and their officers, directors and employees.
In January 2022, PrimeEx received regulatory approval from FINRA to conduct investment banking and equity capital markets business. Such business is conducted
under the name Freedom Capital Markets.
Foreign Corrupt Practices Act
In the United States, the 1970 Foreign Corrupt Practices Act, or FCPA, broadly prohibits foreign bribery and mandates recordkeeping and accounting practices. The
foreign countries where our subsidiaries operate have similar anti-bribery and anti-corruption laws imposed on our subsidiaries. The anti-bribery provisions make it illegal for us,
either directly or through any subsidiary that we may acquire, to bribe any foreign official for the purpose of obtaining business. The term "public official" is defined broadly to
include persons affiliated with government-sponsored or owned commercial enterprises as well as appointed or elected public officials. The recordkeeping provisions require that
we and our subsidiaries make and maintain books that, in reasonable detail, reflect our transactions and dispositions of assets and devise and maintain a system of internal
accounting controls that enables us to provide reasonable assurance that transactions are properly recorded in accordance with management's authorizations, that transactions are
recorded as necessary to permit the preparation of financial statements, that access to our funds and other assets is permitted only in accordance with management's authorizations,
and that the recorded accounts for assets are compared periodically with the existing assets to assure conformity. The FCPA requires that we establish and maintain an effective
compliance program to ensure compliance with U.S. law. Failure to comply with the FCPA can result in substantial fines and other sanctions.
Foreign Account Tax Compliance Act
The 2010 Foreign Account Tax Compliance Act ("FATCA") was enacted in the U.S. to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires
foreign financial institutions, such as certain of our non-U.S. subsidiaries, to report to the U.S. Internal Revenue Service ("IRS") information about financial accounts held by U.S.
taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
The U.S. has entered into intergovernmental agreements with a number of countries establishing mutually agreed-upon rules for the implementation of the data-sharing
requirements of FATCA. Cyprus, Kazakhstan, Ukraine, Uzbekistan, Turkey, Azerbaijan, and the United Arab Emirates have entered into Model 1 intergovernmental agreements
with the U.S. containing provisions regulating the process for financial institutions in these countries to collect information on U.S. taxpayer accounts and provide that information
to the IRS. In general, the requirements of the agreements concern the analysis of new and existing customer accounts to identify U.S. taxpayers. The agreements require financial
institutions in these countries to identify their customers and analyze their products to identify the accounts of customers affected by FATCA and collect all necessary information
to classify those accounts in compliance with the requirements of FATCA. After classifying the accounts, financial institutions must regularly present information, including name,
taxpayer identification number, and account balance, to the local tax authorities for transfer to the IRS. The agreements also address when financial institutions in these countries are
required to withhold taxes to be remitted to the IRS. Pursuant to these
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intergovernmental agreements, our subsidiaries in the relevant countries which are financial institutions are required to obtain customer documentation associated with the indicia
of the relevant customer's U.S. tax residency status, as well as related account information, and to report it accordingly. A failure by our subsidiaries to comply with FATCA could
result in adverse financial and reputational consequences to us as well as the imposition of sanctions or penalties, including responsibility for the taxes on any funds distributed
without the proper withholdings having been made.
Anti-Money Laundering, Anti-Terrorism Funding and Economic Sanctions Laws
Anti-money laundering laws, financial record-keeping and reporting laws, and similar legislation and regulations in the jurisdictions where our subsidiaries operate, as well
as certain stock exchanges and self-regulatory organizations, impose a variety of rules that require registered broker-dealers to meet "know your customer" requirements and
monitor their customers' transactions for potentially suspicious activities.
OFAC, in connection with its administration and enforcement of economic and trade sanctions publishes lists of individuals and companies, known as "Specially
Designated Nationals," or SDNs. Assets of SDNs are blocked, and U.S. companies are generally prohibited from dealing with them. OFAC also administers a number of
comprehensive sanctions and embargoes that target certain countries, governments and geographic regions. Under our global sanctions compliance policies and procedures, we and
our U.S. subsidiaries and, in certain circumstances, our non-U.S. subsidiaries may be prohibited from engaging in transactions involving any individual, entity, country, region or
government that is subject to such sanctions. Additionally, our U.S. subsidiary, PrimeEx, operates under its own U.S. sanctions compliance policies and procedures, which govern
its own sanctions compliance activities with its institutional customers and with other group companies.
We are committed to compliance with all applicable economic sanctions. As of the date of this annual report, the Russia-related economic sanctions that have been
imposed generally do not target our Russian client base, most of whom are members of the emerging Russian middle class population and many of whom live outside of Russia. In
the case of a customer or counterparty becoming known to one of our subsidiaries to be subject to sanctions, the relevant subsidiaries take active steps to ensure that we do not
violate, or cause a violation of, applicable sanctions. In addition, where sanctions do not apply to particular transactions or activities due to a lack of a nexus to the jurisdiction that
imposed the relevant sanctions, our subsidiaries aim to refrain from any conduct that could create exposure to secondary sanctions, taking into account potential conflicting law
issues given that certain of these subsidiaries operate in highly-regulated industries in which a disregard of local law requirements results in regulatory and litigation risk. As of
March 31, 2024, our Freedom KZ, Freedom Bank KZ, Freedom Global and Freedom EU subsidiaries collectively had customer liabilities relating to sanctioned individuals and
entities that represented approximately 3.4% of our total customer liabilities as of such date. These liabilities as of March 31, 2024 consisted of cash balances in blocked brokerage
and bank accounts and an approximately $670,000 cash balance of a customer whose sanctioned status was being confirmed at the time and which is not currently a sanctioned
entity. During fiscal 2024, we had no revenue from sanctioned clients other than approximately $126,000 of interest accrued during the process of closing the deposit account of a
bank which became sanctioned and approximately $13,000 of commission income from the settlement of transactions that occurred before the relevant clients were sanctioned.
FRHC has entered into an agreement with Sum and Substance, a third-party service provider, for the use by the Freedom group of the Sum and Substance all-in-one
KYC/AML compliance suite. This compliance suite enables companies to stay compliant while ensuring that users can quickly access services digitally. The services covered by the
suite include:
•
KYC and AML: ID verification, AML screening, and facematch checks for any jurisdiction.
•
Liveness technology: In-house facial biometrics for fast onboarding and continuous checks.
•
Video verification: Agent-assisted video verification built to comply with AMLD requirements.
•
Chargeback prevention: Verification of payment methods before transactions are made.
Our Freedom EU, FF Armenia, Freedom KZ, Freedom Bank KZ and Freedom Global subsidiaries are currently using the Sum and Substance verification platform, and
this platform is currently being implemented at our operations in Kazakhstan. We plan to roll out the Sum and Substance platform so that it is used by all brokerage companies,
banks and other companies within our group of companies. Subject to local legislation, some of the features may be limited, but in such as case such features would be replaced by
relevant government services. For example, banks in Kazakhstan use the national government system for biometric identification.
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At our subsidiaries Freedom KZ and Freedom Global, Sum and Substance is integrated with the World-Check (Refinitiv) database. At our subsidiary Freedom Bank KZ,
Refinitiv is integrated with the Colvir banking system. The Refinitiv database is used during the onboarding and ongoing processes, by checking clients. It contains information on
individuals and legal entities from more than 715 lists submitted by international and national security agencies and law enforcement agencies. World-Check allows identification
of hidden risks associated with individuals or companies that have been included in sanctions lists, involved in money laundering (AML) or the financing of terrorist activities,
including the proliferation of weapons of mass destruction (CFT and/or WMD). Our subsidiary Freedom Bank KZ also uses the Dow Jones database during the onboarding process
by checking clients against sanctions lists.
Historically our affiliate FST Belize engaged in a significant amount of trading with us through its omnibus account at Freedom EU. This trading was governed by a
Cross-Border Correspondent Relationship Agreement between Freedom EU and FST Belize wherein FST Belize agreed to follow sanctions laws and AML controls that are
applicable to brokers in the United States and the European Union and granted us access to its customer records for purposes of compliance monitoring. In accordance with the
Cross-Border Correspondent Relationship Agreement, Freedom EU conducted on a regular basis random checks of trades received from FST Belize, whereby it was able to obtain
information on, and conduct customer checks on, the beneficial owners who are the beneficiaries of the relevant trades. FST Belize had its own agreement with Sum and Substance
and had implemented digital onboarding via its website in the scope of liveness, facematch and AML screening. However, we did not have direct access to FST Belize's customer
check systems. Our omnibus brokerage arrangement with FST Belize had been terminated as of March 31, 2024.
In addition, we maintain omnibus brokerage accounts for certain other institutional brokerage clients. The order flow from these accounts represents transactions of
underlying customers of the relevant institutions, which are executed by the relevant institutions through their omnibus accounts with us. We have agreements with such institutional
clients in which they have agreed to comply with AML/CTF controls that are applicable to brokers in the U.S. and EU, and we audit their frameworks and systems by regular risk-
based sampling and have access to their underlying customer records for purposes of compliance monitoring. Nevertheless we do not have direct access to such institutional clients'
underlying customers or screening systems.
See "Our measures to prevent money laundering, terrorist financing, and sanctions violations may not be completely effective." and "Non-compliance with U.S., EU, UK,
Russian or other sanctions programs could adversely impact our company." in "Risk Factors" in Part I Item 7A of this annual report and "Key Factors Affecting Our Results of
Operations - Russia-Ukraine Conflict" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II Item 7 of this annual report.
Protection of Customer Assets
Our business is subject to extensive oversight by regulators around the world relating to, among other things, the fair treatment of customers, safeguarding of customer
assets and our management of customer funds. Freedom EU is subject to the European Union Markets in Financial Instruments Directive ("MiFID") and/or related regulations and
must, when holding funds belonging to customers, make adequate arrangements to safeguard the rights of customers and maintain their records and accounts in a way that ensures
their accuracy. As a licensed Kazakhstan broker, Freedom KZ is obliged to maintain segregated accounting of its own and customers' assets. Freedom Global is subject to the AIFC
business rules and is required to have systems and controls in place to ensure the proper safeguarding of customer assets which includes conducting proper due diligence of the third
parties in which customer assets will be held and confirming that the laws and regulations that govern such third parties are appropriate.
Data Privacy and Cybersecurity
As part of our business, we routinely receive sensitive and confidential information from our clients. We also collect personal information from our prospective and
current employees, as permitted by employment laws and regulations. We are subject to laws and regulations in relation to the privacy of such information in the various
jurisdictions where we conduct business or have customers. These include the laws of Kazakhstan, the EU, the UK and the U.S., as well as the rules and regulations of their various
state agencies and self-regulatory organizations.
These laws include the data privacy and security frameworks in the European Union and the United Kingdom, each entitled the General Data Protection Regulations,
Kazakhstan's Law on Personal Data and Its Protection, Information Technologies and Information Protection, as well as the laws of a number of states of the United States and SEC
cybersecurity disclosure rules. These laws, rules and regulations require us to maintain high standards for personal data collection, processing, and retention and impose strict
standards for reporting data breaches. They also provide for potentially significant penalties for non-compliance. For a discussion of risks related to data privacy and cybersecurity,
see "Risk Factors" in Part I Item 1A and Cybersecurity in Part I Item 1C in this annual report.
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MONETARY POLICY
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the governments of the jurisdictions in which we operate,
including Kazakhstan, the European Union, Kyrgyzstan, Uzbekistan, Azerbaijan, Tajikistan, Armenia and the 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.
AVAILABLE INFORMATION
Our investor relations website is located at https://ir.freedomholdingcorp.com. We use our investor relations website as a channel for disclosing material non-public
information and for complying with SEC Regulation FD and our other disclosure obligations. In addition to our investor relations website, our subsidiaries maintain corporate
websites and we may use social media to communicate with the public. It is possible that information we post on social media could be deemed to be material to investors.
Accordingly, investors should monitor the website, in addition to following our press releases and SEC filings. We are subject to the reporting requirements of the Exchange Act.
Reports filed with or furnished to the SEC pursuant to the Exchange Act, including annual and quarterly reports, are available free of charge, through our website. We make them
available on our website as soon as reasonably possible after we file them with the SEC. The reports we file with or furnish to the SEC are also available on the SEC's website
(www.sec.gov). Our corporate governance policies, code of ethics and Board committee charters are also posted on our investor relations website. The content of our website, the
websites of our subsidiaries, and the information we communicate through social media is not intended to be incorporated by reference or otherwise included into this annual report
or in any other report or documents that we file with the SEC.
Item 1A. Risk Factors
The risks and uncertainties described in the risk factors below are those that we currently consider material, and the statements contained elsewhere in this annual report,
including our financial statements, should be read together with these risk factors. The occurrence of any of, or a combination of, the following risks or uncertainties, or additional
risks and uncertainties not presently known to us or that we currently believe to be immaterial, could materially and adversely affect our business, financial position, results of
operations, liquidity, cash flows, or reputation.
Summary of Risk Factors
The following is a summary of the principal risks that could affect our businesses and should be read with the more complete discussion of risks and uncertainties set forth
below it.
Risks Related to Our Business and Operations:
•
Our relatively limited operational history has coincided with sustained market growth, which may not be predictive of future operating results.
•
We may not be able to manage our growth effectively.
•
We anticipate that acquisitions will continue to play a key role in our growth strategy, but we may be unable to identify, acquire, complete or integrate acquisition targets
successfully.
•
We have engaged in related party transactions and arrangements, which exposes us to a number of risks.
•
Competition in the markets in which we operate may result in a decrease in our market share and/or profitability.
•
We plan to incur losses in our new telecommunications and media businesses.
•
We may be unable to implement our digital fintech ecosystem strategy successfully.
•
We could suffer significant losses from credit exposure.
•
Our revenues are concentrated in certain customers and products, which may materially adversely affect our business, results of operations, financial condition and cash
flows.
•
Risks related to our business relationships with third-party broker-dealers, clearing firms and market makers could result in reduced profitability, increased compliance costs,
regulatory violations and negative publicity.
•
We are subject to potential losses as a result of our clearing and execution activities.
•
A breakdown or interruption in our operational systems or processes may adversely affect our reputation, customers, clients, business activities, operational outcomes, and
financial stability.
•
Our ability to meet our obligations, and the cost of funds to do so, depend on our ability to access identified sources of liquidity at a reasonable cost.
•
We may need to raise additional capital, and we cannot be sure that additional financing will be available or available on attractive terms.
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•
Reductions in our credit ratings or an increase in our credit spreads could adversely affect our business, liquidity and cost of funding.
•
Our investments expose us to a significant risk of capital loss.
•
We may suffer significant loss from changes in the KASE's requirements related to the discount coefficients on the securities in securities repurchase transactions.
•
Our risk management framework may not be effective in mitigating risks and/or losses to us.
•
Our modeling and assumptions used in assessing risks in our business may differ materially from actual results.
•
In our insurance business, we may not be able to obtain reinsurance at required levels or prices, or otherwise collect on reinsurance, which could increase our exposure or
limit our ability to write new policies.
•
We are dependent on our executive management team, particularly Timur Turlov, and our ability to hire and retain skilled personnel.
•
Extraordinary events beyond our control could negatively impact our business.
•
Possible future pandemics may impact the global economy, global financial markets and our business, financial condition, results of operations and cash flows.
•
Our financial results depend on interest rate volatility.
•
We are exposed to foreign currency fluctuation risks.
•
Damage to our reputation could harm our business.
Risks Related to the Global Political, Regulatory and Economic Environment:
•
Our business and operations may be materially adversely affected by the ongoing Russia-Ukraine conflict.
•
Sanctions imposed by Ukraine on our Chief Executive Officer and our former Ukrainian subsidiary could have a material adverse effect on us.
•
Non-compliance with U.S., EU, UK, Russian or other sanctions programs could adversely impact our company.
•
Emerging markets, such as many of the markets in which we operate, are subject to greater risks than more mature markets, including significant political, economic and
legal risks.
•
The economies of Kazakhstan and other countries in which we operate are vulnerable to external shocks and fluctuations in the global economy.
•
Kazakhstan's economy is vulnerable to internal political and social unrest.
Risks Related to Legal and Regulatory Matters:
•
We are subject to extensive regulation, and the failure to comply with laws and regulations could subject us to monetary penalties or sanctions.
•
Financial services firms have been subject to increased regulatory scrutiny increasing the risk of financial liability and reputational harm resulting from adverse regulatory
actions.
•
As a U.S. public company listed on Nasdaq we have substantial regulatory reporting obligations.
•
We are subject to risks related to anti-corruption laws in effect in the United States and the non-U.S. jurisdictions where we conduct business.
•
A failure by our subsidiaries to meet capital adequacy and liquidity requirements could affect our operations, financial condition and cash flows.
•
The countries in which we operate have changing regulatory regimes, regulatory policies, and interpretations.
•
Our measures to prevent money laundering and terrorist financing violations may not be completely effective.
•
If we violate securities laws, or are involved in litigation in connection with a violation, our reputation and results of operations may be adversely affected.
•
We are subject to risks related to potential litigation.
Risks Related to Information Technology and Cybersecurity:
•
Our operations are highly dependent on the continued and proper functioning of our information technology systems.
•
We interact with large volumes of sensitive data that exposes us to IT breach and other data security risks and liabilities.
•
The infrastructure on which our IT systems depend is subject to events that could interrupt our ability to operate.
•
Failure or compromise of third-party systems operations or security could adversely affect our business and expose us to data breaches and cyber attacks.
•
To remain competitive, we must keep pace with rapid technological change.
Taxation Risks Related to Our International Operations:
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•
Global anti-offshore measures could adversely impact our business.
•
Frequent tax law changes in regions where we conduct operations could adversely affect our business and the value of investments.
•
Kazakhstan transfer pricing legislation may require pricing adjustments and impose additional tax liabilities.
•
Uncertainties and ongoing changes in Kazakhstan's tax regime may have an adverse impact on our business.
•
Changes in regulations related to taxes on stock transfers and other financial transactions could reduce the volume of market transactions and impact our business.
Risks Related to Our Corporate Structure and Internal Operations:
•
As a diversified holding company with few operations of its own, FRHC is reliant on the operations of our subsidiaries to fund its holding company operations.
•
As a "controlled company" under Nasdaq rules, we qualify for exemptions from certain corporate governance requirements that may adversely affect our stock price.
•
The interests of our controlling shareholder may conflict with those of other shareholders.
•
Civil liability may be difficult or impossible to enforce against us.
•
We have identified material weaknesses in our internal control over financial reporting in the past, and we may identify material weaknesses in the future or fail to establish
and maintain effective internal control over financial reporting, which could have a material adverse effect on our business and stock price.
Risks Related to Ownership of Our Securities:
•
The price of our common stock has fluctuated historically and may be volatile.
•
Future offerings of securities which would rank senior to our common stock may adversely affect the market price of our common stock.
•
We do not intend to pay dividends on our common stock for the foreseeable future and, consequently, our stockholders’ ability to achieve a return on their investment will
depend on appreciation in the price of our common stock.
Risks Related to our Business and Operations
Our relatively limited operational history has coincided with sustained market growth, which may not be predictive of future operating results.
Our legacy brokerage operations were merged into our holding company, which is a Nevada-incorporated company, in several stages between November 2015 and 2017,
and we have grown rapidly over the last several years. For example, our total revenue, net (after presenting our former Russian subsidiaries as discontinued operations) was $689.8
million for the fiscal year ended March 31, 2022, $795.7 million for the fiscal year ended March 31, 2023 and $1,635.1 million for the fiscal year ended March 31, 2024. Although
we have sustained growth over several years, our operational life has been relatively limited compared to longer-term market and macroeconomic cycles. Our operating history has
coincided with a period of general growth in the U.S. equity markets, as well as growth in the financial services and technology industries in which we operate. We therefore have
not experienced any prolonged downturn or slowdown in macroeconomic or industry growth or any significant downturn in U.S. equity markets and cannot assure that we will be
able to respond effectively to any such downturn or slowdown in the future. In addition, our results have been positively affected by net gains on trading securities, primarily driven
by increases in market prices of Kazakhstan sovereign and quasi-sovereign debt securities held in our proprietary portfolio. As such, our recent growth should not be considered
indicative of our future performance. Further, as a result of the limited operating history of the Company in its current form, and our rapid growth during sustained favorable market
and economic conditions, we have limited financial data that can be used to evaluate our future prospects, which subjects us to a number of uncertainties, including our ability to
plan for, model and manage future growth and risks.
We may not be able to manage our growth effectively.
We have experienced recent rapid growth in our business over a short period. Our number of total retail brokerage customer accounts increased from approximately
250,000 as of March 31, 2022 to approximately 530,000 as of March 31, 2024. Our total number of employees increased from 3,421 employees as of March 31, 2022 to 6,197
employees as of March 31, 2024. Our total assets increased by 157% to $8.3 billion as of March 31, 2024 from $3.2 billion as of March 31, 2022. In addition, we have made a
number of recent significant acquisitions, including the acquisitions of Freedom Bank KZ and PrimeEx in December 2020, and Freedom Life and Freedom Insurance in May 2022.
For the fiscal year ended March 31, 2024 we have also made several acquisitions, including the acquisitions of Aviata LLP ("Aviata") and Internet-Tourism LLP ("Internet
Tourism") in April 2023, Arbuz in May 2023, and ReKassa in July 2023. In addition, in November 2023, our Board of Directors approved a plan to expand our business by
entering the telecommunications market in Kazakhstan through our Freedom Telecom subsidiary, pursuant to our strategy to build a digital fintech ecosystem. See
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"Products and Services - Digital Fintech Ecosystem and Product Expansion" in "Business" in Part I Item 1 of this annual report. Also in furtherance of our strategy to build a digital
fintech ecosystem, on January 25, 2024, Freedom Telecom established a subsidiary, Freedom Media, for the purposes of providing media content to customers in Kazakhstan.
There can be no assurance that we will be able to achieve a positive return on the investment we make in the general expansion of our business. Moreover, our overall
growth has required and will continue to require significant allocation of capital and management resources, further development of our financial, internal controls and information
technology systems, continued upgrading and streamlining of our risk management systems and additional training and recruitment of management and other key personnel. At the
same time, we must maintain a consistent level of client services and current operations to avoid loss of business or damage to our reputation. If we fail to adequately manage
growth, such failure may have a material adverse effect on our business, results of operations, financial condition and cash flows.
We anticipate that acquisitions will continue to play a key role in our growth strategy, but we may be unable to identify, acquire, complete or integrate acquisition
targets successfully.
Acquisitions have been, and continue to be, a significant component of our growth strategy. However, there can be no assurance that we will be able to continue to grow
our business through acquisitions as we have done historically, that businesses acquired will perform in accordance with our expectations or that business judgments concerning the
value, strengths and weaknesses of businesses acquired will prove to be correct.
We will continue to analyze and evaluate the acquisition of strategic businesses or product lines with the potential to strengthen our industry position, expand our customer
base or enhance our existing service offerings. There is no assurance that we will identify or successfully complete transactions with suitable acquisition candidates in the future,
nor is there assurance that completed acquisitions will be successful.
In addition, there are substantial risks associated with acquisitions and expansion into new business areas, including risks that (i) our unfamiliarity with new lines of
business may adversely affect the success of such acquisitions, (ii) revenue from such activities might not be sufficient to offset the development, regulatory and other
implementation costs, (iii) competing products and services and shifting market preferences might affect the profitability of such activities, and (iv) our internal controls might be
inadequate to manage the risks associated with new activities. There is also substantial cost and time expended to complete post-closing integration of acquisitions, including human
resource training, data and technology systems and operational processes. We may also incur potential dilution of our brand, assumption of known and unknown liabilities,
indemnities and potential disputes with the sellers. Any such difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and
adversely affect our results of operations. Furthermore, we cannot provide any assurance that we will realize the anticipated benefits and/or synergies of any such acquisition or
investment.
We have engaged in related party transactions and arrangements, which exposes us to a number of risks.
We have engaged in related party transactions and arrangements, in particular with companies controlled by our Chief Executive Officer Timur Turlov, and we expect to
continue to do so from time to time going forward. For example, from the time of our establishment through March 2024, we engaged in a significant volume of transactions with
our FST Belize affiliate through its omnibus account arrangement with our Freedom EU subsidiary. In fiscal 2024, 2023 and 2022 respectively, approximately 14%, 60% and 82%
of our fee and commission income was derived from transactions with FST Belize. As of March 31, 2024, we had terminated our omnibus brokerage relationship with FST Belize.
In addition to our transactions with FST Belize, we have also engaged in other related party transactions and arrangements. For example, we have continuing involvement
with an affiliated company, microfinance organization Freedom Finance Credit, through the purchase and sale of right of claims of retail loans.
Our entry into related party transactions and arrangements subjects us to certain risks. In particular, related party transactions are generally regarded as increasing the risk
of misstatements or omissions in financial reporting, the risk of transactions being done on other than arm’s length terms due to the close ties between the parties involved and the
risk of regulatory non-compliance. In addition, the large extent of our related party transactions in the past with FST Belize could have an adverse effect on our relationships with
applicable regulators and on our reputation.
Competition in the markets in which we operate may result in a decrease in our market share and/or profitability.
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We face intense competition in each of the markets where we offer our services. We compete with international,
regional and local brokerage, banking, and financial services firms that offer an array of financial products and services. Many of the firms with which we currently compete, or
will compete in the future, are larger, provide additional and more diversified services and products, provide access to more international markets, and have greater technical, and
financial resources. In addition, as part of our strategy to enter the telecommunications and media markets in Kazakhstan, we will compete with various telecommunications
operators and other participants in the telecommunications market and with various media providers, respectively. Our competition in the telecommunications area will relate to
attracting and retaining customers as well as obtaining licenses and entering into partnerships. If we fail to compete effectively with other firms and participants in any of the
markets in which we operate, or with potential new entrants to such markets, this could have a material adverse effect on our business, results of operations, financial condition and
cash flows.
We plan to incur losses in our new telecommunications and media businesses.
Our recently established telecommunications subsidiary, Freedom Telecom, is currently expected to be loss-making for the first several years of its operations, based on
assumptions included in our current financial model. Such losses, and increased debt service costs associated with funding the implementation of the strategic plan, will have an
adverse effect on our consolidated net income in the relevant periods. Our strategy and budget for Freedom Telecom are currently being reassessed and are subject to revisions,
which may be material. In addition, we currently project that our recently established Freedom Media subsidiary will incur losses in the calendar years from 2024 to 2026 with
profitability forecasted to commence from the 2027 calendar year onwards, based on assumptions included in our financial model.
We may be unable to implement our digital fintech ecosystem strategy successfully.
A component of our business strategy is to build a digital fintech ecosystem through which our products and services can be provided to our customers. Our ability to
execute this strategy could be affected by a number of factors, including but not limited to, the factors described in our annual report on Form 10-K for the fiscal year ended March
31, 2023.
There are substantial risks associated with our efforts to build a digital fintech ecosystem, including risks that (i) our unfamiliarity with new lines of business may
adversely affect the success of such actions, (ii) revenue from such activities might not be sufficient to offset the development, regulatory and other implementation costs, (iii)
competing products and services and shifting market preferences might affect the profitability of such activities and (iv) our internal controls might be inadequate to manage the
risks associated with new activities. If any such expansions into new product markets are not successful, there could be a material adverse effect on our business and results of
operations.
In particular, we can give no assurance as to our future ability to successfully implement our telecommunications strategy in Kazakhstan in a timely fashion or on
profitable terms. Our ability to do so will depend on, among other things, our ability to construct a backbone network, obtain frequency licenses or enter into partnerships with
incumbent operators and acquire smaller companies in the sector. Our ability to accomplish our goals in this business area on schedule and within budget, achieve our revenue
targets or realize acceptable returns, is subject to a number of risks as a result of factors over which we have no control, including the need for regulatory approvals, the availability
of equipment and labor, equipment breakdowns or accidents, adverse weather conditions, social unrest, unforeseen or uncontrollable cost increases and other risks associated with
the deployment of new telecommunications infrastructure. We can give no assurance as to the commercial viability of our planned backbone network or our ability to overcome any
obstacles we may encounter during their construction or to complete them, or as to our ability to finance our capital expenditures in connection with their establishment. Our ability
to operate our telecommunications business, once established, successfully and profitability will also depend on a number of factors, many of which are beyond our control.
Similarly, we can give no assurance as to our future ability to establish a media business in Kazakhstan in a timely fashion or on profitable terms.
Given the various risks to which we are exposed and the uncertainties inherent in the relevant business areas, we cannot guarantee the successful execution of our digital
fintech ecosystem strategy. Additionally, the implementation of this strategy may put operational strain on our business and consume management time and focus to the detriment
of our existing business operations. If we do not meet our strategic objectives or achieve the results initially expected, we may be unable to recover our investments, which may
have a material adverse effect on our business, financial condition and results of operations. Furthermore, the cost of certain online and technology investments, including any
operating losses incurred, could adversely impact our financial performance in the short term and failure to realize the benefits of these investments may adversely impact our
financial performance over the longer term.
We could suffer significant losses from credit exposure.
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We are exposed to credit risk through our products and assets, such as loans issued, marginal lending, derivatives, debt securities, reverse repurchase agreements, and
trading account assets. A decline in the financial condition of our borrowers, brokerage clients, counterparties, or the assets securing these products could negatively impact our
financial standing,operational performance and cash flows.
Our loan portfolio may be impacted by global, regional and local macroeconomic and market dynamics, including prolonged weakness in GDP, reductions in consumer
spending, decreases in property values or market corrections, growing levels of consumer debt, rising or high unemployment rates, changes in foreign exchange or interest rates,
widespread health crises or pandemics, severe weather conditions, and the effects of climate change. Economic or market stresses generally have negative effect on the business
landscape and financial markets. Decreases in property values or market adjustments may increase the likelihood of borrowers or counterparties failing to meet their obligations to
us, potentially leading to an increase in credit losses.
The main share of our customer loan portfolio is represented by digital mortgage loans issued within the framework of state support programs, funded from the funds of
quasi state organizations. We participate in the government mortgage program in which the Kazakhstan government provides funding in the amount of approved mortgages and
buys out the mortgages after disbursement with a recourse to the bank in case of default by a borrower. We mitigate our credit risk exposure in this case by our security interest in
the financed real estate property. As such, significant rate of mortgage defaults in Kazakhstan could adversely affect our banking operations and the ultimate success of our digital
mortgage product.
We reserve for potential credit losses in the future by recording a provision for credit losses through our earnings. This includes the allowance for credit losses based on
management’s estimates of current expected credit losses over the life of the respective credit exposures. These estimates are based on a review of past events, current conditions,
and reasonable forecasts of future economic situations that might influence the recoverability of our loans. Our approach to determining these allowances involves both quantitative
methods and a qualitative framework. Within this framework, management uses its judgment to evaluate internal and external risk factors. However, such judgments are inherently
subject to the risk of misjudging these factors or misestimating their effects. We cannot guarantee that charge-offs related to our credit exposures will not happen in the future.
Market and economic changes could lead to higher default and delinquency rates, adversely affecting our loan portfolio's quality and potentially resulting in higher charge-offs.
While our estimates account for current conditions and anticipated changes during the portfolio's lifetime, actual outcomes could be worse than expected, significantly impacting
our financial results, condition and cash flows.
We extend margin loans to our brokerage customers. As of March 31, 2024, we had margin lending receivables in the amount of approximately $1.7 billion and $376.3
million as of March 31, 2023. When we purchase securities on margin, enter into securities repurchase agreements or trade options or futures, we are subject to the risk that we, or
our customers, may default on those obligations when the value of the securities and cash in our own proprietary or in the customers' accounts falls below the amount of the
indebtedness. Abrupt changes in securities valuations and the failure to meet margin calls could result in substantial financial losses. Margin loans are collateralized by cash and
securities in the customers' accounts. The risks associated with margin credit increase during periods of fast market movements, or in cases where collateral is concentrated and
market movements occur. During such times, customers who utilize margin loans and who have collateralized their obligations with securities may find that the securities have a
rapidly depreciating value and may not be sufficient to cover their obligations in the event of a liquidation. We are also exposed to credit risk when our customers execute
transactions, such as short sales of equities that can expose them to risk beyond their invested capital. Because we indemnify and hold harmless our clearing houses and
counterparties from certain liabilities or claims, the use of margin loans and short sales may expose us to significant off-balance-sheet risk in the event that collateral requirements
are not sufficient to fully cover losses that customers may incur and those customers fail to satisfy their obligations. The amount of risk to which we are exposed from the margin
lending we extend to our customers and from short sale transactions by our customers is potentially unlimited and not quantifiable as the risk is dependent upon analysis of a
potential significant and undeterminable increase or fall in stock prices. As a matter of practice, we enforce real-time margin compliance monitoring and liquidate customers'
positions if their equity falls below established margin requirements.
Our clearing operations also require a commitment of our capital and, despite safeguards implemented through both manual and automated controls, involve risks of losses
due to the potential failure of our customers or counterparties to perform their obligations under these transactions If our customers default on their obligations, including failing to
pay for securities purchased, deliver securities sold, we remain financially liable for such obligations, and although these obligations are collateralized, we are subject to market risk
in the liquidation of customer collateral to satisfy those obligations. While we have established systems and processes designed to manage risks related to our clearing and
execution services, we face a risk that such systems and processes might be inadequate. Any liability arising from clearing
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and margin operations could have an adverse effect on our business, financial condition, results of operations and cash flows.
Furthermore, we have exposure to credit risk associated with our proprietary investments. We rely on the use of credit arrangements as a significant component of our
trading strategy. Our investments are subject to price fluctuations as a result of changes in the financial markets' assessment of credit quality. Loss in securities value can negatively
affect our financial performance and earnings if our management determines that such securities are other-than-temporarily-impaired ("OTTI"). The evaluation of whether OTTI
exists is a matter of judgment, which includes the assessment of several factors. If our management determines that a security is OTTI, the cost basis of the security may be
adjusted, and a corresponding loss may be recognized in current earnings. Deterioration in the value of securities held in our proprietary portfolio could result in the recognition of
future impairment charges. Even if a security is not considered OTTI, if we were forced to sell the security sooner than intended, we may have to recognize an unrealized loss at that
time.
While we have policies and procedures designed to manage credit risk, the policies and procedures may not be fully effective to protect us against the risk of loss.
Our revenues are concentrated in certain customers and products, which may materially adversely affect our business, results of operations, financial condition and
cash flows.
We have derived a significant portion of our fee and commission income from trading activity of certain institutional market maker customers with whom we internalize
the execution of trades of our customers. Prior to the end of fiscal 2024, we had such an arrangement indirectly with an institutional market maker customer of our affiliate FST
Belize, and since approximately the end of fiscal 2023 we have had such an arrangement directly with an institutional market maker customer of our Freedom Global subsidiary.
We receive a commission from such institutional market maker customers for executing their trades, and in the past we earned such commissions indirectly through commissions
we received from FST Belize. For the years ended March 31, 2024 and March 31, 2023 we earned fee and commission income from the market maker customer at our Freedom
Global subsidiary in an amount of $196.7 million and $24.3 million representing 12% and 7% of our total fee and commission income for fiscal 2024 and 2023, and we earned
interest income from margin loans to customers from such customer in an amount of approximately $100 million, representing 6% of our total interest income from margin loans to
customers for fiscal 2024. For fiscal 2024, 2023 and 2022, approximately 14%, 60% and 82% of our fee and commission income from our affiliate FST Belize, respectively, and
we understand that the majority of such fee and commission income was attributable to execution of trades of a market maker institution with an account at FST Belize. In addition,
approximately 93%, 91% and 82% of our trading income in the fiscal years ended March 31, 2024, 2023 and 2022, respectively, was derived from interest income on Kazakhstan
government or quasi-government debt securities. These concentrations of our revenues means that our success financial condition is, in part, dependent on the continuation or
increase of our revenues from these particular sources. There can be no assurance that our business, results of operations and financial condition will not be adversely affected by
changes to, or the termination of, our relationships with, market maker institutions with whom we conduct a substantial amount of business or adverse developments with regard to
the debt securities from which we have derived a substantial amount of trading income.
Risks related to our business relationships with third-party broker-dealers, clearing firms and market makers could result in reduced profitability, increased
compliance costs, regulatory violations and negative publicity.
A significant amount of our brokerage business relates to trading in U.S.-listed securities by our brokerage customers. Our PrimeEx subsidiary in the United States is not a
licensed clearing firm. When executing trades directly in the U.S. market, we rely on the services of a limited number of third-party U.S.-registered securities broker dealer and
clearing firms. We also routinely evaluate opportunities to establish relationships with other U.S.-registered securities broker-dealer and clearing firms. While part of our strategy is
to consider acquiring an ownership interest in a self-clearing company in the United States in the future on an opportunistic basis in order to provide us additional access to the U.S.
stock markets, there can be no assurance that we will ultimately do so. Damage to or the loss of our relationships with the U.S. registered securities broker-dealer and clearing firm
on which we currently rely could impair our ability to continue to provide our customers access to the U.S. markets at the volumes and in the manner they are accustomed to and
could result in higher transaction costs for us or our customers, any of which could have a material adverse impact on our business, results of operations, financial condition and
cash flows.
A majority of the trades we execute for our brokerage customers are done on an "over-the-counter" basis with counterparties outside the United States, including
institutional market makers who hold accounts with us or, previously, with our FST Belize affiliate. Such market maker customers may engage in various trading strategies,
including short positions. We earn fee and commission income from such market maker customers for executing their trades. This revenue is sensitive to and dependent on trading
volumes and therefore tends to decline during periods in which we experience decreased levels of trading generally. Computer-generated buy/sell programs and other technological
advances and
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regulatory changes in the marketplace might continue to tighten spreads on transactions, which could also lead to a decrease in our commissions earned from such market maker
customers.
Practices involving arrangements with market makers for order flow have drawn heightened scrutiny from the U.S. Congress, the SEC, U.S. state regulators, regulators in
the European Union and other regulatory and legislative authorities. Our competitors may adopt different business practices that could affect our market position. Any negative
publicity surrounding practices involving arrangements of the type we utilize with market maker customers generally, or our implementation of these practices, could harm our
brand and reputation. If our customers or potential customers believe that they might get better execution quality (including better price improvement) directly from stock
exchanges or from our competitors that have different execution arrangements, or if our customers perceive our arrangements with our market maker customers to create a conflict
of interest between us and them, or if they begin to disfavor the specific market maker customers with which we do business due to. among other things, any negative media
attention regarding our arrangements, they might come to have an adverse view of our business model and might decide to limit or cease the use of our platform. Some customers
might prefer to invest through our competitors that do not engage in these arrangements or engage in them differently than do we. Any such loss of customer engagement as a result
of any negative publicity associated with our market maker customer arrangements could adversely affect our business, financial condition, results of operations and cash flows.
We are subject to potential losses as a result of our clearing and execution activities.
We provide clearing and execution services for our securities brokerage business. Clearing and execution services include the confirmation, receipt, settlement and
delivery functions involved in securities transactions. Clearing brokers also assume direct responsibility for the possession or control of customer securities and other assets, the
clearing of customer securities transactions and lending money to customers on margin. Self-clearing securities firms are subject to substantially more regulatory control and
examination than introducing brokers that rely on others to perform clearing functions. Errors in performing clearing functions, including clerical and other errors related to the
handling of funds and securities on behalf of customers, could lead to (i) civil penalties, as well as losses and liability as a result of related lawsuits brought by customers and others
and any out-of-pocket costs associated with remediating customers for losses, and (ii) the risk of fines or other actions by regulators. See "We could suffer significant losses from
credit exposure." above.
A breakdown or interruption in our operational systems or processes may adversely affect our reputation, customers, clients, business activities, operational outcomes,
and financial stability.
Our company faces potential operational risk exposure internally and through our interactions and dependencies on third parties and the infrastructure of the financial
services industry. The performance of our operational and security systems, such as computer systems, technologies, data management, and internal processes, along with those
belonging to third parties, is crucial. Additionally, we depend on our employees and third parties for routine and ongoing operations. Human errors, misconduct (including fraud),
wrongdoing, or failures or breaches in systems or infrastructure by these parties can lead to disruptions within our company and increase our exposure to operational and regulatory
risks.
Our ability to meet our obligations, and the cost of funds to do so, depend on our ability to access identified sources of liquidity at a reasonable cost.
Liquidity risk is the risk that we will not be able to meet our obligations, including financial commitments, as they come due. This risk is inherent in our operations and
can be heightened by a number of factors, including an over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market
dislocation and major disasters. We fund ourselves principally by issuing long-term debt instruments, from deposits at our bank subsidiary, by issuing hybrid financial instruments,
by entering into repurchase agreements and from cash flow from operations.
The proportion of our funding represented by customer deposits has been increasing, and we intend for this proportion to continue to increase going forward as part of our
funding strategy. We obtain deposits directly from retail and commercial customers and through brokerage firms that offer our deposit products to their customers. However,
customer deposits are subject to fluctuation due to certain factors outside our control, such as increasing competitive pressures for retail or corporate customer deposits, changes in
interest rates and returns on other investment classes, or a loss of confidence by customers in us or in the banking sector generally, any of which could result in a significant outflow
of deposits within a short period of time. To the extent there is heightened competition among Kazakh banks for retail customer deposits, this competition may increase the cost of
procuring new deposits and/or retaining existing deposits, and otherwise negatively affect our ability to grow our deposit base. An inability to grow, or any material decrease in, our
deposits could have a material adverse effect on our ability to satisfy our liquidity needs.
Maintaining a diverse and appropriate funding strategy for our assets consistent with our wider strategic risk appetite and plan remains challenging, and any tightening of
credit markets could have a material adverse impact on us. In
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particular, there is a risk that corporate and financial institution counterparties may seek to reduce their credit exposures to banks and other financial institutions, which may cause
funding from these sources to no longer be available. Under these circumstances, we may need to seek funds from alternative sources, potentially at higher costs than has previously
been the case, or may be required to consider disposals of other assets not previously identified for disposal, in order to reduce our funding commitments. Widening credit spreads,
as well as significant declines in the availability of credit, have in the past adversely affected our ability to borrow on a secured and unsecured basis and may do so in the future. If
our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of
funding, either of which could reduce our profitability, particularly in our businesses that involve investing, lending and market making.
We may need to raise additional capital, and we cannot be sure that additional financing will be available or available on attractive terms.
To satisfy or refinance existing obligations, support the development of our business, adapt to changing business conditions or carry out our growth strategy through
acquisitions, we may require additional cash resources. If our existing resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt
securities or obtain other borrowings, and we cannot be certain that such additional financing would be available on terms acceptable to us or at all. The sale of additional equity
securities could result in dilution to our stockholders, and additional indebtedness would result in increased debt service costs and obligations and could impose operating and
financial covenants that would further restrict our operations.
Reductions in our credit ratings or an increase in our credit spreads could adversely affect our business, liquidity and cost of funding.
On August 24, 2023, S&P Global Ratings placed the ratings of Freedom Holding Corp., Freedom KZ, Freedom Europe, Freedom Global and Freedom Bank KZ on
CreditWatch with negative implications. Reasons provided by S&P Global Ratings for the CreditWatch designation included the risk that certain disclosures in the Company's
annual report and recently published allegations by a third party could lead to a loss of critical counterparties and potentially weaken the Company's franchise. On October 31,
2023, S&P Global Ratings removed the ratings of FRHC and its core subsidiaries from CreditWatch on the basis that the immediate fallout from the allegations published by a
third party was relatively contained, and it affirmed the long-term credit rating of Freedom Holding Corp. at the "B-" level and long-term and short-term credit ratings of Freedom
Finance JSC, Freedom Finance Europe Ltd., Freedom Finance Global PLC and Freedom Finance Kazakhstan Bank JSC at the "B/B" level. The ratings of Freedom KZ and Freedom
Bank KZ on the national scale were confirmed at the level of "kzBB+", and S&P Global Ratings revised the outlook on Freedom Holding Corp. and its core subsidiaries to
negative. A negative outlook means that the rating agency may revise the rating to a lower level during its next rating action, which may negatively affect our cost of funding and
access to liquidity.
Freedom Life has a long-term issuer credit and financial strength rating of of "BB" (negative outlook) and a rating on the Kazakhstan national scale of "kzA+", and
Freedom Insurance has a "B+" rating (positive outlook) and "kzBBB+" Kazakhstan national scale rating, in each case from Standard & Poor's. These ratings were affirmed by
Standard & Poor's on December 8, 2023.
Reductions in our credit ratings may adversely affect both our ability to obtain long-term funding and our credit spreads and resulting cost of such funding. Our cost of
obtaining long-term unsecured funding is directly related to our credit spreads (the amount in excess of the interest rate of benchmark securities that we need to pay). Increases in
our
credit spreads can significantly increase our cost of this funding. Changes in credit spreads are continuous, market-driven, and subject at times to unpredictable and highly volatile
movements. In addition, decreases in the credit rating of Freedom KZ, or FRHC as its owner, may affect Freedom KZ's brokerage license and impose certain requirements on
Freedom Holding Corp. as its owner with respect to Freedom KZ's investment portfolio management capacity. Decreases in the credit rating of Freedom Bank KZ may also impose
certain requirements on Freedom Holding Corp. as its owner with regard to its regulatory status as a bank holding company in Kazakhstan.
Our investments expose us to a significant risk of capital loss.
We use a significant portion of our capital to engage in a variety of investment activities for our own account, as well as in our exchange-based market making activities.
As of March 31, 2024, our assets included $3.7 billion of trading securities, approximately 30.1% of which consisted of corporate debt securities and approximately 65.3% of which
consisted of non-U.S. sovereign debt securities. We have relied on leverage, including by entering into reverse repurchase agreements, repurchase agreements, securities borrowed
and securities loaned transactions, to increase the size of our proprietary securities portfolio. As a result, we may face risks of illiquidity, loss of principal and revaluation of assets.
The companies in which we invest may concentrate on markets which are or may be disproportionately impacted by pressures in the sectors on which they focus, and their existing
business operations or investment strategies may not perform as
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projected. As a result, we may suffer losses from our investment activities. Our proprietary portfolio is concentrated in the sovereign debt instruments of a few non-U.S. countries
and debt and equities of a number of companies. A consequence of this investment strategy is that our investment returns could be materially and adversely affected if these
investments do not perform as anticipated or if the market performs differently than we forecast. Moreover, because we rely on leverage in our portfolio, when an investment does
not perform within the time horizon we project, we face the risk of either having to close the position at a time when the market price or liquidity might be unfavorable, or
extending financing arrangements beyond the time frame initially anticipated, which can result in paying higher financing costs than projected. If a significant investment such as
this fails to perform as anticipated our return on investment, liquidity, cash flow, financial condition and results of operations could be materially negatively affected, and the
magnitude of the loss could be significant.
Substantially all of our investing and market-making positions are marked-to-market on a daily basis, and declines in asset values directly and immediately impact our
earnings. Although we may take measures to manage market risk, such as employing position limits, hedging and using quantitative risk measures, we may incur significant losses
from our trading activities due to leverage, market fluctuations, currency fluctuations and volatility. To the extent that we own assets, i.e., have long positions, a downturn in the
value of those assets or markets could result in losses. Conversely, to the extent we have sold assets we do not own, i.e., have short positions, an upturn in those markets could
expose us to potentially large losses as we attempt to cover our short positions by acquiring assets in a rising market. We cannot give assurance that our investing and market-
making strategies will be effective in all situations or that those activities will always be profitable. For example, an increase in interest rates, a general decline in debt or equity
markets, an inability to properly and cost effectively hedge, economic slowdowns, delays in timing of anticipated events, an inability to identify and engage suitable counterparties,
or other market conditions adverse to entities or investments of the type in which we invest or for which we make markets, or other world events, such as wars, including the Russia-
Ukraine conflict, natural disasters or the outbreak of a pandemic such as Covid-19, could result in a decline in the value of our investments. Additionally, changes in existing laws,
rules or regulations, or judicial or administrative interpretations thereof, or new laws, rules or regulations could have an adverse impact on our investments.
We may suffer significant loss from changes in the KASE's requirements related to the discount coefficients on the securities in securities repurchase transactions.
As part of our investment activities, both as an intermediary between borrowers and lenders and on a proprietary basis, we raise funds through repurchase transactions on
the KASE. Our short-term financing is primarily obtained through securities repurchase arrangements. As of March 31, 2024, $2.8 billion, or 75%, of the trading securities held in
our proprietary trading account were subject to securities repurchase obligations. The securities we pledge as collateral under repurchase agreements are liquid trading securities
with market quotes and significant trading volume.
Depending on the reliability of the instrument used to secure the repurchase transaction, the KASE has established the size of the discount for securities. The discount is a
decreasing coefficient that sets the maximum borrowing amount for repurchase transactions in relation to each individual instrument. In the event of unexpected changes in the
terms of the discount, we may incur financial losses associated with the need to sell securities to cover liquidity at a cost disadvantageous to us, or due to the need to borrow
necessary funds at higher rates.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is designed to identify, assess, and mitigate risks across our operations, including credit, market, liquidity, operational, IT, cybersecurity,
legal, regulatory, reputational and ESG risks. We cannot guarantee that our risk management framework will always be effective, as unforeseen circumstances or misjudgments
could arise. If our framework fails to address a particular risk effectively, we could face losses that would negatively impact our business, financial position, and prospects.
Regulatory bodies in the jurisdictions where we operate might also impose adverse consequences.
Our modeling and assumptions used in assessing risks in our business may differ materially from actual results.
We use modeling and forecasts to estimate exposures, loss trends and other risks, and to assist us in decision-making related to underwriting, pricing, capital allocation,
and other issues associated with our businesses. Our models and forecasts are subject to various unverifiable assumptions, uncertainties, model design errors, complexities and
inherent limitations, including those arising from the use of historical internal, industry, and unverified, third-party-provided data and assumptions. If, based upon these models,
forecasts or other factors, we misprice our products or fail to correctly
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estimate the associated risks, our business, results of operations, financial condition and cash flows may be materially adversely affected.
We also establish and monitor underwriting guidelines and an approval process for assessing and addressing risks and their limits; however, we cannot assure that the
assumptions our guidelines and limits are based on, or the analysis of those assumptions, are correct or will accurately reflect future results. As a result, we cannot assure that these
guidelines and approval process will be effective in mitigating our underwriting risks.
In our insurance business, we may not be able to obtain reinsurance at required levels or prices, or otherwise collect on reinsurance, which could increase our
exposure or limit our ability to write new policies.
The availability and cost of reinsurance are dependent on market conditions beyond our control. As a result, reinsurance may not be continuously available to us to the
extent and on the terms we require to write new business. If we cannot obtain reinsurance or purchase reinsurance at acceptable prices, we would have to either accept an increase in
our exposure, or reduce our insurance exposure by limiting writing new policies that we think necessitate reinsurance protections, either of which could have a materially adverse
effect on our insurance businesses.
Further, our reinsurance programs have counterparty risk that may result in uncollectible claims. Collectability from reinsurers is subject to factors such as whether
reinsurers have the financial capacity to make payments, whether insured losses meet the conditions of the reinsurance contract, and whether the reinsurer otherwise disputes
coverage. Our inability to recover from reinsurers, for any reason, could have a material effect on our results of operations, financial condition, cash flows and business prospects.
We are dependent on our executive management team, particularly Timur Turlov, and our ability to hire and retain skilled personnel.
We depend on the efforts, skills, reputations and business contacts of our executive management team, in particular Timur Turlov, and the management teams of our
subsidiaries. These individuals have made significant contributions to our success and we believe our success moving forward depends, to a significant extent, on the experience of
these individuals, whose continued service is not guaranteed. If certain individuals leave or are otherwise no longer available to us for any reason, we may not be able to replace
them with comparable capable personnel. Due to Mr. Turlov's importance to our company, we would be materially adversely affected if Mr. Turlov ceased to actively participate in
the management of our business or left the company entirely. We do not hold “key man” life insurance on Mr. Turlov or any of our other officers or directors.
In addition to the importance of Mr. Turlov and other executive management in our continued growth and success, we are dependent, in part, on our continued ability to
hire, adequately train and retain skilled employees. The pool of experienced and qualified employee candidates is limited in some of the geographical areas where we conduct
business, and competition for skilled employees can be significant. Additionally, we rely on experienced managerial, marketing and support personnel to effectively manage and
operate our business. If we do not succeed in engaging and retaining skilled employees and other personnel or if we experience a loss of such personnel, we may be unable to meet
our objectives and, as a result, our business may suffer.
Extraordinary events beyond our control could negatively impact our business.
Our business and operations could be seriously disrupted and our reputation could be harmed, by events or contributing factors that are wholly or partially beyond our
control. The occurrence of such extraordinary events, including the emergence of pandemics or other widespread health emergency (or concerns over the possibility of such an
emergency); persistent or recurring endemics; political discord and civil unrest; terrorist attacks; cyber attacks; war and armed conflict (including but not limited to the Russia-
Ukraine conflict); extreme weather events or other natural disasters; failure of, or loss of access to, technology or operational systems, including any resulting loss of critical data;
power, telecommunications or internet outages; or shutdowns of mass transit, could create, and in the cases of Covid-19, civil unrest in Kazakhstan in January 2022, and the Russia-
Ukraine conflict, have created, and may continue to create, economic, governmental and financial disruptions, and could lead to operational difficulties (including shutdowns of our
offices, quarantine, shelter in place and travel limitations) that could impair our ability to operate our business.
Possible future pandemics may impact the global economy, global financial markets and our business, financial condition, results of operations and cash flows.
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The Covid-19 pandemic created financial disruption and impacted the economies of every country in which we operate. Although financial markets have rebounded from
the significant declines experienced during the Covid-19 outbreak, signs of underlying economic weakness persist, including elevated levels of market volatility, high
unemployment, lack of consumer confidence, depressed levels of business activity in certain sectors, and increased cybersecurity, information security and operational risks
resulting from expansion of remote work.
We believe that the interventions from banks and governments in response to the Covid-19 pandemic and the increase in the amount of time people spent at home during
the pandemic led to an increase in the opening of investment accounts and investing in securities worldwide. The increased levels of customer activity combined with greater market
volatility led to significant growth in our customer accounts, trading volume, fee and commission income, gains in our proprietary trading and net income during the fiscal year
ended March 31, 2022. These effects are no longer applicable following the relative return to pre-Covid-19 operating conditions.
If Covid-19 or another highly infectious or contagious disease continues to spread, if the response to contain it is unsuccessful, or if there are adverse changes in political
conditions or social unrest as a result of the response, we could experience adverse effects on our business, financial condition, liquidity, results of operations and cash flows.
Our financial results depend on interest rate volatility.
Fluctuations in interest rates can impact our earnings. Declines in interest rates can have a detrimental effect on the interest we earn. An increase in interest rates could
negatively impact us if we hold securities that have an inverse relationship with interest rates or where market conditions or the competitive environment induces us to raise our
interest rates or replace deposits with higher cost funding sources without offsetting increases in yields on interest-earning assets.
To reduce the negative impact of sanctions and other actions related to the Russia-Ukraine conflict on the Kazakhstan economy, the NBK raised the base rate from 10.25%
to 16.75% per annum. The base rate was increased to produce an increase in deposit rates to levels needed to compensate for increased depreciation and inflation risks. This was
needed to support financial and price stability and protect the savings of Kazakhstan citizens from depreciation. Russia similarly raised interest rates during this period. The rate
increases contributed to a significant net loss on our trading securities, largely due to the revaluation of our bond positions. Despite the fact that since then the NBK decreased the
base rate to 14.75% per annum, there always remains a possibility of further interest rate hikes in the future which could have negative effects on our earnings.
We are exposed to foreign currency fluctuation risks.
Because our business is conducted in multiple countries, we face exposure to movements in foreign currency exchange rates. This exposure may change over time as
business practices evolve and can have a material impact on our financial statements. Our functional currency is the U.S. dollar. The functional currencies of our subsidiaries
include the Kazakhstan tenge, the Euro, the Ukrainian hryvnia, the Uzbekistan sum, the Kyrgyzstan som, the Azerbaijan manat, the Armenian dram, the British pound sterling and
the United Arab Emirates dirham. For financial reporting purposes, those currencies are translated into U.S. dollars as the reporting currency. Assets and liabilities are translated at
the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. As the value of
the functional currencies of our subsidiaries weakens against the U.S. dollar, we may realize losses arising as a result of translating such foreign currencies to U.S. dollars.
Conversely, as the value of the U.S. dollar weakens against the functional currencies of our subsidiaries, we may realize gains arising as a result of currency translation.
Fluctuations in currency exchange rates have had, and will continue to have, an impact on our results of operations. For example, the countrywide unrest in Kazakhstan in
January 2022 and again following the onset of the Russia-Ukraine conflict the government of Kazakhstan imposed rules that included strict restrictions on currency operations
between residents and non-residents. Such rules may be imposed when the applicable regulator believes there exists a serious threat to the stability of payment balances, the foreign
currency market or economic security and can have a significant impact on currency rate fluctuation.
Damage to our reputation could harm our business.
Maintaining our reputation is critical to attracting and maintaining customers, investors, and employees. If we fail to address, or appear to fail to address, issues that may
give increase to reputational risk, we could significantly harm our business. These issues may include, but are not limited to, any of the risks discussed in this Item 1A, including but
not limited to legal and regulatory requirements and actions, measures to prevent money laundering, terrorist financing and
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sanctions violations and management of risks in relation to related party transactions and arrangements . Adverse developments could impair our reputation and materially
adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to the Global Political, Regulatory and Economic Environment
Our business and operations may be materially adversely affected by the ongoing Russia-Ukraine conflict.
Historically, a large portion of our brokerage business was attributable to securities trading by individuals and qualifying institutions in Russia. Although we divested our
Russian subsidiaries in February 2023, and we are actively seeking to decrease the amount of our clients located in Russia, the brokerage and banking customers of our non-US
subsidiaries continue to include non-sanctioned Russian persons. As a result, we continue to have exposure to Russia, which poses continuing challenges for our business and
operations.
Although neither FRHC nor any of its group companies is the subject of any sanctions imposed by the United States, the European Union or the United Kingdom, and we
have divested our Russian subsidiaries, the effects of the Russia-Ukraine conflict could adversely impact our business. For example, given Kazakhstan's extensive historical
business ties with Russia, we are exposed to the risk that secondary sanctions could be imposed on participants in the financial sector in Kazakhstan. There is a similar risk that
existing international sanctions and countersanctions measures that limit the ability of Russian persons to engage in securities activities in certain securities may be expanded in a
manner that curtails our ability to provide brokerage services to such customers through our non-Russian subsidiaries. The effects of the Russia-Ukraine conflict could also limit our
ability to, or make it difficult for us to, enter into agreements with certain counterparties. The materialization of any of the foregoing factors could have a material adverse effect on
our business, financial condition, results of operations and stock price.
Sanctions imposed by Ukraine on our Chief Executive Officer and our former Ukrainian subsidiary could have a material adverse effect on us.
On October 19, 2022, Timur Turlov, our former Ukrainian subsidiary Freedom UA (which has been deconsolidated from our financial statements starting from the first
quarter of fiscal 2024 due to the uncertainty of our ability to control it) and our two former Russian subsidiaries (which Russian subsidiaries have since been divested) were
included on the National Security and Defense Council of Ukraine sanctions list, which included more than 2,500 companies and individuals. In connection with these sanctions,
the operations of our former Ukrainian subsidiary were suspended. We believe that the inclusion of Mr. Turlov and these subsidiaries on the list was due to perceived connections
with Russia. While we believe the inclusion of Mr. Turlov and our former Ukrainian subsidiary on the list is not justified and we have been actively appealing the decision, there
can be no assurance as to when they will be removed from the list, if at all. While our former Ukrainian subsidiary is not material in the context of our overall group, the inclusion
of Mr. Turlov and our former Ukrainian subsidiary on this list could materially adversely affect our relationships with counterparties and regulators in other jurisdictions and as a
result could restrict our ability to conduct our business and carry out our business strategy. In addition, because we have a significant number of Ukrainian brokerage customers that
are served by our non-Ukrainian subsidiaries, the existing sanctions imposed by Ukraine or any expansion of such sanctions could adversely affect our brokerage business. See
"Russia-Ukraine conflict" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II Item 7 of this annual report.
Non-compliance with U.S., EU, UK, Russian or other sanctions programs could adversely impact our company.
We are committed to compliance with all applicable economic sanctions, including those related to the Russia-Ukraine conflict. U.S. economic sanctions include
prohibitions that are generally administered and enforced by OFAC. With the exception of OFAC’s Iran and Cuba sanctions programs these prohibitions apply to U.S. persons,
including companies organized under the laws of the United States and their overseas branches (such sanctions applicable to U.S. persons are generally referred to as “primary”
sanctions) but do not apply to non-U.S. subsidiaries of U.S. persons unless the relevant transactions have a nexus with the United States. U.S. economic sanctions also include
“secondary” sanctions that make certain activities of non-U.S. persons sanctionable under U.S. statutes such as the Countering America’s Adversaries Through Sanctions Act
(CAATSA) or the U.S. President’s executive orders. These sanctions are administered by OFAC and/or the U.S. Department of State. We require all of our group companies to
fully comply with all U.S. primary sanctions that are applicable to them and/or to transactions with a U.S. nexus in which they are involved. In addition, where sanctions do not
apply to particular transactions or activities due to a lack of a nexus to the jurisdiction that imposed the relevant sanctions, our subsidiaries aim to refrain from any conduct that
could create exposure to secondary sanctions, taking into account potential conflicting law issues given that certain of these subsidiaries operate in highly-regulated industries in
which a disregard of local law requirements results in regulatory and litigation risk.
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Because Freedom Holding Corp. is a U.S.-domiciled holding company that operates through its subsidiaries, we are obliged to comply with Ukraine-Russia conflict-
related sanctions imposed by the United States, but those sanctions do not apply to the fully independent activities of our non-U.S. subsidiaries where there is no U.S. nexus. If,
however, it were determined that Freedom Holding Corp. facilitated activities of its subsidiaries that are prohibited under U.S. sanctions, Freedom Holding Corp. could be subject to
civil or criminal penalties under OFAC regulations. In addition, non-U.S. companies that cause U.S. companies to violate OFAC regulations may be subject to enforcement action
and thereby the imposition of civil or criminal penalties. This could occur, for example, if one of our non-U.S. subsidiaries were to process a U.S. dollar transaction involving
sanctioned securities through the U.S. financial system. The risk of noncompliance may arise in connection with international transactions conducted in U.S. dollars, transfers to or
from U.S. bank accounts, or dealings with U.S. broker-dealers.
We maintain omnibus brokerage accounts for several institutional clients. The order flow from these accounts represents transactions of customers of the relevant
institutions, which are executed by the relevant institutions through their omnibus accounts with us. While we have agreements with such customers in which they have agreed to
comply with sanctions laws, and to grant us access to its customer records for purposes of compliance monitoring upon our request, we do not have direct access to such institutional
customers' own customer check systems. While based on the procedures we have performed we believe that the beneficial owners who are the beneficiaries of trades being carried
out through such omnibus accounts are not sanctioned persons, because we do not have such direct access we cannot provide assurance that this is the case.
In the event that we believe or have reason to believe that our employees, agents or independent contractors have or may have caused us or any of our subsidiaries to
violate applicable economic sanctions laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which could be costly and
require significant time and attention from senior management. Non-compliance with these laws may result in criminal or civil penalties, which could disrupt our business and
result in a material adverse effect on our financial condition, results of operations, and cash flows and cause significant brand or reputational damage.
Sanctions are subject to rapid change, and it is also possible that new sanctions programs could be established, or secondary sanctions could be imposed, by the U.S. or
other jurisdictions without warning in relation to the Russia-Ukraine conflict. The extent of current sanctions measures, not all of which are fully aligned across jurisdictions,
further increases operational complexity for our business and increases the risk of making errors in managing day-to-day business activities within the rapidly evolving sanctions
environment.
We are monitoring closely the developing sanctions environment, including Russian countersanctions, and utilizing dedicated corporate governance structures and in-
house and outside advisors as and when required to ensure our continued compliance. However, we cannot assure that we can remain in compliance with all sanctions and
countersanctions.
See "Russia-Ukraine conflict" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II Item 7 of this annual report.
Emerging markets, such as many of the markets in which we operate, are subject to greater risks than more mature markets, including significant political, economic
and legal risks.
Generally, investments in emerging markets are only suitable for sophisticated investors who fully appreciate the significance of the risks involved. Investors in emerging
markets should be aware that these markets are subject to greater risk than more mature markets, including in some cases significant political, economic and legal risks, including:
•
difficulties in enforcing legal rights;
•
corruption in certain countries;
•
economic volatility and sustained economic downturns;
•
restrictive changes in securities brokerage, financial services and banking laws;
•
differing and sometimes conflicting legal and regulatory regimes;
•
unpredictable, uncertain and potentially adverse changes to tax regimes;
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•
difficulties in developing, staffing, and simultaneously managing a number of international operations;
•
risks related to government regulation;
•
uncertain protection and enforcement of our intellectual property rights;
•
uncertain and changing judicial and regulatory environments and requirements;
•
currency exchange rate fluctuations and currency exchange controls;
•
procuring adequate insurance; and
•
political or social unrest, including domestic protests such as occurred in Kazakhstan in January 2022 and international conflicts, such as the Russia-Ukraine conflict.
Emerging market governments and judiciaries often exercise broad, unchecked discretion and are susceptible to abuse and corruption. Investors should also note that
emerging economies such as Kazakhstan are subject to rapid change and that the information set out herein may become outdated relatively quickly. Moreover, financial, political
or social turmoil in any emerging market country can disrupt the local securities markets.
The economies of Kazakhstan and other countries in which we operate are vulnerable to external shocks and fluctuations in the global economy.
Shocks and fluctuations to the global economy may adversely impact Kazakhstan and the other emerging market countries in which we operate. We estimate that, for
fiscal 2024, approximately 89% of our total revenue and most of our total net income was attributable to our operations in Kazakhstan, and as of March 31, 2024, approximately
81% of our total assets were attributable to our operations in Kazakhstan. The economic resilience of Kazakhstan has been tested by global financial shifts and political events,
impacting its growth trajectory. Particularly, the Covid-19 pandemic led to a significant downturn in 2020, exacerbated by a sharp decline in oil prices. Although there was a
subsequent recovery, the economy's growth rates have been inconsistent, influenced by external challenges such as reduced oil production and supply chain disruptions, partly from
the ongoing Russia-Ukraine conflict. Kazakhstan's heavy reliance on its oil and gas sector, despite diversification efforts, underscores the economy's vulnerability. CPC is the main
oil export route (at least two thirds of total oil exports), which runs from fields in the west of the country to a terminal near the Russian port of Novorossiysk. Even though
Kazakhstan is undertaking efforts to diversify its oil export routes through the Transcaspian International Transport Route (TITR), the CPC will continue to play a major role in the
transportation of Kazakhstan's oil. The Russia-Ukraine conflict may cause damages to the Russian port that can lead to a decrease of oil exports for Kazakhstan.
Changes in both the global and domestic environment have resulted in, among other things, lower liquidity levels across the banking sector, tighter credit conditions for
Kazakhstan companies generally and fluctuating global demand for, and instability in, the price of crude oil and other commodities and downward pressure on the tenge. For
example, the tenge depreciated significantly relative to the U.S. dollar in 2018 mainly due to significant deterioration of external factors, such as depreciation of the Russian ruble
and the decrease in crude oil prices (starting from October 2018) due to increased oil reserves and oil production by principal exporters. The tenge depreciated relative to the U.S.
dollar by 10.4% in 2020 primarily due to a sharp fall in oil prices caused by the Covid-19 pandemic. As a result of the onset of the Russia-Ukraine conflict, the tenge depreciated by
8.0% relative to the U.S. dollar during the quarter ended March 31, 2022. However, during fiscal 2024 the value of the tenge largely stabilized and appreciated by approximately 4%
against the U.S. dollar.
Kazakhstan and other countries remain vulnerable to external shocks and the economic performance of their trading partners. A significant decline in economic growth in
the EU or in any of a country's other major trading partners, including Russia (whether or not resulting from international sanctions), could have a material adverse effect on such
country's balance of trade and adversely affect its economic growth.
Weaknesses in the global economy, or a future external economic crisis, may have a negative effect on economies or investors' confidence in the markets where we
operate. Such developments could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Kazakhstan's economy is vulnerable to internal political and social unrest.
The countrywide unrest in Kazakhstan that occurred in January 2022 resulted in major interruptions to Kazakhstan's financial market. As a result of shutdowns (or
restrictions on access to) the internet and the state of emergency declared by the president of Kazakhstan, our Kazakhstan subsidiaries, along with other financial institutions in
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Kazakhstan, were unable to conduct operations or operated with limited functionality during the unrest. We are currently exploring the possibility of obtaining alternative ways to
access the internet in the case of such emergency situations and to eliminate or mitigate the consequences of losing access to the internet. This event also resulted in significant
changes to the Kazakhstan government and reshuffling of government officials, which could in turn result in future impacts to the financial markets in Kazakhstan, including
possible amendments to legislation that may limit or make it more difficult or expensive to conduct our operations or make our services less attractive to our customers.
Risks Related to Legal and Regulatory Matters
We are subject to extensive regulation, and the failure to comply with laws and regulations could subject us to monetary penalties or sanctions.
Our business is subject to extensive government regulation, licensing and oversight in multiple jurisdictions. Laws, regulations and rules or other obligations to which we
are subject include but are not limited to those concerning securities brokerage, retail and commercial banking, insurance services, payment services, securities trading, underwriting
and market-making, granting of credit, deposit taking, margin lending, foreign currency exchange, data protection and privacy, cross-border and domestic money transmission,
cybersecurity, fraud detection, antitrust and competition, consumer protection, U.S. and non-U.S. sanctions regimes, anti-money laundering and counter-terrorist financing. See
"Non-compliance with U.S., EU, UK, Russian or other sanctions programs could adversely impact our company." above and "Our measures to prevent money laundering, terrorist
financing violations may not be completely effective." below. Our Prime Executions subsidiary is a broker-dealer and investment adviser registered with the SEC and is primarily
regulated by FINRA.
As we introduce new products and services and expand existing product and service offerings we may become subject to additional regulations, restrictions, licensing
requirements and related regulatory oversight.
Compliance with many of the regulations applicable to us involves a number of risks, particularly in areas where applicable regulations may be subject to varying
interpretation. Many of the requirements imposed by these regulations are designed to ensure the integrity of the financial markets and to protect customers and other third parties
who deal with us. New regulations may result in enhanced standards of duty on our subsidiaries in their dealings with their clients. Consequently, these regulations often serve to
limit our activities, including through net capital, customer protection and market conduct requirements, including those relating to principal trading.
We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations. Notwithstanding these measures, it is possible that our
employees, contractors, and agents could nevertheless breach such laws and regulations. We may be subject to legal claims from our customers and counterparties, as well as
regulatory actions brought against us by the regulators, self-regulatory agencies and supervisory authorities that oversee and regulate the industries in which we operate.
From time to time, we have been, and in the future may be, subject to investigations, audits, inspections and subpoenas, as well as regulatory proceedings and fines and
penalties brought by regulators. We are subject to regulation from numerous regulators, which include, but are not limited to, the NBK, the AFSA, the ARDFM, CySEC and the
SEC. We have received various inquiries and formal requests for information on various matters from certain regulators, with which we have cooperated and will continue to do so.
If we are found to have violated any applicable laws, rules or regulations, formal administrative or judicial proceedings may be initiated against us that may result in censure, fine,
civil or criminal penalties. For example, on February 13, 2023, following an elective audit of Freedom Bank KZ commenced by the ARDFM in June 2022, the ARDFM issued an
order providing that Freedom Bank KZ violated a number of banking laws and regulations. In connection with such order, Freedom Bank KZ developed and implemented a
remediation plan, the completion of which was confirmed on April 10, 2024. We could also experience negative publicity and reputational damage as a result of future lawsuits,
claims or regulatory actions. Any of the foregoing could, individually or in the aggregate, adversely affect our business, results of operations, financial condition and cash flows.
Financial services firms have been subject to increased regulatory scrutiny increasing the risk of financial liability and reputational harm resulting from adverse
regulatory actions.
Firms in the financial services industry have been operating in an onerous regulatory environment. The industry has experienced increased scrutiny from a variety of
regulators, including the SEC and FINRA in the United States, U.S. state regulators and regulators in non-U.S. jurisdictions. Penalties and fines sought by regulatory authorities
have increased substantially. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities. Each of the
regulatory bodies with jurisdiction over us has regulatory powers dealing with many different aspects of financial services, including, but not limited to, the authority to fine us and
to grant, cancel,
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restrict or otherwise impose conditions on the right to continue operating particular businesses. Increasingly, regulators have instituted a practice of "regulation by enforcement"
where new interpretations of existing regulations are introduced by bringing enforcement actions against securities firms for activities that occurred in the past but were not then
thought to be problematic. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or non-U.S. governmental
regulatory authorities or self-regulatory organizations (e.g., FINRA) that supervise the financial markets. Substantial legal liability or significant regulatory action taken against us
could have a material adverse effect on our business prospects including our cash position.
As a U.S. public company listed on Nasdaq we have substantial regulatory reporting obligations.
We are subject to extensive corporate governance, reporting and accounting disclosure requirements under U.S. securities laws and regulations of the SEC. These laws, as
well as the listing standards of Nasdaq, impose certain compliance requirements, costs and obligations on listed companies. This requires a significant commitment of resources and
management oversight. The expenses associated with being a public company include auditing, accounting and legal fees and expenses, investor relations expenses, increased
directors' fees, registrar and transfer agent fees and listing fees, as well as other expenses.
Failure to comply with the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") or the Dodd-Frank Wall Street Reform and Consumer Protection Act could potentially
subject us to sanctions or investigations by the SEC or other regulatory, exchange or market authorities, and related penalties, fines and litigation.
We are subject to risks related to anti-corruption laws in effect in the United States and the non-U.S. jurisdictions where we conduct business.
We are subject to the U.S. Foreign Corrupt Practices Act ("FCPA") and similar non-U.S. anti-corruption laws that generally prohibit companies and their intermediaries
from making improper payments or providing anything of value to influence foreign government officials for the purpose of obtaining or retaining business or obtaining an unfair
advantage.
Recent years have seen a substantial increase in the global enforcement of anti-corruption laws, with more frequent voluntary self-disclosures by companies, aggressive
investigations and enforcement proceedings, resulting in record fines and penalties, increased enforcement activity, and increases in criminal and civil proceedings brought against
companies and individuals.
We operate through subsidiaries in Kazakhstan, Kyrgyzstan, Uzbekistan, Azerbaijan, Armenia, Turkey, the EU, the UAE, the U.S., Germany, and Cyprus including
representative offices of our Cyprus broker in Austria, Bulgaria, Greece, France, Spain, Italy, Poland and Netherlands. Enforcement officials generally interpret anti-corruption laws
to prohibit, among other things, improper payments to government officials such as those of the ARDFM, the NBK, AFSA, CySEC, FINRA, the Federal Financial Supervisory
Authority of Germany ("BaFIN"), the National Agency for Prospective Projects (NAPP) in Uzbekistan and the National Commission on Securities and Stock Market of Ukraine,
which are the principal regulatory bodies that control and monitor our operations in the respective countries in which we operate. Our internal policies and those of our subsidiaries
provide for training and compliance with all applicable anti-corruption laws and regulations. Despite our training and compliance programs, it is possible that our employees, agents
or independent contractors may cause us or a subsidiary to violate applicable laws. In the event that we believe or have reason to believe that our employees, agents or independent
contractors have or may have caused us or a subsidiary to violate applicable anti-corruption laws, we may be required to investigate or have outside counsel investigate the relevant
facts and circumstances, which can be costly and require significant time and attention from senior management. Non-compliance with these laws may result in criminal or civil
penalties, which could result in a material adverse effect on our business, financial condition, result of operations and cash flows.
A failure by our subsidiaries to meet capital adequacy and liquidity requirements could affect our operations, financial condition and cash flows.
As a condition to maintaining our licenses to conduct brokerage, insurance and banking activities, some of our subsidiaries must meet ongoing capital and liquidity
standards, which are subject to evolving rules and qualitative judgments by government regulators regarding the adequacy of their capital and internal assessment of their capital
needs. These net capital rules may limit the ability of each subsidiary to transfer capital to us. New regulatory capital, liquidity, and stress testing requirements may limit or
otherwise restrict how each subsidiary utilizes its capital and may require us to increase our capital and/or liquidity or to limit our growth. Failure by our subsidiaries to meet
minimum capital requirements could result in certain mandatory and additional discretionary actions by regulators that, if undertaken, could
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adversely affect the licenses of our subsidiaries, as well as our business, financial condition, results of operations, and cash flows.
The countries in which we operate have changing regulatory regimes, regulatory policies, and interpretations.
The countries in which we operate have differing, and sometimes conflicting, regulatory regimes governing the delivery of financial services in each country, the transfer
of funds to and from such countries, and other aspects of the broker-dealer, finance, investment, banking, and insurance industries. In some jurisdictions where we operate, these
provisions were promulgated during changing political circumstances, are continuing to change and may be relatively untested, particularly insofar as they apply to foreign
investments by residents of various countries.
Therefore, there may exist little or no administrative or enforcement history or established practice that can aid us in evaluating how the regulatory regimes may impact
our operations or our customers. It is possible that governmental policies will change or that new laws and regulations, administrative practices or policies, or interpretations of
existing laws and regulations including those governing capital, liquidity, leverage, long-term debt, margin requirements, restrictions on leveraged lending or other business
practices, reporting requirements and tax burdens will materially and adversely affect our activities in one or more of the countries where we operate. Further, since the history and
practice of industry regulation is limited in a number of jurisdictions where we operate, our activities may be particularly vulnerable to the decisions and positions of individuals,
who may change, be subject to external pressures, or administer policies inconsistently. Internal bureaucratic politics may have unpredictable and negative consequences. If we fail
to develop and maintain good working relationships with local regulators, or a local regulator determines that we have violated local laws in a particular market it could negatively
impact our businesses in that market and our reputation generally.
Our revenue and profitability could be affected by changes to rules and regulations that impact the business and financial sectors generally, including changes to the laws
governing foreign ownership, electronic commerce, customer privacy and security of customer data. In addition, changes to laws, rules and regulations or changes in the
enforcement of existing laws, rules or regulations, could:
•
limit the lines of business we conduct;
•
require us to reduce our ownership stake in a subsidiary;
•
compel us to terminate certain lines of business in affected jurisdictions;
•
require us to reduce our investment position in a particular instrument;
•
result in material cost increases including our cost of capital;
•
otherwise adversely affect our ability to compete effectively with other institutions that are not similarly impacted;
•
require us to modify existing business practices;
•
force us to relocate operations or personnel;
•
require us to invest significant management attention and resources and legal costs to evaluate and make necessary changes to our compliance, risk management, treasury
and operations functions;
•
make it uneconomical for us to provide certain services in particular countries; and
•
influence how we manage our capital and liquidity.
Our measures to prevent money laundering and terrorist financing violations may not be completely effective.
Notwithstanding the anti-money-laundering (“AML”) regulations that are in place in Kazakhstan, the EU, the U.S. and other jurisdictions in which we operate, we are
subject to the risk that our subsidiaries that are financial institutions could be used as vehicles for money laundering.
Minimum standards and duties according to the anti-money laundering legislation in Kazakhstan, Cyprus, the EU, the U.S. and other jurisdictions where we operate include
customer identification, analysis of the customer's economic profile, record keeping, suspicious activity reporting, employee training, an audit function and designation of a
compliance officer. Suspicious transactions must be reported on a daily basis to the relevant authorities. We comply with applicable
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anti-money-laundering and anti-terrorist-financing laws and regulations. Our anti-money-laundering measures are based on relevant legislation. For example, Kazakhstan is a
member of the Eurasian Group (an Associate Member of the FATF) and has enacted laws and regulations to combat money laundering, terrorist financing and other financial
crimes. We have procedures and documents aimed at preventing money laundering and financing of terrorist activities, including a general anti-money-laundering policy, employee
training, the designation of a compliance officer, internal control procedures that include a refusal policy whereby we may refuse to conduct business with suspicious entities or
individuals and rules on counteracting money laundering and financing of individuals and legal entities engaged in terrorist activities. In the case of suspicious transactions, internal
suspicion reports (ISRs) are submitted to the local compliance departments for initial internal investigation. In the case of confirmed suspicious transactions, such transactions are
reported immediately to the relevant local financial intelligence unit (FIU). We believe that we fully comply with the reporting requirements under applicable legislation related to
money laundering or terrorist financing. However, there can be no assurance that third parties will not attempt to use us as a conduit for money laundering or terrorist financing
without our knowledge, nor that the measures described above will be completely effective. Any technical or other breaches of the anti-money laundering laws and regulations by
us could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Due to the omnibus brokerage accounts we maintain for certain institutional brokerage clients, penalties and other enforcement actions could be brought against us under
relevant AML/CTF laws due to breaches by those clients of those laws and regulation and similar laws despite the fact that we have no direct control over the activities or policies
of such clients. The order flow from these accounts represents transactions of underlying customers of the relevant institutions, which are executed by the relevant institutions
through their omnibus accounts with us. While we have agreements with such institutional clients in which they have agreed to comply with AML/CTF controls that are applicable
to brokers in the U.S. and EU, and we test their frameworks and systems by regular risk-based sampling and have access to their underlying customer records for purposes of
compliance monitoring, because we do not have direct access to such institutional clients' underlying customers or screening systems, we cannot provide assurance that the
beneficial owners who are the beneficiaries of trades being carried out through such omnibus accounts are conducting trades in compliance with applicable AML/CTF laws.
If we violate securities laws, or are involved in litigation in connection with a violation, our reputation and results of operations may be adversely affected.
Many aspects of our business involve substantial risks of liability. In our underwriting business, we are exposed to substantial liability under U.S. federal, state and non-
U.S. securities laws, other U.S. federal and state and non-U.S. laws, and court decisions, including decisions with respect to underwriters' liability and limitations on indemnification
of underwriters by issuers. For example, a firm that acts as an underwriter may be held liable for material misstatements or omissions of fact in a prospectus used in connection with
the securities being offered or for statements made by its securities analysts or other personnel. Our underwriting activities will usually involve offerings of the securities of smaller
companies, which often involve a higher degree of risk and are more volatile than the securities of more established companies. In comparison with more established companies,
smaller companies are also more likely to be the subject of securities class actions, to carry directors and officers liability insurance policies with lower limits or not at all, and to
become insolvent. In addition, in market downturns, claims tend to increase. Each of these factors increases the likelihood that an underwriter may be required to contribute to an
adverse judgment or settlement of a securities lawsuit.
We are subject to risks related to potential litigation.
We may be subject to legal claims from our customers and counterparties, employment-related claims and other claims. We could experience negative publicity and
reputational damage as a result of lawsuits or claims, in addition to potential significant costs incurred to defend ourselves or settle claims and judgments. Any of the foregoing
could have a material adverse impact on our business, financial condition results of operations and cash flows.
Risks Related to Information Technology and Cybersecurity
Our operations are highly dependent on the continued and proper functioning of our information technology systems.
Our brokerage, financial services and banking businesses are highly dependent on processing, on a daily basis, a large number of communications and increasingly
complex transactions across diverse markets, in various languages. These communications and transactions are accomplished primarily through electronic information technology
systems
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("IT") that are comprised of a wide array of computer systems, software, server and network hardware, internet connectivity and underlying infrastructure that enable them to
function. The financial, accounting, or other data processing systems we or the firms that clear transactions on behalf of our customers use may fail to operate properly, become
disabled, or otherwise become unavailable, as a result of events that are wholly or partially beyond our control. Events causing failures of our systems may include a disruption of
electrical, communications, internet or other infrastructure, or related services, or our inability to access or use one or more of our facilities, as a result of any number of
occurrences, including, but not limited to, the outbreak of a pandemic such as Covid-19, social unrest such as occurred in Kazakhstan in January 2022, or armed conflict such as the
Russia-Ukraine conflict. For example, during the transition from the calendar year 2022 to the calendar year 2023, Freedom Bank KZ experienced a technical failure in processing
transactions on its MultiInvest cards, as a result of which it incurred losses of approximately $3 million. After the error was identified, measures were taken to rectify the issue and
provide for timely synchronization of the balances going forward.
In particular, our "Tradernet" electronic trading platform is proprietary technology that plays a key role in both our customers' use of our services and for other important
aspects of our business. Errors, failures, delays, interruptions, disruptions, vulnerabilities, bugs, incompatibility, obsolescence, or similar issues with Tradernet, or the software or
systems upon which Tradernet relies for its functionality, however caused, could result in business disruptions, financial loss, reputational damage, and other adverse impacts on our
business.
Other businesses we currently operate, or that we will establish in the future pursuant to our digital fintech ecosystem strategy, including our planned telecommunications
and media businesses, will also be highly dependent on the proper functioning of IT systems and related technology.
If any of our systems do not operate properly or are disabled or otherwise unavailable, or if there are other
shortcomings or failures in our internal processes, personnel, or systems related to the electronic communications and
functionality our operations depend on, we could suffer impairment to our liquidity, financial loss, a disruption of business,
liability to customers, regulatory intervention, or reputational damage. The inability of our systems to accommodate an
increasing volume of transactions could also constrain our ability to expand our business operations.
We interact with large volumes of sensitive data that exposes us to IT breach and other data security risks and liabilities.
Our operations rely on the secure processing, storage, and transmission of confidential, personal, financial and other information in our computer systems and networks. In
particular, our ability to operate our business, and specifically our electronic trading platform, Tradernet, depends on our ability to protect the computer systems, networks and
databases that we operate and use from unauthorized intrusions of third parties, including cyber attacks. Our computer systems, software, and networks may be vulnerable to
unauthorized access, computer viruses, spyware or other malicious code, and other evolving cybersecurity threats.
The occurrence of one or more of these events could: (a) jeopardize confidential and other information processed by, stored in, and transmitted through our computer
systems and networks or the computer systems and networks of our customers or other third parties with whom we conduct business; or (b) otherwise cause interruptions or
malfunctions in our operations or the operations of our customers or third parties with whom we conduct business. In addition, new and expanding data privacy laws and regulations
(such as the GDPR, as discussed above in this Item 1A under "We operate in highly regulated industries") are, or soon will be, in effect in many of the jurisdictions where we
conduct business. These pose increasingly complex compliance challenges, which may increase compliance costs, and compliance failures could result in significant fines, penalties
and liability.
We have previously experienced cybersecurity incidents which breached our information systems, but these were contained by our response teams and generated
negligible impacts. There is also a possibility that we are not currently aware of certain undisclosed vulnerabilities in our IT systems and other assets. There is an increased
likelihood that escalation of tensions from the Russia-Ukraine conflict could result in cyber attacks that could either directly or indirectly impact our operations. Although our
subsidiaries have implemented cybersecurity strategies for mitigating these risks, we cannot be sure that our network and information technology systems will not be subject to such
issues, or, if they are, that we will be able to maintain the integrity of our customers' and employees' data or that malware or other technical or operational issues will not disrupt our
network or systems and cause significant harm to our operations. If our services are affected by attacks or malware and this degrades our services, our products and services may be
perceived as being vulnerable to cyber risk and the integrity of our data protection systems may be questioned. As a result, users and customers may curtail or stop using our
products and services, and we might incur reputational damage, litigation exposure, regulatory fines, penalties, reimbursement or other compensatory costs.
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As of the date of this report, most of our employees have returned to working on site rather than remotely, which we believe lessens the overall IT risks associated with
widespread remote work. However, possible outbreaks or other events occur in the future, we may again be required to move a significant portion of our workforce to working
remotely. We continue use risk management and contingency plans and other precautions designed to address the heightened risk of cybersecurity breaches resulting from a
significant remote work force. However, we cannot assure that such measures will continue to adequately protect our business in the event of future transitions of our workforce to
remote working, as remote working environments may be less secure and more susceptible to IT and cybersecurity threats.
The infrastructure on which our IT systems depend is subject to events that could interrupt our ability to operate.
The infrastructure upon which our operations and IT systems depend, including electrical communications and internet, and transportation and other services, are
vulnerable to damage or disruptions from events outside our control, including natural disasters, military conflicts, power, telecommunications and internet unavailability or
outages, terrorist acts, riots, government shutdown orders, changes in government regulation, equipment or system failures or an inability to access or operate such equipment or
systems, human error or intentional wrongdoings, cyber attacks or any other types of information technology security threats.
In addition, as we operate in emerging markets which may have an increased threat of terrorism, military conflict, social unrest or governmental interference with
infrastructure, which could result in property damage, business interruption and damage to our brand or reputation. The local authorities may order our subsidiaries to temporarily
shut down their entire networks or part or all of our networks may be shut down due to actions relating to military conflicts, social unrest or a nationwide strike. For example,
during the social unrest in Kazakhstan that occurred in January 2022, the Kazakhstan government temporarily shut down access to the internet in the country, which resulted in
severance of internal communications within our Kazakhstan subsidiaries.
Because we have employees in a number of locations in Kazakhstan, Uzbekistan, Kyrgyzstan, Turkey, Azerbaijan, Germany, Spain, Greece, France, Poland, Bulgaria,
Austria, Italy, Netherlands, Belgium, Armenia, the UAE, the UK, the U.S. and Cyprus, all of whom need to work and communicate as an integrated team, the functionality of the
infrastructure affects our ability to conduct business. If a disruption occurs in one location and our employees in that location are unable to communicate with or travel to other
locations, our ability to service and interact with our customers may suffer. While we have contingency plans in place to address such issues, these plans may not always be
deployed successfully or be sufficiently adequate to fully offset the impacts of such disruptions. We do not maintain insurance policies to mitigate these risks because such
insurance may not be available or may be more expensive than the perceived benefit. Further, any insurance that we may purchase to mitigate certain risks may not cover all losses.
In addition, the computers and data centers that process our trades and payments are located in the same locale. If a catastrophic event were to occur at such a locale it may
result in permanent data loss. More generally, substantial property and equipment loss, and disruption in operations as well as any defects in our systems or those of third parties or
other difficulties could expose us to liability and materially adversely impact our business, financial condition, results of operations and cash flows. In addition, any outage or
disruptive efforts could adversely impact our reputation and other aspects of our business.
Failure or compromise of third-party systems operations or security could adversely affect our business and expose us to data breaches and cyber attacks.
We rely on certain third-party computer systems or third-party service providers, including clearing systems, other broker-dealers, exchange systems, banking systems,
internet service, co-location facilities, communications facilities and other facilities. Any interruption in these third-party services, or deterioration in their performance, could be
disruptive to our business. If our arrangement with any third-party is terminated, we may not be able to find an alternative source of systems support on a timely basis or on
commercially reasonable terms. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In particular, funds invested by our customers in securities of U.S. companies are transmitted by us to U.S. registered securities broker-dealer and clearing firms. Funds
from the sale of securities are transmitted from such U.S. registered securities broker-dealer and clearing firms back to us through international banking electronic transfers, which
can experience clerical and administrative mistakes, be subject to technical interruption, be delayed, or otherwise fail to work as planned. We do not have any control over these
funds transfers. Failures or substantial delays in funds transfers could impair our customer relationships. Damage to or the loss of our relationships with these U.S. registered
securities broker-dealer and clearing firms could also impair our ability to continue to offer such services to our customers which
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could have a material adverse impact on our business, results of operations, financial condition and cash flows. See "We are dependent upon our relationships with third party
U.S.-registered securities broker-dealer and clearing firms to receive and transmit securities and funds internationally." above.
Our success also depends on the continued availability, development and maintenance of the internet infrastructure globally and particularly in the countries in which we
operate. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable internet services. Any disruption in
network access provided by third parties or any failure by them to handle current or higher future volumes of use may significantly harm our business. We have experienced and
expect to continue to experience interruptions and delays in service from time to time. Furthermore, we depend on hardware and software suppliers for prompt delivery, installation
and service of servers and other equipment to deliver our services.
Use of third-party systems and vendors creates additional potential vulnerabilities. These third-parties may have weaker cybersecurity practices than our own. A
cyberattack, data breach, or system failure originating within a third-party system could disrupt our operations, compromise sensitive data, or damage our reputation. Despite
measures to manage third-party risks, we cannot fully eliminate these exposures.
To remain competitive, we must keep pace with rapid technological change.
The global securities industry is characterized by rapidly changing technology, shifting industry standards and evolving trading systems, practices and techniques. Our
customers' needs and demands fluctuate with these changes. We are focused on anticipating and developing technologies to meet the constantly changing demands of the market
through ongoing enhancement of our products, services and platforms. If our platforms and systems do not operate properly, are slow to market, provide customers with a poor user
experience, or are non-competitive with the offering of our competitors, we could experience a loss in business that could reduce our earnings or cause a loss of revenue.
In particular, our "Tradernet" electronic trading platform is proprietary technology that has taken substantial resources and time to build and requires continued
development to remain competitive with other trading platforms. Adoption or development of superior platforms or technologies by our competitors may require us to devote
substantial resources to the further development of Tradernet, or other platforms, to remain competitive. Our future success will depend in part on our ability to develop, adapt or
acquire up-to-date technology that meets ever evolving industry standards. We may not always be correct or timely in our assessment of how technological changes may impact
our business. If we are unable to develop, adapt to, access or acquire technology that meets or exceeds industry standards on a timely and cost-effective basis, which could
materially and adversely impact our business, financial condition, results of operations and cash flows.
For example, in Kazakhstan we have developed an online-based platform that integrates Kazakhstan government databases with our services, making our service offerings
faster and more convenient than services without such integration. We do not control the relevant government databases and cannot guarantee that we will always have access to
such databases or proper functionality with such databases. For us to expand this type of integrated product outside of Kazakhstan, we would be reliant on similar databases being
available and able to integrate with our systems in the jurisdictions to which we expand, the availability of which will likely vary greatly among jurisdictions.
Other businesses we currently operate, or that we will establish in the future pursuant to our digital fintech ecosystem strategy, including our planned telecommunications
and media businesses, are also subject to rapid technological change.
Furthermore, many of our competitors are larger, more experienced and have greater resources to devote to the development of new technologies and services. If we are
unable to keep pace with their development efforts our customers may find our platforms and services less compelling, which could lead to customer losses or a reduction in the
revenue we generate from our product and service offerings.
Taxation Risks Related to Our International Operations
Global anti-offshore measures could adversely impact our business.
In 2013, the Organization for Economic Co-operation and Development ("OECD") and G20 countries accepted that existing international tax rules create opportunities for
base erosion and profit shifting. Pursuing solutions to this problem, the OECD and G20 countries adopted a 15-point Action Plan to Base Erosion and Profit Shifting ("BEPS"). The
BEPS package of measures represents a substantial revision of international tax rules. In light of the new measures, it is
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expected that profits will be reported where the economic activities that generate them are carried out and where value is created.
The Convention on Mutual Administrative Assistance in Tax Matters developed by the Council of Europe and the OECD in 1988 and amended by Protocol in 2010 has
now been signed by 141 jurisdictions (including Kazakhstan, Armenia and Cyprus). This convention requires competent authorities of jurisdictions-signatories to participate in the
exchange of information that is foreseeably relevant for the administration or enforcement of their domestic laws concerning taxes. In 2018 Kazakhstan joined the Standard for
Automatic Exchange of Financial Account Information (Common Reporting Standard) (the "CRS"). The CRS calls on jurisdictions to obtain information from their financial
institutions and automatically exchange that information with other jurisdictions on an annual basis.
The foregoing developments regarding global information exchange could complicate our tax planning as well as related business decisions and could possibly expose us
to significant fines and penalties and to enforcement measures, despite our best efforts at compliance, and could result in a greater than expected tax burden.
On November 24, 2016, the OECD published the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the "MLI") which introduces new
provisions to existing double tax treaties limiting the use of tax benefits provided thereby. As a minimum standard, the MLI implements a principal purposes test, under which
treaty benefits are disallowed if one of the principal purposes of the transaction or the structure was to obtain a tax benefit. The MLI was ratified by Cyprus on January 22, 2020, by
Kazakhstan on February 20, 2020 and by Armenia on September 25, 2023. Application of the MLI could potentially limit tax benefits granted under the double tax treaties of
Cyprus, Kazakhstan and Armenia.
Frequent tax law changes in regions where we conduct operations could adversely affect our business and the value of investments.
We are subject to a broad range of taxes and other compulsory payments, including, but not limited to, income tax, VAT and social contributions. Tax laws have been in
force for a short period relative to tax laws in more developed market economies, and the implementation of these tax laws is still unclear or inconsistent. The tax laws and
regulations in our regions outside the U.S. are subject to frequent changes, varying and contradicting interpretations, and inconsistent and selective enforcement. Currently the
Government of the Republic of Kazakhstan is developing new Tax Code which can significantly affect our business.
The Transfer Pricing Law of the Republic of Kazakhstan, dated July 5, 2008, provides for three-level transfer pricing documentation, including a country-by-country report
(CbCR). Under the mandatory filing requirements or CbCR in Kazakhstan, if a corporation reaches the reporting threshold established for the group's consolidated revenue (e.g.
EUR 750 million) it may be required to submit relevant CbCR reports. The mentioned threshold was reached in FY2024, as such we are required to prepare and submit CbCR
during FY2025.
Kazakhstan transfer pricing legislation may require pricing adjustments and impose additional tax liabilities.
Under Kazakhstan transfer pricing legislation, the burden of proving market prices, as well as keeping specific documentation, lies with the taxpayers. In certain
circumstances, the local tax authorities may apply the transfer pricing rules and methods in cases where the rules are formally not applicable, claiming additional tax charges
calculated using the transfer rules but based on other tax concepts (e.g., anti-avoidance rules, lack of economic justification of expenses, etc.). Our subsidiaries in Kazakhstan could
become subject to transfer pricing tax audits by the Kazakhstan tax authorities in the foreseeable future. As a result of such audits, the tax authorities could challenge the level of
prices applied by us under "controlled" transactions (including certain intercompany transactions) or challenge the methods used to prove prices applied by us, and as a result we
may accrue additional tax liabilities. If additional taxes are assessed with respect to these matters, they could have a material adverse effect on our business, financial condition,
cash flows, and results of operations.
Uncertainties and ongoing changes in Kazakhstan's tax regime may have an adverse impact on our business.
Kazakhstan's tax regime is subject to ongoing changes, resulting in uncertainties in the interpretation and application of its tax laws. For example, the Kazakhstan
government has taken steps to promote investment in its financial markets, including providing a preferential tax regime within the AIFC established by the Constitutional Law of
the Republic of Kazakhstan dated December 7, 2015 "On the Astana International Financial Center" (the "AIFC Framework Law"). Among other tax benefits, there is an exemption
from corporate income tax on commission income earned by an AIFC-registered member from rendering defined financial services in the AIFC. It is currently unclear whether an
AIFC-registered member is eligible for the tax benefits if, for example, it renders services online through employees working outside the AIFC. As a result of these uncertainties,
the availability of these new tax exemptions to us is currently unclear.
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Another tax risk we face is associated with "corporate tax residency" in Kazakhstan. Notably, when an entity is recognized as a Kazakhstan tax resident it is obligated to
register with the Kazakhstan tax authorities, calculate and pay Kazakhstan income tax on its worldwide income and comply with other tax-related rules established for Kazakhstan
entities. There is uncertainty as to how these residency criteria will be treated and applied by the Kazakhstan tax authorities to FRHC. There is also uncertainty regarding
determination of the "beneficial owner" of income under Kazakhstan tax law, for purposes of double-tax treaties. In particular, to date, there are still no officially approved
requirements for the documentation to be obtained from the recipient of income claiming beneficial owner status. . In case one of our non-Kazakhstan subsidiaries is not able to
provide evidence that it is a beneficial owner of the income which it receives from one of our Kazakhstan subsidiaries, benefits under a double tax treaty will not be applicable, as a
result of which the Kazakhstan subsidiary would be required to withhold taxes from such payment at the rate provided by the Tax Code of Kazakhstan without any reductions or
exemptions from taxation in Kazakhstan. This could lead to additional tax liabilities for our companies.
More generally, Kazakhstan tax legislation is subject to frequent changes, varying and potentially contradicting interpretations and inconsistencies. There can be no
assurance that Kazakhstan tax legislation will be amended in the future in a manner that makes our tax planning more predictable. Further, the introduction of new taxes,
amendments to current taxation rules, or new interpretations of existing tax law may have a substantial impact on the overall amount of our tax liabilities. As a result, there is no
assurance that we will not be required to make substantially larger tax payments in the future, which may adversely affect our business, financial condition, results of operations
and cash flows.
Changes in regulations related to taxes on stock transfers and other financial transactions could reduce the volume of market transactions and impact our business.
Changes to laws or regulations, such as tax laws, could also have a disproportionate impact on our business or profitability, based on the way those laws or regulations are
applied to us due to our corporate structure. For example, the current U.S. presidential administration has proposed tax policy ideas that if enacted would, among other things,
increase the corporate tax rate and the U.S. tax rate on Global Intangible Low Taxed Income ("GILTI").
Because of certain tax advantages we realize in certain jurisdictions where we operate, the proposed changes in the GILTI tax rate by the current U.S. administration,
which have not yet been adopted and may change significantly before being implemented, if at all, could result in significantly higher tax burdens on us in the U.S., which could
offset some of the favorable tax advantages we realize in some of the jurisdictions where we conduct business.
Risks Related to Our Corporate Structure and Internal Operations
As a diversified holding company with few operations of its own, FRHC is reliant on the operations of our subsidiaries to fund its holding company operations.
Our operations are conducted primarily through the subsidiaries of Freedom Holding Corp., and Freedom Holding Corp.'s ability to generate cash to fund its operations
and expenses, to pay dividends or to meet debt service obligations is highly dependent on the earnings and the receipt of funds from our subsidiaries through dividends or
intercompany loans. Deterioration in the financial condition, earnings or cash flow of our subsidiaries for any reason, including the risks discussed herein as applicable or the
occurrence of such events to any such subsidiary, could limit or impair their ability to pay such distributions to Freedom Holding Corp. Additionally, to the extent our subsidiaries
are restricted from making such distributions under applicable laws or regulations or under the terms of financing arrangements or are otherwise unable to provide funds to the
extent of Freedom Holding Corp.'s needs, there could be a material adverse effect on our business, financial condition, cash flows and results of operations.
As a "controlled company" under Nasdaq rules, we qualify for exemptions from certain corporate governance requirements that may adversely affect our stock price.
Timur Turlov controls a majority of the voting power of our outstanding common stock. Accordingly, we qualify as a "controlled company" within the meaning of Nasdaq
corporate governance standards. Under Nasdaq rules, a company of which more than 50% of the voting power is held by one individual is a "controlled company" and may elect
not to comply with certain corporate governance standards, including the requirements that:
•
a majority of its board of directors consist of independent directors;
•
its nominating and corporate governance committee and compensation committee be composed entirely of independent directors;
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•
each committee have a written charter addressing such committee's purpose and responsibilities; and
•
an annual evaluation of the nominating and corporate governance committee and compensation committee be performed.
We currently utilize an exemption to allow Timur Turlov to sit on our nominating and corporate governance committee. The charters for each of our board committees
provide for annual performance evaluations. Currently we have a majority of independent directors on our board of directors.
Our status as a controlled company and resulting available exemptions from corporate governance standards could make our common stock less attractive to some
investors or otherwise harm our stock price.
The interests of our controlling shareholder may conflict with those of other shareholders.
Timur Turlov, our chief executive officer and chairman of our board, beneficially owns 69.9% of our outstanding common stock. He currently has voting control of FRHC
and can control the outcome of matters submitted to stockholders for approval. In addition, Mr. Turlov has the ability to control our management and affairs as a result of his
position as our chief executive officer, chairman of our board and his ability to control the election of our directors. Mr. Turlov also has interests in other companies, certain of
which, in particular FST Belize, have conducted significant amounts of business with our company and have significantly contributed to our revenues. Such related party
transactions give increase to a risk of the conclusion of transactions on terms less favorable than could be obtained in arm’s length transactions. The interests of Mr. Turlov could
conflict with those of other stockholders. Any such conflict could have a material adverse effect on our business, financial condition, cash flows, results of operations and prospects.
Mr. Turlov is prohibited from membership on the audit committee of our board under the terms of such committee's charter. As majority shareholder, Mr. Turlov owes
fiduciary duties to minority shareholders under Nevada law. Mr. Turlov also owes fiduciary duties to the Company as a board member and officer. However, Nevada corporate law
can be viewed as more protective of officers and directors than the corporate laws of other U.S. state jurisdictions, and it therefore may not provide the same level of redress as
other U.S. state corporate laws.
Civil liability may be difficult or impossible to enforce against us.
Certain of our directors, substantially all of our officers, and our controlling shareholder reside outside the U.S., and a substantial portion of our assets are located outside
the U.S. in jurisdictions that are not parties to treaties or other agreements with the U.S. for the mutual enforcement of U.S. court judgments. As a result, it may be difficult or
impossible for investors to enforce against us or such persons judgments of U.S. courts.
For example, the Civil Procedure Code of Kazakhstan, which became effective on January 1, 2016, provides that Kazakhstan courts should recognize and enforce foreign
court judgments only if provided for by Kazakhstan law or an international treaty to which Kazakhstan is a party (based on reciprocity). Kazakhstan is not a party to any multilateral
or bilateral treaties with the U.S. or the UK (or most other western jurisdictions) for the mutual enforcement of court judgments, and, accordingly, there is a risk that a judgment
obtained from a court in New York or England would not be enforceable in Kazakhstan courts. Each of Kazakhstan, the U.S. and the UK are, however, parties to the 1958 New
York Convention on Recognition and Enforcement of Arbitral Awards (the "Convention"), and, accordingly, an arbitral award under the Convention should generally be
recognized and enforceable in Kazakhstan provided the conditions to enforcement set out in the Convention and applicable Kazakhstan laws are met. The Civil Procedure Code of
Kazakhstan establishes the procedure for the enforcement of foreign arbitral awards.
We have identified material weaknesses in our internal control over financial reporting in the past, and we may identify material weaknesses in the future or fail to
establish and maintain effective internal control over financial reporting, which could have a material adverse effect on our business and stock price.
We are required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), which requires
management to certify financial and other information in our quarterly and annual reports and to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act.
Section 404 of the Sarbanes-Oxley Act requires management to provide an annual report on the effectiveness of internal control over financial reporting. Additionally, we are
required to have our independent registered public accounting firm report on the effectiveness of our internal control over financial reporting. Our independent registered public
accounting firm needs to issue an adverse report if there is a material weakness in our internal control over financial reporting.
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A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
In preparing our financial statements in connection with our Annual Report on Form 10-K for the year ended March 31, 2023, we previously identified material
weaknesses in our internal control over financial reporting. Management identified a material weakness due to a deficiency in one of the principles associated with the Control
Environment component of the COSO framework, specifically relating to a lack of a sufficient complement of qualified technical accounting and financial reporting personnel to
perform control activities in support of preparing the financial statements in accordance with U.S. GAAP.
The Control Environment material weakness contributed to other material weaknesses, either individually or in the aggregate, related to the design of our controls over:
•
the application of U.S. GAAP to complex transactions;
•
the classification of certain loans and deposits from banking institutions within the Consolidated Statements of Cash Flows;
•
the classification of certain interest income from margin lending within the Consolidated Statements of Operations and Other Comprehensive Income;
•
the classification of funds received under the Kazakhstan state program for financing of mortgage loans “7-20-25” within the Consolidated Statements of Cash Flows; and
•
the review and timely identification of misstatements in the notes to the Consolidation Financial Statements.
While we have remediated these material weaknesses as of March 31, 2024, we cannot assure you that these or other measures will prevent future material weaknesses
from occurring.
As part of our remediation of the material weakness identified above we (a) provided training on U.S. GAAP to employees responsible for preparing the Consolidated
Financial Statements; (b) implemented new or modified existing controls over the preparation of the financial statements and (c) hired additional employees and external consultants
with appropriate qualifications and expertise in U.S. GAAP and in designing, maintaining and improving procedures and controls focused on the application of U.S. GAAP.
Failure to maintain effective internal control over financial reporting by us going forward could adversely impact our ability to report our financial position, results of
operations and cash flows on a timely and accurate basis. If our financial statements are inaccurate, investors may not have a complete understanding of our operations and we
could face the risk of stockholder litigation. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock
exchange on which our common stock is listed, the SEC or other regulatory authorities. Ineffective internal control over financial reporting could also cause investors to lose
confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
Risks Related to Ownership of Our Securities
The price of our common stock has fluctuated historically and may be volatile.
The market price of our common stock may fluctuate significantly. Among the factors that could affect our stock price are:
•
the Russia-Ukraine conflict and related sanctions and their direct and indirect effects;
•
geopolitical and civil unrest in any of the markets in which we operate;
•
planned or completed acquisitions or disposals;
•
investigations, lawsuits, enforcement actions, and other claims by third parties or governmental authorities;
•
new regulatory pronouncements and changes in regulatory guidelines;
•
actual or anticipated fluctuations in our quarterly operating results;
•
changes in market valuations or earnings of similar companies;
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•
any future sales of our common stock or other securities;
•
material breaches of regulations by our employees;
•
changes in securities analysts' estimates of our financial performance or lack of research coverage and reports by industry analysts;
•
domestic and international economic factors unrelated to our performance;
•
pandemic and epidemic disease;
•
announcements by us of significant impairment charges;
•
investor perception of us and our industry;
•
announcements by us or our competitors of significant contracts, acquisitions, dispositions or strategic partnerships; and
•
speculation in the press or investment community.
Stock markets can experience extreme volatility unrelated to the operating performance of any particular company. These broad market fluctuations may adversely affect
the trading price of our common stock. In the past, following periods of volatility in the market price of a company's securities, class action litigation has often been instituted
against the affected company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management's attention and resources, which
could materially and adversely affect our business, financial condition, results of operations and cash flows.
Future offerings of securities which would rank senior to our common stock may adversely affect the market price of our common stock.
Our Articles of Incorporation authorize our board of directors to fix the relative rights and preferences of our 20,000,000 shares of authorized preferred stock, without
approval from our stockholders. This could affect the rights of our common stockholders regarding, among other things, voting, distributions, dividends and liquidation. We could
also use the preferred stock to deter or delay a change in control of the Company that may be opposed by our management, even if the transaction might be favorable to our
common stockholders.
If, in the future, we issue debt or equity securities that rank senior to our common stock, it is possible that such securities will be governed by an indenture or other
instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights,
preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will
bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk that future offerings
might reduce the market price of our common stock and dilute the value of their stock holdings in the Company.
We do not intend to pay dividends on our common stock for the foreseeable future and, consequently, our stockholders’ ability to achieve a return on their investment
will depend on appreciation in the price of our common stock.
We currently intend to use our future earnings to repay debt, to fund our growth, to develop our business, for working capital needs and for general corporate purposes. We
are not likely to pay dividends on our common stock for the foreseeable future, and the success of an investment in our common stock will depend upon any future appreciation in
the value of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain its current value.
Payments of dividends, if any, are at the sole discretion of our board of directors after taking into account various factors, including general and economic conditions, our
financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax, and regulatory restrictions and
implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. In addition, our
operations are conducted almost entirely through our subsidiaries. As such, to
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the extent that we determine in the future to pay dividends on our common stock, none of our subsidiaries will be obligated to make funds available to us for the payment of such
dividends. Further, Nevada law imposes additional requirements that may restrict our ability to pay dividends to holders of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy
Cybersecurity is a critical component of our risk management program, given the increasing reliance on technology and potential cyber threats. Our Chief Technology
Officer is leading cybersecurity risk management improvement initiatives as part of our Technology Strategy to 2025.
Our overall cybersecurity risk management objective is to avoid or minimize the impacts of threat events that could lead to penetration, disruption or misuse of our
information systems and to ensure compliance with applicable legal and contractual obligations. Our cybersecurity risk management improvement initiatives are informed by
regulatory guidance, industry standards, threat intelligence feeds, internal and external audits, external consultants, and insights from cybersecurity community. Experts from our
Technology Leadership Centre, under the supervision of the Chief Technology Officer, periodically review our cybersecurity risk management processes to address changing
threats and conditions.
We leverage people, processes, and technology as part of our efforts to manage and maintain cybersecurity. We employ a variety of preventative and detective tools
designed to monitor, block, and provide alerts regarding suspicious activity, as well as to report on suspected threats. We have established processes and systems designed to
mitigate technology risk, including our corporate IT control system, to work towards a consistent minimal level of cybersecurity across all our subsidiaries. We engage in periodic
or regular monitoring and assessments of our technology key infrastructure and processes using internal staff and third-party specialists. We assess and manage risks, including IT
and cybersecurity risks, associated with external service providers and our supply chain. Our audit procedures include testing of IT and cybersecurity controls to ensure reliability.
The type, maturity, and formalization of controls in our subsidiaries is informed by the level of anticipated threats and their impacts associated with each organization.
We maintain an IT and cybersecurity incident management process that provides a framework for responding to actual or potential cybersecurity incidents, engagement of
third parties, including external incident response professionals, and timely reporting of incidents with material impact or reasonably likely to materially impact to our Chief
Technology Officer, Chief Financial Officer, who inform other senior management members and our board of directors as appropriate. The cybersecurity incident management
process facilitates coordination across multiple areas of our organization.
Governance
Our cybersecurity risk governance model consists of three lines of defense. Our Chief Technology Officer, supported by the experts in our Technology Leadership Centre
and IT and cybersecurity teams at our subsidiaries represent the first line. Our Chief Risk Officer, supported by corporate and subsidiary risk teams, and Risk Committee of the
board of directors represent the second line. The third line consists of our Controlling Department, subsidiary internal audit functions and Audit Committee of the board of
directors.
Our Chief Technology Officer has over 15 years of information technology experience, including over a decade in leadership positions. He is supported by IT,
cybersecurity and data protection professionals from our Technology Leadership Centre with extensive IT, cybersecurity and data protection education and experience, including
from regulatory agencies. At the subsidiary level our IT and cybersecurity management team has varying degrees of technology, operational and cybersecurity experience,
including experience in mitigating and responding to cybersecurity incidents and managing cyber risks.
Our Chief Technology Officer leads cybersecurity risk management improvement initiatives as part of our Technology Strategy to 2025, coordinated and monitored by
experts from our Technology Leadership Centre. In contrast, the program's implementation at our subsidiaries is largely delegated to the subsidiary staff. Significant subsidiaries
provide updates on their implementation progress, significant cybersecurity incidents, and risks to their senior executives and the experts from our Technology Leadership Centre.
The experts periodically consolidate and analyze information about the cybersecurity risk management program, cybersecurity and privacy incidents and risks, key initiatives, and
other matters relating to cybersecurity processes for reporting to our Chief Technology Officer and our Chief Risk Officer. Both
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officers periodically report to the Risk Committee of the board of directors. Our Chief Technology Officer also regularly reports directly to the board of directors including on
cybersecurity initiatives, notable incidents, and risks. Our Chief Risk Officer also periodically reports directly to the board of directors including on cybersecurity incidents and
risks.
Our overall cybersecurity risk management is overseen by the Risk Committee of our board of directors who assists our senior management and the board of directors with
their overall risk management responsibilities. Our audit procedures include testing of IT and cybersecurity. Our financial reporting department ensures financial performance
reliability under U.S. regulatory requirements and provides an independent objective assurance to evaluate the effectiveness of IT and cybersecurity controls and governance. The
department is directly subordinate to the Audit Committee of our board of directors.
Notwithstanding our defensive measures and processes, the threats posed by IT failures and cyber-attacks are always present. While our subsidiaries have experienced
cybersecurity incidents in the past, no cybersecurity incidents have had, either individually or in the aggregate, a material adverse effect on our business, financial condition, cash
flows or results of operations as of the date of this report.
We do not maintain insurance policies to mitigate cybersecurity risks because such insurance may not be available
or may be more expensive than the perceived benefit. Further, any insurance that we may purchase to mitigate certain risks
may not cover all losses.
For further discussion of risks from cybersecurity threats, see the section captioned “Risks Related to Information
Technology and Cybersecurity” in Item 1A. Risk Factors.
Item 2. Properties
We lease and own a number of properties across our business segments: Brokerage, Banking, Insurance, and Other, through which we conduct our operations.
We currently lease office space for 265 retail, executive, administrative and operational facilities in Kazakhstan, Cyprus, Uzbekistan, Azerbaijan, Armenia, the United
States, Turkey, Germany, Spain, France, Greece and Kyrgyzstan. Our total aggregate leased square footage is approximately 562,380 square feet. We own 20 buildings consisting
of an aggregate of approximately 287,913 square feet, in Kazakhstan and Cyprus.
In our Insurance and Bank segments collectively, as of March 31, 2024, we owned 16 buildings consisting of approximately 129,992 square feet and we leased offices
consisting of an aggregate of 112,688 square feet. Our Insurance and Bank segment properties include our principal executive offices, which are located at "Esentai Tower" BC,
Floor 7, 77/7 Al Farabi Ave., Almaty, Kazakhstan 050040, and which are leased.
In our Other segment we own two buildings consisting of approximately 83,014 square feet. As of March 31, 2024, the area of leased offices in our Other segment was
254,598 square feet.
In our Brokerage segment we own 2 buildings consisting of approximately 74,907 square feet. As of March 31, 2024, the area of leased offices in our Brokerage segment
was 195,094 square feet. Our principal property in our Brokerage segment is our office building located at Christaki Kranou 20, Freedom Tower, 5th floor, 4041 Limassol, Cyprus
with an area of 6,959 square meters (approximately 74,906 square feet), which we own. On May 10, 2023, our subsidiary Freedom EU signed a contract for the construction of
Elysium Tower, a building in Limassol, Cyprus, which is planned to be a new office building for our Freedom EU subsidiary. Also, we rent our offices in the United States, which
are located at 40 Wall Street, 57th and 58th floor, New York, and comprise 15,250 square feet.
We consider our properties to be in good condition. While we believe our properties are adequate for our current needs, we have engaged in a number of business
acquisitions in the past, and future acquisitions may require us to add additional space or dispose of existing space. For additional information regarding our office lease
commitments see Note 27 "Leases" in the notes to our consolidated financial statements contained in Part II Item 8 of this annual report.
Item 3. Legal Proceedings
The financial services industry is highly regulated. In recent years, there has been an increasing incidence of litigation involving the brokerage industry, including
customer and shareholder class action suits that generally seek substantial damages, including in some cases punitive damages. Compliance and trading problems that are reported
to federal, state and provincial regulators, exchanges or other self-regulatory organizations by dissatisfied customers are investigated by such regulatory bodies, and, if pursued by
such regulatory body or such customers, may increase to the
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level of arbitration or disciplinary action. We are also subject to periodic governmental and regulatory audits and inspections that might result in fines or other charges.
From time to time, we or our subsidiaries may be named as defendants in various routine legal proceedings, claims, and regulatory inquiries arising out of the ordinary
course of our business. Management believes that the results of these routine legal proceedings, claims, and regulatory matters will not have a material adverse effect on our
financial condition, or on our operations and cash flows. However, we cannot estimate the legal fees and expenses to be incurred in connection with these routine matters and,
therefore, are unable to determine whether these future legal fees and expenses will have a material impact on our operations and cash flows. It is our policy to expense legal and
other fees as incurred.
Estate of Toleush Tolmakov Litigation
The Estate of Toleush Tolmakov (the “Estate”) commenced a legal action against Freedom Holding Corp., and our subsidiary FFIN Securities, Inc. in the Third Judicial
District Court of Salt Lake County, State of Utah in December 2021. This proceeding relates to cash distributions arising from the 2011 sale of a subsidiary of BMB Munai, Inc.
(the predecessor to Freedom Holding Corp.) and shares of common stock of the Company belonging to Toleush Tolmakov, who was a shareholder of the Company at the time he
died in 2011, and a now defunct British Virgin Islands corporation, in which Mr. Tolmakov may have had an interest. The Company has held the relevant assets since Mr.
Tolmakov's death because it does not know to whom they should be distributed and no party has yet established legal right of ownership of the assets. On October 21, 2022, in
accordance with an order entered into by the Third Judicial District Court of Salt Lake County, we deposited an amount of $8.4 million into the registry of the court, representing the
amount of cash distributions claimed by the Estate. The Company continues to deny any and all liability in this matter. We are currently in settlement discussions with the Estate.
We do not believe that the outcome of this legal action could be material to our financial condition.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the Nasdaq Capital Market under the symbol "FRHC". Our common stock also trades on the KASE under the symbol "US_FRHC".
Holders
As of May 13, 2024, we had approximately 479 shareholders of record. The number of record holders was determined from the records of our stock transfer agent and
does not include beneficial owners of common stock whose shares are held in street name (i.e., in the names of various securities brokers, dealers, and registered clearing houses or
agencies or similar institutions).
Dividends
We have not declared or paid a cash dividend on our common stock for the past two fiscal years. Any payment of cash dividends on stock in the future will be at the
discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual and legal
restrictions and other factors deemed relevant by our board of directors. We currently intend to retain any future earnings to fund the operation, development and expansion of our
business, and therefore we do not anticipate paying any cash dividends on common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
See "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in Part III Item 12 of this annual report for our equity
compensation plan information.
Stock Performance Graph
The graph and table below compares our cumulative 5-year total shareholder return on common stock with the cumulative total returns of the S&P 500 index and the S&P
500 Diversified Financials index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from
March 31, 2019 to March 31, 2024.
The comparisons shown in the graph and table below are based upon historical data. The stock price performance shown in the graph and table below is not necessarily
indicative of, nor is it intended to forecast, the future performance of our common stock
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3/19
3/20
3/21
3/22
3/23
3/24
Freedom Holding Corp.
100
163
613
685
826
811
S&P 500
100
91
140
160
145
185
S&P 500 Diversified Financials
100
89
142
170
148
188
The performance graph and table shall not be deemed "soliciting material" or to be "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the
liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act.
Recent Sales of Unregistered Equity Securities
During fiscal 2024, we did not sell any unregistered shares of our equity securities.
Issuer Repurchases of Equity Securities
We did not repurchase any equity securities of the Company during fiscal 2024.
Item 6. [Reserved]
Item 7. 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 of Freedom Holding Corp.
("FRHC") and its consolidated subsidiaries in Part II Item 8 of this annual report as well as the information set forth in Part I Item 1 "Business" of this annual report. Except
where the context otherwise requires or where otherwise indicated, references herein to the "Company," "Freedom," "we," "our," and "us") mean Freedom Holding Corp. together
with its consolidated subsidiaries. This discussion contains certain forward-looking statements that involve known and unknown risks, uncertainties, and other factors as described
under the heading "Special Note About Forward-Looking Information" in this annual report. Actual results could differ materially
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from those projected in any forward-looking statements. For additional information regarding these risks and uncertainties, see the disclosure under the heading "Risk Factors" in
Part I Item 1A of this annual report.
This discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources for fiscal 2024, 2023 and
2022.
OVERVIEW
Freedom Holding Corp. is organized under the laws of the State of Nevada and acts as a holding company for all of our operating subsidiaries. Our subsidiaries engage in a
broad range of activities including securities brokerage, securities dealing for customers and for our own account, market making activities, investment research, investment
counseling, investment banking services, retail and commercial banking, insurance products, payment services, and information processing services. We also own several ancillary
businesses which complement our core financial services businesses, including telecommunications and media businesses in Kazakhstan that are in a developmental stage.
Our business was founded in order to provide access to the international capital markets for retail brokerage clients. Our business has grown rapidly in recent years. We are
pursuing a strategy to become a leader in the financial services industry, serving individuals and institutions desiring enhanced market access to international capital markets using
state of the art technology platforms for their brokerage and banking needs.
Our principal executive office is in Almaty, Kazakhstan. We have a presence in Kazakhstan, Uzbekistan, Kyrgyzstan, Cyprus, Germany, the United Kingdom, Greece,
Spain, France, Poland, Austria, Bulgaria, Italy, Netherlands, Belgium, the United States, Turkey, Armenia, Azerbaijan, and the United Arab Emirates. We divested our Russian
subsidiaries in February 2023. Our subsidiaries in the United States include an SEC- and FINRA-registered broker dealer. As of March 31, 2024, we had 6,197 employees, 161
offices (of which 46 offered brokerage services, 52 offered insurance services, 20 offered banking services and seven offered other financial and non-financial services) and 530,000
retail brokerage customer accounts.
Exclusion of Russian subsidiaries presented as discontinued operations
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this annual report focuses exclusively on the continuing
operations of the Company in accordance with U.S. GAAP. The financial results, operating performance, and liquidity discussed herein explicitly exclude our former Russian
subsidiaries, which were divested in February 2023 and have been classified as discontinued operations for fiscal 2023. The prior periods discussed in this annual report have also
been recasted for discontinued operations. For a comprehensive understanding of the Company's overall financial position, results, and the impact of the discontinued operations,
we encourage you to refer to the accompanying financial statements and relevant notes.
Inclusion of insurance companies under the pooling of interest method due to being under common control
As of May 17, 2022, the Company's financials included the acquisition of two insurance companies in Kazakhstan: Freedom Life, a life insurance company, and Freedom
Insurance, a direct insurance carrier excluding life, health, and medical coverage. These entities have been considered under common control with the Company since 2018. Prior to
the Company's acquisition of these companies, each was wholly owned by the Company's controlling shareholder, chairman and chief executive officer, Timur Turlov, who had
previously acquired Freedom Life and Freedom Insurance from a non-related party on February 28, 2018, and August 22, 2018, respectively. The two companies are under
common control with the Company since the dates when they were acquired by Timur Turlov. The financial results, operating performance, and liquidity discussed herein explicitly
include two insurance companies above-mentioned and prior periods have been recasted accordingly.
Change in reportable segment
Effective from the beginning of the fiscal year 2024, the Company has undergone a strategic realignment in its business management and reporting structure. Our Chief
Executive Officer, Chief Financial Officer and President, collectively acting as the Chief Operating Decision Maker (CODM), have initiated a new approach to managing our
operations. This approach is based on a more segmented analysis of our business activities, allowing for more precise operating decisions and performance evaluations.
Change in accounting principle
On April 1, 2023, we adopted new accounting guidance which requires entities to estimate and recognize an allowance for lifetime expected credit losses for our financial
assets in scope. Previously, an allowance for credit losses was recognized based on probable incurred losses. The results for reporting periods beginning on or after April 1, 2023 are
presented under ASC 326, while prior periods amount continue to be reported in accordance with previously applicable
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GAAP. For more information regarding adoption of new standard, see "Recent accounting pronouncements" in Note 2 "Summary of Significant Accounting Policies" of this annual
report.
Summary of Results of Operations
The highlights of our consolidated results for fiscal 2024 are as follows:
•
We had total revenues, net of $1,635.1 million for fiscal 2024, as compared to $795.7 million for fiscal 2023, respectively. The increase from fiscal 2023 and 2024 was
primarily attributable to the following:
◦
Our interest income for fiscal 2024 was $828.2 million, representing an increase of $533.5 million, or 181%, compared to fiscal 2023. The increase was primarily attributable
to an increase of interest income on trading securities. Interest income on loans to customers and margin loans to customers also increased.
◦
Our fee and commission income for fiscal 2024 was $440.3 million, an increase of $113.1 million, or 35%, compared to fiscal 2023. The increase was mainly attributable to
increases in fee and commission income from brokerage services and commission income from payment processing.
◦
Our net gain on trading securities for fiscal 2024 was $133.9 million, an increase of $62.8 million, or 88%, compared to fiscal 2023. The majority of the net gain for fiscal
2024 was attributable to appreciation during the course of the fiscal year of Kazakhstan sovereign bonds held in our proprietary portfolio.
◦
Our insurance underwriting income for fiscal 2024 was $264.2 million, an increase of $148.8 million or 129%, compared to fiscal 2023. The increase was driven by the
expansion of our insurance operations and increase in the number of active insurance contracts from 681,667 as of March 31, 2023 to 807,173 as of March 31, 2024.
•
We had net income of $375.0 million for fiscal 2024, as compared to $205.6 million for the fiscal year ended March 31, 2023.
•
Our total assets increased to $8.3 billion as of March 31, 2024 from $5.1 billion as of March 31, 2023. Of our total assets:
◦
Our proprietary trading portfolio increased by 53% to $3,688.6 million as of March 31, 2024 from $2,412.6 million as of March 31, 2023.
◦
The loan portfolio of Freedom Bank KZ increased by 68% to $1,374.1 million as of March 31, 2024 from $819.4 million as at March 31, 2023.
•
We had approximately 530,000 total retail brokerage customers as of March 31, 2024 as compared to approximately 370,000 as of March 31, 2023.
•
We had approximately 3,360,000 bank accounts at our Freedom Bank KZ subsidiary as of March 31, 2024 as compared to approximately 1,662,000 as of March 31, 2023
The operating results for any period are not necessarily indicative of the results that may be expected for any future period.
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. The key factors affecting our business and the results
of operations include, in particular: market and economic conditions, the growth of retail brokerage activity in our key markets, the effects of the Russia-Ukraine conflict,
acquisitions and divestitures, the entry into new business areas and markets, our transactions with related parties, our arrangements with market maker customers and governmental
policies. Each of these factors is discussed in more detail below.
Market and Economic Conditions
Performance in the financial services industry is heavily influenced by the overall strength of economic conditions and financial market activity, which generally have a
direct and material impact on our results of operations and financial condition. These conditions are a product of many factors, which are mostly unpredictable and beyond our
control, and may affect the decisions made by financial market participants.
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Changes in economic and political conditions, including economic output levels, interest and inflation rates, employment levels, prices of commodities including oil and
gas, exogenous market events, consumer confidence levels, and fiscal and monetary policy can affect market conditions. While many global financial markets have shown signs of
improvement in recent years, uncertainty remains. A period of sustained downturns and/or volatility in the securities markets, and/or prolonged levels of increasing interest rates,
could lead to a return to increased credit market dislocations, reductions in the value of real estate, and other negative market factors which could significantly impair our revenues
and profitability.
Financial markets may also be impacted by political and civil unrest occurring in the Middle East, Eastern Europe, Russia and Ukraine, South America and Asia. Hostilities
between Russia and Ukraine have created global uncertainties around the spread of the conflict, and the potential use of nuclear weapons and have impacted global supply chains of
energy supplies and food supplies throughout the world. These issues could have unforeseen and negative impacts upon the financial markets and our company and its operations.
Growth of Retail Brokerage Activity in Our Key Markets
The growth of our business has been driven to a large extent by growth in retail brokerage activity in our key markets. Historically, these markets have included
Kazakhstan, Russia and certain other Eastern Europe and Central Asia jurisdictions. Retail brokerage activity in our key markets has grown rapidly in recent years. Our total number
of retail brokerage customer increased from approximately 250,000 as of March 31, 2022 to approximately 370,000 as of March 31, 2023, to approximately 530,000 as of
March 31, 2024. Internally, we designate "active customers" as those in which at least one transaction occurs per quarter. For the year ended March 31, 2024, we had approximately
96,906 active customers. The increases in the number of our customers have in turn contributed to increases in our customer liabilities over these periods. We currently regard our
key markets to be Kazakhstan, Europe and other Central Asian jurisdictions, and we are actively seeking to decrease the amount of our clients located in Russia.
Russia-Ukraine Conflict
In February 2022, Russia launched a military offensive against Ukraine, which has resulted in a protracted conflict. The war is ongoing, and it is difficult to predict how
long it will last. The economies of Russia, Ukraine and the surrounding region, the global economy generally and the Company specifically have been adversely affected by the
conflict.
In response to the Russia-Ukraine conflict, numerous governments, including those of the United States, the EU and the United Kingdom have imposed an extensive range
of additional economic sanctions on Russia, certain financial institutions, business enterprises, and key persons in Russia or deemed to be enabling the Russia-Ukraine conflict. The
imposed sanctions significantly expand the sanctions first imposed on Russia following the 2014 Russian invasion of Ukraine and its annexation of the Crimea region of Ukraine. In
addition, many businesses are adopting a cautious approach to sanctions and export compliance matters, implementing internal policies that are more restrictive than strictly
required by the applicable rules. The Russian government has issued countersanctions as a defensive measure targeted at "unfriendly states" which include the United States and
most countries that have imposed sanctions on Russia, as well as imposed restrictions on currency transactions of its own citizens.
Historically, a large portion of our revenues was derived from individuals and institutions in Russia, through accounts at our Russian subsidiaries, through accounts at our
non-Russian subsidiaries, and indirectly through accounts held by Russian customers of FST Belize. After careful consideration of the needs of our employees, customers and
shareholders and the best interests of our company, shortly after the onset of the Russia-Ukraine conflict we decided to divest our Russian subsidiaries, Freedom RU and Freedom
Bank RU. In February 2023, we divested our Russian subsidiaries, including all of their offices and employees. As of March 31, 2022, our Russian subsidiaries had 43 offices and
branches and 1,717 employees. Despite the divestiture of these subsidiaries, the scale of our overall business increased from fiscal 2022 to fiscal 2023. As of March 31, 2022, our
total number of employees was 1,704 and our total number of offices was 66. As of March 31, 2023, the number of employees increased to 3,689 and the number of our offices
increased to 126. The increase in the scale of our operations between the two fiscal years, despite the divestment of our Russian subsidiaries, was mainly attributable to our growth
during fiscal 2023 through several acquisitions. In addition, certain customers of our former Russian subsidiaries opened accounts at our non-Russian subsidiaries, which mitigated
the effects of the divestment of our Russian subsidiaries. Although we are actively seeking to decrease the amount of our clients located in Russia, the brokerage and banking
customers of our non-US subsidiaries continue to include non-sanctioned Russian persons through their accounts at non-Russian companies within our group. Many of these
Russian persons live outside of Russia. We do not regard the total number of Russian persons who are currently our clients to be material in the context of of our total customer base
of brokerage, banking and insurance customers. See "Regulation" in "Business" in Part I Item 1 of this annual report.
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Even before the Russia-Ukraine conflict began in February 2022, our clients were required to conform to strict anti-money laundering regulations and to undergo ongoing
sanctions screening to assure us that they were not subject to United States, EU or UK sanctions that would restrict our ability to do business with them or require us to take
regulatory compliance actions in response to their activities. However, the evolving sanctions and countersanctions in connection with the Russia-Ukraine conflict expose us to
heightened risks and challenges. The Russia-Ukraine conflict has also exposed us to a range of other heightened risks stemming from our actual or perceived connections with
Russia, including risks related to our business relationships with counterparties outside of Russia, including commercial banks, settlement banks, stock exchanges and regulators.
The Russia-Ukraine conflict has also had, and may continue to have, adverse effects on our results of operations related to proprietary trading. For example, during the
fiscal year ended March 31, 2023 we sold 7,500,000 shares in the SPB Exchange that we owned and realized a loss from the divestiture in the amount of $73.4 million. We attribute
this loss to a combination of factors, including the heightened market uncertainty and increased volatility caused by the Russia-Ukraine conflict and its geopolitical consequences.
On October 19, 2022, the President of Ukraine signed a decree enacting a decision of the National Security and Defense Council of Ukraine (NSDC) on the application of
personal special economic and other restrictive measures (sanctions) against more than 1,300 companies and more than 2,500 individuals. 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 the sanctions list. The lists of companies and individuals sanctioned
included both Freedom UA and Timur Turlov, in his personal capacity. In addition, the list included our two former Russian subsidiaries, which have since been divested. We note
that all persons on the Russian list of Forbes entrepreneurs for 2021 were included. In 2021 Mr. Turlov was on this Forbes list and still had Russian citizenship (in the appendix to
the presidential decree there is a reference to Mr. Turlov’s Russian citizenship. We note that, prior to June 2022, Mr. Turlov was a Russian citizen. As from June 2022, Mr. Turlov
renounced his Russian citizenship and is now a citizen of Kazakhstan. We have made a series of efforts seeking to have Freedom UA and Mr. Turlov removed from the sanctions
list. In addition, we have contributed approximately $11.7 million to humanitarian relief efforts in Ukraine through charitable funds. In view of the ongoing uncertainty related to
Freedom UA, the management of the Company has determined that starting from April 1, 2023 the Company does not maintain effective control over Freedom UA. Accordingly,
Freedom UA has not been consolidated in the Company's consolidated financial statements in this annual report.
Other than the Ukrainian sanctions described above, none of FRHC, nor any of our group companies, nor any of our current directors or senior management, is a target of
sanctions imposed by the United States, the EU or the UK.
As of the date of this annual report, the Russia-Ukraine conflict is ongoing and its effects on us continue to evolve. As such, we expect there will be further impacts and
unknown risks related to our business, the substance and reach of which we cannot fully anticipate.
Acquisitions and Divestitures
Divestiture of Former Russian Subsidiaries
Historically, a large portion of our trading volume has been derived from individuals and qualifying institutions in Russia, through accounts at our former Russian
subsidiaries and through non-Russian accounts. On February 28, 2023, we completed the divestiture of our former Russian subsidiaries. This divestiture has had an impact on our
business and results of operations. For more information see "Russia-Ukraine Conflict" above.
Acquisitions
Historically we have been active in pursuing non-organic growth through mergers and acquisitions. We expect this trend to continue in the future. In particular, we plan to
make acquisitions as part of our strategy to create a digital fintech ecosystem. Acquisitions and divestitures may have a material effect on our business and financial results. For
additional information see Note 1 "Description of Business" and Note 30 "Segment Information" in the notes to our consolidated financial statements contained in Part II Item 8 and
"Business" in Part I Item 1 of this annual report.
Acquisitions we completed in the 2023 and 2024 fiscal years include the following:
•
On April 26, 2023, we completed the acquisition of 100% of Internet-Tourism LLP, a Kazakhstan-based online aggregator for buying air and railway tickets, in order to
expand our presence in the digital services ecosystem in Kazakhstan. The purchase price paid for the acquisition was $2.0 million.
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•
On April 26, 2023, we completed the acquisition of 100% of Aviata LLP, a Kazakhstan-based online aggregator for buying air and railway tickets, in order to expand our
presence in the digital services ecosystem in Kazakhstan. The purchase price paid for the acquisition was $31.3 million.
•
As a result of a series of transactions, we effectively obtained control over Arbuz Group LLP ("Arbuz") on May 22, 2023, and as a result of other transactions we increased
our ownership interest to 94.73% by December 31, 2023, with Timur Turlov owning the remaining 5.27%. We acquired Arbuz to accelerate our growth in e-commerce
sector. For more details please refer to Note 28 Acquisitions of Subsidiaries in the notes to our consolidated financial statements contained in Part II Item 8.
•
On July 27, 2023, we completed the acquisition of 90% of Comrun LLP ("Rekassa"), a Kazakhstan-based digital service for cash transaction data management, in order to
expand our presence in the digital services ecosystem in Kazakhstan. The purchase price paid for the acquisition was $3.1 million.
•
On January 9, 2024, we completed the acquisition of 100% of DITel LLP ("DITel"), a provider of telecommunications services in Kazakhstan. The purchase price paid for
the acquisition was $1.1 million.
Deconsolidation of Freedom UA
On October 19, 2022, Freedom UA was included on the National Security and Defense Council of Ukraine sanctions list, which resulted in the blocking of the assets and
liabilities of Freedom UA and the suspension of its brokerage license. Due to the uncertainty of our ability to control Freedom UA, the Company believes that it no longer controls
Freedom UA starting April 1 2023, and accordingly it has not been consolidated in the financial statements starting from the first quarter of fiscal 2024.
Entry Into New Business Areas and Markets
On November 27, 2023, consistent with our strategy to build a digital fintech ecosystem, our Board of Directors approved a plan to expand our business by entering the
telecommunications market in Kazakhstan through our Freedom Telecom subsidiary. Execution of the new plan is expected to require significant capital expenditure, the specific
amount of which is currently uncertain. Total capital expenditures for the development of this business area are currently expected to be required for, among other things,
construction of network infrastructure, including a backbone network, obtaining frequency licenses or other rights to provide services where required and acquisitions of smaller
companies in the sector. See "Liquidity and Capital Resources - Capital Expenditures" below. We currently project that Freedom Telecom will incur losses for the first several
years of its operations based on assumptions included in our current financial model. While such losses, and increased debt service costs associated with funding the
implementation of the strategic plan, will have an adverse effect on our consolidated net income in the relevant periods, the current financial model provides that the successful
execution of the new plan will begin to have a significant positive impact on our consolidated net income starting in 2028. Our strategy and budget for Freedom Telecom are
currently being reassessed and are subject to revisions, which may be material.
As a further step in implementing our strategy to build a digital fintech ecosystem, on January 25, 2024, Freedom Telecom established a subsidiary, Freedom Media, in
Kazakhstan for the purposes of providing media content to customers in Kazakhstan. It is planned that Freedom Media will offer comprehensive access to an extensive portfolio of
television series, movies, documentaries, and exclusive content, covering a wide range of genres. Total capital expenditures required in connection with Freedom Media over the
next five years are estimated to be approximately $54 million. We project that Freedom Media will incur losses for the calendar years 2024 and 2025 with profitability forecasted to
commence from the calendar year 2026 onwards, based on assumptions included in our financial model.
Related Party Transactions
During the fiscal years ended March 31, 2024, 2023 and 2022, the Company engaged in various related party transactions, a substantial amount of which were conducted
with FST Belize, a corporation registered in and licensed as a broker dealer in Belize. FST Belize was formed in 2014 and is 100% owned by the Company's controlling
shareholder, chairman and chief executive officer, Timur Turlov. FST Belize is not part of our group of companies. Between 2022 and 2024, we actively reduced the scale of our
omnibus brokerage relationship with FST Belize and had terminated that relationship as of March 31, 2024.
During the fiscal years under review, we received fee and commission income from FST Belize, which had its own brokerage customers. FST Belize's customers included
a market maker institution with whom a significant amount of
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our customer orders were executed through FST Belize's omnibus brokerage account at Freedom EU. For the year ended March 31, 2023, $197.4 million, or 60% and for the year
ended March 31, 2024, $61.4 million or 14% of our total fee and commission income, was derived from the omnibus brokerage relationship between Freedom EU and FST Belize.
In fiscal 2024, 2023 and 2022, respectively, approximately 14%, 60% and 82% of our fee and commission income was derived from the omnibus brokerage relationship between
Freedom EU and FST Belize. We understand that the majority of the fee and commission income Freedom EU received from FST Belize during these fiscal years was attributable
to commissions paid by such market maker customer in connection with its trading. See "Market Maker Customer Arrangements" below. The decrease in fee and commission
income generated from FST Belize as a percentage of our total fee and commission income across the fiscal years ended March 31, 2024 and 2023 and 2022 was due to a decrease
in the volume of trading activity by FST Belize through its omnibus accounts with us across the respective periods, as a result of ongoing joint efforts by us and FST Belize to
encourage clients of FST Belize to open accounts at brokerage companies within our group, in particular Freedom Global and Freedom AR, and conduct ongoing trading through
such accounts, consistent with our strategy to reduce and ultimately eliminate our omnibus brokerage relationship with FST Belize. During the fiscal year ended March 31, 2024,
we estimate that approximately 30,000 customers of FST Belize migrated their brokerage accounts to brokerage companies within our group.
Interest income generated from FST Belize accounted for approximately 3%, 8% and 8% of our total interest income for the years ended March 31, 2024, 2023 and 2022,
respectively.
As of March 31, 2024, and March 31, 2023, our margin lending receivables due from FST Belize were $— million and $290.2 million, respectively. The decrease in
margin lending receivables due from FST Belize was attributable to a significant reduction in the volume of business we conducted involving FST Belize between the two dates,
consistent with our strategy to eliminate our omnibus brokerage arrangement with FST Belize. Historically, majority of this margin receivable was attributable to a market maker
customer.
As of March 31, 2024 and March 31, 2023, our customer liabilities included deposits from FST Belize held by Freedom EU related to brokerage services provided by
Freedom EU to FST Belize in the amounts of $0.8 million and $23.7 million, respectively. Part of these deposits as of March 31, 2024 represents funds retained as proceeds
following the closing of margin loan and short positions by FST Belize in connection with FST Belize closing its positions in its omnibus accounts of Freedom EU, consistent with
our strategy to eliminate our omnibus brokerage arrangement with FST Belize.
Our transactions with FST Belize 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. 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.
For additional information regarding our transactions with FST Belize, see Note 24 "Related Party Transactions" in the notes to our consolidated financial statements
contained in Part II Item 8 of this annual report.
Market Maker Customer Arrangements
We have derived a significant portion of our fee and commission income and interest income from margin loans to customers from trading activity of certain institutional
market maker customers with whom we internalize the execution of trades of our customers. We earn fee and commission income from such market maker customers for executing
trades as well as commissions paid by them for order flow, which is net compensation received from firms to which our broker-dealer subsidiaries send equity and options orders,
and fees for outstanding short sale positions. We also earn interest income on margin loans we grant to them. Our arrangements with such market maker customers have provided us
and our customers with a substantial liquidity pool for trading, including reduced settlement costs for us and enabling faster execution of trades for our customers. Prior to the end of
fiscal 2024, we had such an arrangement indirectly with an institutional market maker customer of our affiliate FST Belize, and since approximately the beginning of fiscal 2024 we
have had such an arrangement with an institutional market maker customer of our Freedom Global subsidiary. We receive a commission from such institutional market maker
customers for executing their trades, and in the past we earned such commissions indirectly through commissions we received from FST Belize. For the year ended March 31,
2024, we earned fee and commission income from the market maker customer at our Freedom Global subsidiary in an amount of $196.7 million, representing 12% of our total fee
and commission income for fiscal 2024. For the year ended March 31, 2024, we earned interest income from margin lending from the market maker customer at our Freedom
Global subsidiary in an amount of approximately $100 million, representing 6% of our total interest income from margin lending for fiscal 2024. For fiscal 2024, 2023 and 2022,
approximately 14%, 60% and 82% of our fee and commission income from our affiliate
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FST Belize, respectively, and we understand that the majority of such fee and commission income was attributable to execution of trades of a market maker institution with an
account at FST Belize.
Governmental Policies
Our earnings are and will be affected by the monetary, fiscal and foreign policies of the governments of the jurisdictions in which we operate, in particular Kazakhstan, the
European Union and the 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.
Key Income Statement Line Items
Revenue
We derive revenue primarily from fee and commission income, net gain on trading securities, interest income, insurance underwriting income, and net gain on foreign
exchange operations.
Fee and Commission Income
Fee and commission income consists principally of fees and commissions from brokerage customer trading, banking services, payment processing services and
underwriting and market making activities. A substantial portion of our revenue is derived from commissions from customers through accounts with transaction-based pricing.
Brokerage commissions are charged on investment products in accordance with a schedule we have formulated that aligns with local practices. Part of our brokerage fees from
customer trading consists of commissions we receive for from institutional market maker customers for execution of trades requested by them. Fees received for banking services
consist primarily of commissions earned from merchants on acquiring operations, commission on transfer and payment processing and commissions on cash operations. Fees for
payment processing services are mainly related to the charges for the service of handling and processing particular cash transfer transactions or operations.
Fee and commission income as a percentage of our total revenue was 27%, 41% and 49% in the fiscal years ended , March 31, 2024, 2023 and 2022 respectively. Retail
brokerage service fee and commission income as a percentage of our total fee and commission income was 76%, 88% and 95% in the fiscal years ended March 31, 2024, 2023 and
2022, respectively.
Interest Income
We earn interest income from trading securities, margin lending, reverse repurchase transactions, and loans to customers. Interest income on trading securities consists of
interest earned from investments in debt securities held in our proprietary trading account.
Net Gain/(Loss) on Trading Securities
Net gain/(loss) on trading securities reflects the change in value of the securities held in our proprietary trading portfolio during the relevant period. A net gain or loss is
comprised of both realized and unrealized gains and losses during the period. 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 financial statements 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 resulting from market and economic uncertainty arising from
global or local events that cause significant market volatility, or even halting of trading in certain markets, all of which occurred as a result of the Russia-Ukraine conflict.
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 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 swings in net gains and losses realized on our trading securities year-over-year and quarter-to-quarter.
Insurance Underwriting Income
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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.
Net Gain on Foreign Exchange Operations
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. Under U.S. GAAP, we
are required to revalue assets and liabilities denominated in foreign currencies into our reporting currency, the U.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.
Net (Loss)/Gain on Derivatives
The Company enters into various derivative financial instruments, including forwards and swaps, in the foreign exchange markets. These financial instruments are held for
trading and are initially recognized at fair value. Fair value is determined based on quoted market prices or valuation models that consider the current market and contractual values
of the relevant underlying instruments, along with other factors. Derivative financial instruments with a positive fair value are recorded as assets, while those with a negative fair
value are recorded as liabilities. Gains and losses on these instruments are recognized in the Consolidated Statements of Operations and Statements of Other Comprehensive Income
as net (loss)/gain on derivatives.
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”) for traditional life insurance and long-duration health insurance 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.
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.
Payroll and Bonus
Payroll and bonuses represent the costs incurred by a company in compensating its employees for their services and providing performance-based incentives.
Professional Services
Professional services represent the costs associated with engaging external experts and consultants.
Stock Compensation Expense
Stock compensation expense represents the cost associated with issuing stock grants to employees and executives as part of their compensation packages.
Advertising Expense
Advertising expense represents a component of operating expenses. It signifies the investments made to promote products, services, or the overall brand to a targeted
audience, ultimately driving customer acquisition and revenue growth.
General and Administrative Expense
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General and administrative expense includes lease cost, depreciation and amortization, communications services, software support, representative expenses, business travel
expenses, utilities, charity, sponsorship, fines and penalties, taxes other than income tax, rent and other operating 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, less 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 the Kazakhstan tenge, the euro, the U.S. dollar, the Uzbekistan som, Kyrgyzstani som, the Azerbaijani manat,
the Armenian dram, the British pound sterling and the United Arab Emirates dirham. Our reporting currency is the U.S. dollar. Pursuant to U.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 interests in Arbuz and ReKassa. As of
March 31, 2024 we held 94.73% of the ownership interest in Arbuz and 90% of the ownership interest in ReKassa. The remaining 5.27% of the ownership interest in Arbuz and
10.00% of the ownership interest in ReKassa are considered as non-controlling interests in our Consolidated Statements of Operations and Statements of Other Comprehensive
Income.
Prior to April 1, 2023, the Company reflected Mr. Tashtitov's ownership interest in Freedom UA as a non-controlling interest in its Consolidated Balance Sheets,
Consolidated Statements of Operations and Statements of Other Comprehensive Income, Consolidated Statements of Shareholders’ Equity and Consolidated Statements of Cash
Flows. Given the ongoing uncertainty regarding the status of Freedom UA, the management of the Company determined that starting from April 1, 2023 the Company does not
maintain effective control over Freedom UA and it is no longer consolidated in the Company's financial statements. Accordingly, as of March 31, 2024 there are no non-controlling
interests in relation to Freedom UA.
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended March 31, 2024, 2023 and 2022
The following comparison of our financial results for the fiscal years ended March 31, 2024, 2023 and 2022, is not necessarily indicative of future results. Prior period
presentations and disclosures were reclassified to provide comparability with current period classifications.
Revenue
The following table sets out information regarding our total revenue, net for the fiscal years presented.
Year ended March 31,
2024
2023
Amount Change
%
Change
2022 (Recasted)
Amount Change
%
Change
Fee and commission income
$
440,333
$
327,215
$
113,118
35 % $
335,211
$
(7,996)
(2)%
Net gain on trading securities
133,854
71,084
62,770
88 %
155,252
(84,168)
(54)%
Interest income
828,224
294,695
533,529
181 %
121,609
173,086
142 %
Insurance underwriting income
264,218
115,371
148,847
129 %
72,981
42,390
58 %
Net gain on foreign exchange operations
72,245
52,154
20,091
39 %
3,791
48,363
1276 %
Net loss on derivatives
(103,794)
(64,826)
(38,968)
60 %
946
(65,772)
(6,953)%
65
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Total revenue, net
$
1,635,080
$
795,693
$
839,387
105 % $
689,790
$
105,903
15 %
The following table sets out the components of our revenue as a percentage of total revenue, net for the fiscal years presented.
Year ended March 31,
2024
2023
2022
(Recasted)
Fee and commission income
27 %
41 %
49
%
Net gain on trading securities
8 %
9 %
22
%
Interest income
51 %
37 %
18
%
Insurance underwriting income
16 %
14 %
10
%
Net gain on foreign exchange operations
4 %
7 %
1
%
Net (loss)/gain on derivatives
(6) %
(8) %
—
%
Total revenue, net
100 %
100 %
100 %
Fee and commission income
The following table sets forth information regarding our fee and commission income for the fiscal years presented.
Year ended March 31,
2024
2023
Amount Change
%
Change
2022 (Recasted)
Amount Change
%
Change
Brokerage services
$
333,383
$
286,732
$
46,651
16 % $
318,698
$
(31,966)
(10) %
Commission income from payment processing
41,659
6,385
35,274
552 %
—
6,385
— %
Bank services
25,180
17,964
7,216
40 %
6,727
11,237
167 %
Underwriting and market-making services
18,801
11,948
6,853
57 %
5,963
5,985
100 %
Other fee and commission income
21,310
4,186
17,124
409 %
3,823
363
9 %
Total fee and commission income
$
440,333
$
327,215
$
113,118
35 % $
335,211
$
(7,996)
(2) %
The following table sets out the components of our fee and commission income as a percentage of total fee and commission income, net for the fiscal years presented.
Year ended March 31,
2024
2023
2022 (Recasted)
(as a % of total fee and commission income)
Brokerage services
76 %
88 %
95
%
Commission income from payment processing
9 %
2 %
—
%
Bank services
6 %
5 %
2
%
Underwriting and market-making services
4 %
4 %
2
%
Other fee and commission income
5 %
1 %
1
%
Total fee and commission income
100 %
100 %
100 %
Fee and commission income for the fiscal year ended March 31, 2024, amounted to $440.3 million, reflecting an increase of $113.1 million or 35% compared to $327.2
million in the fiscal year ended March 31, 2023. This increase was driven by multiple factors, including:
•
Fee and commission income from brokerage services generated $333.4 million, representing a 16% increase from $286.7 million in fiscal 2023. This growth was primarily
due to an increase in number of retail brokerage
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customers from 370,000 in 2023 to 530,000 in 2024. The increase in the number of customers was attributable in part to the migration of customers from FST Belize to
brokerage companies within our group during fiscal 2024. The increase in fee and commission income from brokerage services was offset in part by a decrease in fee and
commission income from brokerage services from FST Belize, as our omnibus brokerage arrangement with FST Belize was wound down and customers of FST Belize
closed their accounts with FST Belize and opened accounts with brokerage companies within our group.
•
Fee and commission income from payment processing increased to $41.7 million in fiscal 2024 from $6.4 million in fiscal 2023 due to the acquisition of Paybox and its
subsidiaries in the fourth quarter of fiscal 2023. This acquisition has added new revenue streams.
•
Fee and commission income from banking services increased compared to fiscal 2023 by 40% to $25.2 million in fiscal 2024 reflecting increased volume of servicing of
payment cards and a higher average turnover of merchants. This growth reflects our expanded banking operations and client acquisition strategies.
•
Revenue from underwriting and market-making services increased by 57% to $18.8 million, driven by a higher volume of underwriting transactions and enhanced market
positioning in fiscal 2024 as compared to fiscal 2023.
•
Other fee and commission income increased by 409% to $21.3 million, largely due to an increase in agency fees generated by our online travel ticket aggregator, which was
in turn due to an increase in usage and demand of such services.
Fee and commission income for the fiscal year ended March 31, 2023, amounted to $327.2 million, reflecting a decrease of $8.0 million or 2% compared to $335.2 million
in the fiscal year ended March 31, 2022. This decrease was driven by multiple factors, including:
•
Brokerage services generated $286.7 million, representing a 10% decrease from $318.7 million in the previous fiscal year. The decline in brokerage services was driven by a
decrease in trading volumes and the number of transactions, mainly due to deteriorating stock market conditions and macroeconomic uncertainty. Despite this decrease, we
believe it was not indicative of a broader trend but rather a result of high market volatility and geopolitical and economic situations during the period.
•
Fee and commission income from banking services increased by $11.2 million to $18.0 million, reflecting growth in payment card servicing and higher average merchant
turnover. This growth highlights the successful expansion of our banking operations and effective client acquisition strategies.
•
Income from underwriting and market-making services increased by 100% to 11.9 million, driven by higher volumes and size of debt capital market transactions arranged by
us and the unique market dynamics resulting from the Covid-19 pandemic.
•
Other fee and commission income also increased by 9% to $4.2 million from $3.8 million in the previous fiscal year.
Net gain on trading securities
Net gain on trading securities was $133.9 million for the year ended March 31, 2024, an increase of $62.8 million as compared to $71.1 million for the year ended
March 31, 2023. The following table sets forth information regarding our net gains and losses on trading securities for fiscal 2024, and 2023:
Realized Net
Gain/(Loss)
Unrealized Net
Gain/(Loss)
Net Gain on Trading
Securities
Fiscal 2024
$
38,125
$
95,729
$
133,854
Fiscal 2023
$
(36,226)
$
107,310
$
71,084
Fiscal 2022
$
206,239
$
(50,987)
$
155,252
During the year ended March 31, 2024, we had a realized gain on trading securities of $38.1 million, which is attributable to debt securities of the Ministry of Finance of
the Republic of Kazakhstan sold during the year ended March 31, 2024. We had an unrealized net gain in the year ended March 31, 2024, due to securities positions we continued
to hold at March 31, 2024, having appreciated by $95.7 million. The majority of the unrealized net gain was attributable to
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appreciated debt securities of the Ministry of Finance of the Republic of Kazakhstan, which appreciation was primarily due to a decline in the NBK's base interest rate during the
year ended March 31, 2024.
Net gain on trading securities was $71.1 million for fiscal 2023 as compared to $155.3 million for fiscal 2022. For fiscal 2023, we sold securities for a realized net gain of
$37.2 million. This realized gain was offset by a realized net loss of $73.4 million, which was attributable to shares in the SPB Exchange that we sold in fiscal 2023, resulting in
realized net loss of $36.2 million. Similarly, securities positions we continued to hold as of March 31, 2023, had appreciated by $56.5 million as compared to March 31, 2022. In
addition to this unrealized gain, an unrealized loss of $50.8 million on SPB Exchange shares which was recognized during previous periods was reclassified to realized net loss
during fiscal 2023, resulting in an unrealized net gain of $107.3 million for such fiscal year.
Interest income
The following table sets forth information regarding our revenue from interest income for the fiscal years presented:
Year ended March, 31
2024
2023
Amount Change
%
Change
2022 (Recasted)
Amount Change
%
Change
Interest income on trading securities
$
426,428
$
178,288
$
248,140
139 % $
78,327
$
99,961
128 %
Interest income on loans to customers
176,539
43,486
133,053
306 %
4,617
38,869
842 %
Interest income on margin loans to customers
175,571
34,558
141,013
408 %
14,164
20,394
144 %
Interest income on available-for-sale securities
32,821
27,003
5,818
22 %
22,437
4,566
20 %
Interest income on reverse repurchase
agreements and amounts due from banks
16,865
9,836
7,029
71 %
1,658
8,178
493 %
Other interest income
—
1,524
(1,524)
(100) %
406
1,118
275 %
Total interest income
$
828,224
$
294,695
$
533,529
181 % $
121,609
$
173,086
142 %
The following table sets out the components of our interest income as a percentage of total interest income, net for the fiscal years presented:
Year ended March 31,
2024
2023
2022 (Recasted)
(as a % of total interest income)
Interest income on trading securities
51.5 %
60.5 %
64.4 %
Interest income on loans to customers
21.3 %
14.8 %
3.8 %
Interest income on margin loans to customers
21.2 %
11.7 %
11.6 %
Interest income on available-for-sale securities
4.0 %
9.2 %
18.5 %
Interest income on reverse repurchase agreements and amounts due from banks
2.0 %
3.3 %
1.4 %
Other interest income
— %
0.5 %
0.3 %
Total interest income
100 %
100 %
100 %
Interest income for the fiscal year ended March 31, 2024, was $828.2 million, an increase of $533.5 million or 181% compared to $294.7 million for the fiscal year ended
March 31, 2023. This increase was primarily attributable to an increase on interest income on trading securities. Interest income on trading securities increased by 139% to $426.4
million, driven by an expanded trading portfolio and a higher proportion of bonds. This reflects a strategic focus on diversifying the investment portfolio and taking advantage of
market opportunities where consistent with our investment policies and principles. In addition, there were increases in interest income on loans to customers, margin loans to
customers, reverse repurchase agreements and amounts due from banks, and available-for-sale securities. Interest income from loans to customers increased by 306% to $176.5
million, reflecting the significant expansion of Freedom Bank KZ's loan portfolio. Our digital products, client oriented service and competitive interest rates have attracted a broader
customer base. Interest income on margin loans to customers increased by 408% to $175.6 million due to higher utilization of margin
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loans by our clients, particularly by an institutional market maker customer, which became our client in the second half of fiscal 2023. We had an increase of $5.8 million, or 22%,
in interest income on available-for-sale securities, primarily due to the expansion of our trading portfolio between the two fiscal years. Our interest income on reverse repurchase
agreements increased by $7.0 million, or 71%, from $9.8 million as of March 31, 2023, to $16.9 million as of March 31, 2024.
For the fiscal year ended March 31, 2023 interest income was $294.7 million, representing an increase of $173.1 million, or 142%, compared to the fiscal year ended
March 31, 2022. The increase in interest income was primarily attributable to an increase in interest income from trading securities of $100.0 million, or 128%, which was in turn
the result of an increase in the total size of our trading portfolio between the two fiscal years and an increase in the amount of bonds we held as a percentage of our total trading
portfolio between the two fiscal years. We had trading securities of $2.4 billion as at March 31, 2023, as compared to $1.2 billion as at March 31, 2022. In addition, we had an
increase of $38.9 million, or 842%, in interest income on loans to customers between the two fiscal years, which was mainly attributable to an increase in the amount of mortgage
loans issued and the purchase of uncollateralized bank customer loans from our affiliate FFIN Credit. Our loans to customers increased by $733.8 million, or 794%, from $92.4
million as of March 31, 2022 to $826.3 million as of March 31, 2023. In addition, we had a $20.4 million, or 144%, 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 FST Belize, between the two fiscal years. Moreover, this increase was caused by the
increase in loan volumes and interest rate.
The following table provides a summary of the monthly average balances and average interest rates for the major categories of interest-earning assets for the fiscal years
ended March 31, 2024, 2023 and 2022.
Year ended March 31,
2024
2023
2022
(Recasted)
Average balance
Interest-earning assets
Trading securities
$
3,381,287
$
1,532,598
$
853,541
Loans issued
1,218,935
440,486
29,266
Margin lending, brokerage and other receivables, net
933,797
406,884
141,948
Available for sale securities, at fair value
221,356
198,080
153,044
Average yields
Trading securities
12.6 %
11.6 %
9.2 %
Margin lending, brokerage and other receivables, net
8.2 %
7.1 %
10.0 %
Loans issued
14.5 %
9.9 %
15.8 %
Available- for- sale securities, at fair value
14.8 %
13.6 %
14.7 %
Interest income
Interest income on trading securities
$
426,428
$
178,288
$
78,327
Interest income on loans to customers
176,539
43,486
4,617
Interest income on margin loans to customers
76,871
28,767
14,164
Interest income on available- for- sale securities
32,821
27,003
22,437
Other interest income
16,865
11,360
2,064
Total interest income
$
729,524
$
288,904
$
121,609
(1) Average balance and average yields relate to margin lending activities.
(2) Average balance, average yields, and interest income relates to corporate debt, non-US sovereign debt and US sovereign debt activities.
Interest income on margin loans to customers includes income accrued on off-balance sheet arrangements, the monthly average balance of which is not included in the
table above. These off-balance sheet arrangements mainly included repurchase agreements of our brokerage clients. As of March 31, 2024, 2023 and 2022, the monthly average
(2)
(1)
(2)
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balance of off-balance sheet arrangements were $822.5 million, $96.5 million and $0, respectively, and the weighted average interest rate was 12%, 6%, and 0%, respectively.
The following table sets forth the effects of changing rates and volumes on interest income. The rate column shows the effects attributable to changes in rate (changes in
rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate), The net column represents
the sum of the prior columns. Changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on changes due to rate
and the changes due to volume.
Year ended March 31,
2024 vs 2023
Increase/ (decrease) due to change in
Rate
Volume
Net
Interest income
Interest income on loans to customers
$
27,813
$
105,240
$
133,053
Interest income on margin loans to customers
5,419
42,686
48,105
Interest income on trading securities
16,173
231,967
248,140
Interest income on available-for-sale securities
2,486
3,332
5,818
Other interest income
—
—
5,505
Total interest income
$
51,890
$
383,226
$
440,621
Year ended March 31,
2023 vs 2022
Increase/ (decrease) due to change in
Rate
Volume
Net
Interest income
Interest income on loans to customers
$
(1,064)
$
39,933
$
38,869
Interest income on margin loans to customers
(2,702)
17,305
14,603
Interest income on trading securities
25,165
74,796
99,961
Interest income on available-for-sale securities
(1,429)
5,995
4,566
Other interest income
—
—
9,296
Total interest income
$
19,971
$
138,028
$
167,295
Insurance underwriting income
Insurance underwriting income for the fiscal year ended March 31, 2024, was $264.2 million, an increase of $148.8 million or 129% compared to $115.4 million in the
previous fiscal year. The increase was mainly attributable to a 110% increase in written insurance premiums to $287.8 million, in fiscal 2024 from $137.3 million in fiscal 2023,
which was in turn driven by the expansion of our insurance operations and an increase in the number of active insurance contracts from 681,667 as of March 31, 2023 to 807,173 as
of March 31, 2024. This growth reflects our successful efforts in diversifying our insurance product offering and expanding our insurance customer base. In addition, there was a
decrease in the negative change in the unearned premium reserve to $3.8 million, or 22%. This adjustment indicates improved underwriting practices and a more favorable risk
profile. These positive factors were partially offset by a $5.4 million, or 127%, increase in the negative change in reinsurance premiums ceded.
Insurance underwriting income for the fiscal year ended March 31, 2023, was $115.4 million, an increase of $42.4 million or 58% compared to $73.0 million for the fiscal
year ended March 31, 2022. The increase was mainly attributable to a 78% increase in written insurance premiums to $137.3 million in fiscal 2023 from $77.1 million in fiscal
2022, which was in turn driven by the expansion of our insurance operations, including an increase in the number of active insurance contracts from 558,530 as of March 31, 2022
to 681,667 as of March 31, 2023. This growth reflects our successful efforts in diversifying our insurance product offerings and expanding our customer base. In addition, there was
an increase in the negative change in reinsurance premiums ceded to $3.8 million, or 905% due to expansion of our insurance operations generally, which is reflected by increase in
number of active contracts and acquisition of London-Almaty. The foregoing
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positive factors were partially offset by an increase in the negative change in unearned premium reserve to $17.7 million in fiscal 2023, from $3.7 million in fiscal 2022.
The following table sets out information on our insurance underwriting income for the fiscal years presented.
Year ended March, 31
2024
2023
Amount Change
%
Change
2022 (Recasted)
Amount Change
%
Change
Written insurance premiums
$
287,773
$
137,346
$
150,427
110 % $
77,131
$
60,215
78 %
Reinsurance premiums ceded
(9,647)
(4,252)
(5,395)
127 %
(423)
(3,829)
905 %
Change in unearned premium reserve, net
(13,908)
(17,723)
3,815
(22) %
(3,727)
(13,996)
376 %
Insurance underwriting income
$
264,218
$
115,371
$
148,847
129 % $
72,981
$
42,390
58 %
Net gain on foreign exchange operations
For the fiscal year ended March 31, 2024, we realized a net gain on foreign exchange operations of $72.2 million compared to a net gain of $52.2 million for the fiscal year
ended March 31, 2023. The change was driven by our subsidiary Freedom Bank KZ in the fiscal year ended March 31, 2024 from the purchase and sale of foreign currency in the
amount of $22.2 million, as the volume of currency transactions conducted by such subsidiary increased by 248% in the fiscal year ended March 31, 2024 as compared to the fiscal
year ended March 31, 2023.
For the fiscal year ended March 31, 2023, we realized a net gain on foreign exchange operations of $52.2 million compared to a net gain of $3.8 million for the fiscal year
ended March 31, 2022. The change was primarily due to a net gain of $45.7 million by our subsidiary Freedom Bank KZ in the fiscal year ended March 31, 2023 from the purchase
and sale of foreign currency, as the volume of currency transactions conducted by such subsidiary increased by 701% in the fiscal year ended March 31, 2023 as compared to the
fiscal year ended March 31, 2022. This net gain was primarily the result of the appreciation of the Kazakhstan tenge relative to the Russian ruble by approximately 16% over the
course of fiscal 2023.
Net loss on derivatives
For the fiscal year ended March 31, 2024, we had a net loss on derivatives of $103.8 million compared to a net loss of $64.8 million for the fiscal year ended March 31,
2023. Our subsidiary, Freedom Bank KZ, started engaging in currency swaps in fiscal 2023 to diversify its funding sources. As a result of the negative revaluation of those swaps
and an increased volume of swaps in fiscal 2024, we realized a loss of $98.8 million for the fiscal year ended March 31, 2024.
For the fiscal year ended March 31, 2023, we realized a net loss on derivatives of $64.8 million compared to a realized net gain of $0.9 million for the fiscal year ended
March 31, 2022. The change was primarily attributable to our subsidiary, Freedom Bank KZ, which realized net loss of $65.3 million for the fiscal year ended March 31, 2023 in
connection with currency swaps entered into to diversify its funding sources.
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Expense
The following table sets forth information regarding our total expense for the periods presented.
Year ended March 31,
2024
2023
Amount Change
%
Change
2022 (Recasted)
Amount Change
%
Change
Fee and commission expense
$
154,351
$
65,660
$
88,691
135 % $
85,909
$
(20,249)
(24) %
Interest expense
501,111
208,947
292,164
140 %
76,947
132,000
172 %
Insurance claims incurred, net of reinsurance
139,561
77,329
62,232
80 %
54,447
22,882
42 %
Payroll and bonuses
181,023
81,819
99,204
121 %
46,288
35,531
77 %
Professional services
34,238
17,006
17,232
101 %
12,682
4,324
34 %
Stock compensation expense
22,719
9,293
13,426
144 %
7,859
1,434
18 %
Advertising expense
38,327
14,059
24,268
173 %
11,916
2,143
18 %
General and administrative expense
120,888
59,971
60,917
102 %
23,533
36,438
155 %
Allowance for expected credit losses
21,225
29,119
(7,894)
(27) %
2,502
26,617
1,064 %
Other (income)/expense, net
(13,734)
(3,448)
(10,286)
298 %
4,014
(7,462)
(186) %
Total expense
$
1,199,709
$
559,755
$
639,954
114 % $
326,097
$
233,658
72 %
The following table sets out the components of our expense as a percentage of total expense for the fiscal years presented.
Year ended March 31,
2024
2023
2022
(Recasted)
Fee and commission expense
12 %
12 %
26
%
Interest expense
42 %
37 %
24
%
Insurance claims incurred, net of reinsurance
12 %
14 %
17
%
Payroll and bonuses
15 %
15 %
14
%
Professional services
3 %
3 %
4
%
Stock compensation expense
2 %
2 %
2
%
Advertising expense
3 %
2 %
4
%
General and administrative expense
10 %
11 %
7
%
Allowance for expected credit losses
2 %
5 %
1
%
Other (income)/expense, net
(1) %
(1) %
1
%
Total expense
100 %
100 %
100 %
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Fee and commission expense
The following table sets forth information regarding our fee and commission expense for the periods presented.
Year ended March 31,
2024
2023
Amount Change
%
Change
2022 (Recasted)
Amount Change
%
Change
Agency fees expense
$
103,020
$
23,518
$
79,502
338 % $
12,378
$
11,140
90 %
Bank services
18,121
11,645
6,476
56 %
7,826
3,819
49 %
Brokerage services
16,587
26,148
(9,561)
(37) %
60,352
(34,204)
(57) %
Exchange services
3,302
2,631
671
26 %
1,669
962
58 %
Central Depository services
446
364
82
23 %
329
35
11 %
Other commission expenses
12,875
1,354
11,521
851 %
3,355
(2,001)
(60) %
Total fee and commission expense
$
154,351
$
65,660
$
88,691
135 % $
85,909
$
(20,249)
(24)%
The following table sets out the components of our fee and commission expense as a percentage of total fee and commission expense, net for the periods presented.
Year ended March 31,
2024
2023
2022 (Recasted)
(as a % of total fee and commission expense)
Agency fees expense
67 %
36 %
14
%
Bank services
12 %
17 %
10
%
Brokerage services
11 %
40 %
70
%
Exchange services
2 %
4 %
2
%
Central Depository services
— %
1 %
—
%
Other commission expenses
8 %
2 %
4
%
Total fee and commission expense
100 %
100 %
100 %
Fee and commission expense increased by $88.7 million, or 135% in fiscal 2024, as compared to fiscal 2023. The increase was mainly attributable to an increase of agency
fees expense of $79.5 million in fiscal 2024 as compared to fiscal 2023. The increase was mainly due to an increase of insurance product sales by Freedom Finance Life, which are
outsourced to outside agents. The increase was partially offset by a decrease in fee and commission expense from brokerage services by $9.6 million or 37%, which is the net result
of the effect of a decrease in pricing levels as a result of our change to a new prime broker in Europe during fiscal 2023, as a result of which, for part of fiscal 2023 prior to such
change, we had a different composition of order flow transactions, which were charged at higher rates than we paid in fiscal 2024. Such decrease was partially offset by an increase
in the volume of transactions between the two periods. There was also an increase in other commission expense by $11.5 million.
Fee and commission expense decreased by $20.2 million, or 24%, for fiscal 2023 as compared to fiscal 2022. There were increases in fee and commission expense from
bank services of $3.8 million and agency fees expenses of $11.1 million, which were offset by a decrease in brokerage commissions expense by $34.2 million due to our change to a
new prime broker in Europe during fiscal 2023, as a result of which, for part of fiscal 2023, we had a different composition of order flow transactions, which were charged at lower
rates than we paid in fiscal 2022. The decrease in brokerage commissions expense was also attributable to a decrease in the volume of transactions executed by our brokerage
customers between the two fiscal years. Generally, we expect fee and commission expense to increase and decrease in correspondence with increases and decreases in fee and
commission income.
Interest expense
For fiscal 2024, we had a $292.2 million, or 140%, increase in interest expense as compared to fiscal 2023. The increase in interest expense was primarily attributable to a
$244.1 million, or 154%, increase in interest expense on short-term financing through securities repurchase agreements due to an increase in the volume of such financing, and a
$30.4 million, or 75%, increase in interest expense on customer deposits. Compared to the fiscal year ended March 31,
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2023, 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 fiscal years.
For fiscal 2023, we had a $132.0 million, or 172%, increase in interest expense as compared to fiscal 2022. The increase in interest expense was primarily attributable to a
$100.4 million, or 172%, increase in interest expense on short-term financing through securities repurchase agreements due to an increase in the volume of such financing we
conducted in fiscal 2023.
The following table provides a summary of the monthly average balances and average interest rates for the major categories of interest-bearing liabilities for the fiscal
years ended March 31, 2024, 2023 and 2022.
Year ended March 31,
2024
2023
2022
(Recasted)
Average balance
Interest-bearing liabilities
Securities repurchase agreement obligations
$
2,590,599
$
1,182,110
$
537,303
Customer liabilities
1,070,098
433,450
101,307
Debt securities issued
131,047
50,065
25,908
Average rates
Securities repurchase agreement obligations
15.54 %
13.42 %
10.84 %
Customer liabilities
6.61 %
9.31 %
16.13 %
Debt securities issued
7.90 %
6.16 %
7.03 %
Interest expense
Interest expense on securities repurchase agreement obligations
$
402,665
$
158,595
$
58,229
Interest expense on customer accounts and deposits
70,778
40,335
16,336
Interest expense on debt securities issued
10,356
3,085
1,822
Other interest expense
17,312
6,932
560
Total interest expense
$
501,111
$
208,947
$
76,947
(1) Average balance, average rates, and interest expense relates to interest-bearing deposits.
The following table sets forth the effects of changing rates and volumes on interest. The rate column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate), The net column represents the
sum of the
1
1
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prior columns. Changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on changes due to rate and the changes
due to volume.
Year ended March 31,
2024 vs 2023
Increase/ (decrease) due to change in
Rate
Volume
Net
Interest expense
Interest expense on securities repurchase agreement obligations
$
28,662
$
215,408
$
244,070
Interest expense on customer accounts and deposits
(7,465)
37,908
30,443
Interest expense on debt securities issued
1,081
6,190
7,271
Other interest expense
10,380
Total
$
22,278
$
259,506
$
292,164
Year ended March 31,
2023 vs 2022
Increase/ (decrease) due to change in
Rate
Volume
Net
Interest expense
Interest expense on securities repurchase agreement obligations
$
16,609
$
83,757
$
100,366
Interest expense on customer accounts and deposits
(3,554)
27,553
23,999
Interest expense on debt securities issued
(193)
1,456
1,263
Other interest expense
6,372
Total interest expense
$
12,862
$
112,766
$
132,000
Insurance claims incurred, net of reinsurance
For fiscal 2024, we had a $62.4 million, or 81%, increase in insurance claims incurred, net of reinsurance, as compared to the fiscal year ended March 31, 2023. The
increase was primarily attributable to a $58.4 million or 221% increase in expenses for insurance reserve, which correlates with the increase in premiums received for the period,
and a $1.4 million, or 7% increase in claims paid as compared to the fiscal year ended March 31, 2023. The increases were offset in part by a $0.6 million, or 150%, decrease in in
claims paid, reinsurers share between the two fiscal years.
For fiscal 2023, we had a $22.9 million, or 42%, increase in insurance claims incurred, net of reinsurance, as compared to the fiscal year ended March 31, 2022. The
increase was primarily attributable to a $17.2 million or 128%, increase in other insurance expenses, which are mainly represented by redemption amounts under the pension
annuity upon termination of the contract, a $9.3 million, or 82%, increase in expenses for claims for the year ended March 31, 2023, and a $0.6 million, or 59% increase in claims
paid, reinsurers share as compared to the year ended March 31, 2022, in each case due to the expansion of our insurance operations between the two periods. The increases were
offset in part by a $4.2 million, or 14%, decrease in expenses for insurance reserve between the two fiscal years.
Payroll and bonuses
In fiscal 2024, we had payroll and bonuses expense of $181.0 million, representing an increase of $99.2 million or 121% compared to $81.8 million in fiscal 2023. The
increase was attributable to the expansion of our operations generally and in particular the expansion of our workforce through hiring and acquisitions.
In fiscal 2023, we had payroll and bonuses expense of $81.8 million, representing an increase of $35.5 million or 77% compared to payroll and bonuses expense of $46.3
million in fiscal 2022. The increase was attributable to the expansion of our operations generally and in particular the expansion of our workforce through hiring and acquisitions.
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Professional services
For fiscal 2024, our professional services expense was $34.2 million, representing an increase of $17.2 million or 101% compared to $17.0 million for fiscal 2023. The
increase was attributable to an increase in audit services expense due to the accruals for the annual external audit in respect of fiscal 2024. There was also an increase in expenses for
legal and consulting services due to an increase in the use of such services in connection with the acquisition of new companies, regulatory matters and the general development and
expansion of our business and operations.
For fiscal 2023, our professional services expense was $17.0 million, representing an increase by $4.3 million or 34% compared to $12.7 million for fiscal 2022. The
increase was mainly attributable to increased expenses for consulting services provided in connection with the acquisition of new companies and the general development and
expansion of our business and operations.
Stock compensation expense
In fiscal 2024, our stock compensation expense was $22.7 million, representing an increase of $13.4 million or 144% compared to stock compensation expense of $9.3
million for fiscal 2023. The increase is attributable to new stock grants the majority of which vested on the date of their issuance during fiscal 2024.
In fiscal 2023, our stock compensation expense was $9.3 million, representing an increase of $1.4 million or 18% compared to stock compensation expense of $7.9 million
for fiscal 2022. The increase is attributable to the relocation of multiple employees of our former Russian subsidiaries to our Kazakhstan subsidiaries during fiscal 2023. These
employees held an aggregate of 195,000 shares, which contributed to the increase in stock compensation expense.
Advertising expense
Advertising expense for fiscal 2024, was $38.3 million, representing an increase of $24.3 million or 173% compared to $14.1 million for fiscal 2023. There was an
increase of $13.7 million from Freedom EU, which is mostly attributable to increase in influencers and affiliates advertising, brand promotions on social networks and marketing
sponsorships. During fiscal 2024, Freedom EU spent approximately $1.0 million on sponsorships of events such as the Celebrity Gala Ballet, the Freedom24 Influence Festival and
the European Sailing Championship. There was also an increase in advertising expense by $3.4 million, related to advertising and marketing related expenses of our Aviata
subsidiary, which was acquired in fiscal 2024. Additionally, there was an increase in marketing expenses from Freedom Bank KZ in the amount of $1.6 million related to loan
products, such as the Digital Car Loan and the Loan for Small and Middle-sized Business. There was also an increase of $1.0 million of advertising expense from FRHC due to
video advertising and branded posters for sponsored events. There was also an increase in advertising expense from Freedom Global by $1.0 million due to the increased
expenditure on digital marketing.
Advertising expense for fiscal 2023 was $14.1 million, representing an increase of $2.1 million or 18% compared to advertising expense of $11.9 million for fiscal 2022.
The primary reason for this increase was increased advertising expenditure of Bank KZ, which was primarily attributable to the introduction of new loan products such as the digital
mortgage and digital car loan products. Additionally, the implementation of the “7-20-25” state mortgage program led to increased expense on advertising campaigns.
General and administrative expense
General and administrative expenses for the fiscal year 2024, were $120.9 million, representing an increase of $60.9 million or 102% compared to $60.0 million for the
fiscal 2023. This increase is attributable to the general expansion and development of our business between the two fiscal years. The main factors were contributing to the increase
were increases in other operating expenses, depreciation and amortization expenses, charity and sponsorship, software support, taxes other than income tax, lease depreciation
expenses, business travel, IT services, communications services, rent and inventory write-off. Other operating expenses increased by $10.0 million, primarily attributable to
increased banking and overhead costs from Freedom Bank KZ and the organization of major events such as the Qara Forum, Freedom Ballet, and participation in the Digital Bridge
forum. These activities highlight our efforts to strengthen our market position and enhance brand visibility through high-profile events and initiatives. Depreciation and amortization
expenses increased by $9.5 million, driven by the addition of new subsidiaries during fiscal 2024 and the overall growth of our operations. The integration of these subsidiaries
required substantial investments in new technology and infrastructure, leading to higher depreciation and amortization costs. Charity and sponsorship expenses increased by $8.0
million due to contributions made to several organizations through our subsidiaries, including the Kazakhstan Chess Federation, International Chess Federation, Unique Media,
Ukraine for humanitarian aid, Republican Scientific and Practical Center "Daryn," and "Paryz" Aktobe Public Fund. Software support expenses increased by $6.7 million, mainly
due to the general growth of our operations and personnel. Taxes, other than income tax, increased by $6.2 million, mainly due to our general growth,
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including the addition of new subsidiaries. The expansion of our business operations resulted in higher tax liabilities, reflecting our broader market presence and increased
operational scale. Lease depreciation expenses increased by $4.9 million, attributable to our overall growth and the need for more office space. The expansion of our workforce and
the establishment of new offices required additional leasing, leading to higher depreciation costs. Business travel expenses increased by $3.8 million, reflecting more frequent
business travel during fiscal 2024 as a result of the growth of our operations in Kazakhstan and other regions and our expanded geographic footprint.
General and administrative expense for fiscal 2023 amounted to $60.0 million, representing an increase of $36.4 million or 155% compared to general and administrative
expense of $23.5 million for fiscal 2022. The main factors contributing to the increase were increases in fines and penalties, charity and sponsorship, other operating expenses,
software support, communications services and depreciation and amortization. Fines and penalties increased by $2.8 million in fines and penalties primarily due to penalties
imposed one of our non-U.S. subsidiaries by a local regulator for regulatory noncompliance. Charity and sponsorship increased by $12.9 million due to humanitarian aid we
provided to a Ukraine-based charitable fund in connection with the Russia-Ukraine conflict. Other operating expenses increased by $3.6 million driven by our general organic
growth. Software support increased by $2.4 million due to the expansion of our software infrastructure and the implementation of systems to support our operations.
Communication services expenses increased by a $2.6 million due to the implementation of SMS-informing services for banking operations by Freedom Bank KZ.
Allowance for credit losses
We recognized allowance for credit losses in the amount of $21.2 million for fiscal 2024, as compared to provisions for credit losses of $29.1 million for fiscal 2023. The
decrease was primarily attributable to the fact that in fiscal 2023 we accrued a one-off provision expense for restricted brokerage customers' cash, cash and cash equivalents and
loans issued which was held with a Ukrainian bank due to the Russia-Ukraine conflict. The decrease was partially offset by an increase in allowance for credit losses for loans
issued, due to the adoption of ASC 326 starting from April 1, 2023 and the growth of the loan portfolio of Freedom Bank KZ, as the majority of provisions is accrued on loan
products.
For fiscal 2023, we recognized an allowance for credit losses in the amount of $29.1 million, compared to an allowance for credit losses of $2.5 million for fiscal 2022.
The increase was primarily attributable to the growth of the loan portfolio of Freedom Bank KZ, as the majority of allowances are accrued on loan products. Additionally, in fiscal
2023, we accrued a one-off provision expense for restricted brokerage customers' cash, cash equivalents, and loans issued, which were held with a Ukrainian bank due to the Russia-
Ukraine conflict.
Other (income)/expense, net
For the fiscal year ended March 31, 2024, we had other income, net of $13.7 million, an increase of $10.3 million or 298% compared to other income, net of $3.4 million
in fiscal 2023. The increase in other income was attributable to dividends received on shares in our trading portfolio amounting to $2.9 million, income from the sale of educational
materials in the amount of $1.4 million, income from the revaluation of previously held interest in Arbuz in the amount of $1.0 million and related products, a net realized gain of
$0.7 million on available-for-sale securities and increases in several other types of other income.
For the fiscal year ended March 31, 2023, we had other expense, net of $3.4 million, representing a decrease of $7.5 million or 186% compared to other income, net of
$4.0 million in fiscal 2022. This decrease was primarily driven by a net realized loss on the revaluation of available-for-sale securities in the amount of $5.4 million in fiscal 2024,
which was in turn due to the adverse impact of heightened market volatility and a global economic slowdown, which led to a negative revaluation of our securities portfolio,
reflecting the challenging market conditions during such fiscal year.
Income tax expense
We had net income before income tax of $435.4 million, $235.9 million and $363.7 million in fiscal 2024, 2023, and 2022 respectively. Our effective tax rate for fiscal
2024 decreased to 13.9%, from 18.1% during fiscal 2023 as a result of changes in the composition of the revenues we realized from our operating activities and the tax treatment of
those revenues in the various jurisdictions where our subsidiaries operate along with the incremental U.S. tax on GILTI. Despite the increase in our net income before income tax by
$199.4 million, as a result of the decrease in our effective tax rate, our income tax expense decreased by $17.6 million for fiscal 2024.
Our effective tax rate for fiscal 2023 increased to 18.1%, from 10.6% during fiscal 2022 as a result of changes in the composition of the revenues we realized from our
operating activities and the tax treatment of those revenues in the various jurisdictions where our subsidiaries operate along with the incremental U.S. tax on GILTI. Despite
decrease in our
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net income before income tax by $127.8 million, as a result of the increase in our effective tax rate, our income tax expense increased by $4.2 million for fiscal 2023.
Net income
As a result of the foregoing factors, for fiscal 2024 we had net income of $375.0 million as compared to $205.6 million for fiscal 2023, an increase of 82%, and for fiscal
2023 we had net income of $205.6 million as compared to $220.9 million for fiscal 2022, a decrease of 7%.
Non-controlling interest
As of March 31, 2024, FRHC held a 94.7% ownership interest in Arbuz and a 90.0% ownership interest in ReKassa. The remaining 5.3% of the ownership interest in
Arbuz and 10.0% of the ownership interest in ReKassa are recognized as non-controlling interests in our Consolidated Balance Sheets, Consolidated Statements of Operations and
Statements of Other Comprehensive Income, Consolidated Statements of Shareholders’ Equity and Consolidated Statements of Cash Flows.
Prior to April 1, 2023, the Company reflected the ownership interest of Askar Tashtitov, FRHC's President, in Freedom UA as a non-controlling interest in its
Consolidated Balance Sheets, Consolidated Statements of Operations and Statements of Other Comprehensive Income, Consolidated Statements of Shareholders’ Equity and
Consolidated Statements of Cash Flows. Given the ongoing uncertainty regarding the status of Freedom UA, our management determined that starting from April 1, 2023 the
Company does not maintain effective control over Freedom UA and it is no longer consolidated in the Company's financial statements. Accordingly, as of March 31, 2024 there are
no non-controlling interests in relation to Freedom UA.
Net loss attributable to non-controlling interest was $0.6 million for fiscal 2024, as compared to net income of $0.4 million for fiscal 2023, and net loss of $6.6 million for
fiscal 2022.
Foreign currency translation adjustments, net of tax
Due to a 1.1% appreciation of the Kazakhstan tenge against the U.S. dollar during the year ended March 31, 2024, we realized a foreign currency translation gain of $12.1
million for the year ended March 31, 2024, as compared to a foreign currency translation gain of $5.2 million for the year ended March 31, 2023.
Due to the appreciation of the Russian ruble by 5% against the U.S. dollar and appreciation of the Kazakhstan tenge by 4.4% against the U.S. dollar at March 31, 2023 as
compared to March 31, 2022, we realized a foreign currency translation loss of $5.2 million for fiscal year 2023, as compared to a foreign currency translation loss of $20.6 million
for fiscal year 2022.
Business Segment Operations
We report our results of operations through the following four business segments: Brokerage, Banking, Insurance, and Other. These operating segments are based on how
our CODM will be making decisions about allocating resources and assessing performance. The total revenue, net associated with our segments is summarized in the following
table:
Year ended March 31,
2024
2023
Amount Change
%
Change
2022 (Recasted)
Amount Change
%
Change
Brokerage
$
616,951
$
384,576
$
232,375
60 % $
395,562
$
(10,986)
(3) %
Banking
614,660
245,105
369,555
151 %
84,346
160,759
191 %
Insurance
340,998
170,723
170,275
100 %
105,238
65,485
62 %
Other
62,471
(4,711)
67,182
(1426) %
104,644
(109,355)
(105) %
Total revenue, net
$
1,635,080
$
795,693
$
839,387
105 % $
689,790
$
105,903
15 %
During fiscal 2024, total revenue, net increased across each of our business segments compared to fiscal 2023. In fiscal 2023, total revenue, net increased in the Banking
and Insurance segments but decreased in the Brokerage and Other segments compared to fiscal 2022. In our segment reporting, we account for all operations within each business
segment, including all related subsidiaries and their activities. This method offers a thorough perspective on the financial performance and operational characteristics of each
segment. By incorporating all subsidiaries and their activities into the
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respective segments, we ensure that the reporting accurately represents the full financial status and performance of each business area. Below is a detailed analysis of these changes:
We generate revenue from these products and services in several ways, including:
Brokerage Segment
•
In fiscal 2024, the Brokerage segment saw a significant increase in total revenue, net, primarily driven by higher interest income. This was largely due to an increase in
interest accrued on securities held in our trading portfolio and on margin loans to customers. Fee and commission income also increased, primarily due to a general increase
in brokerage activity between the two periods. Additionally, there was an increase in net gain on trading securities, reflecting the growth of the trading portfolio within the
Brokerage segment. However, these revenue gains were partially offset by a net loss on derivatives and a net loss on foreign exchange operations.
•
In fiscal 2023, total revenue, net in the Brokerage segment decrease was primarily due to a reduction in fee and commission income, driven by a decrease in the number of
active brokerage clients and a decline in the volume of transactions per client. Additionally, there was a decrease in net gain on trading securities, resulting from relatively
lower trading activity and the revaluation of the trading portfolio. These decreases were partially offset by an increase in interest income due to the growth of margin lending
balances.
Banking Segment
•
In fiscal 2024, total revenue, net in the Banking segment increase was mainly attributable to higher interest income from trading securities and loans to customers. An
increase in net gain on trading securities, due to the growth of the trading portfolio within this segment, also contributed to the revenue increase. However, these gains were
partially offset by a net loss on derivatives.
•
In fiscal 2023, total revenue, net in the Banking segment increase was primarily driven by higher interest income from trading securities and loans to customers.
Additionally, there was an increase in net gain on foreign exchange operations due to higher foreign exchange dealing operations. The growth in net gain on trading
securities, resulting from the expansion of the trading portfolio, also contributed to the increase. These gains were partially offset by a decrease in net gain on derivatives.
Insurance Segment
•
In fiscal 2024, total revenue, net in the Insurance segment increase was mainly due to an increase in insurance underwriting income, reflecting the overall growth of our
insurance operations.
•
In fiscal 2023, total revenue, net in the Insurance segment increase was primarily due to an increase in insurance underwriting income, driven by the expansion of our
insurance operations.
Other Segment
•
In fiscal 2024, total revenue, net in the Other segment increase was mainly due to an increase in fee and commission income from payment processing at Paybox and its
subsidiaries, which were acquired in the fourth quarter of fiscal 2023.
•
In fiscal 2023, total revenue, net in the Other segment decrease was primarily driven by a trading gain in fiscal 2022 following our acquisition of an equity interest in the
SPB Exchange at the end of fiscal 2021. During fiscal 2023, the value of our equity interest in the SPB Exchange decreased and was subsequently liquidated by the end of
the fiscal year, resulting in a net loss on trading securities in the Other segment.
The total expenses associated with our segments are summarized in the following table:
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Year ended March 31,
2024
2023
Amount Change
%
Change
2022 (Recasted)
Amount Change
%
Change
Brokerage
$
268,037
$
182,401
$
85,636
47 % $
142,448
$
39,953
28 %
Banking
487,930
187,842
300,088
160 %
66,605
121,237
182 %
Insurance
298,525
136,176
162,349
119 %
95,555
40,621
43 %
Other
145,217
53,336
91,881
172 %
21,489
31,847
148 %
Total expense, net
$
1,199,709
$
559,755
$
639,954
114 % $
326,097
$
233,658
72 %
For fiscal 2024, total expenses, net increased across each of our business segments compared to fiscal 2023. In our segment reporting, we account for all operations within
each business segment, including all related subsidiaries and their activities. This method offers a thorough perspective on the financial performance and operational characteristics
of each segment. By incorporating all subsidiaries and their activities into the respective segments, we ensure that the reporting accurately represents the full financial status and
performance of each business area. Below is a detailed analysis of these changes:
Brokerage Segment
•
In fiscal 2024, total expenses, net in our Brokerage segment increase was primarily driven by an increase in interest expense, mainly due to interest paid on securities
repurchase agreements. Additionally, there was an increase in payroll and bonuses, reflecting our efforts to attract and retain top talent. Advertising expenses also increased
as we intensified our marketing efforts to expand our client base. General and administrative expenses rose due to the overall growth of our operations. However, these
increases were partially offset by a decrease in provision for impairment and fee and commission expenses.
•
In fiscal 2023, total expenses, net in our Brokerage segment increase was mainly attributable to higher interest expenses, driven by interest paid to clients on positive cash
balances in their brokerage accounts. Additionally, there was an increase in general and administrative expenses, provision for impairment losses, and payroll and bonuses.
These increases were partially offset by a decrease in fee and commission expenses.
Banking Segment
•
In fiscal 2024, total expenses, net in our Banking segment increase was primarily due to a $199.7 million increase in interest expense on securities repurchase agreements
within this segment, and a $37.8 million increase in interest expense on customer deposits. Additionally, payroll and bonuses increased by $27.2 million, reflecting the
growth of Freedom Bank KZ's operations. General and administrative expenses rose by $17.1 million, further contributing to the overall increase.
•
In fiscal 2023, total expenses, net in our Banking segment increase was driven by higher interest expenses on securities repurchase agreements and customer deposits.
Additionally, there was a increase in payroll and bonuses, as well as general and administrative expenses, reflecting the overall growth of the bank's operations.
Insurance Segment
•
In fiscal 2024, total expenses, net in our Insurance segment increase was mainly due to higher fee and commission expenses, particularly agency fees, attributable to the
overall growth of our insurance operations. Interest expenses also increased, primarily from securities repurchase agreements executed within this segment.
•
In fiscal 2023, total expenses, net in our Insurance segment increase was primarily driven by an increase in fee and commission expenses, particularly agency fees, and
insurance claims incurred, net of reinsurance. Interest expenses and payroll and bonuses also increased between the two fiscal years.
Other Segment
•
In fiscal 2024, total expenses, net in our Other segment increase was driven by higher general and administrative expenses, payroll and bonuses, and professional services
and advertising expenses related to FRHC and Paybox. There was also an increase in fee and commission expenses due to the overall growth in the provision of acquiring
and payment services, as well as online aggregators for buying air and railway tickets.
•
In fiscal 2023, total expenses, net in our Other segment increase was primarily due to higher interest expenses accrued from a direct repurchase agreement in the amount of
$12.8 million entered into by FRHC. Additionally,
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there was an increase in operating expenses amounting to $3.4 million which is attributable to Freedom Finance Technologies due to the overall growth of its IT
development.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measurement of our ability to meet our potential cash requirements for general business purposes. During the periods 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 and banks in 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 asset positions are stated at fair value and should generally be readily marketable in most market conditions.
The following sets out certain information regarding our assets as of the dates presented:
As of March 31,
2024
2023
Cash and cash equivalents
$
545,084
$
581,417
Trading securities
$
3,688,620
$
2,412,556
Total assets
$
8,301,930
$
5,084,558
Net liquid assets
$
3,137,383
$
1,852,886
Of the $545.1 million in cash and cash equivalents we held at March 31, 2024, $135.0 million, or approximately 25%, were subject to reverse repurchase agreements.
By comparison, at March 31, 2023, we had cash and cash equivalents of $581.4 million, of which $29.8 million, or 5%, were subject to reverse repurchase
agreements. The amount of cash and cash equivalents we hold is subject to minimum levels set by regulatory bodies to comply with required rules and regulations,
including adequate capital and liquidity levels for each entity.
Consists of cash and cash equivalents, trading securities, and margin lending, brokerage and other receivables, net of securities repurchase agreement obligations. It
includes liquid assets possessed after deducting securities repurchase agreement obligations.
As at March 31, 2024 and 2023, we had total liabilities of $7.1 billion and $4.3 billion, respectively, including customer liabilities of $2.3 billion and $1.9 billion,
respectively.
We finance our assets primarily from revenue-generating activities and short-term and long-term financing arrangements.
(1)
(2)
(1)
(2)
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Cash Flows
The following table presents information from our statement of cash flows for the periods indicated. Our cash and cash equivalents include restricted cash, which
principally consists of cash of our brokerage customers which are segregated in a special custody accounts for the exclusive benefit of our brokerage customers.
Year ended March 31,
2024
2023
2022
Net cash used in operating activities
$
(1,064,362)
$
(951,683)
$
(406,365)
Net cash used in investing activities
(638,222)
(1,463,244)
(146,323)
Net cash from financing activities
1,674,572
2,133,381
618,528
Effect of changes in foreign exchange rates on cash and cash equivalents and restricted cash
8,788
78,191
(54,420)
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
$
(19,224)
$
(203,355)
$
11,420
Net Cash Used In Operating Activities
Net cash used in operating activities during fiscal 2024 was comprised of net cash from operating activities and net income adjusted for non-cash movements (changes in
deferred taxes, unrealized gain on trading securities, net change in accrued interest, change in insurance reserves, and allowance for credit losses). Net cash used in operating
activities resulted primarily from changes in operating assets and liabilities. Such changes included those set out in the following table.
Year ended March 31,
2024
2023
2022
Increases in trading securities
$
(1,048,205)
$
(1,019,191)
(608,622)
Increases/(decreases) in brokerage customer liabilities
$
112,258
$
105,942
(23,167)
(Increases)/decreases in margin lending, brokerage and other receivables
$
(1,272,652)
$
(253,301)
(103,756)
Increases in margin lending and trade payables
$
734,605
163,763
26,062
Resulted from an increase in the amount of securities held in our proprietary account.
Resulted from increased funds in brokerage accounts from new and existing customers.
Resulted from an increase in volume of margin lending receivables.
Resulted from increased volume of margin lending payables.
Net cash used in operating activities increased to $1.1 billion for fiscal 2024 from $951.7 million for fiscal 2023. Net cash used in operating activities in each of fiscal 2024
and fiscal 2023 was attributable to net cash outflows from increases in trading securities and increases in margin lending, brokerage and other receivables, which increases were
offset in part primarily by an increase margin lending and trade payables. The increase in net cash used in operating activities in fiscal 2024 as compared to fiscal 2023 was mainly
attributable to an increase in margin lending, brokerage and other receivables, which was due to increase in the usage of margin loans for trades by our clients. This increase was
offset in part by an increase in increase in margin lending and trade payables.
Net Cash Used In Investing Activities
During fiscal 2024, net cash used in investing activities was $638.2 million compared to net cash used in investing activities of $1.5 billion during fiscal 2023 ($629.7
million of which relates to discontinued operations), and net cash used in investing activities of $146.3 million during fiscal 2022 ($4.4 million of which relates to discontinued
operations). Net cash flow used in investing activities from discontinued operations in the amount of $629.7 million during fiscal 2023 mostly relates to cash, cash equivalents and
restricted cash disposed of in connection with the divestiture of our Russian subsidiaries. Net cash used in investing activities from continuing operations during fiscal 2024
decreased in comparison
(1)
(2)
(3)
(4)
(1)
(2)
(3)
(4)
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with net cash used in investing activities from continuing operations during fiscal 2023 mainly due to a larger amount of payments made for acquisition of new companies during
fiscal 2023 and a decrease in funds used for the issuance of new loans to customers during fiscal 2024.
During fiscal 2024, cash used in investing activities included cash used for the issuance of loans, net of repayment by customers, in the amount of $569.2 million,
consideration paid for the acquisitions of Aviata, Arbuz, Ticketon, Internet Tourism and DItel in the aggregate amount of $34.5 million and cash used for the purchase of fixed
assets in the amount of $43.8 million. Cash used in investing activities in fiscal 2024 was partially offset by the proceeds received from the sale of available for sale securities, net of
purchase, in the amount of $30.4 million, and cash and cash equivalents received as part of the acquisitions of Aviata, Internet Tourism, Arbuz, ReKassa and DItel in the amount of
$2.5 million.
Net Cash From Financing Activities
Net cash from financing activities decreased in fiscal 2024 as compared to fiscal 2023 mainly due to a decrease in funds received from customer deposits and a decrease in
funds received under the state program "7-20-25" due to a decrease in mortgage loans issued under the program. These decrease were partially offset by an increase in proceeds
from issuance of debt securities due the our issuance of debt securities in December 2023 and proceeds from securities repurchase agreement obligations due to an increase in the
size of our trading portfolio, the securities in which are used as collateral under securities repurchase agreements.
Net cash from financing activities for fiscal 2024, consisted principally of proceeds from securities repurchase agreement obligations in the amount of $1,191.2 million,
bank customer deposits received in the amount of $217.6 million due to the growth of banking activity, mortgage loans sold to JSC Kazakhstan Sustainability Fund as the Program
Operator, net of repurchase, under the state mortgage program "7-20-25" in the amount of $60.2 million, proceeds from the issuance, net of repurchase, of debt securities in the
amount of $206.3 million and proceeds from loans received of $2.5 million. These cash inflows were offset in part by a cash outflow for the purchase of a non-controlling interest in
Arbuz in the amount of $3.2 million.
Capital Expenditures
On May 10, 2023, our subsidiary Freedom EU signed a contract for the construction of Elysium Tower, a building in Limassol, Cyprus. The building is planned to be a
new office building for our Freedom EU subsidiary. The contract implies approximate capital expenditures in the amount of $7.5 million and $4.5 million for the 2024 and 2025
fiscal years, respectively. We are financing this construction project primarily using our own funds.
On November 27, 2023, our Board of Directors approved a strategic plan to expand our business by entering the telecommunications market in Kazakhstan through our
Freedom Telecom subsidiary. Execution of the new plan is expected to require significant capital expenditure, the specific amount of which is currently uncertain. Total capital
expenditures for the development of this business area are currently expected to be required for, among other things, construction of network infrastructure, including a backbone
network, obtaining frequency licenses or other rights to provide services where required and acquisitions of smaller companies in the sector. Our strategy and budget for Freedom
Telecom are currently being reassessed and are subject to revisions, which may be material. We currently plan to finance our capital expenditures for this business area with a
combination of own funds and borrowings, including vendor financing, including the proceeds of a $200 million U.S. dollar domestic bond placement on the AIX that we
completed on December 19, 2023. For further information, see "Indebtedness - Long-term" below.
As a further step in implementing our strategy to build a digital fintech ecosystem, on January 25, 2024, Freedom Telecom established a subsidiary, Freedom Media, in
Kazakhstan for the purposes of providing media content to customers in Kazakhstan. Total capital expenditures required in connection with Freedom Media over the next five years
are estimated to be approximately $54 million. We will finance our capital expenditures related to Freedom Media primarily using our own funds.
Dividends
Any payment of cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend upon our results of operations,
earnings, capital requirements, financial condition, future prospects, contractual and legal restrictions and other factors deemed relevant by our Board of Directors. We currently
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intend to retain any future earnings to fund the operation, development and expansion of our business, and therefore we do not anticipate paying any cash dividends on our common
stock in the foreseeable future.
We did not declare or pay a cash dividend on our common stock during fiscal 2024. Any payment of cash dividends on stock in the future will be at the discretion of our
Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual and legal restrictions and other
factors deemed relevant by our Board of Directors. We currently intend to retain any future earnings to fund the operation, development and expansion of our business, and
therefore we do not anticipate paying any cash dividends on common stock in the foreseeable future.
Indebtedness
Short-term
Our short-term financing is primarily obtained through securities repurchase arrangements conducted through stock exchanges. We use repurchase arrangements, among
other things, to finance our liquidity positions. As of March 31, 2024, $2.8 billion, or 75% of the trading securities held in our proprietary trading account were subject to securities
repurchase obligations compared to $1.5 billion, or 63% as of March 31, 2023. The securities we pledge as collateral under repurchase agreements are liquid trading securities with
market quotes and significant trading volume. For additional information regarding our securities repurchase agreement obligations see Note 13 "Securities Repurchase Agreement
Obligations" in the notes to our consolidated financial statements contained in Part II Item 8 of this annual report.
Long-term
On October 21, 2021, our subsidiary Freedom Finance Special Purpose Company LTD ("Freedom SPC") issued U.S. dollar-denominated bonds due 2026, in an aggregate
principal amount up to $66 million, which are listed on the AIX. The annual interest rate for such bonds is 5.5%. The bonds are guaranteed by FRHC.
On December 19, 2023, Freedom SPC issued U.S. dollar-denominated bonds due 2028, in an aggregate principal amount of $200 million, for the purpose of raising funds
to finance the development of the Freedom Telecom business. The bonds are guaranteed by FRHC and are listed on the AIX. For the first and second years, the annual interest rate
for such bonds is 12%, and for subsequent years the interest rate will be fixed and set as the sum of the effective federal funds rate as of December 10, 2025 and a margin of 6.5%.
As of March 31, 2024, there was an aggregate of $64.5 million and $200.4 million in principal amount of Freedom SPC Bonds due 2026 and Freedom SPC bonds due
2028, respectively, outstanding. The aggregate accrued interest as of March 31, 2024 for both the Freedom SPC bonds due 2026 and the Freedom SPC bonds due 2028 was $2.3
million.
Net Capital and Capital Requirements
A number of our subsidiaries are required to satisfy minimum net capital and capital adequacy requirements to conduct their brokerage, banking and insurance operations
in the jurisdictions in which they operate. This is partially maintained by retaining cash and cash equivalent investments in those subsidiaries or jurisdictions. As a result, such
subsidiaries may be restricted in their ability to transfer cash between different jurisdictions and to FRHC. Additionally, transfers of cash between international jurisdictions may
have adverse tax consequences that could discourage such transfers.
At March 31, 2024, these minimum net capital and capital adequacy requirements for each company ranged from approximately $0.2 million to $196.6 million and
fluctuate depending on various factors. At March 31, 2024, the aggregate net capital and capital adequacy requirements of our subsidiaries was approximately $245.9 million. Each
of our subsidiaries that is subject to net capital or capital adequacy requirements exceeded the minimum required amount at March 31, 2024.
Although we operate with levels of net capital and capital adequacy substantially greater than the minimum established thresholds, in the event we fail to maintain
minimum net capital or capital adequacy, we may be subject to fines and penalties, suspension of operations, revocation of licensure and disqualification of our management from
working in the industry. Our subsidiaries are also subject to various other rules and regulations, including liquidity and capital
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adequacy ratios. Our operations that require the intensive use of capital are limited to the extent necessary to meet our regulatory requirements.
Over the past several years, we have pursued an aggressive growth strategy both through acquisitions and organic growth efforts. While our active growth strategy has led
to revenue growth it also results in increased expenses and greater need for capital resources. Additional growth and expansion may require greater capital resources than we
currently possess, which could require us to pursue additional equity or debt financing from outside sources. We cannot assure that such financing will be available to us on
acceptable terms, or at all, at the time it is needed.
We believe that our current cash and cash equivalents, cash expected to be generated from operating activities, and forecasted returns from our proprietary trading,
combined with our ability to raise additional capital will be sufficient to meet our present and anticipated financing needs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. Following are the accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe
are the most critical to aid in fully understanding and evaluating our reported financial results.
Allowance for credit losses
The Company has recently adopted a new accounting standard, ASC 326 - Current Expected Credit Losses (CECL), effective April 1, 2023. This standard has introduced
significant changes to how we estimate and recognize credit losses for our financial assets. Management estimates and recognizes the CECL as an allowance for lifetime expected
credit losses for loans issued. This is different compared to the previous practice of recognizing allowances based on probable incurred losses.
Under CECL, the allowance for credit losses (ACL) primarily consists of two components:
Collective CECL Component: This component is used for estimating expected credit losses for pools of loans that share common risk characteristics.
Individual CECL Component: This component is applied to loans that do not share common risk characteristics and require individual assessment.
The ACL is a valuation account that is subtracted from the amortized cost of total loans and available-for-sale securities to reflect the net amount expected to be collected.
Our methodology for establishing the allowance for loan losses is based on a comprehensive assessment that considers relevant and available information from internal and external
sources. This assessment takes into account past events, including historical trends in loan delinquencies and charge-offs, current economic conditions, and reasonable and
supportable forecasts. Our processes and accounting policies for the CECL methodology are further described in Note 2 Summary of Significant Accounting Policies to the
consolidated financial statements included in this annual report on Form 10-K.
Goodwill
We have accounted for our acquisitions using the acquisition method of accounting. The acquisition method requires us to make significant estimates and assumptions,
especially at the acquisition date as we allocate the purchase price to the estimated fair values of acquired tangible and intangible assets and the liabilities assumed. We also use our
best estimates to determine the useful lives of the tangible and definite-lived intangible assets, which impact the periods over which depreciation and amortization of those assets
are recognized. These best estimates and assumptions are inherently uncertain as they pertain to forward looking views of our businesses, customer behavior, and market
conditions. In our acquisitions, we have also recognized goodwill at the amount by which the purchase price paid exceeds the fair value of the net assets acquired.
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Our ongoing accounting for goodwill and the tangible and intangible assets acquired requires us to make significant estimates and assumptions as we exercise judgement to
evaluate these assets for impairment. Our processes and accounting policies for evaluating impairments are further described in Note 2 "Summary of Significant Accounting
Policies" to our consolidated financial statements contained in Part II Item 8 of our annual report. As of March 31, 2024, the Company had goodwill of $52.6 million.
Income taxes
We are subject to income taxes in both the United States and numerous foreign jurisdictions. These tax laws are complex and subject to different interpretations by the
taxpayer and the relevant governmental taxing authorities. Significant judgement is required in determining the provision for income tax. There are many transactions and
calculations for which the ultimate tax determination is uncertain. As a result, actual future tax consequences relating to uncertain tax positions may be materially different than our
determinations or estimates.
We recognize deferred tax liabilities and assets based on the difference between the Consolidated Balance Sheet and tax basis of assets and liabilities using the enacted tax
rates in effect for the year in which the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that,
based on available evidence, are not expected to be realized.
Income taxes are determined in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. We account for income taxes using the asset and liability approach. Under this method, deferred income
taxes are recognized for tax consequences in future years based on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at
each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable to the differences that are expected to affect taxable
income.
We periodically evaluate and establish the likelihood of tax assessments based on current and prior years' examinations, and unrecognized tax benefits related to potential
losses that may arise from tax audits in accordance with the relevant accounting guidance. Once established, unrecognized tax benefits are adjusted when there is more information
available or when an event occurs requiring a change.
Legal contingencies
We review outstanding legal matters at each reporting date, in order to assess the need for provisions and disclosures in our financial statements. Among the factors
considered in making decisions on provisions are the nature of the matter, the legal process and potential legal exposure in the relevant jurisdiction, the progress of the matter
(including the progress after the date of the financial statements but before those statements are issued), the opinions or views of our legal advisers, experiences on similar cases and
any decision of our management as to how we will respond to the matter.
Consolidation of FST Belize
We have assessed whether we should consolidate FST Belize under the variable interest entity (“VIE”) accounting method or the voting interest method ("VOE"). In July
2014, prior to our reverse acquisition transaction, Timur Turlov founded FST Belize, a Belize-based broker dealer. FST Belize is solely owned by Mr. Turlov and was not acquired
by our company as part of our reverse acquisition transaction. Although FRHC and FST Belize are common control entities, under the control of an individual, there is no
indication that FRHC should consolidate FST Belize given that:
(1) FST Belize is not a VIE and is not subject to further VIE analysis due to the fact it has sufficient equity at risk to finance its activities without additional financial
support and the control over its significant activities is held by its sole shareholder, Mr. Turlov who is also FRHC's controlling shareholder, chairman and chief executive officer;
and
(2) Mr. Turlov has a controlling interest in FST Belize such that under the VOE model FRHC is not required to consolidate FST Belize.
FST Belize is a corporation and Mr. Turlov is the sole owner of FST Belize, holding 100% of the ownership interest in it. There are no other shareholders or parties with
participating rights or the ability to remove Mr. Turlov from his ownership position. Mr.Turlov has the ability to make all decisions in respect of FST Belize. FRHC's management
has also assessed the relationship between FRHC (through its subsidiary Freedom EU) and FST Belize. Other than the tariff rates stipulated in the Variation Agreement dated
February 25, 2020 entered into between Freedom EU and FST Belize, including the General Terms and Conditions of Business, which sets out the specific terms and conditions of
the
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relationship between Freedom EU and FST Belize, there are no other contractual agreements or other implicit arrangements between the two parties that provide FRHC the power
to control the operations of FST Belize. The most recent VIE analysis was performed on December 2022 as a result of a change in certain contractual arrangements with FST
Belize. Since such analysis was performed, there were no material changes to the contractual agreements or other implicit arrangements that affected the VIE analysis, and our
omnibus brokerage relationship with FST Belize had been terminated as of March 31, 2024.
RECENT ACCOUNTING PRONOUNCEMENTS
For details of applicable new accounting standards, see "Recent accounting pronouncements" in Note 2 "Summary of Significant Accounting Policies" in the notes to our
consolidated financial statements contained in Part II Item 8 of this annual report.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Market Risk
The following information, together with information included in "Overview" in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II Item 7 of this annual report, describes our primary market risk exposures. Market risk is the risk of economic loss arising from the adverse impact of market
changes to the market value of our trading and investment positions. We are exposed to a variety of market risks, including interest rate risk, foreign currency exchange risk and
equity price risk.
Interest Rate Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio and outstanding debt. While we are exposed to global interest rate fluctuations, we
are most sensitive to fluctuations in interest rates in Kazakhstan. Changes in interest rates in Kazakhstan may have significant effect on the fair value of securities on our balance
sheet.
Our investment policies and strategies are focused on preservation of capital and supporting our liquidity requirements. We typically invest in highly rated securities, with
the primary objective of minimizing the potential risk of principal loss. Our investment policies generally require securities to be investment grade and limit the amount of credit
exposure to any one issuer with the exception of government and quasi-government entities. To provide a meaningful assessment of the interest rate risk associated with our
investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis
point parallel shift in the yield curve. Based on investment positions as of March 31, 2024 and 2023 (not including assets held for sale), a hypothetical 100 basis point increase in
interest rates across all maturities would have resulted in $128.9 million and $80.9 million incremental decline in the fair market value of the portfolio, respectively. Such losses
would only be realized if we sold the investments prior to maturity. A hypothetical 100 basis point decrease in interest rates across all maturities would have resulted in a $138.3
million and $87.0 million incremental increase in the fair market value of the portfolio (not including assets held for sale), respectively.
Foreign Currency Exchange Risk
We have a presence in Kazakhstan, Uzbekistan, Kyrgyzstan, Cyprus, Germany, the United Kingdom, Greece, Spain, France, Poland, Austria, Bulgaria, Belgium, Italy,
Netherlands, the United States, Turkey, Armenia, Azerbaijan, and the United Arab Emirates. The activities and accumulated earnings in our non-U.S. subsidiaries are exposed to
fluctuations in foreign exchange rate between our functional currencies and our reporting currency, which is the U.S. dollar.
In accordance with our risk management policies, we manage foreign currency exchange risk on financial assets by holding or creating financial liabilities in the same
currency, maturity and interest rate profile. This foreign exchange risk is calculated on a net foreign exchange basis for individual currencies. We may also enter into foreign
currency forward, swap and option contracts with financial institutions to mitigate foreign currency exposures associated with certain existing assets and liabilities, firmly
committed transactions and forecasted future cash flows.
As mentioned before, our main market is Kazakhstan. Because Kazakhstan's economy is highly dependent on oil exports, any significant decrease in oil prices lead to a
devaluation of local currency, which can lose up to 17% quarterly (during COVID-19 outbreak) of its value relative to the U.S. dollar.
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Based on an analysis of our March 31, 2024 and 2023 (not including assets held for sale) balance sheets we estimate that the net impact of a 10% adverse change in the
value of the U.S. dollar relative to all other currencies would have resulted in an increase of income before income tax in the amount of $121.5 million and decrease of $88.7
million, respectively.
Equity Price Risk
Our equity investments are susceptible to market price risk arising from uncertainties about future values of such investment securities. Equity price risk results from
fluctuations in price and level of the equity securities or instruments we hold. We also have equity investments in entities where the investment is denominated in a foreign
currency, or where the investment is denominated in U.S. dollars but the investee primarily makes investments in foreign currencies. The fair values of these investments are subject
to change at the spot foreign exchange rate between these currencies and our functional currency fluctuates. We attempt to manage the risk of loss inherent in our equity securities
portfolio through diversification and by placing limits on individual and total equity instruments we hold. Reports on our equity portfolio are submitted to our management on a
regular basis.
As of March 31, 2024, and 2023, our exposure to equity investments at fair value was $126.1 million and $65.7 million, respectively. Based on an analysis of the
March 31, 2024 and 2023 (not including assets held for sale) balance sheets we estimate that a decrease of 10% in the equity price would have reduced the value of the equity
securities or instruments we held by approximately $12.6 million and $6.6 million, respectively.
Credit Risk
Credit risk refers to the risk of loss arising when a borrower or counterparty does not meet its financial obligations to us. We are exposed to credit risk through our
products and assets, such as loans issued, marginal lending, derivatives, debt securities, reverse repurchase agreements, and trading account assets.
The table below presents the current credit ratings of issuers of securities in our proprietary portfolio as of March 31, 2024 and 2023:
March 31, 2024
>BB
BB