# Freedom Holding Corp. (FRHC) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Freedom Holding Corp.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/924805/000092480522000027/frhc-20220331.htm Accession: 0000924805-22-000027 Filing date: 2022-05-31 Report date: 2022-03-31 Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub. Confidence: high Company profile: /company/FRHC/ All MD&A years: /company/FRHC/mda/ Next year: /company/FRHC/mda/fy2023/ (FY 2023) OVERVIEW Historically, we have operated the Company as a single operating segment. With the decision to divest our Company of our Russian subsidiaries, we have elected to restructure our operations have been organized into five geographic regions: Kazakhstan, Europe, the U.S., Middle East/Caucasus and Russia. Within these regions, through our subsidiaries, we engage in a broad range of activities in the securities industry, including securities dealing, market making, retail securities brokerage, investment research, investment counseling, investment banking and underwriting services, and in Kazakhstan and Russia we have operated commercial banking services that complement our other financial services. Subsequent to our March 31, 2022, year end we concluded the acquisition of two insurance companies operating in Kazakhstan and have determined to divest our interests in Russia. For additional information see Note 1 "Description of Business" and Note 28 "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. Subsequent Events Acquisitions In May 2022 we completed the acquisition of two insurance companies in Kazakhstan: (1) Freedom Life, which sells products including life insurance, health insurance, annuity insurance, accident insurance, obligatory worker emergency insurance, travel insurance and reinsurance, and (2) Freedom Insurance, a direct insurance carrier, that sells general insurance products in property (including automobile), casualty, civil liability, personal insurance and reinsurance. The acquisition of these two insurance companies will allow us to broaden our product and service offerings to our customers in Kazakhstan and will give us access to the insurance companies' customers to offer them other products and services we sell in Kazakhstan. For additional information regarding Freedom Life and Freedom Insurance, see "Insurance" in "Business" in Part I Item 1 of this annual report. We have additional planned acquisitions of PayBox, Ticketon and ReKassa, which are technology companies that we plan to integrate into our financial services technology platform. We do not consider these planned acquisitions to be material. For additional information regarding these planned acquisitions, see "Planned Information Technology Acquisitions" in "Business" in Part I Item 1 of this annual report. Planned Divestiture of our Russian Subsidiaries As a result of the Russia/Ukraine Conflict, the economic climate in Russia has experienced significant volatility of the ruble, currency controls, materially increased interest rates and inflation and a potential contraction in consumer spending, as well as the withdrawal of foreign businesses from the Russian market. This has and may continue to have a significant negative impact on the Russian economy. This also negatively impacted our business and operations in Russia as well as Ukraine. For additional information see "Recent Events" in "Business" in Part Item 1 of this annual report. After careful consideration, we have decided to divest our interests in our two Russian subsidiaries, Freedom RU and Freedom Bank RU. The divestiture will be made to our chairman, chief executive officer and controlling shareholder, Timur Turlov. We believe the planned divestiture of our Russian subsidiaries is not subject to approval from the CBR, however, given the evolving nature of the Russian countersanctions and their implementation, we cannot assure that such approval will not be required. 57 Table of Contents Following the divestiture, Mr. Turlov has indicated that he in turn intends to pursue the resale of the two entities to certain members of the current management teams operating the Russian brokerage and bank, or to some other suitable buyer, subject to the qualification of any potential purchaser under Russian law and any required governmental or commercial consents. As part of this plan the two entities will be renamed and rebranded immediately after their divestiture from the Company and Mr. Turlov will not hold any position as an officer or director or be involved in the day-to-day operations of either entity. We currently anticipate that the sale of the two entities to Mr. Turlov will be completed as soon as practicable, the completion of which, however, is uncertain and subject to factors beyond our control, but we expect it to be completed before the end of the third fiscal quarter of our 2023 fiscal year. Following the divestiture, Mr. Turlov intends to dispose of the Russian entities within the next 12-18 months, this timing, however, is also uncertain and subject to factors beyond our control. For additional information see "Planned Divestiture of our Russian Subsidiaries" in "Business" in Part I Item 1 of this annual report. At March 31, 2022 and 2021, our Russia segment accounted for 28% and 37% of our total assets, respectively and 32% and 38% of our total liabilities, respectively. As of March 31, 2022, our Russian subsidiaries had 43 offices and branches, which represented approximately 40% of our total offices and branches, and 1,717 employees, which represented approximately 50% of our total employee count. The table below reflects the percentage of the total that certain Russia segment operating results contributed to our total operating results for the fiscal years ended March 31, 2022, 2021 and 2020. [[GREPCENT_TABLE]] [["","For the years ended March 31,"],["","2022","","2021","","2020"],["Fee and commission income","19","%","","19","%","","28","%"],["Total Revenue, Net","\u2014","%","","25","%","","32","%"],["Operating Expenses","45","%","","54","%","","57","%"],["Total Expenses","30","%","","32","%","","43","%"],["Net Profit/(Loss)","(40)","%","","15","%","","(11)","%"]] [[/GREPCENT_TABLE]] For additional details regarding our segment results of operations for each of our segments for the fiscal years ended March 31, 2022, 2021 and 2020, see Note 28 "Segment Reporting" to our consolidated financial statements contained in Part II Item 8 of our annual report. At this time, we do not know what the outcome will be of the Russia/Ukraine Conflict or its long-term impact on the economy of Russia or our Russian subsidiaries. Similarly, we cannot forecast with any certainty the potential impacts the fluid and evolving Russia-related sanctions and ad hoc corporate actions may have on businesses operating in Russia, including our Russian subsidiaries. The divestiture of our Russian subsidiaries will result in significant contraction in the overall size of our Company. Because of the significant uncertainty surrounding the Russia/Ukraine Conflict, it is less clear what impacts the divestiture of our Russian subsidiaries will have on our results of operations and financial condition in the short-term and the long-term. We believe, however that divestiture of our Russian subsidiaries is in the best interest of our Company and shareholders. Going forward we will be focused on completing our corporate restructuring, the divestiture and growing our business operations in Central Asia, Europe, the U.S., and Middle East/Caucasus. Corporate Restructuring As of the fiscal year end Freedom RU owned approximately a 90% interest in Freedom KZ with the remaining ownership held by FRHC. Freedom KZ owns a 100% interest in Freedom Bank KZ, Freedom Insurance and Freedom Life. Prior to the divestiture of our Russian entities, we will undertake a corporate restructuring to transfer legal ownership of Freedom KZ and its subsidiaries to FRHC as a direct subsidiary. For additional information regarding our corporate restructuring, see "Corporate Restructuring" in "Business" in Part I Item 1 of this annual report. Summary of Results of Operations Historically, we have operated as a single operating segment offering financial services to our customers in a single Eurasian geographic region. In conjunction with the decision to divest our Russian subsidiaries and the corporate restructure, coupled with our continued expansion, we have also elected to restructure our operations geographically into five regional segments: Central Asia, Europe, the U.S., Middle East/Caucasus and Russia (until completion of our planned divestiture). Moving forward after completion of the divestiture of our Russian subsidiaries, we will manage our operations in four regional segments. 58 Table of Contents We are focused on growing our business in our four regional segments: Central Asia, Europe, the U.S., and Middle East/Caucasus. Refer to Note 28 "Segment Information", of the Notes to our consolidated financial statements contained in Part II Item 8 of this annual report for further discussion. Depending upon the region, this may include securities brokerage, capital markets/investment banking, commercial banking and insurance. See "Our Regional Segments" in "Business" in Part I Item 1 of this annual report for a further discussion of the services we currently offer in each region. For the fiscal year ended March 31, 2022, we had total revenues, net of $564,663 as compared to $352,551 and $121,902 for the fiscal years ended March 31, 2021 and 2020, respectively. For the fiscal year ended March 31, 2022, we had net income of $211,369 as compared to $142,924 and $22,130 for the fiscal years ended March 31, 2021 and 2020, respectively. Our number of total client accounts increased from approximately 140,000 as of March 31, 2020 to approximately 290,000 as of March 31, 2021, to approximately 410,000 as of March 31, 2022. As of March 31, 2022, more than 55% of those client accounts carried positive cash or asset account balances. Internally, we designate “active accounts” as those in which at least one transaction occurs per quarter. For the fiscal year ended March 31, 2022, we had approximately 94,000 active accounts. Our total assets increased to $2,921,009 as of March 31, 2022 from $2,018,645 as of March 31, 2021 and $453,523 as of March 21, 2020. In addition, during the year ended March 31, 2022, we had a net gain recognized on trading securities of $77,671, primarily due to our disposal in the quarter ended September 30, 2021 of stock we owned in the SPBX. The growth in our revenue and net income resulting from the recognized net gain on the sale of SPBX shares should not be considered indicative of future performance. By comparison, during the fiscal years ended March 31, 2021 and March 31, 2020, we recognized net gain on trading securities of $46,186 and $14,923, respectively. Key Factors Affecting Our Results of Operations Our operations have been, and may continue to be, affected by certain key factors as well as certain historical events and actions. The key factors affecting our business and the results of operations include, in particular: the Russia/Ukraine Conflict (including but not limited to related sanctions and countersanctions), the planned divestiture of our Russian subsidiaries and corporate restructuring discussed above, the business environment in which we operate, the growth of retail brokerage activity in our key markets, the impact of COVID-19, governmental polices, and acquisitions. Each of these factors is discussed in more detail below. Business Environment Financial services industry performance is closely correlated to economic conditions and financial market activity. The Russia/Ukraine Conflict which began in our fourth fiscal quarter has caused significant disruption in the currency market, affected interest rates, securities markets, and negatively impacted Russian and Ukrainian customer confidence. Additionally, broader market conditions and investor activity are a product of many variables, most of which are generally beyond our control and unpredictable. For example, during the period from January 1, 2022 to March 31, 2022, we recognized a decrease in net gain on trading securities of $107,883 as a result of revaluation of securities in our proprietary investment accounts. Despite the impact of the Conflict on the economies and securities markets where we operate, we realized a net gain on trading securities of $77,671 for fiscal 2022, as compared to $46,186 for fiscal 2021 and $14,923 for fiscal 2020. The net gain on trading securities of $77,671 was composed of $179,216 of realized net gain and $101,545 of unrealized net loss on securities positions that remained open at March 31, 2022. For additional information regarding net gains and losses on trading securities see "Net Gain/(Loss) on Trading Securities" below in this Item 7. Similarly, the significant fluctuations in the value of the Russian ruble and the Kazakhstan tenge leading up to and following the beginning of the Conflict in February 2022, resulted in us recognizing a $38,578 net loss on foreign exchange operations during our fourth fiscal quarter 2022 and a net loss on foreign exchange operations of $37,693 for the 2022 fiscal year. From April 1, 2022, through the date of this annual report, the USD/RUB exchange rate has decreased by 25% (from 84.09 to 63.10) and USD/KZT exchange rate decreased by 8% (from 465.46 to 427.39). Given the fluid and unpredictable nature of the Conflict and sanctions and countersanctions, there is no assurance this trend will continue. However, we expect this strengthening of the Russian ruble and the Kazakhstan tenge against the U.S. dollar to positively impact our foreign exchange operations in our first fiscal 2023. For additional information regarding net losses and gains on foreign exchange operations, see "Net (Loss)/Gain on Foreign Exchange Operations" below in this Item 7 Despite the negative effects of the fourth fiscal quarter discussed above, we realized total revenue, net during fiscal 2022 of $564,663, including $431,938 of fee and commission income, and a net gain of trading securities of $77,671 and total net income of $211,369, compared to total net income of $142,924 and $22,130, respectively, during fiscal 2021 and 2020. 59 Table of Contents Growth of Retail Brokerage Activity The retail brokerage markets in Kazakhstan and Russia, have grown rapidly in recent years. This growth has had a significant positive effect on our results of operations in recent periods. According to data from the KASE, the number of active accounts of retail investors on the KASE equity market increased from approximately 150.2 thousand in March 31, 2021 to 218.3 thousand in March 31, 2022. According to the MOEX (based on data provided by NAUFOR), the number of retail customers on the MOEX increased from approximately 11.1 million as of March 31, 2021 to 16.8 million as of March 31, 2022. There is no assurance that such growth rates will continue in future periods. Impact of COVID-19 The COVID-19 pandemic affected the global financial markets and resulted in unprecedented global market conditions that led to significant growth in our customer accounts, as well as increased activity from our existing customers, resulting in higher fee and commission income. We believe that the interventions from banks and governments in response to the COVID-19 pandemic and increased time people spent at home during the pandemic, led to an opportunity and optimism in opening investment accounts and investing in financial markets worldwide, particularly in the U.S. capital markets, and in the non-U.S. markets where we operate. 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 and 2021. While the overall impact of COVID-19 has been largely positive for our business during the fiscal years ended March 31, 2022 and 2021, its future impacts on our business, operational and financial performance is uncertain. We expect a return to more traditional levels of customer interest in investing as we enter into a less critical endemic period. Governmental Policies Our earnings are and will be affected by the monetary, fiscal and foreign policies of the governments of Kazakhstan, Cyprus, and Russia. 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. Related Party Transactions with FFIN Brokerage A significant part of our brokerage business has consisted of providing brokerage services indirectly to brokerage clients of FFIN Brokerage, which is owned personally by Timur Turlov, our controlling shareholder, chairman and chief executive officer, and is not part of our group of companies. FFIN Brokerage has its own brokerage customers, which include individuals and market-maker institutions. A large portion of our fee and commission income is derived from the customer relationship between Freedom EU and FFIN Brokerage. See "Legacy Operations and Key Relationships" in "Business" of Item 1, Part I of this annual report. Fee and commission income generated from FFIN Brokerage accounted for approximately 54% of our total revenue for the year ended March 31, 2022, as compared to approximately 55% of our total revenue for the year ended March 31, 2021, and 62% of our total revenue for the year ended March 31, 2020. As of March 31, 2022, 2021 and 2020, amounts due from FFIN Brokerage were $102,680, $8,948, and $90,696, respectively or 29%, 14%, and 80%, respectively, of total brokerage and other receivables, net. We consider our receivables due from related parties as at these respective dates to be fully collectible. All of our transactions with FFIN Brokerage are conducted in the ordinary course of business. Such transactions are conducted on substantially the same terms as those prevailing at the time for comparable transactions with similarly situated unaffiliated third parties. Acquisitions Historically we have been active in pursuing non-organic growth through mergers and acquisitions. We expect this trend to continue in the future, including the planned acquisitions discussed in "Acquisitions" above in this Item 7. 60 Table of Contents Key Income Statement Line Items Revenue We derive revenue primarily from fee and commission income earned from our retail brokerage and banking customers, fee and commission income from investment banking services, our proprietary trading activities and interest income. Fee and commission income as a percentage of our total revenue was 77%, 77% and 76% in the fiscal year ended March 31, 2022, 2021 and 2020, respectively. Fee and Commission Income Fee and commission income consists principally of brokerage fees from customer trading, including fees charged for providing margin lending and related banking services, and fees for underwriting, market making and consulting services. A substantial portion of our revenue is derived from commissions from customers through accounts with transaction based pricing. Brokerage commissions are charged on investment products in accordance with a schedule we have formulated that aligns with local practices. Retail brokerage service fee and commission income as a percentage of our total fee and commission income was 91%, 90% and 89% in the fiscal years ended March 31, 2022, 2021 and 2020, respectively. Fees received for banking services consist primarily of wire transfer fees, commissions for payment processing and commissions for currency exchange operations. 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 each period. A net gain or loss is comprised of both realized and unrealized gains and losses during the period being presented. Realized gains or losses are recognized when we close an open position in a security and recognize a gain or a loss on that position. U.S. GAAP requires that we also reflect in our 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. Interest Income We earn interest income from trading securities, reverse repurchase transactions, and loans to customers. Interest income on trading securities consists of interest earned from investments in debt securities and dividends earned on equity securities held in our proprietary trading account. Fee and Commission Expense We incur fee and commission expense for operations within our brokerage and banking activities. Fee and commission expense consists of expenses related to brokerage, banking, stock exchange, clearing, and depository services. Generally, we expect fee and commission expense to increase and decrease corresponding to increases and decreases in fee and commission income. Interest Expense Interest expense includes the expenses associated with our short-term and long-term financing, which consist of interest on securities repurchase agreement obligations, customer accounts and deposits, debt securities issued, and loans received. Operating Expense 61 Table of Contents Operating expense includes payroll and bonuses, advertising expenses, lease cost, professional expenses, depreciation and amortization, communication services, software support, stock compensation expense, representative expenses, business trip expenses, utilities, charity, and other expenses. Foreign Currency Translation Adjustments, Net of Tax The functional currencies of our operating subsidiaries are the Russian ruble, the Kazakhstan tenge, the euro, the U.S. dollar, the Ukrainian hryvnia, the Uzbekistani som, the Kyrgyzstani som, the UK pound sterling, the Azerbaijani manat and the Armenian dram. 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 We own a 9% interest in Freedom UA. The remaining 91% interest is owned by Askar Tashtitov, the president of our Company. Through a series of agreements entered into with Freedom UA that obligate us to guarantee the performance of all Freedom UA obligations, provide Freedom UA adequate funding to cover its operating losses and net capital requirements, provide the management competence and operational support and ongoing access to our significant assets, technology resources and expertise in exchange for 90% of all net profits of Freedom UA after tax, we account for Freedom UA as a variable interest entity. We reflect our ownership of Freedom UA as a non-controlling interest in our Consolidated Statements of Financial Condition, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows. All dollar amounts reflected in "Results of Operations," "Liquidity and Capital Resources," "Contractual Obligations," and "Critical Accounting Policies" of this MD&A are presented in thousands of U.S. dollars unless the context indicates otherwise. Results of Operations Comparison of Years Ended March 31, 2022, 2021 and 2020 The following comparison of our financial results for the year ended March 31, 2022, 2021 and 2020, is not necessarily indicative of future results. Certain prior period presentations and disclosures, while not required to be recast, were reclassified to ensure comparability with current period classifications. Revenue The following table sets out information regarding our total revenue, net for the periods presented. [[GREPCENT_TABLE]] [["","Year ended March 31,"],["","2022","","2021","","Amount Change","","%Change","","2020","","AmountChange","","%Change"],["Fee and commission income","$","431,938","","","$","271,939","","","$","159,999","","","59","%","","$","92,668","","","$","179,271","","","193","%"],["Net gain on trading securities","77,671","","","46,186","","","31,485","","","68","%","","14,923","","","31,263","","","209","%"],["Interest income","91,801","","","30,873","","","60,928","","","197","%","","12,134","","","18,739","","","154","%"],["Net (loss)/gain on foreign exchange operations","(37,693)","","","3,428","","","(41,121)","","","(1,200)","%","","2,315","","","1,113","","","48","%"],["Net gain/(loss) on derivatives","946","","","125","","","821","","","657","%","","(138)","","","263","","","(191)","%"],["Total revenue, net","$","564,663","","","$","352,551","","","$","212,112","","","60","%","","$","121,902","","","$","230,649","","","189","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Year ended March 31,"],["","2022","","2021","","2020"],["Fee and commission income","77","%","","77","%","","76","%"],["Net gain on trading securities","14","%","","13","%","","12","%"],["Interest income","16","%","","9","%","","10","%"],["Net (loss)/gain on foreign exchange operations","(7)","%","","1","%","","2","%"],["Net gain/(loss) on derivatives","\u2014","%","","\u2014","%","","\u2014","%"],["Total revenue, net","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] 62 Table of Contents During fiscal 2022, we realized total net revenue of $564,663, a 60% increase compared to fiscal 2021. Revenue during fiscal 2022 was higher than fiscal 2021 primarily due to increased fee and commission income, net gain on trading securities and interest income, which was partially offset by a net loss on foreign exchange operations. During fiscal 2021 we realized total net revenue of $352,551, a 189% increase compared to fiscal 2020. Revenue during fiscal 2021 was significantly higher than fiscal 2020 primarily due to increases in all revenue categories during fiscal 2021. Fee and commission income The following tables set forth information regarding our fee and commission revenues for the periods presented. [[GREPCENT_TABLE]] [["","Year ended March 31,"],["","2022","","2021","","Amount Change","","%Change","","2020","","AmountChange","","%Change"],["Retail brokerage fee and commission income","$","391,996","","","$","245,913","","","$","146,083","","","59","%","","$","82,800","","","$","163,113","","","197","%"],["Investment banking fee and commission income","8,705","","","8,345","","","360","","","4","%","","2,360","","","5,985","","","254","%"],["Commission from bank services","23,274","","","12,403","","","10,871","","","88","%","","7,240","","","5,163","","","71","%"],["Other fee and commission income","7,963","","","5,278","","","2,685","","","51","%","","268","","","5,010","","","1869","%"],["Total fee and commission income","$","431,938","","","$","271,939","","","$","159,999","","","59","%","","$","92,668","","","$","179,271","","","193","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Year ended March 31,"],["","","2022","","2021","","2020"],["","","(as a % of total fee and commission income)"],["Retail brokerage fee and commission income","","91","%","","90","%","","89","%"],["Investment banking fee and commission income","","2","%","","3","%","","3","%"],["Commission from bank services","","5","%","","5","%","","8","%"],["Other fee and commission income","","2","%","","2","%","","\u2014","%"],["Total fee and commission income","","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] During fiscal 2022 fee and commission income was $431,938, an increase of $159,999, or 59%, as compared to fee and commission income of $271,939 for fiscal 2021. This increase in fee and commission income was primarily attributable to a $146,083 increase in fees and commission from brokerage services. The increase in fee and commission income from brokerage services was attributable to growth in client accounts through organic efforts including expansion of fee and commission generating activities such as an increase in the number of clients, an increase in number of active clients, and more trades by clients. During fiscal 2021 fee and commission income increased by $179,271, a 193% increase over fiscal 2020. This increase was the result of a $163,113 increase in fees and commission from brokerage services primarily as a result of growth in client accounts through non-organic and organic efforts including expansion of our retail financial advisers and increases in the volume of analysts' reports made available to our customer base, and significantly increased trading volume and client activity stemming from government and bank interventions and other events in response to the COVID-19 pandemic and the resulting increased market volatility and economic uncertainty. During fiscal 2021 we also realized a $5,163 increase in related banking service fees, and a $5,985 increase in fees for underwriting services. The increase in fees from underwriting services was driven mainly by increases in the volume and size of debt capital market transactions arranged by Kazakhstan brokerage companies, and the unique market opportunities created by the COVID-19 pandemic. 63 Table of Contents Net gain on trading securities Net gain on trading securities was $77,671 for fiscal 2022 as compared to $46,186 for fiscal 2021. See the following table for information regarding our net gains and losses during fiscal 2022 and 2021: See the following table for information regarding our net gains and losses during fiscal 2022, 2021 and 2020: [[GREPCENT_TABLE]] [["","Realized Net Gain","","Unrealized Net Gain/(Loss)","","Net Gain on Trading Securities"],["Fiscal 2022","$","179,216","","","$","(101,545)","","","$","77,671"],["Fiscal 2021","$","39,267","","","$6,919","","","$","46,186"],["Fiscal 2020","$","22,770","","","$","(7,847)","","","$","14,923"]] [[/GREPCENT_TABLE]] During fiscal 2022 we exchanged approximately 12.5 million shares of stock in the SPBX we held in our proprietary trading account for units in the SPBX ETF. The main contributing factors to the increase in realized net gain on trading securities during fiscal 2022, compared to fiscal 2021, was the sale of those SPBX ETF units and other SPBX shares we held. As a result, in fiscal 2022 we recognized realized net gain on trading securities sold of $179,216. Largely as a result of the Russia/Ukraine Conflict and its impacts on the securities markets we had unrealized net losses on open trading positions of $101,545. As a result of the foregoing, during fiscal 2022 we recognized a net gain on trading securities of $77,671 as shown in the table above. The main contributing factors to the increase in net gain on trading securities in fiscal 2021 compared to fiscal 2020 included the increased size of our trading portfolio, favorable market conditions, increased use and success of intraday algorithmic trading and market-making activities on the SPBX outside of regular U.S. market hours. Interest income The following tables set forth information regarding our revenue from interest income for the periods presented. [[GREPCENT_TABLE]] [["","Year ended March 31,"],["","2022","","2021","","Amount Change","","%Change","","2020","","AmountChange","","%Change"],["Interest income on reverse repurchase agreements and amounts due from banks","$","6,172","","","$","3,428","","","$","2,744","","","80","%","","$","1,586","","","$","1,842","","","116","%"],["Interest income on loans to customers","$","4,927","","","$","579","","","$","4,348","","","751","%","","$","572","","","$","7","","","1","%"],["Interest income on trading securities","$","80,702","","","$","26,866","","","$","53,836","","","200","%","","$","9,976","","","$","16,890","","","169","%"],["Total interest income","$","91,801","","","$","30,873","","","$","60,928","","","197","%","","$","12,134","","","$","18,739","","","154","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Year ended March 31,"],["","","2022","","2021","","2020"],["","","(as a % of total interest income)"],["Interest income on reverse repurchase agreements and amounts due from banks","","7","%","","11","%","","13","%"],["Interest income on loans to customers","","5","%","","2","%","","5","%"],["Interest income on trading securities","","88","%","","87","%","","82","%"],["Total interest income","","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] During fiscal 2022 we recognized a $60,928, or 197% increase in interest income as compared to fiscal 2021. This increase in interest income was the result of an increase in the total size of our trading portfolio and an increase in the amount of bonds we held as a percentage of our total trading portfolio. During fiscal 2022 we shifted more of our portfolio from equity to debt to take advantage of a profitable bond market. In addition, we recognized a $4,348 or 751% increase in interest income from new loans issued to customers of Freedom Bank KZ. We also realized a $2,744, or 80% increase in interest income due from banks and from reverse repurchase transactions during fiscal 2022 as compared to fiscal 2021. 64 Table of Contents During fiscal 2021 we realized a $16,890, or 169% increase in interest income from trading securities compared to fiscal 2020 because we increased the total size of our trading portfolio and the percentage of our investments in bonds. We also realized a $1,842, or 116% increase in interest income due from banks that resulted primarily from increased overnight deposit transactions during fiscal 2021 and from reverse repurchase transactions because we engaged in an increased volume of such transactions during fiscal 2021. We also realized increased interest income due from banks of $461 that resulted primarily from increased overnight deposit transactions during fiscal 2021. Net gain/(loss) on foreign exchange operations Under U.S. GAAP, we are required to revalue monetary assets and liabilities denominated in any currency other than the functional currency of the entity holding such asset or liability to the functional currency of that entity. During the year ended March 31, 2022, we realized a net loss on foreign exchange operations of $37,693 compared to a net gain of $3,428 during the year ended March 31, 2021. The primary reason for this net loss was the 11% decrease in the value of the Russian ruble against the U.S. dollar stemming from the geopolitical turmoil that began in early 2022. Due to large amounts of USD denominated net liabilities held in our subsidiary Freedom RU, we recognized a net loss on foreign exchange operations of $21,532. Further, we realized a net loss on foreign exchange operations affected by the purchase and sale of foreign currency of $12,378 as a result of higher volume of currency exchange transactions. During fiscal 2021 we recognized a $1,113 increase in net gain on foreign exchange operations compared to fiscal 2020 as the value of Kazakhstan tenge and Russian ruble appreciated by 4.8% and 2.6%, respectively against U.S. dollar. Expense The following tables set forth information regarding our total expense for the periods presented. [[GREPCENT_TABLE]] [["","Year ended March 31,"],["","2022","","2021","","Amount Change","","% Change","","2020","","Amount Change","","% Change"],["Fee and commission expense","$","81,231","","","$","73,100","","","$","8,131","","","11","%","","$","21,936","","","$","51,164","","","233","%"],["Interest expense","75,899","","","27,366","","","48,533","","","177","%","","12,399","","","14,967","","","121","%"],["Operating expense","161,593","","","77,434","","","84,159","","","109","%","","59,990","","","17,444","","","29","%"],["Provision for impairment losses/(recoveries)","2,985","","","1,561","","","1,424","","","91","%","","(1,164)","","","2,725","","","(234)","%"],["Other expense, net","6,061","","","68","","","5,993","","","8813","%","","609","","","(541)","","","(89)","%"],["Total expense","$","327,769","","","$","179,529","","","$","148,240","","","83","%","","$","93,770","","","$","85,759","","","91","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Year ended March 31,"],["","2022","","2021","","2020"],["Fee and commission expense","25","%","","41","%","","23","%"],["Interest expense","23","%","","15","%","","13","%"],["Operating expense","49","%","","43","%","","64","%"],["Provision for impairment losses/(recoveries)","1","%","","1","%","","(1)","%"],["Other expense, net","2","%","","\u2014","%","","1","%"],["Total expense","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] For fiscal 2022 we incurred total expenses of $327,769, an 83% increase as compared to total expense of $179,529 for fiscal 2021. Expenses increased with the increase of interest expense and the growth of our business primarily in connection with increases in administrative costs and fees from the growth in our revenue generating activities and integrating our acquisition targets. During fiscal 2021 we incurred total expenses of $179,529, a 91% increase compared to fiscal 2020. Expenses increased with the growth of our business during fiscal 2021 primarily in connection with corresponding administrative costs and fees from the growth in our revenue generating activities and integrating our acquisition targets. 65 Table of Contents Fee and commission expense Fee and commission expense increased by $8,131, or 11%, during fiscal 2022 as compared with fiscal 2021. This included increases in commissions paid for bank services of $5,894 and commission fees paid for clearing and exchange services of $1,185. Fee and commission expense increased by $51,164, or 233% during fiscal 2021 compared to fiscal 2020. This included increases in brokerage commissions to our prime brokers of $44,425, commissions paid for bank services of $3,796 and commission fees paid to Central Depositories and stock exchanges of $879. These increases in fee and commission expense were the result of both growth in our client base and increased transaction volume from our clients. 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 2022 we incurred a $48,533, or 177% increase in interest expense as compared to fiscal 2021. The increase in interest expense is primarily attributable to a $36,929, or 253% increase in the volume of short-term financing through securities repurchase agreements, and a $11,327 increase in interest on customer deposits. During fiscal 2022 we increased our volume of short-term financing through securities repurchase agreements primarily in order to fund our investment portfolio. The increase in interest on customer deposits was a result of the growth of customer deposit accounts. For fiscal 2021 we incurred a $14,967 or 121% increase in interest expense over fiscal 2020. The increased interest expense is primarily attributable to a $7,434 increase in volume of short-term financing through securities repurchase agreements, a $5,671 increase in interest on client deposits, and a $1,914 increase in interest expense on debt securities issued. 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 client deposits was a result of a growth of customer deposits. The increase of interest expense on debt securities was due to increased interest payments paid on the FRHC Notes issued in December 2019 and February 2020. Operating expenses Operating expenses for fiscal 2022 was $161,593, a 109% increase compared to fiscal 2021. This increase was primarily attributable to a $36,949 increase in payroll and bonuses expense as a result of expansion of our workforce through hiring, a $14,599 increase in stock compensation expense from issuing restricted stock grants to key employees in May 2021, a $10,247 increase in advertising expenses, an $8,448 increase in professional services as a result of expansion of our business, a $2,311 increase in software support, and a $1,695 in lease depreciation. Operating expenses for fiscal 2021 totaled $77,434, a $17,444, or 29% increase compared to fiscal 2020. This increase was primarily attributable to a $14,015 increase in payroll and bonus expense as a result expansion of our workforce through acquisition and hiring. Other expense During fiscal 2022, we incurred an 8,813% increase of other expense, net as compared to fiscal 2021. This was due to economic uncertainty during our fourth fiscal quarter stemming from the Russia/Ukraine Conflict, where we recognized a $2,300 impairment losses on goodwill of Freedom Bank RU, Zerich, and Freedom UA. Other expense, net during fiscal 2022 also included write-off expenses of client base that was recognized with the acquisition of Zerich in the amount of $3,126. Income tax expense We recognized net income before income tax of $236,894, $173,022 and $28,132 during fiscal 2022, 2021 and 2020, respectively. Our effective tax rate during fiscal 2022 decreased to 10.8%, from 17.4% during fiscal 2021 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 foreign jurisdictions where our subsidiaries operate along with the incremental U.S. tax on GILTI. Despite the decrease in our effective tax rate, as a result in the increase of our net income before income tax by $63,872, our income tax expense increased by $4,573 during the fiscal 2022. Net income 66 Table of Contents As a result of the foregoing factors, for fiscal 2022 we had net income of $211,369 as compared to $142,924 for fiscal 2021, an increase of 48%. For fiscal 2020 we had net income of $22,130. Non-controlling interest We reflect our ownership of Freedom UA as a non-controlling interest in our Consolidated Statements of Financial Condition, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows. We recognized a net loss attributable to non-controlling interest of $6,566 for the fiscal year 2022 as compared to a net income attributable to non-controlling interest of $631 for the fiscal year 2021. Largely as a result of the Russia/Ukraine Conflict and its impacts on the securities markets where Freedom UA held most of its open securities positions, we recognized an unrealized net loss on open trading positions of $5,471. We own a 9% interest in Freedom UA. The remaining 91% interest is owned by Askar Tashtitov, the president of our Company. Through a series of agreements entered into with Freedom UA that obligate us to guarantee the performance of all Freedom UA obligations, provide Freedom UA adequate funding to cover its operating losses and net capital requirements, provide the management competence and operational support and ongoing access to our significant assets, technology resources and expertise in exchange for 90% of all net profits of Freedom UA after tax, we account for Freedom UA as a variable interest entity. We reflect our ownership of Freedom UA as a non-controlling interest in our Consolidated Statements of Financial Condition, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows. Foreign currency translation adjustments, net of tax Due to the depreciation of the Russian ruble by 11% against the U.S. dollar and depreciation of Kazakhstan tenge by 9.4% against the U.S. dollar for fiscal year 2022 as compared to fiscal year 2021, we realized a foreign currency translation loss of $17,245 for fiscal year 2022, compared to a foreign currency translation gain of $1,857 for fiscal year 2021. During fiscal 2020, we realized a foreign currency translation loss of $14,851 as a result of the depreciation of the Russian ruble by 20% and the Kazakhstan tenge by 18% against the U.S. dollar. Segment Results of Operations We have historically operated as a single operating segment. With the planned restructuring of our operations and divestiture of our Russian subsidiaries, coupled with our continued expansion, we have elected to reorganize our operations geographically into five regional segments: Central Asia, Europe, United States, Middle East/Caucasus, and Russia (until completion of the planned divestiture). Moving forward after completion of the divestiture of our Russian subsidiaries, we will manage our operations in four regional segments. These operating segments are based on how our CODM will be making decisions about allocating resources and assessing performance. The total revenue, net associated with our segments is summarized in the following table: [[GREPCENT_TABLE]] [["","","Year ended March 31,"],["","","2022","","2021","","Amount Change","","% Change","","2020","","Amount Change","","% Change"],["Central Asia","","118,067","","","55,722","","","$","62,345","","","112","%","","$","19,221","","","$","36,501","","","190","%"],["Europe","","437,706","","","201,188","","","236,518","","","118","%","","63,781","","","137,407","","","215","%"],["U.S.","","9,139","","","9,086","","","53","","","1","%","","236","","","8,850","","","3,750","%"],["Russia","","(249)","","","86,555","","","(86,804)","","","(100)","%","","38,664","","","47,891","","","124","%"],["Middle East/Caucasus","","\u2014","","","$","\u2014","","","\u2014","","","\u2014","%","","\u2014","","","\u2014","","","\u2014","%"],["Total revenue, net","","$","564,663","","","$","352,551","","","$","212,112","","","60","%","","$","121,902","","","$","230,649","","","189","%"]] [[/GREPCENT_TABLE]] During fiscal 2022 total revenue, net increased across each of our regional operating segments, except Russia. During fiscal 2021 total revenue, net increased across each of our regional operating segments. The increase in total net revenues for fiscal 2022 compared to fiscal 2021, and fiscal 2021 compared to fiscal 2020, was driven by the following: •Total revenue, net in our Central Asia segment increased $62,345, or 112%, to 118,067 for fiscal 2022, as compared to $55,722 during fiscal 2021. This increase was mainly driven by the increase of interest income. This increase of interest income was primarily impacted by growth of interest received from securities held in our trading portfolio and an increase in interest accrued from loans issued. Moreover, this segment was significantly affected by the increase in commission fees from brokerage and banking services during the year caused by the expansion of our brokerage and banking business. 67 Table of Contents Total revenue, net in our Central Asia segment increased $36,501, or 190%, to $55,722 for fiscal 2021, as compared to $19,221 during fiscal 2020. This increase was mainly driven by the increase of commission income. During fiscal 2022 growth of commission income was caused by the opening and rapid growth of brokerage services by Freedom Global. Furthermore, we had growth of income on brokerage services and growth of commission from underwriting services. The increase of revenue was also due to the rise of net gain on trading securities, related to growth of our trading portfolio and an increase in interest income from securities held in our trading portfolio. •Total revenue, net in our Europe segment increased $236,518, or 118%, to $437,706 for fiscal 2022, as compared to $201,188 during fiscal 2021. This increase was driven by an increase in fee and commission income due to an increase in the number of clients and the volume of transactions they made. There was also a large increase in revenue due to the growth of net gain on trading securities as a result of realized gain from the sale of the SPBX ETF and SPBX shares for our investment portfolio. Total revenue, net in our Europe segment increased $137,407, or 215%, to $201,188 for fiscal 2021, as compared to $63,781 during fiscal 2020. This growth was driven by an increase in commission income for the year due to an increase in the size of our customer base and the volume of transactions they make. •Total revenue, net in our U.S. segment was stable during fiscal 2022 and increased only by $53 or 1% as compared to fiscal year 2021. Total revenue, net in our U.S. segment increased by $8,850 or 3,750%, to $9,086 for fiscal year 2021, as compared to $236 during fiscal year 2020. This increase was driven by positive revaluation of the SPBX shares and acquisition of PrimeEx in addition to its earned fee and commission income. •We did not recognize revenue in our Middle East/Caucasus segment during fiscal 2021 and 2020 as none of our Azerbaijani, Armenian or UAE subsidiaries existed in those periods. During fiscal 2022 we began the process of forming our Azerbaijani and Armenian subsidiaries and establishing their operations. We did not form our UAE subsidiary until April 2022 and are still in process of establishing its operations. •Total revenues, net in our Russia segment decreased by $86,804, or 100%, generating negative net revenue of ($249) for fiscal year 2022, as compared to $86,555 during fiscal year 2021. This decrease in total revenue, net was driven by a net loss on trading securities from negative revaluation of certain securities, and a net loss on foreign currency exchange operations from an 11% depreciation of the Russian ruble against the U.S. dollar. These decreases were partially offset by growth in fee and commission income as a result of an increase the volume of customer transactions and expansion of the customer base in our Russia segment. Total revenue, net in our Russia segment increased by $47,891, or 124% during fiscal 2021, to $86,555, as compared to$38,664 during fiscal year 2020. During fiscal 2021, net revenues increased as a result of overall expansion our business in our Russia segment, both in the size of its customer base and its trading portfolio. The total expenses associated with our segments is summarized in the following table: [[GREPCENT_TABLE]] [["","","Year ended March 31,"],["","","2022","","2021","","Amount Change","","% Change","","2020","","Amount Change","","% Change"],["Central Asia","","112,316","","","34,632","","","$","77,684","","","224","%","","26,927","","","$","7,705","","","29","%"],["Europe","","101,078","","","79,176","","","21,902","","","28","%","","22,432","","","56,744","","","253","%"],["U.S.","","17,134","","","7,642","","","9,492","","","124","%","","4,423","","","3,219","","","73","%"],["Russia","","96,961","","","58,064","","","38,897","","","67","%","","39,988","","","18,076","","","45","%"],["Middle East/Caucasus","","280","","","15","","","265","","","1,767","%","","\u2014","","","15","","","\u2014","%"],["Total expense, net","","$","327,769","","","$","179,529","","","$","148,240","","","83","%","","$","93,770","","","$","85,759","","","91","%"]] [[/GREPCENT_TABLE]] During fiscal 2022, total expense increased across each of our regional operating segments. During fiscal 2021, total expense increased in our Central Asia, Europe, U.S and Russia segments as compared to fiscal 2020. The increase in total expenses for fiscal 2022 compared to fiscal 2021, and fiscal 2021 compared to fiscal 2020, was driven by the following: •Total expense in our Central Asia segment increased by $77,684, or 224%, to $112,316 for fiscal 2022, as compared to $34,632 during fiscal 2021. This increase was driven by the increase in interest expense. This increase of interest expense was primarily impacted by growth of interest paid on securities repurchase agreements and customer deposits. Moreover, this segment was significantly affected by the increase in operating expenses due to the growth of payroll and bonuses and administrative expenses. Total expense in our Central Asia segment increased by $7,705, or 29%, to $ 34,632 for fiscal 2021, as compared to $26,927 during fiscal 2020. 68 Table of Contents This increase was driven by the increase in interest expense. During the fiscal 2021, growth of interest expense was caused by the acquisition of Freedom Bank KZ, and its rapid growth of securities repurchase agreements and payments for customer deposits. The increase of expenses was also caused by an increased expenses associated with provisions for impairment losses due to estimates of uncollectible receivables. •Total expense in our Europe segment increased $21,902, or 28%, to $101,078 for fiscal 2022 as compared to $79,176 during fiscal 2021. This increase was driven by the growth of operating expense, mainly due to payroll and bonuses, marketing expense, and professional services. Total expense in our Europe region increased $56,744, or 253%, to $79,176 for fiscal 2021 as compared to $22,432 during fiscal 2020. This increase was driven by the growth of fee and commission expense from an increase in our customer base and related transaction volume increase, and by an increase in operating expense related to the growth of our business in this region. •Total expense in our U.S. segment increased $9,492, or 124%, to $17,134 for fiscal 2022 as compared to $7,642 during fiscal 2021. This increase was driven by the growth of stock compensation expense and an increase of professional services. Total expenses in our U.S. segment increased by $3,219 or 25%, to $7,642 for fiscal 2021 compared to $4,423 during fiscal 2020 due to the growth of stock compensation expenses. •Total expense in our Russia segment increased $38,897, or 67%, to $96,961 for fiscal 2022 as compared $58,064 during fiscal 2021. This increase was mostly due to the increase of operating expenses for payroll and bonuses, advertising, lease cost and representative expenses. Total expenses in our Russia segment increased by $18,076, or 45% to $58,064 during fiscal 2021 as compared to $39,988 during fiscal 2020. This increase was driven mostly due to the increase of fee and commission expense, interest expense and operating expenses from the expansion our business in our Russia segment. 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 inventory 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: [[GREPCENT_TABLE]] [["","As of March 31,"],["","2022","","2021"],["Cash and cash equivalents(1)","$","625,547","","","$","698,828"],["Trading securities","$","1,203,479","","","$","736,188"],["Total assets","$","2,921,009","","","$","2,018,645"],["Net liquid assets(2)","$","2,212,300","","","$","1,519,719"]] [[/GREPCENT_TABLE]] (1)Of the $625,547 in cash and cash equivalents we held at March 31, 2022, $278,463, or approximately 45%, were subject to reverse repurchase agreements. By comparison, at March 31, 2021, we had cash and cash equivalents of $698,828, of which $248,946, or 36%, were subject to reverse repurchase agreements. 69 Table of Contents The amount of cash and cash equivalents 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. (2)Consists of cash and cash equivalents, trading securities, brokerage and other receivable and other assets. During fiscal year 2022 and 2021, we had total liabilities of $2,413,334 and $1,742,974, respectively, including customer liabilities of $1,417,937 and $1,163,697, respectively. We financed our assets primarily from cash flows from operations and short-term and long-term financing arrangements. Cash Flows The following table presents our cash flows for fiscal 2022, 2021 and 2020: [[GREPCENT_TABLE]] [["","Year endedMarch 31, 2022","","Year endedMarch 31, 2021","","Year ended March 31, 2020"],["Net cash flows (used in)/from operating activities","$","(347,988)","","","$","565,299","","","$","44,271"],["Net cash flows (used in)/from investing activities","(8,703)","","","97,040","","","(10,854)"],["Net cash flows from financing activities","453,684","","","348,411","","","33,109"],["Effect of changes in foreign exchange rates on cash","(54,552)","","","(3,769)","","","(25,141)"],["NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH","$","42,441","","","$","1,006,981","","","$","41,385"]] [[/GREPCENT_TABLE]] Net Cash Flows (Used In)/From Operating Activities Net cash used in operating activities during fiscal 2022 was comprised of net cash used in operating activities and net income adjusted for non-cash movements (depreciation and amortization, noncash lease expense, changes in deferred taxes, stock compensation expense, unrealized gain on trading securities, net change in accrued interest and allowance form receivables). Net cash used in operating activities resulted primarily from changes in operating assets and liabilities. Such changes included those set out in the following table: [[GREPCENT_TABLE]] [["","Year endedMarch 31, 2022","","Year endedMarch 31, 2021","","Year ended March 31, 2020"],["Increases in trading securities","$","654,027","","(1)","$","507,493","","","$","22,870"],["Increases in customer liabilities","$","352,533","","(2)","$","860,438","","","$","115,844"],["Increases/(decreases) in brokerage and other receivables","$","313,687","","(3)","$","(49,303)","","","$","47,089"],["Increases in loans purchased from microfinance organization","$","59,839","","(4)","$","\u2014","","","$","\u2014"],["Increases in loans issued","$","44,270","","(5)","$","850","","","$","7,787"]] [[/GREPCENT_TABLE]] (1)Resulted from increased purchases of securities held in our proprietary account. (2)Resulted from increased deposits from new and existing customers. (3)Resulted from increased volume of margin lending receivables. (4)Resulted from the purchase of uncollateralized consumer retail loans from FFIN Credit. (5)Resulted from launching a first-in-market digital mortgage product by our subsidiary Freedom Bank KZ. The net cash outflow during fiscal 2022 was primarily attributable to an increase in brokerage and other receivables over that period, which resulted from larger amounts of margin receivables. Margin lending balances fluctuate on a daily basis during the normal course of business and depend on various factors, including trading activity of customers. 70 Table of Contents Net Cash Flows (Used In)/From Investing Activities During the fiscal year 2022 net cash used in investing activities was $8,703 compared to net cash from investing activities of $97,040 during the fiscal year 2021 and cash used in investing activities of $10,854 during the fiscal year 2020. During the fiscal 2022 cash used in investing activities was used for the purchase of fixed assets, net of sales, in the amount of $8,703. Cash from investing activities during the fiscal 2021 included $157,382 received in the acquisition of Zerich, Freedom Bank KZ and PrimeEx and $6,437 from proceeds on the sale of investments available-for-sale, which was partially offset by consideration paid for the Freedom Bank KZ acquisition of $53,097, the Zerich acquisition of $7,110, the PrimeEx acquisition of $2,500 and the purchase of fixed assets, net of sales of $4,072. During the fiscal year 2020 cash used in investing activities was mostly used for the purchase of investments available-for-sale securities and fixed assets, net of sales, the amount of $6,508 and $4,346, respectively. Net Cash Flows From Financing Activities Net cash from financing activities for fiscal year 2022 consisted principally of proceeds from securities repurchase agreement obligations in the amount of $401,468, proceeds from issuance of debt securities of $47,200, and capital contributions of $21,600, partially offset by net cash used in the repurchase of outstanding Freedom KZ and Freedom RU debt securities in the amount of $16,703. Net cash from financing activities during fiscal 2021 consisted principally of proceeds from securities repurchase agreement obligations in the amount of $349,717, which was partially offset with net cash used in repurchase of outstanding Freedom KZ debt securities in the amount of $8,350. Net cash from financing activities during fiscal 2020 consisted principally of proceeds from issuance of debt securities in the amount of $62,970, which was partially offset with net cash used in payment of securities repurchase agreement obligations of $16,730, and repurchase of Freedom KZ debt securities in the amount of $9,578. Dividends We have not declared or paid a cash dividend on our common stock during the past three fiscal years. 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. 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. Indebtedness Short-term Securities Repurchase Arrangements. Our short-term financing is primarily obtained through securities repurchase arrangements entered into with the KASE. We use repurchase arrangements, among other things, to finance our inventory positions. As of March 31, 2022, $769,627, or 64% of the trading securities held in our proprietary trading account were subject to securities repurchase obligations compared to $426,669, or 58% as of March 31, 2021. 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 12 "Securities Repurchase Agreement Obligations" to our consolidated financial statements contained in Part II Item 8 of our annual report. Long-term FRHC 7.00% Notes due December 2022. As of March 31, 2022, we had outstanding $20,500 in principal amount of FRHC 7.00% notes due December 2022, which are listed on the AIX. These notes provide for semi-annual interest payments in June and December and include customary events of default relating to the disposition of our assets outside the ordinary course of business, defaults on other liabilities and obligations, corporate reorganizations, initiation of bankruptcy proceeding, termination of the AIX listing by us, and substitution of the principal debtor without requisite approval. These notes mature in December 2022. Freedom RU USD 6.50% Bonds. As of March 31, 2022, we had outstanding $30,043 in principal amount of Freedom RU U.S. dollar denominated 6.50% bonds (the "Freedom RU USD 6.50% Bonds"). The Freedom RU USD 6.50% Bonds have a term of three years, with a quarterly coupon payment. The Freedom RU USD 6.50% Bonds were issued in denomination of U.S. $1, with a minimum purchase requirement of 1.4 million Russian rubles. Freedom RU is authorized to place up to a maximum of 40,000 of these Freedom RU USD 6.50% Bonds. The Freedom RU USD 6.50% Bonds are listed on the MOEX and are governed by the "Exchange Bond Terms and Conditions in the Framework of the Exchange Bonds Program". The Freedom RU USD 6.50% Bonds mature in January 2023. 71 Table of Contents Freedom RU USD 5.50% Bonds. As of March 31, 2022, we had outstanding $34,000 in principal amount of Freedom RU U.S. dollar denominated 5.50% bonds (the "Freedom RU USD 5.50% Bonds"). The Freedom RU USD 5.50% Bonds have a term of five years, with a quarterly coupon payment. The Freedom RU USD 5.50% Bonds were issued in denomination of U.S. $1, with a minimum purchase requirement of 1.4 million Russian rubles. Freedom RU is authorized to place up to a maximum of 34,000 of these Freedom RU USD 5.50% Bonds. The Freedom RU USD 5.50% Bonds are listed on the MOEX. The Freedom RU USD 5.50% Bonds are governed by the Securities Placement Terms and Conditions and the Resolution to Issue Securities. The Freedom RU USD 5.50% Bonds mature in November 2026. Freedom SPC Bonds. On November 16, 2021, Freedom SPC commenced a best efforts underwritten public offering of up to US $66,000 aggregate principal amount of its 5.50% US dollar denominated bonds due October 21, 2026 (the "Freedom SPC Bonds"), which are listed on the AIX. As of March 31, 2022, there were outstanding $13,200 in principal amount of the Freedom SPC Bonds. The offering may continue for a period of up to one year from the date of the commencement of the offering. The Freedom SPC Bonds are guaranteed by FRHC and the proceeds from the issuance of the Freedom SPC Bonds have been and will be, as the case may be, transferred to FRHC pursuant to an intercompany loan agreement that bears interest at a rate of 5.50% per annum. The Freedom SPC Bonds are governed by the Offer Terms of the 5.5% Coupon US $66,000,000 Bonds Due October 21, 2026. The Freedom SPC Bonds mature in October 2026. Freedom RU RUB Bonds. During the quarter ended December 31, 2021, we repaid in full at maturity our RUB denominated 12.00% Freedom RU RUB Bonds that had a carrying value of $7,042 including interest accrued of $312 as of December 31, 2021.     Freedom KZ USD Bonds. During the quarter ended June 30, 2021, we repaid in full at maturity our U.S. dollar denominated 8% Freedom KZ USD bonds that had a carrying value of $10,477 including interest accrued of $447 as of March 31, 2021. Net 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. These minimum net capital and capital adequacy requirements range from approximately $22 to $21,480 and fluctuate depending on various factors. At March 31, 2022, the aggregate net capital requirements of our subsidiaries was approximately $27,585. Each of our subsidiaries that are subject to net capital or capital adequacy requirements exceeded the minimum required amount at March 31, 2022. 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 levels, 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 other various rules and regulations, including liquidity and capital adequacy ratios. Our operations that require the intensive use of capital would be limited to the extent necessary to meet all our regulatory requirements. Over the past several years, we have pursued an aggressive growth strategy both through acquisitions and organic growth efforts. During fiscal 2022 we anticipate continuing efforts to expand the footprint of our business on a scale similar to fiscal 2021, while at the same time divesting our Russian subsidiaries. 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, or the costs associated with divestiture of our Russian subsidiaries and the impacts of that action, 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. 72 Table of Contents Off-Balance Sheet Financing Arrangements For a discussion of off-balance sheet financing arrangements of the Company as of March 31, 2022, see Note 27 "Commitments and Contingencies" to our consolidated financial statements contained in Part II Item 8 of our annual report. Contractual Obligations The following table sets forth information related to our contractual obligations as of March 31, 2022: [[GREPCENT_TABLE]] [["","","Payment Due by Period"],["Contractual Obligations","","Total","","Less than 1 year","","Years 2-3","","Years 4-5","","More than 5 years"],["","","(in thousands)"],["Operating lease obligations","","$","18,531","","","$","8,582","","","$","7,299","","","$","2,379","","","$","271"],["Outstanding bonds and notes","","113,389","","","56,516","","","5,170","","","51,703","","","\u2014"],["TOTAL","","$","131,920","","","$","65,098","","","$","12,469","","","$","54,082","","","$","271"]] [[/GREPCENT_TABLE]] 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 accounts receivable Allowance for accounts receivable is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the collectability of an account receivable balance is doubtful. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past accounts receivable loss experience, the nature and volume, information about specific counteragent situation and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific accounts receivable, but the entire allowance is available for any accounts receivable that in management's judgment should be charged off. The allowance consists of specific and general components, the specific component relates to accounts receivable that are individually classified as impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the agreement. The general component is based on historical loss experience adjusted for current factors. The historical loss experience is based on the actual loss history we have experienced over the most recent period of time, mostly 3-5 years, which management reviews periodically. 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. 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, 2022, the Company had goodwill of $5,388. 73 Table of Contents Income taxes We are subject to income taxes in both the U.S. 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 financial statements 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 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 are established 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. Recent Accounting Pronouncements For details of applicable new accounting standards refer to Recent accounting pronouncements in Note 2 "Summary of Significant Accounting Policies" of our financial statements contained in Part II Item 8 of this annual report. Effects of Inflation Because our assets are primarily short-term and liquid in nature, they are generally not significantly impacted by inflation. The rate of inflation does, however, affect our expenses, including employee compensation, communications and information processing and office leasing costs, which may not be readily recoverable from our customers. To the extent inflation result in rising interest rates and has adverse impacts upon securities markets, it may adversely affect our results of operations and financial condition.