☑
For the fiscal year ended March 31, 2015ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended March 31, 2017
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐
For the transition period from ________ to _________ |
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
BMB MUNAI, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 30-0233726 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
| | | |
324 South 400 West, Suite 250Office 1704, 4B Building “Nurly Tau” BC 17 Al Farabi Ave | | |
Salt Lake City, UtahAlmaty, Kazakhstan | | 84101050059 |
| (Address of principal executive offices) | | (Zip Code) |
(801) 355-2227+7 727 311 10 64
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨☐ Yes þ☑ 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.
¨☐ Yes þ☑ 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. ☑ Yes ☐ No
þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,website, if any, every Interactive Data File required to be submitted and posted 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 and post such files.) ☑ Yes ☐ No
þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
þ
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Filer ¨ | Accelerated filer ¨ |
Non-accelerated Filer ¨ (Do not check if smaller reporting company) | Smaller reporting company þ |
Large accelerated filer ☐ Accelerated filer ☐Non-accelerated filer ☐ (Do not check if smaller reporting company) Smaller reporting company ☑
Emerging growth company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) ☐ Yes ☑ No
þ Yes ¨ 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 was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter computed by reference to the average bid and asked price for such common equity was $276,479.$228,339.
As of June 12, 2015,29, 2017, the registrant had 55,787,554490,000,000 shares of common stock, par value $0.001, outstanding.
Documents Incorporated by Reference: None
Table of Contents
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| | PART II | |
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| | PART III | |
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| Exective | 20 |
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| | PART IV | |
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BMB MUNAI, INC.
Unless otherwise specifically indicated by the context,or as is otherwise contextually required, references herein to the “Company”, “BMB”, “we”, “our” or “us” means BMB Munai, Inc, a Nevada corporation.
corporation and its wholly-owned subsidiary FFIN Securities, Inc. Unless otherwise specifically indicated or as is otherwise contextually required, references herein to the “Freedom Companies” means LLC IC Freedom Finance, including its wholly owned subsidiaries, JSC Freedom Finance, LLC FFIN Bank, LLC First Stock Store, Branch Office of LLC IC Freedom Finance in Kazakhstan. Unless otherwise indicated by the context all dollar amounts stated in this annual report on Form 10-K are in U.S. dollars.
Special Note about Forward-Looking Information
This annual report on Form 10-KCertain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking,, including, but not limited to statements relating to our anticipated revenues, gross margin and operating results, estimates used in the preparation of our financial statements, future performance and operations, ability to identify orobtain and maintain required approvals and licenses to pursue other opportunities, our operations, plans for future expansion, capital spending, sources of liquidity, and financing sources. Forward-looking information involves important risks and uncertainties that could significantly affect anticipated results of operations, capital resourcesin the future, and liquidity, future actions, intentions, plans, strategies and objectives. Without limitingaccordingly, such results may differ from those expressed in any forward-looking statements made herein. These forward-looking statements can sometimes be recognized by the foregoing,use of words such as “expect,“anticipate,” “project,“believe,” “estimate,” “believe,” “anticipate,“expect,” “intend,” “budget,” “plan,” “forecast,” “predict,” “may,” “should,” “could,” “will” or comparable terminologyand similar expressions. Such statements are intendedsubject to identify forward-looking statements. These statements by their nature involve known and unknown risks, and uncertainties, and other factors, including the meaningful and important risks and uncertainties discussed in this report. These forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management. These statements include, among other things:
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the ability of the Freedom Companies to comply with the extensive and pervasive regulatory requirements in the various jurisdictions where they may operate;
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volatility of the capital markets and in economic conditions generally;
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the ability of FFINEU Investments Limited, a Cyprus limited company (“Freedom CY”) to obtain necessary regulatory approvals to maintain their foreign licensing in connection with the transfer of ownership from the current owner to us;
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the ability of Freedom CY to maintain a satisfactory clearing arrangement in the U.S. with a qualified clearing firm with necessary licenses and clearing relationships;
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the ability of the Freedom Companies to attract and retain key management and other properly licensed and experienced personnel to satisfy applicable regulatory standards;
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the ability of the Freedom Companies to profitably invest their own funds;
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possible lack of interest by foreign investors to invest in securities of U.S. publicly traded companies;
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the financial performance of the Freedom Companies; and
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the other factors contained in the section entitled “Risk Factors” in Part I, Item 1A, this report.
Although we have attempted to identify important factors that maycould cause actual results and outcomes to differ materially, depending on a variety of factors, many of which are not within our control. These factors include, but are not limited to, availability of business opportunities, sufficiency of working capital, capital resources and liquidity, costs and expenses, economic conditions, andthere may be other factors detailed herein andthat cause the forward-looking statements not to come true as described in our other Securities and Exchange Commission (the “Commission”) filings.this report. These forward-looking statements are only predictions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomesresults may vary materially from those indicated.materially.
Forward-lookingYou should not rely on forward-looking statements as predictions of future events. While we believe that the expectations reflected in the forward-looking statements are predictions and not guaranteesreasonable, we cannot guarantee future results, levels of futureactivity, performance, or events. Forward-lookingachievements. Moreover, neither we nor any other person assumes any responsibility for the accuracy or completeness of these statements are based on current industry, business, financial and economic information, which we have assessed but which by its nature is dynamic and subjector undertakes any obligation to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by suchrevise these forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements.
Forward-looking statements in this annual report on Form 10-K speak only as ofreflect events or circumstances after the date on this report or to reflect the occurrence of this annual report, and forward-looking statements in documents attached or incorporated by reference speak only as of the date of those documents and should not be unduly relied upon. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.unanticipated events.
The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
3
PART I
Overview
BMB Munai, Inc. (“BMBM”) is a Nevada corporation that originally incorporated in the State of Utah in 1981. From 2003 to 2011, ourBMBM’s business activities focused on oil and natural gas exploration and production in the Republic of Kazakhstan through a wholly-owned operating subsidiary, Emir Oil LLP, (“Emir Oil”). Emir Oil held an exploration contract that allowed exploration drilling and oil production in the Mangistau Province in the southwestern region of Kazakhstan.
In September 2011, we sold Emir Oil (the “Sale”) to an independent third party. In connection with the Sale, weBMBM sold all of our interest in our wholly-owned operating subsidiary, Emir Oil, including all of ourits right, title, and interest in and to theits oil and gas licenses and licensed territory owned by Emir Oil. With the saleto an independent third party for cash of Emir Oil, we own no oil and gas properties and are not currently engaged in oil and gas exploration or production activities.
In connection with the Sale, and pursuant to the terms of our agreement with the purchaser, theabout $170 million. The proceeds of the Salesale were used to, among other things, repay outstanding obligations, satisfy certain post-closing undertakings, meet ongoing expenses, and make two separate cash distributions totaling approximately $74,750,000 to ourits stockholders.
On November 23, 2015, BMBM entered into a Share Exchange and Acquisition Agreement with Timur Turlov (the “Acquisition Agreement”) with the intent to build an international, broadly based brokerage and financial services firm to meet the growing demand from an increasing number of investors in Russia and Kazakhstan for access to the financial opportunities, relative stability, and comprehensive regulatory reputation of the U.S. securities markets.
Our Business
Pursuant to the Acquisition Agreement, BMBM acquired FFIN Securities, Inc., a Nevada corporation, (“FFIN”) from Mr. Turlov in exchange for 224,551,913 shares of BMBM common stock, which constituted approximately 80.1% of BMBM’s outstanding common stock after giving effect to the transaction. FFIN was established to serve primarily foreign clients referred from LLC IC Freedom Finance, a Russian limited company (“Freedom RU”) and its wholly owned subsidiary JSC Freedom Finance, a Kazakhstan joint stock company (“Freedom KZ”) as part of a strategy to provide these clients with access to the U.S. securities markets through a single integrated financial services firm.
From September 2011 through
In December 2015, FFIN applied to become a member of FINRA and a licensed securities broker-dealer with United States Securities and Exchange Commission (“SEC”). This application was subsequently withdrawn in 2016. Through the fiscal year ended March 31, 2015,date of this report, FFIN has not resubmitted its new membership application to FINRA. We continue to believe licensure as a securities broker-dealer in the U.S. may be a valuable component of our principal business operations have been were focused on satisfying our post-closing undertakingsstrategy and we continue to evaluate the cost benefit, likelihood of success and appropriate timing of another application, or to otherwise become a licensed securities broker-dealer in connectionthe U.S.
On June 29, 2017, BMBM closed the acquisition of Freedom RU. The acquisition of Freedom RU included the securities brokerage and financial services business conducted by it in Russia, along with its wholly owned subsidiaries: Freedom KZ, and the securities brokerage and financial services business conducted by it in Kazakhstan; LLC FFIN Bank, a Russian limited company (“FFIN Bank”), and the banking business conducted by it in Russia, LLC First Stock Sale, winding down our operationsa Russian limited company (“FSS”), and the online securities marketplace it provides to Russian investors, and Branch Office of IC LLC Freedom Finance in Kazakhstan, a Kazakhstan limited liability company, (“KZ Branch”) organized to serve as the representative office of Freedom RU in Kazakhstan.
Pursuant to the terms of the Acquisition Agreement, BMBM previously agreed to issue to Mr. Turlov 13% of its issued and exploring opportunitiesoutstanding common stock for his 100% interest in Freedom RU. As BMBM had insufficient authorized but unissued common stock to return additional valuedeliver the full agreed upon consideration to our stockholders.
We continue our effortsMr. Turlov at the closing of the acquisition of Freedom RU, as an accommodation to identify new business opportunities. These activities, however, do not generate revenue forfacilitate the Company. We do not anticipate generating revenueclosing, Mr. Turlov agreed to accept a partial issuance of 209,660,533 shares of BMBM’s common stock and to defer issuance of the balance of the shares agreed to until such time as we complete a reverse stock split and recapitalization, to provide sufficient additional shares to issue him the percentage agreed in the Acquisition Agreement.
We continue to make progress in our efforts to close the acquisition of FFINEU Investments Limited, a Cyprus limited company, (“Freedom CY”), and the securities brokerage and financial services business conducted by it in Cyprus. We continue to work with the Cypress Securities and Exchange Commission (“CySEC”) to obtain the necessary regulatory approvals to transfer ownership of Freedom CY to BMBM. At this time we cannot predict with certainty if and/or when the required regulatory approvals will be granted.
Recapitalization
We are authorized to issue 500,000,000 shares of common stock. Pursuant to the Acquisition Agreement, BMBM agreed to issue sufficient shares to Mr. Turlov such that following the acquisitions of FFIN, Freedom RU and Freedom CY, Mr. Turlov will own approximately 95% of the issued and outstanding common stock of BMBM, which together with our currently outstanding stock, would exceed our authorized common stock. As we had insufficient unissued authorized common stock to deliver the full agreed upon consideration to Mr. Turlov at the closing of the Freedom RU acquisition, as an accommodation to facilitate the closing, Mr. Turlov agreed to accept a partial issuance of 209,660,533 shares of BMBM common stock, and to defer issuance of the balance of the shares agreed to until such time as we can complete a reverse stock split and recapitalization so we have sufficient additional shares to issue him the percentage agreed in the Acquisition Agreement. We will also need shares to complete the acquisition of Freedom CY when the required regulatory approvals to transfer ownership to BMBM are received. After giving effect to the acquisitions of FFIN, Freedom RU and Freedom CY, Mr. Turlov will own up to approximately 95% of our post-reverse split shares then issued and outstanding.
Our Business
We believe the Freedom Companies serve an emerging capitalistic and investing segment of the economies of Russia and Kazakhstan that is interested in saving, investing, and diversifying risk through foreign investment. Under the existing regulatory regimes in Russia and Kazakhstan, Freedom RU and Freedom KZ are limited in their ability to grant their customers access to the U.S. securities markets. Currently, many of the customers of Freedom RU and Freedom KZ access the U.S. securities markets through Freedom CY.
The Freedom Companies are seeking a sustainable, long-term strategy to allow our customer base in Russia and Kazakhstan to participate in the U.S. markets because of what we perceive to be the growing disfavor of omnibus clearing accounts for foreign financial institutions among regulators and U.S. financial institutions as well as customer concerns that the Freedom Companies expose them to attendant political, regulatory, currency, banking, and economic risks and uncertainties in their respective countries of operation.
The Freedom Companies
Since the organization of Freedom RU in 2010 and the acquisitions of Freedom KZ, FFIN Bank and FSS, they have serviced a growing customer base with increasing amounts invested. Freedom RU and Freedom KZ together have approximately 33,000 total customer accounts. FFIN Bank has approximately 400 total active customer accounts, with total deposits of approximately $3.5 million. The customers of the Freedom RU and Freedom KZ typically execute approximately 25,000 transactions per month, with an aggregate transaction value of approximately $1 billion. The customers of Freedom RU and Freedom KZ range from retail traders that frequently execute large transactions to relatively small, inactive accounts that hold securities positions long-term. In the preceding year, approximately 80% or more of the aggregate trading dollar volume was generated by about two dozen margin day traders. The Freedom RU and Freedom KZ customers principally invest in exchange-traded securities. The customers of FFIN Bank are generally individuals. Approximately 77% of the FFIN Bank customers are also Freedom RU customers.
For the fiscal years ended March 31, 2017 and 2016, Freedom RU and its subsidiaries together had consolidated profits of approximately $7.3 million and $9.2 million, respectively on revenues of about $19.4 million and $17.3 million, respectively. As of March 31, 2017 and 2016, the consolidated total assets of the Freedom RU were approximately $111.7 million and $39.1 million. Collectively, Freedom RU employs approximately 130 people in Russia and 140 people in Kazakhstan.
In recent years, Freedom RU has pursued an aggressive growth strategy both in terms of customer acquisition and business acquisitions. We anticipate this will continue as we seek to expand the footprint of our brokerage, banking and financial services business in Russia, Kazakhstan and other markets.
Freedom RU
Freedom RU provides financial services in the Russian Federation in accordance with the Russian government’s open-ended licenses for brokerage, dealer, and depository operations and for activities in securities management. The Federal Financial Markets Service of Russia and the Central Bank of the Russian Federation provide governmental regulation of company operations and the protection of the interests of its customers.
Freedom KZ
Freedom RU acquired Freedom KZ in 2013 from unrelated parties. When Mr. Turlov acquired Freedom KZ, it was controlled by Korean nationals and principally facilitated Korean investment in Kazakhstan. Freedom KZ provides professional services in the capital markets. Since 2006, Freedom KZ has been a professional participant of the Kazakhstan Stock Exchange, which enables it to manage investment portfolios for its clients. Freedom KZ is regulated by the Committee for the Control and Supervision of the Financial Market and Financial Organizations of the National Bank of the Republic of Kazakhstan.
FFIN Bank
FFIN Bank was acquired by Freedom RU in April 2016. FFIN Bank has a license issued by the Central Bank of the Russian Federation for execution of banking operations in rubles and foreign currencies for individuals and legal entities and is regulated by the Central Bank. In accordance with federal law in Russia, the Deposit Insurance Agency of Russia insures 100% of deposits of individuals up to 1.4 million Russian rubles. FFIN Bank derives revenue from providing banking services, including money transfers, foreign currency exchange operations, interbank lending and deposits. Currently, FFIN Bank’s operation is focused on servicing the Group’s brokerage customers. FFIN Bank is an authorized Visa/MasterCard issuer, and has introduced internet banking and mobile applications for Android/iOS for companies and individuals. In addition FFIN Bank has completed development of several investment and structured banking products (insured deposits with option feature and currency risk hedging products.) We anticipate FFIN Bank will continue to expand the banking services it provides to the customers of FFIN bank and Freedom RU. We also anticipate geographical expansion of FFIN Bank to complement Freedom RU locations.
First Stock Store
FSS was launched to be the first online securities marketplace for retail customers in Russia. FSS was launched to attract new brokerage clients for Freedom RU by providing a medium for individual investors to buy and sell securities traded on the Russian and US stock exchanges. We consider FSS to currently be one of the most dynamic fin tech projects in the Russian Federation. With the addition of the FSS project, Freedom RU is currently adding approximately 600 customer accounts each month.
KZ Branch
KZ Branch serves as the representative office of Freedom RU in Kazakhstan.
Freedom CY
Freedom CY was organized in August 2013 and completed its regulatory licensing in May 2015. In 2016 Freedom CY activated its licenses to receive, transmit and execute customer orders, establish custodial accounts, engage in foreign currency exchange services and margin lending. Freedom CY is in the process of obtaining its dealer license to trade its own investment portfolio. Freedom CY provides transaction handling and intermediary services to Freedom RU and Freedom KZ and is regulated by the CySEC.
Customer Base and Marketing Plan
The Freedom Companies’ principal marketing efforts are focused on offering brokerage, banking and financial services to their customers. The Freedom Companies’ customers are a mix of individual retail customers, including family or small business entities owned and controlled by individuals, family asset planning or holding companies, and private equity funds.
Competition
Since the customer base of the Freedom Companies is located in Russia and Kazakhstan, their principal competitors are in those countries, each of which has a vigorous and aggressive competitive investment and securities markets. There are both local and large financial services firms that offer an array of financial products and services in these countries. The financial service firms with which the Freedom Companies compete for customers in Russia include JSC Brokerage House Otkrytiye, LLC Company BrokerCreditService, LLC KIT Finance, and FINAM Group and in Kazakhstan include JSC Halyk Finance, JSC BCC Invest and JSC Centras Securities. The bank’s principal competitors include JSC Tinkoff Bank and LLC BCS.
We believe competition is based principally on the ability of the Freedom Companies to provide access to the U.S. securities markets, the level of their service, the convenience of their services, their ability to provide personalized service, and their charges to customers. Customer costs include transaction execution fees, commissions and charges as well as margin interest rates the Freedom Companies charge their customers investing on margin.
Many of the firms with which the Freedom Companies compete are larger, provide more diversified services and products, provide access to more international markets, and have greater management, technical, and financial resources. We cannot assure that the Freedom Companies will be able to findcompete effectively.
Regulation
Overview
The business of the Freedom Companies and exploitthe securities and banking industries in general are subject to extensive regulation.
Foreign Corrupt Practices Act
In the U.S., the 1970 Foreign Corrupt Practices Act, or FCPA, broadly prohibits foreign bribery and mandates recordkeeping and accounting practices. 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, or FATCA, was enacted in the United States to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions, such as the Freedom Companies, to report to the United States 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 United States 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. It has not, however, entered into such an agreement with Russia. As a result, Russia adopted legislation to allow financial institutions to share foreign taxpayer data with foreign tax authorities, such as the IRS, without breaching Russian data protection and confidentiality laws. The Russian legislation sets forth extensive rules relating to when and how the financial institution may gather and share foreign taxpayer information. The Russian legislation establishes extensive monitoring procedures requiring, among other things, the notification to various Russian state bodies by the financial institution of registration with a foreign tax authority, receipt of requests for foreign taxpayer data, and the delivery to Russian state bodies of foreign taxpayer data prior to delivery to a foreign tax authority. Under the legislation, Russian regulators retain the right to prohibit disclosure of foreign taxpayer information in certain instances. Failure to comply with the Russian legislation may result in monetary fines for the financial institution and its officers. Because of the lack of an agreement between the U.S. and Russia establishing mutually agreed-upon guidelines for data sharing, inconsistencies in the two legal regimes exist, which can place financial institutions in Russia, such as Freedom RU and FFIN Bank, in the position of having to decide whether to comply with Russian legislation or with FATCA. For example, under Russian legislation, a financial institution may share foreign taxpayer data only with the consent of the foreign taxpayer, and even when consent is given, Russian regulators may, in certain circumstances, prohibit disclosure. There is no exemption for foreign financial institutions from the FATCA disclosure requirements. Similarly, FATCA generally requires the foreign financial institution to withhold 30% of designated payments. However, the Russian legislation does not grant financial institutions the authority to act as a withholding agent for a foreign tax authority. The Russian legislation does allow financial institutions to decline to provide services to foreign taxpayers.
Kazakhstan and the United States have entered an intergovernmental agreement containing provisions regulating the process for Kazakh financial institutions to collect information on U.S. taxpayer accounts and provide that information to the IRS. In general, the requirements of the agreement concern the analysis of new and existing customer accounts to identify U.S. taxpayers. The agreement requires Kazakh financial institutions to register with the IRS and define their status in accordance with FATCA. Financial institutions are obligated to identify their clients 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 are obligated to regularly present information, including name, taxpayer identification number, and account balance, to the Kazakh tax authorities for transfer to the IRS.
Cyprus and the United States have entered an intergovernmental agreement that requires Cyprus financial institutions to determine accounts maintained by U.S. tax residents, comply with verification and enhanced due diligence procedures, and provide annual reporting on these accounts to the Cyprus tax authorities who subsequently will provide the reports to the IRS. In addition, Cyprus financial institutions are required to make necessary tax withholdings to be paid to the IRS. As a “Reporting Financial Institution” under the intergovernmental agreement, Freedom CY will be required to obtain required client documentation associated with the indicia of his, her, or its U.S. tax residency status as well as all related account information in order to report accordingly.
The failure to comply with FATCA could result in adverse financial and reputational consequences to the Freedom Companies as well as the imposition of sanctions or penalties including responsibility for the taxes on any funds distributed without the proper withholdings set aside.
Foreign Regulation
Russia
Freedom RU provides professional services in the capital markets of the Russian Federation and is a professional participant of the Moscow and Saint Petersburg Stock Exchange. Freedom RU holds four licenses issued by the Federal Service for Financial Markets of the Russian Federation that allow it to provide brokerage, dealer, depository and securities management services in Russia. Freedom RU also provides foreign currency trading services.
FFIN Bank provides banking services for legal entities and individuals from the Federation of Russia (the “Central Bank”) and other countries. FFIN Bank holds a license issued by the Central Bank for the execution of banking operations in rubles and foreign currency for individuals and legal entities.
In Russia, a number of federal and industry regulatory agencies are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. The Central Bank is the principal financial industry regulator responsible for the regulation of broker-dealers, banks, depositories, and securities managers doing business opportunity. No assurancein Russia. Industry self-regulatory organizations (“SROs”), each of which has authority over the firms that are its members, include the Association of Securities Market Participants (“NAUFOR”), National Securities Market Association (“NFA”) national securities exchanges such as the Moscow Stock Exchange and the St. Petersburg Stock Exchange on which securities are traded, and other SROs.
Freedom RU and FFIN Bank are subject to overlapping schemes of regulation that govern all aspects of their business. The regulations cover a broad range of practices and procedures, including:
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the use and safekeeping of customers’ funds and securities;
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recordkeeping and reporting requirements;
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customer identity, clearance, and monitoring to identify and prevent money laundering;
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supervisory and organizational procedures intended to monitor and assure compliance with securities laws and to prevent improper trading practices;
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transaction execution, clearance, and settlement procedures;
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maximum loan and bank guarantees concentration issued to shareholders;
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credit risk requirements;
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liquidity risk requirements;
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qualification of firm management; and
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risk detection, management, and correction.
The Central Bank and NAUFOR regulations include rules governing practices and procedures addressing the relationship between financial institutions and their customers. As a result, many aspects of the financial institutions’ customer relationship are subject to regulation. These regulations include customer identification and due diligence procedures, collection of customer financial suitability documentation, anti-money laundering monitoring and reporting, customer fees, clearing, settlements, risk management and other matters.
Violations of securities and banking laws and regulations by financial institutions in Russia can subject them to a broad range of disciplinary actions including remedial actions, imposition of fines and sanctions, removal from managerial positions, loss of licensing, and criminal proceedings.
Capital Requirements
The Central Bank establishes minimum net capital requirements for financial institutions including brokerages, dealers, depositories, securities managers and banks. In the event the net capital of such service provider drops below the minimum requirement, it is obligated to notify the Central Bank, provide a plan to meet its minimum capital requirements and perform all actions necessary to bring it back into compliance with the net capital requirement. The minimum net capital requirement of Freedom RU to provide brokerage, dealer, depository, securities management is approximately $790,000, and for foreign currency trading services is approximately $2,360,000, which it currently has. The minimum net capital requirement of FFIN Bank to provide banking services is approximately $5,320,000, which it currently has.
In the event a financial institution fails to maintain its minimum net capital, it must immediately notify the Central Bank. The Central Bank may take any of the following actions, (i) require the financial institution to submit a detailed plan to increase its net capital to at least the minimum requirement, (ii) impose financial penalties in the event the financial institution does not provide a detailed explanation as to the reasons for the decrease below the minimum requirement, (iii) cause the financial institution to cease operations until it meets the minimum net capital requirement, (iv) suspend the financial institution’s licenses for a period of time, and (v) in case of failures, the Central Bank can withdraw licensing and disqualify the firm’s management from working within the industry. This disqualification can be for up to a three-year period for the general director, controller and the head of the compliance department of the financial institution.
Compliance with minimum capital requirements could limit Freedom RU and FFIN Bank’s expansion into activities and operations that require the intensive use of capital. Minimum capital requirements could also restrict our ability to withdraw capital from Freedom RU and FFIN Bank, which in turn could limit our ability to transfer funds among our subsidiaries. Additionally, the failure of Freedom RU or FFIN Bank to maintain its minimum net capital requirement could result in penalties or other sanctions.
Anti-Money Laundering
The law on the Prevention of Money Laundering and the Financing of Terrorism (“AML Law”) establishes laws designed to prevent money laundering activities and financing of terrorism. The AML Law is supported by recommendations, binding instructions and regulations of the Central Bank and other authorities. The AML Law requires institutions dealing with cash operations, including all kinds of financial institutions, which includes professional participants in the securities markets and banks, to establish mandatory internal protocols for client and payment acceptance. In particular, regulated entities must perform due diligence procedures to ascertain the identity of the customer and monitor transactions for suspicious activity. Regulated entities must identify and report transactions falling within certain categories. If either party to such transactions is suspected of being connected to terrorist activity the transaction is subject to mandatory control regardless of the nature of the transaction.
The Central Bank may take preventative or enforcement measures against regulated financial institutions involved in transactions that infringe on anti-money laundering legislation. Preventative measures may include issuing an order to cease a violation and provide the Central Bank with a program for improvement and establishing additional monitoring measures. Enforcement measures may include the imposition of fines and withdrawal of licenses. The failure of Freedom RU and FFIN Bank to comply with the AML Law could subject them to material legal action, which could have a material adverse effect on our business and results of operations.
Kazakhstan
Freedom KZ provides professional services in the capital markets of Kazakhstan and is a professional participant of the Kazakhstan Stock Exchange, which enables Freedom KZ to manage investment portfolios for its clients. Freedom KZ is regulated by the Committee for the Control and Supervision of the Financial Market and Financial Organizations of the National Bank of the Republic of Kazakhstan.
In Kazakhstan the National Bank of the Republic of Kazakhstan (the “NBK”) and the Kazakhstan Stock Exchange (the “KASE”) are the principal organizations tasked with safeguarding the stability of financial markets and financial institutions. The NBK and KASE are responsible for setting the standards for regulating the activities of financial institutions and participants in the financial services industry and for monitoring compliance. Settlement services for securities transactions are primarily governed by the rules and procedures of the Central Depositary.
Freedom KZ is licensed to provide broker-dealer services with the right to carry customer accounts and to provide investment portfolio management services. Freedom KZ has 13 offices located in 13 cities in Kazakhstan.
Freedom KZ is subject to overlapping schemes of regulation that govern all aspects of its securities business. The regulations cover a broad range of practices and procedures, including:
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the use and safekeeping of customers’ funds and securities;
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recordkeeping and reporting requirements;
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customer identity, clearance, and monitoring to identify and prevent money laundering;
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supervisory and organizational procedures intended to monitor and assure compliance with securities laws and to prevent improper trading practices;
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transaction execution, clearance, and settlement procedures;
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qualification of firm management; and
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risk detection, management and correction.
NBK and KASE regulations include rules governing practices and procedures addressing the relationship between broker-dealers and their customers. As a result, many aspects of the broker-dealer customer relationship are subject to regulation. These regulations include customer identification and due diligence procedures, collection of customer financial suitability documentation, anti-money laundering and anti-terrorism funding monitoring and reporting, customer fees, clearing, settlements, and other matters.
The Republic of Kazakhstan has adopted extensive regulation regarding the responsibility for wrongdoing by broker-dealers and investment portfolio managers, ranging from disciplinary action to criminal punishment. The penalties available to the NBK in the event of wrongdoing include cancelation of licenses, removal of management, monetary damages and criminal prosecution. The NBK may also impose remedial requirements, such as requiring the wrongdoer to provide a plan of remediation to ensure the wrongdoing is prevented in the future. Action may be taken against the broker-dealer, the management board of the broker-dealer or both depending on the severity of the violation.
Capital Requirements
Kazakhstan regulation establishes minimum share capital requirements for broker-dealers and investment portfolio managers. In the event the net capital of a broker-dealer or investment portfolio manager falls below the requirement, it is obligated to notify the NBK, provide a plan to meet is minimum capital requirements and perform all actions to bring it back into compliance with the requirement. The minimum capital for broker-dealers with a license to provide investment portfolio management services is approximately $835,000. The net capital requirement must be calculated on a daily basis.
The failure of a broker-dealer to maintain its minimum capital requirement could result in the NBK taking any of the following enforcement measures, (i) require a letter of commitment to comply, (ii) execution of a written agreement to comply; (iii) issue a warning; (iv) issue a written prescription to eliminate the violation; and (v) impose penalties. Enforcement measures may be imposed on the broker-dealer or on top management of the broker-dealer or both depending on the severity of the violation.
Compliance with minimum capital requirements could limit Freedom KZ’s expansion into activities and operations that require the intensive use of capital. Minimum capital requirements could also restrict our ability to withdraw capital from Freedom KZ, which in turn could limit our ability to transfer funds among our subsidiaries. Additionally, if Freedom KZ falls below it minimum capital requirements the NBK could impose penalties or other sanctions on Freedom KZ.
Anti-Money Laundering
The Law on Anti-Money Laundering and Combating of Terrorism Financing (“AML/CFT”) establishes laws designed to combat money laundering and funding of terrorist activities. By regulation adopted by the NBK, companies operating in the financial services industry in Kazakhstan are required to establish procedures designed to ensure, among other things, that the broker-dealer:
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undertake adequate due diligence of its customers;
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perform financial monitoring of operations related to transfers of cash and property;
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monitor transactions and report suspicious activities to appropriate authorities; and
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provide periodic reporting to appropriate authorities.
The failure of Freedom KZ to comply with AML/CFT requirements could subject it to material sanctions, including penalties and fines, which could have a material adverse effect on the business and results of operations of Freedom KZ.
Cyprus
Freedom CY has applied for and been granted licensure by CySEC to provide investment and ancillary services as a Cypriot Investment Firm (“CIF”). In 2016, Freedom CY activated its licenses to receive, transmit and execute orders on behalf of clients, establish custodial accounts for financial instruments and related services, engage in foreign currency exchange services and margin lending. Freedom CY is in the process of obtaining its dealer license to trade its own investment portfolio. Freedom CY’s activities are regulated by and under the supervision CySEC, an independent public supervisory authority, responsible for the supervision of the investment services market and transactions in transferable securities carried out in the Republic of Cyprus. As a CIF, the activities of Freedom CY are subject to various laws including the Cyprus Investment Act of 2002-2005, which provides the legal framework for the operation and supervision of CIFs, the rules and regulations of the Cyprus Stock Exchange and the Markets in Financial Instruments Directive II and Regulation (“MiFID”).
The MiFID is aimed at creating a single, more transparent market in financial services across all EU member states, to (i) improve the competitiveness and integration of EU financial markets by creating a single market for investment services and activities, (ii) ensure a high degree of harmonized protection for investors in financial instruments, (iii) increase market transparency, and (iv) promote easier cross border business. The MiFID allows registered investment firms to provide services throughout the EU on the basis of home country supervision.
Freedom CY is subject to an overlapping scheme of regulation that covers all aspects of its securities business. These regulations cover a broad range of matters, including:
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safekeeping of clients’ funds and assets;
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recordkeeping and reporting requirements;
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client identification, clearance and monitoring to identify and prevent money laundering and funding of terrorism and facilitate FATCA reporting;
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supervisory and organizational procedures intended to monitor and assure compliance with the relevant laws and regulations and to prevent improper trading practices;
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employee-related matters, including qualification and certification of personnel; and
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provision of investment and ancillary services, clearance, and settlement procedures.
Serious or systematic infringement of rules, regulations and directives of the laws, rules and regulations of Cyprus securities laws and/or the directives issued pursuant relevant EU regulations could subject Freedom CY, its principals and other employees to disciplinary proceedings or civil or criminal liability, including withdrawal of CySEC licensure, administrative fines, temporary suspension or permanent bar from the performance of Freedom CY’s business activities. Any such proceeding could have an adverse material effect upon the business activity of Freedom CY.
Capital Requirements
Freedom CY is subject to the capital requirements of the CRD IV package of the Capital Requirements Directives of the European Union. A CIF must maintain a minimum initial capital requirement of approximately $220,000 if it holds client assets or client financial instruments and provides any of the following services: (i) receiving and transmitting orders, (ii) executing orders on behalf of clients; (iii) providing portfolio management; or (iv) providing investment advice. The minimum initial capital requirement for a CIF providing any of the above services without holding client assets or client financial instruments is approximately $87,000, with some exceptions. Freedom CY holds client assets and client financial instruments and has a minimum initial capital requirement of approximately $384,360. Freedom CY anticipates receiving a dealer license in 2017, which will increase its minimum capital requirement to $1,100,000.
At all times Freedom CY’s minimum net capital must meet or exceed certain target capital ratios. The capital ratio is a percentage calculated by dividing: (a) the total of the firm’s Basel III Tier 1 capital (the sum of its common shares, share surplus, retained earnings, accumulated other comprehensive income, and other disclosed reserves and common shares issued by consolidated subsidiaries that meet the criteria for inclusion, subject to regulatory adjustments) and its Basel III Tier 2 capital (instruments that meet the criteria for Tier 2 capital that are not included in Tier 1 capital, share premium resulting from instruments included in Tier 2 capital, instruments issued by consolidated subsidiaries and held by third parties that are not included in Tier 1 capital and certain loan loss provisions, subject to regulatory adjustments applied in calculation of Tier 2 capital); by (b) the sum of risk-weighted exposures (including credit, currency and operational risk exposures. Currently, Freedom CY must maintain a minimum total capital ratio of 8% and a minimum total Tier 1 capital ratio of 6%.
Cyprus securities rules require all CIFs to have processes in place to assess and maintain the minimum capital requirements on an ongoing basis. These processes are subject to regular internal review to ensure that they remain comprehensive and proportionate to the nature of the activities of the CIF. If a CIF fails to maintain its minimum capital requirement, the CIF is required to timely notify CySEC of such failure. CySEC may, at its discretion, set a deadline by which the CIF must remedy the situation. If a CIF violates the net capital requirements and the directives issued by CySEC, CySEC may, in its absolute discretion based on the gravity of the violation, impose measures, penalties and sanctions including, (i) withdraw or suspend CIF authorization, (ii) publicly censure the CIF and the individuals responsible, (iii) issue cease and desist orders against the CIF and the individuals committing such violations, (iv) temporarily ban the individuals responsible for the violation and members of the CIF’s board of directors from exercising functions for a CIF, and (v) impose financial penalties upon the CIF and the individuals responsible for the violation.
Compliance with regulatory minimum capital requirements could limit Freedom CY’s expansion into activities and operations that require the intensive use of capital, such as dealing on its own account or underwriting or placing securities. Minimum capital requirements also could restrict our ability to withdraw capital from Freedom CY, which in turn could limit our ability to transfer funds among our subsidiaries.
Investor Compensation Fund
Pursuant to current CySEC legislation, CIFs are required to register as members of the Investor Compensation Fund (the “ICF”) for the protection of CIF clients, and must comply with the obligations of the ICF. The ICF was established to compensate CIF covered clients as to covered investment services and ancillary services. Payment of compensation by the ICF is subject to the existence of a well-founded claim by the client against a member of the Fund. The amount of compensation payable to each covered client is calculated in accordance with the legal and contractual terms governing the relationship of the covered client with the CIF, subject to the off-set rules applied for the calculations of claims. The current maximum pay out by the ICF is approximately $22,000.
Anti-Money Laundering
The Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007, imposes laws and regulations designed to prevent the use of the Cyprus financial system for the purpose of money laundering and terrorist financing. The law places special responsibilities on financial institutions, including CIFs, to implement and adhere to prescribed procedures for customer identification, record keeping and internal reporting and reporting of suspicious money laundering transactions. This law imposes requirements on such institutions to ensure that all employees are aware of their obligations under the law and receive adequate training designed to assist them in recognizing and reporting suspicious transactions. Freedom CY’s failure to comply with these provisions could have a material adverse effect on its business and expose it to possible sanctions, including substantial fines and penalties. Freedom CY’s obligations respecting anti-money laundering will extend to its customers in Russia and Kazakhstan.
Monetary Policy
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the Russian, Kazakh, Cyprus and United States governments. 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.
Employees
With the closing of the acquisition of Freedom RU, we now have approximately 310 total employees, including 273 full-time employees.
In addition to the negative implications of all information and financial data included in or referred to directly in this report, you should consider the following risk factors. This report contains forward-looking statements and information concerning us, our plans, and other future events. Those statements should be read together with the discussion of risk factors set forth below, because those risk factors could cause actual results to differ materially from such forward-looking statements.
Risks Related to Our Acquisitions and Proposed Acquisitions
We believe our proposed acquisition of Freedom CY, which operates as a broker-dealer in Cyprus and provides our clients in Russia and Kazakhstan greater access to the U.S. markets is probable, but we cannot predict when the acquisition, may be completed.
The Acquisition Agreement, under which we propose to acquire Freedom CY, specifies that the acquisition is conditioned on the satisfaction of specified regulatory requirements in Cyprus. While we have been working with CySEC for some time to obtain the necessary regulatory approvals to transfer ownership of Freedom CY to the Company, and now believe receipt of such approval is probable, there is no time limit to when approval may be given and we cannot guarantee we will receive approval to close the acquisition of Freedom CY. As many of our Russian and Kazakh customers access the U.S. markets through Freedom CY, we may be required to revise our business model if we are unable to obtain the necessary regulatory approvals to transfer ownership of Freedom CY to the Company.
The percentage ownership of our stockholders has been reduced substantially as a result of our acquisition of FFIN and the closing of the Freedom RU acquisition and will be further substantially reduced. We may also identify and pursue additional acquisitions that could require the issuance of additional stock, which would likely further reduce the percentage ownership of our stockholders
As a result of the acquisition of FFIN, stockholders that previously owned 100% of our outstanding stock (the “original BMB stockholders”) were reduced to owning approximately 19.9% of our stock. With the closing of the Freedom RU acquisition, that percentage was reduced to approximately 13.2% and we have agreed, following a reverse split of our common stock, to issue additional shares to Mr. Turlov that would reduce the holdings of the original BMB stockholders to approximately 7%. If the reverse split and proposed acquisition of Freedom CY are completed, the ownership of the original BMB stockholders will be reduced to approximately 5% of our common stock. We cannot assure that the value of the retained stock of the original BMB stockholders is or will be greater when their ownership is reduced to approximately 13.2%, 7% or 5% as a result of the transfer of assets and operations to the Company as consideration for the issuance of a controlling interest in the Company.
We may acquire or make investments in businesses, whether complementary or otherwise, as a means to expand our business if appropriate opportunities arise. Although we cannot give assurances that we will be able to identify a new business opportunity,future suitable acquisitions or investment candidates, or, if we do identify suitable candidates, that we will have funds thenbe able to make the acquisitions or investments on reasonable terms or at all. The financing of any such acquisition or investment, or of a significant general expansion of our business, may not be readily available on favorable terms. Any significant acquisition or investment, or major expansion of our business, may require us to explore external financing sources, such as an offering of our equity or debt securities. We cannot be certain that in the future these financing sources will be available to us that would enable us to take advantage of any such opportunity, or that we will be able to returnnegotiate commercially reasonable terms for any additional valuesuch financing, or that our actual cash requirements for an acquisition, investment or expansion will not be greater than anticipated. In addition, any indebtedness that we may incur in such a financing may inhibit our operational freedom, while any equity securities that we may issue in connection with such a financing may further reduce the percentage ownership of our then-existing stockholders.
In addition, we do not have extensive experience in integrating acquisitions and we could experience difficulties incorporating an acquired company's personnel, operations, technology or products and service offerings into our own or in retaining and motivating key personnel from these businesses. We may also incur unanticipated liabilities. 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.
Timur Turlov will be subject to significant conflicts of interest in connection with the Acquisition Agreement.
Timur Turlov will be required to make decisions about his performance under and compliance with the terms and conditions to which he is subject under the Acquisition Agreement while he is also our chairman, chief executive officer, and controlling stockholder and, therefore, has a fiduciary duty to us and our stockholders. These factors raiseAccordingly, he will be subject to substantial doubt aboutconflicts of interest in such matters. We have not adopted procedures to resolve these conflicts of interest in our abilityfavor. Further, we cannot assure that our intent to continue as a going concern.
Ashave all of March 31, 2015, we had no employees. Our officersour decisions respecting our performance under and directors provide services to the Company on an as-needed basis.
Reports to Security Holders
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other informationcompliance with the Commission. The publicterms and conditions to which we are subject under the Acquisition Agreement determined by a majority of our disinterested, independent directors will eliminate all conflicts of interest to which such disinterested, independent directors may read and copy any materialsbe subject.
Because we file withare a “controlled company” within the Commission at the Commission’s Public Reference Room at 100 F Street N.E., Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operationmeaning of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains its Internet website at www.sec.gov, that contains reports, proxyNYSE and information statements and other information regarding issuers that file electronically with the Commission.
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Item 1A. Risk Factors
Listed below are some of the more critical or unique risk factors that we have identified as affecting or potentially affecting the Company. You should carefully consider these risks and the risks identified elsewhere in this annual report on Form 10-K and in the notes to the financial statements included in this report when evaluating our forward-looking statements and our Company. The effect of any one risk factor or a combination of several risk factors could materially affect our business and the accuracy of the forward-looking statements and other information provided in this annual report on Form 10-K. These risks are not presented in order of importance or probability of occurrence.
We have no operations and minimal assets, which raises substantial doubt about our ability to return any additional value to our stockholders.
We no longer have operationsNASDAQ corporate governance standards, and as a result, may qualify for exemptions from certain corporate governance requirements, you may not have the same protections afforded to stockholders of companies that are subject to such requirements.
Mr. Turlov currently holds 88.6% of our issued and outstanding common stock, with the Sale, the repaymentright to receive an additional 4.4% following completion of a reverse stock split. If we receive approval to transfer ownership of Freedom CY to BMBM, his ownership interest may increase to up to 95% of our outstanding notes,common stock.
As a result of Mr. Turlov’s acquisition of greater than 50% of the firstvoting power of BMBM, we became a “controlled company” under the corporate governance standards of the NYSE and second cash distributionsNASDAQ. Controlled companies are exempt from compliance with the listing standards of the NYSE and NASDAQ regarding majority board independence or the independence requirements relating to certain compensation and nominating committee decisions, and in the case of the NYSE, corporate governance committees. We are not currently subject to the corporate governance standards of the NYSE or NASDAQ, but should we at some future date become subject to such standards while still being a controlled company, we could be eligible to take advantage of the exemptions from compliance with such corporate governance standards. If we take advantage of the exemptions from compliance with such corporate governance standards, you may not have the same protections afforded to stockholders of companies that are subject to such requirements.
Mr. Turlov has control over key decision making as a result of his ownership of a majority of our voting stock.
Mr. Turlov, our chief executive officer and chairman of our board of directors, beneficially owns approximately 88.6% of our outstanding common stock, which could increase to as much as 95%. Mr. Turlov currently has sole voting control of BMBM and can control the outcome of matters submitted to stockholders for approval, including the election of directors, a reverse stock split and recapitalization the Company, and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Turlov has the ability to control our management and affairs as a result of his position as our chief executive officer and his ability to control the election of our directors. Additionally, in the event that Mr. Turlov controls BMBM at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr. Turlov owes a fiduciary duty to our stockholders and the winding up of our operationsmust act in Kazakhstan, we have very limited assets. These factors raise substantial doubt about our ability to continue asgood faith and in a going concern or to return any additional value to our stockholders. While we will continue to look for opportunities as time and financial resources allow, there is no guarantee that we will we be able to successful in our efforts. If we are not successful, our management and the board of directors may determine itmanner he reasonably believes to be in the best interestinterests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Turlov is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.
Risks Related to Effecting Securities Transactions for Foreign Customers
The Freedom Companies’ business would be negatively impacted if Freedom CY is unable to maintain its relationship with a U.S. securities broker-dealer and clearing firm willing to receive and transmit funds internationally.
Funds invested by customers of the CompanyFreedom Companies’ in U.S. securities are transmitted to a U.S. securities broker-dealer and its stockholdersclearing firm and by the U.S. securities broker-dealer and clearing firm back to liquidate the CompanyFreedom Companies’ customers through international banking electronic transfers, which can experience clerical and terminate its existence, whichadministrative mistakes, be subject to technical interruption, be delayed, or otherwise fail to work as planned. Neither Freedom CY, nor the Freedom Companies have any control over these funds transfers. Failures or substantial delays in funds transfers could impair the Freedom Companies’ customer relationships.
The Freedom Companies must comply with the U.S. Foreign Corrupt Practices Act (“FCPA”) in their operations in Russia and Kazakhstan.
The Freedom Companies will be required to conduct their activities in compliance with the FCPA and similar anti-bribery laws that generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Enforcement officials interpret the FCPA’s prohibition on improper payments to government officials to apply to officials like those of the state-operated Federal Financial Markets Service of Russia and the Committee for the Control and Supervision of the Financial Market and Financial Organizations of the National Bank of the Republic of Kazakhstan, the principal regulatory bodies that would control and monitor our operations in Russia and Kazakhstan. While the employees and agents of Freedom Companies will be required to acknowledge and comply with these laws, we cannot assure that their internal policies and procedures will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of risks may expose us to fines and other sanctions and adversely affect our business, performance, prospects, value, financial condition, reputation, and results of operations.
Foreign laws, regulations, and policies may change in ways that could adversely impact our business.
The Freedom Companies securities broker-dealer and banking activities for customers in Russia and Kazakhstan are and will continue to be subject to ongoing uncertainties and risks, including:
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possible changes in government personnel, the development of new administrative policies, practices, and political conditions in Russia, Kazakhstan, or Cyprus that may affect the enforcement or administration of laws and regulations;
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possible changes to the laws, regulations, and policies applicable to their customers or the securities business generally;
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the potential adoption of entirely new regulatory regimes for foreign investment, the transfer of funds to or from foreign countries, and the permitted financial activities of residents;
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uncertainties as to whether the laws and regulations will be applicable in any particular circumstance;
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uncertainty as to whether the Freedom Companies will be able to demonstrate, to the satisfaction of the applicable governing authorities, their compliance with governmental requirements;
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currency exchange rates, regulations, or limitations;
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political instability and possible changes in government;
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local and national tax requirements;
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expropriation or nationalization of private enterprises and other risks arising out of foreign government sovereignty over properties in Russia and Kazakhstan; and
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possible significant delays in obtaining governmental authorizations, consents, or approvals of applicable requirements.
Our customers are concentrated in Russia and Kazakhstan such that any impediment to their investments and other activities could have a material adverse effect on our business, financial condition, and results of operations.
Russia and Kazakhstan have changing regulatory regimes, regulatory policies, and interpretations.
Russia and Kazakhstan have regulatory regimes governing the operation of broker-dealers within those countries, the transfer of funds to and from such countries, and other aspects of the finance, investment and banking industries. 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. Therefore, there is little or no administrative or enforcement history or established practice that can aid us in evaluating how the regulatory regimes will affect the Freedom Companies’ operations. It is possible that those governmental policies will change or that new laws and regulations, administrative practices or policies, or interpretations of existing laws and regulations will materially and adversely affect the Freedom Companies’ activities in Russia or Kazakhstan. Further, since the history and practice of industry regulation is sparse, the Freedom Companies’ 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. The profitability of the Freedom Companies could also be affected by changes to rules and regulations that impact the business and financial communities generally, including changes to the laws governing taxation, electronic commerce, client privacy and security of client data. In addition, changes to these rules and regulations could result in a complete losslimitations on the lines of business the Freedom Companies conduct, modifications to their business practices, more stringent capital and liquidity requirements, or additional costs. These changes may also require the Freedom Companies to invest significant management attention and resources to evaluate and make necessary changes to their compliance, risk management, treasury and operations functions.
International currency exchange rates may affect the investment practices of the customers of the Freedom Companies.
The customers of the Freedom Companies seek to invest in U.S. securities in part to dampen the financial risk of domestic currency fluctuations and to invest in dollar-denominated securities. Even though the Freedom Companies’ customers’ investments in U.S. securities are dollar-denominated, the funds available to customers to invest will depend on the rates at which the dollar is convertible into the currency of the country in which they reside—principally the Russian ruble and the Kazakh tenge. Declines in the value of the common stockRussian ruble or the Kazakh tenge compared to the U.S. dollar reduce the amounts that residents of those countries have to invest in the U.S. Conversely, increases in the value of the Company.Russian ruble and the Kazakh tenge relative to the U.S. dollar reduces the financial advantage of investing in U.S. securities. Customer expectations respecting applicable currency exchange rates may affect the timing, number, and amounts of customer transactions in U.S. securities. Accordingly, the Freedom Companies’ businesses may be affected substantially by currency exchange rate fluctuations.
Shareholders who hold unregistered shares of
It may be difficult for us to enforce any civil liabilities against our common stockcustomers that are subject to resale restrictions pursuant to Rule 144, due to our status as a “shell company.”outside the United States.
Pursuant to Rule 144The customers of the Securities ActFreedom Companies are residents of 1933, as amended (“Rule 144”), a “shell company” is defined as a company that has no or nominal operations;countries outside of the U.S. and either no or nominal assets; assets consisting solelybeyond the jurisdiction of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets. As such, we are a shell company pursuant to Rule 144, and as such, sales of our securities pursuant to Rule 144 are not able to be made until: 1) we have ceased to be a shell company; 2) we have filed all of our required periodic reports for at least the previous one year period prior to any sale pursuant to Rule 144; and 3) a period of at least twelve months has elapsed from the date “Form 10 information” (i.e., information similar to that which would be found in a Form 10 Registration Statement filing with the SEC) has been filed with the Commission reflecting the Company’s status as a non-shell company. Because none of our non-registered securities can be sold pursuant to Rule 144, until at least a year after we cease to be a shell company, any non-registered securities we sell in the future or issue to management or service providers in consideration for services rendered or for any other purpose will have no liquidity until and unless such securities are registered with the Commission and/or until a year after we cease to be a shell company and have complied with the other requirements of Rule 144, as described above.U.S. courts. As a result, it may be harderdifficult for us to pay enforce within the U.S. any claims or seek any remedies against such foreign persons, including claims, remedies, or judgments predicated upon the civil liability provisions of the securities laws of the U.S. or any state. Instead, we, or our subsidiaries, may as a practical matter, be forced to rely on remedies under foreign laws as interpreted and enforced by foreign courts, which generally would not enforce U.S. laws or enforce or interpret contracts consistent with U.S. legal principles or precedent. Further, such foreign courts and laws in Russia and Kazakhstan are based on non-Western principles of jurisprudence and may not provide the same kinds of remedies, relief, or procedural safeguards that are familiar in U.S. or Western legal systems.
International currency exchange rates will affect the investment practices of our customers.
The customers of the Freedom Companies seek to invest in U.S. securities in part to dampen the financial risk of domestic currency fluctuations and to invest in dollar-denominated securities. Even though the Freedom Companies’ customers’ investments are dollar-denominated, the funds available to customers to invest will depend on the rates at which the dollar is convertible into the currency of the country in which they reside—principally the Russian ruble and the Kazakh tenge. Declines in the value of the Russian ruble or the Kazakh tenge compared to the U.S. dollar reduce the amounts that residents of those countries have to invest in the United States. Conversely, increases in the value of the Russian ruble and the Kazakh tenge relative to the U.S. dollar reduces the financial advantage of investing in U.S. securities. Customer expectations respecting applicable currency exchange rates may affect the timing, number, and amounts of customer transactions in U.S. securities. Accordingly, our business may be affected substantially by currency exchange rate fluctuations.
Risks Related Generally to our Business
We may not be able to generate positive cash flow and profitability.
Our ability to generate positive cash flow and profitability depends on the ability of the Freedom Companies to generate and maintain revenue greater than the level of expenses we incur. Their ability to do this depends, among other things, on:
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maintenance and increase of their customer base;
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management or other service providersof the quality of their services;
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effective competition with ourexisting and potential competitors;
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further development of their business activities;
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attraction and retention of qualified personnel;
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ability to limit operating costs;
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integration of their activities and the broader development of an integrated securities insteadbrokerage and banking business;
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compliance with the regulatory regimes in each of cash. Furthermore, itthe jurisdictions in which they operate; and
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maintenance of adequate working capital.
We will be harder for usunable to raise funding throughachieve/maintain profitability if the saleFreedom Companies fail to do any of debt or equity securities unless we agreethe foregoing. We cannot be certain that the Freedom Companies will be able to register such securities with the Commission, which could cause us to expend additional resourcesconsistently generate positive cash flow and profitability in the future. Our statusTheir inability to consistently generate profitability or positive cash flow could result in disappointing financial results, impede implementation of their growth strategy, or have an adverse impact on the trading price or volume of our common stock. Accordingly, we cannot assure that we will be able to generate the cash flow and profits necessary to sustain our business.
Developments in the business, economic, and geopolitical environment could negatively impact the business of the Freedom Companies.
The businesses of the Freedom Companies can be adversely affected by the general environment, including economic, corporate, securities market, regulatory, and geopolitical developments all play a role in client asset valuations, trading activity, interest rates and overall investor engagement, and are outside their control. Deterioration in the credit markets, reductions in short-term interest rates, and decreases in securities valuations negatively impact their results of operations and capital resources.
Failure to meet capital adequacy and liquidity guidelines could affect the financial condition of the Freedom Companies.
The Freedom Companies must meet certain capital and liquidity standards, subject to qualitative judgments by regulators about the adequacy of their capital and internal assessment of their capital needs. These net capital rules may limit the ability of each Freedom Company to transfer capital to the Company or any other Freedom Company. New regulatory capital, liquidity, and stress testing requirements may limit or otherwise restrict how each Freedom Company utilizes its capital, and may require a Freedom Company to increase its capital and/or liquidity or to limit its growth. Failure by any Freedom Company to meet its minimum capital requirements could result in certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a negative impact on us.
A significant decrease in liquidity could negatively affect the business and financial management of the Freedom Companies as a shell companywell as reduce client confidence.
Maintaining adequate liquidity is crucial to the business operations of the Freedom Companies. They meet their liquidity needs primarily through cash generated by client activity and operating earnings, as well as cash provided by external financing. Fluctuations in client cash or deposit balances, as well as changes in regulatory treatment of client deposits or market conditions, may affect their ability to meet their liquidity needs. A reduction in their liquidity position could prevent us from raising additional funds, engaging service providers, and using our securities to pay for any acquisitions,reduce customer confidence, which could result in the loss of customer accounts, or could cause them to fail to satisfy their liquidity requirements. In addition, if they fail to meet regulatory capital guidelines, regulators could limit their operations.
Factors which may adversely affect their liquidity position include having temporary liquidity demands due to timing differences between brokerage transaction settlements and the availability of segregated cash balances, unanticipated outflows of company cash, fluctuations in cash held in banking or brokerage customer accounts, a dramatic increase in customer lending activities (including margin and personal lending), increased capital requirements, changes in regulatory guidance or interpretations, other regulatory changes, or a loss of market or customer confidence.
If cash generated by customer activity and operating earnings is not sufficient for their liquidity needs, they may be forced to seek external financing. During periods of disruptions in the credit and capital markets, potential sources of external financing could be reduced, and borrowing costs could increase. Financing may not be available on acceptable terms or at all due to market conditions or disruptions in the credit markets.
The Freedom Companies may suffer significant losses from credit exposures.
The business of the Freedom Companies is subject to the risk that a customer, counterparty or issuer will fail to perform its contractual obligations, or that the value of ourcollateral held to secure obligations will prove to be inadequate. While the Freedom Companies have policies and procedures designed to manage this risk, the policies and procedures may not be fully effective to protect the Freedom Companies against the risk of loss. The exposure of the Freedom Companies results principally from margin lending, clients’ options trading, futures activities, securities lending, their role as a counterparty in financial contracts, investing activities, and indirectly from proprietary investing of the Freedom Companies own funds.
When customers purchase securities on margin, borrow on lines of credit collateralized by securities, or trade options or futures, the Freedom Companies are subject to the risk that customers may default on their obligations when the value of the securities and cash in their accounts falls below the amount of the customers’ indebtedness. Abrupt changes in securities valuations and the failure of customers to meet margin calls could result in substantial losses.
The Freedom Companies have exposure to credit risk associated with their investments. Those investments are subject to price fluctuations as a result of changes in the Russia, Kazakhstan and U.S. financial markets’ assessment of credit quality. Loss of value of securities can negatively affect earnings if management determines that such securities are other than temporarily impaired. The evaluation of whether other-than-temporary impairment (OTTI) exists is a matter of judgment, which includes the assessment of several factors. If 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 performance of available for sale securities could result in the recognition of future impairment charges. Even if a security is not considered OTTI, if the Freedom Company holding the security were ever forced to sell the security sooner than intended prior to maturity due to liquidity needs, that Freedom Company would have to recognize any unrealized losses at that time.
The Freedom Companies’ investments expose them to a significant risk of capital loss.
The Freedom Companies use a portion of their own capital in a variety of investment activities, each of which involves risks of illiquidity, loss of principal and revaluation of assets. The companies in which they 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 strategy may not perform as projected. As a result, they have suffered losses in the past and may suffer losses from their investment activities in the future.
The Freedom Companies’ investments are concentrated in relatively few companies and industries and a consequence of this investment strategy is that their investment returns will be materially and adversely affected if the companies or the industries they target perform poorly. As a result, if a significant investment fails to perform as they anticipated their business, financial condition and results of operations could be more negatively affected and the magnitude of the loss could be more significant than if they had made smaller investments in more companies and industries.
Even if the Freedom Companies make appropriate investment decisions based on the intrinsic value of an enterprise, we cannot assure you that the market value of the investment will not decline, perhaps materially, as a result of general market conditions or changes in law. For example, an increase in interest rates, a general decline in the stock markets, or other market conditions adverse to companies or investment funds of the type in which the Freedom Companies invest could result in a decline in the value of their 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 the business and industries in which the Freedom Companies invest.
Changes in interest rates could negatively affect the value of investments the Freedom Companies make with their capital, which could result in reduced earnings or losses.
From time to time, the Freedom Companies invest capital in interest rate sensitive securities. “Long” investments that are sensitive to interest rate fluctuations will decline in value if long-term interest rates increase, and “short” investments that are sensitive to interest rate risk will decline in value if long-term interest rates decrease. Declines in market value may ultimately reduce earnings or become worthless. result in losses to us.
5
Freedom RU and Freedom KZ are subject to risks associated with their securities lending business.
Freedom RU and Freedom KZ have an active securities borrowed and loaned business in which they borrow securities from one party and lend them to another. As a result, market risk in their securities lending business arises when the market value of securities borrowed declines relative to the cash they post as collateral with the lender; and when the market value of securities they have loaned increases relative to the cash they have received as collateral from the borrower. Market value fluctuations in their securities lending business are measured daily and any exposure versus cash received or posted is settled daily with counterparties. In addition, credit risk from their securities lending operations arises if a lender or borrower defaults on an outstanding securities loan or borrowing transaction and the cash or securities they are holding is insufficient to cover the amount they owe the Freedom Companies for that receivable. Finally, there is systemic risk associated with the concentration of clearing and related functions in covered clearing agencies involved in securities lending activities. The market and credit risks associated with their securities lending business have the potential of adversely impacting their business, financial condition and results of operations.
Operating risks associated with Freedom RU and Freedom KZ’s securities lending business may result in counterparty losses, and in certain circumstances, potential financial liabilities.
As part of their securities lending business, Freedom RU and Freedom KZ lend securities to banks and broker-dealers on behalf of certain of their clients. In these securities lending transactions, the borrower is required to provide and maintain collateral at or above regulatory minimums. Securities on loan are marked to market daily to determine if the borrower is required to pledge additional collateral. The Freedom Companies must manage this process and are charged with mitigating the associated operational risks. Failure to mitigate such operational risks could result in financial losses for counterparties in the securities lending business (separate from the risks of collateral investments) of Freedom RU and Freedom KZ. Additionally, in certain circumstances, Freedom RU or Freedom KZ could potentially be held liable for the failure to manage any such risks.
Larger and more frequent capital commitments in the trading and underwriting businesses of Freedom RU and Freedom KZ increase the potential for them to incur significant losses.
Freedom RU and Freedom KZ commit their capital to maintain trading positions in the equity, convertible securities and debt markets. They may enter into large transactions in which they commit their own capital as part of their client trading activities. The number and size of these large transactions may adversely affect our results of operations in a given period. Although they may take measures to manage market risk, such as employing inventory position limits and using quantitative risk measures, they may incur significant losses from their trading activities due to market fluctuations and volatility in their results of operations. To the extent that they own assets, i.e., have long positions, in any of those markets, a downturn in the value of those assets or in those markets could result in losses. Conversely, to the extent they have sold assets they do not own, i.e., have short positions, in any of those markets, an upturn in those markets could expose them to potentially large losses as they attempt to cover their short positions by acquiring assets in a rising market.
We are a holding company and are dependent on our subsidiaries for funds.
Since we are a holding company, our cash flow and consequent ability to satisfy our obligations is dependent upon the earnings of our subsidiaries and the distribution of those earnings as dividends or loans or other payments by those subsidiaries to us. Our independent auditor has issued a report questioningsubsidiaries are subject to various capital adequacy requirements promulgated by regulatory and other authorities. These regulatory rules may restrict our ability to continue as a going concern. This report may impairwithdraw capital from our subsidiaries by dividends, loans or other payments. Additionally, our ability to raise additional financingparticipate as an equity holder in any distribution of assets of any subsidiary upon liquidation is generally subordinate to the claims of creditors of the subsidiary.
The operations and infrastructure of the Freedom Companies may malfunction or fail.
The broker-dealer, 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 different languages. The financial, accounting, or other data processing systems the Freedom Companies, or the firms that clear transactions on behalf of their customers, use may fail to operate properly or become disabled as a result of events that are wholly or partially beyond their control, including a disruption of electrical or communications services or their inability to occupy one or more of our facilities. The inability of these systems to accommodate an increasing volume of transactions could also constrain their ability to expand their businesses. If any of these systems do not operate properly or are disabled, or if there are other shortcomings or failures in their internal processes, personnel, or systems, they could suffer impairment to their liquidity, financial loss, a disruption of business, liability to clients, regulatory intervention, or reputation damage.
They also face the risk of operational failure of any of the exchanges, depositories, clearing houses, clearing firms or other financial intermediaries they use to facilitate their securities transactions. Any such failure or termination could adversely affect their ability to effect transactions and to manage their exposure to risk.
Their ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports their business and the communities in which they and third parties with which they conduct business are located, including disruption involving electrical, communications, transportation, or other services, whether due to fire, other natural disaster, power or communications failure, act of terrorism, war, or otherwise. The Freedom Companies have employees in a number of cities in Russia and Kazakhstan, all of who need to work and communicate as an integrated team. If a disruption occurs in one location and their employees in that location are unable to communicate with or travel to other locations, their ability to service and interact with their clients may suffer, and they may not be able to successfully implement contingency plans that depend on communication or travel. We do not maintain insurance policies to mitigate these risks because it may not be available or may be more expensive than the perceived benefit. Further, any insurance that we may purchase to mitigate certain of these risks may not cover these losses.
Their operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Their computer systems, software, and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. The occurrence of one or more of these events could: (a) jeopardize confidential and other information processed by, stored in, and transmitted through their computer systems and networks or the computer systems and networks of their customers or other third parties with which they conduct business; or (b) otherwise cause interruptions or malfunctions in their operations or the operations of their customers or third parties with which they conduct business. They may be required to expend significant additional resources to modify their protective measures or to investigate and remediate vulnerabilities or other exposures, and they may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance.
In addition to the risk of systems failures or interruption from benign but nevertheless disruptive causes, the systems they use and rely on may also be vulnerable to intentional unauthorized access, vandalism, software interruption, data corruption, or other mischief by unauthorized third parties, or “hackers.” Such efforts may be directed at them and their business specifically, which might disrupt their operations, or generally to broadly based, international financial, banking, and communications systems, which could disrupt broad segments of the financial and banking systems worldwide. Any such disruptions could adversely affect our business and results of operations.
The Freedom Companies are dependent on their executive management teams, in particular Timur Turlov, and they may not be able to execute their business plan in the event that members of their executive management teams are no longer available to them and they are unable to find suitable replacements for them or the members of their executive management teams do not dedicate a sufficient amount of their professional time to their endeavors.
The Freedom Companies depend on the efforts, skill, reputations and business contacts of the executive management teams of the Freedom Companies, in particular Timur Turlov, and we believe their success depends to a significant extent upon the experience of these individuals, whose continued service is not guaranteed. We have no assurance that the services of these executive management teams will continue to be available to the full extent of the needs of the Freedom Companies. If certain members of the executive management teams leave or are otherwise no longer available to their respective Freedom Company or are not available to the full extent of their needs, they may not be able to replace them with suitable management and may be unable to execute their business plan.
It may be difficult for our stockholders to enforce any civil liabilities against us or our officers or directors, because many of our officers and operations are, and are expected to be, outside the United States. The assets of the Freedom Companies are located outside the United States. Several of our directors and officers are nationals and/or residents of countries other than the United States, with all or a substantial portion of each person’s assets located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state. Further, it may be difficult for investors to enforce in foreign countries judgments obtained in the United States.
Pricing and other competitive pressures may impair the revenue and profitability of the Freedom Companies.
The Freedom Companies derive their revenues from brokerage, banking and financial services businesses serving customers in Russia and Kazakhstan. Investing by retail customers, particularly in U.S. securities, is an emerging market in those countries, and we expect the Freedom Companies will encounter intense price competition in this business as this industry matures with more competitive service providers. We believe the Freedom Companies may experience competitive pressures in these and other areas as existing or new competitors seek to obtain market share by competing on the basis of price or service. In addition, their retail brokerage business will likely face pressure from larger competitors, which may be better able to offer a broader range of complementary products and services to retail brokerage clients in order to win their trading business. The inability of the Freedom Companies to compete effectively with their competitors in these areas would adversely affect their business, financial condition, and results of operations.
From time-to-time the Freedom Companies may be subject to litigation and regulatory investigations and proceedings and may not be successful in defending themselves against claims or proceedings.
The financial services industry faces significant litigation and regulatory risks. From time-to-time the Freedom Companies may be subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. From time-to-time they may also be the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.
Actions brought against them may result in settlements, awards, injunctions, fines, penalties or other results adverse to them including reputational harm. Even if they are successful in defending against such actions, the defense of such matters may result in them incurring significant expenses. A substantial judgment, settlement, fine, or penalty could be material to our operating results or cash flows for a particular future period, depending on our results for that period. In market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies have historically increased.
Risks Related to Owning our Stock
A significant percentage of our outstanding common stock is owned or controlled by Timur Turlov, whose interests may differ from those of other stockholders.
Timur Turlov, our chairman and chief executive officer, owns approximately 88.6% of our outstanding common stock, which could increase to as high as 95% as contemplated by the Acquisition Agreement. Therefore, Mr. Turlov will be able to control all matters requiring approval by our stockholders, including the election of directors, the approval of our proposed recapitalization, and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of us and might affect the market price of our common stock.
The report
Provisions of our independent auditor contained inorganizational documents may be potentially detrimental to our financial statements for the fiscal years ended March 31, 2015 and 2014 includes a paragraph that explains that we have no continuing operations that result in positive cash flow. This raises substantial doubt about our ability to continue as a going concern. Reports of independent auditors questioning a company’s ability to continue as a going concern are generally viewed unfavorably by analysts and investors. This report may make it difficult for us to raise additional financing, if sought, to make an acquisition, or to pursue a new opportunity if one is identified. We urge you to review this report before making any investment decision.common stockholders.
Management and the boardOur articles of directors may be unable to provide sufficient time to seeking a new business opportunity, which may adversely impact our ability to identify and exploit a new business opportunity to return additonal value to our stockholders.
Our ability to successfully identify a new business opportunity to exploit will be dependent upon the efforts of our management and board of directors. As we no longer have sufficient funds to compensate our management and board members for their services, those individuals are involved in other business activities and they may have limited financial ability to devote significant time to the Company. If our management and board of directors have insufficient time to devote to identify and exploit a new business opportunity, the likelihood of our success in this endeavor will be adversely impacted which would likewise adversely impact our ability to return additonal value to our stockholders.
The board of directors may determine it to be in the best interest of the Company and its stockholders to liquidate and terminate the Company’s existence.
Based on the advice of management regarding potential business opportunities available to the Company, or the lack thereof, or the advice of the Company’s tax, accounting, legal or other experts,incorporation authorize our board of directors may, at any time, determine it to befix 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 the best interestcontrol of theour Company and its stockholders to liquidate the Company and terminate its existence. Such action would result in a complete loss in the value of the common stock of the Company.
If we are unsuccessful in obtaining a source of capital to meet our ongoing expenses, wethat may be forcedopposed by our management, even if the transaction might be favorable to liquidate and terminate the Company’s existence.
We have very limited capital to fund our efforts to identify new business opportunities. While we continue to incur expenses, we do not currently generate any revenue nor do we expect to do so until such time as we can make an acquisition or exploit an opportunity that would allow us to generate revenue. There is no guarantee we will be able to do so. Similarly, there is no guarantee that if we were to identify an opportunity we would have sufficient funds then available to us to enable us to make an acquisition or exploit such an opportunity. Given our current situation, economic conditions could materially adversely affect our ability to obtain credit or access the capital markets to fund an acquisition or exploit a new business opportunity, which would make it very difficult to pursue a new opportunity. If we are unable to pursue a new opportunity prior to expending the very limited funds we have remaining, we may be forced to liquidate and terminate the Company’s existence which would result in a complete loss in the value of the common stock of the Company.stockholders.
6
Risks Relating to Our Common Stock
If the existence of the CompanyThere is terminated, our common stock will cease to exist or trade on any market.
At any time, management and the board of directors could determine that it is in the best interest of the Company and its stockholders to liquidate the Company and terminate its existence. In the event the Company’s existence is terminated, our common stock will cease to exist and there will be noa limited trading market for our common stock. This would result in a complete loss in the value of
Although our common stock.
Our common stock is subjectcurrently quoted on the OTC Pink market, our stock trades sporadically, with limited volume. We cannot assure that a more active trading market will develop. Accordingly, our stockholders may not be able to sell our shares when they want or at the Commission’s pennyprice they want.
Penny stock rules,regulations will impose certain restrictions on resales of our securities, which may make it difficult for broker-dealerscause an investor to complete customer transactions and adversely affect trading activity in our securities.lose some or all of its investment.
Any time we have net tangible assets of $5.0 million or less and our common stockThe SEC has adopted regulations that generally define a “penny stock” to be any equity security that has a market price per share(as defined) of less than $5.00 transactions in our common stock will beper share that is not traded on a national securities exchange or that has an exercise price of less than $5.00 per share, subject to the “penny stock” rules promulgated under the Exchange Act. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
| • | make a special written suitability determination for the purchaser; |
| • | receive the purchaser’s written agreement to a transaction prior to sale; |
| • | provide the purchaser with risk disclosure documents that identify certain risks associated with investing in “penny stocks” and that describe the market for the “penny stocks,” as we as a purchaser’s legal remedies: and |
| • | obtain a signed and dated acknowledgement from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed. |
Whencertain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers that sell these securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, broker-dealers may find it difficultthe broker-dealer must make a special suitability determination for the purchase of these securities and have received the purchaser’s written consent to effect customer transactionsthe transaction before the purchase. Further, if the price of the stock is below $5.00 per share and the issuer does not have $2,000,000 or more net tangible assets or is not listed on a registered national securities exchange, sales of such stock in the secondary trading activitymarket are subject to certain additional rules promulgated by the SEC. These rules generally require, among other things, that brokers engaged in our securities may be adversely affected. As a result,secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market pricevalue of our securitiespenny stocks, disclosure of the bid and asked prices, and disclosure of the compensation to the broker-dealer and the salesperson working for the broker-dealer in connection with the transaction. These rules and regulations may be depressed, and you may find it more difficultaffect the ability of broker-dealers to sell our securities.common stock, thereby effectively limiting the liquidity of our common stock. These rules may also adversely affect the ability of persons that acquire our common stock to resell their securities in any trading market that may exist at the time of an intended sale.
We are a smaller reporting company, and the reduced reporting requirements applicable to smaller reporting companies may make our common stock less attractive to investors.
We are a “smaller reporting company” as defined in Section 12 of the Exchange Act. For as long as we continue to be a smaller reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not smaller reporting companies, including not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding nonbinding advisory votes on executive compensation, and stockholder approval of any golden parachute payments not previously approved. We could remain a smaller reporting company until the last day of the fiscal year when the aggregate worldwide market value of the voting and nonvoting common equity held by our nonaffiliates is $75 million or more on the last business day of our most recently completed second fiscal quarter, but less than $700 million. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Item 1B. Unresolved
Unresolved Staff Comments None.
Item 2.
7
Item 2. Properties
OurWith the closing of the Freedom RU acquisition, our principal executive office will be located at Office 1704, 4B Building, “Nurly Tau” BC, 17 Al Farabi Ave. Almaty, Kazakhstan 050059 in approximately 91 square feet of leased space. The Freedom Companies also maintain a securities brokerage branch at this location. This lease expires in December 2017. As of June 29, 2017, they also lease 13 other securities brokerage branch locations in Kazakhstan, one administrative office for their securities brokerage and corporate offices are locatedbanking operations in Russia, 12 securities brokerage branch locations and two bank branch locations in Russia, and our two locations in Salt Lake City, Utah,Utah. The lease terms for these offices range from month-to-month to year-to-year and expire at 324 South 400 West, Suite 250, Salt Lake City, Utah 84101, USA. Wevarious dates through December 2019. Monthly lease this space on a month-to-month basis.payment obligations are currently approximately $104,000. All locations are leased. We believe it is sufficient to meet our needs for the foreseeable future.these offices are suitable and adequate.
Item 3. Legal Proceedings
Management is not aware of any material existing or pending legal, judicial or administrative proceedings, to whichLegal ProceedingsIn the Company is a party or of which any property of the Company is the subject. Management is not aware of any proceedings in which anynormal course of our directors, officers, any affiliate or any registered or beneficial shareholder, is an adverse party or hasbusiness, lawsuits and claims may be brought against us and our subsidiaries. While the ultimate outcome of these proceedings cannot be predicted with certainty, our management, after consultation with legal counsel representing us in these proceedings, does not expect that the resolution of these proceedings will have a material interest adverse toeffect on our interest.financial condition, results of operations or cash flows.
PART II
Item 5. Market
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted over-the-counter on the OTC Pink under the symbol “BMBM.” The following table presentssets forth for the periods indicated the high and low bid quotationsprices for our common stock as quoted under the symbol “BMBM” on the Over-the-Counter Pink market for the fiscal years ended March 31, 20152017 and 2014. The published high and low bid2016. These quotations were furnished to us by the OTC Markets Group, Inc. These quotationsand reflect inter-dealerinterdealer prices without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.transactions:
| Fiscal year ended March 31, 2015 | High | | Low | |
| Fiscal year ended March 31, 2017 | | | |
| | | | | |
| Fourth quarter | $ 0.006 | | $ 0.005 | $0.017 | $0.005 |
| Third quarter | $ 0.007 | | $ 0.004 | $0.008 | $0.003 |
| Second quarter | $ 0.010 | | $ 0.006 | $0.006 | $0.003 |
| First quarter | $ 0.009 | | $ 0.007 | $0.007 | $0.002 |
| | | | | |
| Fiscal year ended March 31, 2014 | High | | Low | |
| | | | | |
| Fourth quarter | $ 0.008 | | $ 0.006 | |
| Third quarter | $ 0.013 | | $ 0.006 | |
| Second quarter | $ 0.016 | | $ 0.011 | |
| First quarter | $ 0.025 | | $ 0.012 | |
| Fiscal year ended March 31, 2016 | | |
| | | |
| Fourth quarter | $0.007 | $0.003 |
| Third quarter | $0.009 | $0.001 |
| Second quarter | $0.004 | $0.002 |
| First quarter | $0.008 | $0.004 |
Holders
As of June 12, 201529, 2017, we had approximately 363365 shareholders of record holding 55,787,554490,000,000 shares of our common stock. 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 the names of various securities brokers, dealers, and registered clearing houses or agencies.
8Dividends
Dividends
We have not declared or paid a cash dividend on our common stock during the past two fiscal years. Our ability to pay dividends is subject to limitations imposed by Nevada law. Under Nevada law, dividends may be paid to the extent that a corporation’s assets exceed it liabilities and it is able to pay its debts as they become due in the usual course of business.
In connection with the Sale, on October 24, 2011 we made an initial cash distribution to our stockholders in the amount of $1.04 per share. On October 30, 2012 we made a second cash distribution in the amount of $0.30 per share.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this report.
Performance Graph
Because we are a smaller reporting company, we are not required to provide the information required by this Item.
Recent Sales of Unregistered Securities
In connection with closing the acquisition of Freedom RU and its wholly owned subsidiaries Freedom KZ, FFIN Bank and FSS, on June 29, 2017, we issued 209,660,533 shares of our common stock to Timur Turlov. Upon completion of a reverse stock split, Mr. Turlov will be issued additional shares, consistent with the terms of the Acquisition Agreement. Prior to entering the Acquisition Agreement, there was no material relationship between Mr. Turlov and the Freedom Companies, on the one hand, and BMBM and our affiliates, on the other.
We didissued this common stock to Mr. Turlov in reliance on the exemptions from registration provided in Section 4(a)(2) of the Securities Act for transactions not sellinvolving any unregistered equitypublic offering and Regulation S promulgated under the Securities Act for offers and sales made outside the United States without registration. Mr. Turlov represented that he was an “accredited investor” as defined in Rule 501(a) of Regulation D and acknowledged, in writing, that the securities duringmust be acquired and held for investment. Mr. Turlov confirmed in writing that he is a non-U.S. person, as defined in Regulation S. All certificates evidencing the year ended March 31, 2015.shares issued bear a restrictive legend. No underwriter participated in the offer and sale of these securities, and no commission or other remuneration was paid or given directly or indirectly in connection therewith.
Issuer Purchases of Equity Securities
We did not repurchase any equity securities of the Company during the fiscal year ended March 31, 2015.2017.
Item 6. Selected FinancialFinancial Data
Because we are aThis information is not required for smaller reporting company, we are not required to provide the information required by this Item.companies.
Item 7. Management'sManagement's Discussion and Analysis of Financial Condition and Results of Operations
As discussedThe following discussion and analysis should be read in Note 1 – Description of Business of the notes toconjunction with, and is qualified in its entirety by our audited annual financial statements accompanyingand the related notes thereto included elsewhere in this report, on September 19, 2011 we sold all our interestreport. This discussion contains certain forward-looking statements that involve risks and uncertainties, as described under the heading “Special Note About Forward-Looking Information” in our oilthis report. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and natural gas exploration and production assets withuncertainties, please see the sale of our wholly-owned subsidiary Emir Oil LLP (the “Sale”). Since September 2011 we have been working to completedisclosure under the Sale, wind down our operationsheading “Risk Factors” elsewhere in Kazakhstan, and identify new business opportunities that might allow us to take advantage of the expertise of our management staff and return additional value to our stockholders.this report.
This discussion summarizes the significant factors affecting our consolidated operation results, of operations, financial condition, and liquidity and capital resources during the fiscal year ended March 31, 2017 and 2016.
Overview
On June 29, 2017, we closed the acquisition of Freedom RU and its wholly-owned subsidiaries, including their securities brokerage, financial services and banking businesses in Russia and Kazakhstan, as we continue our efforts to build an international broadly based brokerage and financial services firm. We continue to work with Cyprus securities authorities to obtain the required regulatory approvals to transfer ownership of Freedom CY to BMBM.
Because the acquisition of Freedom RU did not close until after the end of the fiscal periods included in this report, unless otherwise specifically indicated or as is otherwise contextually required, the discussion included in this Item 7. Management’s Discussion and Analysis and Results of Operations reflects the results of operations and financial condition of the Company as of March 31, 2017, prior to closing the acquisition of Freedom RU.
Results of Operations
The years ended March 31, 20152017 and 2014. This discussion should be read in conjunction with the financial statements and notes to the financial statements accompanying this report.2016.
9Revenue
Results of Continuing Operations
Year ended March 31, 2015 compared to the year ended March 31, 2014.
Revenue
We did not generate any revenue during the years ended March 31, 2017 and 2016.
Expenses
Operating Expenses. During the fiscal years ended March 31, 20152017 and 2014. We do not expect to generate revenue in the future unless we are successful in identifying2016, operating expenses included professional fees of $364,334 and exploiting a new business opportunity. There is no guarantee we will be successful in so doing.
Expenses
The following table presents details of our expenses for the years ended March 31, 2015 and 2014:
| | For the year ended | | For the year ended |
| | March 31, 2015 | | March 31, 2014 |
| Costs and Operating Expenses: | | | |
| General and administrative | $ 80,410 | | $ 1,490,344 |
| Amortization and depreciation | - | | 98,356 |
| Total | $ 80,410 | | $1,588,700 |
General and Administrative Expenses. General$222,511, general and administrative expenses duringof $214,310 and $268,018, and depreciation expenses of $3,330 and $3,305, respectively. Professional services mainly included legal, consulting, and accounting fees incurred in connection with the year ended March 31, 2015 were $80,410 compared to $1,490,344 duringplanned acquisition of the year ended March 31, 2014.Freedom Companies. General and administrative expenses were lower duringcomprised of payroll and related payments, rent expenses, and office supplies. Operating expenses were higher in the fiscal year ended March 31, 2015 because, with2017, compared to the winding down of our operations we incurred lower expenses, including the elimination of executive officer and director compensation. During fiscal 2015 our general and administrative expenses were primarily limited to expenses for legal services, rent, transfer agent, listing and filing fees and accounting and audit fees.
Amortization and Depreciation. Amortization and depreciation expense for the year ended March 31, 2015 decreased2016, primarily because we incurred more legal and consulting services in connection with FFIN’s new membership application to zero becauseFINRA. With the closing of the acquisition of Freedom RU during the first fiscal quarter of 2018, we anticipate operating expenses to be higher, as a result of the increased size of our fixed assets were fully amortized as of March 31, 2015.operations, during fiscal 2018.
Loss from Operations. During the yearfiscal years ended March 31, 20152017 and 2016, we recognized alosses from operations of $581,974 and $493,834, respectively. As discussed above, our loss from operations of $80,410 compared to a loss from operations of $1,588,700 during the year ended March 31, 2014. This decrease in loss from operations during the year ended March 31, 2015 was the result of the 95% decrease in general and administrative expenses and the elimination of amortization and depreciation expense. We anticipate loss from operations will follow the same trend as general and administrative expenses.
Total Other Income/Expense. During the year ended March 31, 2015 we recognized total other income of $6,819 compared to total other income of $16,951 during the year ended March 31, 2014. The decrease resulted from lower interest income on our cash balances during the year ended March 31, 2015.
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Income Tax Benefit. During the year ended March 31, 2015 we were refunded previously overpaid estimated tax payments totaling $54,804. We realized no income tax benefit or expensehigher during the fiscal year ended March 31, 2014.
Net Loss. For all of2017, than the foregoing reasons, during thefiscal year ended March 31, 20152016, primarily because of the increase in professional services. With the closing of the acquisition of Freedom RU during the first fiscal quarter of 2018, we incurred a net lossanticipate we will begin the realize revenue from the operations of $18,787 compared to a net loss of $1,571,749 forFreedom RU commencing in the year ended March 31, 2014. We expect to continue to realize net lossessecond fiscal quarter 2018. Based on current projected income and expenses, we anticipate realizing operating gains in upcoming fiscal periods unless we are able to identify and exploit a new business opportunity to generate revenue and increase our level of activity.
Liquidity and Capital Resources
As noted throughout this report, in September 2011 we completed the sale of our oil and natural gas exploration and production assets. In September 2012 we completed our post-closing obligations in connectioncommencing with the Sale. We continue our efforts to identify new business opportunities that will allow us to return additional value to our stockholders, but we have limited funds remaining to continue such efforts. There is no assurance that we will be able to continue such efforts or that, at some point, our board of directors will not determine that it is in the best interest of the Company and its stockholders to dissolve the Company.second fiscal quarter 2018.
We do not currently generate revenue and do not anticipate generating revenue until such time as we are able to identify and exploit a new business opportunity, if ever. No assurance can be given that we will be successful in this endeavor, that we will have sufficient funds to continue to look for a new business opportunity, that we will have the funds then available to us to take advantage of any such opportunity if one is found or that our management and board of directors will be financially able to continue providing services to the Company without compensation. These factors raise substantial doubt about our ability to continue as a going concern or to return any additional value to our stockholders.
Cash Flows
Total Other Income. During the fiscal year ended March 31, 2015,2017, we recognized total other income of $3,935 compared to $1,595 during the fiscal year ended March 31, 2016. This other income resulted from interest income on our cash balances.
Net Loss. For the reasons discussed above, during the fiscal year ended March 31, 2017, we realized a net loss of $578,139, or $0.00 per share. During the fiscal year ended March 31, 2016, we realized a net loss of $491,999, or $0.00 per share. As noted above, with the closing of the acquisition of Freedom RU, we anticipate beginning to realize net income from operations commencing in the second fiscal quarter 2018. Prior to closing the acquisition of Freedom RU, BMBM was generating no operating revenue.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements for general business purposes. As of March 31, 2017, we had cash and cash equivalents of $50,537, compared to cash and cash equivalents of $99,678, at March 31, 2016. At March 31, 2017, we had total current assets (less restricted cash) of $50,987, and total current liabilities (less deferred distribution payment) of $206,071, resulting in a working capital deficit of $155,084. By comparison, at March 31, 2016, we had total current assets (less restricted cash) of $150,053 and total current liabilities (less deferred distribution payment) of $50,329, resulting in working capital of $99,724.
During the periods covered by this annual report, we did not generate any revenue and were reliant upon capital contributions from Mr. Turlov our CEO and chairman, to satisfy our operating expenses. For the year ended March 31, 2017, Mr. Turlov provided capital contributions to us totaling $320,000. In April 2017, Mr. Turlov provided us an additional capital contribution of $240,000.
With the closing of the Freedom RU acquisition on June 29, 2017, we anticipate that commencing in the second fiscal quarter 2018, revenue generated by Freedom RU will be sufficient to meet our liquidity and capital resources needs.
Regulatory requirements applicable to the Freedom Companies require them to maintain minimum capital levels. Their primary sources of funds for liquidity consist of existing cash balances (i.e., available liquid capital not invested in their operating businesses), capital contributions from Mr. Turlov, gains from their proprietary investment accounts, fees and commissions, and interest income.
The Freedom Companies monitor and manage their leverage and liquidity risk through various committees and processes they have established. The Freedom Companies assess their leverage and liquidity risk based on considerations and assumptions of market factors, as well as factors specific to them, including the amount of available liquid capital (i.e., the amount of their cash and cash equivalents not invested in their operating business).
Freedom RU has pursued an aggressive growth strategy during the past several years, and we anticipate continuing efforts to rapidly expand the footprint of our brokerage and financial services business in Russia, Kazakhstan and other markets. While this strategy has led to revenue growth it also results in increased expenses and greater need for capital resources. Expansion may require greater capital resources than we currently possess. Should we need additional capital resources, we could seek to obtain such through debt financing. Once we complete a reverse stock split, we could also seek to equity financing. We do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining debt or equity financing when needed on favorable terms, or at all.
Cash Flows
During the fiscal years ended March 31, 2017 and 2016, we used cash primarily used to pay for current expenses. See below for additional discussion and analysis of cash flow.
| | Year ended | | Year ended | | |
| | March 31, | | March 31, | |
| | 2015 | | 2014 | |
| Net cash provided by (used in) operating activities | $ 40,201 | | $ (1,802,986) | |
| Net cash used in operating activities | | $(369,141) | $(538,629) |
| Net cash provided by investing activities | $ - | | $ - | $- | $8,589,155 |
| Net cash used in financing activities | $ (2,460) | | $ (73,300) | |
| Net cash provided by financing activities | | $320,000 | $180,000 |
| | | | | |
| NET CHANGE IN CASH AND CASH EQUIVALENTS | $ 37,741 | | $ (1,876,286) | $(49,141) | $8,230,526 |
Net cash used in operating activities during the fiscal year ended March 31, 2017 was lower compared to 2016 due to a bigger increase in accounts payable during fiscal 2017.
During the year ended March 31, 2016, net cash provided by investing activities included $8,589,354 resulting from the acquisition of BMBM. Included in this amount is the reserve held for distribution to shareholders who have not yet claimed their distributions from the sale of the Company’s oil and gas exploration and production operations of $8,533,566.
During fiscal 2017, net cash provided by financing activities was $320,000 compared to $180,000 during the year ended March 31, 2016. All funds provided by financing activities resulted from capital contributions to the Company by Mr. Turlov. Our principal source of liquidity during the yearfiscal years ended March 31, 2015 was cash2017 and cash equivalents. 2016, were these capital contributions from Mr. Turlov.
At March 31, 20152017, unrestricted cash and cash equivalents totaled $8,624,986. At$50,537 compared to $99,678 at March 31, 2014 cash and cash equivalents totaled $8,587,245. At March 31, 2015 $8,537,905 was being held for distribution to stockholders who have not yet claimed their distributions pursuant to the first and/or second stockholder distributions as reflected in the table of Contractual Obligations and Contingencies below.
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Contractual Obligations and Contingencies
The following table lists our significantis a summary of the material contractual commitments atof BMBM as of March 31, 2015 excluding current liabilities, as listed on our balance sheets:2017:
| | |
| Contractual obligations | | | | | |
| Deferred distribution | $8,533,566 | $8,533,566 | $- | $- | $- |
Office lease(1) | 7,187 | 7,187 | - | - | - |
| TOTAL | $8,540,753 | $8,540,753 | $- | $- | $- |
| | | | | | |
(1) This office lease expires June 30, 2017.
The Freedom Companies lease a number of office facilities for their securities brokerage, banking and financial services businesses. The terms of these leases range from month-to-month to year-to-year and expired at various dates through December 2019. The office lease payment obligations of the Freedom Companies are approximately $104,000 per month.
| | Payments Due By Period |
| Contractual obligations | Total | Less than 1 year | 2-3 years | 4-5 years | After 5 years |
Initial cash distribution payable(1) | $ 6,620,623 | $ 6,620,623 | $ - | $ - | $ - |
Second cash distribution payable(1) | 1,917,282 | 1,917,282 | - | - | - |
| | | | | | |
| TOTAL | $ 8,537,905 | $ 8,537,905 | $ - | $ - | $ - |
| | | | | | |
(1) | See Note 4 – Shareholders’ Deficit, of the financial statements for additional information regarding the first and second cash distributions.
|
During the year ended March 31, 2017, Freedom KZ placed bonds in the amount of $9,530,000. The bonds have an 11.50% fixed annual coupon rate and mature on January 21, 2019. The Freedom Companies have the right to repurchase and resell the bonds at market value. During the year ended March 31, 2017, the Freedom Companies repurchased bonds totaling $6,145,000. The Freedom KZ bonds trade actively on the KASE.
As of March 31, 2017, the accrued interest on these bonds totaled $74,000. The semi-annual coupon payment is paid in January and July. In January 2019, Freedom KZ will be required to repay the face value of the then outstanding bonds to the bondholders.
As described in more detail in Item 1. Description of Business of this report, pursuant to the Acquisition Agreement, we had agreed to issue to Mr. Turlov, our CEO and chairman, and the owner of Freedom RU, 13% of our issued and outstanding common stock for his interest in Freedom RU. As we had insufficient authorized but unissued common stock to deliver the full agreed upon consideration to Mr. Turlov at the closing of the acquisition of Freedom RU, as an accommodation to facilitate the closing, Mr. Turlov agreed to accept a partial issuance, and to defer issuance of the balance of the shares until such time as BMBM can complete a reverse stock split and recapitalization so we have sufficient additional shares to issue him the percentage agreed in the Acquisition Agreement. Until such time as we complete the reverse stock split, we will also have insufficient authorized but unissued common stock to complete the acquisition of Freedom CY.
Off-Balance Sheet Financing Arrangements
As of March 31, 20152017, we had no off-balance sheet financing arrangements.
Critical Accounting PoliciesEstimates
We have identified certainbelieve that the following accounting policies asare the most critical to our business operationsaid you in fully understanding and an understanding of our financial statements. The impact of these policies and associated risks are discussed throughoutevaluating this Management’sItem 7. Management Discussion and Analysis where such policiesof Financial Condition and Results of Operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect ourthe reported amounts of assets and expected financial results. A complete discussionliabilities and disclosure of our accounting policies is included in Note 2contingent assets and liabilities at the date of the notes to our financial statements.statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
For details of applicable new accounting standards, please, refer to “Recent accounting pronouncements” in Note 2 of our financial statements accompanying this report.
Item 7A. Qualitative
Qualitative and Quantitative Disclosures about Market Risk This information is not required for smaller reporting companies.
Because we are a smaller reporting company, we are not required to provide the information required by this Item.
Item 8.
Financial StatementsStatements and Supplementary Data The financial statements and supplementary data required by this Item 8 are included beginning at page F-1 of this report.
