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, or 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.
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 the 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) withdrawalwithdraw or suspension ofsuspend 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.
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 Application to Operate as a Securities Broker-Dealer
We cannot assure that FFIN will complete the required steps to become a U.S. securities broker-dealer.
FFIN recently withdrew its application to become a member of FINRAAcquisitions and to register as a broker-dealer with the SEC to allow it more time to gather and provide additional information to FINRA and to decide whether to resubmit its new membership application. Applications for licensure, particularly the FINRA application, are technical and complicated and require substantial information about FFIN, its operations, our company, our stockholders and management. Application for FINRA membership must satisfy stringent requirements, and approval is subject to substantial discretion. FFIN cannot commence business as a U.S. securities broker-dealer until all applications are refiled and approved, and we cannot assure refiling or approval. Further, before FFIN can commence operations as a U.S. securities broker-dealer it will also need to establish a clearing arrangement with a U.S. clearing broker to hold customer funds and securities and process transactions, and we cannot assure that FFIN will be able to do so. FFIN’s inability to complete the licensing and membership requirements to become a U.S. broker-dealer does not preclude us from completing the acquisitions of Freedom RU, Freedom KZ, and Freedom CY, but the inability to use FFIN to execute securities transactions in the United States on behalf of the customers of Freedom RU, Freedom KZ, and Freedom CY may have a material adverse effect on our business and results of operation.Proposed Acquisitions
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We may have to reconsider our core business strategy if we are unable to provide the Freedom Companies’ clients access to the U.S. securities markets.
The core of our long-term strategy is to access U.S. securities markets: directly with a subsidiary that is a registered broker-dealer; indirectly through ownership of a minority interest in another broker-dealer augmented by strategic operating relationships with the Freedom brokers; or merely through strategic relationships with other broker-dealers. FFIN is currently assessing whether to reapply to become a registered broker-dealer in the U.S. If it elects to do so, there is no guarantee such application will be successful. Should FFIN elect not to refile, or if it is unsuccessful in the application process, there is likewise no guarantee that we would be able to acquire a minority interest in another broker-dealer, or establish strategic relationships with other broker-dealers registered in the U.S. If we are unable to provide the customers of the Freedom Companies access, directly or indirectly, to the U.S. securities markets our business and results of operations would be materially adversely impacted and we may have to reconsider our core business strategy.
Regulatory authorities may impose substantial restrictions on the nature and extent ofbelieve our proposed activities as a condition to approval of a FINRA membership application.
Applications to regulatory authorities, particularly for membership in FINRA, are subject to substantive review under a number of regulatory criteria. Pursuant to its discretion, FINRA typically imposes restrictions on the activities of new members to limit certain kinds or amounts of activities that may adversely impact a firm’s financial integrity or expose its customers to risk. These restrictions may expire after a designated period or may be lifted after specified operating conditions are met. We cannot predict the nature of such new membership restrictions or the extent to which they will limit FFIN’s proposed activities.
We may need to change our proposed plan of operation, management and supervisory personnel and procedures, and operating systems in order to overcome objections from authorities.
New membership applications filed with FINRA include detailed information about the manner in which an applicant proposes to conduct business; the applicant’s management and supervisory personnel and procedures; transaction processing, recordkeeping, and reporting; satisfaction of monitoring and compliance requirements; administrative and customer relations protocols; and other matters. FFIN submitted a new membership application to FINRA in December 2015, which it recently withdrew to allow itself additional time to collect information requested by FINRA. FFIN is currently assessing whether to re-submit its new membership application to FINRA. If FFIN elects to pursue reapplication, we anticipate it will do so before the end of calendar 2016. We may be required to change or supplement our current plans, arrangements, and personnel to overcome comments or objections to any new membership application filed by FFIN. These changes may cause delays or additional costs and may be inconsistent with our current business plan and overall strategy. We cannot predict the nature or extent of any conditions that may be imposed or their impact on our proposed activities.
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There is no arrangement for us to rescind the transaction through which we issued what is now 80.1% of our outstanding common stock in consideration of the acquisition of 100% ownership of FFIN if FFIN cannot become licensed as a U.S. securities broker-dealer.
Under the Acquisition Agreement, we issued 224,551,913 shares, or approximately 80.1% of our outstanding common stock, in consideration of our acquisition of 100% of the ownership of FFIN. We cannot assure that FFIN can meet the applicable requirements or that FFIN will successfully complete the steps required to become a U.S. broker-dealer. If FFIN fails to become a U.S. broker-dealer, the foundation of our proposed international financial services firm may be substantially undermined and devalued. We cannot assure that we would be able to identify and implement alternative ways to serve international securities customers, including customers of the Freedom Companies. We do not have the right to rescind the acquisition of FFIN and recover the shares issued in the transaction if FFIN’s efforts to become a U.S. broker-dealer are not successful, even if the value of FFIN to us would be reduced substantially.
Risks Related to Our Proposed Acquisitions
We cannot assure when or whether our proposed acquisitions of Freedom RU, including its subsidiary Freedom KZ, which operate as securities broker-dealers in Russia and Kazakhstan, and 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 RU, including its subsidiary Freedom KZ, and Freedom CY, specifies that ourthe acquisition of any individual Freedom Company will not be completed until such companies complete and provide audited financial statements prepared in accordance with GAAP and GAAS and the requirements of the SEC. The books and records of each of these companies have been maintained under accounting principles and regulatory requirements in their respective jurisdictions of organization, operation, and regulation that are materially different and perhaps less rigorous than GAAP and GAAS in the United States and SEC requirements. We cannot assure when or whether the Freedom Companies can meet these financial statement requirements. The acquisition of Freedom RU is further conditioned on the satisfaction of specified regulatory requirements in Kazakhstan applicable to Freedom KZ.
The completion of any acquisition is further dependent on us having a sufficient number of authorized but unissued shares to issue the amount of stock that we agreed to issue in the Acquisition Agreement. If, at the time of a proposed acquisition, we do have a sufficient number of authorized but unissued shares to complete the transaction,Cyprus. While we have agreedbeen working with CySEC for some time to effect a recapitalization consisting of a reverse-split of our outstanding common stock and, possibly, a change inobtain the number of shares of common stock we are authorizednecessary regulatory approvals to issue, in each case to such number as the board of directors may determine. Mr. Turlov, our principal stockholder, will have the power to authorize this action without the vote of any other stockholder, so approval of the recapitalization is assured. The acquisitiontransfer ownership of Freedom RUCY to the Company, and its subsidiary Freedom KZnow believe receipt of such approval is separate fromprobable, 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, so both, one, or neither of these acquisitionswe may be completed.
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Eachrequired to revise our business model if we are unable to obtain the necessary regulatory approvals to transfer ownership of the acquisitions is also subjectFreedom CY to the satisfaction of a number of additional conditions that are beyond our control that may prevent, delay, or otherwise adversely affect the completion of one or both of the proposed acquisitions, including the continued accuracy of several representations and warranties, some of which may be waived. We cannot predict whether or when any of these conditions will be satisfied. Assuming satisfaction of the conditions to the acquisitions, we expect, but cannot assure, the completion of both acquisitions before the end of calendar 2016. Any of the proposed acquisitions may be abandoned if not closed by that date.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 as a resultreduced. We may also identify and pursue additional acquisitions that could require the issuance of additional stock, which would likely further reduce the completionpercentage ownership of the proposed acquisitions.our stockholders
As a result of the acquisition of FFIN, stockholders that previously owned 100% of our outstanding stock now own(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 acquisitionsacquisition of Freedom RU and Freedom CY are completed, the ownership of the original BMB stockholders that owned 100% of our outstanding stock before signing the Acquisition Agreement will own an aggregate ofbe reduced to approximately 5% of our common stock. We cannot assure that the value of the retained stock of the original BMB stockholders that owned 100% of our outstanding stock is or will be greater when their ownership is reduced to approximately 19.9%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 future suitable acquisitions or investment candidates, or, if we do identify suitable candidates, that we will be able to make the acquisitions or investments on reasonable terms or at all. The Acquisition Agreement restricts the conductfinancing of any such acquisition or investment, or of a significant general expansion of our business, before the completion of the acquisitions and limits our ability to pursue alternativemay not be readily available on favorable terms. Any significant acquisition expansion, or diversification alternatives.
The Acquisition Agreement restricts our ability to engage in activitiesinvestment, or transactions outside the ordinary coursemajor expansion of our business, pendingmay require us to explore external financing sources, such as an offering of our equity or debt securities. We cannot be certain that in the completion of the acquisitions, December 31, 2016,future these financing sources will be available to us or the consent of Mr. Turlov, which maythat we will be grantedable to negotiate commercially reasonable terms for any such financing, or withheld in his absolute discretion. These restrictions may prevent us from pursuing otherwise attractive business opportunities and making other changes tothat our business.
Our failure to complete the proposed acquisitions could negatively impact the trading priceactual cash requirements for our common stock and our future business and financial results.
If onean acquisition, investment or both acquisitions areexpansion will not completed, the trading price for our common stock and our business may be adversely affected by several risks and consequences. For example, we may experience negative reactions from the financial markets about our ongoing viability and concernsgreater than anticipated. In addition, any indebtedness that we may seek other activities and operationsincur in such a financing may inhibit our operational freedom, while any equity securities that may expose us to further risks. Further, while we are prohibited by the terms of the Acquisition Agreement from pursuing other opportunities, we may miss opportunities to expandissue 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 enterproducts and service offerings into newour 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 financial transactions that have attractive potential to provide value to our stockholders. We cannot assure that Mr. Turlov, whose consent is required in order to enter into a transaction other than in the ordinary coursesynergies of business, would consent. He is under no obligation to provide his consent.any such acquisition or investment.
Timur Turlov will be subject to significant conflicts of interest in connection with the Acquisition Agreement.
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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. Accordingly, he will be subject to substantial conflicts of interest in such matters. We have not adopted procedures to resolve these conflicts of interest in our favor. Further, we cannot assure that our intent to have all of our decisions respecting our performance under and compliance with the terms 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 be subject.
Because we are a “controlled company” within the meaning of the NYSE and NASDAQ 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.
Upon execution of the Acquisition Agreement, Mr. Turlov was issued 224,551,913 sharescurrently holds 88.6% of our common stock, which constituted approximately 80.1% of ourissued and outstanding common stock, after giving effectwith the right to the acquisitionreceive an additional 4.4% following completion of FFIN. Mr. Turlov’sa 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 common stock if the acquisitions of the Freedom Companies are successfully completed.stock.
As a result of Mr. Turlov’s acquisition of greater than 50% of the voting power of BMBM, we became a “controlled company” under the corporate governance standards of the NYSE and NASDAQ. 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 80.1%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 possible proposal to recapitalize us in order to enable the acquisitions of the Freedom Companies to be completed,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 must act in good faith and in a manner he reasonably believes to be in the best interests 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.
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Risks Related to Effecting Securities Transactions for Foreign Customers
Anti-money laundering obligations under the U.S. Patriot Act will require usThe Freedom Companies’ business would be negatively impacted if Freedom CY is unable to monitor and report suspicious activity impose special compliance obligations, expose us to compliance risks, and may adversely affect our customer relations.
Anti-money laundering obligations under the U.S. Patriot Act will require us to adopt and implement a comprehensive compliance policy that will require us to review the identity and conduct of potential customers and the nature of their transactionsmaintain its relationship with a view to determining whether they or their conduct is proscribed by law. If we determine to re-apply for registration as aU.S. securities broker-dealer and become a registered broker-dealer in the U.S., our efforts, in conjunction with a clearing firm to obtain the required detailed information and documentation from customers, particularly in Russia and Kazakhstan, may be inconsistent with cultural norms and may adversely affect our customer relationships. If we reapply for and are able to obtain licensure, we will be obligated to report to federal officials our customers’ suspicious activities, and our failure to do so timely, adequately, or accurately may expose us to sanctions.
If we are able to obtain necessary licensure, our business will depend on the ability of our clearing firm, on our behalf,willing to receive and transmit funds internationally.
If FFIN determinesFunds invested by customers of the Freedom Companies’ in U.S. securities are transmitted to reapply for and is able to obtain necessary licensure to operate as a U.S. securities broker-dealer funds invested by our customers will be transmitted to aand clearing firm and by itthe U.S. securities broker-dealer and clearing firm back to ourthe Freedom Companies’ customers through international banking electronic transfers, which can experience clerical and administrative mistakes, be subject to technical interruption, be delayed, or otherwise fail to work as planned. We willNeither Freedom CY, nor the Freedom Companies have noany control over these funds transfers. Failures or substantial delays in funds transfers could impair ourthe Freedom Companies’ customer relationships.
Our business may experience day-to-day operational delays and difficulties because of language differences.
We anticipate at least some of FFIN’s proposed customers in Russia and Kazakhstan will not speak English at all, or sufficiently, to execute securities transactions in English. Accordingly, if FFIN determines to reapply and is able to obtain licensure to operate as a U.S. securities broker-dealer, it will depend on the local employees of theThe Freedom Companies to communicate and translate into English communications necessary to conduct business routinely and accurately. Errors in translation could result in errors in order execution, expose us to liability to customer losses, and impair our customer relationships.
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We must comply with the U.S. Foreign Corrupt Practices Act (“FCPA”) in ourtheir operations in Russia Kazakhstan, and Cyprus.Kazakhstan.
WeThe Freedom Companies will be required to conduct ourtheir activities in or related to Russia, Kazakhstan, and Cyprus 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, and the Cyprus Securities and Exchange Commission, the principal regulatory bodies that would control and monitor our operations in those countries.Russia and Kazakhstan. While ourthe employees and agents of Freedom Companies will be required to acknowledge and comply with these laws, we cannot assure that ourtheir 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 be changedchange in ways that could adversely impact our business.
If we determine to reapply for and are successful in obtaining necessary licensure to operate as aThe Freedom Companies securities broker-dealer in the U.S., our proposed securities broker-dealerand banking activities for customers in Russia and Kazakhstan are and will continue to be subject to ongoing uncertainties and risks, including:
● | ● 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; |
● | possible changes to the laws, regulations, and policies applicable to our customers or us or the securities business generally; |
● | 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; |
● | uncertainties as to whether the laws and regulations will be applicable in any particular circumstance; |
● | uncertainties as to whether we will be able to enforce our legal rights in Russia, Kazakhstan, or Cyprus; |
● | uncertainty as to whether we will be able to demonstrate, to the satisfaction of the applicable governing authorities, our compliance with governmental requirements; |
● | currency exchange rates, regulations, or limitations; |
● | political instability and possible changes in government; |
● | local and national tax requirements; |
● | expropriation or nationalization of private enterprises and other risks arising out of foreign government sovereignty over properties in Russia, Kazakhstan, or Cyprus; and |
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● | possible significant delays in obtaining governmental authorizations, consents, or approvals of applicable requirements. |
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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 will beare 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 Kazakhstan, and CyprusKazakhstan have changing regulatory regimes, regulatory policies, and interpretations.
Russia Kazakhstan, and CyprusKazakhstan 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 investmentbanking 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 our proposedthe 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 ourthe Freedom Companies’ activities in Russia Kazakhstan, or Cyprus. For example, certain of the laws of Russia and Kazakhstan may reflect reactions to international sanctions in response to Russian actions in Crimea and Ukraine.Kazakhstan. Further, since the history and practice of industry regulation is sparse, ourthe 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 rateprofitability of privatizationthe 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 industries in Kazakhstanclient data. In addition, changes to these rules and regulations could affect its business.
The expansion of Freedom KZ since its organization in 2006 has benefited from the privatization of industries and companies in that country, which has led to significant growth in investments by individuals, which in turn has increased the number of Freedom KZ’s customer accounts. The Kazakh government has announced that it intends to continue privatization of companies in various industries in that country through public offerings of securities. Recently, Kazakhstan has engaged in initial public offerings to privatize companies in the oil and gas and energy distribution segments, and has announced plans for initial public offerings for companies in transportation, healthcare, energy services and other segments. We cannot assure that any continued privatization in Kazakhstan will result in increased customer accountslimitations on the lines of business the Freedom Companies conduct, modifications to their business practices, more stringent capital and liquidity requirements, or securities transactions by persons in that country.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.
The ongoing political and economic uncertainties affecting Russia and, to a lesser extent, Kazakhstan and collateral financial issuesInternational currency exchange rates may adversely affect our proposed activities.
Russia and, to a lesser extent, Kazakhstan continue to be impacted by changing policies that may reflect reactions to international sanctions against Russia in response to Russian actions in Crimea and Ukraine. Further, economic, domestic, and international political circumstances in the area may change. The economies of both Russia and Kazakhstan are substantially dependent on revenue from the production and sale of oil, which has declined substantially in price during the past year, resulting in economic pressures that continue to increase. These factors may adversely impact the economic stability of these countries and, in turn, the investment practices of ourthe 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 Russian ruble or the regulatory policies affecting their investments.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 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.
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It may be difficult for us to enforce any civil liabilities against our customers that are outside the United States.
If we become a licensed securities broker-dealer inThe customers of the U.S., we anticipate that initially almost all of our customers will beFreedom Companies are residents of countries outside of the U.S. and beyond the jurisdiction of U.S. courts. As a result, it may be difficult for us to 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. securities or other 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 will 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. The values of the Russian ruble and Kazakh tenge declined approximately 50% and 40%, respectively, as compared to the U.S. dollar between June 2014 and November 2015, and will likely continue to fluctuate. Declines in the value of the Russian ruble or the Kazakh tenge compared to the U.S. dollar correspondingly 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 willmay be affected substantially by currency exchange rate fluctuations.
Risks Related Generally to our Securities Business
FFIN may face penalties or other sanctions that may be detrimental to our business if FFIN fails to comply with the comprehensive regulations administered by the SEC, state regulators, and FINRA.
If FFIN reapplies for and is able to obtain licensure to operate as a U.S. securities broker-dealer, it will be subject to extensive regulation under both federal and state laws respecting almost all aspects of its business, including:
● | customer accounts and customer transactions and interactions; |
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● | trade practices among broker-dealers; |
● | conduct of directors, officers, and employees; and |
● | supervision of employees. |
The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker-dealers.
Uncertainty regarding the application of these laws and other regulations to the business of a U.S. securities broker-dealer business may adversely affect the viability and profitability of its business. The SEC, FINRA, other self-regulatory organizations, and state securities authorities can censure, fine, issue cease-and-desist orders, or suspend or expel a broker-dealer or any of its officers or employees. If it becomes licensed, FFIN’s ability to comply with all applicable laws and rules is largely dependent on its establishment, maintenance, and documentation of compliance procedures to ensure such compliance, as well as its ability to attract and retain qualified compliance personnel. If it becomes licensed, FFIN could be subject to disciplinary or other actions due to claimed noncompliance in the future, and the imposition of any material penalties or orders on FFIN could have a material adverse effect on its business, operating results, and financial condition. In addition, it is possible that noncompliance could subject FFIN to future civil lawsuits, the outcome of which could harm our business. In addition, our mode of operation and profitability may be directly affected by additional legislation; changes in rules promulgated by the SEC, state regulators, FINRA, and other regulatory and self-regulatory organizations; and changes in the interpretation or enforcement of existing laws and rules.
If FFIN reapplies and becomes a licensed U.S. securities broker-dealer, its failure to remain in compliance with the net capital rule would adversely affect its ability to continue to operate, which could be a material factor if FFIN’s net capital requirement were to increase substantially above its current anticipated $6,000 level.
The SEC, FINRA, and various other regulatory agencies have stringent rules respecting the maintenance of specific levels of net capital by securities broker-dealers. Net capital is the net worth of a broker or dealer (assets minus liabilities), less certain deductions that result from excluding assets that are not readily convertible into cash and from conservatively valuing certain other assets, all as calculated pursuant to detailed and stringent requirements. If FFIN reapplies and is successful in obtaining licensure as a licensed U.S. securities broker-dealer, failure to maintain the required net capital could subject FFIN to suspension or revocation of registration by the SEC and suspension or expulsion from FINRA and other regulatory bodies and ultimately could require the firm’s liquidation.
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If FFIN reapplies and is successful in becoming a licensed U.S. securities broker-dealer, a change in the nature of its business activities, amendment of the net capital rules, the imposition of new rules, or any unusually large charge against net capital could limit those aspects of FFIN’s contemplated operations that require the intensive use of capital. A significant operating loss or any unusually large charge against net capital could adversely affect FFIN’s ability to operate and/or expand, which could have a material adverse effect on our business, financial condition, and operating results. We cannot assure that FFIN would not fall below minimum net capital requirements in the future.
We may not be able to generate positive cash flow and profitability.
Our ability to generate positive cash flow and profitability depends on ourthe ability of the Freedom Companies to generate and maintain revenue greater than the level of expenses we incur. ThisTheir ability to do this depends, among other things, on:
● | successfully pursuing registration of FFIN as a U.S. broker-dealer; |
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maintenance and increase of their customer base;
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management of the quality of their services;
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effective competition with existing and potential competitors;
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further development of their business activities;
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attraction and retention of qualified personnel;
●
ability to limit operating costs;
●
integration of their activities and the broader development of an integrated securities brokerage and banking business;
●
compliance with the regulatory regimes in each of the jurisdictions in which they operate; and
●
maintenance of adequate working capital.
● | completion of our proposed acquisitions of Freedom RU and its Kazakhstan broker-dealer subsidiary and Freedom CY; |
● | integration of all of the activities of our combined subsidiaries and the broader development of an integrated, international securities brokerage and investment banking business; |
● | successful transition of the customers of the existing broker-dealers we acquire to effecting transactions through our U.S. broker-dealer; |
● | maintenance and increase of our customer base; |
● | management of the quality of our services; |
● | effective competition with existing and potential competitors; |
● | further development of our business activities; |
● | attraction and retention of qualified personnel; |
● | ability to limit operating costs; |
● | compliance with the regulatory regimes in each of the jurisdictions in which we operate; and |
● | maintenance of adequate working capital. |
We maywill be unable to achieveachieve/maintain profitability if wethe Freedom Companies fail to do any of the foregoing. We cannot be certain that wethe Freedom Companies will be able to consistently generate a positive cash flow and profitability in the future. OurTheir inability to consistently generate profitability or positive cash flow could result in disappointing financial results, impede implementation of ourtheir 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.
31Developments 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.
Our
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 resultsmanagement of the Freedom Companies as well 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 fluctuate substantially from periodaffect their ability to period,meet their liquidity needs. A reduction in their liquidity position could 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 our stock price.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 collateral 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 experienced, and will likely experienceexposure 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 periodic variationsrisk of capital loss.
The Freedom Companies use a portion of their own capital in revenuea 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 result in losses to us.
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 expectare 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 subsidiaries are subject to various capital adequacy requirements promulgated by regulatory and other authorities. These regulatory rules may restrict our ability to withdraw capital from our subsidiaries by dividends, loans or other payments. Additionally, our ability to participate 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 FFIN, if licensed, will fluctuate similarly. These variationstheir customers or third parties with which they conduct business. They may be attributed in partrequired 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 fact thatrisk 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 operationsdisruptions 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 vagariesevent that members of international economictheir executive management teams are no longer available to them and political conditions, over which we have no control. Asthey are unable to find suitable replacements for them or the members of their executive management teams do not dedicate a result, we are unlikelysufficient amount of their professional time to achieve steady and predictable earnings on a quarterly basis, which could in turn adversely affect our stock price.
Our independent auditor has issued a report questioning our ability to continue as a going concern. This report may impair our ability to raise additional financing and adversely affect the price of our common stock.their endeavors.
The reportFreedom Companies depend on the efforts, skill, reputations and business contacts of our independent auditor containedthe executive management teams of the Freedom Companies, in our financial statements forparticular Timur Turlov, and we believe their success depends to a significant extent upon the fiscal years ended March 31, 2016 and 2015 includes a paragraph that explains that weexperience of these individuals, whose continued service is not guaranteed. We have no continuing operationsassurance that result in positive cash flow. This raises substantial doubt about our abilitythe services of these executive management teams will continue to continue as a going concern. Reportsbe available to the full extent of independent auditors questioning a company’s abilitythe needs of the Freedom Companies. If certain members of the executive management teams leave or are otherwise no longer available to continue as a going concerntheir respective Freedom Company or are generally viewed unfavorably by analystsnot available to the full extent of their needs, they may not be able to replace them with suitable management and investors. This report may make it difficult for usbe unable 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.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 RU, Freedom KZ, and Freedom CY, which we hope to acquire,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 ourthe Freedom Companies.
The Freedom Companies derive their revenues from brokerage, business.
We expect to derive a significant portion of our revenue from brokeragebanking 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 tothe Freedom Companies will encounter intense price competition in this business as this industry matures with more competitive service providers. We believe wethe 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, ourtheir 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. OurThe inability of the Freedom Companies to compete effectively with ourtheir competitors in these areas would adversely affect ourtheir business, financial condition, and results of operations.
32
Difficult market conditions could adversely affect our business in many ways.
Volatile, down-trending, and negative market and economic conditions and geopolitical uncertainties are likely to adversely affect our business in many ways. Weakness in equity markets and diminished trading volume of securities could adversely impact our brokerage business, from which we expect to derive most of our revenue.
Our operations and infrastructure may malfunction or fail.
The international broker-dealer business is 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 we, orFrom time-to-time the firms that clear securities transactions on behalf of our customers, use may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our or our clearing firm’s systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. If any of these systems do not operate properly or are disabled, or if there are other shortcomings or failures in our internal processes, personnel, or systems, we could suffer impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or reputation damage.
We also face the risk of operational failure of any of the exchanges, depositories, clearing houses, or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and to manage our exposure to risk.
Our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our business and the communities in which we and third parties with which we 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. When and if our broker-dealer activities become fully operational, we will have employees in Moscow, Russia; Almaty, Kazakhstan; Nicosia, Cyprus; and Salt Lake City, Utah, who will need to work and communicate as an integrated team. If a disruption occurs in one location and our employees in that location are unable to communicate with or travel to other locations, our ability to service and interact with our clients may suffer, and we 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 our losses.
Our operations will rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Our 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 our computer systems and networks or the computer systems and networks of our customers or other third parties with which we conduct business; or (b) otherwise cause interruptions or malfunctions in our operations or the operations of our customers or third parties with which we conduct business. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and weFreedom Companies may be subject to litigation and financial losses that are eitherregulatory investigations and proceedings and may not insuredbe successful in defending themselves against claims or not fully covered through any insurance maintained by us.proceedings.
33The 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.
In addition to the risk of systems failures or interruption from benign but nevertheless disruptive causes, the systems we use and rely on will also be vulnerable to intentional unauthorized access, vandalism, software interruption, data corruption,Actions brought against them may result in settlements, awards, injunctions, fines, penalties or other mischief by unauthorized third parties,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 “hackers.” Such efforts maypenalty could be directed at us andmaterial to our business specifically, which might disruptoperating results or cash flows for a particular future period, depending on our 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.
Our exposure to legal liability is significant, and damagesfor that we may be required to pay and the reputational harm that could result from legal action against us could materially adversely affect our businesses.
We face significant legal risks in our businesses, and in recent years,period. In market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against broker-dealers and other financial services firmscompanies have been increasing. These risks include potential liability under securities or other laws for materially false or misleading statements made in connection with securities transactions, the suitability of certain investments for specific customers, trading while in possession of material nonpublic information, and disputes over the terms and conditions of complex trading arrangements.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 80.1%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.
Provisions of our organizational documents may discourage an acquisition of us.be potentially detrimental to our common stockholders.
Our articles of incorporation authorize our board of directors to issue up tofix the relative rights and preferences of our 20,000,000 shares of authorized preferred stock, without approval from our stockholders. This means that our board of directors has the right, without stockholder approval, to fix the relative rights and preferences of the preferred stock. This could affect the rights of our common stockholders regarding, among other things, voting, distributions, dividends and liquidation. We could also use the preferred stock to deter or delay a change in control of our Company that may be opposed by our management, even if the transaction might be favorable to our common stockholders.
34
There is a limited trading market for our common stock.
Although our common stock is currently quoted on the OTC Pink market, our stock trades sporadically, with limited volume. We cannot assure that a more active trading market will develop even if FFIN becomes licensed as a U.S. broker-dealer and all proposed acquisitions are completed.develop. Accordingly, our stockholders may not be able to sell our shares when they want or at the price they want.
Penny stock regulations will impose certain restrictions on resales of our securities, which may cause an investor to lose some or all of its investment.
The SEC has adopted regulations that generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per 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 certain 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, the broker-dealer must make a special suitability determination for the purchase of these securities and have received the purchaser’s written consent to the transaction before the purchase. Further, if the price of the stock is below $5.00 per share and the issuer does not have $2.0 million$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 market are subject to certain additional rules promulgated by the SEC. These rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny 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 affect the ability of broker-dealers to sell our 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 Staff Comments None.
With 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 banking operations in Russia, 12 securities brokerage branch locations and two bank branch locations in Russia, and our two locations in Salt Lake City, Utah. The lease terms for these offices range from month-to-month to year-to-year and expire at various dates through December 2019. Monthly lease payment obligations are currently approximately $104,000. All locations are leased. We believe these offices are suitable and adequate.
In the normal course of our business, 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 effect on our financial condition, results of operations or cash flows.
35
We do not expect to pay any cash dividends in the foreseeable future.
We intend to retain any future earnings to fund the operation and expansion of our business and, therefore, we do not anticipate paying cash dividends in the foreseeable future. Accordingly, our stockholders must rely on sales of their shares of common stock after price appreciation, which may never occur, as the only way to realize any future gains on an investment in our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
BMBM’s principal office, located at 324 South 400 West, Suite 250, Salt Lake City, UT 84101, is leased for $250 per month ($3,000 annually) on a month-to-month basis, with an unrelated person. FFIN’s principal office, located at 324 South 400 West, Suite 150, Salt Lake City, UT 84101, contains approximately 1,700 square feet and is leased at $2,396 per month ($28,747 annually) under a lease agreement that expires June 30, 2017, with an unrelated person. We believe these facilities are sufficient to meet our needs for the foreseeable future.
Item 3. Legal Proceedings
We are not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this report, no director, officer, or affiliate is a party adverse to us in any legal proceeding or has an adverse interest to us in any legal proceeding. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.
PART II
Item 5. Market
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table sets forth for the periods indicated the high and low bid prices for our common stock as quoted under the symbol “BMBM” on the Over-the-Counter Pink market for the fiscal years ended March 31, 20162017 and 2015.2016. These quotations were furnished to us by the OTC Markets Group, Inc. and reflect interdealer prices without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions:
36Fiscal year ended March 31, 2017 | | |
| | |
Fourth quarter | $0.017 | $0.005 |
Third quarter | $0.008 | $0.003 |
Second quarter | $0.006 | $0.003 |
First quarter | $0.007 | $0.002 |
| | |
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 |
Fiscal year ended March 31, 2016 | | High | | Low |
| | | | |
Fourth quarter | | $ 0.007 | | $ 0.003 |
Third quarter | | $ 0.009 | | $ 0.001 |
Second quarter | | $ 0.004 | | $ 0.002 |
First quarter | | $ 0.008 | | $ 0.004 |
| | | | |
Fiscal year ended March 31, 2015 | | High | | Low |
| | | | |
Fourth quarter | | $ 0.006 | | $ 0.005 |
Third quarter | | $ 0.007 | | $ 0.004 |
Second quarter | | $ 0.010 | | $ 0.006 |
First quarter | | $ 0.009 | | $ 0.007 |
Holders
As of June 30, 2016,29, 2017, we had approximately 365 shareholders of record holding 280,339,467490,000,000 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.
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.
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 pursuant to the Acquisition Agreement,Bank and FSS, on November 23, 2015,June 29, 2017, we issued 224,551,913209,660,533 shares of our common stock to Timur Turlov. Upon completion of a reverse stock split, Mr. Turlov in exchange for allwill be issued additional shares, consistent with the terms of the issued and outstanding common stock of FFIN andAcquisition Agreement. Prior to entering the right to purchase the Freedom Companies on agreed terms. Before entering into this agreement,Acquisition Agreement, there was no material relationship between Mr. Turlov and the Freedom Companies, on the one hand, and usBMBM and our affiliates, on the other.
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We issued 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 involving any public offering and in 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 must 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 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, 2016.2017.
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
The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by our audited annual financial statements and the related notes thereto included elsewhere in this report. This discussion contains certain forward-looking statements that involve risks and uncertainties, as described under the heading “Special Note About Forward-Looking Information” in this report. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the disclosure under the heading “Risk Factors” elsewhere in this report.
This discussion summarizes the significant factors affecting our consolidated operation results, financial condition, liquidity and capital resources during the fiscal year ended March 31, 20162017 and the period from August 25, 2014 (inception) to March 31, 2015.2016.
Overview
On November 23, 2015,June 29, 2017, we entered into the Acquisition Agreement and closed on the acquisition of all of the issuedFreedom RU and outstanding equity securities of FFIN. FFIN is currently assessing whether to resubmit the necessary applications to pursue licensure to conduct business as a U.S. securities broker-dealer. The Acquisition Agreement also provides for us to acquireits wholly-owned subsidiaries, including their securities brokerage, and financial services and banking businesses in Russia and Kazakhstan, and Cyprusas we continue our efforts to build an international broadly based brokerage and financial serviceservices firm. It is anticipated we willWe 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 onuntil after the acquisitionsend of the brokeragefiscal 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 services businesses in Russia, Kazakhstan, and Cyprus at such timecondition of the Company as of March 31, 2017, prior to closing the closing conditions set forth in the Acquisition Agreement are satisfied, as described in more detail in Item 1. Descriptionacquisition of Business of this report.Freedom RU.
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Should FFIN elect to reapply and should it be successful in obtaining licensure in the U.S., we anticipate this integrated, international firm could offer the financial opportunities, relative stability, and comprehensive regulatory reputation of U.S. securities markets to meet the growing demand from an increasing number of investors in Russia and Kazakhstan.
Limited Operating History
We have not generated any revenue from operations as a securities broker-dealer, and there is limited historical information about us on which to base an evaluation of our performance. As noted in Item 1. Description of Business, and Item 1A. Risk Factors, before we can commence operations as a U.S. securities broker-dealer we must be granted licensure with the SEC, FINRA and applicable state securities commissions. There is no guarantee we will be successful in receiving the licenses necessary to carry out our proposed business operations. Moreover, there is no guarantee our current cash balance will be sufficient to fund our expenses and satisfy our net capital requirements while we seek licensure and until such time as we can commence operations and generate revenue. While we anticipate we would be able to secure additional funding should it be required, we have no assurance of such. Further, even if additional funding is available to us, we have no assurance that it will be available to us on acceptable terms. Equity financing could result in additional dilution to existing shareholders.
Results of Operations
The yearyears ended March 31, 20162017 and the period from August 25, 2014 (inception) to March 31, 2015.2016.
Revenue
We did not generate any revenue during the yearyears ended March 31, 2016, or during the period from inception to March 31, 2015.2017 and 2016.
Expenses
Operating Expenses. During the fiscal yearyears ended March 31, 20162017 and the period from inception to March 31, 2015,2016, operating expenses included professional fees of $222,511$364,334 and $96,149,$222,511, general and administrative expenses of $268,018$214,310 and $41,869,$268,018, and depreciation expenses of $3,305$3,330 and $278,$3,305, respectively. Professional services mainly included legal, fees, consulting, and accounting fees.fees incurred in connection with the planned acquisition of the Freedom Companies. General and administrative expenses were comprised of payroll and related payments, rent expenses, and office supplies. Operating expenses were higher in the fiscal year ended March 31, 20162017, compared to the period from inception to March 31, 2015, primarily because the period from inception to March 31, 2015 was only seven months. We anticipate operating expenses during fiscal 2017 to remain relatively constant in comparison to the 2016 fiscal year or until such time as we close the acquisitions of one or more of the Freedom Companies and/or FFIN reapplies for and receives licensure and commences operations as a licensed U.S. securities broker-dealer.
Loss from Operations. During the fiscal year ended March 31, 2016, primarily because we incurred more legal and consulting services in connection with FFIN’s new membership application to FINRA. With the periodclosing 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 operations, during fiscal 2018.
Loss from inception toOperations. During the fiscal years ended March 31, 2015,2017 and 2016, we recognized losses from operations of $493,834$581,974 and $138,296,$493,834, respectively. As discussed above, our loss from operations was higher during the fiscal year ended March 31, 2016,2017, than the period from inception tofiscal year ended March 31, 2015,2016, primarily because of the shorter time period from inception to March 31, 2015. Weincrease in professional services. With the closing of the acquisition of Freedom RU during the first fiscal quarter of 2018, we anticipate we will continue tobegin the realize lossesrevenue from the operations at a level similar to that experienced duringof Freedom RU commencing in the second fiscal 2016 until such time asquarter 2018. Based on current projected income and expenses, we are successfulanticipate realizing operating gains in closingupcoming periods commencing with the acquisitions of one or more of the Freedom Companies and/or FFIN reapplies for and receives licensure and commences operations as a licensed U.S. securities broker-dealer.second fiscal quarter 2018.
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Total Other Income. During the fiscal year ended March 31, 20162017, we recognized total other income of $1,595$3,935 compared to $2$1,595 during the period from inception tofiscal year ended March 31, 2015.2016. 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. DuringAs noted above, with the period from inception to March 31, 2015,closing of the acquisition of Freedom RU, we realized a net loss of $138,634, or $0.01 per share. Because we currently engage in no revenue generating activities, we expect to continueanticipate beginning to realize net lossesincome from operations commencing in upcomingthe second fiscal periods until we startquarter 2018. Prior to closing the acquisition of Freedom RU, BMBM was generating revenues from our planned business activities.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.
We doDuring the periods covered by this annual report, we did not currently generate any revenue and as noted above will be unable to generate revenuewere reliant upon capital contributions from Mr. Turlov our proposed business activities until such time as we obtain required licensesCEO and memberships and establish a clearing relationship and/or we are successful in closing the acquisitions of one or more of the Freedom Companies. Whether or when we will satisfy these conditions, or close the acquisitions, is beyond our control. If our existing cash assets are insufficientchairman, to satisfy our expenses while we assess whether to proceed with the registration process, and/or complete closing the acquisitions, we will need to seek additional funding. We currently have no commitment for additional funding, and there is no guarantee additional funding will be available, or if it is, that such funding will be available to us on acceptable terms.
Cash Flows
Duringoperating expenses. For the year ended March 31, 2016,2017, 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 periodFreedom 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 inceptionMr. 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, 2015,2017 and 2016, we used cash primarily to pay for current expenses. See below for additional discussion and analysis of cash flow.
| Year ended March 31, 2016 | | Period from August 25, 2014 (inception) to March 31, 2015 | | |
| | | | |
Net cash used in operating activities | $ (538,629) | | $ (88,467) | $(369,141) | $(538,629) |
Net cash provided by (used in) investing activities | $ 8,589,155 | | $ (8,815) | |
Net cash provided by investing activities | | $- | $8,589,155 |
Net cash provided by financing activities | $ 180,000 | | $ 500,000 | $320,000 | $180,000 |
| | | | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | $ 8,230,526 | | $ 402,718 | $(49,141) | $8,230,526 |
During the year ended March 31, 2016, net cash provided by investing activities included $8,533,566$8,589,354 resulting from the acquisition of BMBM. ThisIncluded in this amount is restricted and isthe 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.operations of $8,533,566.