☑
For the fiscal year ended March 31, 2017
OR
☐
For the transition period from ________ to _________
Commission File Number 001-33034
BMB MUNAI, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 30-0233726 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
Office 1704, 4B Building “Nurly Tau” BC 17 Al Farabi Ave | ||
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) ☑ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Non-accelerated filer ☐ (Do not check if smaller reporting company) Smaller reporting company ☑
Emerging growth company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) ☐ Yes ☑ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter computed by reference to the average bid and asked price for such common equity was $136,113.$228,339.
As of June 30, 2016,29, 2017, the registrant had 280,339,467490,000,000 shares of common stock, par value $0.001, outstanding.
Documents Incorporated by Reference: None
Table of Contents
| PART I | ||
| Page | ||
| PART II | ||
| PART III | ||
BMB MUNAI, INC.
Unless otherwise specifically indicated by the context,or as is otherwise contextually required, references herein to the “Company”, “BMBM”, “we”, “our” or “us” means BMB Munai, Inc, a Nevada corporation and its wholly-owned subsidiary FFIN Securities, Inc. Unless otherwise specifically indicated or as is otherwise contextually required, references herein to the “Freedom Companies” means LLC IC Freedom Finance, including its wholly owned subsidiaries, JSC Freedom Finance, LLC FFIN Bank, LLC First Stock Store, Branch Office of LLC IC Freedom Finance in Kazakhstan. Unless otherwise indicated by the context all dollar amounts stated in this annual report on Form 10-K are in U.S. dollars.
Special Note about Forward-Looking Information
Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such asincluding, but not limited to statements relating to our anticipated revenues, gross margin and operating results, estimates used in the preparation of our financial statements, future performance and operations, ability to obtain and maintain required licensures or approvals and licenses to pursue our proposed operations, plans for future expansion, capital spending, sources of liquidity, and financing sources. Forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These forward-looking statements can sometimes be recognized by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” and similar expressions. Such statements are subject to known and unknown risks, uncertainties, and other factors, including the meaningful and important risks and uncertainties discussed in this report. These forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management. These statements include, among other things:
●
the ability of the Freedom Companies to comply with the extensive and pervasive regulatory requirements in the various jurisdictions where they may operate;
●
volatility of the capital markets and in economic conditions generally;
●
the ability of FFINEU Investments Limited, a Cyprus limited company (“Freedom CY”) to obtain necessary regulatory approvals to maintain their foreign licensing in connection with the transfer of ownership from the current owner to us;
●
the ability of Freedom CY to maintain a satisfactory clearing arrangement in the U.S. with a qualified clearing firm with necessary licenses and clearing relationships;
●
the ability of the Freedom Companies to attract and retain key management and other properly licensed and experienced personnel to satisfy applicable regulatory standards;
●
the ability of the Freedom Companies to profitably invest their own funds;
●
possible lack of interest by foreign investors to invest in securities of U.S. publicly traded companies;
●
●
the other factors contained in the section entitled “Risk Factors” in Part I, Item 1A, this report.
Although we have attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause the forward-looking statements not to come true as described in this report. These forward-looking statements are only predictions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially.
You should not rely on forward-looking statements as predictions of future events. While we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes any responsibility for the accuracy or completeness of these statements or undertakes any obligation to revise these forward-looking statements to reflect events or circumstances after the date on this report or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
PART I
Item 1.
Business
Overview
BMB Munai, Inc. (“BMBM”) is a Nevada corporation that originally incorporated in the State of Utah in 1981. From 2003 to 2011, BMBM’s business activities focused on oil and natural gas exploration and production in the Republic of Kazakhstan through its then wholly-owned subsidiary Emir Oil LLP (“Emir Oil”).Kazakhstan. In September 2011, BMBM sold all of its interest in Emir Oil, including its right, title, and interest in and to theits oil and gas licenses and licensed territory owned by Emir Oil, to an independent third party for cash of about $170 million. The proceeds of the sale were used to, among other things, repay outstanding obligations, satisfy certain post-closing undertakings, meet ongoing expenses, and make two separate cash distributions totaling approximately $74,750,000 to its stockholders.
Pursuant to the Acquisition Agreement, BMBM acquired all of the issued and outstanding common stock of FFIN Securities, Inc., a Nevada corporation, (“FFIN”) from Mr. Turlov in exchange for 224,551,913 shares of BMBM common stock, which constituted approximately 80.1% of BMBM’s outstanding common stock after giving effect to the transaction.
In December 2015, FFIN applied to become a member of FINRA and a licensed securities broker-dealer with United States Securities and Exchange Commission (“SEC”). This application was subsequently withdrawn in 2016. Through the date of this report, FFIN has not resubmitted its new membership application to FINRA. We continue to believe licensure as a securities broker-dealer in the U.S. may be a valuable component of our business strategy and we continue to evaluate the cost benefit, likelihood of success and appropriate timing of another application, or to otherwise become a licensed securities broker-dealer in the U.S.
On June 29, 2017, BMBM closed the acquisition of Freedom RU. The acquisition of Freedom RU included the securities brokerage and financial services business conducted by it in Russia, along with its wholly owned subsidiaries: Freedom KZ, and the securities brokerage and financial services business conducted by it in Kazakhstan; LLC FFIN Bank, a Russian limited company (“FFIN Bank”), and the banking business conducted by it in Russia, LLC First Stock Sale, a Russian limited company (“FSS”), and the online securities marketplace it provides to Russian investors, and Branch Office of IC LLC Freedom Finance in Kazakhstan, a Kazakhstan limited liability company, (“KZ Branch”) organized to serve as the representative office of Freedom RU in Kazakhstan.
Pursuant to the terms of the Acquisition Agreement, BMBM previously agreed to issue to Mr. Turlov 13% of its issued and outstanding common stock for his 100% interest in Freedom RU. As BMBM had insufficient authorized but unissued common stock to deliver the full agreed upon consideration to Mr. Turlov at the closing of the acquisition of Freedom RU, as an accommodation to facilitate the closing, Mr. Turlov agreed to accept a partial issuance of 209,660,533 shares of BMBM’s common stock and to defer issuance of the balance of the shares agreed to until such time as we complete a reverse stock split and recapitalization, to provide sufficient additional shares to issue him the percentage agreed in the Acquisition Agreement.
We continue to make progress in our efforts to close the acquisition of FFINEU Investments Limited, a Cyprus limited company, (“Freedom CY”), and the securities brokerage and financial services business conducted by it in Russia,Cyprus. We continue to work with the Cypress Securities and its wholly owned subsidiary,Exchange Commission (“CySEC”) to obtain the necessary regulatory approvals to transfer ownership of Freedom Finance JSC, a Kazakhstan joint stock company (“Freedom KZ”), andCY to BMBM. At this time we cannot predict with certainty if and/or when the securities brokerage and financial services business conducted by it in Kazakhstan, and FFINEU Investments Limited, a Cyprus limited company (“Freedom CY”) andrequired regulatory approvals will be granted.
Recapitalization
We are authorized to issue 500,000,000 shares of common stock. Pursuant to the securities brokerage and financial services business conducted by Freedom CY.Acquisition Agreement, BMBM agreed to issue sufficient shares to Mr. Turlov such that following the acquisitions of FFIN, Freedom RU Freedom KZ, and Freedom CY, Mr. Turlov will own approximately 95% of the issued and outstanding common stock of BMBM, which together with our currently outstanding stock, would exceed our authorized common stock. As we had insufficient unissued authorized common stock to deliver the securities brokeragefull agreed upon consideration to Mr. Turlov at the closing of the Freedom RU acquisition, as an accommodation to facilitate the closing, Mr. Turlov agreed to accept a partial issuance of 209,660,533 shares of BMBM common stock, and investment services businesses conducted by eachto defer issuance of them,the balance of the shares agreed to until such time as we can complete a reverse stock split and recapitalization so we have sufficient additional shares to issue him the percentage agreed in each case,the Acquisition Agreement. We will also need shares to complete the acquisition of Freedom CY when the required regulatory approvals to transfer ownership to BMBM are collectively referredreceived. After giving effect to herein as the “Freedom Companies” unless otherwise specifically indicated or as is otherwise contextually required.acquisitions of FFIN, Freedom RU and Freedom CY, Mr. Turlov will own up to approximately 95% of our post-reverse split shares then issued and outstanding.
Our Business
We believe the Freedom Companies serve an emerging capitalistic and investing segment of the economies of Russia and Kazakhstan that is interested in saving, investing, and diversifying risk through foreign investment. Under the existing regulatory regimes in Russia and Kazakhstan, Freedom RU and Freedom KZ are limited in their ability to grant their customers access to the U.S. securities markets. Currently, many of the customers of Freedom RU and Freedom KZ access the U.S. securities markets through Freedom CY.
The Freedom Companies
Since the organization of Freedom RU in 2010 and the acquisitionacquisitions of Freedom KZ, in 2013,FFIN Bank and FSS, they have serviced a growing customer base with increasing amounts invested. As of March 31, 2016, Freedom RU and Freedom KZ together hadhave approximately 30,00033,000 total customer accounts. FFIN Bank has approximately 400 total active customer accounts, with aggregate investment positionstotal deposits of more than $100approximately $3.5 million. The customers of the Freedom CompaniesRU and Freedom KZ typically execute approximately 15,00025,000 transactions per month, with an aggregate transaction value of approximately $1 billion. The customers of Freedom RU and Freedom KZ range from retail traders that frequently execute large transactions to relatively small, inactive accounts that hold securities positions long-term. In the preceding year, approximately 80% or more of the aggregate trading dollar volume was generated by about two dozen margin day traders. The Freedom Companies’RU and Freedom KZ customers principally invest in exchange-traded securities. The customers of FFIN Bank are generally individuals. Approximately 77% of the FFIN Bank customers are also Freedom RU customers.
For the yearfiscal years ended March 31, 2017 and 2016, Freedom RU and its subsidiary Freedom KZsubsidiaries together had consolidated profits of approximately $11.3$7.3 million and $9.2 million, respectively on revenues of about $14.4$19.4 million (unaudited, subject to adjustment).and $17.3 million, respectively. As of March 31, 2017 and 2016, the consolidated total assets of the Freedom CompaniesRU were approximately $40.1$111.7 million and $39.1 million. Collectively, Freedom RU employs approximately 130 people in Russia and Freedom KZ together employ 17 executive and supervisory employees, 44 administrative and clerical employees, and 75 persons serving as customer representatives.140 people in Kazakhstan.
Freedom RU
Freedom RU was organized in 2010 and provides financial services in the Russian Federation in accordance with the Russian government’s open-ended licenses for brokerage, dealer, and depository operations and for activities in securities management. The Federal Financial Markets Service of Russia providesand the Central Bank of the Russian Federation provide governmental regulation of company operations and the protection of the interests of its customers.
Freedom KZ
Freedom RU acquired Freedom KZ was acquired by Mr. Turlov in 2013 from unrelated parties. When Mr. Turlov acquired Freedom KZ, it was controlled by Korean nationals and principally facilitated Korean investment in Kazakhstan. It was not profitable. Freedom KZ provides professional services in the capital markets. Since 2006, Freedom KZ has been a professional participant of the Kazakhstan Stock Exchange, which enables it to manage investment portfolios for its clients. Freedom KZ is regulated by the Committee for the Control and Supervision of the Financial Market and Financial Organizations of the National Bank of the Republic of Kazakhstan.
FFIN Bank
FFIN Bank was acquired by Freedom RU in April 2016. FFIN Bank has a license issued by the Central Bank of the Russian Federation for execution of banking operations in rubles and foreign currencies for individuals and legal entities and is regulated by the Central Bank. In accordance with federal law in Russia, the Deposit Insurance Agency of Russia insures 100% of deposits of individuals up to 1.4 million Russian rubles. FFIN Bank derives revenue from providing banking services, including money transfers, foreign currency exchange operations, interbank lending and deposits. Currently, FFIN Bank’s operation is focused on servicing the Group’s brokerage customers. FFIN Bank is an authorized Visa/MasterCard issuer, and has introduced internet banking and mobile applications for Android/iOS for companies and individuals. In addition FFIN Bank has completed development of several investment and structured banking products (insured deposits with option feature and currency risk hedging products.) We anticipate FFIN Bank will continue to expand the banking services it provides to the customers of FFIN bank and Freedom RU. We also anticipate geographical expansion of FFIN Bank to complement Freedom RU locations.
First Stock Store
FSS was launched to be the first online securities marketplace for retail customers in Russia. FSS was launched to attract new brokerage clients for Freedom RU by providing a medium for individual investors to buy and sell securities traded on the Russian and US stock exchanges. We consider FSS to currently be one of the most dynamic fin tech projects in the Russian Federation. With the addition of the FSS project, Freedom RU is currently adding approximately 600 customer accounts each month.
KZ Branch
KZ Branch serves as the representative office of Freedom RU in Kazakhstan.
Freedom CY
Freedom CY was organized in August 2013 and completed its regulatory licensing in May 2015,2015. In 2016 Freedom CY activated its licenses to receive, transmit and execute customer orders, establish custodial accounts, engage in foreign currency exchange services and margin lending. Freedom CY is in the process of initiating activities pursuantobtaining its dealer license to this license.trade its own investment portfolio. Freedom CY will provideprovides transaction handling and intermediary services to Freedom RU and Freedom KZ and is regulated by the Cyprus Securities and Exchange Commission. Until Freedom CY initiates activities pursuant to its regulatory licensing and begins operations, transaction intermediary services will continue to be provided to Freedom RU and Freedom KZ through another Cyprus entity owned by Mr. Turlov pursuant to an interim informal licensing exemption.CySEC.
Customer Base and Marketing Plan
Competition
We believe competition will beis based principally on ourthe ability of the Freedom Companies to provide access directly to the U.S. securities markets, the level of ourtheir service, the convenience of ourtheir services, ourtheir ability to provide personalized service, and ourtheir charges to customers. Customer costs include transaction execution fees, commissions and charges as well as margin interest rates the Freedom Companies charge their customers investing on margin.
Many of the firms with which we willthe Freedom Companies compete are larger, provide more diversified services and products, provide access to more international markets, and have greater management, technical, and financial resources. We cannot assure that wethe Freedom Companies will be able to compete effectively.
8
Regulation
Overview
Foreign Corrupt Practices Act
The FCPA requires that we establish and maintain an effective compliance program through both our domestic employees and the foreign employees of our foreign subsidiaries, to ensure compliance with U.S. law. Our failureFailure to comply with the FCPA couldcan result in substantial fines and other sanctions.
Foreign Account Tax Compliance Act
The 2010 Foreign Account Tax Compliance Act, or FATCA, was enacted in the United States to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions, such as the Freedom Companies, to report to the United States Internal Revenue Service (“IRS”) information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
The United States has entered into intergovernmental agreements with a number of countries establishing mutually agreed-upon rules for the implementation of the data sharing requirements of FATCA. It has not, however, entered into such an agreement with Russia. As a result, Russia adopted legislation to allow financial institutions to share foreign taxpayer data with foreign tax authorities, such as the IRS, without breaching Russian data protection and confidentiality laws. The Russian legislation sets forth extensive rules relating to when and how the financial institution may gather and share foreign taxpayer information. The Russian legislation establishes extensive monitoring procedures requiring, among other things, the notification to various Russian state bodies by the financial institution of registration with a foreign tax authority, receipt of requests for foreign taxpayer data, and the delivery to Russian state bodies of foreign taxpayer data prior to delivery to a foreign tax authority. Under the legislation, Russian regulators retain the right to prohibit disclosure of foreign taxpayer information in certain instances. Failure to comply with the Russian legislation may result in monetary fines for the financial institution and its officers. Because of the lack of an agreement between the U.S. and Russia establishing mutually agreed-upon guidelines for data sharing, inconsistencies in the two legal regimes exist, which can place a financial institutioninstitutions in Russia, such as Freedom RU and FFIN Bank, in the position of having to decide whether to comply with Russian legislation or with FATCA. For example, under Russian legislation, a financial institution may share foreign taxpayer data only with the consent of the foreign taxpayer, and even when consent is given, Russian regulators may, in certain circumstances, prohibit disclosure. There is no exemption for foreign financial institutions from the FATCA disclosure requirements. Similarly, FATCA generally requires the foreign financial institution to withhold 30% of designated payments. However, the Russian legislation does not grant financial institutions the authority to act as a withholding agent for a foreign tax authority. The Russian legislation does allow financial institutions to decline to provide services to foreign taxpayers.
Kazakhstan and the United States have entered an intergovernmental agreement containing provisions regulating the process for Kazakh financial institutions to collect information on U.S. taxpayer accounts and provide that information to the IRS. In general, the requirements of the agreement concern the analysis of new and existing customer accounts to identify U.S. taxpayers. The agreement requires Kazakh financial institutions to register with the IRS and define their status in accordance with FATCA. Financial institutions are obligated to identify their clients and analyze their products to identify the accounts of customers affected by FATCA and collect all necessary information to classify those accounts in compliance with the requirements of FATCA. After classifying the accounts, financial institutions are obligated to regularly present information, including name, taxpayer identification number, and account balance, to the Kazakh tax authorities for transfer to the IRS.
Cyprus and the United States have entered an intergovernmental agreement that requires Cyprus financial institutions to determine accounts maintained by U.S. tax residents, comply with verification and enhanced due diligence procedures, and provide annual reporting on these accounts to the Cyprus tax authorities who subsequently will provide the reports to the IRS. In addition, Cyprus financial institutions are required to make necessary tax withholdings to be paid to the IRS. As a “Reporting Financial Institution” under the intergovernmental agreement, Freedom CY will be required to obtain required client documentation associated with the indicia of his, her, or its U.S. tax residency status as well as all related account information in order to report accordingly.
The failure to comply with FATCA could result in adverse financial and reputational consequences to the Freedom RU, Freedom KZ, or Freedom CYCompanies as well as the imposition of sanctions or penalties including responsibility for the taxes on any funds distributed without the proper withholdings set aside.
Foreign Regulation
Russia
Freedom RU provides professional services in the capital markets of the Russian Federation and is a professional participant of the Moscow and Saint Petersburg Stock Exchange. Freedom RU holds four licenses issued by the Federal Service for Financial Markets of the Russian Federation that allow it to provide brokerage, dealer, depository and securities management services in Russia. Freedom RU also provides foreign currency trading services.
FFIN Bank provides banking services for legal entities and individuals from the Federation of Russia (the “Central Bank”) and other countries. FFIN Bank holds a license issued by the Central Bank for the execution of banking operations in rubles and foreign currency for individuals and legal entities.
In Russia, a number of federal and industry regulatory agencies are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. The Central Bank of the Federation of Russia (the “Central Bank”) is the principal financial marketindustry regulator responsible for the regulation of broker-dealers, banks, depositories, and securities managers doing business in Russia. Industry SROs,self-regulatory organizations (“SROs”), each of which has authority over the firms that are its members, include the Association of Securities Market Participants (“NAUFOR”), National Securities Market Association (“NFA”) national securities exchanges such as the Moscow Stock Exchange and the St. Petersburg Stock Exchange on which securities are traded, and other SROs.
Freedom RU isand FFIN Bank are subject to overlapping schemes of regulation that govern all aspects of its securitiestheir business. The regulations cover a broad range of practices and procedures, including:
●
capital requirements;
●
●
recordkeeping and reporting requirements;
●
●
supervisory and organizational procedures intended to monitor and assure compliance with securities laws and to prevent improper trading practices;
●
transaction execution, clearance, and settlement procedures;
●
maximum loan and bank guarantees concentration issued to shareholders;
●
credit risk requirements;
●
liquidity risk requirements;
●
acquisitions;
●
qualification of firm management; and
●
risk detection, management, and correction.
The Central Bank NAUFOR, and NFANAUFOR regulations include rules governing practices and procedures addressing the relationship between broker-dealersfinancial institutions and their customers. As a result, many aspects of the broker-dealerfinancial institutions’ customer relationship are subject to regulation. These regulations include customer identification and due diligence procedures, collection of customer financial suitability documentation, anti-money laundering monitoring and reporting, customer fees, clearing, settlements, risk management and other matters.
Violations of securities and banking laws and regulations by broker-dealers and other securities industry fiduciariesfinancial institutions in Russia can subject them to a broad range of disciplinary actions including remedial actions, imposition of fines and sanctions, removal from managerial positions, loss of licensing, and criminal proceedings.
Capital Requirements
The Central Bank establishes minimum net capital requirements for securities market participantsfinancial institutions including brokerages, dealers, depositories, securities managers and securities managers.banks. In the event the net capital of such service provider drops below the minimum requirement, it is obligated to notify the Central Bank, provide a plan to meet its minimum capital requirements and perform all actions necessary to bring it back into compliance with the net capital requirement. The minimum net capital requirement of Freedom RU to provide brokerage, dealer, depository, securities management is approximately $790,000, and for foreign currency trading services is approximately $2,770,000,$2,360,000, which it currently has. The minimum net capital requirement of FFIN Bank to provide banking services is approximately $5,320,000, which it currently has.
In the event a broker-dealerfinancial institution fails to maintain its minimum net capital, it must immediately notify the Central Bank. The Central Bank may take any of the following actions, (i) require the broker-dealerfinancial institution to submit a detailed plan to increase its net capital to at least the minimum requirement, (ii) impose financial penalties in the event the broker-dealerfinancial institution does not provide a detailed explanation as to the reasons for the decrease below the minimum requirement, (iii) cause the broker-dealerfinancial institution to cease operations until it meets the minimum net capital requirement, (iv) suspend the broker-dealer’sfinancial institution’s licenses for a period of time, and (v) in case of failures, the Central Bank can withdraw licensurelicensing and disqualify the firm’s management from working within the industry. This disqualification can be for up to a three-year period for the general director, controller and the head of the compliance department of the broker-dealer.financial institution.
Compliance with minimum capital requirements could limit Freedom RU’sRU and FFIN Bank’s expansion into activities and operations that require the intensive use of capital. Minimum capital requirements could also restrict our ability to withdraw capital from Freedom RU and FFIN Bank, which in turn could limit our ability to transfer funds among our subsidiaries. Additionally, the failure of Freedom RU or FFIN Bank to maintain its minimum net capital requirement could result in penalties or other sanctions.
Anti-Money Laundering
The law on the Prevention of Money Laundering and the Financing of Terrorism (“AML Law”) establishes laws designed to prevent money laundering activities and financing of terrorism. The AML Law is supported by recommendations, binding instructions and regulations of the Central Bank and other authorities. The AML Law requires institutions dealing with cash operations, including all kinds of financial institutions, which includes professional participants in the securities markets and banks, to establish mandatory internal protocols for client and payment acceptance. In particular, regulated entities must perform due diligence procedures to ascertain the identity of the customer and monitor transactions for suspicious activity. Regulated entities must identify and report transactions falling within certain categories. If either party to such transactions is suspected of being connected to terrorist activity the transaction is subject to mandatory control regardless of the nature of the transaction.
The Central Bank may take preventative or enforcement measures against regulated financial institutions involved in transactions that infringe on anti-money laundering legislation. Preventative measures may include issuing an order to cease a violation and provide the Central Bank with a program for improvement and establishing additional monitoring measures. Enforcement measures may include the imposition of fines and withdrawal of licenses. The failure of Freedom RU and FFIN Bank to comply with the AML Law could subject itthem to material legal action, which could have a material adverse effect on theour business and results of operations of Freedom RU.operations.
Kazakhstan
In Kazakhstan the National Bank of the Republic of Kazakhstan (the “NBK”) and the Kazakhstan Stock Exchange (the “KASE”) are the principal organizations tasked with safeguarding the stability of financial markets and financial institutions. The NBK and KASE are responsible for setting the standards for regulating the activities of financial institutions and participants in the financial services industry and for monitoring compliance. Settlement services for securities transactions are primarily governed by the rules and procedures of the Central Depositary.
Freedom KZ is licensed to provide broker-dealer services with the right to carry customer accounts and to provide investment portfolio management services. Freedom KZ has 13 offices located in 13 cities in Kazakhstan.
Freedom KZ is subject to overlapping schemes of regulation that govern all aspects of its securities business. The regulations cover a broad range of practices and procedures, including:
●
capital requirements;
●
the use and safekeeping of customers’ funds and securities;
●
recordkeeping and reporting requirements;
●
customer identity, clearance, and monitoring to identify and prevent money laundering;
●
supervisory and organizational procedures intended to monitor and assure compliance with securities laws and to prevent improper trading practices;
●
transaction execution, clearance, and settlement procedures;
●
●
risk detection, management and correction.
NBK and KASE regulations include rules governing practices and procedures addressing the relationship between broker-dealers and their customers. As a result, many aspects of the broker-dealer customer relationship are subject to regulation. These regulations include customer identification and due diligence procedures, collection of customer financial suitability documentation, anti-money laundering and anti-terrorism funding monitoring and reporting, customer fees, clearing, settlements, and other matters.
The Republic of Kazakhstan has adopted extensive regulation regarding the responsibility for wrongdoing by broker-dealers and investment portfolio managers, ranging from disciplinary action to criminal punishments.punishment. The penalties available to the NBK in the event of wrongdoing include cancelation of licenses, removal of management, monetary damages and criminal prosecution. The NBK may also impose remedial requirements, such as requiring the wrongdoer to provide a plan of remediation to ensure the wrongdoing is prevented in the future. Action may be taken against the broker-dealer, the management board of the broker-dealer or both depending on the severity of the violation.
Capital Requirements
Kazakhstan regulation establishes minimum share capital requirements for broker-dealers and investment portfolio managers. In the event the net capital of a broker-dealer or investment portfolio manager falls below the requirement, it is obligated to notify the NBK, provide a plan to meet is minimum capital requirements and perform all actions to bring it back into compliance with the requirement. The minimum capital for broker-dealers with a license to provide investment portfolio management services is approximately $760,000.$835,000. The net capital requirement must be calculated on a daily basis.
The failure of a broker-dealer to maintain its minimum capital requirement could result in the NBK taking any of the following enforcement measures, (i) requiringrequire a letter of commitment to comply, (ii) execution of a written agreement to comply; (iii) issue a warning; (iv) issue a written prescription to eliminate the violation; and (v) impose penalties. Enforcement measures may be imposed on the broker-dealer or on top management of the broker-dealer or both depending on the severity of the violation.
Compliance with minimum capital requirements could limit Freedom KZ’s expansion into activities and operations that require the intensive use of capital. Minimum capital requirements could also restrict our ability to withdraw capital from Freedom KZ, which in turn could limit our ability to transfer funds among our subsidiaries. Additionally, if Freedom KZ falls below it minimum capital requirements the NBK could impose penalties or other sanctions on Freedom KZ.
Anti-Money Laundering
The Law on Anti-Money Laundering and Combating of Terrorism Financing (“AML/CFT”) establishes laws designed to combat money laundering and funding of terrorist activities. By regulation adopted by the NBK, companies operating in the financial services industry in Kazakhstan are required to establish procedures designed to ensure, among other things, that the broker-dealer:
●
undertake adequate due diligence of its customers;
●
●
monitor transactions and report suspicious activities to appropriate authorities; and
●
provide periodic reporting to appropriate authorities.
The failure of Freedom KZ to comply with AML/CFT requirements could subject it to material sanctions, including penalties and fines, which could have a material adverse effect on the business and results of operations of Freedom KZ.
Cyprus
Freedom CY has applied for and been granted licensure by the Cyprus Securities and Exchange (“CySEC”)CySEC to provide investment and ancillary services as a Cypriot Investment Firm (“CIF”). In 2016, Freedom CY activated its licenses to receive, transmit and execute orders on behalf of clients, establish custodial accounts for financial instruments and related services, engage in foreign currency exchange services and margin lending. Freedom CY is currently putting in place the necessary infrastructureprocess of obtaining its dealer license to activatetrade its license. If our acquisition of Freedom CY is completed andown investment portfolio. Freedom CY’s license is activated, its activities will beare regulated by and under the supervision CySEC, an independent public supervisory authority, responsible for the supervision of the investment services market and transactions in transferable securities carried out in the Republic of Cyprus. As a CIF, the activities of Freedom CY will beare subject to various laws including the Cyprus Investment Act of 2002-2005, which provides the legal framework for the operation and supervision of CIFs, the rules and regulations of the Cyprus Stock Exchange and the Markets in Financial Instruments Directive II and Regulation (“MiFID”).
The MiFID is aimed at creating a single, more transparent market in financial services across all EU member states, to (i) improve the competitiveness and integration of EU financial markets by creating a single market for investment services and activities, (ii) ensure a high degree of harmonized protection for investors in financial instruments, (iii) increase market transparency, and (iv) promote easier cross border business. The MiFID allows registered investment firms to provide services throughout the EU on the basis of the home country supervision.
●
capital requirements;
●
safekeeping of clients’ funds and assets;
●
recordkeeping and reporting requirements;
●
●
supervisory and organizational procedures intended to monitor and assure compliance with the relevant laws and regulations and to prevent improper trading practices;
●
●
provision of investment and ancillary services, clearance, and settlement procedures.
Serious or systematic infringement of rules, regulations and directives of the laws, rules and regulations of Cyprus securities laws and/or the directives issued pursuant relevant EU regulations could subject Freedom CY, its principals and other employees to disciplinary proceedings or civil or criminal liability, including withdrawal of CySEC licensure, administrative fines, 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.
Capital Requirements
Freedom CY is subject to the capital requirements of the CRD IV package of the Capital Requirements Directives of the European Union. A CIF must maintain a minimum initial capital requirement of approximately $220,000 if it holds client assets or client financial instruments and provides any of the following services: (i) receiving and transmitting orders, (ii) executing orders on behalf of clients; (iii) providing portfolio management; or (iv) providing investment advice. The minimum initial capital requirement for a CIF providing any of the above services without holding client assets or client financial instruments is approximately $87,000, with some exceptions. As Freedom CY will holdholds client assets and client financial instruments we anticipate that Freedom CY will have anand has a minimum initial minimum capital requirement of approximately $220,000.$384,360. Freedom CY anticipates receiving a dealer license in 2017, which will increase its minimum capital requirement to $1,100,000.
At all times Freedom CY’s minimum net capital must meet or exceed certain target capital ratios. The capital ratio is a percentage calculated by dividing: (a) the total of the firm’s Basel III Tier 1 capital (the sum of its common shares, share surplus, retained earnings, accumulated other comprehensive income, and other disclosed reserves and common shares issued by consolidated subsidiaries that meet the criteria for inclusion, subject to regulatory adjustments) and its Basel III Tier 2 capital (instruments that meet the criteria for Tier 2 capital that are not included in Tier 1 capital, share premium resulting from instruments included in Tier 2 capital, instruments issued by consolidated subsidiaries and held by third parties that are not included in Tier 1 capital and certain loan loss provisions, subject to regulatory adjustments applied in calculation of Tier 2 capital); by (b) the sum of risk-weighted exposures (including credit, currency and operational risk exposures. Currently, Freedom CY must maintain a minimum total capital ratio of 8% and a minimum total Tier 1 capital ratio of 6%.
Cyprus securities rules require all CIFs to have processes in place to assess and maintain the minimum capital requirements on an ongoing basis. These processes are subject to regular internal review to ensure that they remain comprehensive and proportionate to the nature of the activities of the CIF. If a CIF fails to maintain its minimum capital requirement, the CIF is required to timely notify 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.
Investor Compensation Fund
Pursuant to current CySEC legislation, CIF’sCIFs are required to register as members of the Investor Compensation Fund (the “ICF”) for the protection of CIF clients, and must comply with the obligations of the ICF. The ICF was established to compensate CIF covered clients as to covered investment services and ancillary services. Payment of compensation by the ICF is subject to the existence of a well-founded claim by the client against a member of the Fund. The amount of compensation payable to each covered client is calculated in accordance with the legal and contractual terms governing the relationship of the covered client with the CIF, subject to the off-set rules applied for the calculations of claims. The current maximum pay out by the ICF is approximately $22,000.
Anti-Money Laundering
The Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007, imposes laws and regulations designed to prevent the use of the Cyprus financial system for the purpose of money laundering and terrorist financing. The law places special responsibilities on financial institutions, including CIFs, to implement and adhere to prescribed procedures for customer identification, record keeping and internal reporting and reporting of suspicious money laundering transactions. This law imposes requirements on such institutions to ensure that all employees are aware of their obligations under the law and receive adequate training designed to assist them in recognizing and reporting suspicious transactions. Freedom CY’s failure to comply with these provisions could have a material adverse effect on its business and expose it to possible sanctions, including substantial fines and penalties. Freedom CY’s obligations respecting anti-money laundering will extend to its customers in Russia and Kazakhstan.
Monetary Policy
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the Russian, Kazakh, Cyprus and United States governments. The monetary policies of these countries may have a significant effect upon our operating results. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
Employees
Item 1A.
Risk Factors
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 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 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 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.
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.
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.
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.
Risks Related to Effecting Securities Transactions for Foreign Customers
Foreign laws, regulations, and policies may be changedchange in ways that could adversely impact our business.
● 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 their customers 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;
●
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;
●
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 and Kazakhstan; and
●
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 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.
It may be difficult for us to enforce any civil liabilities against our customers that are outside the United States.
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
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:
●
maintenance and increase of their customer base;
●
management of the quality of their services;
●
effective competition with existing and potential competitors;
●
further development of their business activities;
●
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.
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.
The businesses of the Freedom Companies can be adversely affected by the general environment, including economic, corporate, securities market, regulatory, and geopolitical developments all play a role in client asset valuations, trading activity, interest rates and overall investor engagement, and are outside their control. Deterioration in the credit markets, reductions in short-term interest rates, and decreases in securities valuations negatively impact their results of operations and capital resources.
Failure to meet capital adequacy and liquidity guidelines could affect the financial condition of the Freedom Companies.
The Freedom Companies must meet certain capital and liquidity standards, subject to qualitative judgments by regulators about the adequacy of their capital and internal assessment of their capital needs. These net capital rules may limit the ability of each Freedom Company to transfer capital to the Company or any other Freedom Company. New regulatory capital, liquidity, and stress testing requirements may limit or otherwise restrict how each Freedom Company utilizes its capital, and may require a Freedom Company to increase its capital and/or liquidity or to limit its growth. Failure by any Freedom Company to meet its minimum capital requirements could result in certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a negative impact on us.
A significant decrease in liquidity could negatively affect the business and financial 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.
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.
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.
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.
Item 2.
Properties
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.
Item 3.
Legal Proceedings
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.
Item 4. Mine
Mine Safety Disclosures
Not applicable.
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:
| Fiscal year ended March 31, 2017 | High | Low |
| 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 | 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, 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.
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.
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
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.
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 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.
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.
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 | Year ended March 31, 2017 | Year ended March 31, 2016 | ||
| 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 | |
Net cash used in operating activities during the fiscal year ended March 31, 20162017 was higherlower compared to the period from inception to March 31, 20152016 due to a larger net loss realizedbigger increase in accounts payable during fiscal 2016.
2017.
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.
During fiscal 2016,2017, net cash provided by financing activities was $180,000$320,000 compared to $500,000$180,000 during the period from inception toyear ended March 31, 2015.2016. All funds provided by financing activities resulted from capital contributions to the Company by Mr. Turlov.
Our principal source of liquidity during the fiscal yearyears ended March 31, 2017 and 2016, and the periodwere these capital contributions from inception to March 31, 2015, was cash and cash equivalents. Mr. Turlov.
At March 31, 2016,2017, unrestricted cash and cash equivalents totaled $99,678$50,537 compared to $402,718$99,678 at March 31, 2015.2016.
Contractual Obligations and Contingencies
The following is a summary of ourthe material contractual commitments of BMBM as of March 31, 2016:2017:
Payments Due By Period | |||||
| Contractual obligations | Total | Less than 1 year | 2-3 years | 4-5 years | After 5 years |
| Deferred distribution | $8,533,566 | $8,533,566 | $- | $- | $- |
Office lease(1) | 7,187 | 7,187 | - | - | - |
| TOTAL | $8,540,753 | $8,540,753 | $- | $- | $- |
(1) This office lease expires June 30, 2017.
The Freedom Companies lease a number of office facilities for their securities brokerage, banking and financial services businesses. The terms of these leases range from month-to-month to year-to-year and expired at various dates through December 2019. The office lease payment obligations of the Freedom Companies are approximately $104,000 per month.
| Payments Due By Period | ||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||
| Deferred distribution | $ | 8,533,566 | $ | 8,533,566 | $ | - | $ | - | $ | - | ||||
| Office Lease | $ | 35,934 | $ | 28,747 | $ | 7,187 | $ | - | $ | - | ||||
| Total | $ | 8,569,500 | $ | 8,569,500 | $ | 7,187 | $ | - | $ | - | ||||
During the year ended March 31, 2017, Freedom KZ placed bonds in the amount of $9,530,000. The bonds have an 11.50% fixed annual coupon rate and mature on January 21, 2019. The Freedom Companies have the right to repurchase and resell the bonds at market value. During the year ended March 31, 2017, the Freedom Companies repurchased bonds totaling $6,145,000. The Freedom KZ bonds trade actively on the KASE.
As of March 31, 2017, the accrued interest on these bonds totaled $74,000. The semi-annual coupon payment is paid in January and July. In January 2019, Freedom KZ will be required to repay the face value of the then outstanding bonds to the bondholders.
As described in more detail in Item 1. Description of Business of this report, pursuant to the Acquisition Agreement, we had agreed to issue to Mr. Turlov, our CEO and chairman, and the owner of Freedom RU, 13% of our issued and outstanding common stock for his interest in Freedom RU. As we had insufficient authorized but unissued common stock to deliver the full agreed upon consideration to Mr. Turlov at the closing of the acquisition of Freedom RU, as an accommodation to facilitate the closing, Mr. Turlov agreed to accept a partial issuance, and to defer issuance of the balance of the shares until such time as BMBM can complete a reverse stock split and recapitalization so we have sufficient additional shares to issue him the percentage agreed in the Acquisition Agreement. Until such time as we complete the reverse stock split, we will also have insufficient authorized but unissued common stock to complete the acquisition of Freedom CY.
Off-Balance Sheet Financing Arrangements
As of March 31, 2016,2017, we had no off-balance sheet financing arrangements.
Critical Accounting Policy and Estimates
We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “ManagementItem 7. Management Discussion and Analysis of Financial Condition and Results of Operations.”
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
For details of applicable new accounting standards, please, refer to “Recent accounting pronouncements” in Note 2 of our financial statements accompanying this report.
Item 7A. Qualitative
Qualitative and Quantitative Disclosures about Market Risk
This information is not required for smaller reporting companies.
Item 8.
Financial StatementsStatements and Supplementary Data
The financial statements and supplementary data required by this Item 8 are included beginning at page F-1 of this report.
Item 9.
Changes in and DisagreementsDisagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the evaluation of our disclosure controls and procedures as of March 31, 2017, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Rule 13a-15(f) andor 15d-15(f) ofunder the Exchange Act. Internal
Our internal control over financial reporting isrefers to a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Under the supervision and | |
Based on this assessment,evaluation under the framework in theInternal Control – Integrated Framework (2013), our management, including our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2016, the end of our fiscal year, our internal control over financial reporting wasis effective to provide reasonable assurance regarding the reliabilityas of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.March 31, 2017.
Attestation Report of Independent Registered Public Accounting Firm
��
This annual report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 404 of the Sarbanes-Oxley Act of 2002.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2016,2017, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
On June 29, 2017, we closed the acquisition of Freedom RU, and the securities brokerage and financial services business conducted by it in Russia, and its wholly owned subsidiaries: Freedom KZ, and the securities brokerage and financial services business conducted by it in Kazakhstan; FFIN Bank, and the banking business conducted by it in Russia, and FSS, and the online securities marketplace business conducted by it in Russia.
Pursuant to the terms of the Acquisition Agreement, we agreed to issue to Mr. Turlov, our CEO and chairman, and the owner of Freedom RU, 13% of our issued and outstanding common stock for his 100% interest in Freedom RU. As we had insufficient authorized but unissued common stock to deliver the full agreed upon consideration to Mr. Turlov at the closing, as an accommodation to facilitate the closing, Mr. Turlov agreed to accept a partial issuance of 209,660,533 shares of our common stock and to defer issuance of the balance of the shares until such time as we can complete a reverse stock split and recapitalization so we have sufficient additional shares to issue him the percentage agreed in the Acquisition Agreement (approximately 93% of our then issued and outstanding common stock).
We continue our efforts to obtain the required regulatory approval from CySEC to close the acquisition of Freedom CY and the securities brokerage and financial services business conducted by Freedom CY. Given the progress that has been made to date, we believe a closing of the acquisition of Freedom CY is probable, but we cannot at this time predict with certainty if and/or when the required regulatory approvals will be granted.
Prior to entering the Acquisition Agreement in November 2015, there was no material relationship between Mr. Turlov and the Freedom Companies, on the one hand, and BMBM and our affiliates, on the other.
Financial statements of Freedom RU and Freedom CY prepared in accordance with Rule 8-04 of Regulation S-X and pro forma financial information prepared in accordance with Rule 8-05 of Regulation S-X are included as exhibits 99.01, 99.02 and 99.03 to this report and are incorporated herein by this reference.
PART III
Item 10.
Directors, ExecutiveExecutive Officers and Corporate Governance
The following table sets forth our directors and executive officers, their ages, and all offices and positions held. held with the Company as of June 29, 2017. There is no agreement or understanding between the Company or any other person and any director or executive officer pursuant to which he or she was selected as a director or executive officer. Directors are elected for a period of three years and thereafter serve until their successor is duly elected by the stockholders and qualified.
Name of Director or Executive Officer | Age | Positions with the Company | Director Since | Officer Since | ||||
| Timur Turlov | Chief Executive Officer and Chairman | September 2015 | September 2015 | |||||
| Jason M. Kerr | Director | May 2008 | ||||||
| Arkady Rakhilkin | Director | November 2015 | ||||||
| Leonard Stillman | Director | October 2006 | ||||||
| Askar Tashtitov | Director | May 2008 | ||||||
| Evgeniy Ler | Chief Financial Officer and Treasurer | April 2009 |
A brief description of the background and business experience of each of the above listed individuals follows.
Timur Turlov. Mr. Turlov graduated from Russia State Technic University (named after Tsialkovskiy) in 2009 with a Bachelor of Science degree in economics and management. Mr. Turlov has more than 10 years of experience in various areas in the international securities industry. Since July 2013, Mr. Turlov has served as the Advisor to the Chairman of the Board of JSC Freedom Finance JSC.Finance. In that capacity, Mr. Turlov has been primarily responsible for strategic management, public and investor relations events, investment strategy, sales strategy, and government relations. He has also served as the General Director of Investment CompanyLLC IC Freedom Finance, LLC, since August 2001.2011. As the General Director, Mr. Turlov is responsible for establishing the company’s strategic goals, including acquisition and retention of large clients, sales strategy and company development. From May 2012 through January 2013, Mr. Turlov served as the Chairman of the Board of Directors of JSC Nomad Finance JSC where he oversaw business set up and acquisition of large clients. From May 2011 to December 2011, Mr. Turlov served as the General Director and Chief Accountant of Investment Company Duntonse LLC, where he was tasked with overseeing business set up, operations with the firm’s intermediary broker and sales. From July 2010 through August 2011, Mr. Turlov was employed as the Vice Director of the International Sales Department of Nettrade LLC. In this capacity, his major responsibilities included consulting to set up access to foreign markets, trading, back office, and internal accounting functions. Mr. Turlov is not currently, and has not been in the past five years, a nominee or director of any other SEC registrant or registered investment company. In concluding that Mr. Turlov should serve as our chairman, we considered his in depth knowledge of the businesses of the Freedom Companies, his professional experience and his educational background in economics and management.
Jason M. Kerr. Mr. Kerr earned his Bachelor of Science degree in economics in 1995 and a Juris Doctorate in 1998 from the University of Utah, where he was named the William H. Leary Scholar. In 2011, Mr. Kerr founded the law firm Price, Parkinson & Kerr, where he practices commercial litigation. From 2006 to 2011, Mr. Kerr was the associate general counsel of Basic Research, LLC, concentrating in intellectual property litigation. Before joining Basic Research, Mr. Kerr was a partner with the law firm of Plant, Christensen & Kanell in Salt Lake City, Utah. Mr. Kerr was employed with Plant, Christensen & Kanell from 1996 through 2001 and from 2004 to 2006. From 2001 through 2004, Mr. Kerr was employed as a commercial litigator with the Las Vegas office of Lewis and Roca. Mr. Kerr became our director in May 2008. Mr. Kerr is not currently, and has not been in the past five years, a nominee or director of any other SEC registrant or registered investment company. In concluding that Mr. Kerr should serve as our director, we considered his educational background in economics and his professional experience as an attorney.
Arkady Rakhilkin. Mr. Rakhilkin earned his undergraduate degree in 1992 and post graduate degree in 1994 from Novosibirsk State Technical University both with an emphasis in applied mathematics. Mr. Rakhilkin also completed a course in effective management as part of an executive MBA program from Open University London. Mr. Rakhilkin has over 20 years of experience in the finance and banking industry. Mr. Rakhilkin has served as the Chairman of the Board of Directors ofJSC Freedom Finance, JSC, and its predecessor,JSC Seven Rivers Capital JSC since April 2008. Prior to that, he served as the Chairman of the Management Board of Seven Rivers Capital from November 2006 through April 2008. Mr. Rakhilkin’s principal responsibilities included interaction with large clients, attraction of strategic partners, management of corporate finance, introduction of new information systems, and sales of financing and underwriting services. Mr. Rakhilkin is not currently, and has not been in the past five years, a nominee or director of any other SEC registrant or registered investment company. In concluding that Mr. Rakhilkin should serve as our director, we considered his extensive experience in the finance and banking industry, as well as his significant tenure and experience withJSC Freedom Finance JSC.Finance.
Leonard M. Stillman. Mr. Stillman earned his Bachelor of Science degree in mathematics from Brigham Young University and Masters of Business Administration from the University of Utah. He began his career in 1963 with Sperry UNIVAC as a programmer developing trajectory analysis software for the Sergeant Missile system. Mr. Stillman spent many years as a designer and teacher of computer language classes at Brigham Young University, where he developed applications for the Administrative Department including the school’s first automated teacher evaluation system. During that time, he was also a vice-president of Research and Development for Automated Industrial Data Systems, Inc. and the Owner of World Data Systems Company, which provided computerized payroll services for companies such as Boise Cascade. Mr. Stillman has over 40 years of extensive business expertise, including strategic planning, venture capital financing, budgeting, manufacturing planning, cost controls, personnel management, quality planning and management, and the development of standards, policies, and procedures. He has extensive skills in the design and development of computer software systems and computer evaluation. Mr. Stillman helped found Stillman George, Inc. in 1993 and founded Business Plan Tools, LLC in 2004. He was employed with Stillman George, Inc. until 2010, where his primary responsibilities included managing information, technical development, and financial analysis projects and development, as well as general company management and consulting activities. He is currently employed by Business Plan Tools, LLC, which provides cloud-based SaaS business planning software and consolidates a broad variety of skills from a growing group of business professionals to provide needed support in finance, marketing, management, sales, planning, product development, and more to businesses worldwide. Mr. Stillman is not currently, and has not been in the past five years, a director or nominee of any other SEC registrant or registered investment company. In concluding that Mr. Stillman should serve as a director, we considered his training in business management, strategic planning, corporate finance, and information management.
Askar Tashtitov. Mr. Tashtitov started with BMBM in 2004 and served as the president of BMBM from May 2006 to November 2015. He has served as a director since May 2008. Before joining BMBM, from 2002 to 2004, Mr. Tashtitov was employed by PA Government Services, Inc. as a management consultant specializing in oil and gas projects. Mr. Tashtitov earned a Bachelor of Arts degree from Yale University majoring in economics and history in 2002. Mr. Tashtitov passed the AICPA Uniform CPA Examination in 2006. Mr. Tashtitov is not, and has not been in the past five years, a director or nominee of any other SEC registrant or registered investment company. We considered Mr. Tashtitov’s extensive experience in the public company arena, particularly his expertise in interfacing with equity and debt financing professionals, as well as his significant business management experience in concluding that he should serve as our director.
Evgeniy Ler. Mr. Ler started with BMBM in 2006. Before being appointed chief financial officer in April 2009, Mr. Ler served in other capacities with us, including finance manager and reporting manager. From September 2011 to December 2012, Mr. Ler also served as a Deputy Director for Emir Oil, LLP. Before joining BMBM, from 2002 to 2006, Mr. Ler was employed by Deloitte & Touche, where he held the position of senior auditor in Financial Services & Industries Group, Audit. In that position, he led large engagements for banks, financial institutions, and oil and gas companies. In 2003, Mr. Ler was awarded a Bachelor’s degree in financial management from the Kazakh-American University located in Almaty, Kazakhstan. In 2008, Mr. Ler passed the AICPA Uniform CPA Examination and was awarded licensure as a CPA in November 2013. Mr. Ler has also completed trainings in London on financial reporting in accordance with IFRS and US GAAP and internal Deloitte trainings on audit, financial reporting, and due diligence.
Family Relationships
There are no family relationships among our directors, executive officers and/or nominees.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and any persons who own more than 10% of the common stock of the Company to file with the Commission reports of beneficial ownership and changes in beneficial ownership of our common stock. Officers and directors are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of such reports furnished to us or written representations that no reports were required, we believe that during fiscal 20162017 all filing requirements applicable to our executive officers, directors and greater than 10% shareholders were met on a timely basis.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar duties. The code is designed to deter wrongdoing and to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, timely, accurate and understandable disclosure in reports and documents that we file with, or submit to the Commission and in our other public communications; (iii) compliance with applicable governmental laws, rules and regulations; (iv) prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code. A copy of our code of ethics was filed with the Commission as Exhibit 14.1 to the Company’s annual report on Form 10-KSB for the fiscal year ended March 31, 2004, filed with the Commission on June 29, 2004. A copy of the code of ethics will be provided to any person without charge upon written request to our Corporate Secretary at 324 South 400 West, Suite 250, Salt Lake City, Utah 84101.
Director Nominations Procedures
There have been no material changes to the procedures set forth in our proxy statement filed with the Commission on November 18, 2009, by which security holders may recommend nominees to our board of directors.
Committees of the Board of Directors
The OTC Pink market does not require the Company to have any committees of the board of directors. The board does not currently have a standing audit committee or any standing committees. Rather these functions are currently fulfilled by the full board.
Board Diversity
While we do not have a formal policy regarding the consideration of diversity in identifying and evaluating potential director candidates, the board considers the interplay of a candidate’s knowledge, expertise, skills and experience with that of the other members of the board of directors in order to build a board of directors that is effective, collegial and responsive to the needs of the Company. We believe this analysis results in a board of directors that is diverse in knowledge, expertise, skills, experience and viewpoint.
The table below summarizes compensation awarded to, earned by or paid to or earned by all individuals serving as the principal executive officer of BMBM or acting in a similar capacity during the last two completed fiscal years regardless of compensation level. No individual was awarded, earned in excess ofor was paid more than $100,000 for services rendered to BMBM during the last two completed fiscal year.
Summary Compensation Table
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Compen- sation ($) | Total ($) |
Timur Turlov(1) | 2016 | -0- | -0- | -0- | -0- | -0- |
| Chief Executive Officer | ||||||
Askar Tashtitov(2) | 2016 | -0- | -0- | -0- | -0- | -0- |
| President (PEO) | 2015 | -0- | -0- | -0- | -0- | -0- |
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Compensation ($) | Total ($) |
| Timur Turlov | 2017 | -0- | -0- | -0- | -0- | -0- |
| Chief Executive Officer | 2016 | -0- | -0- | -0- | -0- | -0- |
Mr. Turlov was appointed Chief Executive Officer of BMBM in November 2015. He also served as President of FFIN from September 2015 to May 2016. During the fiscal yearyears ended March 31, 2017 and 2016, Mr. Turlov provided services to BMBM and FFIN on an as needed basis and received no compensation for the services he provided. During the fiscal years ended March 31, 2016 and 2015, Mr. Tashtitov provided services to BMBM on an as needed basis and received no compensation for the services he provided. We do not have employment agreements with either Mr. Turlov or Mr. Tashtitov.
Outstanding Equity Awards at Fiscal Year-End
As of March 31, 2016, neither2017, Mr. Turlov nor Mr. Tashtitov held anyno outstanding stock options, unvested restricted stock grants, or other shares of stock, units or other rights awarded under any equity incentive plan that had not vested or that had not been earned.
Compensation of Directors
During the fiscal years ended March 31, 2017 and 2016, we did not pay directors’ fees to any member of our board of directors. During the fiscal year ended March 31, 2016, and the period from August 25, 2014 (inception) to March 31, 2015,2017, we did nothowever; pay $1,000 to Mr. Kerr and Mr. Stillman to compensate any members of our board of directorsthem for their board service.time spent compiling information for submission to securities regulators in Russia, Kazakhstan and Cyprus.
Equity Compensation
We do not currently have a fixed plan for the award of equity compensation to our directors. Equity compensation of directors, if any, is typically recommended by the compensation committee or management and is subject to approval of the full board of directors. Any equity grants to directors are to be granted at a price equal to the fair market value of our common stock on the date of the grant. We did not award any equity compensation to our directors during the year ended March 31, 2015.2017.
Item 12. Security OwnershipOwnership of Certain Beneficial Owners and Management andRelated Stockholder Matters
At June 10, 2016,29, 2017, we had 280,339,467490,000,000 shares of common stock issued and outstanding. The following table sets forth the outstanding shares of common stock owned of record or beneficially by each person that owned of record, or was known by us to own beneficially, more than 5% of our issued and outstanding stock, and the name and stock holdings of each director and nominee for director, and the stock holdings of all of the executive officers and directors as a group:
Name of Person or Group(1) | Nature of Ownership | Amount | Percent | |
| Principal Stockholders: | ||||
Timur Turlov(2) | Common Stock | 224,551,913 | 80.1% | |
| Directors: | ||||
Timur Turlov(2) | Common Stock | 224,551,913 | 80.1 | |
| Jason Kerr | Common Stock | -- | -- | |
| Arkady Rakhilkin | Common Stock | -- | -- | |
| Leonard M. Stillman | Common Stock | -- | -- | |
Name of Person or Group(1) | Nature of Ownership | Amount | Percent | Nature of Ownership | Amount | Percent | |
| Principal Stockholders: | |||||||
Timur Turlov(2) | Common Stock | 434,212,446 | 88.6% | ||||
| Directors: | |||||||
Timur Turlov(2) | Common Stock | 434,212,446 | 88.6 | ||||
| Jason Kerr | Common Stock | -- | |||||
| Arkady Rakhilkin | Common Stock | -- | |||||
| Leonard M. Stillman | Common Stock | -- | |||||
| Askar Tashtitov | Common Stock | 480,000 | * | Common Stock | 480,000 | * | |
| All Executive Officers and Directors as a Group (6 persons): | Common Stock | 225,221,913 | 80.3% | Common Stock | 434,882,446 | 88.7% | |
____________________
*
Less than 1%.
(1)
Unless otherwise indicated, the mailing address of each beneficial owner is c/o BMB Munai, Inc., Office 1704, 4B Building, “Nurly Tau” BC, 17 Al Farabi Ave, Almaty, Kazakhstan 050059. The information provided in the table is based on our records, information filed with the SEC, and information provided to us, except where otherwise noted.
(2)
As discussed in Item 1. Description of Business, in connection with the acquisitions of Freedom RU, and Freedom CY, if completed, Mr. Turlov will be issued additional shares of common stock increasing his ownership in our then outstanding common stock to up to approximately 95% of the then issued and outstanding common stock of the Company.
To our knowledge, there are no present arrangements or pledges of our securities, the operation of which may at a subsequent date result in a change in our control.
Change in Control
To the knowledge of management, there are no present arrangements or pledges of our securities the operation of which may at a subsequent date result in a change in control of the Company.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information respecting our compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance:
| Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a))(c) | ||||
Equity compensation plans approved by security holders | -- | -- | 4,025,000 | ||||
Equity compensation plans not approved by security holders | -- | -- | -- | ||||
| Total | -- | -- | 4,025,000 |
Item 13.
Certain Relationships and Related Transactions and Director Independence
Related Party Transactions
The disclosures set forth in this report in Item 1. Business regarding the acquisition of Freedom RU is incorporated by reference into this Item 13. Certain Relationships and Related Transactions and Director Independence.
During the year ended March 31, 2016,2017, Mr. Turlov made a capital contributioncontributions of $180,000$320,000 to the Company. At the time such contribution was made, Mr. Turlov was the Chief Executive Officer, Chairman of the board, and majority shareholder of the Company.
Director Independence
Our common stock is traded on the OTC Pink market and we are not subject to exchange listing requirements with respect to “independent” directors or composition of board committees. However we have chosen to use the definition of “independent director” in Section 803(A) of the NYSE MKT Company Guide to evaluate whether our directors are independent. Based upon the standards set forth in Section 803(A) of the NYSE MKT Company Guide, as of the date of this report, the board of directors has determined that following directors are independent: Jason Kerr Arkady Rakhilkin, and Leonard Stillman.
Item 14.
Principal AccountantAccountant Fees and Services
The firm of WSRP, LLC (“WSRP”) has served as our independent registered public accounting firm for the fiscal yearyears ended March 31, 20162017 and the period from August 25, 2014 (inception) through March 31, 2015.2016. Principal accounting fees for professional services provided to us by WSRP for the fiscal yearyears ended March 31, 20162017 and the period from August 25, 2014 (inception) to March 31, 2015,2016, are summarized as follows:
For the year ended March 31, 2016 | For the period from August 25, 2014 (inception) to March 31, 2015 | For the year ended March 31, 2017 | For the year ended March 31, 2016 | ||
| Audit | $ 22,180 | $ 27,572 | $30,000 | $22,180 | |
| Audit related | - | - | 169,718 | - | |
| Tax | - | 2,470 | 8,146 | - | |
| All other | - | - | - | ||
| Total | $ 22,180 | $ 30,042 | $207,864 | $22,180 | |
Audit Fees. Audit fees were for professional services rendered in connection with the audit of the financial statements included in our annual report on Form 10-K and review of the financial statements included in our quarterly reports of Form 10-Q and for services normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings or engagements and fees for Sarbanes-Oxley 404 audit work.
Tax Fees. Our independent registered accounting firm billed us an aggregate of $0$8,146 and $2,470$0 for professional services rendered for tax compliance, tax advice and tax planning within the United States for the fiscal yearyears ended March 31, 20162017 and the period from August 25, 2014 (inception) to March 31, 2015.2016.
Audit Committee Pre-Approval Policies and Procedures. The board of directors had not, as of the time of filing this annual report on Form 10-K with the Commission, adopted policies and procedures for pre-approving all audit services and permitted non-audit services to be performed by our independent auditors. Instead, the board has adopted a practice to meet as a whole to pre-approve any such services prior to the time they are performed. In the future, our board may adopt pre-approval policies and procedures to approve the services of our independent registered public accounting, provided the policies and procedures are detailed as to the particular service, the board is informed of each service, and such policies and procedures do not include delegation of the board’s responsibilities to our management.
The board of directors has determined that the provision of services by our independent registered accounting firm described above areis compatible with maintaining WSPR’s independence.
Item 15.
Exhibits, FinancialFinancial Statement Schedules
(a)
The following documents are filed as part of this report:
Financial Statements
Report of Independent Registered Public Accounting Firm – WSPR,WSRP, LLC, dated July 13, 2016June 30, 2017
Consolidated Balance Sheets as of March 31, 20162017 and 20152016
Consolidated Statements of Operations for the yearyears ended March 31, 20162017 and the period from August 25, 2014 (inception) to March 31, 20152016
Consolidated Statements of Shareholders’ Equity for the year ended March 31, 20162017 and the period from August 25, 2014 (inception) to March 31, 20152016
Consolidated Statements of Cash Flows for the yearyears ended March 31, 20162017 and the period from August 25, 2014 (inception) to March 31, 20152016
Notes to the Consolidated Financial Statements
Financial Statement Schedules
Schedules are omitted because the required information is either inapplicable or presented in the financial statements or related notes.
Exhibits
| Exhibit No. | Exhibit Description | ||
| 2.01 | Share Exchange and Acquisition Agreement between BMB Munai, Inc., and Timur Turlov dated November 23, 2015(1) | ||
| 3.01 | Articles of Incorporation of BMB Munai, Inc.(2) | ||
| 3.02 | Amendment to Articles of Incorporation of BMB Munai, Inc.(3) | ||
| 3.03 | By-Laws of BMB Munai, Inc. (as amended through July 8, 2010)(4) | ||
| 4.01 | BMB Munai, Inc. 2009 Equity Incentive Plan(5) + | ||
| 14.01 | Code of Ethics(6) | ||
| 21.01 | Schedule of Subsidiaries* | ||
| 31.01 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | ||
| 31.02 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | ||
| 32.01 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | ||
| 99.01 | LLC IC Freedom Finance Consolidated Financial Statements for the years ended March 31, 2017 and 2016* | ||
| 99.01 | FFINEU Investments Limited Financial Statements for the years ended March 31, 2017 and 2016* | ||
| 99.03 | Pro forma financial information* | ||
| 101 | The following BMB Munai, Inc. financial information for the year ended March 31, |
| * | Filed herewith. | ||
| + | Indicates management contract, compensatory plan or arrangement of the Company. | ||
| (1) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Commission on November 23, 2015. | ||
| (2) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Commission on January 18, 2005. | ||
| (3) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Commission on June 26, 2006. | ||
| (4) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Commission on July 13, 2010. | ||
| (5) | Incorporated by reference to Registrant’s Revised Definitive Proxy Statement on Schedule 14A filed with the Commission on June 23, 2008. | ||
| (6) | Incorporated by reference to Registrant’s Annual Report on Form 10-KSB filed with the Commission on June 29, 2004. | ||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized.
| BMB MUNAI, INC. | ||||
| Date: | By: | |||
| Timur Turlov | ||||
| Chief Executive Officer | ||||
| (Duly Authorized Representative) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dated indicated.
| Signatures | Title | Date | ||
| Chief Executive Officer and | ||||
| Timur Turlov | Chairman | |||
| Chief Financial Officer | ||||
| Evgeniy Ler | ||||
| Director | ||||
| Jason Kerr | ||||
| Director | ||||
| Arkady Rahkilkin | ||||
| Director | ||||
| Leonard Stillman | ||||
| Director | ||||
| Askar Tashtitov |
Table of Contents
| Page | |
Board of Directors and Stockholders
BMB Munai, Inc.
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of BMB Munai, Inc. (the Company) as of March 31, 20162017 and 20152016, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the yearyears in the two-year period ended March 31, 2016 and for the period August 25, 2014 (inception) to March 31, 2015. BMB Munai, Inc.’s2017. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BMB Munai, Inc. as of March 31, 20162017 and 2015,2016, and the results of its operations and its cash flows for each of the yearyears in the two-year period ended March 31, 2016 and the period August 25, 2014 (inception) to March 31, 2015,2017, in conformity with accounting principles generally accepted in the United States of America.
/s/ WSRP, LLC WSRP, LLC | |
| Salt Lake City, Utah | |
| June 30, 2017 | |
F-1
| March 31, 2016 | March 31, 2015 | March 31, 2017 | March 31, 2016 | ||
| ASSETS | |||||
| CURRENT ASSETS | |||||
| Cash and cash equivalents | $ 99,678 | $ 402,718 | $50,537 | $99,678 | |
| Restricted cash | 8,533,566 | - | 8,533,566 | ||
| Employee receivables | - | 1,300 | 25 | - | |
| Prepaid expenses | 50,375 | 483 | 425 | 50,375 | |
| Total current assets | 8,683,619 | 404,501 | 8,584,553 | 8,683,619 | |
| NON-CURRENT ASSETS | |||||
| Fixed assets, net | 5,431 | 8,537 | 2,100 | 5,431 | |
| Total non-current assets | 5,431 | 8,537 | 2,100 | 5,431 | |
| TOTAL ASSETS | $ 8,689,050 | $ 413,038 | $8,586,653 | $8,689,050 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||
| CURRENT LIABILITIES | |||||
| Accounts payable | $ 50,229 | $ 46,632 | $205,680 | $50,229 | |
| Accrued payroll and other liabilities | - | 4,700 | 291 | - | |
| State taxes payable | 100 | 100 | 100 | ||
| Deferred tax liabilities, net | - | 180 | |||
| Deferred distribution payments | 8,533,566 | - | 8,533,566 | ||
| Total current liabilities | 8,583,895 | 51,612 | 8,739,637 | 8,583,895 | |
| LONG-TERM LIABILITIES | |||||
| Long-term deferred tax liabilities | - | 60 | |||
| Total long-term liabilities | - | 60 | |||
| Total liabilities | 8,583,895 | 51,672 | |||
| COMMITMENTS AND CONTINGENCIES (Note 8) | - | ||||
| SHAREHOLDERS’ EQUITY | |||||
Common stock - $0.001 par value; 500,000,000 shares authorized; 280,339,467 and 224,551,913 shares outstanding as of March 31, 2016 and 2015, respectively | 280,340 | 224,552 | |||
Common stock - $0.001 par value; 500,000,000 shares authorized; 280,339,467 and 280,339,467 shares outstanding as of March 31, 2017 and 2016, respectively | 280,340 | ||||
| Preferred stock - $0.001 par value; 20,000,000 shares authorized; no shares issued or outstanding | - | - | - | ||
| Additional paid in capital | 455,448 | 275,448 | 775,448 | 455,448 | |
| Accumulated deficit | (630,633) | (138,634) | (1,208,772) | (630,633) | |
| Total shareholders’ equity | 105,155 | 361,366 | |||
| Total shareholders’ equity (deficit) | (152,984) | 105,155 | |||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ 8,689,050 | $ 413,038 | $8,586,653 | $8,689,050 | |