Capital Financial Holdings, Inc - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Capital Financial Holdings, Inc	Financial_Report.xls
EX-32.1 - CERTIFICATION - Capital Financial Holdings, Inc	cpfh_ex321.htm
EX-31.2 - CERTIFICATION - Capital Financial Holdings, Inc	cpfh_ex312.htm
EX-31.1 - CERTIFICATION - Capital Financial Holdings, Inc	cpfh_ex311.htm
EX-32.2 - CERTIFICATION - Capital Financial Holdings, Inc	cpfh_ex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 0-25958

CAPITAL FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

North Dakota		45-0404061
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

1 Main Street North

Minot, North Dakota 58703

(Address of principal executive offices) (Zip code)

(701) 837-9600

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of April 30, 2012, there were 14,455,943 common shares of the issuer outstanding.

FORM 10-Q

CAPITAL FINANCIAL HOLDINGS, INC.

INDEX

		Page #
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets - March 31, 2012 and December 31, 2011		3

	Unaudited Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2012 and 2011		5

	Unaudited Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011		6

	Notes to Condensed Consolidated Financial Statements		7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		16

Item 4.	Controls and Procedures		16

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		17

Item 1A.	Risk Factors		17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		17

Item 3.	Defaults Upon Senior Securities		18

Item 4.	Removed and Reserved		18

Item 5.	Other Information		18

Item 6.	Exhibits		18

SIGNATURES			19

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS

	March 31,			December 31,
	2012			2011

CURRENT ASSETS
Cash and cash equivalents	$	785,032		$	929,030
Accounts receivable (net of an allowance of $24,000 for 2012 and 2011)		1,280,636			1,294,930
Income taxes receivable		52,009			58,354
Deferred tax asset – current		138,119			81,287
Prepaids		29,185			44,063

Total current assets	$	2,284,981		$	2,407,664
PROPERTY AND EQUIPMENT	$			$
Property and equipment		307,833			1,740,606
Less accumulated depreciation		(258,696	)		(674,590	)
Net property and equipment	$	49,137		$	1,066,016

OTHER ASSETS
Goodwill	$	2,155,068		$	2,472,419
Severance escrow		260,473			229,568
Deferred tax asset		549,113			521,897
Other assets (net of accumulated amortization of $214,444 for 2012 and 2011)		225,890			225,503

Total other assets	$	3,190,544		$	3,449,387

TOTAL ASSETS	$	5,524,662		$	6,923,067

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS’ EQUITY

(Unaudited)

	March 31,			December 31,
	2012			2011

CURRENT LIABILITIES
Accounts payable	$	109,533		$	85,094
Commissions payable		1,244,304			1,184,745
Other current liabilities		27,917			144,882
Current portion of long-term liabilities		231,703			242,475

Total current liabilities	$	1,613,457		$	1,657,196

LONG-TERM LIABILITIES
Promissory note		162,243			1,057,525
Other long-term liabilities		-			61,590

Total long-term liabilities	$	162,243		$	1,119,115

TOTAL LIABILITIES	$	1,775,700		$	2,776,311

STOCKHOLDERS' EQUITY
Series A preferred stock – 5,000,000 shares authorized, $.0001 par value; 3,050,000 and 3,050,000 shares issued and outstanding, respectively	$	305		$	305
Additional paid in capital – series A preferred stock		1,524,695			1,524,695
Common stock – 1,000,000,000 shares authorized, $.0001 par value; 14,455,943 and 14,455,943 shares issued and outstanding, respectively		1,446			1,446
Additional paid in capital – common stock		10,446,301			10,446,301
Accumulated deficit		(6,923,785	)		(6,525,991	)
Less Treasury stock, 3,050,000 preferred shares at $0.4262		(1,300,000	)		(1,300,000	)
TOTAL STOCKHOLDERS’ EQUITY	$	3,748,962		$	4,146,756

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	5,524,662		$	6,923,067

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	(Unaudited) Three Months Ended March 31,
	2012			2011
OPERATING REVENUES
Fee income	$	259,305		$	257,734
Commissions		3,864,888			4,775,579
Interest and other income		36,585			136,777

Total revenue	$	4,160,778		$	5,170,089

OPERATING EXPENSES
Compensation and benefits	$	263,261		$	234,875
Commission expense		3,569,916			4,463,500
General and administrative expenses		449,969			342,864
Depreciation and amortization		14,892			17,277
Goodwill impairment		314,531			-

Total operating expenses	$	4,612,569		$	5,058,516

OPERATING INCOME/(LOSS)	$	(451,791	)	$	111,574

OTHER INCOME/(EXPENSES)
Interest expense	$	(21,769	)	$	(19,851	)

INCOME/(LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE)	$	(473,560	)	$	91,723

INCOME TAX BENEFIT (EXPENSE)	$	75,766		$	(17,454	)

NET INCOME/LOSS	$	(397,794	)	$	74,269

NET LOSS OF CONTINUING OPERATIONS PER COMMON SHARE:
Basic	$	(.03	)	$	.00
Diluted	$	(.03	)	$	.00

SHARES USED IN COMPUTING NET PER COMMON SHARE:
Basic		14,638,937			14,638,937
Diluted		14,638,937			14,638,937

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited) Three Months Ended March 31,
	2012			2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(397,794	)	$	74,269
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		14,892			17,277
Goodwill Impairment		314,531			-
Loss on sale of building		74,651
Deferred tax (benefit)/expense		(75,766	)
(Incre`ase) decrease in:
Accounts receivable		14,294			(28,579	)
Deferred tax-current		(8,281	)		3,950
Income taxes receivable		6,345			8,257
Prepaids & Other		17,311			11,273

Increase (decrease) in:
Accounts payable		24,439			(144,808	)
Commissions payable		59,559			168,595
Other liabilities		(116,965	)		(81,868	)
Net cash (used in) provided by operating activities	$	(72,784	)	$	28,366

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	$	(3,909	)	$	(5,666	)
Proceeds from sale of building		931,245			-
Net cash (used in) provided by investing activities	$	927,336		$	(5,666	)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term liability	$	(19,410	)	$	(17,490	)
Repayment of promissory note		(948,235	)		(7,902	)
Preferred dividends paid		-			(22,875	)
Net cash used in financing activities	$	(967,645	)	$	(48,267	)

NET DECREASE IN CASH AND CASH EQUIVALENTS	$	(113,093	)	$	(25,566	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	$	1,158,598			2,186,201

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,045,505		$	2,160,635

RECONCILIATION OF CASH AND CASH EQUIVALENTS
Cash	$	785,032		$	1,948,321
Severance escrow		260,473			212,314
Net Cash	$	1,045,505		$	2,160,635

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock dividends declared		-			22,875
Cash paid for interest		21,769			19,851

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2012 and 2011

NOTE 1 - BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of Capital Financial Holdings, Inc., a North Dakota corporation, and its subsidiary (collectively, the "Company"), included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2011, of Capital Financial Holdings, Inc., as filed with the SEC. The condensed consolidated balance sheet at December 31, 2011, contained herein, was derived from audited financial statements, but does not include all disclosures included in the Form 10-K and applicable under accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but not required for interim reporting purposes, have been condensed or omitted.

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are of a normal, recurring nature) necessary for a fair presentation of the financial statements. The results of operations for the three months ended March 31, 2012, are not necessarily indicative of operating results for the entire year.

NOTE 2 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

A summary of our significant accounting policies is included in Note 1 on pages F-9 through F-11 of our 2011 Form 10-K.

The Company adopted Financial Accounting Standard Board Accounting Standards Codification “ASC” 220-10, Comprehensive Income. ASC 220-10 establishes standards for the reporting and presentation of comprehensive income in the financial statements and requires the reporting of comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. ASC 220-10 eliminates the option of reporting components of other comprehensive income as part of the statement of changes in stockholder’s equity. Since the Company has no items of other comprehensive income at this time or in prior periods presented within these condensed consolidated financial statements, the Company is not required to report other comprehensive income or comprehensive income. Therefore the adoption of ASC 220 did not have an effect on the Company’s condensed consolidated financial statements.

The Company adopted ASC 820-10, Fair Value Measurements and Disclosures, for nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of ASC 820-10 did not have a material impact on the Company’s condensed consolidated financial statements.

NOTE 3 - RECLASSIFICATION

Certain amounts in the 2011 condensed consolidated financial statements have been reclassified to conform to the 2012 presentation. These reclassifications had no effect on the Company’s net income (loss).

NOTE 4 - INCOME TAXES

The Company has completed various acquisitions in prior years, which have been classified as goodwill at the time of acquisition. The Company amortizes certain goodwill for tax purposes. The Company tests goodwill for impairment annually for book purposes, during the second quarter of each fiscal year. The annual test is done at the reporting unit level using a fair value approach, in accordance with the FASB accounting and reporting standards. Deferred tax assets or deferred tax liabilities may result from these timing differences.

The Company has adopted the FASB accounting and reporting standards for share-based payment (See Note 8 – Stock Warrants, Stock Splits, and Stock Options.) As a result, the Company expenses stock-based employee compensation for book purposes on the grant date, but does not expense them for tax purposes until such options are exercised. Deferred tax assets are a result of these timing differences.

NOTE 5 - BUSINESS ACQUISITIONS

On March 7, 2007, the Company acquired certain assets of United Heritage Financial Services, Inc. (UHFS), a wholly owned subsidiary of United Heritage Financial Group, Inc., of Meridian, Idaho. UHFS had approximately 120 independent registered representatives who became part of Capital Financial Services, Inc. (CFS), the retail brokerage division of the Company. Pursuant to the agreement, in exchange for receipt of the assets of UHFS set forth above, the Company agreed to issue 500,000 restricted CFH shares and pay a deferred cash earn out payment totaling a maximum of $900,000, to be paid in 21 quarterly installments. On March 7, 2007, the Company issued 500,000 restricted common shares to UHFS. As a result of this issuance of shares, $175,000 was recorded by the Company as goodwill relating to the purchase of the assets. As of March 31,2012, the Company had made twenty quarterly installment payments totaling $428,356. The liability relating to this acquisition is valued at approximately $42,180 as of March 31,2012, and has also been recorded by the Company as goodwill. Due to the goodwill impairment charge that was recorded on December 31, 2010 and March 31, 2012(See Note 7-Goodwill), as of March 31, 2012, the total goodwill recorded relating to this acquisition was $476,631.

NOTE 6 - SALE OF BUILDING

On February 22, 2012, the Company entered into and signed an agreement with Corridor Investors, LLC. The Company agreed to sell the building and assets related to the building owned by the Company for $990,000 cash. The closing date was March 30, 2012. The proceeds from the sale were paid to PawnMart, Inc., a holder of a promissory note that held the building as collateral (See Note 9-Debt).

NOTE 7 - GOODWILL

The changes in the carrying amount of goodwill for the three months ended March 31, 2012, are as follows:

Balance as of January 1, 2011	$	2,472,419
Impairment loss on goodwill		(314,531	)
Goodwill acquisition price adjustment during the period (See Note 5)		(2,820	)
Balance as of March 31, 2012	$	2,155,068

The Company’s goodwill represents the excess of purchase prices over the fair value of the identifiable net assets of previously acquired broker/dealer businesses. The goodwill is not amortized; instead it is tested for impairment annually or more frequently if the fair value of a reporting unit is below its carrying value. Absent any impairment indicators, the Company performs its annual goodwill impairment testing as of June 30 of each year.

The Company’s policy is to test goodwill for impairment using a fair value approach at the reporting unit level. The Company performs its goodwill impairment test in two steps. Step one compares the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the unit determined in step one is lower than its carrying value, the Company proceeds to step two, which then compares the carrying value of goodwill to its implied fair value. Any excess of carrying value of goodwill over its implied fair value at a reporting unit is recorded as impairment.

The valuation methodology the Company utilizes in testing the Company’s goodwill for impairment is based on the income approach. The income approach is based on a discounted cash flow methodology in which expected future net cash flows are discounted to present value, using a discounted rate that compensates for the risk in attaining the projected cash flows. This approach is dependent upon a number of significant management estimates about future performance including but not limited to, market performance, income taxes, capital spending and working capital changes.

The Company tests goodwill for impairment annually during the second quarter of each fiscal year. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests. During the first quarter of 2012, the Company noticed a negative variance from budget and a decline in our stock price. Under qualitative review, the Company determined it was more likely than not that the fair value of the reporting unit is less than its carrying value. Therefore, it was decided that the Company would complete a two-step test at the reporting unit level to determine if impairment was needed. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any.

Based on the analysis performed, the Company’s reporting unit’s fair market value of $3.07 million is less than its carrying value of $3.39 million. Therefore, impairment of $314,531 was indicated, and the Company proceeded to the second step of the testing process and determined that the Company would record goodwill impairment of $314,531 during the 1Q of 2012 to reduce the carrying value of goodwill to its implied fair value. Losses of $314,531 represent an impairment charge related to the goodwill attributable to the Broker-Dealer segment.

NOTE 8 - STOCK WARRANTS, STOCK SPLITS, AND STOCK OPTIONS

The Company measures and records compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. There were no compensation costs or deferred tax benefits recognized for stock-based compensation awards for the three months ended March 31, 2012 and 2011.

Option activity for the twelve months ended December 31, 2011 and the three months ended March 31, 2012 was as follows:

	Number of Options		Weighted Average Exercise Price per Share		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value

Outstanding on January 1, 2011		5,888,113	$	.54	$	.28	$	-
Granted		-		-		-
Exercised		-		-		-
Canceled		-		-		-
Outstanding on December 31, 2011		5,888,113	$	.54	$	.28	$	-
Granted		-		-		-
Exercised		-		-		-
Canceled				-		-
Outstanding on March 31, 2012		5,888,113	$	.54	$	.28	$	-

Exercisable options totaled 5,888,113 at both December 31, 2011 and March 31, 2012.

NOTE 9 - DEBT

Promissory Note – On October 21, 2011, the Company issued a promissory note to PawnMart, Inc. in exchange for the repurchase of the 3,050,000 shares of preferred stock. The note carries an interest rate of 7%. As of December 31, 2011 the Company made one quarterly payment of $66,801. On March 30, 2012 the Company made a payment of $925,922. In April of 2012, the Company made a $100,000 payment. The Company will make quarterly payments of $34,000 with the last payment being $34,965. The note will mature April 1, 2014.

NOTE 10 - EARNINGS PER SHARE

Basic earnings per share are computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common shares had been converted to common shares. The following reconciles amounts reported in the financial statements:

	Three Months Ended March 31, 2012								Three Months Ended March 31, 2011
	Numerator			Denominator		Per Share Amount			Numerator			Denominator		Per Share Amount
Net Loss	$	(397,794	)						$	74,269
Less: Preferred Stock Dividends		-								(22,875	)
Income Available to Common Shareholders – Basic Earnings per Share	$	(397,794	)		14,638,937	$	(.03	)	$	51,394			14,638,937	$	.00
Effect of Dilutive Securities:
Preferred Stock Dividends		-			-					-			-
Stock Options and Warrants		-			-					-			-
Income Available to Common Shareholders – Diluted Earnings per Share	$	(397,794	)		14,638,937	$	(.03	)	$	51,394			14,638,937	$	.00

The variance between the 14,638,937 shares reported and the 14,455,943 actual shares outstanding is due to the Employee Stock Option Plan that closed at the end of 2009.

Options and warrants to purchase 8,486,113 common shares at exercise prices between $0.35 and $1.43 were outstanding at March 31, 2012, but were not included in the computation of diluted earnings per share for the quarter ending March 31, 2012, because their effect was anti-dilutive.

The Company had outstanding, at March 31, 2012, 3,050,000 Series A preferred shares. The preferred shares are entitled to receive a cumulative dividend at a rate of 6% per year, payable quarterly. The preferred shares are convertible to the Company’s common shares at the rate of one share of common shares for one share of Series A preferred shares at any time after issuance.

The Series A preferred shares were not included in the computation of diluted earnings per share for the quarter ended March 31, 2012, , because their effect was anti-dilutive.

NOTE 11 – FAIR VALUE DISCLOSURES

The Company has adopted a framework for measuring fair value, and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value in three broad levels:

● Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company has the ability to access.

● Level 2 inputs are inputs (other than quoted prices included within level 1) that are observable for the asset or liability, either directly or indirectly.

● Level 3 are unobservable inputs for the asset or liability and rely on management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. (The unobservable inputs should be developed based on the best information available in the circumstances and may include the Company’s own data.)

The application of valuation techniques applied to similar assets and liabilities has been consistently applied. The following is a description of the valuation methodologies used for instruments measured at fair value:

On February 12, 2009, CFS entered into a settlement agreement with a client, which resulted in CFS purchasing the client’s investment in the Omega 2007 Drilling Program 1, LP. This limited partnership carries a “presentment” feature which allows CFS to sell the investment to the General Managing Partner of the limited partnership; and this feature has become available. The fair market value of this $76,876 investment is estimated to be $45,000 based on discounted cash flows; however this amount could fluctuate with the prices of oil and natural gas. CFS has determined, based off of information provided by the Limited Partnership, that the “presentment” feature will not be utilized at this time, due to the reduction in the present value of the investment. This investment is included in other assets on the balance sheet.

The Company has accumulated cash for the possible future payments of severance and benefits for senior management, should they leave. There is not a legal obligation, but a holding of cash should such an event occur. These funds are reflected as Severance Escrow on the balance sheet, and consist of cash accounts.

	Carrying Value at March 31, 2012												Quarter ended March 31, 2012
	Total			Level 1			Level 2			Level 3			Total Losses

Other Investment		$	45,000		$	-		$	-		$	45,000		$	-

Severance Escrow			260,473			260,473

	Carrying Value at March 31, 2011												Quarter ended March 31, 2011
	Total			Level 1			Level 2			Level 3			Total Losses

Other Investment		$	45,000		$	-		$	-		$	45,000		$	-

Severance Escrow			251,176			251,176

Reconciliation of Level 3 Balances:

Balance as of January 1, 2011	$	45,000
Purchase of other investment		-
Impairment loss on other investment		-
Balance as of December 31, 2011		45,000
Impairment loss on other investment		-
Balance as of March 31, 2012	$	45,000

The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the hierarchy (as described above) as of March 31, 2012, which are measured on a non-recurring basis.

	Carrying Value at March 31, 2012												Three Months ended March 31, 2012
	Total			Level 1			Level 2			Level 3			Total Losses

Goodwill		$	2,155,068		$	-		$	-		$	2,155,068		$	314,531

Losses of $314,531 represent an impairment charge related to the goodwill of the Broker-Dealer segment.

Reconciliation of Level 3 Balances:

Balance as of January 1, 2011	$	2,574,413
Reduction in goodwill related to UHFS acquisition (See Note 5-Business Acquisitions)		(101,994	)
Balance as of December 31, 2011		2,472,419
Reduction in goodwill related to UHFS acquisition (See Note 5-Business Acquisitions)		(2,820	)
Impairment loss on goodwill		(314,531	)
Balance as of March 31, 2012	$	2,155,068

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Capital Financial Holdings, Inc. derives the majority of its revenues and net income from sales of mutual funds, insurance products, and various other securities through Capital Financial Services, Inc. (“CFS”), the Company’s broker-dealer subsidiary.

The Company has been engaged in the financial services business since 1987. The Company was incorporated September 22, 1987, as a North Dakota corporation. The Company’s principal offices are located at 1 Main Street North, Minot, North Dakota 58703. As of March 31, 2012, the Company had 16 full-time employees consisting of officers, securities distribution, data processing, compliance, accounting, and clerical support staff.

CFS is a full-service brokerage firm. CFS is registered with the SEC as an investment advisor and broker-dealer and also with FINRA as a broker-dealer. CFS specializes in providing investment products and services to independent investment representatives, financial planners, and investment advisors and currently supports over 240 investment representatives and investment advisors.

RESULTS OF OPERATIONS

	Three Months Ended March 31,
	2012			2011

Net income (loss)	$	(397,794	)	$	74,269
Income (loss) per share:
Basic	$	(.03	)	$	.00
Diluted	$	(.03	)	$	.00

The Company reported a net loss for the quarter ended March 31, 2012, of $397,794, compared to a net income of $74,269 for the same quarter in 2011.

Operating revenues

Total operating revenues for the quarter ended March 31, 2012 were $4,160,778, a decrease of 20% from $5,170,089 for the quarter ended March 31,2011. The decreases for the quarter and three month periods resulted primarily from decreased commission income received by CFS.

Fee Income

Fee income for the quarter ended March 31, 2012 was $259,305, an increase of .6% from $257,734 for the quarter ended March 31, 2011. The increases were due to rise in fee income received by CFS, as a result of higher values of client assets under management.

The Company earns investment advisory fees in connection with CFS’ registered investment advisor. The Company pays the registered representatives a portion of this fee income as commission expense and retains the balance. These fees constituted 6% of the Company’s consolidated revenues for the three months ended March 31, 2012.

Commission Income

Commission income includes CFS commissions. The Company pays the registered representatives a percentage of this income as commission expense and retains the balance. Commission income for the quarter ended March 31, 2012 was $3,864,888, a decrease of 19% from $4,775,579 for the quarter ended March 31, 2011. The decreases were due primarily to the reduction in commissions received by CFS due to market conditions. Future market conditions will continue to impact commission levels. Commission revenues constituted 93% of the Company’s consolidated revenues for the three months ended March 31, 2012.

Other income

Interest and other income for the quarter ended March 31, 2012 was $36,585, a decrease of 73% from $136,777 for the quarter ended March 31, 2012. The decrease in the three month period was due to a reduction in settlement checks and income received, regarding the subsidiaries that closed including the mutual fund division and the energy division. Interest and other income constituted 1% of the Company’s consolidated revenues for the three months ended March 31, 2012.

Operating expenses

Total operating expenses for the quarter ended March 31, 2012 were $4,612,570, a decrease of 9% from $5,058,516 for the quarter ended March 31, 2011. The decreases resulted from the net decreases in the expense categories described in the paragraphs below.

Compensation and benefits

Compensation and benefits expense for the quarter ended March 31, 2012 was $263,261, an increase of 11% from $234,875 for the quarter ended March 31, 2011. The increases resulted from an increase in wages to employees, increases in 401K matching, payroll taxes, and paid bonuses.

Commission expense

Commission expense for the quarter ended March 31, 2012 was $3,569,916, a decrease of 20% from $4,463,500 for the quarter ended March 31, 2011. The decreases in commission expense correspond with the decreases in commission income.

Goodwill impairment expense

Goodwill impairment expense for the quarter ended March 31, 2012 was $314,531, an increase of 100% from $0 for the quarter ended March 31, 2011. During the first quarter of 2012, the Company noticed a negative variance from budget and a decline in our stock price. Based on the analysis performed, the Company’s reporting unit’s fair market value of $3.07 million is less than its carrying value of $3.39 million. Therefore, impairment of $314,531 was indicated and recorded during the 1Q of 2012.

General and administrative expense

Total general and administrative expenses for the quarter ended March 31, 2012 were $449,969, an increase of 24% from $342,864 for the quarter ended March 31, 2011. The increases were due primarily to an increase in legal expenses incurred through litigation costs and settlements paid by the Company.

Depreciation and amortization

Depreciation and amortization expense for the quarter ended March 31, 2012 was $14,892, a decrease of 14% from $17,277 for the quarter ended March 31, 2011.

Liquidity and capital resources

Net cash used in operating activities was $72,784

for the three months ended March 31, 2012, as compared to net cash provided by operating activities of $28,366 during the three months ended March 31,2011. The primary difference corresponds with the impairment to goodwill, the change in our deferred tax asset and our net loss.

Net cash provided by investing activities was $927,336 for the three months ended March 31, 2012, compared to net cash used in investing activities of $5,666 for the three months ended March 31, 2011. The primary difference corresponds with the sale of the building and the disposal of assets.

Net cash used in financing activities was $967,645 for the three months ended March 31, 2012, compared to net cash used by financing activities of $48,267 for the three months ended March 31, 2011. During the three months ended March 31, 2012 the Company paid down the promissory note with PawnMart with payments totaling $948,235.

At March 31, 2012, the Company held $1,045,505 in cash and cash equivalents, as compared to $1,158,598 at December 31, 2011. The Company is required to maintain certain levels of cash and liquid securities in CFS to meet regulatory net capital requirements.

The Company currently has no lines of credit available.

The Company has historically relied upon sales of its equity securities and debt instruments, as well as bank loans, for liquidity and growth. Management believes that the Company’s existing liquid assets, along with cash flow from operations, will provide the Company with sufficient resources to meet its ordinary operating expenses during the next twelve months. Significant, unforeseen or extraordinary expenses may require the Company to seek alternative financing sources, including common or preferred share issuance or additional debt financing.

In addition to the liabilities coming due in the next twelve months, management expects that the principal needs for cash may be broker recruitment, repurchase shares of the Company’s common stock, and debt service. Management also expects to realize increases in consultant expenses as well as increased compliance and legal costs with respect to its broker dealer subsidiary related to regulatory and litigation matters.

FORWARD-LOOKING STATEMENTS

When used herein, in future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company's press releases, and in other Company-authorized written or oral statements, the words and phrases "can be," "expects," "anticipates," "may affect," "may depend," "believes," "estimate," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Such statements are subject to certain risks and uncertainties, including those set forth in this "Forward-Looking Statements" section, which could cause actual results for future periods to differ materially from those presently anticipated or projected. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statement to reflect events or circumstances after the date of such statements.

Forward-looking statements include, but are not limited to, statements about the Company’s:

●	Business strategies and investment policies,

●	Possible or assumed future results of operations and operating cash flows,

●	Financing plans and the availability of short-term borrowing,

●	Competitive position,

●	Potential growth opportunities,

●	Recruitment and retention of the Company’s key employees,

●	Potential operating performance, achievements, productivity improvements, efficiency and cost reduction efforts,

●	Likelihood of success and impact of litigation,

●	Expected tax rates,

●	Expectations with respect to the economy, securities markets, the market for merger and acquisition activity, the market for asset management activity, and other industry trends,

●	Competition, and

●	Effect from the impact of future legislation and regulation on the Company.

The following factors, among others, could cause actual results to differ materially from forward-looking statements, and future results could differ materially from historical performance:

●	General political and economic conditions which may be less favorable than expected;

●	The effect of changes in interest rates, inflation rates, the stock markets, or other financial markets;

●	Unfavorable legislative, regulatory, or judicial developments;

●	Adverse findings or rulings in arbitrations, litigation or regulatory proceedings;

●	Incidence and severity of catastrophes, both natural and man-made;

●	Changes in accounting rules, policies, practices, and procedures which may adversely affect the business;

●	Terrorist activities or other hostilities which may adversely affect the general economy.

The Company is a financial services holding company that, through its broker dealer subsidiary, provides brokerage, investment advisory, insurance and related services. The Company operates in a highly regulated and competitive industry that is influenced by numerous external factors such as economic conditions, marketplace liquidity and volatility, monetary policy, global and national political events, regulatory developments, competition, and investor preferences. The Company’s revenues and net earnings may be either enhanced or diminished from period to period by such external factors. The Company remains focused on continuing to reduce redundant operating costs, upgrade operating efficiency, recruit quality representatives and grow our revenue base. The Company provides broker-dealer services in support of trading and investment by its representatives’ customers in corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, private placement alternative investments, variable annuities and variable life insurance. The Company also provides investment advisory services for its representative’s customers

A key component of the broker-dealer subsidiary’s business strategy is to recruit well-established, productive representatives who generate substantial revenues from an array of investment products and services. Additionally, the broker-dealer subsidiary assists its representatives in developing and expanding their business by providing a variety of support services and a diversified range of investment products for their clients.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable as a Smaller Reporting Company

ITEM 4.

CONTROLS AND PROCEDURES

The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15c-14(c) under the Exchange Act) as of the end of the period covered by this report, pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2011, and that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed and summarized, and reported within the time periods specified by the SEC’s rules and forms.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. As a result, the Company is involved in various disputes and legal proceedings, including litigation, arbitration and regulatory investigations, including a number of investigatory matters and legal proceedings arising out of customer allegations related to past commissioned sales of alternative investment products. In 2007 through the first quarter of 2009 a substantial amount (approximately 10% to 20%) of the Company’s sales of commissioned products were in private placements of alternative products, two of which as of December 31, 2009 (Medical Capital Corporation and related issuer entities and Provident Royalties, LLC and related issuer entities) were placed in receivership by action of the United States Securities and Exchange Commission and issuers of certain other alternative products sold by the Company are in Chapter 11 Bankruptcy or may have other financial difficulties. Additionally, difficult economic conditions in general and the stock market decline have contributed to a decline in the portfolio values of the clients of our broker-dealer subsidiary. As a result of such alleged failings of alternative products and the uncertainty of client recovery from the various product issuers, the Company is subject to several FINRA arbitration claims, one federal court action, and a trustee action in Delaware Bankruptcy Court. The Company vigorously contests the allegations contained in these various proceedings and believes that there are multiple meritorious legal and fact based defenses in these matters. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, including the impact on operations or on the financial statements, particularly in the earlier stages of a case. The Company makes provisions for cases brought against it when, in the opinion of management after seeking legal advice, it is probable that a liability exists, and the amount can be reasonably estimated. The current proceedings are subject to uncertainties and as such, the Company is unable to estimate the possible loss or a range of loss that may result; however, results in these cases that are against the interests of the Company could have a severe negative impact on the financial position of the Company.

ITEM 1A.

RISK FACTORS

Not Applicable as a Smaller Reporting Company

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company has issued the following securities in the past quarter without registering the securities under the Securities Act:

None

Small Business Issuer Repurchases of Equity Securities:

In November of 1997, the Board of Directors of the Company authorized the repurchase of up to $2,000,000 of its outstanding common stock from time to time in the open market. The table below displays the dollar value of shares that may yet be purchased under this plan.

Period	Total Number of Shares Purchased		Average Price Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
January 2012		-		-		-	$	597,754
February 2012		-		-		-	$	597,754
March 2012		-		-		-	$	597,754
Total		-		-		-	$	597,754

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

(REMOVED AND RESERVED)

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS

Exhibits

31.1	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
31.2	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
32.1	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350
32.2	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350

CAPITAL FINANCIAL HOLDINGS, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CAPITAL FINANCIAL HOLDINGS, INC.

Date: May 15, 2012	By:	/s/ John Carlson
		John Carlson
		Chief Executive Officer & President (Principal Executive Officer)


Date: May 15, 2012	By	/s/ Elizabeth Redding
		Elizabeth A. Redding
		Chief Financial Officer & Corporate Secretary
		(Principal Financial Officer)

Attached files

Capital Financial Holdings, Inc Reports

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