Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2017
OR
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)
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Identification
No.)
|
1821
Burdick Expressway W
|
Minot,
North Dakota 58701
|
(Address
of principal executive offices) (Zip code)
|
(701)
837-9600
|
(Registrant's
telephone number, including area code)
|
1 N
Main St
Minot,
North Dakota 58703
(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
☒
No
☐
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
☒
No
☐
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
|
☐
|
|
Accelerated
filer
|
☐
|
Non-accelerated
filer
|
☐
|
|
Smaller
reporting company
|
☒
|
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
As of
September 30, 2017, there were 1,241 common shares of the issuer
outstanding.
FORM 10-Q
CAPITAL FINANCIAL HOLDINGS, INC.
INDEX
PART
I FINANCIAL
INFORMATION
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Page
#
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Item
1. Financial
Statements
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3
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|
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|
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Unaudited
Condensed Consolidated Balance Sheets - September 30, 2017
and December 31, 2016
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3
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|
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|
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Unaudited
Condensed Consolidated Statements of Operations -
Three
Months Ended September 30, 2017 and 2016
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5
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Unaudited
Condensed Consolidated Statements of Operations -
Nine
Months Ended September 30, 2017 and 2016
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6
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|
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Unaudited
Condensed Consolidated Statements of Cash Flows -
Nine
Months Ended September 30, 2017 and 2016
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7
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|
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|
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Notes
to Unaudited Condensed Consolidated Financial
Statements
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8
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|
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|
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Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Item
3. Quantitative and
Qualitative Disclosures About Market Risk
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22
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|
|
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Item
4. Controls and
Procedures
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22
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PART
II OTHER
INFORMATION
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Item
1. Legal
Proceedings
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23
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Item
1A. Risk
Factors
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23
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Item
2. Unregistered Sales
of Equity Securities and Use of Proceeds
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23
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Item
3. Defaults Upon
Senior Securities
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23
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Item
4. Removed and
Reserved
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23
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Item
5. Other
Information
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23
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Item
6. Exhibits
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23
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SIGNATURES
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24
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2
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
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(Unaudited)
|
|
|
September 30,
|
December 31,
|
|
2017
|
2016
|
|
|
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CURRENT ASSETS
|
|
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Cash
and cash equivalents
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$1,245,304
|
$934,711
|
Accounts
receivable (net of an allowance of $24,000 for 2017 and
2016)
|
1,657,328
|
1,932,933
|
Prepaids
|
34,699
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61,709
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Current
assets of discontinued operations
|
-
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6,375
|
|
|
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Total
current assets
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2,937,331
|
2,935,728
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|
|
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PROPERTY AND EQUIPMENT
|
|
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Land
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98,409
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98,409
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Building
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1,096,946
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875,682
|
|
|
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Furniture,
fixtures and equipment
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384,118
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543,601
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Less
accumulated depreciation
|
(289,388)
|
(422,058)
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Property
and equipment of discontinued operations
|
-
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72,616
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Net
property and equipment
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1,290,085
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1,168,250
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|
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OTHER ASSETS
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Severance
escrow
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157,892
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258,185
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Deferred
tax asset
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320,436
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417,542
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Other
assets
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175,279
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175,279
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|
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Total
other assets
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653,607
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851,006
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$
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TOTAL ASSETS
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4,881,023
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$4,954,984
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SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
3
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
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(Unaudited)
|
|
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September 30,
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December 31,
|
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2017
|
2016
|
|
|
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CURRENT LIABILITIES
|
|
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Accounts
payable
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$257,066
|
$292,987
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Commissions
payable
|
1,764,537
|
2,027,962
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Income
taxes payable
|
8,857
|
10,187
|
Other
current liabilities
|
113,699
|
12,962
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Current
liabilities of discontinued operations
|
-
|
7,434
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Total
current liabilities
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$2,144,159
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$2,351,532
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|
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NON CURRENT LIABILITIES
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|
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Non
current liabilities of discontinued operations
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-
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2,907
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Building
mortgage
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675,000
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475,000
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Total
noncurrent liabilities
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675,000
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477,907
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TOTAL LIABILITIES
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$2,819,159
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$2,829,439
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|
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STOCKHOLDERS' EQUITY
|
|
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Series
A preferred stock – 5,000,000 shares authorized, $.0001 par
value;
|
|
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3,050,000
and 3,050,000 shares issued and 0 outstanding,
respectively
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$305
|
$305
|
Additional
paid in capital – series A preferred stock
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1,524,695
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1,524,695
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Common
stock – 1,000,000,000 shares authorized, $.0001 par
value;
|
|
|
|
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1,241
and 1,241 shares issued and outstanding, respectively
|
1,241
|
1,241
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Additional
paid in capital – common stock
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10,221,515
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10,221,515
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Accumulated
deficit
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(8,385,892)
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(8,322,211)
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Less
Treasury stock, 3,050,000 preferred shares at $0.4262
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(1,300,000)
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(1,300,000)
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TOTAL STOCKHOLDERS’ EQUITY
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$2,061,864
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$2,125,545
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|
|
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$4,881,023
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$4,954,984
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SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
4
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
|
|
|
Three
Months Ended
|
|
|
September
30,
|
|
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2017
|
2016
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OPERATING REVENUES
|
|
|
Fee
income
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$431,944
|
292,645
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Commissions
|
3,213,739
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4,307,574
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Other
fee income
|
102,580
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112,841
|
|
|
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Total
revenue
|
3,748,263
|
4,713,060
|
|
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OPERATING EXPENSES
|
|
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Compensation
and benefits
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344,674
|
345,020
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Commission
expense
|
3,028,630
|
3,978,901
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General
and administrative expenses
|
320,917
|
309,752
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Depreciation
|
8,647
|
12,188
|
|
|
|
Total
operating expenses
|
3,702,868
|
4,645,861
|
|
|
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OPERATING INCOME
|
45,395
|
67,199
|
|
|
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OTHER INCOME (EXPENSES)
|
|
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Interest
expense
|
(8,453)
|
-
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Loss
from disposed assets
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(5,092)
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-
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Other
income
|
67,289
|
27,080
|
|
|
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Total other income
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53,744
|
27,080
|
|
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX
|
99,139
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94,279
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INCOME TAX EXPENSE
|
50,505
|
28,745
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48,634
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65,534
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NET INCOME BEFORE DISCONTINUED OPERATIONS
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DISCONTINUED
OPERATIONS
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-
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(20,794)
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NET INCOME (LOSS)
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$48,634
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(44,740)
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|
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NET INCOME (LOSS) PER COMMON SHARE, BASIC AND DILUTED:
|
|
|
Continuing
|
$39
|
53
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Discontinued
|
$-
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(17)
|
|
|
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SHARES USED IN COMPUTING NET PER COMMON SHARE:
|
|
|
Basic
and diluted
|
1,241
|
1,241
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
5
CAPITAL FINANCIAL HOLDINGS, INC., AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
2017
|
2016
|
OPERATING REVENUES
|
|
|
Fee
income
|
$1,144,548
|
888,734
|
Commissions
|
9,971,996
|
12,131,401
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Other
fee income
|
312,299
|
232,275
|
|
|
|
Total
revenue
|
11,428,843
|
13,252,410
|
|
|
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OPERATING EXPENSES
|
|
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Compensation
and benefits
|
1,102,698
|
1,044,677
|
Commission
expense
|
9,373,638
|
11,387,667
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General
and administrative expenses
|
986,657
|
796,705
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Depreciation
|
44,054
|
35,751
|
|
|
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Total
operating expenses
|
11,507,047
|
13,264,800
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|
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OPERATING LOSS
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(78,204)
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(12,390)
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OTHER INCOME (EXPENSES)
|
|
|
Interest
expense
|
(20,714)
|
(947)
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Loss
from disposed assets
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(5,092)
|
-
|
Other
income
|
71,970
|
26,200
|
|
|
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Total other income
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46,164
|
25,253
|
|
|
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAX
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(32,040)
|
12,863
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INCOME TAX EXPENSE
|
9,326
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44,095
|
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(41,366)
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(31,232)
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NET LOSS BEFORE DISCONTINUED OPERATIONS
|
|
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DISCONTINUED
OPERATIONS
|
(22,315)
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(35,668)
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NET LOSS
|
$(63,681)
|
(66,900)
|
|
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NET LOSS PER COMMON SHARE, BASIC AND DILUTED:
|
|
|
Continuing
|
$(33)
|
(25)
|
Discontinued
|
$(18)
|
(29)
|
|
|
|
SHARES USED IN COMPUTING NET PER COMMON SHARE:
|
|
|
Basic
and diluted
|
1,241
|
1,241
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
6
CAPITAL FINANCIAL HOLDINGS, INC., AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2017
|
2016
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
loss
|
$(63,681)
|
(66,900)
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
Depreciation
|
44,054
|
36,200
|
Depletion
|
(29,354)
|
13,743
|
Provision
for deferred income taxes
|
97,106
|
17,118
|
(Increase)
decrease in:
|
|
|
Accounts
receivable
|
275,605
|
(115,736)
|
Income
taxes payable
|
(1,330)
|
(52,930)
|
Prepaids
|
27,010
|
6,833
|
Severance
escrow
|
100,293
|
(194)
|
Accounts
payable
|
(43,355)
|
122,414
|
Commissions
payable
|
(263,425)
|
233,636
|
Other
liabilities
|
100,736
|
38,905
|
Net
cash provided by operating activities
|
$243,659
|
233,089
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
Purchase
of property and equipment
|
$(22,333)
|
(22,439)
|
Payment
of Baron notes receivable
|
-
|
500,000
|
Improvements
to building
|
(221,264)
|
-
|
Deductions
to property and equipment
|
5,093
|
-
|
Deductions
to oil and gas properties
|
105,438
|
-
|
Net
cash (used in) provided by investing activities
|
$(133,066)
|
477,561
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
Proceeds
from long-term borrowings
|
200,000
|
-
|
Repayment
of short-term borrowings
|
-
|
(50,000)
|
Net
cash provided by (used in) financing activities
|
$200,000
|
(50,000)
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
$310,593
|
660,650
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
$934,711
|
1,038,426
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$1,245,304
|
1,699,076
|
SUPPLEMENTAL
SCHEDULE OF NONCASH
|
|
|
INVESTING
AND FINANCING ACTIVITIES:
|
|
|
Cash paid for
interest on building mortgage
|
8,453
|
-
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
7
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2017 and 2016
NOTE 1 - BASIS OF PRESENTATION
The
accompanying condensed consolidated financial statements of Capital
Financial Holdings, Inc., a North Dakota corporation, and its
subsidiaries Capital Financial Services, Inc. (“CFS”)
and Capital Natural Resources, Inc. (“CNR”)
(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, 2016, of Capital Financial Holdings, Inc., as filed
with the SEC. The condensed consolidated balance sheet at December
31, 2016, 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 nine months ended September 30, 2017, are not necessarily
indicative of operating results for the entire year.
Oil and Gas Properties
CNR follows the full cost method of accounting for crude oil and
natural gas operations whereby all costs related to the exploration
and development of crude oil and natural gas properties are
capitalized into a single cost center (“full cost
pool”). Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on
non-producing properties, costs of drilling directly related to
acquisition, and exploration activities.
Capitalized costs are depleted and amortized on the
unit-of-production method based on the estimated gross proved
reserves as determined by independent petroleum
engineers. The costs of unproved properties are withheld
from the depletion base until such time as they are either
developed or abandoned. When proved reserves are
assigned or the property is considered to be impaired, the cost of
the property or the amount of the impairment is added to costs
subject to depletion and full cost ceiling
calculations. For the nine months ended September 30,
2017, depletion expense was zero.
CNR held leasehold interests on acreage located in Gonzalas and
Taylor County, Texas, Lincoln County, Colorado and Divide and
Williams County, North Dakota. Proceeds from property sales will
generally be credited to the full cost pool with no gain or loss
recognized, unless such a sale would significantly alter the
relationship between capitalized costs and the proved reserves
attributable to these costs. In the first quarter
of 2017, these assets were sold for $66,200.
The Company assesses all items classified as unproved property on
an annual basis, or if certain circumstances exist, more
frequently, for possible impairment or reduction in
value. In the first quarter of 2017, non-producing and
unproved properties in Lincoln County, Colorado and Divide and
Williams County, North Dakota held by the Company were disposed of
in transfers deemed effective as of December 31, 2016 by assignment
documents in accordance with established practice in the oil and
gas industry.
Oil and Gas Revenue
The
Company recognizes oil and gas revenue for only its ownership
percentage of total production under the entitlement method. There
was no imbalance as of September 30, 2017.
Asset Retirement Obligations
Asset retirement obligation is included in other noncurrent
liabilities and relates to future costs associated with the
plugging and abandonment of crude oil and natural gas wells,
removal of equipment and facilities from leased acreage and
returning the land to its original condition. Estimates
are based on estimated remaining lives of those wells based on
reserve estimates, external estimates to plug and abandon the wells
in the future, inflation, credit adjusted discount rates and
federal and state regulatory requirements. The liability
is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related
asset. As of September 30, 2017, asset retirement
obligations were zero and for the nine months ended September 30,
2017 accretion expense was zero.
As of
December 31, 2016, the natural resource segment met the definition
of discontinued operations.
8
NOTE 2 – ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET
EFFECTIVE
A
summary of our significant accounting policies is included in Note
1 of our 2016 Form 10-K filed on March 30, 2017.
ASU
2014-15 —Presentation of
Financial Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern. The amendment requires that in
connection with preparing financial statements for each annual and
interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the
aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the
date that the financial statements are issued. The Company is
currently evaluating the impact of its pending adoption of ASU
2014-15.
ASU
2016-02 – Leases (Topic
842): - The amendments in this update supersede nearly all
existing lease guidance under GAAP. The amendment requires the
recognition of lease assets and lease liabilities on the balance
sheet by lessees for those leases currently classified as operating
leases. Qualitative and quantitative disclosures are required. This
update is effective for fiscal years beginning after December 15,
2018 including interim periods within those fiscal years. Early
application is permitted. Entities are required to apply the
amendments at the beginning of the earliest period presented using
a modified retrospective approach. The Company is currently
evaluating the impact of its pending adoption of ASU
2016-02.
NOTE 3 – BUSINESS VENTURES
On June
9, 2014, the Company launched a new wholly-owned operating
subsidiary, Capital Natural Resources, Inc., by acquiring 1,000,000
shares, .001 par value common stock of Capital Natural Resources,
Inc. for the amount of $100,000. Capital Natural Resources, Inc.
will seek opportunities related to natural resources in the United
States, including petroleum, natural gas and/or other minerals,
water resources and land.
On
April 1, 2015, CNR obtained a non-operating working interest in an
oil and gas property consisting of three oil and gas leases in
Taylor County, Texas for a purchase price of $90,000 paid in
cash.
On
December 1, 2015, CNR purchased a non-operating working interest in
the Kifer Rozella 1, producing oil well, located in the County of
Gonzales, state of Texas. The purchase price of $100,000 for
CNR’s interest was paid by $50,000 by a promissory note and
deed of trust carried by the Seller, Origin Production Company,
Inc. Said promissory note has an annual interest rate of 10% per
annum and is payable in monthly installment of approximately $1,062
beginning January 1, 2016 with final maturity on December 1, 2020.
On February 1, 2016, the Company paid off the promissory note in
the amount of approximately $50,847 bringing the balance of the
note to zero. Total interest paid on the promissory note was
approximately $847.
On July
28, 2015, CNR acquired five year oil and gas leases located in
Williams County, North Dakota and two tracts located in Divide
County, North Dakota for a combined acquisition cost of $7,676,
including lease bonus and prepaid annual rentals. The oil and gas
leases were obtained from the State of North Dakota Department of
Trust Lands. The leases grant the right to conduct oil and gas
operations and extract oil and gas from the property with payment
of royalty to the lessor of 3/16 of oil and gas produced. The
leases were to expire August 3, 2020 unless held by production,
meaning oil and gas is being produced from the
properties.
On
August 20, 2015, CNR acquired a five year oil and gas lease located
in Lincoln County, Colorado at an initial acquisition cost of
$1,652 including the first annual rental payment of $1,600. The oil
and gas lease was obtained from the Colorado State Board of Land
Commissioners. The lease grants the right to conduct oil and gas
operations and extract oil and gas from the property with payment
of royalty to the lessor of 1/6 of oil and gas produced. The lease
was to expire August 20, 2020 unless held by production, meaning
oil and gas is being produced from the property.
The oil
and gas leases in North Dakota and Colorado were non-producing
properties and non-operating leases.
The
purchase allocation for all four CNR oil and gas lease transactions
was based on the estimated fair value of the assets
acquired.
On May
19, 2015, CNR acquired interests in coal rights located in Kanawha
County, West Virginia with 1,483,451 recoverable tons for a
purchase price of $1,275 paid in cash.
On June
11, 2015, CNR acquired mineral, water rights and surface interests
in Hudspeth County, Texas for a purchase price of $83,350 paid in
cash.
In the
first quarter of 2017, all of the natural resource assets described
above were disposed of by CNR. As of December 31, 2016, the natural
resource subsidiary, Capital Natural Resources, Inc., met the
definition of discontinued operations.
9
NOTE 4 – DISCONTINUED
OPERATIONS
On
March 2 and 3, 2017 the Company sold the assets in its natural
resource segment, Capital Natural Resources, Inc. The sale included
all of the leases and coal, mineral, water and surface
interests.
The
summarized balance sheet for discontinued operations is presented
below:
|
2017
|
2016
|
Current
Assets
|
|
|
Accounts
receivable
|
$-
|
5,626
|
Current Long term
receivable
|
|
-
|
Prepaids
|
-
|
749
|
Total current
assets
|
$-
|
6,375
|
|
|
|
Property
and Equipment
|
|
|
Oil and natural gas
properties, Full Cost Method of Accounting
|
$-
|
61,829
|
Less accumulated
depletion
|
-
|
(29,354)
|
Equipment
|
-
|
4,690
|
Less accumulated
depreciation
|
-
|
(816)
|
Other property
holdings
|
-
|
36,267
|
Net property and
equipment
|
$-
|
72,616
|
|
|
|
|
|
|
Total
Assets
|
$-
|
78,991
|
|
|
|
Current
liabilities
|
|
|
Accounts
payable
|
$-
|
7,434
|
Total current
liabilities
|
$-
|
7,434
|
|
|
|
Noncurrent
liabilities
|
|
|
Asset retirement
obligation
|
$-
|
2,907
|
Total noncurrent
liabilities
|
$-
|
2,907
|
|
|
|
Stockholder’s
Equity
|
|
|
Common
Stock
|
$-
|
300,400
|
Accumulated
deficit
|
-
|
(231,750)
|
Total
stockholder’s equity
|
$-
|
68,650
|
|
|
|
Total
liabilities and stockholder’s equity
|
$-
|
78,991
|
The
results of operations of Capital Natural Resources, Inc. are
included in the Company’s Consolidated Statements of
Operations as discontinued operations.
The
company recorded impairment on the assets held for sale as of
December 31, 2016. The proceeds of the sale, after giving effect to
any working capital adjustments, will be allocated among the
holding company.
10
The
summarized income for the three months ended September 30, 2017 and
September 30, 2016 from discontinued operations is presented
below:
|
2017
|
2016
|
Operating
Revenues
|
|
|
Oil lease
income
|
$-
|
13,336
|
Total operating
revenue
|
$-
|
13,336
|
|
|
|
Operating
Expenses
|
|
|
Compensation and
benefits
|
$-
|
18,132
|
Lease operating
expense
|
-
|
20,500
|
General and
administrative
|
-
|
3,583
|
Depletion
|
-
|
3,301
|
Depreciation
|
-
|
167
|
Loss from
discontinued operations
|
(22,315)
|
|
Total operating
expenses
|
$(22,315)
|
45,683
|
|
|
|
Operating
loss
|
$(22,315)
|
(32,347)
|
|
|
|
|
|
|
Loss
of discontinued operations before income tax expense
|
$(22,315)
|
(32,347)
|
|
|
|
Income
tax benefit
|
$-
|
11,553
|
|
|
|
Net
loss
|
$(22,315)
|
(20,794)
|
The
summarized income for the nine months ended September 30, 2017 and
September 30, 2016 from discontinued operations is presented
below:
|
2017
|
2016
|
Operating
Revenues
|
|
|
Oil lease
income
|
$-
|
46,472
|
Total operating
revenue
|
$-
|
46,472
|
|
|
|
Operating
Expenses
|
|
|
Compensation and
benefits
|
$-
|
51,067
|
Lease operating
expense
|
-
|
49,139
|
General and
administrative
|
-
|
6,098
|
Depletion
|
-
|
13,743
|
Depreciation
|
-
|
448
|
Loss from
discontinued operations
|
(22,315)
|
|
Total operating
expenses
|
$(22,315)
|
120,495
|
|
|
|
Operating
loss
|
$(22,315)
|
(74,023)
|
|
|
|
Other
income (expenses)
|
|
|
Interest
expense
|
$-
|
(847)
|
Interest
income
|
-
|
16,206
|
Total other
income
|
$-
|
15,359
|
|
|
|
Loss
of discontinued operations before income tax expense
|
$(22,315)
|
(58,664)
|
|
|
|
Income
tax benefit
|
$-
|
22,996
|
|
|
|
Net
loss
|
$(22,315)
|
(35,668)
|
11
The
Company did not reclassify its Statements of Cash Flows to reflect
the various discontinued operations. Cash flows from 2017 are
combined with the cash flows from continuing operations within each
of the categories presented.
NOTE 5—BARON NOTES
RECEIVABLE
On June
11, 2014, June 27, 2014, and July 22, 2014, Baron Energy, Inc.,
issued promissory notes receivable to Capital Natural Resources,
Inc. (the “note holder”) in the amounts of $85,000,
$40,000 and $375,000 respectively. The three notes carry an
interest rate of 15% per annum, payable monthly, and mature on June
12, 2016, June 28, 2016 and July 23, 2016 respectively. The
Chairman of the Company has acted, and continues to act, as counsel
to the Company while his affiliated law firm has acted and
continues to act as counsel to Baron Energy, Inc. Moreover, the
Chairman also serves on the management team of the subsidiary that
holds the Baron Energy Notes. This related party transaction was
reviewed by the Company. At maturity, the notes are convertible at
the option of the note holder into specified non-operating minority
working interests in Baron Energy, Inc.’s oil and gas
operations in Frio County, Texas. As additional compensation to the
note holder, at the maturity of the notes, regardless of whether
the note holder elects to convert the principal of the notes to
non-operating minority working interests, the note holder will be
assigned specified non-operating minority working interests in
Baron Energy, Inc.’s oil and gas operations in Frio County,
Texas. The note holder also has the option to receive additional
working interests if it extends the maturity dates of the notes.
Interest income earned on the notes was $82,642. On March 21, 2016,
the Baron Notes were paid in full in the amount of $500,000
together with accrued interest.
NOTE 6 – LINE OF CREDIT
On
September 12, 2016, the Company signed renewal loan documents for
the line of credit with American Bank Center in the amount of
$500,000. The line of credit had a variable interest rate of 1.509
percent above Wall Street Journal U.S. Prime Rate which was 4.25%
as of September 30, 2017. The credit line expired on September 12,
2017 without being used. As of September 30, 2017, the Company had
zero outstanding and zero interest expense against the line of
credit. There were no financial covenants associated with the line
of credit.
NOTE 7 - 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 nine months
ended September 30, 2017 and 2016. Changes are due to the stock
buyback and reverse stock split.
Option
activity for the twelve months ended December 31, 2016 and the nine
months ended September 30, 2017 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, 2016
|
207
|
$8,692
|
$4,435
|
$-
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Canceled
|
(39)
|
-
|
-
|
|
Outstanding on
December 31, 2016
|
168
|
$5,000
|
$3,844
|
$-
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Canceled
|
(1)
|
-
|
-
|
|
Outstanding on
September 30, 2017
|
167
|
$4,538
|
$4,190
|
$-
|
Exercisable
options totaled 168 at December 31, 2016 and totaled 167 at
September 30, 2017.
NOTE 8 – INCOME TAXES
Deferred
taxes arise because of different tax treatment between financial
statement accounting and tax accounting, known as “temporary
differences.” The Company records the tax effect of these
temporary differences as “deferred tax assets”
(generally items that can be used as a tax deduction or credit in
future periods) and “deferred tax liabilities”
(generally items for which the Company has received a tax deduction
and has not yet been recorded in the consolidated statement of
operations).
12
Management
reviews and adjusts those estimates annually based upon the most
current information available. However, because the recoverability
of deferred taxes is directly dependent upon the future operating
results of the Company, actual recoverability of deferred taxes may
differ materially from management’s estimates.
Due to
stock options forfeited, the deferred tax assets associated with
stock compensation valued under the Black Scholes model were
reduced. As of September 30, 2017, an accumulated amount of
approximately $434,610 has been recorded as tax expense since the
beginning of stock options being forfeited. There are no additional
stock options subject to forfeiture.
The
effective tax rates for the nine months ended September 30,
2017 were different from the statutory rate primarily due to the
reduction of the deferred tax assets related to stock
compensation.
At
September 30, 2017, the Company has approximately $65,084 in
federal net operation loss carry forward which begins to expire in
2036.
NOTE 9 - 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 September 30, 2017
|
Three Months
Ended September 30, 2016
|
||||
|
Numerator
|
Denominator
|
Per Share
Amount
|
Numerator
|
Denominator
|
Per Share
Amount
|
Net (Loss) Income
of continuing operations
|
$48,634
|
|
|
65,534
|
|
|
Less: Preferred
Stock Dividends
|
|
|
|
|
|
|
Income of
Continuing Operations Available to Common Shareholders –
Basic and diluted Earnings per Share
|
$48,634
|
1,241
|
39
|
65,534
|
1,241
|
$53
|
|
Nine Months
Ended September 30, 2017
|
Nine Months
Ended September 30, 2016
|
||||
|
Numerator
|
Denominator
|
Per Share
Amount
|
Numerator
|
Denominator
|
Per Share
Amount
|
Net (Loss) Income
of continuing operations
|
$(41,366)
|
|
|
(31,232)
|
|
|
Less: Preferred
Stock Dividends
|
|
|
|
|
|
|
Income of
Continuing Operations Available to Common Shareholders –
Basic and diluted Earnings per Share
|
$(41,366)
|
1,241
|
(33)
|
(31,232)
|
1,241
|
$(25)
|
Options
and warrants to purchase 377 common shares at exercise prices
between $3,500 and $14,300 were outstanding at September 30, 2017,
but were not included in the computation of diluted earnings per
share for the quarter ending September 30, 2017 and September 30,
2016, because their effect was anti-dilutive.
NOTE 10 – RULE 4110
(c)(1)
The
Company operates under the provision of FINRA Rule 4410 (c)(1) and,
accordingly, the member is restricted from withdrawing equity
capital for a period of one year from the date such equity capital
is contributed, unless otherwise permitted by FINRA in writing.
Subject to the requirements of paragraph (c)(2) of this Rule, this
paragraph shall not preclude a member from withdrawing profits
earned. On December 28, 2016, the board of the holding company of
Capital Financial Services, Inc. approved capital contribution in
the amount of $65,000 to be transferred to the
Company.
13
NOTE 11 – REGULATORY MATTERS
The
broker dealer (“BD”) segment of Capital Financial
Services, Inc. is subject to periodic examinations by its
regulators, the Financial Industry Regulatory Authority
(“FINRA”) and the Securities Exchange Commission
(“SEC”).
During
2016, the SEC conducted a routine examination of the CFS BD.
At the conclusion of its examination, the SEC issued an Examination
Report with certain findings, asking the Company’s regulated
entity to improve its anti-money laundering program, record
additional information on the Company’s transaction blotters,
and record transactions on the Company’s transaction blotters
that are performed at other companies. On November 28, 2016 the
broker dealer provided its last response to the routine examination
report.
On May
19, 2017, FINRA, the regulatory authority for the Company’s
subsidiary Capital Financial Services, Inc. (the broker dealer
subsidiary) issued its post examination report for the FINRA
examination of the broker dealer subsidiary which began in April
2017. In that report FINRA noted exceptions in its risk assessment
of the firm in the following areas: 1) the need for an adequate
anti-money laundering program to detect and report suspicious
activity, 2) three instances of procedural inadequacy regarding due
diligence or suitability with respect to REIT offerings
participated in by the broker dealer subsidiary and 3) one instance
of inadequate disclosure to a customer of variable annuity fees by
a registered representative of the broker dealer subsidiary. The
broker dealer subsidiary is working to resolve the forgoing
exception issues with FINRA as well as to make improvements in its
procedural processes.
NOTE 12 – BUILDING
PURCHASE
On November 16, 2016, the Company closed on the acquisition of a
commercial office building and associated property (the
“Office Building”) located at 1821 Burdick Expressway
West, Minot, North Dakota from Evanmark Enterprises, LLC, an entity
unrelated to the Company. The contract purchase price for the
Office Building was $975,000, exclusive of closing costs of $9,091,
with all built-in fixtures and other furniture, fixtures and
equipment in the building remaining with the property. The Company
paid $509,091 at closing toward the purchase price of the Office
Building with the remaining $475,000 of the purchase price financed
by a commercial real estate loan from American Bank Center
(“American Bank”) in the principal amount of $675,000,
$475,000 of which was applied to the purchase price of the Office
Building and $200,000 of which was utilized for renovations to the
building. The loan carries a fixed interest rate of 4.879% per
annum for five (5) years with the rate to be adjusted at the end of
the five (5) year period based on the Wall Street Journal Prime
interest rate plus 1.759%. American Bank has a first priority
mortgage on the Office Building. On April 7, 2017 the Company was
notified by the City of Minot that the address on this property was
changing from 1801 Burdick Expressway W to 1821 Burdick Expressway
W. Effective in June 2017, the Company’s broker-dealer
subsidiary began paying rent to the Company of $8,500 per month on
a month-to-month basis for a portion of the office facility owned
by the Company. The broker-dealer utilizes approximately 5,817
square feet of office space for its operations out of the 6,188
square feet in the office facility utilized in the Company’s
operations. Rent Income and Rent Expense related to this
Company/Subsidiary arrangement are eliminated in the consolidated
financial statements. Approximately 4,152 square feet in a separate
section of the building remains vacant and is available as on
office rental unit or expansion.
NOTE 13 – SEGMENT REPORTING
The
Company organizes its current business units into three reportable
segments: broker dealer services, natural resources (discontinued
operation as of December 31, 2016), and holding company. The
broker-dealer services segment distributes securities and insurance
products to retail investors through a network of registered
representatives through its wholly-owned subsidiary, Capital
Financial Services, Inc. (“CFS”), a Wisconsin
corporation. The natural resources segment sought opportunities
related to natural resources in the United States, including
petroleum, natural gas and/or other minerals, water resources and
land through its wholly-owned subsidiary, Capital Natural
Resources, Inc. (“CNR”), a Colorado corporation. As of
December 31, 2016, this operation met the definition of
discontinued operation. The holding company encompasses cost
associated with business development and acquisitions, dispositions
of subsidiary entities and results of discontinued operations,
dividend income and recognized gains or losses.
The
Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies.
The
historical results of Capital Natural Resources, Inc. have been
reflected as discontinued operations.
14
|
Holding
|
Broker-Dealer
|
|
As
of, and for the three months ended:
|
Company
|
Services
|
Total
|
|
|
|
|
September 30, 2017
|
|
|
|
Commissions
and fee income
|
-
|
3,645,683
|
3,645,683
|
Other
fee income
|
-
|
102,580
|
102,580
|
Other
income
|
166
|
67,123
|
67,289
|
Interest
expense
|
(8,453)
|
-
|
(8,453)
|
Depreciation
|
(1,464)
|
10,111
|
8,647
|
Income
before income tax expense
|
49,040
|
50,099
|
99,139
|
Income
tax expense
|
(31,572)
|
(18,933)
|
(50,505)
|
Net
income (loss) of continued operations
|
17,468
|
31,166
|
48,634
|
Segment
assets of continued operations
|
1,835,630
|
3,045,393
|
4,881,023
|
|
|
|
|
|
Holding
|
Broker-Dealer
|
|
As
of, and for the three months ended:
|
Company
|
Services
|
Total
|
|
|
|
|
September 30, 2016
|
|
|
|
Commissions
and fee income
|
-
|
4,600,219
|
4,600,219
|
Other
fee income
|
-
|
112,841
|
112,841
|
Other
income
|
16
|
27,064
|
27,080
|
Depreciation
|
996
|
11,192
|
12,188
|
Income
(loss) before income tax benefit (expense)
|
(128,262)
|
222,541
|
94,279
|
Income
tax benefit (expense)
|
44,379
|
(73,124)
|
(28,745)
|
Net
income (loss) of continued operations
|
(83,883)
|
149,417
|
65,534
|
Segment
assets of continued operations
|
1,388,992
|
3,386,800
|
4,775,792
|
15
|
Holding
|
Broker-Dealer
|
|
As
of, and for the nine months ended:
|
Company
|
Services
|
Total
|
|
|
|
|
September 30, 2017
|
|
|
|
Commissions
and fee income
|
-
|
11,116,544
|
11,116,544
|
Other
fee income
|
-
|
312,299
|
312,299
|
Other
income
|
260
|
71,710
|
71,970
|
Interest
expense
|
20,714
|
-
|
20,714
|
Depreciation
|
13,061
|
30,993
|
44,054
|
Income
(loss) before income tax benefit (expense)
|
(273,778)
|
241,738
|
(32,040)
|
Income
tax benefit (expense)
|
85,433
|
(94,759)
|
(9,326)
|
Net
income (loss) of continued operations
|
(188,345)
|
146,979
|
(41,366)
|
Segment
assets of continued operations
|
1,835,630
|
3,045,393
|
4,881,023
|
|
|
|
|
|
Holding
|
Broker-Dealer
|
|
As
of, and for the nine months ended:
|
Company
|
Services
|
Total
|
|
|
|
|
September 30, 2016
|
|
|
|
Commissions
and fee income
|
-
|
13,020,135
|
13,020,135
|
Other
fee income
|
-
|
232,275
|
232,275
|
Other
income
|
(3,480)
|
29,680
|
26,200
|
Depreciation
|
2,218
|
33,533
|
35,751
|
Income
(loss) before income tax benefit (expense)
|
(318,520)
|
331,383
|
12,863
|
Income
tax benefit (expense)
|
85,807
|
(129,902)
|
(44,095)
|
Net
income (loss) of continued operations
|
(232,713)
|
201,481
|
(31,232)
|
Segment
assets of continued operations
|
1,388,992
|
3,386,800
|
4,775,792
|
16
NOTE 14 – LEGAL PROCEEDINGS
The
Company operates in a legal and regulatory environment that exposes
it to potentially significant litigation risks. Issuers of certain
alternative products sold by the Company are in Bankruptcy or may
have other financial difficulties. 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 legal and/or arbitration proceedings. These proceedings
include customer suits, investments alleged to be unsuitable, and
bankruptcies and other issues brought by claimants. The Company
vigorously contests the allegations of the 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 range of loss
that may result from the outcome of these cases; 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. As of September 30, 2017, the Company is a defendant in
five on-going suits or arbitrations as discussed above. In April
2017, the Company issued payment of $62,673 on a pending litigation
matter as a deposit with the court pursuant to a court order and
recorded a $63,000 accrual for the matter as of December 31,
2016. On August 22, 2017 the matter was settled by payment of
an additional $60,000.
On April 5, 2011, several broker-dealers and their
principals/officers, including the Company and John Carlson, who
was then President and Chief Compliance Officer of the Company,
filed a lawsuit in the Superior Court of California for Orange
County against Mayer Hoffman McCann, P.C. (“Mayer
Hoffman”) captioned Signature Financial Group, Inc., et al,
(“Signature”) v. Mayer Hoffman McCann, P.C., et al. The
lawsuit arose out of reviews of the financial statements of Medical
Capital Holdings, Inc. (“Medical Capital”) by Mayer
Hoffman. In June 2009, Medical Capital was sued by the U.S.
Securities and Exchange Commission (“SEC” or
“Commission”), a finding was made that Medical Capital
was conducting a “Ponzi scheme” and a receiver was
appointed to liquidate Medical Capital. The plaintiffs in the
Signature lawsuit are broker-dealers and principals of
broker-dealers that sold Medical Capital investments to their
clients. These plaintiffs sought to recover damages from Mayer
Hoffman for the losses and expenses they incurred as a result of
the Medical Capital financial deceptions and resulting expenses and
losses to the plaintiffs. Specific claims asserted and relief
requested included fraud-intentional misrepresentation of
fact/concealment of fact; negligent misrepresentation; equitable
indemnity and declaratory relief. On September 23, 2014, the
Plaintiffs entered into a Confidential Settlement and Mutual
Release Agreement (the “Settlement Agreement”) with
Mayer Hoffman and entities affiliated with Mayer Hoffman to settle
the Plaintiffs’ claims against Mayer Hoffman and all
affiliated parties of Mayer Hoffman. The parties acknowledged that
as between the Company and Mr. Carlson, one hundred percent (100%)
of the settlement proceeds paid to them was for the alleged damage
or harm to goodwill (and loss of goodwill). The settlement proceeds
were received on December 4, 2014 and charged against goodwill
carried on the consolidated financial statements of Capital
Financial Holdings, Inc., the parent of the Company. In a
matter related to the Settlement Agreement, on or about October 6,
2014, the Company filed a lawsuit seeking declaratory judgment
against its former errors and omission insurance carrier - Arch
Specialty Insurance Company (“Arch”) - in the Circuit
Court of Wisconsin for Milwaukee County (Capital Financial
Services, Inc. v. Arch Specialty Insurance Company). On or about
November 24, 2014, Arch filed counterclaims against the Company.
The actions were for declaratory relief in connection with a
dispute over whether Arch was entitled to any portion of the
settlement proceeds that the Company received in exchange for
dismissing the lawsuit with Mayer Hoffman. On approximately
September 14, 2016 the Company and Arch agreed to settle the
matter, on October 14, 2016 a Stipulation and Order for Dismissal
was filed with the Court and on October 24, 2016 the Court entered
an order dismissing the case, including all claims, counterclaims
and third party claims with prejudice with no costs assessed to any
party.
NOTE 15 – SUBSEQUENT
EVENTS
None.
17
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
segment.
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 1821 Burdick Expressway W, Minot, North Dakota 58701. As
of September 30, 2017, the Company had 19 full-time employees
consisting of officers, principals, data processing, compliance,
accounting, and clerical support staff.
The
Company organized its business units into three reportable
segments: broker dealer services, natural resources (discontinued
operation as of December 31, 2016), and holding company. The
broker-dealer services segment distributes securities and insurance
products to retail investors through a network of registered
representatives through its wholly-owned subsidiary, Capital
Financial Services, Inc. (“CFS”), a Wisconsin
corporation. The natural resources segment sought opportunities
related to natural resources in the United States, including
petroleum, natural gas and/or other minerals, water resources and
land through its wholly-owned subsidiary, Capital Natural
Resources, Inc. (“CNR”), a Colorado corporation. As of
December 31, 2016, this operation met the definition of
discontinued operations. The holding company encompasses cost
associated with business development and acquisitions, dispositions
of subsidiary entities and results of discontinued operations,
dividend income and recognized gains or losses.
The
Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies.
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
segment.
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 as of September 30, 2017
supported approximately 152 investment representatives and
investment advisors.
RESULTS OF CONTINUED OPERATIONS
|
Three Months
Ended
|
Nine Months
Ended
|
||
|
September
30,
|
September
30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Net income
(loss)
|
48,634
|
65,534
|
(41,366)
|
(31,232)
|
Income (loss) per
share:
|
|
|
|
|
Basic and
diluted
|
39
|
53
|
(33)
|
(25)
|
The
Company reported a net income for the three months ended September
30, 2017, of $48,634, compared to a net income of $65,534 for the
same quarter in 2016. The Company reported a net loss for the nine
months ended September 30, 2017, of $41,366 compared to a net loss
of $31,232 for the same quarter in 2016.The decrease in net income
for the three months ended September 30, 2017 compared to 2016 is
due primarily to reduce revenues related to the broker dealer
segment. The increase in net loss for the nine months ended
September 30, 2017 compared to net loss in the same period in 2016
is primarily due to increased compensation and benefits and general
and administrative expenses.
Operating revenues
Total
operating revenues for the three months ended September 30, 2017
were $3,748,263, a decrease of 20% from $4,713,060 for the same
period ended September 30, 2016. Total operating revenues for the
nine months ended September 30, 2017 were $11,428,843, a decrease
of 14% from $13,252,410 for the same period ended September 30,
2016. The changes for the three and nine month period net revenue
categories are listed below.
18
Fee income
Fee
income for the three months ended September 30, 2017 was $431,944,
an increase of 48% from $292,645 for the same period ended
September 30, 2016. Fee income for the nine months ended September
30, 2017 was $1,144,548, an increase of 29% from $888,734 for the
same period ended September 30, 2016. The increase is due to an
increase in fee income received by the broker dealer segment as a
result of higher values of client assets under
management.
The
Company earns investment advisory fees in connection with the
broker dealer’s 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
approximately 12% and 10% of the Company’s consolidated
revenues for the three and nine months ended September 30, 2017
respectively and approximately 6% and 7% of the Company’s
consolidated revenues for the three and nine months ended September
30, 2016 respectively. There is no fee income attributable to the
other segments.
Commission income
Commission
income includes broker dealer segment commissions. The Company pays
the registered representatives a percentage of this income as
commission expense and retains the balance. Commission income for
the three months ended September 30, 2017 was $3,213,739, a
decrease of 25% from $4,307,574 for the same period ended September
30, 2016. Commission income for the nine months ended September 30,
2017 was $9,971,996, a decrease of 18% from $12,131,401 for the
same period ended September 30, 2016. The decreases were due
primarily to the decrease in commissions received by the broker
dealer segment due to regulatory and market conditions. Commission
revenues constituted approximately 86% and 87% of the
Company’s consolidated revenues for the three and nine months
ended September 30, 2017 respectively and approximately 91% and 92%
of the Company’s consolidated revenues for the three and nine
months ended September 30, 2016 respectively. There is no
commission income attributable to the other segments.
Other fee income
Other
operating fee income for the three months ended September 30, 2017
was $102,580, a decrease of 9% from $112,841 for the same period
ended September 30, 2016. Other operating fee income for the nine
months ended September 30, 2017 was $312,299, an increase of 34%
from $232,275 for the same period ended September 30, 2016. The
decreases and increases were primarily due to increases and
decreases in the income received related to alternative investment
products. There is no other operating fee income attributable to
the holding segments. Other operating fee income constituted
approximately 3% of the Company’s consolidated revenues for
the three and nine months ended September 30, 2017 and
approximately 2% of the Company’s consolidated revenues for
the three and nine months ended September 30, 2016.
Operating expenses
Total
operating expenses for the three months ended September 30, 2017
were $3,694,368, a decrease of 20% from $4,645,861 for the three
months ended September 30, 2016. Total operating expenses for the
nine months ended September 30, 2017 were $11,507,047, a decrease
of 13% from $13,264,800 for the nine months ended September 30,
2016. The decreases resulted from the net decreases in the expense
categories described below.
Compensation and benefits
Consolidated
compensation and benefits expense for the three months ended
September 30, 2017 was $344,674, a slight decrease from $345,020
for the same period ended September 30, 2016. Consolidated
compensation and benefits expense for the nine months ended
September 30, 2017 was $1,102,698, an increase of 6% from
$1,044,677 for the same period ended September 30,
2016.
Compensation
and benefits for the holding segment for the three months ended
September 30, 2017 was a credit of $60,061, an increase of 592%
from a credit of $8,682 for the same period ended September 30,
2016. Compensation and benefits for the holding segment for the
nine months ended September 30, 2017 was $14,012, a decrease of 80%
from an expense of $68,955 for the same period ended September 30,
2016. The increase and decrease is primarily due to changes in
employee compensation in the form of paid time off was allocated to
this segment.
Compensation
and benefits for the broker dealer segment for the three months
ended September 30, 2017 was $404,735, a 14% increase from $353,702
for the same period ended September 30, 2016. Compensation and
benefits for the broker dealer segment for the nine months ended
September 30, 2017 was $1,088,686, a 12% increase from $975,723 for
the same period ended September 30, 2016. The increases were due to
the recording of paid time off benefits allocated to this
segment.
19
Commission expense
Commission
expense for the three months ended September 30, 2017 was
$3,028,630, a decrease of 24% from $3,978,901 for the same period
ended September 30, 2016. Commission expense for the nine months
ended September 30, 2017 was $9,373,638, a decrease of 18% from
$11,387,667 for the same period ended September 30, 2016. The
decrease is a result of the lower revenues received and to lower
commissions paid to independent representatives in the broker
dealer segment during the period ended September 30, 2017. There is
no commission expense attributable to the other
segments.
General and administrative expense
Consolidated
general and administrative expenses for the three months ended
September 30, 2017 were $320,917, an increase of 4% from $309,752
for the same period ended September 30, 2016. Consolidated general
and administrative expenses for the nine months ended September 30,
2017 were $986,657, an increase of 24% from $796,705 for the same
period ended September 30, 2016. The increase resulted from the net
increases in the expense categories described below.
General
and administrative expenses for the holding segment for the three
months ended September 30, 2017 were $28,800, a 79% decrease from
$135,964 for the same period ended September 30, 2016. The
decreases were primarily due to reduced legal expenses over the
period. General and administrative expenses for the holding segment
for the nine months ended September 30, 2017 were $259,354, a 7%
increase from $242,920 for the same period ended September 30,
2016. The increases were from an increase in expenses tied to
outside services, legal expenses and utility expenses related to
the new office building.
General
and administrative expenses for the broker dealer segment for the
three months ended September 30, 2017 were $317,617, an increase of
83% from $173,788 for the same period ended September 30, 2016.
General and administrative expenses for the broker dealer segment
for the nine months ended September 30, 2017 were $761,304, an
increase of 27% from $553,784 for the same period ended September
30, 2016. The increases are from increases in rent, legal, outside
services related to compliance and recruiting
expenses.
For the
three and nine month periods ended September 30, 2017 there was
$25,500 and $34,000 respectively of general and administrative
expenses related to the Company/Subsidiary arrangement for rent
expense that were eliminated on the consolidated financial
statements.
Depreciation
Consolidated
depreciation expense for the three months ended September 30, 2017
was $8,647, a decrease of 29% from $12,188 for the same period
ended September 30, 2016. Consolidated depreciation expense for the
nine months ended September 30, 2017 was $44,054, an increase of
23% from $35,751 for the same period ended September 30, 2016.
Decreases and increases resulted from the net changes in the
expense categories described below.
Depreciation
for the holding segment for the three months ended September 30,
2017 was a benefit of $1,464, a decrease of 247% from an expense of
$996 for the same period ended September 30, 2016. The decrease in
depreciation was due to fewer depreciable assets as a result of the
disposal of assets during the three months ended September 30,
2017. Depreciation expense for the holding segment for the nine
months ended September 30, 2017 was $13,061, an increase of 489%
from $2,218 for the same period ended September 30, 2016. The
increases in depreciation expenses were due to additional fixed
assets purchased related to the new office building.
Depreciation
expense for the broker dealer segment for the three months ended
September 30, 2017 was $10,111, a decrease of 10% from $11,192 for
the same period ended September 30, 2016. Depreciation expense for
the broker dealer segment for the nine months ended September 30,
2017 was $30,993, a decrease of 8% from $33,533 for the same period
ended September 30, 2016. The decreases are due to lower
depreciable assets in 2017 than in 2016.
Interest expense
Interest
expense for the three months ended September 30, 2017 was $8,453,
an increase of 100% from zero for the same period ended September
30, 2016. Interest expense for the nine months ended September 30,
2017 was $20,714, an increase of 2,087% from $947 for the same
period ended September 30, 2016. The increase is due to the
interest payments made on the building mortgage during 2017 by the
holding segment. There were no interest payments made on the
building mortgage in the three and nine month periods ended
September 30, 2016. There is no interest expense attributable to
the other segments.
20
Liquidity and capital resources
Net
cash provided by operating activities was $243,659 for the nine
months ended September 30, 2017, as compared to net cash provided
by operating activities of $233,089 during the nine months ended
September 30, 2016. The difference corresponds to operating
activities attributed to discontinued operations, commissions
payable and the timing of payment/reimbursement on the E&O
insurance within the broker dealer segment and income
taxes.
Net
cash used in investing activities was $133,066 for the nine months
ended September 30, 2017, as compared to net cash provided by
investing activities of $477,561 for the nine months ended
September 30, 2016. The primary difference corresponds with
repayment of the Baron notes receivable in early 2016, improvements
made on the recently purchased office space and the deductions to
oil and gas properties attributed to discontinued operations in
2017.
Net
cash provided by financing activities was 200,000 for the nine
months ended September 30, 2017, as compared to net cash used in
financing activities of $50,000 for the nine months ended September
30, 2016. The primary difference corresponds with the proceeds of
long-term borrowings for the improvements made on the recently
purchased office space.
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 of shares of the Company’s common
stock, and debt service.
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
commodity pricing due to natural resource investments;
●
Changes in
accounting rules, policies, practices, and procedures which may
adversely affect the business; and
●
Terrorist
activities or other hostilities which may adversely affect the
general economy.
21
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, 2017, 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.
We are not currently a “listed company” under SEC rules
and are therefore not required to have a board comprised of a
majority of independent directors or separate committees comprised
of independent directors. We use the definition of
“independence” under the NASDAQ Rules, as applicable
and as may be modified or supplemented from time to time and the
interpretations thereunder, to determine if the members of our
Board are independent. In making this determination, our
Board considers, among other things, transactions and relationships
between each director and his immediate family and us, including
those reported in its Annual Report under the caption
“Certain Relationships and Related
Transactions.” The purpose of this review is to
determine whether any such relationships or transactions are
material and, therefore, inconsistent with a determination that the
directors are independent. On the basis of such review
and its understanding of such relationships and transactions, our
Board has determined that none of our Board members is an
independent director.
22
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
The
information in response to this item can be found in Note 14 (Legal
Proceedings) to Financial Statements in this Report, which
information is incorporated by reference into this
item.
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
|
July
2017
|
-
|
-
|
-
|
$597,754
|
August
2017
|
-
|
-
|
-
|
$597,754
|
September
2017
|
-
|
-
|
-
|
$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
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
|
|
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
|
|
|
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
and 18 U.S.C. Section 1350
|
|
|
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
and 18 U.S.C. Section 1350
|
|
101.INS
|
|
XBRL Instance Document
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
101 CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
101 DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
101 LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
101 PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
23
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:
|
November
14, 2017
|
By /s/
Gordon Dihle
|
|
|
|
Gordon
Dihle
|
|
|
|
Chief
Executive Officer & President
(Principal
Executive Officer)
|
|
Date:
|
November
14, 2017
|
By /s/
Elizabeth Colby
|
|
|
|
Elizabeth
A. Colby
|
|
|
|
Chief
Financial Officer & Corporate Secretary
|
|
|
|
(Principal
Financial Officer)
|
|
24