Blueprint
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, 2016
OR
☐ 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.
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(Exact
name of registrant as specified in its charter)
|
North
Dakota
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45-0404061
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification
No.)
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1 Main
Street North
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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 ☑ 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, 2016, 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.
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Financial
Statements
|
|
|
|
|
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|
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Unaudited
Condensed Consolidated Balance Sheets - September 30, 2016
and December 31, 2015
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3
|
|
|
|
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|
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Unaudited
Condensed Consolidated Statements of Operations -
Three
Months Ended September 30, 2016 and 2015
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5
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|
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Unaudited
Condensed Consolidated Statements of Operations -
Nine
Months Ended September 30, 2016 and 2015
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6
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|
|
|
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|
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Unaudited
Condensed Consolidated Statements of Cash Flows -
Nine
Months Ended September 30, 2016 and 2015
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7
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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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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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15
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|
|
|
|
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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20
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Item
4.
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Controls
and Procedures
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20
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PART
II OTHER
INFORMATION
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|
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Item
1.
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Legal
Proceedings
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21
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|
|
|
|
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Item
1A.
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Risk
Factors
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21
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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21
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Item
3.
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Defaults
Upon Senior Securities
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22
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Item
4.
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Removed
and Reserved
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22
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Item
5.
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Other
Information
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22
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Item
6.
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Exhibits
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22
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|
|
|
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SIGNATURES
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23
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PART I - FINANCIAL INFORMATION
Item 1.Financial
Statements
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
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Cash
and cash equivalents
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$1,699,076
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$1,038,426
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Accounts
receivable (net of an allowance of $24,000 for 2016 and
2015)
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1,920,186
|
1,766,030
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Baron
notes interest receivable
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-
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38,420
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Prepaids
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114,247
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115,587
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|
|
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Total
current assets
|
3,733,509
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2,958,463
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PROPERTY AND EQUIPMENT
|
|
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Oil
& Natural Gas Properties, Full Cost Method of
Accounting
|
|
|
|
194,602
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194,602
|
Less
accumulated depletion
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(24,210)
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(10,467)
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Total
oil & natural gas properties
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170,392
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184,135
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|
|
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Other
property and equipment
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538,417
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517,192
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Furniture,
fixtures and equipment
|
|
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Less
accumulated depreciation
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(410,661)
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(375,675)
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Other
property holdings
|
86,277
|
86,277
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Net
property and equipment
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384,425
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411,929
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OTHER ASSETS
|
|
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Severance
escrow
|
258,121
|
257,927
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Baron
notes receivable
|
-
|
500,000
|
Deferred
tax asset
|
224,458
|
241,576
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Other
assets (net of accumulated amortization of $214,444 for 2016 and
2015)
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175,279
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180,772
|
|
|
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Total
other assets
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657,858
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1,180,275
|
|
|
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TOTAL ASSETS
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$4,775,792
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$4,550,667
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SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
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CURRENT LIABILITIES
|
|
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Accounts
payable
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$278,726
|
$156,312
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Commissions
payable
|
1,945,745
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1,712,109
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Other
current liabilities
|
63,271
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24,366
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Income
taxes payable
|
8,737
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61,667
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Total
current liabilities
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$2,296,479
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$1,954,454
|
|
|
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NON CURRENT LIABILITIES
|
|
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Asset
retirement obligation
|
2,907
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2,907
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Promissory
note
|
-
|
50,000
|
Total
noncurrent liabilities
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2,907
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52,907
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TOTAL LIABILITIES
|
$2,299,386
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$2,007,361
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|
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STOCKHOLDERS' EQUITY
|
|
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|
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Series
A preferred stock – 5,000,000 shares authorized, $.0001 par
value;3,050,000
and 3,050,000 shares issued and 0 outstanding,
respectively
|
$305
|
$305
|
Additional
paid in capital – series A preferred stock
|
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; 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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(7,971,350)
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(7,904,450)
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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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$2,476,406
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$2,543,306
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$4,775,792
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$4,550,667
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SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
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OPERATING REVENUES
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Fee
income
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$292,645
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282,318
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Commissions
|
4,307,574
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4,188,138
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Oil
and gas revenue
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13,336
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18,187
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Other
operating income
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112,841
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48,323
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Total
revenue
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4,726,396
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4,536,966
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OPERATING EXPENSES
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Compensation
and benefits
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363,152
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362,537
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Commission
expense
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3,978,901
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3,935,925
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General
and administrative expenses
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333,835
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187,160
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Depreciation
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12,356
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11,761
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Depletion
|
3,301
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6,199
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Total
operating expenses
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4,691,545
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4,503,582
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OPERATING INCOME
|
34,851
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33,384
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OTHER INCOME (EXPENSES)
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Interest
expense
|
-
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(195)
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Interest
income
|
77
|
12,500
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Other
income
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27,004
|
36,129
|
|
|
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Total other income
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27,081
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48,434
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INCOME BEFORE INCOME TAX EXPENSE
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61,932
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81,818
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INCOME TAX EXPENSE
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(17,192)
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(45,564)
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NET INCOME
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$44,740
|
36,254
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NET INCOME PER COMMON SHARE:
|
|
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Basic
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$36
|
29
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Diluted
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$36
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29
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|
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SHARES USED IN COMPUTING NET PER COMMON SHARE:
|
|
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Basic
|
1,241
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1,241
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Diluted
|
1,241
|
1,241
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SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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|
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OPERATING REVENUES
|
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Fee
income
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$888,734
|
868,802
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Commissions
|
12,131,401
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13,253,809
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Oil
and gas revenue
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46,472
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26,859
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Other
operating income
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232,275
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182,660
|
|
|
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Total
revenue
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13,298,882
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14,332,130
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|
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OPERATING EXPENSES
|
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Compensation
and benefits
|
1,095,745
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980,067
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Commission
expense
|
11,387,667
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12,405,829
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General
and administrative expenses
|
851,940
|
932,593
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Depreciation
|
36,200
|
32,946
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Depletion
|
13,743
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6,199
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|
|
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Total
operating expenses
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13,385,295
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14,357,634
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OPERATING LOSS
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(86,413)
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(25,504)
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|
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OTHER INCOME (EXPENSES)
|
|
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Interest
expense
|
(1,794)
|
(3,646)
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Interest
income
|
16,436
|
50,000
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Other
income
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25,970
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63,516
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|
|
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Total other income
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40,612
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109,870
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INCOME (LOSS) BEFORE INCOME TAX EXPENSE
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(45,801)
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84,366
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INCOME TAX EXPENSE
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(21,099)
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(114,974)
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NET LOSS
|
$(66,900)
|
(30,608)
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NET LOSS PER COMMON SHARE:
|
|
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Basic
|
$(54)
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(25)
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Diluted
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$(54)
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(25)
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SHARES USED IN COMPUTING NET PER COMMON SHARE:
|
|
|
Basic
|
1,241
|
1,241
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Diluted
|
1,241
|
1,241
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net
loss
|
$(66,900)
|
(30,608)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation
|
36,200
|
32,946
|
Depletion
|
13,743
|
6,199
|
Provision
for deferred income taxes
|
17,118
|
87,750
|
Changes
in:
|
|
|
Accounts
receivable
|
(115,736)
|
254,054
|
Income
taxes receivable
|
(52,930)
|
230,487
|
Prepaids
|
6,833
|
54,066
|
Severance
escrow
|
(194)
|
(192)
|
Accounts
payable
|
122,414
|
(225,799)
|
Commissions
payable
|
233,636
|
(120,197)
|
Other
liabilities
|
38,905
|
100,601
|
Net
cash provided by operating activities
|
$233,089
|
389,307
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
Purchase
of property and equipment
|
$(22,439)
|
(30,790)
|
Additions
to other property holdings
|
-
|
(86,277)
|
Additions
to oil and gas properties
|
-
|
(91,000)
|
Repayment
of Baron notes
|
500,000
|
-
|
Net
cash (used in) provided by investing activities
|
$477,561
|
(208,067)
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
Repayment
of short-term borrowings
|
(50,000)
|
(200,000)
|
Net
cash used in financing activities
|
$(50,000)
|
(200,000)
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
660,650
|
(18,760)
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
1,038,426
|
1,333,323
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
1,699,076
|
1,314,563
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2016 and 2015
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, 2015, of Capital Financial Holdings, Inc., as filed
with the SEC. The condensed consolidated balance sheet at December
31, 2015, 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, 2016, 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.
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.
Capitalized costs are depleted and amortized on the
unit-of-production method based on the estimated 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 three and
nine months ended September 30, 2016, depletion expense was $3,301
and $13,743 respectively.
As of September 30, 2016, CNR held leasehold interests on acreage
located in Taylor and Gonzales County, Texas, Lincoln County,
Colorado and Divide and Williams County, North Dakota. CNR
holds non-operating working interest in the Kifer Rozella 1,
producing oil well, located in the County of Gonzales, state of
Texas and non-operating working interest in an oil and gas property
consisting of three oil and gas leases in Taylor County, Texas. The
oil and gas leases in North Dakota and Colorado are currently
non-producing properties and non-operating leases.
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. As of September 30, 2016 the Company held
non-producing and unproved properties in Lincoln County, Colorado
and Divide and Williams County, North Dakota.
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, 2016.
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, 2016, asset retirement
obligations were $2,907 and for the three and nine months ended
September 30, 2016 accretion expense was not
significant.
NOTE 2 – RECENTLY ADOPTED ACCOUNTING
PRONOUNCEMENTS
A
summary of our significant accounting policies is included in Note
1 of our 2015 Form 10-K filed on March 28, 2016.
ASU
2016-15—Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments – The Company is currently assessing the
potential impact on the company. This amendment becomes effective
for public companies for fiscal years beginning after December 15,
2017. The pronouncement would impact the presentation of certain
items on the statement of cash flows including debt prepayment or
debt extinguishment costs, settlement of zero coupon debt
instruments, contingent consideration payments made after a
business combination, proceeds from the settlement of insurance
claims and/or corporate-owned life insurance policies,
distributions received from equity method investees, beneficial
interests in securitization transactions, and separately
identifiable cash flows and application of the predominance
principle. Should the Company have any of the aforementioned items,
they would be presented on the statement of cash flows in
accordance to ASU 2016-15. Early adoption is permitted, but the
entity must adopt all of the amendments in the same
period.
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. (“CNR”) 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. The new subsidiary
is expected to diversifythe business operations of the Company and
is unrelated to any current or past business. On June 17, 2014, the
Company acquired an additional 400,000 shares, .001 par value
common stock of CNR for the amount of $40,000. On July 21, 2014,
the Company acquired an additional 3,750,000 shares, .001 par value
of common stock of CNR for the amount of $375,000. On September 21,
2016 CNR issued a payment of $214,600 to the Company in exchange
for redemption of 2,146,000 shares, .001 par value of common stock
of CNR As of September 30, 2016, the Company owned 3,004,000 shares
of CNR as CNR’s sole shareholder.
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.
This purchase is presented as oil and natural gas properties on the
balance sheet. As of September 30, 2016, oil and gas revenues were
$46,472.
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.
This purchase is presented as oil and natural gas properties on the
balance sheet. 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 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 will 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
will 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 are currently
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 for a purchase price of $1,275 paid in cash.
This purchase is presented as other property holdings on the
balance sheet.
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. This purchase is presented as other property holdings on the
balance sheet.
NOTE 4 - BARON NOTES
RECEIVABLE
On June
11, 2014, June 27, 2014, and July 22, 2014, Baron Energy, Inc.
issued promissory notes to Capital Natural Resources, Inc. (the
“note holder”) in the amounts of $85,000, $40,000 and
$375,000, respectively. The three notes carried an interest rate of
15% per annum, payable monthly, and mature on June 12, 2016, June
28, 2016 and July 23, 2016, respectively. On March 21, 2016, the
notes were paid in full including all unpaid accrued interest in
the amount of $82,642 bringing the receivable balance to
zero.
NOTE 5 – LINE OF CREDIT
On July
14, 2014, the Company signed new loan documents for a line of
credit with American Bank Center in the amount of $300,000. The
line of credit had a variable interest rate of 1.509 percent above
Wall Street Journal U.S. Prime Rate. The loan matured July 14,
2015. The Company set up monthly payments with an automatic payment
of $25,000. There are no financial covenants associated with the
line of credit. The Company made a payment of $25,000 on July 6,
2015, and a final payment of $28,578 on July 14, 2015, bringing the
balance to zero. The total interest expense on this line of credit
was $8,061.
On July
14, 2015, 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 has a variable interest rate of 1.509 percent above
Wall Street Journal U.S. Prime Rate. The loan matured with
principal due on July 14, 2016. For the period ended September 30,
2016, the Company had no outstanding balance against this line of
credit before renewal. As of September 30, 2016, the Company had
zero outstanding and zero interest expense against its current line
of credit. There are no financial covenants associated with the
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 has a variable interest rate of 1.509
percent above Wall Street Journal U.S. Prime Rate which was 3.5% as
of September 30, 2016. The loan matures with principal due on
September 12, 2017. For the period ended September 30, 2016, the
Company had no outstanding balance against this line of credit
before renewal. As of September 30, 2016, the Company had zero
outstanding and zero interest expense against its current line of
credit. There are no financial covenants associated with the line
of credit.
NOTE 6 - 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, 2016 and 2015. Changes are due to the stock
buyback and reverse stock split.
Option
activity for the twelve months ended December 31, 2015 and the nine
months ended September 30, 2016 was as follows:
|
|
Weighted Average Exercise Price per Share
|
Weighted Average Grant Date Fair Value
|
Aggregate Intrinsic Value
|
Outstanding
on January 1, 2015
|
336
|
$5,400
|
$2,800
|
$-
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Canceled
|
129
|
$5,000
|
$3,487
|
|
Outstanding
on December 31, 2015
|
207
|
$4,734
|
$4,388
|
$-
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Canceled
|
38
|
$4,932
|
$3,866
|
|
Outstanding
on September 30, 2016
|
169
|
$4,599
|
$3,363
|
$-
|
Exercisable
options totaled 207 at December 31, 2015 and totaled 169 at
September 30, 2016.
NOTE 7 – 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).
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, 2016, approximately $10,819 was
recorded as tax expense for the quarter and an accumulated amount
of approximately $431,278 has been recorded as tax expense since
the start of stock options being forfeited in March of
2014.
The effective tax rates for the three and nine months ended
September 30, 2016 were different from the statutory rate
primarily due to the reduction of the deferred tax assets related
to stock compensation.
NOTE 8 - 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, 2016
|
Three Months
Ended September 30, 2015
|
|
|
|
|
|
|
|
Net (Loss)
Income
|
$44,740
|
|
|
36,254
|
|
|
Less: Preferred
Stock Dividends
|
|
|
|
|
|
|
Income Available to
Common Shareholders – Basic Earnings per Share
|
$44,740
|
1,241
|
36
|
36,254
|
1,241
|
$29
|
Effect of Dilutive
Securities:
|
|
|
|
|
|
|
Preferred Stock
Dividends
|
|
|
|
|
|
|
Stock Options and
Warrants
|
|
|
|
|
|
|
Income Available to
Common Shareholders – Diluted Earnings per Share
|
$44,740
|
1,241
|
36
|
36,254
|
1,241
|
$29
|
|
Nine Months
Ended September 30, 2016
|
Nine Months
Ended September 30, 2015
|
|
|
|
|
|
|
|
Net (Loss)
Income
|
$(66,900)
|
|
|
(30,608)
|
|
|
Less: Preferred
Stock Dividends
|
|
|
|
|
|
|
Income Available to
Common Shareholders – Basic Earnings per Share
|
$(66,900)
|
1,241
|
(54)
|
(30,608)
|
1,241
|
$(25)
|
Effect of Dilutive
Securities:
|
|
|
|
|
|
|
Preferred Stock
Dividends
|
|
|
|
|
|
|
Stock Options and
Warrants
|
|
|
|
|
|
|
Income Available to
Common Shareholders – Diluted Earnings per Share
|
$(66,900)
|
1,241
|
(54)
|
(30,608)
|
1,241
|
$(25)
|
Options
and warrants to purchase 379 common shares at exercise prices
between $3,500 and $14,300 were outstanding at September 30, 2016,
but were not included in the computation of diluted earnings per
share for the quarter ending September 30, 2016 and September 30,
2015, because their effect was anti-dilutive.
NOTE 9 – SEGMENT REPORTING
The
Company organizes its current business units into three reportable
segments: broker dealer services, natural resources 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 seeks 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. 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.
|
|
|
|
|
As
of, and for the three months ended:
|
|
|
|
|
|
|
|
|
|
30-Sep-16
|
|
|
|
|
Commissions
and fee income
|
-
|
-
|
4,600,219
|
4,600,219
|
Other
fee income
|
-
|
-
|
112,841
|
112,841
|
Oil
and gas revenue
|
-
|
13,336
|
-
|
13,336
|
Other
income
|
-
|
-
|
27,004
|
27,004
|
Interest
income
|
17
|
-
|
60
|
77
|
Interest
expense
|
-
|
-
|
-
|
-
|
Depreciation
|
996
|
167
|
11,192
|
12,356
|
Depletion
|
-
|
3,301
|
-
|
3,301
|
Income
(loss) before income tax benefit (expense)
|
(128,262)
|
(32,348)
|
222,541
|
61,932
|
Income
tax benefit (expense)
|
44,379
|
11,553
|
(73,124)
|
(17,192)
|
Net
income (loss)
|
(83,882)
|
(20,794)
|
149,417
|
44,740
|
Segment
assets
|
1,056,120
|
332,872
|
3,386,800
|
4,775,792
|
|
|
|
|
|
As
of, and for the three months ended:
|
|
|
|
|
|
|
|
|
|
30-Sep-15
|
|
|
|
|
Commissions
and fee income
|
-
|
-
|
4,470,456
|
4,470,456
|
Other
operating income
|
-
|
-
|
48,323
|
48,323
|
Oil
and gas revenue
|
-
|
18,187
|
-
|
18,187
|
Other
income
|
11,399
|
-
|
24,731
|
36,129
|
Interest
income
|
-
|
12,500
|
-
|
12,500
|
Interest
expense
|
(179)
|
-
|
(16)
|
(195)
|
Depreciation
|
662
|
80
|
11,019
|
11,761
|
Depletion
|
-
|
6,199
|
-
|
6,199
|
Income
(loss) before income tax benefit (expense)
|
(107,165)
|
7,963
|
181,020
|
81,818
|
Income
tax benefit (expense)
|
28,539
|
(3,121)
|
(70,982)
|
(45,564)
|
Net
income (loss)
|
(78,626)
|
4,841
|
110,038
|
36,254
|
Segment
assets
|
747,916
|
798,744
|
3,053,480
|
4,600,140
|
|
|
|
|
|
As
of, and for the nine months ended:
|
|
|
|
|
|
|
|
|
|
30-Sep-16
|
|
|
|
|
Commissions
and fee income
|
-
|
-
|
13,020,135
|
13,020,135
|
Other
fee income
|
-
|
-
|
232,275
|
232,275
|
Oil
and gas revenue
|
-
|
46,472
|
-
|
46,472
|
Other
income
|
(3,531)
|
-
|
29,501
|
25,970
|
Interest
income
|
50
|
16,206
|
180
|
16,436
|
Interest
expense
|
(947)
|
(847)
|
-
|
(1,794)
|
Depreciation
|
2,218
|
448
|
33,533
|
36,200
|
Depletion
|
-
|
13,743
|
-
|
13,743
|
Income
(loss) before income tax benefit (expense)
|
(318,520)
|
(58,664)
|
331,383
|
(45,801)
|
Income
tax benefit (expense)
|
85,807
|
22,996
|
(129,902)
|
(21,099)
|
Net
income (loss)
|
(232,713)
|
(35,668)
|
201,481
|
(66,900)
|
Segment
assets
|
1,056,120
|
332,872
|
3,386,800
|
4,775,792
|
|
|
|
|
|
As
of, and for the nine months ended:
|
|
|
|
|
|
|
|
|
|
30-Sep-15
|
|
|
|
|
Commissions
and fee income
|
-
|
-
|
14,122,611
|
14,122,611
|
Other
operating income
|
-
|
-
|
182,660
|
182,660
|
Oil
and gas revenue
|
-
|
26,859
|
-
|
26,859
|
Other
income
|
26,824
|
-
|
36,692
|
63,516
|
Interest
income
|
-
|
50,000
|
-
|
50,000
|
Interest
expense
|
(3,578)
|
-
|
(68)
|
(3,646)
|
Depreciation
|
2,567
|
80
|
30,299
|
32,946
|
Depletion
|
-
|
6,199
|
-
|
6,199
|
Income
(loss) before income tax benefit (expense)
|
(222,047)
|
13,874
|
292,539
|
84,366
|
Income
tax benefit (expense)
|
5,162
|
(5,439)
|
(114,697)
|
(114,974)
|
Net
income (loss)
|
(216,885)
|
8,436
|
177,842
|
(30,608)
|
Segment
assets
|
747,916
|
798,744
|
3,053,480
|
4,600,140
|
NOTE 10 – 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 and arbitrations related to the failure of
Medical Capital, other alternative investments alleged to be
unsuitable, the bankruptcy proceedings of the various DBSI entities
and the bankruptcy of other various entities. 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, 2016, the Company is a defendant in
two on-going suits or arbitrations as discussed above. The Company
expects to vigorously defend these cases.
On April 5, 2011, several broker-dealers and their
principals/officers, including the Company and John Carlson,
President and Chief Compliance Officer, 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 with no admission of liability
or fault by any defendant. The settlement proceeds were
received on December 4, 2014 and recorded as other income on the
consolidated financial statements of Capital Financial
Holdings, Inc. 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. These actions were
for declaratory relief in connection with a dispute over whether
Arch is entitled to any portion of the settlement proceeds that the
Company received in exchange for dismissing the lawsuit with Mayer
Hoffman. On September 14, 2016 the Company and Arch agreed to
settle all claims between them in exchange for a $82,500 payment by
the Company to Arch which was accrued at September 30, 2016. On
October 24, 2016 the court ordered the case, including all claims,
counterclaims, and third party claims dismissed with prejudice in
accordance with the settlement agreement.
NOTE 11 – REGULATORY MATTERS
The
broker dealer (“BD”) segment of Capital Financial
Services, Inc. is subject to periodic examinations by its
regulator, 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 October 26, 2016 the broker dealer made its
latest response to the routine examination report. The broker
dealer is awaiting further correspondence from the SEC and
continues to work with its legal counsel with respect to any
potential remaining issues.
NOTE 12 – SUBSEQUENT
EVENTS
On
September 12, 2016, the Company executed a Uniform Offer to
Purchase (the Agreement) giving it the right to acquire a
commercial office building and associated property (the Office
Building) located at 1801 Burdick Expressway West, Minot, North
Dakota. Although the Company believes that the acquisition of the
Office Building is probable, there can be no assurance that the
acquisition of the Office Building will be consummated. The
contract purchase price for the Office Building is $975,000,
exclusive of closing costs, with all built in fixtures and other
furniture, fixtures and equipment in the building to remain with
the property. The Company has made a $20,000 refundable earnest
money deposit. The Company anticipates funding the purchase price
with a commercial real estate loan in an amount to be determined
and cash on hand. The amount and terms of the financing are not yet
determined. The consummation of the purchase is subject to the
completion of various closing conditions to be met by the parties.
If the Company does not close on the purchase, there are
circumstances under which it may have the deposit
refunded.
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 1 Main Street North, Minot, North Dakota 58703. As of
September 30, 2016, the Company had 19 full-time employees
consisting of officers, principals, data processing, compliance,
accounting, and clerical support staff.
The
Company organizes its current business units into three reportable
segments: broker dealer services, natural resources 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 seeks 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. 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 currently supports over
175 investment
representatives and investment advisors.
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
44,740
|
36,254
|
(66,900)
|
(30,608)
|
Income (loss) per
share:
|
|
|
|
|
Basic
|
36
|
29
|
(54)
|
(25)
|
Diluted
|
36
|
29
|
(54)
|
(25)
|
The
Company reported net income for the three months ended September
30, 2016, of $44,740, compared to net income of $36,254 for the
same quarter in 2015. The Company reported net loss of $66,900 for
the nine months ended September 30, 2016, compared to a net loss of
$30,608 during the same period in 2015. The increase in net income
for the three months ended September 30, 2016 compared to net
income in the same period in 2015 is due to increased operating
revenues of approximately $189,000. The increased net loss for the
nine months ended September 30, 2016 compared to a net loss in the
same period in 2015 is due primarily to decreased revenues of
approximately $1,033,000 and increased compensation and benefits
expenses of approximately $115,000.
Operating revenues
Total
operating revenues for the three months ended September 30, 2016
were $4,726,396, an increase of 4% from $4,536,966 for the same
period ended September 30, 2015. Total operating revenues for the
nine months ended September 30, 2016 were $13,298,882, a decrease
of 7% from $14,332,130 for the same period ended September 30,
2015. The decrease for the three month and six month periods net
revenue categories are listed below.
Fee income
Fee
income for the three months ended September 30, 2016 was $292,645,
an increase of 4% from $282,318 for the same period ended September
30, 2015. Fee income for the nine months ended September 30, 2016
was $888,734, an increase of 2% from $868,802 for the same period
ended September 30, 2015. The increases are 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 6% of the Company’s consolidated revenues for
the three months ended September 30, 2016 and approximately 7% for
the nine months ended September 30, 2016. These fees constituted
approximately 6% of the consolidated revenues for the three months
ended September 30, 2015 and approximately 6% for the nine months
ended September 30, 2015. 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, 2016 was $4,307,574, an
increase of 3% from $4,188,138 for the same period ended September
30, 2015. Commission income for the nine months ended September 30,
2016 was $12,131,401 a decrease of 8% from $13,253,809 for the same
period ended September 30, 2015. The decreases were due primarily
to the decrease in commissions received by the broker dealer
segment due to market conditions. Commission revenues constituted
approximately 91% of the Company’s consolidated revenues for
the three months ended September 30, 2016 and approximately 91% for
the nine months ended September 30, 2016. Commission revenues
constituted approximately 92% of the consolidated revenues for the
three months ended September 30, 2015 and approximately 92% for the
nine months ended September 30, 2015. There is no commission income
attributable to the other segments.
Oil and gas revenue
Oil and
gas revenue is income tied to the non-operating working interest
well leases and is received by the natural resources segment. It is
the Company’s share of oil and gas revenues for its ownership
percentage of total production. Oil and gas revenue for the three
months ended September 30, 2016 was $13,336, a decrease of 23% from
$18,187 for the same period ended September 30, 2015. Oil and gas
revenue for the nine months ended September 30, 2016 was $46,472,
an increase of 73% from $26,859 for the same periods ended
September 30, 2015. There is no oil and gas revenue attributable to
the other segments.
Other operating income
Other
operating income for the three months ended September 30, 2016 was
$112,841, an increase of 134% from $48,323 for the same period
ended September 30, 2015. Other operating income for the nine
months ended September 30, 2016 was $232,275, an increase of 27%
from $182,660 for the same period ended September 30, 2015. The
increases were primarily due to an increase in the income received
related to alternative investment products. There is no other
operating income attributable to the natural resource or holding
segments. Other operating income constituted approximately 2% of
the Company’s consolidated revenues for the three and nine
months ended September 30, 2016 and approximately 1% of the
consolidated revenues for the three and nine months ended September
30, 2015.
Interest income
Consolidated
interest income for the three months ended September 30, 2016 was
$77, a decrease of 99% from $12,500 for the same period ended
September 30, 2015. Interest income for the nine months ended
September 30, 2016 was $16,436, a decrease of 67% from $50,000 for
the same period ended September 30, 2015. Interest income is
attributable to the Baron Energy notes from the natural resource
segment. There was no material interest income for the holding or
broker dealer segments for the periods ended September 30, 2016 and
2015.
Operating expenses
Total
operating expenses for the three months ended September 30, 2016
were $4,691,545, a decrease of 4% from $4,503,582 for the three
months ended September 30, 2015. Total operating expense for the
nine months ended September 30, 2016 were $13,385,295, a decrease
of 7% from $14,357,634 for the same period ended September 30,
2015. 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, 2016 were $363,152, a slight increase from $362,537
for the same period ended September 30, 2015. Consolidated
compensation and benefits expense for the nine months ended
September 30, 2016 were $1,095,745 an increase of 12% from $980,067
for the same period ended September 30, 2015. The increase resulted
from increased wages, health insurance premiums and 401k
participation by the employees.
Compensation
and benefits for the holding segment for the three months ended
September 30, 2016 was a credit of $8,682 a decrease of 112% from
an expense of $73,656 for the same period ended September 30, 2015.
Compensation and benefits for the holding segment for the nine
months ended September 30, 2016 was an expense of $68,955, a
decrease of 25% from $92,400 for the same period ended September
30, 2015. The decreases are due to decreases in paid wages
connected to personnel associated with the holding
segment.
Compensation
and benefits for the broker dealer segment for the three months
ended September 30, 2016 was $353,702, a 27% increase from $278,169
for the same period ended September 30, 2015. Compensation and
benefits for the broker dealer segment for the nine months ended
September 30, 2016 was $975,723, a 15% decrease from $849,764 for
the same period ended September 30, 2015. The increases were due to
decreases in wages, insurance premiums and 401k participation by
the employees.
Compensation
and benefits for the natural resource segment for the three months
ended September 30, 2016 was $18,132, an increase of 69% from
$10,713 for the same period ended September 30, 2015. Compensation
and benefits for the natural resources segment for the nine months
ended September 30, 2016 was $51,067, an increase of 35% from
$37,903 for the same period ended September 30, 2015.
Commission expense
Commission
expense for the three months ended September 30, 2016 was
$3,978,901, an increase of 1% from $3,935,925 for the same period
ended September 30, 2015. Commission expense for the nine months
ended September 30, 2016 was $11,387,667, a decrease of 8% from
$12,405,829 for the same period ended September 30, 2015. The
increases and decreases are a result of the revenues received by
the broker dealer segment. 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, 2016 were $333,835, an increase of 78% from $187,160
for the same period ended September 30, 2015. Consolidated general
and administrative expenses for the nine months ended September 30,
2016 were $851,940, a decrease of 9% from $932,593 for the same
period ended September 30, 2015. The decrease and increase resulted
from the net increases and decreases in the expense categories
described below.
General
and administrative expenses for the holding segment for the three
months ended September 30, 2016 were $135,964, a 209% increase from
$44,066 for the same period ended September 30, 2015. General and
administrative expenses for the nine months ended September 30,
2015 were $242,920, an increase of 62% from $150,326 for the same
period ended September 30, 2015. The increases were from an
increase in accounting expenses and legal expenses.
General
and administrative expenses for the broker dealer segment for the
three months ended September 30, 2016 were $173,788, an increase of
26% from $137,361 for the same period ended September 30, 2015.
General and administrative expenses for the nine months ended
September 30, 2016 were $553,784, a decrease of 28% from $763,434
for the same period ended September 30, 2015. The increases for the
three months ended September 30, 2016 were from increases in legal
fees and recruiting expenses. The decreases for the nine months
ended September 30, 2016 were from a reduction in legal fees and
settlements and accounting expenses.
General
and administrative expenses for the natural resources segment for
the three month periods ended September 30, 2016 were $24,083 an
increase of 320% from $5,732 for the same period ended September
30, 2015. General and administrative expenses for the nine month
periods ended September 30, 2016 were $55,235 an increase of 194%
from $18,802 for the same period ended September 30, 2015. The
increases were due to the operating expenses tied to the leases
purchased by the natural resources segment.
Depreciation
Consolidated
depreciation expense for the three months ended September 30, 2016
was $12,356, an increase of 5% from $11,761 for the same period
ended September 30, 2015. Consolidated depreciation expense for the
nine months ended September 30, 2016 was $36,200, an increase of
10% from $32,946 for the same period ended September 30,
2015.
Depreciation
expense for the holding segment for the three months ended
September 30, 2016 was $996, an increase of 50% from $662 for the
same period ended September 30, 2015. Depreciation expense for the
holding segment for the nine months ended September 30, 2016 was
$2,218, a decrease of 14% from $2,567 for the same period ended
September 30, 2015.
Depreciation
expense for the broker dealer segment for the three months ended
September 30, 2016 was $11,192, a decrease of 81% from $11,320 for
the same period ended September 30, 2015. Depreciation expense for
the broker dealer segment for the nine months ended September 30,
2016 was $33,533, an increase of 11% from $30,299 for the same
period ended September 30, 2015. The increases in depreciation
expenses were due to additional fixed assets purchased during
2016.
Depreciation
expense for the natural resource segment during the quarter ended
September 30, 2016 is immaterial. There was no depreciation expense
for the natural resources segment for the quarter ended September
30, 2015.
Depletion Expense
Depletion
expense for the natural resources segment for the three months
ended September 30, 2016 was $3,301 a 47% decrease from $6,199 from
the same period ended September 30, 2015. Depletion expense for the
nine months ended September 30, 2016 was $13,743 an increase of
122% from $6,199 from the same period ended September 30, 2015.
There is no depletion expense attributable to the other segments.
Depletion is determined by deducting units (barrels of oil)
extracted on the unit of production method based on the estimated
gross proved reserves as determined by independent petroleum
engineers. The percentage of units extracted to the total estimated
proven reserves is multiplied by the producing property cost to
determine depletion.
Interest expense
Interest
expense for the three months ended September 30, 2016 was zero, a
decrease of 100% from $195 for the same period ended September 30,
2015. Interest expense for the nine months ended September 30, 2016
was $1,794, a decrease of 51% from $3,646 for the same period ended
September 30, 2015. The decrease is due to the interest payments
made on the line of credit issued to the holding division. There is
no material interest expense attributable to the other
segments.
Liquidity and capital resources
Net
cash provided by operating activities was $233,089 for the nine
months ended September 30, 2016, as compared to net cash provided
by operating activities of $389,307 during the nine months ended
September 30, 2015. The primary difference corresponds to the
timing of payment/reimbursement on the E&O insurance,
commissions payable and income taxes.
Net
cash provided by investing activities was $477,561 for the nine
months ended September 30, 2016, as compared to net cash used in
investing activities of $208,067 for the nine months ended
September 30, 2015. The primary difference corresponds with the
launch of the new subsidiary, Capital Natural Resources, Inc., and
the asset investments within that subsidiary.
Net
cash used in financing activities was $50,000 for the nine months
ended September 30, 2016, as compared to net cash used in financing
activities of $200,000 for the nine months ended September 30,
2015. The primary difference corresponds with the payments made on
the line of credit and short term borrowings.
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. 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,
●
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,
●
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,
●
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.
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, 2016, 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.
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
The
information in response to this item can be found in Note 10 (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
|
|
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
2016
|
-
|
-
|
-
|
$597,754
|
August
2016
|
-
|
-
|
-
|
$597,754
|
September
2016
|
-
|
-
|
-
|
$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
|
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 10,
2016
|
By /s/
John Carlson
|
|
|
|
John
Carlson
|
|
|
|
Chief
Executive Officer & President
(Principal
Executive Officer)
|
|
Date:
November 10,
2016
|
By /s/
Elizabeth Colby
|
|
|
|
Elizabeth
A. Colby
|
|
|
|
Chief
Financial Officer & Corporate Secretary
|
|
|
|
(Principal
Financial Officer)
|
|