Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
☑ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended December
31, 2016
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition
period of _________ to _________
Commission File Number 000-25958
CAPITAL FINANCIAL HOLDINGS, INC. (The Company)
(Exact name of registrant as specified in its charter)
North Dakota
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45-0404061
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer Identification No.)
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1 Main Street North
Minot, North Dakota 58703
(Address of principal executive offices)
701.837.9600
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common
Stock; $.0001 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐
No
☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐ No ☑
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☐
Indicate
by check mark whether the registrant is a large accelerated 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
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☑
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Indicate
by check mark whether the registrant is a shell company (as defined
by Rule 12b-2 of the Act). Yes
☐No
☑
The
aggregate market value of voting and non-voting common equity held
by non-affiliates of the Registrant as of March 13, 2017 was
$788,261, based on the last reported sale price. For purposes of
this calculation, the Registrant has assumed that its board of
directors, executive officers and holders of greater than five
percent of the Registrant’s shares are
affiliates.
On
March 15, 2017, there were 1,241 shares of the issuer’s
common equity outstanding.
References
in this Annual Report on Form 10-K to the “Company”,
“CFH”, “we”, “us”,
“its” or “our” includes the subsidiary,
unless the context indicates otherwise.
Documents
Incorporated by Reference: Portions of the Company’s
definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on July 11, 2017, are incorporated by reference in
certain sections of Part III.
10-K
CAPITAL FINANCIAL HOLDINGS, INC.
INDEX
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Page#
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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7
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Item
1B.
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Unresolved Staff
Comments
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7
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Item
2.
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Properties
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7
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Item
3.
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Legal
Proceedings
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7
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Item
4.
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Mine
Safety Disclosure
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8
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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9
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Item
6.
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Selected Financial
Data
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9
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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9
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Item
7A.
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Quantitative and
Qualitative Disclosures About Market Risk
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16
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Item
8.
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Financial
Statements and Supplementary Data
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16
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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16
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Item
9A.
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Controls and
Procedures
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16
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Item
9B.
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Other
Information
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17
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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18
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Item
11.
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Executive
Compensation
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18
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Item
12.
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Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters
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18
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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18
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Item
14.
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Principal
Accounting Fees and Services
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18
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PART
IV
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Item
15.
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Exhibits, Financial
Statement Schedules
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19
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SIGNATURES
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20
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Special Note Regarding 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:
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Business strategies
and investment policies,
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Possible or assumed
future results of operations and operating cash flows,
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Financing plans and
the availability of short-term borrowing,
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Potential growth
opportunities,
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Recruitment and
retention of the Company’s key employees,
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Potential operating
performance, achievements, productivity improvements, efficiency
and cost reduction efforts,
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Likelihood of
success and impact of litigation,
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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,
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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:
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General political
and economic conditions which may be less favorable than
expected;
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The effect of
changes in interest rates, inflation rates, the stock markets, or
other financial markets;
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Unfavorable
legislative, regulatory, or judicial developments;
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Adverse findings or
rulings in arbitrations, litigation or regulatory
proceedings;
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Incidence and
severity of catastrophes, both natural and man-made;
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Changes in
accounting rules, policies, practices, and procedures which may
adversely affect the business; and
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Terrorist
activities or other hostilities which may adversely affect the
general economy.
The
Company has two operating subsidiaries, Capital Financial Services,
Inc. (“CFS” or the “broker-dealer
subsidiary”) a FINRA member broker-dealer and Capital Natural
Resources, Inc. (“CNR” or the “natural resource
subsidiary”).
The
Company is a financial services holding company that, through its
broker dealer subsidiary, Capital Financial Services, Inc.,
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.
PART I
Item 1. Business
OVERVIEW
Capital
Financial Holdings, Inc. (“CFH”) derives the majority
of its revenues and net income from sales of mutual funds,
insurance products, and various other securities through Capital
Financial Services, Inc. (“CFS”), the Company’s
broker-dealer subsidiary.
The
Company organizes its business units into three reportable
segments: Broker-Dealer Services, Holding Company and Natural
Resource. The Broker-Dealer Services segment distributes securities
and insurance products to retail investors through a network of
registered representatives. The Natural Resource segment sought
opportunities in petroleum and natural gas exploration and
production, however in the fourth quarter of 2016 the Company
determined to dispose of its natural resource assets in order to
concentrate on its core business of Broker-Dealer
Services.
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
December 31, 2016, the Company had 21 full-time employees
consisting of officers, principals, data processing, compliance,
accounting, and clerical support staff.
BUSINESS DEVELOPMENT
On
March 7, 2007, the Company acquired certain assets of United
Heritage Financial Services, Inc. (UHFS), a wholly owned subsidiary
of United Heritage Financial Group, Inc., of Meridian, Idaho. UHFS
had approximately 120 independent registered representatives who
became part of Capital Financial Services, Inc. (CFS), the retail
brokerage division of the Company. Pursuant to the agreement, in
exchange for the assets of UHFS set forth above, the Company agreed
to issue 50 restricted CFH shares and pay a deferred cash earn out
payment totaling a maximum of $900,000, to be paid in 21 quarterly
installments. On March 7, 2007, the Company issued 50 options to
purchase shares of the Company to UHFS. As a result of this
issuance of shares, $175,000 was recorded by the Company as
goodwill relating to the purchase of the assets. As of December 31,
2015, the Company had made twenty-one quarterly installment
payments. There is no longer a liability relating to this
acquisition. Due to the goodwill impairment charge that was
recorded for the periods ended December 31, 2010, March 31, 2012,
and December 31, 2015, the total goodwill recorded relating to this
acquisition was zero.
On June
9, 2014, the Company launched a wholly owned operating subsidiary,
Capital Natural Resources, Inc., a Colorado corporation. Capital
Natural Resources, Inc. sought opportunities related to natural
resources in the United States, including petroleum, natural gas,
and/or other minerals, water resources and land. In the fourth
quarter of 2016 the Company determined to dispose of its natural
resource assets in order to concentrate on its core business of
Broker-Dealer Services to enable a more efficient use of its
personnel and financial resources. As of December 31, 2016 the
segment met the definition of discontinued operations.
THE COMPANY’S SUBSIDIARIES
The
Company organizes its 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 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. 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
subsidiary.
Capital Financial Services, Inc.
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
approximately 165 investment representatives and
investment advisors.
Capital Natural Resources, Inc.
On June
9, 2014, the Company launched a wholly-owned operating subsidiary,
Capital Natural Resources, Inc., a Colorado corporation. Capital
Natural Resources, Inc. sought opportunities related to natural
resources in the United States, including petroleum, natural gas,
and/or other minerals, water resources and land. In the fourth
quarter of 2016 the Company determined to dispose of its natural
resource segment in order to concentrate on its core business of
Broker-Dealer Services to enable a more efficient use of its
personnel and financial resources. As of December 31, 2016 the
segment met the definition of discontinued operations.
DESCRIPTION OF BUSINESS
Brokerage Commissions
CFS’s
primary source of revenue is commission revenue in connection with
sales of shares of mutual funds, insurance products, and various
other securities. CFS receives commission and Rule 12b-1 servicing
revenue generated from the sale of investment products originated
by its registered representatives. CFS also receives investment
advisory revenue as a registered investment advisor. CFS pays a
portion of the revenue generated to its registered representatives
and retains the balance. Commission income and the related clearing
expenses are recorded based on the trade date. The revenue earned
from 12b-1 is recognized ratably over the period received.
Investment advisory fees are derived from account management and
investment advisory services. These fees are determined based on a
percentage of the customer’s assets under sponsor management
or a flat fee, may be billed monthly or quarterly and recognized
ratably over the period received. The preparation of consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
REGULATION
Virtually
all aspects of the Company’s businesses are subject to
various complex and extensive federal and state laws and
regulations. Regulated areas include, but are not limited to, the
effecting of securities transactions, the financial condition of
the Company’s subsidiaries, record-keeping and reporting
procedures, relationships with clients, and experience and training
requirements for certain employees. The Company’s subsidiary,
Capital Financial Services, Inc. (“CFS”), is registered
with various federal and state government agencies, including the
SEC, as well as FINRA, a self-regulatory industry organization, as
described below.
CFS is
a registered broker-dealer subject to extensive regulation and
periodic examinations by the SEC, FINRA, and state agencies in
those states in which CFS conducts business. As a broker-dealer,
CFS is subject to the Net Capital Rule promulgated by the SEC under
the Securities Exchange Act of 1934 (the “Exchange
Act”). This rule requires that a broker-dealer must maintain
certain minimum net capital and that its aggregate indebtedness may
not exceed specified limitations.
Federal
and state laws and regulations, and the rules of FINRA, grant broad
powers to such regulatory agencies and organizations. These include
the power to limit, restrict, or prevent the Company from carrying
on its business if it fails to comply with such laws, regulations
and rules. Other possible sanctions that may be imposed include the
suspension of individual employees, restrictions on the Company
expanding its business or paying cash dividends, the revocation of
the investment advisor or broker dealer expulsions, censures,
and/or fines.
The
Company operates under the provision of Paragraph (k)(2)(ii) of
Rule 15c3-3 of the Securities and Exchange Commission and,
accordingly, is exempt from the remaining provisions of that rule.
To the best of its knowledge the Company met the identified
exemption provisions from January 1, 2016 to December 31, 2016
without exception.
Since
1993, FINRA rules have limited the amount of aggregate sales
charges which may be paid in connection with the purchase and
holding of investment company shares sold through broker-dealers.
Congress and the SEC presently are considering amendments to Rule
12b-1 and other statutory provisions and rules that regulate the
distribution of mutual fund shares. The effect of the rule
amendments and other legislative or regulatory actions might be to
limit the amount of fees that could be paid pursuant to a
fund’s 12b-1 Plan in a situation where a fund has no, or
limited, new sales for a prolonged period of time, as well as the
imposition of other limits on the use of fund assets to pay for
distribution.
COMPETITION
The
Company derives substantially all of its revenues from commission
revenue earned in connection with sales of shares of mutual funds,
insurance products and various other securities, and also receives
investment advisory revenue.
The
Company participates in retail brokerage, a highly competitive
related sector of the financial services industry. The Company
competes directly with full-service stock brokerage firms,
insurance companies, banks, regional broker-dealers, other
independent broker-dealers, and other financial institutions, as
well as investment advisory firms. Each of these competitors offer
to the public many of the same investment products and services
offered by the Company. Further, other broker-dealers providing the
same services heavily recruit the representatives and advisors
transacting business through the Company. This competition forces
the Company to maintain high levels of support services and
commission payouts for these representatives and advisors. These
high levels of services and payouts could have a materially adverse
effect on the Company’s earnings.
RECENT DEVELOPMENTS
In the
fourth quarter of 2016 the Company determined to dispose of its
natural resource segment in order to concentrate on its core
business of Broker-Dealer Services to enable a more efficient use
of its personnel and financial resources. As of December 31, 2016
the segment met the definition of discontinued operations.The sale
was completed on March 3, 2017 for cash of $66,200. Impairment on
its oil and gas properties was recorded based upon the actual value
of the assets as determined by sale of the assets in open
unreserved auction through an independent nationally recognized oil
and gas property auction facility as of December 31,
2016.
AVAILABILITY OF SEC REPORTS
All SEC
reports may be viewed and copied at the SEC’s Public
Reference Room at 100 F Street NE, Washington, DC 20549, on
official business days during the hours of 10 a.m. to 3 p.m. local
time. Information on the operation of the Public Reference Room may
be obtained by calling the Commission at 1-800-SEC-0330. The
Commission maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
Commission.
All SEC
reports are also made available on the Company’s website at
http://capitalfinancialholdings.com. These reports, including
annual reports on Form 10-K and 10-KSB, quarterly reports on Form
10-Q and 10-QSB, and current reports on Form 8-K, are available on
the same day they are filed with the SEC.
Item 1A. Risk Factors
Not
Applicable as a Smaller Reporting Company.
Item 1B. Unresolved Staff Comments
Not
Applicable as a Smaller Reporting Company.
Item 2. Properties
The
Company’s principal offices are located at 1 Main Street
North, Minot, North Dakota 58703. At this location, the Company
leases 7,184 square feet of office and storage space. The Company
believes that the leased space is adequate for the Company’s
operating needs. The rental lease agreement ends March 31,
2018.
On
November 16, 2016 the Company purchased commercial office space
located at 1801 Burdick Expressway West, Minot, North Dakota. This
location offers 10,720 square feet of office space. The Company is
currently completing construction on this property and anticipates
moving in to the new office space in June of 2017.
Item 3. 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 December 31, 2016, the Company is a defendant in two
on-going suits or arbitrations as discussed above. In the first
quarter of 2017, the Company received notice of two new arbitration
claims, both in the ordinary course of the business of the Company
as discussed above. The Company expects to vigorously defend these
cases. On December 21, 2016, the Company made a settlement payment
in the amount of $200,000 for a case that was on-going in 2016. As
of December 31, 2016, without admission of liability, the Company
has recorded $63,000 for a potential settlement, pending the
determination of liability, if any. The $63,000 is included in
accrued liabilities as of December 31, 2016. The Company will
continue to defend the case. The Company estimates that the $63,000
accruedis the maximum possible range of loss that may result from
the outcome of this case.
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. 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 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.
Item 4. Mine Safety Disclosure
Not
applicable to the Company.
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
Information about the Company’s Common Stock
The
Company’s Common Shares are traded on the OTC Bulletin Board
under the symbol CPFH. The Company’s common shares began
trading on the OTC Bulletin Board on November 7, 1997. On May 31,
2002, the shareholders of the Company approved a two for one (2:1)
share forward split of the issued and outstanding common shares of
the Company, which took effect on July 1, 2002. On June 19, 2013,
the shareholders of the Company approved a 1:10,000 reverse stock
split, which took effect on August 14, 2013. On December 31, 2016,
the closing price of the Company’s Common Shares on the OTC
Bulletin Board was $1,405 per share. At March 2, 2017, there were
approximately 300 shareholders of record.
The
following table sets forth the high and low closing prices for the
Company’s common stock. The quotations reflect post-reverse
stock split, inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual
transactions.
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Quarter
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First
Quarter
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2,500
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855
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1,250
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1,250
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Second
Quarter
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2,350
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1,600
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2,350
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1,250
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Third
Quarter
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2,000
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1,600
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2,350
|
1,600
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Fourth
Quarter
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2,000
|
1,400
|
2,350
|
1,800
|
The Company has issued the following securities in the past quarter
without registering the securities under the Securities
Act:
None
Smaller Reporting Company 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. As of December 31, 2016 the
approximate dollar value of shares that may yet be purchased under
the plans or programs was $597,754.
Item 6. Selected Financial Data
Not
Applicable as a Smaller Reporting Company.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following information is provided in connection with, and should be
read in conjunction with, the consolidated financial statements and
notes included in this Annual Report on Form 10-K.
GENERAL
Capital
Financial Holdings, Inc. derives the majority of its revenues and
net income from sales of mutual funds, insurance products, and
various other securities through Capital Financial Services, Inc.
(“CFS”), the Company’s broker-dealer
subsidiary.
RESULTS OF OPERATIONS
The
following table sets forth, for the periods indicated, amounts
included in the Company’s Consolidated Statements of
Operations and the percentage change in those amounts from period
to period.
|
|
|
|
|
|
OPERATING
REVENUES
|
|
|
|
|
|
Fee
income
|
$1,227,001
|
$1,154,082
|
$1,095,610
|
6%
|
5%
|
Commission
income
|
15,946,037
|
17,746,896
|
19,559,484
|
(10)%
|
(9)%
|
Other
income
|
50,329
|
103,862
|
155,694
|
(52)%
|
(33)%
|
Other fee
income
|
335,122
|
269,325
|
436,070
|
24%
|
(38)%
|
Total
revenue
|
$17,558,489
|
$19,274,165
|
$21,246,858
|
(9)%
|
(9)%
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
Compensation and
benefits
|
$1,490,033
|
$1,310,099
|
$1,873,558
|
14%
|
(30)%
|
Commission
expense
|
14,987,254
|
16,610,792
|
18,214,481
|
(10)%
|
(9)%
|
Goodwill impairment
expense
|
-
|
-
|
2,132,026
|
0%
|
(100)%
|
General and
administrative expenses
|
1,352,032
|
1,100,417
|
1,127,582
|
23%
|
(2)%
|
Depreciation
|
47,796
|
43,752
|
32,708
|
9%
|
34%
|
Total operating
expenses
|
$17,877,115
|
$19,065,060
|
$23,380,355
|
(6)%
|
(18)%
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
$(318,626)
|
$209,105
|
$(2,133,497)
|
(252)%
|
(110)%
|
|
|
|
|
|
|
OTHER
INCOME/ EXPENSES
|
|
|
|
|
|
Interest
expense
|
$(2,814)
|
$(3,646)
|
$(14,125)
|
(23)%
|
(74)%
|
Settlement
proceeds
|
-
|
-
|
835,873
|
0%
|
(100)%
|
Total other income/
expenses
|
(2,814)
|
(3,646)
|
$821,748
|
(23)%
|
(100)%
|
|
|
|
|
|
|
INCOME
(LOSS) OF CONTINUING OPERATIONS BEFORE INCOME
TAX
|
$(321,440)
|
$205,459
|
$(1,311,749)
|
(256)%
|
(116)%
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (EXPENSE)
|
$61,542
|
$(191,141)
|
$(227,900)
|
(132)%
|
(16)%
|
NET
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
|
$(259,898)
|
$14,318
|
$(1,539,649)
|
(1,915)%
|
(101)%
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
$(157,863)
|
$32,310
|
$(2,535)
|
(589)%
|
(1,375)%
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
$(417,761)
|
$46,628
|
$(1,542,184)
|
(996)%
|
(103)%
|
Net income (loss)
per common share, basic and diluted:
|
|
|
|
|
|
Continuing
|
(209)
|
12
|
(1,241)
|
|
|
Discontinued
|
(127)
|
26
|
(2)
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
|
Basic
and diluted
|
1,241
|
1,241
|
1,241
|
|
|
Year Ended December 31, 2016, compared with Year Ended December 31,
2015:
Operating Revenues—Total continuing operating revenues
for 2016 were $17,558,489 a 9% decrease from $19,274,165 in 2015.
The decrease resulted from the net decreases in the income
categories described in the paragraphs below. There are no material
operating revenues from the Holding Company.
Fee Income—Fee income for 2016 was $1,227,001, a 6%
increase from $1,154,082 in 2015. The increase was due to an
increase in fees received by the Broker-Dealer Services segment as
a result of an increase in assets under management in the
Broker-Dealer Services segment’s registered investment
advisor. Assets under management as of period ended December 31,
2016 were approximately $174,006,074 compared to approximately
$141,962,379 during the same period ended 2015.
The
Company earns investment advisory fees in connection with the
Broker-Dealer Services segment’s registered investment
advisor. The Company pays the registered representatives a portion
of this fee income as a commission expense and retains the balance.
These fees constituted 7% of the Company’s consolidated
revenues in 2016 compared to 6% in 2015.
Commission Income—Commission income includes all
concessions received. The Company pays the registered
representatives a percentage of this income as commission expense
and retains the balance. Commission income for 2016 was
$15,946,037, a 10% decrease from $17,746,896 in 2015. Market
conditions fluctuated between 2016 and 2015 accounting for the
decrease in commission income. Future market conditions and
fluctuations within the makeup of the Company’s
representatives will continue to impact commission levels.
Commission revenues constituted 90% of the Company’s
consolidated revenues in 2016 and 92% in 2015.
Other Fee Income—Other fee income for 2016 was
$335,122 a 24% increase from $269,325 in 2015. The increase was due
primarily to a increase in marketing from sales on alternative
investments. Other fee income constituted 2% of the Company’s
consolidated revenues in 2016 compared to 1% in 2015.
Other Income—Other income for 2016 was $50,329 a 52%
decrease from $103,862 in 2015. The decrease was due primarily to a
decrease in income received from fees charged related to the
Broker-Dealer Services segment. Other income constituted less than
1% of the Company’s consolidated revenues in 2016 and 1%
2015.
Oil Lease Income—Oil lease income includes the revenue
received from operating oil leases within discontinued operations.
There is no oil lease income related to any of the other segments.
Oil lease income for 2016 was $64,785, a 35% increase from $47,965
the same period ended 2015. Oil lease income is discontinued
operations and is reported in discontinued operations on the income
statement.
Gross Margin – The Company’s gross margin for
the year ended December 31, 2016 was 15% and 14% in 2015 The gross
margin consists of continuing operating revenues and commission
expense.
Operating Expenses—Total continuing operating expenses
for 2016 were $17,866,077 a 6% decrease from $19,051,850 in 2015.
The decrease resulted from the net decreases in the expense
categories described in the paragraphs below.
Compensation and Benefits— Consolidated
compensation and benefits expense for 2016 was $1,490,033, a 14%
increase from $1,310,099 in 2015. The increase resulted primarily
from an increase in the number of employees and increased employee
wages, 401k matching and health insurance. Salaries and wages were
$1,308,290 during the period ended December 31, 2016 compared to
$1,165,081 during the same period ended in 2015. Insurance premiums
were $140,780 during the period ended December 31, 2016 compared to
$127,742 during the same period ended in 2015. Compensation and
benefits by segment is as follows:
|
|
|
|
Holding Company
segment
|
213,497
|
143,255
|
49%
|
Broker-Dealer
Services segment
|
1,276,536
|
1,166,844
|
9%
|
Discontinued
operations
|
55,097
|
40,187
|
37%
|
Commission Expense—Commission expense for 2016 was
$14,987,254, a 10% decrease from $16,610,792 in 2015. The decrease
in commissions corresponds with the decrease in concessions
received within the broker dealer segment. There was no commission
expense for the other segments.
Impairment Expense – There was an impairment expense
of $190,094 recorded in 2016 related to assets held for sale in
discontinued operations. There was no impairment expense for the
other segments in 2016 or 2015.
General and Administrative Expenses—Consolidated
general and administrative expenses for 2016 were $1,352,032, a 23%
increase from $1,100,417 in 2015. The increase resulted from a net
increases and decreases in the Company’s subsidiaries.
General and administrative expenses for the Holding Company segment
for 2016 were $375,580, an increase of 87% from $200,400 in 2015.
The increase is due to an increase in accounting services, expenses
tied to the building purchase and legal and settlement expenses.
General and administrative expenses for the Broker-Dealer Services
segment for 2016 were $976,452, an increase of 8% from $900,017 in
2015. The increase resulted from an increase in settlements paid,
due diligence expenses and licensing fees. General and
administrative expenses for discontinued operations were $82,345
for 2016, a 134% increase from $35,130 in 2015. The increase is due
to the operating expenses tied to the oil leases within the
discontinued operations.
Depreciation—Consolidated depreciation for 2016 was
$47,796, a 9% increase from $43,752 in 2015. Depreciation for the
Holding Company segment for 2016 was $3,238, a 4% increase from
$3,100 in 2015. Depreciation for the Broker-Dealer Services segment
for 2016 was $44,558, a 10% increase from $40,652 in 2015. The
depreciation expense in 2016 for discontinued operations was
immaterial and is carried in discontinued operations on the income
statement.
Interest Expense—Interest expense was $2,814 for 2016,
a 23% decrease from $3,646 in 2015. The difference is due to
interest payments made within the Holding Company segment. There
was no material interest expense in the other segments for 2016 or
2015.
Interest Income – Consolidated interest
income was $16,206 for 2016, an 80% decrease from $82,795 in 2015.
Interest income is related to discontinued operations and is
reported discontinued
operations on the income statement. There is no material
interest income in the other segments for 2016 or
2015.
Depletion—Depletion expense was $18,887 for 2016, an
80% increase from $10,467 in 2015. The depletion expense is
attributed to discontinued operations and is carried in
discontinued
operations on the income statement. There is no depletion
expense attributed to the Holding Company segment or the
Broker-Dealer segment.
Year Ended December 31, 2015, compared with Year Ended December 31,
2014:
Operating Revenues—Total continuing operating revenues
for 2015 were $19,274,165 a 9% decrease from $21,246,858 in 2014.
The decrease resulted from the net decreases in the income
categories described in the paragraphs below. There are no material
operating revenues from the Holding Company.
Fee Income—Fee income for 2015 was $1,154,082, a 5%
increase from $1,095,610 in 2014. The increase was due to an
increase in fees received by the Broker-Dealer Services segment as
a result of an increase in assets under management in the
Broker-Dealer Services segment’s registered investment
advisor. Assets under management as of period ended December 31,
2015 were approximately $141,962,379 compared to approximately
$141,000,000 during the same period ended 2014.
The
Company earns investment advisory fees in connection with the
Broker-Dealer Services segment’s registered investment
advisor. The Company pays the registered representatives a portion
of this fee income as a commission expense and retains the balance.
These fees constituted 6% of the Company’s consolidated
revenues in 2015 compared to 5% in 2014.
Commission Income—Commission income includes all
concessions received. The Company pays the registered
representatives a percentage of this income as commission expense
and retains the balance. Commission income for 2015 was
$17,746,896, a 9% decrease from $19,559,484 in 2014. Market
conditions fluctuated between 2015 and 2014 accounting for the
decrease in commission income. Future market conditions and
fluctuations within the makeup of the Company’s
representatives will continue to impact commission levels.
Commission revenues constituted 92% of the Company’s
consolidated revenues in 2015 and 2014.
Other Fee Income—Other fee income for 2015 was
$269,325 a 38% decrease from $436,070 in 2014. The decrease was due
primarily to a decrease in marketing from sales on alternative
investments. Other fee income constituted 1% of the Company’s
consolidated revenues in 2015 compared to 2% in 2014.
Other Income—Other income for 2015 was $103,862 a 33%
decrease from $155,694 in 2014. The decrease was due primarily to a
decrease in income received from fees charged related to the
Broker-Dealer Services segment. Other income constituted
approximately 1% of the Company’s consolidated revenues in
2015 and 2014.
Oil Lease Income—Oil lease income includes the revenue
received from operating oil leases within discontinued operations.
There is no oil lease income related to any of the other segments.
Oil lease income for 2015 was $47,965, a 100% increase from the
same period ended 2014. Oil lease income constituted less than 1%
of the Company’s consolidated revenues in 2015.
Gross Margin – The Company’s gross margin for
the year ended December 31, 2015 and 2014 was 14%.The gross margin
consists of continuing operating revenues and commission
expense.
Operating Expenses—Total continuing operating expenses
for 2015 were $19,051,850 an 19% decrease from $23,380,355 in 2014.
The decrease resulted from the net decreases in the expense
categories described in the paragraphs below.
Compensation and Benefits— Consolidated
compensation and benefits expense for 2015 was $1,310,099, a 30%
decrease from $1,873,558 in 2014. The decrease resulted primarily
from the settlement proceeds that ran through payroll (See Note 15
– Related Party Transactions) and bonuses paid to employees
during 2014. Salaries and wages were $1,165,081 during the period
ended December 31, 2015 compared to $1,341,499 during the same
period ended in 2014. Insurance premiums were $127,742 during the
period ended December 31, 2015 compared to $122,642 during the same
period ended in 2014. Compensation and benefits by segment is as
follows:
|
|
|
|
Holding Company
segment
|
143,255
|
556,667
|
(74)%
|
Broker-Dealer
Services segment
|
1,166,844
|
1,316,891
|
(11)%
|
Discontinued
operations
|
40,187
|
32,273
|
25%
|
Commission Expense—Commission expense for 2015 was
$16,610,792, a 9% decrease from $18,214,481 in 2014. The decrease
in commissions corresponds with the decrease in concessions
received within the broker dealer segment. There was no commission
expense for the other segments.
Goodwill Impairment Expense—There was no goodwill
impairment expense in the Holding Company segment for 2015 compared
to a goodwill impairment expense in 2014 of $2,132,026. There was
no goodwill impairment expense for the other segments.
The
Company’s goodwill represents the excess of purchase prices
over the fair value of the identifiable net assets of previously
acquired broker/dealer businesses. The goodwill is not amortized;
instead it is tested for impairment annually or more frequently if
the fair value of a reporting unit is below its carrying value.
Absent any impairment indicators, the Company performs its annual
goodwill impairment testing as of June 30 of each
year.
The
Company’s policy is to test goodwill for impairment using a
fair value approach at the reporting unit level. The Company
performs its goodwill impairment test in two steps. Step one
compares the fair value of the reporting unit to its carrying
value, including goodwill. If the fair value of the unit determined
in step one is lower than its carrying value, the Company proceeds
to step two, which then compares the carrying value of goodwill to
its implied fair value. Any excess of carrying value of goodwill
over its implied fair value at a reporting unit is recorded as
impairment.
The
valuation methodology the Company utilized in testing the
Company’s goodwill for impairment in 2014 is based on the
Adjusted Book Value Method. The Adjusted Book Value Method computes
the value of the ownership interest, or the owner’s equity,
by adjusting the value of the individual assets and liabilities to
their individual fair market values. The difference between the
adjusted assets and the adjusted liabilities is the adjusted book
value. Different premises or viewpoints (such as Fair Market Value,
replacement cost, liquidation, or going concern) may be employed to
value the individual assets and liabilities, depending upon the
circumstances.
In the
fourth quarter of 2014, due to a reduction in the estimated fair
market value of the Broker-Dealer Services segment (the
Company’s only reporting unit) the Company determined it was
necessary to perform an interim goodwill impairment test. In step
one of the impairment test it was determined that the fair value of
the reporting unit had decreased below its carrying value. The
Company then proceeded to step two of its impairment testing and
compared the carrying value of goodwill to its implied fair value
and determined that an impairment charge of $2,132,026 (See Note 15
– Goodwill) was necessary to reduce the carrying value of
goodwill to its implied fair value of zero.
General and Administrative Expenses—Consolidated
general and administrative expenses for 2015 were $1,100,417, a 2%
decrease from $1,127,582 in 2014. The decrease resulted from a net
increases and decreases in the Company’s subsidiaries.
General and administrative expenses for the Holding Company segment
for 2015 were $200,400, a decrease of 16% from $239,140 in 2014.
The decrease is due to a decrease in accounting services, insurance
expenses and legal expenses. General and administrative expenses
for the Broker-Dealer Services segment for 2015 were $900,017, an
increase of 1% from $889,442 in 2014. The increase resulted from an
increase in legal fees, due diligence expenses and accounting and
audit fees. General and administrative expenses for discontinued
operations were $35,130 for 2015, a 2,539% increase from $1,331 in
2014. The increase is due to the operating expenses tied to the oil
leases within the discontinued operations.
Depreciation—Consolidated depreciation for 2015 was
$43,752, a 34% increase from $32,708 in 2014. The primary
difference corresponds with the purchase of computer equipment and
software for the Company. Depreciation for the Holding Company
segment for 2015 was $3,100, a 15% decrease from $3,634 in 2014.
Depreciation for the Broker-Dealer Services segment for 2015 was
$40,652, a 40% increase from $29,074 in 2014. The depreciation
expense in 2015 for the discontinued operations in 2015 and 2014
was immaterial and is carried in discontinued
operations on the income statement.
Interest Expense—Interest expense was $3,646 for 2015,
a 74% decrease from $14,125 in 2014. The decrease was due to a full
year’s worth of interest payments made in 2014 compared to
only a couple of months with interest payments in 2015 within the
Holding Company segment. There was no material interest expense in
the other segments for 2015 or 2014.
Interest Income – Consolidated interest
income was $82,795 for 2015, a 167% increase from $30,900 2014. The
primary reason for the increase was due to the interest income
received to discontinued operations from the Baron Notes Receivable
in 2015 (See Note 20 – Baron Notes Receivable). Interest
income for discontinued operations for 2015 was $82,642 compared to
$29,435 in 2014. Interest income received to the Holding Company
for 2015 and 2014 is immaterial.
Depletion—Depletion expense was $10,467 for 2015, a
100% increase from 2014. The depletion expense is attributed to
discontinued operations. There is no depletion expense attributed
to the Holding Company segment or the Broker-Dealer
segment.
FINANCIAL CONDITION
On
December 31, 2016, the Company’s assets aggregated
$4,954,985, an increase of 9% from $4,550,667 in 2015, due to an
increase in fixed assets. On December 31, 2016, the Company’s
working capital was $584,196, a decrease of 42% from $1,004,009 in
2015. The decrease was due to a decrease in accounts receivable,
prepaids and cash and cash equivalents, offset by an increase in
liabilities. Stockholder’s equity was $2,125,545 on December
31, 2016, compared to $2,543,306 on December 31, 2015.
On
December 31, 2015, the Company’s assets aggregated
$4,550,667, a decrease of 10% from $5,047,341 in 2014, due to a
decrease in cash and cash equivalents, accounts receivable and
income tax receivable. The main reason tied to the decrease of
Company’s aggregated assets is the overpayment of taxes that
was made in 2014. On December 31, 2015, the Company’s working
capital was $1,004,009, a decrease of 9% from $1,104,533 in 2014.
The increase was due to an increase in accounts receivable and
income taxes receivable, offset by a decrease in settlements
payable and other current liabilities. Stockholder’s equity
was $2,543,306 on December 31, 2015, compared to $2,558,728 on
December 31, 2014.
Cash
used for operating activities was $22,311 for the year ended
December 31, 2016, as compared to net cash provided by operating
activities of $230,268 for the year ended December 31, 2015 and net
cash provided by operating activities of $349,239 for the year
ended December 31, 2014. Cash provided by operating activities
during year ended December 31, 2016, consists of net amounts of an
increase in commissions payable related to the broker dealer
segment, accounts payable related to an increase in conference
expenses within the broker dealer segment and an increase legal
expenses related to the holding segment and broker dealer segment,
a reduction in income taxes payable, an increase in accounts
receivable related to the broker dealer segment and impaired assets
held for sale related to discontinued operations.
Net
cash used for investing activities was $506,404 for the year ended
December 31, 2016, as compared to net cash used for investing
activities of $313,115 for the year ended December 31, 2015 and net
cash used for investing activities of $596,266 for the year ended
December 31, 2014. During the year ended December 31, 2016, the net
cash used for investing activities was from the purchase of the new
commercial office space and the reduction of the Baron notes
receivable. During the year ended December 31, 2015, the cash used
for investing activities was from the additions to discontinued
operations including the Kifer Lease, Shaffer leases and mineral,
water rights and surface interests in Hudspeth County, Texas.
During the year ended December 31, 2014, the cash used for
investing activities was from the Baron notes
receivable.
Net
cash provided by financing activities was $425,000 for the year
ended December 31, 2016, as compared to net cash used for financing
activities of $212,050 for the year ended December 31, 2015, and
net cash used for financing activities of $84,773 for the year
ended December 31, 2014. Cash provided by financing activities
during the year ended December 31, 2016, consists of net amounts of
payments on short term borrowings and proceeds from long term
borrowing attributed to the purchase of commercial office space.
Cash used for financing activities during the year ended December
31, 2015, consists of net amounts of payments on short term
borrowings, proceeds from short term borrowing and shareholder
distributions. Cash used for financing activities during year ended
December 31, 2014, consists of net payments on short term
borrowings, settlements payable in the amount of $22,000 and
shareholder distributions in the amount of $62,050.
LIQUIDITY AND CAPITAL RESOURCES
On
December 31, 2016, the Company’s working capital was $584,196
compared to $1,004,009 in 2015. On December 31, 2016, the Company
held $934,711 in cash and cash equivalents, as compared to
$1,038,426 on December 31, 2015. Liquid assets, which consist of
cash and cash equivalents, totaled $934,711 at December 31, 2016,
as compared to $1,038,426 on December 31, 2015, and $1,333,323 on
December 31, 2014. The Company is required to maintain certain
levels of cash and liquid securities in its broker-dealer
subsidiary to meet regulatory net capital
requirements.
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 to
acquire additional financial services firms, broker recruitment,
and repurchase shares of the Company’s common
stock, and service debt.
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 and additional costs related to acquisition of remodeling
the Company’s new office space.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Not
Applicable as a Smaller Reporting Company.
Item 8. Financial Statements and Supplementary Data
The
financial statements required by this item, the accompanying notes
thereto, and the reports of independent registered public
accounting firm are included as part of this Form 10-K immediately
following the signatures page, beginning on page F-1.
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Item 9A. Controls and Procedures
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.
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 were effective as of the end of
the period covered by this annual report.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Management
of Capital Financial Holdings, Inc. (together with its consolidated
subsidiaries, the “Company”), is responsible for
establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control over
financial reporting is a process designed under the supervision of
the Company’s principal executive and principal financial
officers to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance
with United States generally accepted accounting principles
(“GAAP”).
As of
December 31, 2016, management conducted an assessment of the
effectiveness of the Company’s internal control over
financial reporting, based on the 2013 framework established in
Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management has determined that
the Company’s internal control over financial reporting as of
December 31, 2016, is effective.
The
Company’s internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect
transactions and acquisitions and dispositions of assets; provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures are being made only in
accordance with authorizations of management and the directors of
the Company; and provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition
of Company assets that could have a material effect on the
Company’s financial statements.
This
Annual Report does not include an attestation report of the
Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s
registered public accounting firm pursuant to final rules of the
Securities and Exchange Commission that permit the Company to
provide only management’s report in this Annual
Report.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
The
information required by this Item will be contained in our
definitive Proxy Statement for our 2017 Annual Meeting of
Shareholders and such information is incorporated herein by
reference.
Item 11. Executive Compensation
The
information required by this Item will be contained in our
definitive Proxy Statement for our 2017 Annual Meeting of
Shareholders and such information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this Item will be contained in our
definitive Proxy Statement for our 2017 Annual Meeting of
Shareholders and such information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and
Director Independence
The
information required by this Item will be contained in our
definitive Proxy Statement for our 2017 Annual Meeting of
Shareholders and such information is incorporated herein by
reference.
Item 14. Principal Accounting Fees and Services
The
information required by this Item will be contained in our
definitive Proxy Statement for our 2017 Annual Meeting of
Shareholders and such information is incorporated herein by
reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
The
following exhibits are filed herewith or incorporated herein by
reference as set forth below:
Exhibit
No.
|
|
Description
|
|
|
|
2.1
|
|
Share
Purchase Agreement and Change of Advisor between Capital Financial
Holdings, Inc. and Corridor Investors, LLC (incorporated by
reference to Exhibit 2.1 contained in the Company’s Annual
Report on Form 10-K (File No. 0-25958) filed with the Commission on
March 18, 2014).
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 contained in the Company’s Quarterly Report on
Form 10-QSB, (File No. 0-25958), filed with the Commission on
November 10, 2004 and amended Articles filed with Form 8-K/A on
August 5, 2009).
|
|
|
|
3.2
|
|
Amended
Bylaws of the Company (incorporated by reference to Exhibit 3.2
contained in the Company’s Quarterly Report on Form 10-QSB,
as amended (File No. 0-25958), filed with the Commission on August
11, 2006).
|
|
|
|
4.1
|
|
Specimen
form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 contained in the Company’s Registration Statement
on Form S-1, as amended (File No.33-96824), filed with the
Commission on September 12, 1995).
|
|
|
|
4.2
|
|
Certificate
of Designation of Series A Convertible Preferred Shares
(incorporated by reference to Exhibit 4.1 contained in the
Company’s Quarterly Report on Form 10-QSB, (File No.
0-25958), filed with the Commission on November 10,
2004).
|
|
|
|
4.3
|
|
Instruments
defining rights of holders of securities: (See Exhibit 3.1 &
3.2)
|
|
|
|
14.1
|
|
Code of
Ethics (incorporated by reference to Exhibit 14.1 contained in the
Company’s Annual Report on Form 10-KSB, filed with the
Commission on March 30, 2004).
|
|
|
|
21.1
|
|
Subsidiaries
of the Company.
|
|
|
|
31.1
|
|
CEO
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and
Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
|
|
|
|
31.2
|
|
CFO
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and
Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
|
|
|
|
32.1
|
|
CEO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and
18 U.S.C. Section 1350.
|
|
|
|
32.2
|
|
CFO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and
18 U.S.C. Section 1350.
|
|
|
|
99.2
|
|
Asset
Purchase Agreement between Capital Financial Holdings, Inc. and
United Heritage Financial Group, Inc. (incorporated by reference to
Exhibit 99.2 contained in the Company’s Annual Report on Form
10-K (File No. 0-25958) filed with the Commission on March 18,
2014).
|
|
|
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
CAPITAL
FINANCIAL HOLDINGS, INC.
|
|
|
|
|
Date:
March
30, 2017
|
By: |
/s/
John Carlson
|
|
|
|
John
Carlson
|
|
|
|
Chief
Executive Officer & President
(Principal
Executive Officer)
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
Date
|
Signature
& Title
|
|
|
|
|
|
|
|
|
Date:
March
30, 2017
|
By:
|
/s/
John R.
Carlson
|
|
|
|
John R.
Carlson
|
|
|
|
President,
Executive Officer & Director
(Principal
Executive Officer)
|
|
|
|
|
|
|
By: |
/s/ Elizabeth A.
Colby |
|
|
|
Elizabeth A.
Colby
|
|
|
|
Chief Financial
Officer, Corporate Secretary & Director |
|
|
|
(Principal
Financial & Accounting Officer)
|
|
|
|
|
|
|
By:
|
/s/ Gordon
Dihle
|
|
|
|
Gordon
Dihle
|
|
|
|
Chairman
|
|
|
|
|
|
|
|
|
|
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY
TABLE
OF CONTENTS
|
Pages
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
Consolidated
Balance Sheets
|
F-2 -
F-3
|
|
|
Consolidated
Statements of Operations
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
|
|
Consolidated
Statements of Cash Flows
|
F-6
– F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
– F-26
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
Capital Financial Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Capital Financial Holdings, Inc. and subsidiaries (collectively,
the “Company”) as of December 31, 2016 and 2015, and
the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period
ended December 31, 2016. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Capital Financial Holdings, Inc. and subsidiaries as of
December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2016, in conformity with U.S. generally accepted
accounting principles.
/s/ Hein & Associates LLP
Denver, Colorado
March
30, 2017
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2016 AND 2015
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
Cash and cash
equivalents
|
$934,711
|
$1,038,426
|
Accounts receivable
(net of allowance for doubtfulaccounts of $24,000 for 2016 and
2015)
|
1,932,933
|
1,766,030
|
Prepaids
|
61,709
|
107,690
|
Current assets of
discontinued operations
|
6,375
|
46,317
|
|
|
|
Total current
assets
|
$2,935,727
|
$2,958,463
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
Land
|
98,409
|
-
|
Building
|
875,682
|
-
|
Furniture, fixtures
and equipment
|
543,601
|
513,830
|
Less accumulated
depreciation
|
(422,058)
|
(375,475)
|
Property and
equipment of discontinued operations
|
72,616
|
273,574
|
Net property and
equipment
|
$1,168,250
|
$411,929
|
|
|
|
OTHER
ASSETS
|
|
|
Severance
escrow
|
258,185
|
257,927
|
Deferred tax asset
– non-current
|
417,542
|
241,576
|
Other assets (net
of accumulated amortization
|
175,279
|
180,772
|
of $214,444 for
2016 and 2015)
|
|
|
|
Long-term assets of
discontinued operations
|
$-
|
$500,000
|
Total other
assets
|
$851,006
|
$1,180,275
|
|
|
|
TOTAL
ASSETS
|
$4,954,985
|
$4,550,667
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable
|
$292,987
|
$150,981
|
Commissions
payable
|
2,027,962
|
1,712,109
|
Income taxes
payable
|
10,187
|
61,667
|
Other current
liabilities
|
12,963
|
24,366
|
Current liabilities
of discontinued operations
|
7,434
|
5,331
|
|
|
|
Total current
liabilities
|
$2,351,533
|
$1,954,454
|
|
|
|
NON
CURRENT LIABILITIES
|
|
|
Building
mortgage
|
$475,000
|
$-
|
Non current
liabilities of discontinued operations
|
2,907
|
52,907
|
Total noncurrent
liabilities
|
477,907
|
52,907
|
|
|
|
TOTAL
LIABILITIES
|
$2,829,440
|
$2,007,361
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
Series A Preferred
stock – 5,000,000 shares authorized, $.0001 par value;
3,050,000 shares
issued and 0 outstanding
|
$305
|
$305
|
Additional paid in
capital – series A preferred stock
|
1,524,695
|
1,524,695
|
Common stock
– 1,000,000,000 shares authorized, $.0001 par value
1,241
and 1,241 shares issued and outstanding, respectively
|
1,241
|
1,241
|
|
|
|
Additional paid in
capital – common stock
|
10,221,515
|
10,221,515
|
Accumulated
deficit
|
(8,322,211)
|
(7,904,450)
|
Less Treasury
stock, 3,050,000 preferred shares at $0.4262
|
(1,300,000)
|
(1,300,000)
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
$2,125,545
|
$2,543,306
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$4,954,985
|
$4,550,667
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
|
|
|
|
OPERATING
REVENUES
|
|
|
|
Fee
income
|
$1,227,001
|
$1,154,082
|
$1,095,610
|
Commission
income
|
15,946,037
|
17,746,896
|
19,559,484
|
Other
income
|
50,329
|
103,862
|
155,694
|
Other fee
income
|
335,122
|
269,325
|
436,070
|
Total
revenue
|
$17,558,489
|
$19,274,165
|
$21,246,858
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
Compensation and
benefits
|
$1,490,033
|
$1,310,099
|
$1,873,558
|
Commission
expense
|
14,987,254
|
16,610,792
|
18,214,481
|
Goodwill impairment
expense
|
-
|
-
|
2,132,026
|
General and
administrative expenses
|
1,352,032
|
1,100,417
|
1,127,582
|
Depreciation
|
47,796
|
43,752
|
32,708
|
Total operating
expenses
|
$17,877,115
|
$19,065,060
|
$23,380,355
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
$(318,626)
|
$209,105
|
$(2,133,497)
|
|
|
|
|
OTHER
INCOME/ EXPENSES
|
|
|
|
Interest
expense
|
$(2,814)
|
$(3,646)
|
$(14,125)
|
Settlement
proceeds
|
-
|
-
|
835,873
|
Total other income/
expenses
|
(2,814)
|
(3,646)
|
$821,748
|
|
|
|
|
INCOME
(LOSS) OF CONTINUING OPERATIONS BEFORE INCOME
TAX
|
$(321,440)
|
$205,459
|
$(1,311,749)
|
|
|
|
|
INCOME
TAX BENEFIT (EXPENSE)
|
$61,542
|
$(191,141)
|
$(227,900)
|
NET
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
|
$(259,898)
|
$14,318
|
$(1,539,649)
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
$(157,863)
|
$32,310
|
$(2,535)
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
$(417,761)
|
$46,628
|
$(1,542,184)
|
Net income
(loss) per common share,
basic and diluted:
|
|
|
|
Continuing
|
(209)
|
12
|
(1,241)
|
Discontinued
|
(127)
|
26
|
(2)
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
Basic
and diluted
|
1,241
|
1,241
|
1,241
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
|
|
|
|
|
|
|
|
|
|
Preferred
stock and additional paid-in capital
|
|
|
|
|
|
|
Balance, beginning
of year
|
$1,525,000
|
$1,525,000
|
$1,525,000
|
3,050,000
|
3,050,000
|
3,050,000
|
Preferred stock
issued
|
-
|
-
|
-
|
-
|
-
|
-
|
Balance, end of
year
|
$1,525,000
|
$1,525,000
|
$1,525,000
|
3,050,000
|
3,050,000
|
3,050,000
|
|
|
|
|
|
|
|
Common stock and additional paid-in
capital
|
|
|
|
|
|
|
Balance, beginning
of year
|
$10,222,756
|
$10,222,756
|
$10,222,756
|
1,241
|
1,241
|
1,241
|
Balance, end of
year
|
$10,222,756
|
$10,222,756
|
$10,222,756
|
1,241
|
1,241
|
1,241
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
|
|
|
|
|
Balance, beginning
of year
|
$(7,904,450)
|
$(7,889,028)
|
$(6,284,794)
|
|
|
|
Net income
(loss)
|
(417,761)
|
46,628
|
(1,542,184)
|
|
|
|
Capital
dividends
|
-
|
(62,050)
|
(62,050)
|
|
|
|
Balance, end of
year
|
$(8,322,211)
|
$(7,904,450)
|
$(7,889,028)
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock and additional paid-in capital
|
|
|
|
|
|
|
Balance, beginning
of year
|
$(1,300,000)
|
$(1,300,000)
|
$(1,300,000)
|
|
|
|
Purchase of
preferred stock
|
-
|
-
|
-
|
|
|
|
Balance, end of
year
|
$(1,300,000)
|
$(1,300,000)
|
$(1,300,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
$2,125,545
|
$2,543,306
|
$2,558,728
|
|
|
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net income
(loss)
|
$(417,761)
|
$46,628
|
$(1,542,184)
|
Adjustments to
reconcile net income (loss) to net cash provided by (used for)
operating activities:
|
|
|
|
Depreciation and
Amortization
|
48,412
|
43,952
|
32,708
|
Goodwill impairment
expense
|
-
|
-
|
2,132,026
|
Impairment on
discontinued operations
|
190,094
|
-
|
-
|
Depletion
|
18,887
|
10,467
|
-
|
Provision
(benefit) for deferred income taxes
|
(175,966)
|
123,851
|
135,976
|
Effects on
operating cash flows due to changes in:
|
|
|
|
Accounts
receivable
|
(134,109)
|
175,080
|
(245,765)
|
Income taxes
payable (receivable)
|
(51,480)
|
265,290
|
(203,623)
|
Prepaids
|
51,311
|
(38,917)
|
1,135
|
Severance
escrow
|
(258)
|
(257)
|
(258)
|
Commissions
payable
|
315,853
|
(191,772)
|
42,832
|
Accounts
payable
|
144,109
|
(211,800)
|
27,868
|
Other
liabilities
|
(11,403)
|
7,746
|
(31,476)
|
|
|
|
|
Net cash provided
by (used for) operating activities
|
$(22,311)
|
$230,268
|
$349,239
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
(22,313)
|
(35,143)
|
(96,266)
|
Purchase of
building
|
(984,091)
|
-
|
-
|
Additions to other
property holdings
|
-
|
(87,972)
|
-
|
Additions to
O&G properties
|
-
|
(190,000)
|
-
|
Advances on Baron
notes receivable
|
-
|
-
|
(500,000)
|
Payment received on
notes receivable
|
500,000
|
-
|
-
|
|
|
|
|
Net cash used for
investing activities
|
$(506,404)
|
$(313,115)
|
$(596,266)
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Dividends
paid
|
$-
|
$(62,050)
|
(62,050)
|
Proceeds from
long-term borrowing
|
475,000
|
50,000
|
-
|
Payments on
short-term borrowing
|
(50,000)
|
(200,000)
|
(723)
|
Decrease in
settlements payable
|
-
|
-
|
(22,000)
|
|
|
|
|
Net cash provided
by (used for) financing activities
|
$425,000
|
$(212,050)
|
(84,773)
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
$(103,715)
|
$(294,897)
|
(331,800)
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
1,038,426
|
1,333,323
|
1,665,123
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$934,711
|
$1,038,426
|
1,333,323
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
Cash paid during
the year for:
|
|
|
|
Interest
|
$2,814
|
$3,646
|
$14,125
|
Income
taxes
|
$73,750
|
$30,280
|
$363,840
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
Goodwill impairment
expense
|
$-
|
$-
|
$2,132,026
|
Impairment on
discontinued operations
|
$190,094
|
$-
|
$-
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016, 2015 AND 2014
NOTE
1—NATURE OF OPERATIONS AND
SIGNIFICANT ACCOUNTING POLICIES
The
nature of operations and significant accounting policies of Capital
Financial Holdings, Inc., and its Subsidiaries are presented to
assist in understanding the Company’s consolidated financial
statements.
Nature of operations—Capital
Financial Holdings, Inc., (the “Company”) is the parent
company of Capital Financial Services, Inc. and Capital Natural
Resources, Inc. Capital Financial Holdings, Inc. was established in
September 1987 as a North Dakota corporation. Headquartered in
Minot, North Dakota, the Company is marketing its services
throughout the United States. The Company currently has three
reporting segments:
Broker-Dealer Services
The
Company derives the majority of its operating revenues from Capital
Financial Services, Inc. through investment advisory fees as well
as commissions earned from sales of mutual funds, insurance
products, and various other securities. 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 approximately
165 investment
representatives and investment advisors.
The
Company operates under the provision of Paragraph (k)(2)(ii) of
Rule 15c3-3 of the Securities and Exchange Commission and,
accordingly, is exempt from the remaining provisions of that rule.
To the best of management’s knowledge and belief the Company
met the identified exemption provisions from January 1, 2016 to
December 31, 2016 without exception.
Natural Resources
On June
9, 2014 the Company launched a wholly-owned subsidiary, Capital
Natural Resources, Inc. Capital Natural Resources, Inc. seeks
opportunities related to natural resources in the United States,
including petroleum, natural gas, and/or other minerals, water
resources and land. In the fourth quarter of 2016 the Company
determined to dispose of its natural resource assets in order to
concentrate on its core business of Broker-Dealer Services to
enable a more efficient use of its personnel and financial
resources. As of December 31, 2016 the segment met the definition
of discontinued operations.
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.
During
the year ended December 31, 2016, 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.
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 year ended December 31, 2016,
depletion expense was $18,887.
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. During the year ended December 31, 2016 the
Company held non-producing and unproved properties in Lincoln
County, Colorado and Divide and Williams County, North
Dakota. In the first quarter of 2017 these assets 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.
At the
end of each reporting period, the Company performs a “ceiling
test” on the value of the net capitalized cost of oil and gas
properties. This test compares the net capitalized cost
(capitalized cost of oil and gas properties, net of accumulated
depreciation, depletion and amortization and related deferred
income taxes) to the present value of estimated future net revenues
from oil and gas properties using an average price (arithmetic
average of the beginning of month prices for the prior 12 months)
and current cost discounted at 10% plus cost of properties not
being amortized and the lower of cost is greater than the ceiling,
a write-down or impairment is required. A write-down of the
carrying value of the asset is a non-cash charge that reduces
earnings in the current period. Once incurred, a write-down may not
be reversed in a later period. The Company recorded on impairment
of $190,094 on its oil and gas properties as of December 31, 2016,
based on the sales price received for the assets at
auction.
The
impairment on its oil and gas properties was recorded based upon
the actual value of the assets as determined by sale price of the
assets in open unreserved auction through an independent nationally
recognized oil and gas property auction facility. As of December
31, 2016 the segment met the definition of discontinued
operations.
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 December 31, 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 December 31, 2016, asset retirement obligations
were $2,907 and for the year ended December 31, 2016 accretion
expense was not significant.
Holding Company
The
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.
Principles of consolidation—The
consolidated financial statements include the accounts of Capital
Financial Holdings, Inc., and its subsidiaries Capital Financial
Services, Inc. (“CFS”) and Capital Natural Resources,
Inc. (“CNR”). All significant inter-company
transactions and balances have been eliminated in the accompanying
consolidated financial statements.
Concentrations—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 CFS, the Company’s broker-dealer
subsidiary. The company’s revenues are largely dependent on
the sales activity of registered representatives operating as
independent contractors. Accordingly, fluctuations in financial
markets and the composition of assets under management impact
revenues and results of operations.
Use of estimates—The preparation
of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
– The Company’s financial instruments consist of cash,
accounts receivables, accounts payable and accrued expense
obligations. The carrying value of the Company’s financial
instruments approximate their fair value due to the short-term
nature of their underlying terms.
Revenue recognition—Commission
income and the related clearing expenses are recorded based on the
trade date. The revenue earned from 12b-1 is recognized ratably
over the period received. Investment advisory fees are derived from
account management and investment advisory services. These fees are
determined based on a percentage of the customer’s assets
under sponsor management or a flat fee, may be billed monthly or
quarterly and recognized ratably over the period
received.
Cash and cash equivalents—The
Company’s policy is to record all liquid investments with
original maturities of three months or less as cash equivalents.
Liquid investments with maturities greater than three months are
recorded as investments.
Clearing Deposits—The Company has
“Deposit Accounts” with each of its Clearing Firms, as
set forth in each of the Clearing Agreements. Upon termination or
expiration of these agreements, the Clearing Firms would deliver
the balance of these accounts to the Company. As of December 31,
2016 the balance in the Company’s Dain account and Pershing
account was $35,000 and $100,000 respectively.
Accounts receivable—The
Company’s receivables consist primarily of concessions
related to registered representative activity. Management evaluates
the need for an allowance for doubtful accounts by identifying
troubled accounts and using historical experience. Accounts
receivable are written off when management deems them
uncollectible. Recoveries of accounts receivable previously written
off are recorded when received. The Company does not charge
interest on its receivables.
Baron notes receivable – The
Company monitors the credit qualify and associated risks of notes
receivable on an individual basis based on criteria such as
financial stability of the party and collection experience in
conjunction with general economic market conditions. As of December
31, 2016, the Company no longer has a receivable for Baron
notes.
Goodwill—The Company accounts for
goodwill under the FASB accounting and reporting standards for
goodwill and other intangible assets, which requires that goodwill
and indefinite-lived other intangible assets deemed to have an
indefinite useful life be assessed annually for impairment using
fair value measurement techniques. As of December 31, 2016, the
Company no longer has a value for goodwill.
Property and equipment—Property
and equipment is stated at cost less accumulated depreciation
computed on straight-line and accelerated methods over estimated
useful lives of 5-7 years.
Other assets—Other assets include
clearing deposits and other miscellaneous assets.
Advertising—Costs of advertising
and promotion are expensed as incurred. There were no advertising
and promotion costs in 2016 or 2015.
Earnings per common share—Basic
earnings per common share was computed using the weighted average
number of shares outstanding of 1,241 in 2014, 2015 and 2016.
Diluted earnings per common share is computed using the weighted
average number of shares outstanding adjusted for share equivalents
arising from unexercised stock warrants, stock options, written put
options, and preferred shares.
Income taxes—The Company files a
consolidated income tax return with its wholly owned subsidiaries.
The amount of deferred tax benefit or expense is recognized as of
the date of the consolidated financial statements, utilizing
currently enacted tax laws and rates. Deferred tax benefits or
expenses are recognized in the financial statements for the changes
in deferred tax assets between years. The Company’s policy is
to evaluate the likelihood that its uncertain tax positions will
prevail upon examination based on the extent to which those
positions have substantial support within the Internal Revenue Code
and Regulations, Revenue Rulings, court decisions, and other
evidence. It is the opinion of management that the Company has no
significant uncertain tax positions that would be subject to change
upon examination. The federal income tax returns of the Company are
subject to examination by the IRS, generally for three years after
they were filed.
Severance Escrow—The
Company’s severance escrow accounts are restricted cash held
in third-party administered escrow accounts for the sole purpose of
funding certain employee severance plans established in 2010 by the
Company’s Board of Directors for the benefit of and with the
purpose of retaining its employees. These funds are held in escrow
accounts pursuant to several Involuntary Termination Severance Pay
Plans and are not available to the Company for use other than the
Involuntary Termination Severance Plan purposes nor is it
accessible to creditors of the Company.
Reclassification—Certain amounts
from 2015 and 2014 have been reclassified to conform to the 2016
presentation. These reclassifications had no effect on the
Company’s net income/(loss).
Concentration of Credit Risk - The
Company has a concentration of credit risk for cash deposits at
various financial institutions. These deposits may at times exceed
amounts covered by insurance provided by the U.S. Federal Deposit
Insurance Corporation (FDIC). The Company has not experienced any
losses in such accounts.
Recent Accounting
Developments—
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 entitiy’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.
ASU
2016-12—Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients – The amendments in this update
affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic
606). ASU 2015-14, Revenue
from Contracts with Customers (Topic 606): Deferral of the
Effective Date, defers the effective date of update 2014-09
by one year. ASU 2014-09 is effective in the Company’s first
quarter of fiscal 2018. The Company is currently assessing the
potential impact of update, which is not expected to be
material.
ASU
2016-15—Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments –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. The Company is currently assessing
the requirements of this guidance, but doesn’t foresee a
reporting impact on the Company.
ASU
2016-17—Consolidation (Topic
810): Interests Held through Related Parties That Are under Common
Control - The amendments in this Update do not change the
characteristics of a primary beneficiary in current generally
accepted accounting principles (GAAP). Therefore, a primary
beneficiary of a VIE has both of the following characteristics: (1)
the power to direct the activities of a VIE that most significantly
impact the VIE’s economic performance and (2) the obligation
to absorb losses of the VIE that could potentially be significant
to the VIE or the right to receive benefits from the VIE that could
potentially be significant to the VIE. If a reporting entity
satisfies the first characteristic of a primary beneficiary (such
that it is the single decision maker of a VIE), the amendments in
this Update require that reporting entity, in determining whether
it satisfies the second characteristic of a primary beneficiary, to
include all of its direct variable interests in a VIE and, on a
proportionate basis, its indirect variable interests in a VIE held
through related parties, including related parties that are under
common control with the reporting entity. The amendments in this
Update are effective for public business entities for fiscal years
beginning after December 15, 2016, including interim periods within
those fiscal years. The Company has determined that there is no
impact.
ASU
2016-18—Statement of Cash
Flows (Topic 230): Restricted Cash (a consensus of the FASB
Emerging Issues Task Force) - The amendments in this Update
require that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted
cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows.
The amendments in this Update do not provide a definition of
restricted cash or restricted cash equivalents. The amendments in
this Update are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within
those fiscal years. The Company is currently assessing the
requirements of this guidance and has not yet determined the
potential impact.
ASU
2017-01—Business
Combinations (Topic 805): Clarifying the Definition of a
Business - Under the current implementation guidance in
Topic 805, there are three elements of a business—inputs,
processes, and outputs. While an integrated set of assets and
activities (collectively referred to as a “set”) that
is a business usually has outputs, outputs are not required to be
present. In addition, all the inputs and processes that a seller
uses in operating a set are not required if market participants can
acquire the set and continue to produce outputs, for example, by
integrating the acquired set with their own inputs and processes.
Public business entities should apply the amendments in this Update
to annual periods beginning after December 15, 2017, including
interim periods within those periods. The Company is currently
assessing the requirements of this guidance and has not yet
determined the potential impact.
NOTE
2—CASH AND CASH
EQUIVALENTS
Cash
and cash equivalents at December 31, 2016 and 2015 consist of cash
and savings accounts of $934,711 and $1,038,426 respectively. At
December 31, 2016 and 2015 the Company had severance escrow
balances of $258,185 and $257,927 respectively. The Company’s
severance escrow accounts are restricted cash held in third-party
administered escrow accounts for the sole purpose of funding
certain employee severance plans.
NOTE
3—PROPERTY AND
EQUIPMENT
Property and
equipment at December 31, 2016 and 2015, consists of the
following:
|
|
|
Office furniture
and equipment
|
$543,601
|
$513,830
|
Land
|
98,409
|
-
|
Building
|
875,682
|
-
|
Accumulated
depreciation and amortization
|
(422,058)
|
(375,475)
|
Property and
equipment of discontinued operations
|
72,616
|
273,574
|
|
$1,168,250
|
$411,929
|
Depreciation
expense for continuing operations totaled $47,796, $43,752 and
$32,708 in 2016, 2015 and 2014, respectively. The recently
purchased building and fixtures acquired in the purchase are not
currently listed as active assets and are not
depreciating.
NOTE
4—BUSINESS
VENTURES
On
March 7, 2007, the Company acquired certain assets of United
Heritage Financial Services, Inc. (UHFS), a wholly owned subsidiary
of United Heritage Financial Group, Inc., of Meridian, Idaho. UHFS
had approximately 120 independent registered representatives who
became part of Capital Financial Services, Inc. (CFS), the retail
brokerage division of the Company. Pursuant to the agreement, in
exchange for the assets of UHFS set forth above, the Company agreed
to issue 50 restricted CFH shares and pay a deferred cash earn out
payment totaling a maximum of $900,000, to be paid in 21 quarterly
installments. As of December 31, 2015, the Company had made
twenty-one quarterly installment payments. There is no longer a
liability relating to this acquisition. Due to the goodwill
impairment charge of $101,994 that was recorded on December 31,
2010, a charge of $25,862 that was recorded on March 31, 2012 and a
goodwill impairment charge of $2,132,026 on December 31, 2014 (See
Note 15-Goodwill). As of December 31, 2016, there is no goodwill
recorded relating to this acquisition.
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. In the fourth quarter of 2016 the Company
determined to dispose of its natural resource assets.
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 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 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
fourth quarter of 2016 the Company determined to dispose of its
natural resource segment. In the first quarter of 2017 all of the
natural resource assets described above were sold for
$66,200.
NOTE 5
– 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:
|
|
|
Current
Assets
|
|
|
Accounts
receivable
|
$5,626
|
-
|
Current Long term
receivable
|
-
|
38,420
|
Prepaids
|
749
|
7,897
|
Total current
assets
|
$6,374
|
46,317
|
|
|
|
Property
and Equipment
|
|
|
Oil and natural gas
properties, Full Cost Method of Accounting
|
$61,829
|
194,602
|
Less accumulated
depletion
|
(29,354)
|
(10,467)
|
Equipment
|
4,690
|
3,362
|
Less accumulated
depreciation
|
(816)
|
(200)
|
Other property
holdings
|
36,267
|
86,277
|
Net property and
equipment
|
$72,616
|
273,574
|
|
|
|
Other
Assets
|
|
|
Baron notes
receivable
|
$-
|
500,000
|
Total other
assets
|
$-
|
500,000
|
|
|
|
Total
Assets
|
$78,990
|
819,891
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
Accounts
payable
|
$7,434
|
5,331
|
Total current
liabilities
|
$7,434
|
5,331
|
|
|
|
Noncurrent
liabilities
|
|
|
Asset retirement
obligation
|
$2,907
|
2,907
|
Promissory
note
|
-
|
50,000
|
Total noncurrent
liabilities
|
$2,907
|
52,907
|
|
|
|
Stockholder’s
Equity
|
|
|
Common
Stock
|
$300,400
|
515,000
|
Accumulated
deficit
|
(231,751)
|
246,653
|
Total
stockholder’s equity
|
$68,649
|
761,653
|
|
|
|
Total
liabilities and stockholder’s equity
|
$78,990
|
819,891
|
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.
The
summarized income from discontinued operations is presented
below:
|
|
|
Operating
Revenues
|
|
|
Oil lease
income
|
$64,785
|
47,965
|
Total operating
revenue
|
$64,785
|
47,965
|
|
|
|
Operating
Expenses
|
|
|
Compensation and
benefits
|
$55,097
|
40,187
|
Impairment
|
190,094
|
-
|
Lease operating
expense
|
73,256
|
29,096
|
General and
administrative
|
9,088
|
6,034
|
Depletion
|
18,887
|
10,467
|
Depreciation
|
616
|
200
|
Total operating
expenses
|
$347,038
|
85,984
|
|
|
|
Operating
loss
|
$(282,253)
|
(38,019)
|
|
|
|
Other
income (expenses)
|
|
|
Interest
expense
|
$(847)
|
-
|
Interest
income
|
16,206
|
82,642
|
Total other income
(expenses)
|
$15,359
|
82,642
|
|
|
|
Income
(Loss) of discontinued operations before income tax
expense
|
$(266,894)
|
44,623
|
|
|
|
Income
tax (expense) benefit
|
$109,031
|
(12,313)
|
|
|
|
Net
income (loss)
|
$(157,863)
|
32,310
|
|
|
|
The
Company did not reclassify its Statements of Cash Flows to reflect
the various discontinued operations. Cash flows from 2016 are
combined with the cash flows from continuing operations within each
of the categories presented. Cash flows from discontinued
operations are as follows:
Net cash provided
by operating activities
|
$75,431
|
Net cash provided
by investing activities
|
$498,672
|
Net cash used for
financing activities
|
$590,583
|
NOTE
6—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
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 December 31, 2016. The loan matures with principal due on
September 12, 2017. For the period ended December 31, 2016, the
Company had no outstanding balance against this line of credit
before renewal. As of December 31, 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
7—INCOME
TAXES
The
provision for income taxes is based on earnings before income taxes
reported for financial statement purposes and consisted of the
following:
|
|
|
|
Current income tax
expense:
|
|
|
|
Federal
|
$-
|
$65,206
|
$69,367
|
State
|
10,238
|
23,728
|
20,923
|
Total current tax
expense
|
$10,238
|
$88,934
|
$90,290
|
Deferred tax
expense:
|
|
|
|
Federal
|
$(162,337)
|
$99,403
|
$121,404
|
State
|
(23,867)
|
15,117
|
14,572
|
Total deferred tax
expense
|
$(186,204)
|
$114,520
|
$135,976
|
|
|
|
|
Total provision
(benefit) for income tax
|
|
|
|
expense
|
$(175,966)
|
$203,454
|
$226,266
|
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).
Deferred tax assets
(liabilities) were comprised of the following:
|
|
|
|
Deferred
tax asset:
|
|
|
|
Capital
loss carry forward
|
$-
|
$-
|
$33,077
|
Valuation
on capital loss carry forward
|
-
|
-
|
(33,077)
|
Net
operating loss carryforward
|
135,209
|
-
|
-
|
Intangibles
|
32,111
|
-
|
-
|
Stock
option compensation
|
211,523
|
293,908
|
357,386
|
Other
assets
|
74,517
|
-
|
57,866
|
|
|
|
|
Total
deferred tax assets
|
$453,360
|
$293,908
|
$415,252
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Plant,
property and equipment
|
$(35,818)
|
$(52,332)
|
$(49,825)
|
Total
deferred tax liabilities
|
$(35,818)
|
$(52,332)
|
$(49,825)
|
|
|
|
|
Net
deferred tax asset
|
$417,542
|
$241,576
|
$365,427
|
Net deferred tax asset - non-current
|
417,542
|
241,576
|
365,427
|
Net
deferred tax asset
|
$417,542
|
$241,576
|
$365,427
|
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. The Company is
aware of the risk that the recorded deferred tax assets may not be
realizable. The capital loss generated on the sale of Omega shares
is unlikely to be recognized and therefore has not been included in
deferred assets. However, management believes that the Company will
obtain the full benefit of any net operating loss and other
deferred tax assets on the basis of its evaluation of the
Company’s anticipated profitability over the period of years
that the temporary differences are expected to become tax
deductions. It believes that sufficient book and taxable income
will be generated to realize the benefit of any net operating loss
and other deferred tax assets.
ASC 740
guidance requires that the Company evaluate all monetary tax
positions taken, and recognize a liability for any uncertain tax
positions that are more likely than not to be sustained by the tax
authorities. The Company has not recorded any liabilities, or
interest and penalties, as of December 31, 2016 related to
uncertain tax positions.
The
Company files income tax returns in the U.S. and various state
jurisdictions. There are currently no federal or state income tax
examinations underway for these jurisdictions. The tax years
2013-2015 remain open to examination by taxing jurisdictions to
which the Company is subject.
At
December 31, 2016, the Company has approximately $398,000 in
federal net operation loss carryforward which begins to expire in
2036.
A
reconciliation of the difference between the expected federal tax
rate computed at the U.S. statutory income tax rate of 35% and the
Company’s effective tax rate for the years ended December 31,
2016, 2015 and 2014 is shown in the following table:
|
|
|
|
Expected federal
tax rate
|
35%
|
35%
|
35%
|
State income
taxes
|
(1)%
|
5%
|
5%
|
Effect of permanent
differences
|
0%
|
0%
|
(64)%
|
Change in tax rate
and other
|
(5)%
|
41%
|
8%
|
|
|
|
|
Effective tax
rate
|
29%
|
81%
|
(17)%
|
The
effect of permanent differences in the period ended December 31,
2015, was primarily due to the expiring stock option expense. The
effect of permanent differences in the period ended December 31,
2014, was primarily due to the goodwill impairment that was offset
by the settlement proceeds (See Note 21 – Litigation). Income
tax payable for period ended December 31, 2016 was $10,187 compared
to income tax payable of $61,667 during the same period in
2015.
NOTE
8—STOCK WARRANTS, STOCK
SPLITS, AND STOCK OPTIONS
The
Company has authorized 210 perpetual warrants to certain
organizers, directors, officers, employees and shareholders of the
Company. All of these warrants were issued between 1987 and 1990
and were accounted for in accordance with the provisions of
Accounting Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees. No compensation expense
was recorded for these warrants as the exercise price exceeded the
market price of the stock at the date of issue. The Company plans
to continue to apply APB Opinion No. 25 in accounting for these
warrants. These warrants, at the date of issue, allowed for the
purchase of shares of stock at $2.00 per share. The exercise prices
of these warrants were adjusted to reflect stock splits of 1 for
10,000 in 2013, 2 for 1 in 2002, and 11 for 10 in 1990 and 1989.
0.2 warrants (adjusted for the 1 for 10,000 stock split in 2013 and
the 2 for 1 stock split in 2002) were exercised in 1997, leaving an
outstanding balance of 210 warrants as of December 31,
2016.
The
Company had entered into employment agreements with past employees
of the Company. Upon execution of these employment agreements, a
one-time granting of stock options took effect. These options are
fully vested and have a perpetual life. Each employment contract
stated the strike price for which options were granted. In
addition, the contracts granted options when the employees reach
specified performance goals.
The
Company has also issued options to directors as well as various
other employees and past employees. The options granted to
employees were granted in connection with reaching certain
performance goals. These options are considered to be fully vested
and have a contractual life of ten years.
The
Company plans to issue additional common shares if any of its
outstanding options are exercised. There have been no options
exercised to date.
The
Company has adopted the FASB accounting and standards for fair
value recognition provisions for stock-based employee compensation.
There were no compensation costs or deferred tax benefits
recognized for stock-based compensation awards for the twelve
months ended December 31, 2016. As of December 31, 2016, 421 stock
options totaling $1,103,600 had been cancelled.
In June
of 2013, shareholders approved by a majority vote a 10,000 to 1
reverse stock split during the annual meeting of shareholders. The
reverse stock split became effective on August 14,
2013.
Option
activity for the last three years was as follows:
|
|
Weighted
Average
Exercise Price
per Share
|
Weighted
Average
Grant Date Fair
Value
|
Aggregate
Intrinsic
Value
|
Outstanding on
January 1, 2014
|
539
|
$5,400
|
$2,800
|
$-
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Canceled
|
203
|
-
|
-
|
|
Outstanding on
December 31, 2014
|
336
|
$8,692
|
$4,435
|
$-
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Canceled
|
129
|
-
|
-
|
|
Outstanding on
December 31, 2015
|
207
|
$8,692
|
$4,435
|
$-
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Canceled
|
39
|
-
|
-
|
|
Outstanding on
December 31, 2016
|
168
|
$5,000
|
$3,844
|
$-
|
Exercisable options
at the end of 2016 were 168 and 207 in 2015 and 539 in 2014. The
following table summarizes information concerning options
outstanding and exercisable as of December 31, 2016:
|
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
|
Weighted Average
Exercise Price
|
$0 to $4,900
|
138
|
|
$4,200
|
138
|
$4,200
|
$5,000 to $9,900
|
27
|
1*
|
$5,200
|
27
|
$5,200
|
$10,000 to $15,000
|
3
|
|
$10,100
|
3
|
$10,100
|
$0 to $15,000
|
168
|
1*
|
$8,692
|
168
|
$8,692
|
*
Excludes options with a perpetual life
NOTE
9—EMPLOYEE BENEFIT
PLANS
The
Company sponsors a 401(K) plan for all its employees. Effective
January 1, 2005, the Company implemented a match of up to 4% of
employee deferrals. Plan expenses paid for by the Company were
$2,701, $1,021, and $2,815 for the years ended December 31, 2016,
2015, and 2014, respectively. The matching contributions paid by
the Company were $52,608, $42,393 and $40,411 for the years ended
December 31, 2016, 2015 and 2014, respectively. Effective January
1, 2016, the Company implemented a match of up to 6% of employee
deferrals.
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.
NOTE
11—NET CAPITAL
REQUIREMENTS
The
Company’s broker-dealer subsidiary Capital Financial
Services, Inc. is a member firm of the Financial Industry
Regulatory Authority (FINRA) and is registered with the Securities
and Exchange Commission (SEC) as a broker-dealer. Under the Uniform
Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of
1934), the subsidiary is required to maintain a minimum net capital
and a ratio of aggregate indebtedness to net capital, as defined,
of not more than 15 to 1. At December 31, 2016, this subsidiary had
net capital of $400,209 compared to $496,496 during the same period
ended in 2015; a minimum net capital requirement of $143,787 in
2016 compared to $126,993 during the same period ended in 2015;
excess net capital of $256,422 in 2016 compared to $369,503 during
the same period ended in 2015 and a ratio of aggregate indebtedness
to net capital of 5.4 to 1in 2016 compared to a ratio of aggregate
indebtedness to net capital of 3.8 to 1 during the same period
ended in 2015.
The
subsidiary claims
exemption from Rule 15c3-3 under Section 15c3-3(k)(2)(ii), which
states that all customer transactions are cleared through another
broker-dealer on a fully disclosed basis. The subsidiary promptly
transmits customer funds or securities to its clearing firm.
Therefore, a schedule showing the Computation for Determination of
Reserve Requirements under Rule 15c3-3 of the Securities and
Exchange Commission and the Schedule of Information Relating to
Possession or Control Requirements under Rule 15c3-3 of the
Securities and Exchange Commission, are not required.
We, as
members of management of Capital Financial Services, Inc., (the
subsidiary) are responsible for complying with 17 C.F.R
§240.17a-5, “Reports to be made by certain brokers and
dealers” and complying with 17 C.F.R §240.15c3-3:
((k)(2)(ii)) (the “exemption provisions”). To the best
of our knowledge and belief we state the following:
(1)We
identified the following provisions of 17 C.F.R §15c3-3(k)
under which the subsidiary claimed an exemption from 17C.F.R
§240.15c3-3: ((k)(2)(ii)) (the “exemption
provisions”) and (2) we met the identified exemption
provisions from January 1, 2016 to December 31, 2016 without
exception.
FINRA
conducted an examination of this subsidiary in 2015. The subsidiary
had items identified within the examination. This subsidiary is
exempt from the reserve requirements of Rule 15c3-3(k) (2) (ii).
Management of Capital Financial Services, Inc. is responsible for
complying with 17 C.F.R §240.17a-5, “Reports to be made
by certain brokers and dealers” and complying with 17 C.F.R
§240.15c3-3: ((k)(2)(ii)) (the “exemption
provisions”). To the best of their knowledge and belief,
management stated the following:
(1) We
identified the following provisions of 17 C.F.R §15c3-3(k)
under which the subsidiary claimed an exemption from 17C.F.R
§240.15c3-3: ((k)(2)(ii)) (the “exemption
provisions”) and (2) we met the identified exemption
provisions from January 1, 2015 to December 31, 2015 except as
described below:
On
approximately January 30, 2015, the firm failed to forward two
clearing firm deposits, each a check made payable to RBC
Correspondent Services, each check in the amount of $458.31, prior
to noon of the following business day.
The
subsidiary believes that both exceptions have been remediated prior
to December 31, 2015. The subsidiary has responded to the FINRA
examination to a level that it feels is adequate and has had no
further correspondence to date from FINRA.
NOTE
12 – 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 November 28, 2016 the broker dealer made its
latest response to the routine examination report. The broker
dealer is awaiting the closing letter from the SEC and continues to
work with its legal counsel with respect to any potential remaining
issues.
NOTE 13
– 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 1801 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 is being applied to the purchase price of the
Office Building and $200,000 of which will be utilized for
renovations to the building. The loan will carry 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.
NOTE
14—OPERATING
LEASES
The
Company has various leases for office equipment and office space
that are set to expire over the next several years through 2018.
The total rent expense for these leases was $94,224, $87,078 and
$94,024 for December 31, 2016, 2015 and 2014
respectively.
The
following is a schedule by years of future minimum rental payments
on operating leases as of December 31, 2016.
Years ending
December 31,
|
|
2017
|
$97,181
|
2018
|
23,700
|
2019
|
1,200
|
2020
|
1,200
|
2021
|
1,200
|
Total minimum
future rental payments
|
$124,481
|
NOTE
15—GOODWILL
The
changes in the carrying amount of goodwill for the years ended
December 31, 2016, 2015, and 2014, are as follows:
|
|
Balance as of
January 1, 2014
|
$2,132,026
|
Impairment
losses
|
(2,132,026)
|
Balance as of
December 31, 2014
|
$-
|
|
|
Impairment
losses
|
-
|
Balance as of
December 31, 2015
|
$-
|
|
|
Impairment
losses
|
-
|
Balance as of
December 31, 2016
|
$-
|
The
Company’s goodwill represents the excess of purchase prices
over the fair value of the identifiable net assets of previously
acquired broker/dealer businesses. The goodwill is not amortized;
instead it is tested for impairment annually or more frequently if
the fair value of a reporting unit is below its carrying value.
Absent any impairment indicators, the Company performs its annual
goodwill impairment testing as of June 30 of each
year.
The
Company’s policy is to test goodwill for impairment using a
fair value approach at the reporting unit level. The Company
performs its goodwill impairment test in two steps. Step one
compares the fair value of the reporting unit to its carrying
value, including goodwill. If the fair value of the unit determined
in step one is lower than its carrying value, the Company proceeds
to step two, which then compares the carrying value of goodwill to
its implied fair value. Any excess of carrying value of goodwill
over its implied fair value at a reporting unit is recorded as
impairment.
The
valuation methodology the Company utilized in testing the
Company’s goodwill for impairment in 2014 is based on the
Adjusted Book Value Method. The Adjusted Book Value Method computes
the value of the ownership interest, or the owner’s equity,
by adjusting the value of the individual assets and liabilities to
their individual fair market values. The difference between the
adjusted assets and the adjusted liabilities is the adjusted book
value. Different premises or viewpoints (such as Fair Market Value,
replacement cost, liquidation, or going concern) may be employed to
value the individual assets and liabilities, depending upon the
circumstances.
In the
fourth quarter of 2014, due to a reduction in the estimated fair
market value of Capital Financial Services, Inc., (the
Company’s only reporting unit) the Company determined it was
necessary to perform an interim goodwill impairment test. In step
one of the impairment test it was determined that the fair value of
the reporting unit had decreased below its carrying value. The
Company then proceeded to step two of its impairment testing and
compared the carrying value of goodwill to its implied fair value
and determined that an impairment charge of $2,132,026 was
necessary to reduce the carrying value of goodwill to its implied
fair value of zero.
NOTE
16—FAIR VALUE
DISCLOSURES
FASB
ASC 820 defines fair value, establishes a framework for measuring
fair value, and establishes a fair value hierarchy which
prioritizes the inputs to valuation techniques. Fair value is the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. A fair value measurement assumes that the
transaction to sell the asset or transfer the liability occurs in
the principal market for the asset or liability or, in the absence
of a principal market, the most advantageous market. Valuation
techniques that are consistent with the market, income or cost
approach, as specified by FASB ASC 820, are used to measure fair
value.
The
fair value hierarchy prioritizes the inputs to valuation techniques
used to measure fair value in three broad levels:
●
Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities the Company has the ability to
access.
●
Level 2 inputs are inputs (other than quoted prices included within
level 1) that are observable for the asset or liability, either
directly or indirectly.
●
Level 3 are unobservable inputs for the asset or liability and rely
on management’s own assumptions about the assumptions that
market participants would use in pricing the asset or liability.
(The unobservable inputs should be developed based on the best
information available in the circumstances and may include the
Company’s own data.)
The
application of valuation techniques applied to similar assets and
liabilities has been consistently applied. The following is a
description of the valuation methodologies used for instruments
measured at fair value:
Reconciliation of
Level 3 Balances:
|
|
|
Balance January 1,
2014
|
$2,132,026
|
Impairment loss on
goodwill
|
(2,132,026)
|
Balance January 1,
2015
|
$-
|
Impairment loss on
goodwill
|
-
|
Balance December
31, 2015
|
$-
|
Impairment loss on
goodwill
|
-
|
Balance December
31, 2016
|
$-
|
NOTE
17—EARNINGS PER
SHARE
Basic
earnings per share are computed by dividing earnings available to
common stockholders 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 stock had been converted to common stock. The following
reconciles amounts reported in the financial
statements:
|
For the Year
Ended December 31, 2016
|
|
|
|
|
Income (Loss) from
continuing operations
|
$(259,898)
|
|
|
Less: preferred
stock dividends
|
-
|
|
|
Income (Loss)
available to common stockholders – Basic earnings per
share
|
(259,898)
|
1,241
|
$(209)
|
Effect of dilutive
securities:
|
|
|
|
Options and
warrants
|
-
|
-
|
|
Income (Loss)
available to common stockholders – Diluted earnings per
share
|
$(259,898)
|
1,241
|
$(209)
|
|
For the Year
Ended December 31, 2015
|
|
|
|
|
Income (Loss) from
continuing operations
|
$14,318
|
|
|
Less: preferred
stock dividends
|
-
|
|
|
Income(Loss)
available to common stockholders – Basic earnings per
share
|
14,318
|
1,241
|
$12
|
Effect of dilutive
securities:
|
|
|
|
Options and
warrants
|
-
|
-
|
|
Loss available to
common stockholders – Diluted earnings per share
|
$14,318
|
1,241
|
$12
|
|
For the Year
Ended December 31, 2014
|
|
|
|
|
Income (Loss) from
continuing operations
|
$(1,539,649)
|
|
|
Less: preferred
stock dividends
|
-
|
|
|
Income(Loss)
available to common stockholders – Basic earnings per
share
|
(1,539,649)
|
1,241
|
$(1,241)
|
Effect of dilutive
securities:
|
|
|
|
Options and
warrants
|
-
|
-
|
|
Diluted earnings
per share
|
$(1,539,649)
|
1,241
|
$(1,241)
|
Options
and warrants to purchase 378 common shares at exercise prices
between $3,500 and $14,300 were outstanding at December 31, 2016,
but were not included in the computation of earnings per share for
the year ended December 31, 2016.
NOTE
18—COMPREHENSIVE INCOME
(LOSS)
There
were no differences between net income (loss) and comprehensive
income (loss).
NOTE
19—RELATED PARTY
TRANSACTIONS
On April 5, 2011, several broker-dealers and their
principals/officers, including the Company and John Carlson, the
President 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. The plaintiffs in the Signature
lawsuit were 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. On
September 23, 2014, the Plaintiffs, including the Company and John
Carlson individually, 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. In conjunction with the Settlement
Agreement described in Note 21 - Litigation, as compensation for
Mr. Carlson’s efforts to the benefit of the Company, the
Company agreed to pay $289,858 to John Carlson, which amount was
applied as additional executive compensation to Mr. Carlson in the
quarter ended December 31, 2014 and reported on the Consolidated
Statements of Operations of Capital Financial Holdings, Inc.
under Compensation and Benefits.
NOTE
20—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
21—LITIGATION
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 December 31, 2016, the Company is a defendant in two
on-going suits or arbitrations as discussed above. In the first
quarter of 2017, the Company received notice of two new arbitration
claims, both in the ordinary course of the business of the Company
as discussed above. The Company expects to vigorously defend these
cases. On December 21, 2016, the Company made a settlement payment
in the amount of $200,000 for a case that was on-going in 2016. As
of December 31, 2016, without admission of liability, the Company
recorded $63,000 for a potential settlement, pending the
determination of liability, if any. The $63,000 is included in
accrued liabilities as of December 31, 2016. The Company will
continue to defend the case. The Company estimates that the $63,000
accrued is the maximum possible range of loss that may result from
the outcome of this case.
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. 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
22-OPERATING
SEGMENTS
The
Company organizes its 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
subsidiary.
The
historical results of Capital Natural Resources, Inc. have been
reflected as discontinued operations.
As of,
and for the year ended, December 31, 2016:
|
|
|
|
|
|
|
|
Revenues from
external customers$
|
$-
|
$17,173,038
|
17,173,038
|
Other fee
income
|
-
|
334,882
|
334,882
|
Other
income
|
(3,462)
|
54,031
|
50,569
|
Interest
expense
|
(2,814)
|
-
|
(2,814)
|
Depreciation
|
3,238
|
44,558
|
47,796
|
Income (loss)
before income tax benefit (expense)
|
(587,553)
|
277,151
|
310,402
|
Income tax benefit
(expense)
|
170,185
|
(108,643)
|
61,542
|
Net income (loss)
of continued operations
|
(428,406)
|
168,508
|
(259,898)
|
Segment assets of
continued operations
|
1,662,726
|
3,177,059
|
4,839,785
|
As of,
and for the year ended, December 31, 2015:
|
|
|
|
|
|
|
|
Revenues from
external customers$
|
$-
|
$18,900,978
|
$18,900,978
|
Other fee
income
|
-
|
269,325
|
269,325
|
Other
income
|
26,476
|
77,233
|
103,709
|
Interest
expense
|
(3,578)
|
(68)
|
(3,646)
|
Depreciation
|
3,100
|
40,652
|
43,752
|
Income (loss)
before income tax benefit (expense)
|
(310,494)
|
529,163
|
218,669
|
Income tax benefit
(expense)
|
16,291
|
(207,432)
|
(191,141)
|
Net income (loss)
of continued operations
|
(307,413)
|
321,731
|
14,318
|
Segment assets of
continued operations
|
670,139
|
3,007,946
|
3,678,085
|
As of,
and for the year ended, December 31, 2014:
|
Holding Company
|
Broker-Dealer Services
|
Total
|
Revenues from
external customers
|
$-
|
$21,245,393
|
$21,245,393
|
Interest
Expense
|
(14,116)
|
(9)
|
(14,125)
|
Depreciation
|
3,634
|
29,074
|
32,708
|
Settlement
Proceeds
|
835,873
|
-
|
835,873
|
Goodwill impairment
expense
|
2,132,026
|
-
|
2,132,026
|
Income (loss)
before income tax benefit (expense)
|
(2,107,244)
|
795,495
|
(1,311,749)
|
Income tax benefit
(expense)
|
83,934
|
(311,834)
|
(227,900)
|
Net income (loss)
of continued operations
|
(2,023,310)
|
483,661
|
(1,539,649)
|
Segment assets of
continued operations
|
1,681,573
|
3,281,228
|
4,962,801
|
Reconciliation
of Segment Information
|
|
|
|
|
|
|
|
Assets for the
Holding Company segment
|
$1,662,726
|
$670,139
|
$1,681,573
|
Assets for the
Broker-Dealer Services segment
|
3,177,059
|
3,007,946
|
3,281,228
|
Elimination for the
Holding Company segment receivables
|
(243,392)
|
(178,392)
|
(178,392)
|
Elimination for the
Broker-Dealer Services segment receivables
|
(5,000)
|
(5,000)
|
(5,000)
|
Consolidated assets
of continued operations
|
$4,591,393
|
$3,494,693
|
$4,779,409
|
NOTE
23—SUBSEQUENT
EVENTS
As of
December 31, 2016, without admission of liability, the Company
recorded $63,000 for a potential settlement, pending the
determination of liability, if any. The $63,000 is included in
accrued liabilities as of December 31, 2016. The Company will
continue to defend the case. The Company estimates that the $63,000
accrued is the maximum possible range of loss that may result from
the outcome of this case.