Blueprint
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2018
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ____________ to ____________
Commission
file number: 0-25958
CAPITAL FINANCIAL HOLDINGS, INC.
|
(Exact
name of registrant as specified in its charter)
|
North
Dakota
|
45-0404061
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
1821
Burdick Expressway W
|
Minot,
North Dakota 58701
|
(Address
of principal executive offices) (Zip code)
|
(701)
837-9600
|
(Registrant's
telephone number, including area code)
|
_______________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
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).
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
|
☐
|
|
Accelerated
filer
|
☐
|
Non-accelerated
filer
|
☐
|
|
Smaller
reporting company
|
☒
|
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
As of
November 19, 2018, there were 1,241 common shares of the issuer
outstanding.
FORM 10-Q
CAPITAL FINANCIAL HOLDINGS, INC.
INDEX
PART I
|
FINANCIAL INFORMATION
|
Page #
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets -
|
|
|
September
30, 2018 and December 31, 2017
|
3
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Income (Operations)
–
Three
Months Ended September 30, 2018 and 2017
|
5
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Income (Operations)
–
|
|
|
Nine
Months Ended September 30, 2018 and 2017
|
6
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows -
|
7
|
|
Nine
Months Ended September 30, 2018 and 2017
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
8
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
17
|
|
|
|
Item
4.
|
Controls
and Procedures
|
17
|
|
|
|
PART II
|
OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
18
|
|
|
|
Item
1A.
|
Risk
Factors
|
18
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
18
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
18
|
|
|
|
Item
4.
|
Removed
and Reserved
|
18
|
|
|
|
Item
5.
|
Other
Information
|
18
|
|
|
|
Item
6.
|
Exhibits
|
19
|
|
|
|
|
SIGNATURES
|
|
PART I - FINANCIAL INFORMATION
ITEM 1.
|
Financial Statements
|
CAPITAL FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
Cash and cash
equivalents
|
$1,929,706
|
$1,794,896
|
Accounts receivable
(net of an allowance of $24,000 for 2018 and 2017)
|
1,820,212
|
1,824,995
|
Prepaids
|
8,356
|
55,466
|
|
|
|
|
|
|
Total
current assets
|
$3,758,274
|
$3,675,357
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
Land
|
$98,409
|
$98,409
|
Building
|
1,102,148
|
1,096,946
|
Furniture, fixtures
and equipment
|
348,615
|
348,363
|
Less
accumulated depreciation
|
(326,513)
|
(271,747)
|
|
|
|
|
|
|
Net
property and equipment
|
$1,222,659
|
$1,271,971
|
|
|
|
OTHER
ASSETS
|
|
|
Deferred tax asset
– non-current
|
$187,931
|
$187,931
|
|
|
|
Total
other assets
|
$187,931
|
$187,931
|
|
|
|
TOTAL
ASSETS
|
$5,168,864
|
$5,135,259
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
Accounts
payable and accrued expenses
|
$322,542
|
$496,875
|
Commissions
payable
|
2,045,455
|
2,029,467
|
Income
taxes payable
|
54,578
|
10,859
|
Other
current liabilities
|
–
|
1,749
|
|
|
|
Total current liabilities
|
$2,422,574
|
2,538,951
|
|
|
|
NON
CURRENT LIABILITIES
|
|
|
Building
mortgage
|
$649,150
|
$672,426
|
|
|
|
Total noncurrent liabilities
|
649,150
|
$672,426
|
|
|
|
TOTAL
LIABILITIES
|
$3,071,784
|
$3,211,377
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Series A preferred stock –
5,000,000,000 shares authorized, $.0001 par value;
3,050,000 and 3,050,000 shares issued and outstanding,
respectively
|
$305
|
$305
|
Additional
paid in capital – Series A preferred stock
|
1,524,695
|
1,524,695
|
Common
stock – 1,000,000,000 shares authorized, $.0001 par
value; 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
|
(8,350,616)
|
-8,523,873
|
Less
Treasury stock, 3,050,000 preferred shares at $0.4262
|
(1,300,000)
|
-1,300,000
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
$2,097,140
|
$1,923,883
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
$5,168,864
|
$5,135,259
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(OPERATIONS)
|
(Unaudited)
Three Months
Ended
September
30,
|
|
|
|
REVENUES
|
|
|
Fee
income
|
$552,478
|
$431,944
|
Commission
income
|
3,165,349
|
3,213,739
|
Other fee
income
|
28,487
|
169,869
|
|
|
|
Total
revenue
|
$3,746,314
|
$3,815,552
|
|
|
|
EXPENSES
|
|
|
Compensation and
benefits
|
374,532
|
344,674
|
Commission
expense
|
3,128,245
|
3,028,630
|
General and
administrative expenses
|
315,692
|
320,917
|
Depreciation
|
18,282
|
8,647
|
|
|
|
Total
operating expenses
|
$3,836,751
|
3,702,868
|
|
|
|
INCOME
(LOSS) OF CONTINUING OPERATIONS
|
|
|
|
$(90,437)
|
$112,684
|
OTHER
INCOME/EXPENSES
|
|
|
Interest
(expense)
|
$(8,318)
|
$(8,453)
|
Loss from disposed
assets
|
–
|
(5,092)
|
Other
income-rent
|
800
|
–
|
Other
income-interest
|
264
|
–
|
|
|
|
Total
other income (expense)
|
$(7,254)
|
$(13,545)
|
|
|
|
INCOME
(LOSS) OF CONTINUING OPERATIONS BEFORE INCOME
TAX
|
$(97,691)
|
$99,139
|
INCOME
TAX BENEFIT (EXPENSE)
|
$25,124
|
$(50,505)
|
|
|
|
NET
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
|
(72,567)
|
48,634
|
|
|
|
DISCONTINUED
OPERATIONS
|
–
|
–
|
|
|
|
NET
INCOME (LOSS)
|
$(72,567)
|
48,634
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE, BASIC
AND DILUTED:
|
|
|
Continuing
|
$(58)
|
39
|
Discontinued
|
$–
|
–
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
Basic and
diluted
|
1,241
|
1,241
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(OPERATIONS)
|
(Unaudited)
Nine Months
Ended
September
30,
|
|
|
|
REVENUES
|
|
|
Fee
income
|
$1,578,507
|
$1,144,548
|
Commission
income
|
9,822,090
|
9,971,996
|
Other fee
income
|
72,164
|
384,269
|
|
|
|
Total
revenue
|
$11,472,761
|
$11,500,813
|
|
|
|
EXPENSES
|
|
|
Compensation and
benefits
|
1,006,961
|
1,102,698
|
Commission
expense
|
9,509,096
|
9,373,638
|
General and
administrative expenses
|
599,110
|
986,657
|
Depreciation
|
54,766
|
44,054
|
|
|
|
Total
operating expenses
|
$11,169,993
|
$11,507,047
|
|
|
|
INCOME
(LOSS) OF CONTINUING OPERATIONS
|
$302,828
|
$(6,234)
|
|
|
|
OTHER
INCOME/EXPENSES
|
|
|
Interest
(expense)
|
$(24,589)
|
$(20,714)
|
Loss from disposed
assets
|
0
|
(5,092)
|
Other
income-rent
|
2,000
|
-
|
Other
income-interest
|
583
|
-
|
|
|
|
Total
other income (expense)
|
$(22,006)
|
$(25,806)
|
|
|
|
INCOME
(LOSS) OF CONTINUING OPERATIONS BEFORE INCOME TAX
|
$280,822
|
$(32,040)
|
INCOME
TAX BENEFIT (EXPENSE)
|
$(107,565)
|
$(9,326)
|
|
|
|
NET
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
|
$173,257
|
$(41,366)
|
|
|
|
DISCONTINUED
OPERATIONS
|
$–
|
$(22,315)
|
|
|
|
NET
INCOME (LOSS)
|
$173,257
|
(63,681)
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE, BASIC
AND DILUTED:
|
|
|
Continuing
|
$138
|
(33)
|
Discontinued
|
-
|
(18)
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
Basic and
diluted
|
1,241
|
1,241
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CAPITAL
FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
Nine Months
Ended
September
30,
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net income
(loss)
|
$173,257
|
$(63,681)
|
Adjustments to
reconcile net income (loss) to net cash provided by (used for)
operating activities:
|
|
|
Depreciation
|
54,767
|
44,054
|
Depletion
|
-
|
(29,354)
|
Provision (benefit)
for deferred income taxes
|
-
|
97,106
|
Effects on
operating cash flows due to changes in:
|
|
|
Accounts
receivable
|
(4,783)
|
275,605
|
Income taxes
payable (receivable)
|
43,718
|
(1,330)
|
Prepaids
|
47,110
|
27,010
|
Severance
escrow
|
-
|
100,293
|
Accounts
payable
|
(174,333)
|
(43,355)
|
Commissions
payable
|
15,987
|
(263,425)
|
Other
liabilities
|
(1,749)
|
100,736
|
Net
cash provided by (used for) operating activities
|
$163,540
|
$243,659
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
Disposal (Purchase)
of property and equipment
|
(252)
|
(22,333)
|
Improvements to
building
|
(5,202)
|
(221,264)
|
Deductions to
property and equipment
|
(23,276)
|
5,093
|
Deductions to oil
and gas properties
|
-
|
105,438
|
Net
cash used for investing activities
|
$(28,730)
|
(133,066)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
Proceeds from
long-term borrowings
|
-
|
$200,000
|
Net
cash provided by (used for) financing activities
|
-
|
$200,000
|
|
|
|
|
|
|
NET
[INCREASE/DECREASE] IN CASH AND CASH EQUIVALENTS
|
134,810
|
$310,593
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
1,794,896
|
$934,711
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
1,929,706
|
$1,245,304
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
|
|
|
Cash paid for
interest on building mortgage
|
24,589
|
$8,453
|
|
|
|
SEE
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 AND 2017
NOTE 1 - BASIS OF PRESENTATION
The
accompanying condensed consolidated financial statements of Capital
Financial Holdings, Inc., a North Dakota corporation, and its
subsidiary Capital Financial Services, Inc. (“CFS”)
(collectively, the "Company"), included herein have been prepared
by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”). These unaudited condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and the footnotes thereto
contained in the Annual Report on Form 10-K for the year ended
December 31, 2017, of Capital Financial Holdings, Inc., as filed
with the SEC. The condensed consolidated balance sheet at December
31, 2017, contained herein, was derived from audited financial
statements, but does not include all disclosures included in the
Form 10-K and applicable under accounting principles generally
accepted in the United States of America. Certain information and
footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America, but not
required for interim reporting purposes, have been condensed or
omitted.
In the
opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which
are of a normal, recurring nature) necessary for a fair
presentation of the financial statements. The results of operations
for the nine months ended September 30, 2018, are not necessarily
indicative of operating results for the entire year.
NOTE 2 – ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET
EFFECTIVE
A
summary of our significant accounting policies is included in Note
1 of our 2017 Form 10-K filed on April 18, 2018.
ASU
2014-15 —Presentation of
Financial Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern. The amendment requires that in
connection with preparing financial statements for each annual and
interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the
aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the
date that the financial statements are issued.
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.
NOTE 3 – BUSINESS VENTURES
On June
9, 2014, the Company launched a new wholly-owned operating
subsidiary, Capital Natural Resources, Inc.
(“CNR”).
In the
first quarter of 2017, all of the natural resource assets of CNR
were disposed of. As of December 31, 2016, the natural resource
subsidiary, Capital Natural Resources, Inc., met the definition of
discontinued operations.
NOTE 4 – DISCONTINUED
OPERATIONS
On
March 2 and 3, 2017 the Company sold the assets in its natural
resource segment, Capital Natural Resources, Inc. The sale included
all of the leases and coal, mineral, water and surface
interests.
The
summarized balance sheet for discontinued operations is presented
below:
|
|
|
Current
Assets
|
|
|
Accounts
receivable
|
$–
|
$(19,168)
|
Current Long term
receivable
|
–
|
–
|
Prepaids
|
–
|
–
|
Total current
assets
|
$–
|
$(19,168)
|
|
|
|
Property
and Equipment
|
|
|
Oil and natural gas
properties, Full Cost Method of Accounting
|
$–
|
$–
|
Less accumulated
depletion
|
–
|
–
|
Equipment
|
–
|
–
|
Less accumulated
depreciation
|
–
|
–
|
Other property
holdings
|
–
|
–
|
Net property and
equipment
|
$–
|
$–
|
|
|
|
Total
Assets
|
$–
|
$(19,168)
|
|
|
|
Current
liabilities
|
|
|
Accounts
payable
|
$–
|
$45
|
Total current
liabilities
|
$–
|
$45
|
|
|
|
Noncurrent
liabilities
|
|
|
Asset retirement
obligation
|
$–
|
–
|
Total noncurrent
liabilities
|
$–
|
$–
|
|
|
|
Stockholder’s
Equity
|
|
|
Common
Stock
|
$–
|
$270,400
|
Accumulated
deficit
|
–
|
(289,613)
|
Total
stockholder’s equity
|
$–
|
$(19,213)
|
|
|
|
Total
liabilities and stockholder’s equity
|
$–
|
$(19,168)
|
The
results of operations of Capital Natural Resources, Inc. are
included in the Company’s Consolidated Statements of
Operations as discontinued operations.
The
summarized income for the nine months ended September 30, 2018 and
September 30, 2017 from discontinued operations is presented
below:
|
|
|
Operating
Revenues
|
|
|
Oil lease
income
|
$–
|
$13,676
|
Total operating
revenue
|
$–
|
13,676
|
|
|
|
Operating
Expenses
|
|
|
Compensation and
benefits
|
$–
|
–
|
Lease operating
expense
|
–
|
–
|
General and
administrative
|
–
|
–
|
Depletion
|
–
|
–
|
Depreciation
|
–
|
–
|
Loss from
discontinued operations
|
–
|
(22,315)
|
Total operating
expenses
|
$–
|
$(22,315)
|
|
|
|
Operating
loss
|
$–
|
$(22,315)
|
|
|
|
Other
income (expenses)
|
|
|
Interest
expense
|
$–
|
$–
|
Interest
income
|
–
|
–
|
Total other income
(expenses)
|
$–
|
$–
|
|
|
|
Loss
of discontinued operations before income tax expense
|
$–
|
$(22,315)
|
|
|
|
Income
tax (expense) benefit
|
$–
|
–
|
|
|
|
Net
loss
|
$–
|
(22,315)
|
The
Company did not reclassify its Statements of Cash Flows to reflect
the various discontinued operations. Cash flows from 2017 are
combined with the cash flows from continuing operations within each
of the categories presented.
NOTE 5 - STOCK WARRANTS,
STOCK SPLITS, AND STOCK OPTIONS
The
Company measures and records compensation expense for all
share-based payment awards made to employees and directors,
including employee stock options, based on estimated fair values.
There were no compensation costs or deferred tax benefits
recognized for stock-based compensation awards for the nine months
ended September 30, 2018 and 2017. Changes are due to the stock
buyback and reverse stock split.
Option
activity for the twelve months ended December 31, 2017 and the nine
months ended September 30, 2018 was as follows:
|
|
Weighted
Average
Exercise
Price
per
Share
|
Weighted Average
Grant Date Fair Value
|
Aggregate
Intrinsic
Value
|
Outstanding on
January 1, 2017
|
207
|
$$8,692
|
$$4,435
|
$–
|
Granted
|
-
|
–
|
–
|
|
Exercised
|
-
|
–
|
–
|
|
Canceled
|
39
|
–
|
–
|
|
Outstanding on
December 31, 2017
|
168
|
$$5,000
|
$$3,844
|
$–
|
Granted
|
|
–
|
–
|
|
Exercised
|
|
–
|
–
|
|
Canceled
|
|
–
|
–
|
|
Outstanding on
September 30, 2018
|
167
|
$$4,538
|
$$4,190
|
$-
|
Exercisable
options totaled 168 at December 31, 2017 and totaled 167 at
September 30, 2018.
NOTE 6 – INCOME TAXES
Deferred
taxes arise because of different tax treatment between financial
statement accounting and tax accounting, known as “temporary
differences.” The Company records the tax effect of these
temporary differences as “deferred tax assets”
(generally items that can be used as a tax deduction or credit in
future periods) and “deferred tax liabilities”
(generally items for which the Company has received a tax deduction
and has not yet been recorded in the consolidated statement of
operations).
Management
reviews and adjusts those estimates annually based upon the most
current information available. However, because the recoverability
of deferred taxes is directly dependent upon the future operating
results of the Company, actual recoverability of deferred taxes may
differ materially from management’s estimates.
At
September 30, 2018, the Company has approximately 114,000 in
federal net operation loss carry forward which begins to expire in
2036.
NOTE 7 - EARNINGS PER SHARE
Basic
earnings per share are computed by dividing earnings available to
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect
per share amounts that would have resulted if dilutive potential
common shares had been converted to common shares. The following
reconciles amounts reported in the financial
statements:
|
Nine
Months Ended September 30,
2018
|
Nine
Months Ended September 30,
2017
|
|
|
|
|
|
|
|
Net (Loss) Income
of
continuing
operations
|
$173,257
|
|
|
$(41,366)
|
|
|
Less: Preferred
Stock Dividends
|
–
|
|
|
–
|
|
|
Income
of Continuing
Operations
Available to
Common
Shareholders
Basic
and diluted
Earnings
per share
|
$173,257
|
1,241
|
138
|
$(41,366)
|
1,241
|
$(33)
|
Options
and warrants to purchase 377 common shares at exercise prices
between $3,500 and $14,300 were outstanding at September 30, 2018,
but were not included in the computation of diluted earnings per
share for the quarter ending September 30, 2018 and September 30,
2017, because their effect was anti-dilutive.
NOTE 8 – 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.
NOTE 9 – REGULATORY MATTERS
The
broker dealer (“BD”) segment of Capital Financial
Services, Inc. is subject to periodic examinations by its
regulators, the Financial Industry Regulatory Authority
(“FINRA”) and the Securities Exchange Commission
(“SEC”).
During
the second quarter of 2018, FINRA conducted a routine examination
of the broker dealer segment which was concluded October 9, 2018.
The broker dealer is in the process of adopting recommendations and
procedures ascertained from the examination process.
NOTE 10 – 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 was applied to the purchase price of the Office
Building and $200,000 of which was utilized for renovations to the
building. Renovations to the building were made in 2017 and 2018 to
bring the total cost of the land and building to $1,200,557 at
September 30, 2018. The loan carries a fixed interest rate of
4.879% per annum for five (5) years with the rate to be adjusted at
the end of the five (5) year period based on the Wall Street
Journal Prime interest rate plus 1.759%. American Bank has a first
priority mortgage on the Office Building.
NOTE 11 – SEGMENT REPORTING
The
Company organizes its current business units into two reportable
segments: broker dealer services 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 holding company encompasses cost associated with
its office building, business development and acquisitions,
dispositions of subsidiary entities and results of discontinued
operations, dividend income and recognized gains or
losses.
The
Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies.
As
of, and for the nine months ended September 30,
2018
|
|
|
|
Commissions
and fee income
|
$–
|
$11,472,761
|
$11,472,761
|
Other
fee income
|
$–
|
$72,164
|
$72,164
|
Interest
expense
|
$24,589
|
$–
|
$24,589
|
Depreciation
|
$26,168
|
$28,598
|
$54,766
|
Income
(loss) before income tax benefit (expense)
|
$(138,752)
|
$419,574
|
$280,822
|
Income
tax benefit (expense)
|
$5,015
|
$(112,580)
|
$(107,565)
|
Net
income (loss) of continued operations
|
$(133,737)
|
$306,994
|
$173,257
|
Segment
assets of continued operations
|
$1,529,349
|
$3,639,515
|
$5,168,864
|
NOTE 12 – LEGAL PROCEEDINGS
The
Company operates in a legal and regulatory environment that exposes
it to potentially significant litigation risks. Issuers of certain
alternative products sold by the Company are in Bankruptcy or may
have other financial difficulties. As a result of such alleged
failings of alternative products and the uncertainty of client
recovery from the various product issuers, the Company is subject
to several legal and/or arbitration proceedings. These proceedings
include customer suits, investments alleged to be unsuitable, and
bankruptcies and other issues brought by claimants. The Company
vigorously contests the allegations of the various proceedings and
believes that there are multiple meritorious legal and fact based
defenses in these matters. Such cases are subject to many
uncertainties, and their outcome is often difficult to predict,
including the impact on operations or on the financial statements,
particularly in the earlier stages of a case. The Company makes
provisions for cases brought against it when, in the opinion of
management after seeking legal advice, it is probable that a
liability exists, and the amount can be reasonably estimated. The
current proceedings are subject to uncertainties and, as such, the
Company is unable to estimate the possible loss or range of loss
that may result from the outcome of these cases; however, results
in these cases that are against the interests of the Company could
have a severe negative impact on the financial position of the
Company. As of September 30, 2018, the Company was a defendant in
five on-going suits or arbitrations as discussed
above.
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
General
Capital
Financial Holdings, Inc. derives the majority of its revenues and
net income from sales of mutual funds, insurance products, and
various other securities through Capital Financial Services, Inc.
(“CFS”), the Company’s broker dealer
segment.
The
Company has been engaged in the financial services business since
1987. The Company was incorporated September 22, 1987, as a North
Dakota corporation. The Company’s principal offices are
located at 1821 Burdick Expressway W, Minot, North Dakota 58701. As
of September 30, 2018, the Company had 16 full-time employees
consisting of officers, principals, data processing, compliance,
accounting, and clerical support staff.
The
Company organized its business units into two reportable segments:
broker dealer services 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 holding
company encompasses cost associated with its office building,
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.
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 130 investment representatives and
investment advisors.
Results Of Continued Operations
|
|
|
|
|
|
|
Net Gain
(Loss)
|
$173,257
|
$(63,681)
|
Gain (Loss) per
share:
|
$138
|
$(33)
|
Basic and
diluted
|
$138
|
$(33)
|
The
Company reported a net income for the nine months ended September
30, 2018, of $173,257, compared to a net loss of ($63,781) for the
same quarter in 2017. The net income for the nine months ended
September 30, 2018 compared to net loss in the same period in 2017
is primarily due to increased advisory revenues and decreased
compensation benefits and general and administrative
expenses.
Operating revenues
Total
operating revenues for the nine months ended September 30, 2018
were $11,472,761, an decrease of less than 1% from $11,500,813 for
the same period ended September 30, 2017. The increase for the
nine-month period net revenue categories are listed
below.
Fee income
Fee
income for the nine months ended September 30, 2018, was
$1,578,507, an increase of 38% from $1,144,548 for the same period
ended September 30, 2017. The increase is due to an increase in fee
income received by the broker dealer segment as a result of higher
values of client assets under management.
The
Company earns investment advisory fees in connection with the
broker dealer’s registered investment advisor. The Company
pays the registered representatives a portion of this fee income as
commission expense and retains the balance. These fees constituted
approximately 14% of the Company’s consolidated revenues for
the nine months ended September 30, 2018 and 13% of the
Company’s consolidated revenues for the nine months ended
September 30, 2017. There is no fee income attributable to the
other segment.
Commission income
Commission
income includes broker dealer segment commissions. The Company pays
the registered representatives a percentage of this income as
commission expense and retains the balance. Commission income for
the nine months ended September 30, 2018 was $9,822,090, a decrease
of less than 2% from $9,971,996 for the same period ended September
30, 2017. The decrease was due primarily to the decrease in
commissions received by the broker dealer segment due to reductions
in the number of registered representatives and increase in managed
accounts generating fee income rather than commission income.
Commission revenues constituted approximately 86% of the
Company’s consolidated revenues for the nine months ended
September 30, 2018. There is no commission income attributable to
the other segment.
Other fee income
Other
operating fee income for the nine months ended September 30, 2018
was $72,164, a decrease of 81% from $384,269 for the same period
ended September 30, 2017. The decrease was primarily due to a
decrease in the income received related to alternative investment
products. There is no other operating fee income attributable to
the holding segment. Other operating fee income constituted less
than 1% of the Company’s consolidated revenues for the nine
months ended September 30, 2018.
Rent income
Effective
in June 2017, the Company’s broker-dealer subsidiary began
paying rent to the Company of $8,500 per month on a month-to-month
basis for a portion of the office facility owned by the Company.
The broker-dealer utilizes approximately 5,817 square feet of
office space for its operations out of a total of 6,188 square feet
utilized by the Company in the office facility. Rent Income and
Rent Expense related to this Company/Subsidiary arrangement are
eliminated in the consolidated financial statements. Rent income of
$2,000 was for rental of storage space outside of the office
building by an unrelated party.
Operating expenses
Total
operating expenses for the nine months ended September 30, 2018
were $11,169,993, a decrease of 2% from $11,507,047 for the nine
months ended September 30, 2017. The decrease resulted from the net
decreases in the expense categories described below.
Compensation and benefits
Compensation
and benefits expense for the nine months ended September 30, 2018
was $1,006,961, a decrease of 9% from $1,102,698 for the same
period ended September 30, 2017. The decrease was primarily due to
decreases in management compensation.
Commission expense
Commission
expense for the nine months ended September 30, 2018 was
$9,509,096, an increase of 3% from $9,373,638 for the same period
ended September 30, 2017. The increase is a result of slighter
higher commissions paid to independent representatives in the
broker dealer segment during the period ended September 30,
2018.
General and administrative expense
General
and administrative expenses for the nine months ended September 30,
2018 were $599,110, a decrease of 39% from $986,657 for the same
period ended September 30, 2017. The decrease resulted from
decreases in legal, cost of legal settlements, and accounting
expenses.
Depreciation
Depreciation
expense for the nine months ended September 30, 2018 was $54,766,
an increase of 24% from $44,054 for the same period ended September
30, 2017. The increase in depreciation expenses was due to
increased depreciation on the Company’s Office
Building.
Interest expense
Interest
expense for the nine months ended September 30, 2018 was $24,589 an
increase of 19% from $20,714 for the same period ended September
30, 2017. The increase is due to the interest payments made on the
building mortgage for all periods during 2018.
Liquidity and capital resources
Net
cash provided by operating activities was $163,540 for the nine
months ended September 30, 2018, as compared to net cash provided
by operating activities of $243,659 during the nine months ended
September 30, 2017. The primary difference corresponds to an
increase in net income.
Net
cash used in investing activities was $28,730 for the nine months
ended September 30, 2018, as compared to net cash provided by
investing activities of $133,066 for the nine months ended
September 30, 2017. The primary difference is attributable to
disposal of oil and gas properties in 2017 and improvements made to
the office building in 2017.
The
Company has historically relied upon sales of its equity securities
and debt instruments, as well as bank loans, for liquidity and
growth. Management believes that the Company’s existing
liquid assets, along with cash flow from operations, will provide
the Company with sufficient resources to meet its ordinary
operating expenses during the next twelve months. Significant,
unforeseen or extraordinary expenses may require the Company to
seek alternative financing sources, including common or preferred
share issuance or additional debt financing.
In
addition to the liabilities coming due in the next twelve months,
management expects that the principal needs for cash may be broker
recruitment, repurchase of shares of the Company’s common
stock, and debt service. Management also expects to realize
increased compliance and legal costs with respect to its broker
dealer subsidiary related to regulatory and litigation
matters.
FORWARD-LOOKING STATEMENTS
When
used herein, in future filings by the Company with the Securities
and Exchange Commission (“SEC”), in the Company's press
releases, and in other Company-authorized written or oral
statements, the words and phrases "can be," "expects,"
"anticipates," "may affect," "may depend," "believes," "estimate,"
or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The Company cautions readers not to place undue
reliance on any such forward-looking statements, which speak only
as of the date made. Such statements are subject to certain risks
and uncertainties, including those set forth in this
"Forward-Looking Statements" section, which could cause actual
results for future periods to differ materially from those
presently anticipated or projected. The Company does not undertake
and specifically disclaims any obligation to update any
forward-looking statement to reflect events or circumstances after
the date of such statements.
Forward-looking
statements include, but are not limited to, statements about the
Company’s:
●
Business strategies
and investment policies,
●
Possible or assumed
future results of operations and operating cash flows,
●
Financing plans and
the availability of short-term borrowing,
●
Potential growth
opportunities,
●
Recruitment and
retention of the Company’s key employees,
●
Potential operating
performance, achievements, productivity improvements, efficiency
and cost reduction efforts,
●
Likelihood of
success and impact of litigation,
●
Expectations with
respect to the economy, securities markets, the market for merger
and acquisition activity, the market for asset management activity,
and other industry trends,
●
Effect from the
impact of future legislation and regulation on the
Company.
The
following factors, among others, could cause actual results to
differ materially from forward-looking statements, and future
results could differ materially from historical
performance:
●
General political
and economic conditions which may be less favorable than
expected;
●
The effect of
changes in interest rates, inflation rates, the stock markets, or
other financial markets;
●
Unfavorable
legislative, regulatory, or judicial developments;
●
Adverse findings or
rulings in arbitrations, litigation or regulatory
proceedings;
●
Incidence and
severity of catastrophes, both natural and man-made;
●
Changes in
commodity pricing due to natural resource investments;
●
Changes in
accounting rules, policies, practices, and procedures which may
adversely affect the business; and
●
Terrorist
activities or other hostilities which may adversely affect the
general economy.
The
Company is a financial services holding company that, through its
broker dealer subsidiary, provides brokerage, investment advisory,
insurance and related services. The Company operates in a highly
regulated and competitive industry that is influenced by numerous
external factors such as economic conditions, marketplace liquidity
and volatility, monetary policy, global and national political
events, regulatory developments, competition, and investor
preferences. The Company’s revenues and net earnings may be
either enhanced or diminished from period to period by such
external factors. The Company remains focused on continuing to
reduce redundant operating costs, upgrade operating efficiency,
recruit quality representatives and grow our revenue base. The
Company provides broker-dealer services in support of trading and
investment by its representatives’ customers in corporate
equity and debt securities, U.S. Government securities, municipal
securities, mutual funds, private placement alternative
investments, variable annuities and variable life insurance. The
Company also provides investment advisory services for its
representative’s customers.
A key
component of the broker-dealer subsidiary’s business strategy
is to recruit well-established, productive representatives who
generate substantial revenues from an array of investment products
and services. Additionally, the broker-dealer subsidiary assists
its representatives in developing and expanding their business by
providing a variety of support services and a diversified range of
investment products for their clients.
ITEM 3.
|
Quantitative and Qualitative Disclosures About Market
Risk
|
Not
Applicable as a Smaller Reporting Company
ITEM 4.
|
Controls and Procedures
|
The
Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-14(c)
and Rule 15c-14(c) under the Exchange Act) as of the end of the
period covered by this report, pursuant to Rule 13a-15(b) of the
Exchange Act. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures are effective as
of September 30, 2018, and that information required to be
disclosed by the Company in reports that it files or submits under
the Exchange Act is recorded, processed and summarized, and
reported within the time periods specified by the SEC’s rules
and forms.
Disclosure
controls and procedures are the controls and other procedures that
are designed to ensure that information required to be disclosed in
the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under
the Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
There
were no significant changes in the Company’s internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
We are not currently a “listed company” under SEC rules
and are therefore not required to have a board comprised of a
majority of independent directors or separate committees comprised
of independent directors. We use the definition of
“independence” under the NASDAQ Rules, as applicable
and as may be modified or supplemented from time to time and the
interpretations thereunder, to determine if the members of our
Board are independent. In making this determination, our Board
considers, among other things, transactions and relationships
between each director and his immediate family and us, including
those reported in its Annual Report under the caption
“Certain Relationships and Related Transactions.” The
purpose of this review is to determine whether any such
relationships or transactions are material and, therefore,
inconsistent with a determination that the directors are
independent. On the basis of such review and its understanding of
such relationships and transactions, our Board has determined that
none of our Board members is an independent director.
PART II - OTHER INFORMATION
ITEM 1.
|
Legal Proceedings
|
The
information in response to this item can be found in Note 12 (Legal
Proceedings) to Financial Statements in this Report, which
information is incorporated by reference into this
item.
Not
Applicable as a Smaller Reporting Company.
ITEM 2.
|
Unregistered Sales of Equity Securities and Use of
Proceeds
|
The Company has issued the following securities in the past quarter
without registering the securities under the Securities
Act:
None.
Small Business Issuer Repurchases of Equity
Securities:
In
November of 1997, the Board of Directors of the Company authorized
the repurchase of up to $2,000,000 of its outstanding common stock
from time to time in the open market. The table below displays the
dollar value of shares that may yet be purchased under this
plan.
Period
|
Total Number of
Shares Purchased
|
|
Total Number of
Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate Dollar
Value of Shares That May Yet Be Purchased Under the Plans or
Programs
|
July
2018
|
–
|
–
|
–
|
$597,754
|
August
2018
|
–
|
–
|
–
|
$597,754
|
September
2018
|
–
|
–
|
–
|
$597,754
|
Total
|
–
|
–
|
–
|
$597,754
|
ITEM 3.
|
Defaults Upon Senior Securities
|
None.
ITEM 4.
|
(Removed and Reserved)
|
ITEM 5.
|
Other Information
|
None.
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
|
101.INS
|
XBRL Instance
Document
|
101.SCH
|
XBRL Taxonomy
Extension Schema
|
101
CAL
|
XBRL Taxonomy
Extension Calculation Linkbase
|
101
DEF
|
XBRL Taxonomy
Extension Definition Linkbaset
|
101
LAB
|
XBRL Taxonomy
Extension Label Linkbase Document
|
101
PRE
|
XBRL Taxonomy
Extension Presentation Linkbase
|
CAPITAL FINANCIAL HOLDINGS, INC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
CAPITAL FINANCIAL HOLDINGS, INC.
|
|
|
|
Date:
|
November
19, 2018
|
By
/s/ Gordon
Dihle
|
|
|
Gordon
Dihle
|
|
|
Interim
Chief Executive Officer & President
(Principal
Executive Officer)
|
Date:
|
November
19, 2018
|
By
/s/ Charlene
Fowler
|
|
|
Charlene
Fowler
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|