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, 2017
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)
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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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1821 Burdick Expressway W.
Minot, North Dakota 58701
(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.
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.
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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 30, 2018 was $529,100,
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, 2018,
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 August 8, 2018, are incorporated by reference in
certain sections of Part III.
FORM 10-K
CAPITAL FINANCIAL HOLDINGS, INC.
INDEX
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Page No.
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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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6
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Item
1B.
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Unresolved Staff
Comments
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6
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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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8
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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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12
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Item
8.
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Financial
Statements and Supplementary Data
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12
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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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12
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Item
9A.
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Controls and
Procedures
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12
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Item
9B.
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Other
Information
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13
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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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13
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Item
11.
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Executive
Compensation
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13
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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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13
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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13
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Item
14.
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Principal
Accounting Fees and Services
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13
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PART
IV
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Item
15.
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Exhibits, Financial
Statement Schedules
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14
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SIGNATURES
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15
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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:
●
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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Competitive
position,
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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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Expected tax
rates,
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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,
●
Competition,
and
●
Effect from the
impact of future legislation and regulation on the
Company.
The
following factors, among others, could cause actual results to
differ materially from forward-looking statements, and future
results could differ materially from historical
performance:
●
General political
and economic conditions which may be less favorable than
expected;
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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;
●
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 has one operating subsidiary, Capital Financial Services,
Inc. (“CFS” or the “broker-dealer
subsidiary”) a FINRA member broker-dealer.
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.
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 first quarter of 2017, all of the natural
resource assets were disposed of by CNR and CNR was dissolved on
April 21, 2017. As of December 31, 2016, the natural resource
subsidiary, Capital Natural Resources, Inc., met the definition of
discontinued operations.
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 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. A
former Natural Resource segment sought opportunities in petroleum
and natural gas exploration and production. In the first quarter of
2017, all of the natural resource assets were disposed of by the
Natural Resource segment and the segment met the definition of
discontinued operations as of December 31, 2016.
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 December 31, 2017, the Company had 17 full-time employees
consisting of officers, principals, data processing, compliance,
accounting, and clerical support staff.
Business Development
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.
In
the first quarter of 2017, all of the natural resource assets were
disposed of by CNR and CNR was dissolved on April 21, 2017. As of
December 31, 2016, the natural resource subsidiary, Capital Natural
Resources, Inc., met the definition of discontinued
operations.
The Company’s Subsidiaries
The
Company organizes 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 ownership of 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.
Capital
Financial Holdings, Inc. derives all 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 144
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.
In
the first quarter of 2017, all of the natural resource assets were
disposed of by CNR and CNR was dissolved on April 21, 2017. As of
December 31, 2016, the natural resource subsidiary, Capital Natural
Resources, Inc., 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 incomeand 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, 2017 to December 31, 2017
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.
From time to time, Congress and the SEC have considered adding
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
competitiverelated 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
of the assets of the natural resource segment 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. The natural resource
entity was dissolved on April 21, 2017.
Availability Of Sec Reports
All SEC
reports may beviewed 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 10:00 a.m. to 3:00 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 1821 Burdick
Expressway W., Minot, North Dakota 58701 in a commercial office
building which the Company purchased on November 16, 2016 from
Evanmark Enterprises, LLC for $975,000, exclusive of closing costs
of $9,091. The Company paid $509,091 at closing with the remaining
$475,000 of the purchase price financed by a commercial real estate
loan from American Bank Center 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 at a cost of $221,264 were
made in 2017 to bring the final cost of the land and building to
$1,195,355. 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%. The Company moved into the building in
June of 2017 and occupies 6,188 square feet in the office facility,
of which approximately 5,817 square feet of office space is
utilized by CFS, the Company’s wholly owned broker-dealer
subsidiary. CFS pays $8,500 per month to the Company on a
month-to-month basis for the portion of the office facility
utilized by it. Approximately 4,152 square feet in a separate
section of the building remains vacant and is available as an
office rental unit or for expansion. The Company believes that the
office facility is adequate for the Company’s operating
needs.
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, 2017, the Company was a defendant in
seven on-going suits or arbitrations as discussed above. On January
19, 2018, the Company settled one of the aforementioned arbitration
cases without admission of liability. Payment of $55,249 was made
February 14, 2018, and recorded as a liability on December 31,
2017. On February 15, 2018, the Company settled another one of the
aforementioned arbitration cases without admission of liability.
Payment of $35,000 was made March 19, 2018, and recorded as a
liability on December 31, 2017.
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, 2017,
the closing price of the Company’s Common Shares on the OTC
Bulletin Board was $1,000 per share. At March 30, 2018, 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.
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, 2017 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 as well as advisory fees 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.
|
|
2017
|
2016
|
Variance
2017
to
2016
|
|
OPERATING
REVENUES
|
|
|
|
|
Fee
income
|
$
1,616,970
|
$
1,227,001
|
$
31
%
|
|
Commission
income
|
$
13,481,827
|
$
15,946,037
|
$
15
%
|
|
Other
income
|
$
156,932
|
$
50,329
|
$
211
%
|
|
Other fee
income
|
$
313,462
|
$
335,122
|
$
(6
)%
|
|
Total
revenue
|
$
15,569,191
|
$
17,558,489
|
$
11
%
|
|
OPERATING
EXPENSES
|
|
|
|
|
Compensation and
benefits
|
$
1,458,152
|
$
1,490,033
|
$
(2
)%
|
|
Commission
expense
|
$
12,739,243
|
$
14,987,254
|
$
15
%
|
|
General and
administrative expenses
|
$
1,307,222
|
$
1,352,032
|
$
(3
)%
|
|
Depreciation
|
$
62,705
|
$
47,796
|
$
31
%
|
|
Loss on disposal of
assets
|
4,195
|
–
|
100
%
|
|
Total operating
expenses
|
$
15,571,517
|
$
17,877,115
|
$
13
%
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
$
(2,326
)
|
$
(318,626
)
|
$
(99
)%
|
|
|
|
|
|
|
OTHER
INCOME/ EXPENSES
|
|
|
|
|
Interest
expense
|
$
(29,039
)
|
$
(2,814
)
|
$
932
%
|
|
Total other
income/expenses
|
$
(29,039
)
|
$
(2,814
)
|
$
932
%
|
|
|
|
|
|
|
INCOME
(LOSS) OF CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT
(EXPENSE)
|
$
(31,365
)
|
$
(321,440
)
|
$
90
%
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (EXPENSE)
|
$
(85,933
)
|
$
61,542
|
$
240
%
|
|
|
|
|
|
|
NET
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
|
$
(117,298
)
|
$
(259,898
)
|
$
55
%
|
|
|
|
|
|
|
DISCONTINUED
ASSETS HELD FOR SALE
|
$
–
|
$
(157,863
)
|
$
100
%
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
$
(139,613
)
|
$
(417,761
)
|
$
66
%
|
|
Net income(loss)
per common share, basic and diluted:
|
|
|
|
|
Continuing
|
(95
)
|
(209
)
|
|
|
Discontinued
|
(18
)
|
(127
)
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
Basic and
diluted
|
1,241
|
1,241
|
|
Year Ended December 31, 2017, compared with Year Ended December 31,
2016:
Operating Revenues
—Total continuing operating revenues
for 2017 were $15,569,191, an 11% decrease from $17,558,489 in
2016. 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 2017 was $1,616,970, a 32%
increase from $1,227,001 in 2016. 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,
2017 were approximately $279,888,000 compared to approximately
$174,006,000 during the same period ended 2016.
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 10% of the Company’s consolidated
revenues in 2017 compared to 7% in 2016.
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 2017 was
$13,481,827, a 15% decrease from $15,946,037 in 2016. A reduction
in the number of registered investment advisors affiliated with the
Company between 2017 and 2016 accounted 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 87% of
the Company’s consolidated revenues in 2017 and 91% in
2016.
Other Fee Income
—Other fee income for 2017 was
$313,462, a 6% decrease from $335,122 in 2016. The decrease was due
primarily to a decrease in marketing fees from sales on alternative
investments. Other fee income constituted 2% of the Company’s
consolidated revenues in 2017 compared to 2% in 2016.
Other Income
—Other income for 2017 was $156,932, a
211% increase from $50,329 in 2016. The increase was due primarily
to an increase in income received from miscellaneous fees charged
related to the Broker-Dealer Services segment. Other income
constituted 1% of the Company’s consolidated revenues in 2017
and less than 1% in 2016.
Gross Margin
– The Company’s gross margin for
the year ended December 31, 2017 was 13.5% and 15% in 2016. The
gross margin consists of the difference between continuing
operating revenues and commission expense.
Operating Expenses
—Total continuing operating expenses
for 2017 were $15,571,517, a 13% decrease from $17,877,115 in 2016.
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 2017 was $1,458,152 a 2% decrease from
$1,490,033 in 2016. The decrease resulted primarily from a decrease
in the number of employees. Salaries and wages were $1,265,582
during the period ended December 31, 2017 compared to $1,308,290
during the same period ended in 2016. Insurance premiums were
$127,181 during the period ended December 31, 2017 compared to
$140,780 during the same period ended in 2016.
Commission Expense
—Commission expense for 2017 was
$12,739,243, a 15% decrease from $14,987,254 in 2016. 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 2017 or 2016.
General and Administrative Expenses
—Consolidated
general and administrative expenses for 2017 were $1,307,222, a 3%
decrease from $1,352,032 in 2016. The decrease resulted from net
increases and decreases in the Company’s subsidiaries.
General and administrative expenses for the Holding Company segment
for 2017 were $294,169, a decrease of 22% from $375,580 in 2016.
The decrease is due to lower legal and settlement expenses. General
and administrative expenses for the Broker-Dealer Services segment
for 2017 were $1,013,053, an increase of 4% from $976,452 in 2016.
The increase resulted from an increase in settlements paid, due
diligence expenses and licensing fees. General and administrative
expenses for discontinued operations were $0 for 2017, a 100%
decrease from $82,345 in 2016. The decrease is due to the cessation
of operating expenses tied to the oil leases within the
discontinued operations.
Depreciation
—Consolidated depreciation for 2017 was
$62,705, a 31% increase from $47,796 in 2016. Depreciation for the
Holding Company segment for 2017 was $21,356, an 559% increase from
$3,238 in 2016. Depreciation for the Broker-Dealer Services segment
for 2017 was $41,349, a 7% decrease from $44,558 in 2016. The
depreciation expense in 2017 for discontinued operations was
immaterial and is carried in discontinued operations on the income
statement.
Interest Expense
—Interest expense was $29,039 for
2017, a 930% increase from $2,814 in 2016. The difference is due to
interest payments made within the Holding Company segment on the
building loan. There was no material interest expense in the other
segments for 2017 or 2016.
Interest Income
—Consolidated
interest
income was $0 for 2017, an 100% decrease from $16,206 in 2016.
Interest income in 2016 was related to discontinued operations and
is reported in discontinued operations on the income statement.
There is no material interest income in the other segments for 2017
or 2016.
Depletion
—Depletion expense was $0 for 2017, a 100%
decrease from $18,887 in 2016. The 2016 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.
Financial Condition
On
December 31, 2017, the Company’s assets aggregated
$15,135,259, an increase of 2% from $4,954,985 in 2016, due to an
increase in fixed assets. On December 31, 2017, the Company’s
working capital was $803,217, an increase of 37% from $584,196 in
2016. The increase was due to an increase in cash and cash
equivalents, offset by an increase in liabilities.
Stockholder’s equity was $1,923,883 on December 31, 2017,
compared to $2,125,545 on December 31, 2016.
Cash
provided by operating activities was $460,675 for the year ended
December 31, 2017, as compared to net cash used for operating
activities of ($22,311) for the year ended December 31, 2016. Cash
provided by operating activities during the year ended December 31,
2017, results from a reduction in accounts receivable and increase
in accounts payable.
Net
cash used for investing activities was $166,424 for the year ended
December 31, 2017, as compared to net cash used for investing
activities of ($506,404) for the year ended December 31, 2016.
During the year ended December 31, 2017, the net cash used for
investing activities was from the renovation of the new commercial
office building. During the year ended December 31, 2016, the cash
used by investing activities was from the purchase of the new
commercial office building.
Net
cash provided by financing activities was $132,469 for the year
ended December 31, 2017, as compared to net cash provided by
financing activities of $425,000 for the year ended December 31,
2016. Cash provided by financing activities during the year ended
December 31, 2017, consists of proceeds from long term borrowing
attributed to the purchase of commercial office building. Cash used
for 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 the
commercial office space.
Liquidity And Capital Resources
On
December 31, 2017, the Company’s working capital was $803,217
compared to $584,196 in 2016. On December 31, 2017, the Company
held $1,794,896 in cash and cash equivalents, as compared to
$1,368,176 on December 31, 2016. Liquid assets, which consist of
cash and cash equivalents, totaled $1,794,896 at December 31, 2017,
as compared to $1,368,176 on December 31, 2016. 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.
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 has 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, 2017, 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, 2017, 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 Officersand Corporate
Governance
The
information required by this Item will be contained in our
definitive Proxy Statement for our 2018 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 2018 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 2018 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 2018 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 2018 Annual Meeting of
Shareholders and such information is incorporated herein by
reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
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:
April 17,
2018
|
By:
|
/s/
Gordon
Dihle
|
|
|
|
|
Gordon
Dihle
|
|
|
|
|
Interim
Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
Date:
April 17,
2018
|
By:
|
/s/
Nicole
Bertsch
|
|
|
|
|
Nicole
Bertsch
|
|
|
|
|
Interim Chief
Financial Officer
(Principal
Financial 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: April 17,
2018
|
By:
|
/s/
Gordon
Dihle
|
|
|
|
|
Gordon Dihle,
Director, Interim Chief
|
|
|
|
|
Executive Officer |
|
|
|
|
|
|
|
Date: April 17,
2018
|
By:
|
/s/
Nicole
Bertsch
|
|
|
|
|
Nicole Bertsch,
Interim Chief
|
|
|
|
|
Financial
Officer
|
|
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY
TABLE
OF CONTENTS
|
DAVE
BANERJEE, CPA
An Accountancy Corporation
–
Member AICPA and
PCAOB
21860
Burbank Blvd., Suite 150, Woodland Hills, CA 91367
.
(818)
657-0288
.
FAX (818) 657-0299
.
(818)
312-3283
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Stockholders
and Board of Directors
Capital
Financial Holdings, Inc.
OPINION ON THE FINANCIAL STATEMENTS
We have
audited the accompanying consolidated balance sheet of Capital
Financial Holdings, Inc. (the "Company") and its subsidiaries as of
December 31, 2017, the related consolidated statements of
operations, stockholders’ equity and cash flow, for the
period ended December 31, 2017, and the related notes and schedules
(collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31,
2017, and the results of its operations and its cash flows for the
period ended December 31, 2017, in conformity with accounting
principles generally accepted in the United States of
America.
The
consolidated financial statements of Capital Financial Holdings,
Inc. and its subsidiaries as of and for the year ended December 31,
2016 were audited by other auditors whose report dated March 30,
2017 expressed an unqualified opinion on those statements, a copy
of which is attached.
BASIS FOR OPINION
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting 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. Our audits included
performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit
provide a reasonable basis for our opinion.
Dave Banerjee, CPA, an Accountancy Corporation
We have
served as the Company's auditor since 2017.
Woodland
Hills, CA
April
17, 2018
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
NOTE: Only the year ended December 31, 2016 is presented in the
following Financial Statements. The December 31, 2016 Financial
Statement information is presented in with certain accounts
reclassified to conform to the December 31, 2017 Financial
Statement presentation, which reclassifications have no net effect
on net income, total assets, total liabilities or net equity for
the year ended December 31, 2016. Year ended December 31, 2016,
2015 and 2014 Financial Statement information is presented in Form
10-K filed for the year ended December 31, 2016.
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2017 AND 2016
ASSETS
|
|
2017
|
2016
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash and cash equivalents
|
$
1,794,896
|
$
1,368,176
|
|
Accounts receivable (net of allowance for doubtful accounts
of $24,000 for 2017 and 2016)
|
1,824,995
|
1,932,933
|
|
Prepaids
|
55,466
|
61,709
|
|
Current assets of discontinued operations
|
–
|
6,375
|
|
Total Current Assets
|
$
3,675,357
|
$
3,369,193
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
Land
|
$
98,409
|
$
98,409
|
|
Building
|
1,096,946
|
875,682
|
|
Furniture, fixtures and equipment
|
348,363
|
543,601
|
|
Less accumulated depreciation
|
(271,747
)
|
(422,058
)
|
|
Property and equipment of discontinued operations
|
–
|
72,616
|
|
Net property and
equipment
|
$
1,271,971
|
$
1,168,250
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
Deferred tax asset – non-current
|
187,931
|
417,542
|
|
Total other assets
|
$
187,931
|
$
417,542
|
|
|
|
|
|
TOTAL ASSETS
|
$
5,135,259
|
$
4,954,985
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
2017
|
2016
|
|
CURRENT LIABILITIES
|
|
|
|
Accounts payable and accrued expenses
|
$
496,875
|
$
292,987
|
|
Commissions payable
|
2,029,467
|
2,027,962
|
|
Income taxes payable
|
10,859
|
10,187
|
|
Other current liabilities
|
1,749
|
12,963
|
|
Current liabilities of discontinued operations
|
–
|
7,434
|
|
Total current
liabilities
|
$
2,538,951
|
$
2,351,533
|
|
|
|
|
|
NON CURRENT LIABILITIES
|
|
|
|
Building mortgage
|
$
672,426
|
$
475,000
|
|
Noncurrent liabilities of discontinued operations
|
–
|
2,907
|
|
Total noncurrent
liabilities
|
$
672,426
|
$
477,907
|
|
|
|
|
|
TOTAL LIABILITIES
|
$
3,211,377
|
$
2,829,440
|
|
|
|
|
|
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
|
(8,523,873
)
|
(8,322,211
)
|
|
Less Treasury stock, 3,050,000 preferred shares at
$0.4262
|
(1,300,000
)
|
(1,300,000
)
|
|
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
$
1,923,883
|
$
2,125,545
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
5,135,259
|
$
4,954,985
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE
YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
2017
|
2016
|
|
|
|
|
|
REVENUES
|
|
|
|
Fee income
|
$
1,616,970
|
$
1,227,001
|
|
Commission income
|
13,481,827
|
15,946,037
|
|
Other income
|
156,932
|
50,329
|
|
Other fee income
|
313,462
|
335,122
|
|
Total revenue
|
$
15,569,191
|
$
17,558,489
|
|
|
|
|
|
EXPENSES
|
|
|
|
Compensation and benefits
|
$
1,458,152
|
$
1,490,033
|
|
Commission expense
|
12,739,243
|
14,987,254
|
|
General and administrative expenses
|
1,307,222
|
1,352,032
|
|
Depreciation
|
62,705
|
47,796
|
|
Loss on Disposal of Assets
|
4,195
|
–
|
|
Total operating expenses
|
$
15,571,517
|
$
17,877,115
|
|
|
|
|
|
INCOME (LOSS) OF CONTINUING OPERATIONS
|
$
(2,326
)
|
$
(318,626
)
|
|
|
|
|
|
OTHER INCOME/ EXPENSES
|
|
|
|
Interest expense
|
$
(29,039
)
|
$
(2,814
)
|
|
Total other income/
expenses
|
$
(29,039
)
|
$
(2,814
)
|
|
|
|
|
|
INCOME (LOSS) OF CONTINUING OPERATIONS BEFORE INCOME
TAX
|
$
(31,365
)
|
$
(321,440
)
|
|
|
|
|
|
INCOME TAX BENEFIT (EXPENSE)
|
$
(85,933
)
|
$
61,542
|
|
NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
|
$
(117,298
)
|
$
(259,898
)
|
|
|
|
|
|
DISCONTINUED OPERATIONS
|
$
(22,315
)
|
$
(157,863
)
|
|
|
|
|
|
NET INCOME (LOSS)
|
$
(139,613
)
|
$
(417,761
)
|
|
|
|
|
|
Net income (loss) per common share, basic and diluted:
|
|
|
|
Continuing
|
$
(95
)
|
$
(209
)
|
|
Discontinued
|
$
(18
)
|
$
(127
)
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
Basic
and diluted
|
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, 2017 AND 2016
|
|
Amounts
|
Shares
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
|
|
Preferred stock and additional paid-in capital
|
|
|
|
|
|
Balance, beginning of year
|
$
1,525,000
|
$
1,525,000
|
3,050,000
|
3,050,000
|
|
Preferred stock issued
|
–
|
–
|
–
|
–
|
|
Balance, end of year
|
$
1,525,000
|
$
1,525,000
|
3,050,000
|
3,050,000
|
|
|
|
|
|
|
|
Common stock and additional paid-in capital
|
|
|
|
|
|
Balance, beginning of year
|
$
10,222,756
|
$
10,222,756
|
1,241
|
1,241
|
|
Balance, end of year
|
$
10,222,756
|
$
10,222,756
|
1,241
|
1,241
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
|
|
|
Balance, beginning of year
|
$
8,322,211
|
$
(7,904,450
)
|
|
|
|
Net income (loss)
|
(139,613
)
|
(417,761
)
|
|
|
|
Capital dividends
|
(62,050
)
|
–
|
|
|
|
Balance, end of year
|
$
8,523,874
|
$
(8,322,211
)
|
|
|
|
|
|
|
|
|
|
Treasury stock and additional paid-in capital
|
|
|
|
|
|
Balance, beginning of year
|
$
(1,300,000
)
|
$
(1,300,000
)
|
|
|
|
Purchase of preferred stock
|
–
|
–
|
|
|
|
Balance, end of year
|
$
(1,300,000
)
|
$
(1,300,000
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
$
1,923,882
|
$
2,125,545
|
|
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
2017
|
2016
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net income (loss)
|
$
(139,613
)
|
$
(417,761
)
|
|
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
|
|
|
|
Depreciation
|
62,705
|
48,412
|
|
|
|
|
|
Impairment on discontinued
operations
|
–
|
190,094
|
|
Depletion
|
–
|
18,887
|
|
Provision (benefit) for deferred income
taxes
|
229,611
|
(175,966
)
|
|
Effects on operating cash flows due to changes in:
|
|
|
|
Accounts receivable
|
107,938
|
(134,109
)
|
|
Income taxes payable
(receivable)
|
672
|
(51,480
)
|
|
Prepaids
|
12,618
|
51,311
|
|
Severance escrow
|
-
|
(258
)
|
|
Commissions payable
|
1,505
|
315,853
|
|
Accounts payable
|
203,888
|
144,109
|
|
Other liabilities
|
(18,649
)
|
(11,403
)
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
$
460,675
|
$
(22,311
)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Disposal (Purchase) of property and equipment
|
$
54,840
|
$
(22,313
)
|
|
Purchase of building
|
(221,264
)
|
(984,091
)
|
|
|
|
|
|
|
|
|
|
Payment received on notes receivable
|
–
|
500,000
|
|
|
|
|
|
Net cash used for investing activities
|
$
(166,424
)
|
$
(506,404
)
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
|
|
2017
|
2016
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Dividends paid
|
(62,050
)
|
$
–
|
|
Proceeds from long-term borrowing
|
194,519
|
475,000
|
|
Payments on short-term borrowing
|
–
|
(50,000
)
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
$
132,469
|
$
425,000
|
|
|
|
|
|
CASH ADJUSTMENT FROM CHANGE IN ACCOUNT CLASSIFICATION
|
|
|
|
Reclassification of Employee Severance Escrow Account from Other
Assets
to Cash and Cash Equivalents
|
–
|
$
258,186
|
|
Reclassification of Clearing Account Deposits From Other Assets to
Cash
and Cash Equivalents
|
–
|
179,279
|
|
|
|
|
|
Net cash adjustment by reclassification of accounts
|
–
|
$
433,465
|
|
|
|
|
|
NET [INCREASE/DECREASE] IN CASH AND CASH EQUIVALENTS
|
$
426,720
|
$
329,750
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
1,368,176
|
1,038,426
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
$
1,794,896
|
$
1,368,176
|
SEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 AND 2016
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. 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
two reporting segments:
Broker-Dealer Services
The
Company derives all 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 approximately 144
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, 2017 to
December 31, 2017 without exception.
Holding Company
The
Company encompasses cost associated with ownership of its office
building, 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 subsidiary Capital Financial Services, Inc.
(“CFS”). All significant inter-company transactions and
balances have been eliminated in the accompanying consolidated
financial statements.
Concentrations
—Capital Financial Holdings, Inc.
derives all 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, 2017 and 2016,
the balance in the Company’s Dain account, Pershing account
and NSCC was $35,000, $100,000 and $40,279, respectively. These
deposits are included in Cash and cash equivalents.
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.
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, 2017, 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 other miscellaneous
assets.
Advertising
—Costs of advertising and promotion are
expensed as incurred. There were no advertising and promotion costs
in 2017 or 2016.
Earnings per common share
—Basic earnings per common
share was computed using the weighted average number of shares
outstanding of 1,241 in 2016 and 2017. 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. These restricted cash accounts, totaling
$157,911 in 2017 and $258,185 in 2016 are included in Cash and cash
equivalents.
Reclassification
—Certain amounts from 2016 have been
reclassified to conform to the 2017 presentation. These
reclassifications had no effect on the Company’s net
income/(loss)
,
total
assets, total liabilities or net equity
.
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 entity’s management should
evaluate whether there are conditions or events, considered in the
aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the
date that the financial statements are issued. The Company is
currently evaluating the impact of its pending adoption of ASU
2014-15.
ASU
2016-02 —
Leases (Topic
842):
In February 2016, the FASB issued ASU 2016-02,
Leases
. Under the new
guidance, lessees will be required to recognize a lease liability
and a right-of-use asset for all leases (with the exception of
short-term leases) at the commencement date. ASU 2016-02 is
effective for annual and interim periods beginning on or after
December 15, 2018 and early adoption is permitted. Under ASU
2016-02, lessees (for capital and operating leases) and lessors
(for sales-type, direct financing, and operating leases) must apply
a modified retrospective transition approach for leases existing
at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. Lessees
and lessors may not apply a full retrospective transition approach.
The Company is currently in the process of evaluating the impact of
the pending adoption of ASU 2016-02 on its consolidated financial
statements beginning January 1, 2019.
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
2014-09
- In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with
Customers
, to clarify the
principles of recognizing revenue from contracts with customers and
to improve financial reporting by creating common revenue
recognition guidance for U.S. GAAP and International Financial
Reporting Standards. This ASU will supersede the revenue
recognition requirements in ASC Topic 605,
Revenue Recognition,
and most industry-specific guidance.
Entities are required to apply the following steps when recognizing
revenue under ASU 2014-09: (1) identify the contract(s) with a
customer; (2) identify the performance obligations in the contract;
(3) determine the transaction price; (4) allocate the transaction
price to the performance obligations in the contract; and (5)
recognize revenue when (or as) the entity satisfies a performance
obligation. This ASU also requires additional disclosures related
to the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts. An entity may apply the
amendments by using one of the following two methods: (1)
retrospective application to each prior reporting period presented,
or (2) a modified retrospective approach, requiring the standard be
applied only to the most current period presented, with the
cumulative effect of initially applying the standard recognized at
the date of initial application. ASU 2014-09 is effective for
annual reporting periods beginning after December 15, 2017,
includinginterim periods within that reporting period, with early
adoption permitted. Subsequent to issuing ASU 2014-09, the FASB has
issued additional standards for the purpose of clarifying certain
aspects of ASU 2014-09. The subsequently issued ASUs have the same
effective date and transition requirements as ASU 2014-09. The
Company plans to adopt the revenue recognition standard as of
January 1, 2018. While the Company has not yet identified any
material changes in the timing of revenue recognition, its review
is ongoing. Upon adoption, we plan to use a modified retrospective
approach, with a cumulative effect adjustment to opening retained
earnings. Our implementation efforts include identifying revenues
and costs within the scope of the standard, analyzing contracts and
reviewing potential changes to our existing revenue recognition
accounting policies. The Company continues to evaluate the
potential impacts that these revenue recognition standards may have
on our consolidated financial statements, including the incremental
costs of obtaining contracts, gross versus net reporting, and
additional disclosure requirements. The Company is still evaluating
the impact the adoption of this new guidance will have on our
financial position and results of operations. We are also still
evaluating the impact to our disclosures as a result of adopting
this new guidance but does not anticipate a material impact to the
Company.
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 does not anticipate 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, 2017 and 2016 consist of
checking and savings accounts of $1,461,706 and $934,711,
respectively. At December 31, 2017 and 2016, the Company had
severance escrow balances of $157,911 and $258,185, 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 which are
included in Cash and cash equivalents. The Company had deposit
accounts with clearing firms of $100,000, $35,000 and $40,279 with
Pershing, Dain and NSCC, respectively on December 31, 2017 and
December 31, 2016 which are included in Cash and cash
equivalents.
NOTE
3—
PROPERTY AND
EQUIPMENT
Property
and equipment at December 31, 2017 and 2016, consists of the
following:
|
|
2017
|
2016
|
|
|
|
|
|
Office furniture
and equipment
|
$
348,363
|
$
543,601
|
|
Land
|
98,409
|
98,409
|
|
Building
|
1,096,946
|
875,682
|
|
Accumulated
depreciation
|
(271,747
)
|
(422,058
)
|
|
Property and
equipment of discontinued operations
|
—
|
72,616
|
|
|
$
1,271,971
|
$
1,168,250
|
Depreciation
expense for continuing operations totaled $62,705 and $47,796 in
2017 and 2016, respectively.
NOTE
4—
BUSINESS
VENTURES
On June
9, 2014, the Company launched a new wholly-owned operating
subsidiary, Capital Natural Resources, Inc. (“CNR”), 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. 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.
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.
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 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 with
an effective date of transfer of December 31, 2016 in accordance
with industry practice. As of December 31, 2016, CNR met the
definition of a discontinued operation.
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
with an effective date of December 31, 2016 in accordance with
industry practice.
The
summarized balance sheet for discontinued operations is presented
below:
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, were allocated among the Holding
Company.
The
summarized income from discontinued operations is presented
below:
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
|
$
–
|
|
Net cash provided
by investing activities
|
$
66,200
|
|
Net cash used for
financing activities
|
$
–
|
NOTE
6—
LINE OF
CREDIT
On
September 12, 2016, the Company obtained a one year term line of
credit with American Bank Center in the amount of $500,000. The
line of credit had a variable interest rate of 1.509 percent above
Wall Street Journal U.S. Prime Rate which was 3.5% as of December
31, 2016. The line of credit expired on September 12, 2017 without
being utilized. For the periods ended December 31, 2017 and
December 31, 2016, the Company had no outstanding balance against
this line of credit. As of December 31, 2017, the Company had zero
outstanding and zero interest expense against the expired line of
credit. There were 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:
|
|
2017
|
2016
|
|
|
|
|
|
Current income tax
expense:
|
|
|
|
Federal
|
$
–
|
$
–
|
|
State
|
10,859
|
10,238
|
|
Total current tax
expense
|
$
10,859
|
$
10,238
|
|
Deferred tax
expense:
|
|
|
|
Federal
|
$
(123,124
)
|
$
(162,337
)
|
|
State
|
(18,468
)
|
(23,867
)
|
|
Total deferred tax
expense
|
$
(141,592
)
|
$
(186,204
)
|
|
|
|
|
|
Total provision
(benefit) for income tax expense
|
$
(141,592
)
|
$
(175,966
)
|
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
income).
Deferred
tax assets (liabilities) were comprised of the
following:
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, 2017 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
2014-2017 remain open to examination by taxing jurisdictions to
which the Company is subject.
At
December 31, 2017, the Company has approximately $759,802 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,
2017 and 2016 is shown in the following table:
|
|
2017
|
2016
|
|
|
|
|
|
Expected federal
tax rate
|
21
%
|
35
%
|
|
State income
taxes
|
5
%
|
(1
)%
|
|
Effect of permanent
differences
|
0
%
|
0
%
|
|
Change in tax rate
and other
|
0
%
|
(5
)%
|
|
|
|
|
|
Effective tax
rate
|
26
%
|
29
%
|
Income
tax payable for period ended December 31, 2016 was $10,187 compared
to income tax payable of $10,859 during the same period in
2017.
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,
2017.
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, 2017. As of December 31, 2017, 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:
|
|
Number of
Options
|
Weighted
Average Exercise Price per Share
|
Weighted
Average Grant Date Fair Value
|
Aggregate
Intrinsic Value
|
|
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
|
$
–
|
|
Granted
|
–
|
–
|
–
|
–
|
|
Exercised
|
–
|
–
|
–
|
–
|
|
Cancelled
|
–
|
–
|
–
|
–
|
|
Outstanding on
December 31, 2017
|
168
|
$
5,000
|
$
3,844
|
$
–
|
Exercisable
options at the end of 2017 were 168, 168 in 2016, and 207 in 2015.
The following table summarizes information concerning options
outstanding and exercisable as of December 31, 2016:
|
Range of
Exercise Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Number
Exercisable
|
Weighted
Average Exercise Price
|
|
$
0 to $4,900
|
138
|
Perpetual
|
$
4,200
|
138
|
$
4,200
|
|
$
5,000 to $9,900
|
27
|
1
*
|
$
5,200
|
27
|
$
5,200
|
|
$
10,000 to $15,000
|
3
|
Perpetual
|
$
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 $2,858 and $2,701 for the years ended December 31, 2017
and 2016, respectively. The matching contributions paid by the
Company were $54,826 and $52,608 for the years ended December 31,
2017 and 2016, 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, 2017, this subsidiary had
net capital of $626,186 compared to $400,409 during the same period
ended in 2016; a minimumnet capital requirement of $171,851 in 2017
compared to $143,787 during the same period ended in 2016; excess
net capital of $454,335 in 2017 compared to $171,851 during the
same period ended in 2016 and a ratio of aggregate indebtedness to
net capital of 4.1 to 1in 2017 compared to a ratio of aggregate
indebtedness to net capital of 5.4 to 1 during the same period
ended in 2016.
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, 2017 to December 31, 2017 without
exception.
NOTE
1
2 – 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.
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 was utilized for renovations
to the building. Renovations to the building at cost of $221,264
were made in 2017 tobring the total cost of the land building to
$1,195,355. 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 and $94,224 for
December 31, 2017 and 2016, respectively.
The
following is a schedule by years of future minimum rental payments
on operating leases as of December 31, 2017.
|
Years
ending December 31,
|
|
|
2018
|
$
24,228
|
|
2019
|
4,128
|
|
2020
|
4,128
|
|
2021
|
4,128
|
|
2022
|
4,128
|
|
Total minimum
future rental payments
|
$
40,740
|
NOTE
15—
GOODWILL
The
Company had no Goodwill recorded as of December 31, 2017 or
December 31, 2016.
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
Company had no assets subject to Fair Value Disclosure measurement
calculations at December 31, 2017 or 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:
Options
and warrants to purchase 378 common shares at exercise prices
between $3,500 and $14,300 were outstanding at December 31, 2017,
but were not included in the computation of earnings per share for
the year ended December 31, 2017.
NOTE
18—
COMPREHENSIVE INCOME
(LOSS)
There
were no differences between net income (loss) and comprehensive
income (loss).
NOTE
19—
RELATED PARTY
TRANSACTIONS
There
were no related party transactions during the years ended December
31, 2017 or December 31, 2016.
NOTE
20—
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, 2017, the Company was a defendant in
seven on-going suits or arbitrations as discussed above. On January
19, 2018, the Company settled one of the aforementioned arbitration
cases without admission of liability. Payment of $55,249 was made
February 14, 2018, and recorded as a liability on December 31,
2017. On February 15, 2018, the Company settled another one of the
aforementioned arbitration cases without admission of liability.
Payment of $35,000 was made March 19, 2018, and recorded as a
liability on December 31, 2017.
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
21-
OPERATING
SEGMENTS
The
Company organizes 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 ownership of the
Company’s 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.
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 a former subsidiary, Capital Natural
Resources, Inc., which was dissolved in April of 2017, have been
reflected as discontinued operations.
As of,
and for the year ended, December 31, 2017:
|
|
Holding
Company
|
Broker-Dealer
Services
|
Total
|
|
|
|
|
|
|
Revenues from
external customers$
|
$
–
|
$
15,569,191
|
15,569,191
|
|
Interest
expense
|
(29,039
)
|
–
|
(29,039
)
|
|
Depreciation
|
21,357
|
41,349
|
62,705
|
|
Income (loss)
before income tax benefit (expense)
|
(336,728
)
|
305,363
|
(31,365
)
|
|
Income tax benefit
(expense)
|
16,409
|
(102,342
)
|
(85,933
)
|
|
Net income (loss)
of continued operations
|
(320,319
)
|
203,021
|
(117,298
)
|
|
Segment assets of
continued operations
|
1,638,344
|
3,496,915
|
5,135,259
|
As of,
and for the year ended, December 31, 2016:
|
|
Holding
Company
|
Broker-Dealer
Services
|
Total
|
|
|
|
|
|
|
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
|
Reconciliation of Segment Information
|
|
2017
|
2016
|
|
|
|
|
|
Assets for the
Holding Company segment
|
$
1,638,344
|
$
1,662,726
|
|
Assets for the
Broker-Dealer Services segment
|
$
3,496,915
|
$
3,177,059
|
|
Elimination for the
Holding Company segment receivables
|
$
–
|
$
(243,392
)
|
|
Elimination for the
Broker-Dealer Services segment receivables
|
$
–
|
$
(5,000
)
|
|
Consolidated assets
of continued operations
|
$
5,135,259
|
$
4,591,393
|
NOTE
22—
SUBSEQUENT
EVENTS
The
Company has evaluated subsequent events through the date the
financial statements were available to be issued and have not
identified any significant subsequent events.
