Company Quick10K Filing
Quick10K
Capital Financial Holdings
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-06 Officers
8-K 2019-07-01 M&A
8-K 2018-12-06 Other Events
8-K 2018-11-30 Other Events, Exhibits
8-K 2018-11-15 Officers
8-K 2018-03-05 Officers
XOXO XO Group 906
MPACU Matlin & Partners Acquisition 486
TAKD Transakt 7
AASP All American Sportpark 5
DCTH Delcath Systems 2
TPCS Techprecision 0
ILCC International Leaders Capital 0
INCT InCapta 0
ATMS Artemis Therapeutics 0
SPL Sabine Pass Liquefaction 0
CPFH 2019-03-31
Part I - Financial Information
Note 1 - Basis of Presentation
Note 2 – Accounting Pronouncements Issued But Not Yet Effective
Note 3 - Stock Warrants, Stock Splits, and Stock Options
Note 4 – Income Taxes
Note 5 - Earnings per Share
Note 6 – Rule 4110 (C)(1)
Note 7 – Regulatory Matters
Note 8 – Building Purchase
Note 9 – Segment Reporting
Note 10 – Legal Proceedings
Note 11 – Subsequent Events
Part II - Other Information
Item 4. (Removed and Reserved)
EX-31.1 cpfh_ex311.htm
EX-31.2 cpfh_ex312.htm
EX-32.1 cpfh_ex321.htm
EX-32.2 cpfh_ex322.htm

Capital Financial Holdings Earnings 2019-03-31

CPFH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cpfh_10q.htm QUARTERLY REPORT Blueprint
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
OR
 
☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to ____________
 
Commission file number: 0-25958
 
CAPITAL FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
North Dakota
45-0404061
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
 
1821 Burdick Expressway W
Minot, North Dakota 58701
(Address of principal executive offices) (Zip code)
 
(701) 837-9600
(Registrant's telephone number, including area code)
 
_______________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
 ☒
No
 ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
 ☒
No
 ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 ☐
 
Accelerated filer
 ☐
Non-accelerated filer
 ☐
 
Smaller reporting company
 ☒
 
 
 
Emerging growth company
 ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 ☐
No
 ☒
 
If an emerging growth, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 ☐
No
 ☒
 
As of May 15, 2019, there were 1,241 common shares of the issuer outstanding.

 
 
 
FORM 10-Q
 
CAPITAL FINANCIAL HOLDINGS, INC.
 
INDEX
 
 
PART I
FINANCIAL INFORMATION
Page #
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
5
 
 
 
 

 
6
 
 
 
 
 
 
7
 
 
 
 
8-10
 
 
 
11
 
 
 
14
 
 
 
14
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
15
 
 
 
15
 
 
 
15
 
 
 
16
 
 
 
16
 
 
 
16
 
 
 
16
 
 
 
 
17
 
 
 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements
 
CAPITAL FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
 
 
(Unaudited)
 
 
 
March 31,
2019
 
 
December 31,
2018
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $1,743,589 
 $1,833,079 
Accounts receivable (net of an allowance for doubtful accounts of $24,000 for March 31, 2019 and December 31, 2018)
  1,576,127 
  1,800,704 
Prepaids
  21,326 
  30,587 
 
    
    
 
    
    
Total current assets
 $3,341,042 
 $3,664,370 
 
    
    
PROPERTY AND EQUIPMENT
    
    
Land
 $98,409 
 $98,409 
Building
  1,102,443 
  1,102,148 
Furniture, fixtures and equipment
  349,454 
  350,429 
   Less accumulated depreciation
  (360,389)
  (343,800)
 
    
    
 
    
    
Net property and equipment
 $1,189,917 
 $1,207,186 
 
    
    
OTHER ASSETS
    
    
Deferred tax asset – non-current
 $249,636 
 $270,414 
 
    
    
Total other assets
 $249,636 
 $270,414 
 
    
    
TOTAL ASSETS
 $4,780,595 
 $5,141,970 
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
3
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
(Unaudited)
 
 
 
March 31,
2019
 
 
December 31,
2018
 
CURRENT LIABILITIES
 
 
 
 
 
 
Accounts payable and accrued expenses
 $176,555 
 $302,512 
Commissions payable
  1,849,739 
  2,046,263 
 
    
    
Total current liabilities
 $2,026,294 
 $2,348,775 
 
    
    
NON CURRENT LIABILITIES
    
    
Building mortgage
 $633,005 
 $641,169 
Loss contingency
  555,000 
  555,000 
 
    
    
Total noncurrent liabilities
 $1,188,005 
 $1,196,169 
 
    
    
TOTAL LIABILITIES
 $3,214,299 
 $3,544,944 
 
    
    
STOCKHOLDERS' EQUITY
    
    
Series A preferred stock – 5,000,000 shares authorized, $.0001 par value;
  3,050,000 and 3,050,000 shares issued and outstanding, respectively
 $305 
 $305 
Additional paid in capital – Series A preferred stock
  1,524,695 
  1,524,695 
Common stock – 1,000,000,000 shares authorized, $.0001 par value;   
  1,241 and 1,241 shares issued and outstanding, respectively
  1,241 
  1,241 
Additional paid in capital – common stock
  10,221,515 
  10,221,515 
Accumulated deficit
  (8,881,460)
  (8,850,730)
Less Treasury stock, 3,050,000 preferred shares at $0.4262
  (1,300,000)
  (1,300,000)
 
    
    
TOTAL STOCKHOLDERS’ EQUITY
 $1,566,296 
 $1,597,026 
 
    
    
TOTAL LIABILITIES AND  STOCKHOLDERS' EQUITY
 $4,780,595 
 $5,141,970 
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
4
 
 
CAPITAL FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
 
 
 
(Unaudited)
Three Months Ended
March 31,
 
 
 
2019
 
 
2018
 
REVENUES
 
 
 
 
 
 
Fee income
 $507,105 
 $450,012 
Commission income
  2,888,937 
  3,474,364 
Other income
  11,589 
   
Other fee income
  23,709 
  21,109 
Total revenue
 $3,431,340 
 $3,945,485 
 
    
    
EXPENSES
    
    
Compensation and benefits
  285,401 
  318,611 
Commission expense
  2,834,739 
  3,250,644 
General and administrative expenses
  283,177 
  222,830 
Depreciation
  16,589 
  15,385 
 
    
    
Total operating expenses
 $3,419,906 
 $3,807,470 
 
    
    
INCOME (LOSS) OF CONTINUING OPERATIONS
 $11,434 
 $138,015 
 
    
    
OTHER INCOME/EXPENSES
    
    
Interest expense
 $(7,791)
 $(8,173)
Interest income
  155 
   
Total other income (expense)
 $(7,636)
 $(8,173)
 
    
    
INCOME (LOSS) OF CONTINUING OPERATIONS BEFORE INCOME TAX
 $3,798 
 $129,842 
 
    
    
INCOME TAX BENEFIT (EXPENSE)
 $(34,528)
 $(46,449)
 
    
    
NET INCOME (LOSS)
 $(30,730)
  83,393 
 
    
    
NET INCOME (LOSS) PER COMMON SHARE,
BASIC AND DILUTED:
    
    
Continuing
 $(25)
  67 
 
    
    
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
    
    
Basic and diluted
  1,241 
  1,241 
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
5
 
 
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
Three Months Ended
March 31,
 
 
 
2019
 
 
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net income (loss)
 $(30,730)
 $83,393 
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
    
    
Depreciation
  16,589 
  15,387 
Provision (benefit) for deferred income taxes
   
  (52,956)
Effects on operating cash flows due to changes in:
    
    
Accounts receivable
  224,577 
  100,172 
Income taxes payable (receivable)
  20,778 
  46,449 
Prepaids
  9,261 
  (28,561)
Accounts payable
  (125,957)
  (53,865)
Commissions payable
  (196,524)
  (81,638)
Other liabilities
   
  6,694 
Net cash provided by (used for) operating activities
 $(82,006)
 $35,075 
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES
    
    
Disposal (Purchase) of property and equipment
 $680 
  3,235 
Reduction in Mortgage Debt
  (8,164)
  (7,783)
Net cash used for investing activities
 $(7,484)
 $(4,548)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES
    
    
 
    
    
Net cash provided by (used for) financing activities
 $ 
 $ 
 
    
   
NET [INCREASE/DECREASE] IN CASH AND CASH EQUIVALENTS
 $(89,490)
 $30,527 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 $1,833,079 
 $1,794,896 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 $1,743,589 
 $1,825,423 
 
    
    
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    
    
Cash paid during the year for:
    
    
Interest
 $7,791 
 $8,173 
Income taxes
 $ 
 $ 
 
    
    
SUPPLEMENTAL SCHEDULE OF NON CASH
INVESTING AND FINANCING ACTIVITIES
    
    
Cash paid for interest on building mortgage
 $7,791 
 $8,173 
 
    
    
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
6
 
 
CAPITAL FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
 
 
 
 
Year to Date: Three-Month Period Ended March 31, 2019
 
 
 
Retained
Earnings
(Accumulated
Deficit
 
 
Common
Stock
 
 
Additional
Paid-In
Capital
 
 
Net Paid-in
Series A
Treasury
 
 
Total
 
January 1, 2019
 $(8,850,730)
  1,241 
 $10,221,515 
 $225,000 
 $1,597,026 
Issuance of Company’s common stock
    
  0 
  0 
    
  0 
Dividends declared
  0 
    
    
    
  0 
Comprehensive income:
    
    
    
    
    
   Net income (Loss)
  (30,730)
    
    
    
    
Other comprehensive income (N/A)
    
    
    
    
    
March 31, 2019
 $(8,881,460)
  1,241 
 $10,221,515 
 $225,000 
 $1,566,296 
 
 
 
 
Current Quarter: Three-Month Period Ended March 31, 2019
 
 
 
Retained
Earnings
(Accumulated
Deficit
 
 
Common
Stock
 
 
Additional
Paid-In
Capital
 
 
Net Paid-in
Series A
Treasury
 
 
Total
 
January 1, 2019
 $(8,850,730)
  1,241 
 $10,221,515 
 $225,000 
 $1,597,026 
Issuance of Company’s common stock
    
  0 
  0 
    
  0 
Dividends declared
  0 
    
    
    
  0 
Comprehensive income:
    
    
    
    
    
   Net income (Loss)
  (30,730)
    
    
    
    
Other comprehensive income (N/A)
    
    
    
    
    
March 31, 2019
 $(8,881,460)
  1,241 
 $10,221,515 
 $225,000 
 $1,566,296 
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
7
 
 
CAPITAL FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018
 
NOTE 1 - BASIS OF PRESENTATION
 
The accompanying condensed consolidated financial statements of Capital Financial Holdings, Inc., a North Dakota corporation, and its subsidiary Capital Financial Services, Inc. (“CFS”) (collectively, the "Company"), included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2018, of Capital Financial Holdings, Inc., as filed with the SEC. The condensed consolidated balance sheet at December 31, 2018, contained herein, was derived from audited financial statements, but does not include all disclosures included in the Form 10-K and applicable under accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but not required for interim reporting purposes, have been condensed or omitted.
 
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are of a normal, recurring nature) necessary for a fair presentation of the financial statements. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of operating results for the entire year.
 
NOTE 2 – ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
 
A summary of our significant accounting policies is included in Note 1 of our 2018 Form 10-K filed on April 15, 2019.
 
NOTE 3 - STOCK WARRANTS, STOCK SPLITS, AND STOCK OPTIONS
 
The Company measures and records compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. There were no compensation costs or deferred tax benefits recognized for stock-based compensation awards for the three months ended March 31, 2019 and 2018. Changes are due to the stock buyback and reverse stock split.
 
Option activity for the twelve months ended December 31, 2018 and the three months ended March 31, 2019 was as follows:
 
 
 
Number of
Options
 
 
Weighted
Average
Exercise Price
per Share
 
 
Weighted
Average
Grant Date
Fair Value
 
 
Aggregate
Intrinsic Value
 
Outstanding on January 1, 2018
  167 
 $4,538 
 $4,190 
 $ 
Granted
   
   
   
    
Exercised
   
   
   
    
Cancelled
   
   
   
    
Outstanding on December 31, 2018
  167 
  4,538 
  4,190 
   
Granted
   
   
   
    
Exercised
   
   
   
    
Canceled
   
   
   
    
Outstanding on March 31, 2018
  167 
 $4,538 
 $4,190 
 $- 

Exercisable options totaled 167 at December 31, 2018 and totaled 167 at March 31, 2019.
 
 
8
 

NOTE 4 – INCOME TAXES
 
Deferred taxes arise because of different tax treatment between financial statement accounting and tax accounting, known as “temporary differences.” The Company records the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which the Company has received a tax deduction and has not yet been recorded in the consolidated statement of operations).
 
Management reviews and adjusts those estimates annually based upon the most current information available. However, because the recoverability of deferred taxes is directly dependent upon the future operating results of the Company, actual recoverability of deferred taxes may differ materially from management’s estimates.
 
At March 31, 2019, the Company has approximately $1,084,000 in federal net operation loss carry forward which begins to expire in 2036.
 
NOTE 5 - EARNINGS PER SHARE
 
Basic earnings per share are computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common shares had been converted to common shares. The following reconciles amounts reported in the financial statements:
 
 
 
Three Months Ended March 31, 2019
 
 
Three Months Ended March 31, 2018
 
 
 
Numerator
 
 
Denominator
 
 
Per Share
Amount
 
 
Numerator
 
 
Denominator
 
 
Per Share
Amount
 
Net (Loss) Income of continuing operations
 $(30,730)
 
 
 
 
 
 
 $83,393 
 
 
 
 
 
 
Less: Preferred Stock
  Dividends
   
 
 
 
 
 
 
   
 
 
 
 
 
 
Income of Continuing
  Operations Available to  
  Common Shareholders –   
  Basic and diluted   
  Earnings per Share
 $(30,730)
 $1,241 
  (25)
 $83,393 
  1,241 
 $(67)
 
Options and warrants to purchase 377 common shares at exercise prices between $3,500 and $14,300 were outstanding at March 31, 2019, but were not included in the computation of diluted earnings per share for the quarter ending March 31, 2019 and March 31, 2018, because their effect was anti-dilutive.
 
NOTE 6RULE 4110 (c)(1)
 
The Company operates under the provision of FINRA Rule 4410 (c)(1) and, accordingly, the member is restricted from withdrawing equity capital for a period of one year from the date such equity capital is contributed, unless otherwise permitted by FINRA in writing. Subject to the requirements of paragraph (c)(2) of this Rule, this paragraph shall not preclude a member from withdrawing profits earned.
 
NOTE 7 – REGULATORY MATTERS
 
The broker dealer (“BD”) segment of Capital Financial Services, Inc. is subject to periodic examinations by its regulators, the Financial Industry Regulatory Authority (“FINRA”) and the Securities Exchange Commission (“SEC”).
 
 
9
 
NOTE 8BUILDING 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 to bring the total cost of the land building to $1,195,355, and additional renovation costs of $5,202 and $295 were made in 2018 and 2019 to date to bring the total cost of the land and building to $1,200,852. The loan carries a fixed interest rate of 4.879% per annum for five (5) years with the rate to be adjusted at the end of the five (5) year period based on the Wall Street Journal Prime interest rate plus 1.759%. American Bank has a first priority mortgage on the Office Building.
 
NOTE 9 – SEGMENT REPORTING
 
The Company organizes its current business units into two reportable segments: broker dealer services and holding company. The broker-dealer services segment distributes securities and insurance products to retail investors through a network of registered representatives through its wholly-owned subsidiary, Capital Financial Services, Inc. (“CFS”), a Wisconsin corporation. The holding company encompasses cost associated with its office building, business development and acquisitions, dispositions of subsidiary entities and results of discontinued operations, dividend income and recognized gains or losses.
 
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.
 
As of, and for the three months ended, March 31, 2019
 
Holding
Company
 
 
Broker-Dealer
Services
 
 
Total
 
Commissions and fee income
 $ 
  3,396,042 
  3,396,042 
Other fee income
 $ 
  23,709 
  23,709 
Interest expense
 $7,791 
   
  7,791 
Depreciation
 $8,798 
  7,791 
  16,589 
Income (loss) before income tax benefit (expense)
 $(118,232)
  122,030 
  3,798 
Income tax benefit (expense)
 $ 
  (34,528)
  (34,528)
Net income (loss) of continued operations
 $(118,232)
  87,502 
  (30,730)
Segment assets of continued operations
 $1,508,638 
  3,271,957 
  4,780,595 
 
NOTE 10 – LEGAL PROCEEDINGS
 
The Company operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. Issuers of certain alternative products sold by the Company are in Bankruptcy or may have other financial difficulties. As a result of such alleged failings of alternative products and the uncertainty of client recovery from the various product issuers, the Company is subject to multiple FINRA arbitration proceedings by customers. 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. Collectively these legal proceedings, when resolved are expected to be material to the Company’s financial statements. To protect against the currently known legal risks, including suitable expenses for defense and legal advice related to the legal proceedings, existing information and assessments at the time indicated the need to generate provisions for the contingency. For the year ended December 31, 2018, a sum of $555,000 has been reported for contingent liabilities, insofar as these can be adequately measured at this stage. No additional amount has been reported for the quarter ended March 31, 2019. The provisions recognized, the contingent liabilities disclosed and the other latent legal risks are partially subject to substantial estimation risks given the complexity of the individual factors and the fact that the independent and exhaustive investigations have not yet been completed. The current individual proceedings evaluated separately 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 March 31, 2019, the Company is a defendant in 14 on-going suits or arbitrations as discussed above. Eleven of these arbitrations relate to allegations of unsuitable investments attributed to a single registered representative no longer associated with the Company. The Company expects to vigorously defend itself in these cases.
 
NOTE 11 – SUBSEQUENT EVENTS
 
The Company has evaluated subsequent events through the date the financial statements were available to be issued, May 8, 2019, and have not identified any significant subsequent events.
 
 
10
 

ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
Capital Financial Holdings, Inc. derives the majority of its revenues and net income from sales of mutual funds, insurance products, and various other securities through Capital Financial Services, Inc. (“CFS”), the Company’s broker dealer segment.
 
The Company has been engaged in the financial services business since 1987. The Company was incorporated September 22, 1987, as a North Dakota corporation. The Company’s principal offices are located at 1821 Burdick Expressway W, Minot, North Dakota 58701. As of March 31, 2019, the Company had 9 full-time employees consisting of officers, principals, data processing, compliance, accounting, and clerical support staff.
 
The Company organized its business units into two reportable segments: broker dealer services and holding company. The broker-dealer services segment distributes securities and insurance products to retail investors through a network of registered representatives through its wholly-owned subsidiary, Capital Financial Services, Inc. (“CFS”), a Wisconsin corporation. The holding company encompasses cost associated with its office building, business development and acquisitions, dispositions of subsidiary entities and results of discontinued operations, dividend income and recognized gains or losses.
 
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.
 
Capital Financial Holdings, Inc. derives the majority of its revenues and net income from sales of mutual funds, insurance products, and various other securities through Capital Financial Services, Inc. (“CFS”), the Company’s broker dealer segment.
 
CFS is a full-service brokerage firm. CFS is registered with the SEC as an investment advisor and broker-dealer and also with FINRA as a broker-dealer. CFS specializes in providing investment products and services to independent investment representatives, financial planners, and investment advisors and currently supports approximately 144 investment representatives and investment advisors.
 
Results Of Continued Operations
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2019
 
 
2018
 
Net Gain (Loss)
 $(30,730)
 $83,393 
Gain (Loss) per share:
    
    
   Basic and diluted
 $(25)
 $67 
 
The Company reported a net loss for the three months ended March 31, 2019, of $30,730, compared to a net income of $83,393 for the same quarter in 2018. The net loss for the three months ended March 31, 2019 compared to net income in the same period in 2018 is primarily due to decreased revenues and increased legal costs.
 
 
11
 
Operating revenues
 
Total operating revenues for the three months ended March 31, 2019 were $3,341,340, a decrease of 13% from $3,945,485 for the same period ended March 31, 2018. The decrease for the three-month period net revenue categories are listed below.
 
Fee income
 
Fee income for the three months ended March 31, 2019, was $507,105, an increase of 13% from $450,012 for the same period ended March 31, 2018. The increase is due to an increase in fee income received by the broker dealer segment as a result of higher values of client assets under management.
 
The Company earns investment advisory fees in connection with the broker dealer’s registered investment advisor. The Company pays the registered representatives a portion of this fee income as commission expense and retains the balance. These fees constituted approximately 15% of the Company’s consolidated revenues for the three months ended March 31, 2019 and 11% of the Company’s consolidated revenues for the three months ended March 31, 2018. There is no fee income attributable to the other segments.
 
Commission income
 
Commission income includes broker dealer segment commissions. The Company pays the registered representatives a percentage of this income as commission expense and retains the balance. Commission income for the three months ended March 31, 2019 was $2,888,937, a decrease of 17% from $3,474,364 for the same period ended March 31, 2018. The decrease was due primarily to the decrease in commissions received by the broker dealer segment due to reductions in the number of registered representatives. Commission revenues constituted approximately 84% of the Company’s consolidated revenues for the three months ended March 31, 2019. There is no commission income attributable to the other segments.
 
Other fee income
 
Other operating fee income for the three months ended March 31, 2019 was $23,709, an increase of 12% from $21,109 for the same period ended March 31, 2018. The increase was primarily due to a decrease in the income received related to alternative investment products. There is no other operating fee income attributable to the holding segments. Other operating fee income constituted less than 1% of the Company’s consolidated revenues for the three months ended March 31, 2019.
 
Rent income
 
Effective in June 2017, the Company’s broker-dealer subsidiary began paying rent to the Company of $8,500 per month on a month-to-month basis for a portion of the office facility owned by the Company. The broker-dealer utilizes approximately 5,817 square feet of office space for its operations out of a total of 6,188 square feet utilized by the Company in the office facility. Rent Income and Rent Expense related to this Company/Subsidiary arrangement are eliminated in the consolidated financial statements.
 
Operating expenses
 
Total operating expenses for the three months ended March 31, 2019 were $3,419,906, a decrease of 10% from $3,807,470 for the three months ended March 31, 2018. The decrease resulted from the net decreases in the expense categories described below.
 
Compensation and benefits
 
Compensation and benefits expense for the three months ended March 31, 2019 was $285,401, a decrease of 10% from $318,611 for the same period ended March 31, 2018. The decrease was primarily due to decreases in management compensation
 
 
12
 
Commission expense
 
Commission expense for the three months ended March 31, 2019 was $2,834,739, a decrease of 13% from $3,250,644 for the same period ended March 31, 2018. The decrease is a result of lower commissions paid to independent representatives in the broker dealer segment during the period ended March 31, 2019.
 
General and administrative expense
 
General and administrative expenses for the three months ended March 31, 2019 were $283,177, an increase of 27% from $222,830 for the same period ended March 31, 2018. The increase resulted from increases in legal and professional expense.
 
Depreciation
 
Depreciation expense for the three months ended March 31, 2019 was $16,589, an increase of 1% from $15,385 for the same period ended March 31, 2018. The increase in depreciation expenses was due to increased depreciation on the Company’s Office Building.
 
Interest expense
 
Interest expense for the three months ended March 31, 2019 was $7,791, a decrease of less than 1% from $8,173 for the same period ended March 31, 2018. The decrease is due to reduced interest payments made on amortization of the building mortgage during 2019.
 
Liquidity and capital resources
 
Net cash used for operating activities was $82,006 for the three months ended March 31, 2019, as compared to net cash provided by operating activities of $35,075 during the three months ended March 31, 2018. The primary difference corresponds to reductions in commissions’ payable and accounts payables.
 
Net cash used in investing activities was $7,484 for the three months ended March 31, 2019, as compared to net cash used in investing activities of $4,548 for the three months ended March 31, 2018. The primary difference is attributable to increased mortgage principal payments in 2019 related to the office building compared to the monthly loan principal payments made in 2018.
 
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 litigation settlements, repurchase of shares of the Company’s common stock, and debt service. Management also expects to realize increased compliance and legal costs with respect to its broker dealer subsidiary related to regulatory and litigation matters.
 
FORWARD-LOOKING STATEMENTS
 
When used herein, in future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company's press releases, and in other Company-authorized written or oral statements, the words and phrases "can be," "expects," "anticipates," "may affect," "may depend," "believes," "estimate," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Such statements are subject to certain risks and uncertainties, including those set forth in this "Forward-Looking Statements" section, which could cause actual results for future periods to differ materially from those presently anticipated or projected. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statement to reflect events or circumstances after the date of such statements.
 
 
13
 
Forward-looking statements include, but are not limited to, statements about the Company’s:
 
● 
Business strategies and investment policies,
● 
Possible or assumed future results of operations and operating cash flows,
● 
Financing plans and the availability of short-term borrowing,
● 
Competitive position,
● 
Potential growth opportunities,
● 
Recruitment and retention of the Company’s key employees,
● 
Potential operating performance, achievements, productivity improvements, efficiency and cost reduction efforts,
● 
Likelihood of success and impact of litigation,
● 
Expected tax rates,
● 
Expectations with respect to the economy, securities markets, the market for merger and acquisition activity, the market for asset management activity, and other industry trends,
● 
Competition, and
● 
Effect from the impact of future legislation and regulation on the Company.
 
The following factors, among others, could cause actual results to differ materially from forward-looking statements, and future results could differ materially from historical performance:
 
● 
General political and economic conditions which may be less favorable than expected;
● 
The effect of changes in interest rates, inflation rates, the stock markets, or other financial markets;
● 
Unfavorable legislative, regulatory, or judicial developments;
● 
Adverse findings or rulings in arbitrations, litigation or regulatory proceedings;
● 
Incidence and severity of catastrophes, both natural and man-made;
● 
Changes in commodity pricing due to natural resource investments;
● 
Changes in accounting rules, policies, practices, and procedures which may adversely affect the business; and
● 
Terrorist activities or other hostilities which may adversely affect the general economy.
 
The Company is a financial services holding company that, through its broker dealer subsidiary, provides brokerage, investment advisory, insurance and related services. The Company operates in a highly regulated and competitive industry that is influenced by numerous external factors such as economic conditions, marketplace liquidity and volatility, monetary policy, global and national political events, regulatory developments, competition, and investor preferences. The Company’s revenues and net earnings may be either enhanced or diminished from period to period by such external factors. The Company remains focused on continuing to reduce redundant operating costs, upgrade operating efficiency, recruit quality representatives and grow our revenue base. The Company provides broker-dealer services in support of trading and investment by its representatives’ customers in corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, private placement alternative investments, variable annuities and variable life insurance. The Company also provides investment advisory services for its representative’s customers.
 
A key component of the broker-dealer subsidiary’s business strategy is to recruit well-established, productive representatives who generate substantial revenues from an array of investment products and services. Additionally, the broker-dealer subsidiary assists its representatives in developing and expanding their business by providing a variety of support services and a diversified range of investment products for their clients.
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Not Applicable as a Smaller Reporting Company
 
ITEM 4.
Controls and Procedures
 
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15c-14(c) under the Exchange Act) as of the end of the period covered by this report, pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2018, and that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed and summarized, and reported within the time periods specified by the SEC’s rules and forms.
 
 
14
 
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
 
We are not currently a “listed company” under SEC rules and are therefore not required to have a board comprised of a majority of independent directors or separate committees comprised of independent directors. We use the definition of “independence” under the NASDAQ Rules, as applicable and as may be modified or supplemented from time to time and the interpretations thereunder, to determine if the members of our Board are independent. In making this determination, our Board considers, among other things, transactions and relationships between each director and his immediate family and us, including those reported in its Annual Report under the caption “Certain Relationships and Related Transactions.” The purpose of this review is to determine whether any such relationships or transactions are material and, therefore, inconsistent with a determination that the directors are independent. On the basis of such review and its understanding of such relationships and transactions, our Board has determined that none of our Board members is an independent director.
 
 
PART II - OTHER INFORMATION
 
ITEM 1.
Legal Proceedings
 
The information in response to this item can be found in Note 10 (Legal Proceedings) to Financial Statements in this Report, which information is incorporated by reference into this item.
 
ITEM 1A.
Risk Factors
 
Not Applicable as a Smaller Reporting Company.
 
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
The Company has issued the following securities in the past quarter without registering the securities under the Securities Act:
 
None.
 
Small Business Issuer Repurchases of Equity Securities:
 
In November of 1997, the Board of Directors of the Company authorized the repurchase of up to $2,000,000 of its outstanding common stock from time to time in the open market. The table below displays the dollar value of shares that may yet be purchased under this plan.
 
Period
 
Total Number of Shares Purchased
 
 
Average Price Per Share
 
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
 
January 2019
   
   
   
 $597,754 
February 2019
   
   
   
 $597,754 
March 2019
   
   
   
 $597,754 
Total
   
   
   
 $597,754 
 
 
15
 
 
ITEM 3.
Defaults Upon Senior Securities
 
None.
 
ITEM 4.
(Removed and Reserved)
 
ITEM 5.
Other Information
 
None.
 
ITEM 6.
Exhibits
 
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350
 
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101 CAL
XBRL Taxonomy Extension Calculation Linkbase
101 DEF
XBRL Taxonomy Extension Definition Linkbaset
101 LAB
XBRL Taxonomy Extension Label Linkbase Document
101 PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
16
 
 
CAPITAL FINANCIAL HOLDINGS, INC.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
CAPITAL FINANCIAL HOLDINGS, INC.
 
 
 
Date:
May 15, 2019
By /s/ Gordon Dihle
 
 
     Gordon Dihle
 
 
     Chief Executive Officer & President
     (Principal Executive Officer)
 
 
Date:
May 15, 2019
By /s/ Charlene Fowler
 
 
     Charlene Fowler
 
 
     Chief Financial Officer
 
 
     (Principal Financial Officer)
 
 
 
17