SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

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 No: 333-108818

SUMMIT FINANCIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

Florida	05-0577932
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

595 South Federal Highway

Suite 500

Boca Raton, FL 33432

(Address of principal executive offices)

(Zip Code)

(561) 338-2800

(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  x    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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Class	Outstanding as of November 7, 2013
Common Stock Par value $0.0001 per share	20,459,488

SUMMIT FINANCIAL SERVICES GROUP, INC.

INDEX

		Page
Part I. Financial Information
Item 1.	Financial Statements		3
	Condensed Consolidated Statements of Financial Condition at September 30, 2013 (unaudited) and December 31, 2012		3
	Condensed Consolidated Statements of Income for the Three Months ended September 30, 2013 and 2012 (unaudited)		4
	Condensed Consolidated Statements of Income for the Nine Months ended September 30, 2013 and 2012 (unaudited)		5
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2013 and 2012 (unaudited)		6
	Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 4.	Controls and Procedures		14
Part II. Other Information
Item 6.	Exhibits		15
Signatures			16

FORWARD LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project” or “intend” and similar expressions identify forward-looking statements regarding events, conditions and financial trends in connection with our future plan of operations, business strategy, operating results and financial position. Discussions containing such forward-looking statements may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Shareholders and prospective investors are cautioned that any forward-looking statements are not guarantees of future performance. Such forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results for future periods could differ materially from those discussed in this Report, depending on a variety of important factors, including: any adverse effect on the stock market and investor confidence in general, including, but not limited to, as a result of the economic recession, the sustainability and magnitude of the economic recovery, weak consumer confidence, high unemployment and/or global events, including economic instability among members of the European Union (including Greece, Italy and Cyprus), continued unrest and political uncertainty in the Middle East and political instability in North Korea; strife between the United States and Russia; an increase in oil prices; the success or failure of our management’s efforts to implement our business strategy, including the net addition of financial advisors; declining and/or volatile interest rates; our ability to properly manage growth; our ability to compete with major established companies; our ability to attract and retain qualified personnel in a highly competitive environment; the industry’s increased reliance on technology, including complying with the rules and regulations related to, among other things, trading, privacy, and the use of social media; our ability to comply in a cost-effective manner with increased regulation; political gridlock in the United States, including the impasse over the budget and the resulting sequester, and ongoing debt ceiling concerns; our reliance on our clearing firms (directly) and other third parties (indirectly) to execute trades on behalf of our clients; advisors engaging in inappropriate activities that may adversely affect their clients and our business; and other risks which are described in our filings with the Securities and Exchange Commission (the “SEC”), including the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

	September 30, 2013			December 31, 2012
	(unaudited)
ASSETS
Cash and cash equivalents	$	11,374,522		$	7,966,800
Deposits held at clearing brokers		128,856			128,823
Commissions receivable and other, net		2,132,759			2,142,327
Notes receivable, net		461,238			438,383
Other receivables, net		319,806			317,752
Securities owned, at fair value		2,672			9,695
Prepaid expenses and other assets		863,604			840,255
Property and equipment, net		361,365			411,863
Goodwill		500,714			500,714
Total Assets	$	16,145,536		$	12,756,612
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Accounts payable and accrued expenses	$	2,247,447		$	1,821,704
Accrued commissions expense		2,708,218			2,869,656
Total Liabilities		4,955,665			4,691,360
Commitments and contingencies
Stockholders’ equity
Preferred stock, undesignated; par value $0.0001 per share; authorized 4,850,000 shares; none issued and outstanding		—			—
Preferred stock, Series A, 12% cumulative convertible; par value $0.0001 per share; authorized 150,000 shares; 125,000 issued and outstanding (liquidation preference of $125,000)		13			13
Common stock, par value $0.0001 per share; authorized 100,000,000 shares; 20,431,013 issued and 20,416,101 outstanding at September 30, 2013 and 20,290,567 issued and 20,275,655 outstanding at December 31, 2012		2,040			2,028
Additional paid-in capital		8,891,696			8,499,138
Unearned stock-based compensation		(1,438,497	)		(1,666,572	)
Treasury stock (14,912 shares, at cost)		(10,884	)		(10,884	)
Retained earnings		3,745,503			1,241,529
Total stockholders’ equity		11,189,871			8,065,252
Total liabilities and stockholders’ equity	$	16,145,536		$	12,756,612

See accompanying notes to unaudited condensed consolidated financial statements.

3

SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

	For The Three Months Ended September 30,
	2013		2012
	(Unaudited)		(Unaudited)
Revenues
Commissions	$	20,467,406	$	17,360,920
Interest and dividends		202,005		232,473
Other revenue		1,733,493		848,762
		22,402,904		18,442,155
Expenses
Commissions and related costs		17,301,144		14,847,878
Employee compensation and benefits		1,905,832		1,631,139
Occupancy and equipment		196,776		198,346
Communications		113,926		111,131
Depreciation and amortization		49,176		52,016
Other operating expenses		1,680,463		946,485
		21,247,317		17,786,995
Income before provision for income taxes		1,155,587		655,160
Provision for income taxes		100,000		329,172
Net income	$	1,055,587	$	325,988
Basic income per common share	$	0.05	$	0.01
Diluted income per common share	$	0.04	$	0.01
Weighted average common shares outstanding
Basic		20,362,486		26,670,082
Diluted		25,502,219		31,822,469

See accompanying notes to unaudited condensed consolidated financial statements.

4

SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

	For The Nine Months Ended September 30,
	2013		2012
	(Unaudited)		(Unaudited)
Revenues
Commissions	$	60,788,331	$	50,555,223
Interest and dividends		605,961		737,690
Other revenue		3,907,873		2,497,888
		65,302,165		53,790,801
Expenses
Commissions and related costs		51,380,208		43,054,449
Employee compensation and benefits		5,691,952		4,971,329
Occupancy and equipment		591,232		584,285
Communications		338,574		342,888
Depreciation and amortization		148,566		153,117
Other operating expenses		3,302,457		2,474,584
		61,452,989		51,580,652
Income before provision for income taxes		3,849,176		2,210,149
Provision for income taxes		1,328,000		1,000,000
Net income	$	2,521,176	$	1,210,149
Basic income per common share	$	0.12	$	0.05
Diluted income per common share	$	0.10	$	0.04
Weighted average common shares outstanding
Basic		20,328,516		26,616,082
Diluted		25,263,257		31,748,614

See accompanying notes to unaudited condensed consolidated financial statements.

5

SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

	For The Nine Months Ended September 30,
	2013			2012
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income	$	2,521,176		$	1,210,149
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		148,566			153,117
Stock-based compensation, net		539,011			605,039
Amortization of advisor notes		133,794			125,800
Changes in
Deposits held at clearing brokers		(33	)		(33	)
Commissions receivable and other, net		9,568			(171,397	)
Notes receivable, net		(149,686	)		(165,291	)
Other receivables, net		(2,054	)		195,124
Prepaid expenses and other assets		(23,349	)		(161,394	)
Securities owned, at fair value		7,023			(21,654	)
Accounts payable and accrued expenses		425,743			(16,257	)
Accrued commissions expense		(161,438	)		(8,402	)
Net cash provided by operating activities		3,448,321			1,744,801
Cash flows from investing activities
Purchase of property and equipment		(98,068	)		(37,260	)
Cash flows from financing activities
Dividends paid—preferred stock		(17,201	)		(11,250	)
Proceeds from exercise of stock options		74,670			117,414
Legal fees paid on the issuance of stock and options		—			(41,263	)
Common stock share repurchase		—			(99,400	)
Net cash provided by (used in) financing activities		57,469			(34,499	)
Net increase in cash and cash equivalents		3,407,722			1,673,042
Cash and cash equivalents at beginning of period		7,966,800			10,786,669
Cash and cash equivalents at end of period	$	11,374,522		$	12,459,711

See accompanying notes to unaudited condensed consolidated financial statements.

6

SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

September 30, 2013

NOTE 1—GENERAL

The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods indicated. The condensed consolidated financial statements herein should be read in conjunction with the audited consolidated financial statements and notes thereto, together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in the Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended December 31, 2012 for Summit Financial Services Group, Inc. (the “Company” or “SFSG”). The results of operations for the three- and nine-month periods ended September 30, 2013 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2013. Furthermore, actual results for future periods could differ materially from those reported in this Form 10-Q, depending on a variety of factors, including: any adverse effect on the stock market and investor confidence in general, including, but not limited to, as a result of the economic recession; the sustainability and magnitude of an economic recovery; weak consumer confidence; increases in oil prices; political gridlock in the United States, including the impasse over the budget and the resulting sequester, and ongoing debt ceiling concerns; high unemployment and/or global events, including economic instability among members of the European Union (including Greece, Italy and Cyprus), unrest and political uncertainty in the Middle East, and political instability in North Korea; strife between the United States and Russia; the success or failure of our management’s efforts to implement our business strategy, including the net addition of financial advisors; declining and/or volatile interest rates; our ability to properly manage growth; our ability to compete with major established companies; our ability to attract and retain qualified personnel in a highly competitive environment; our ability to comply in a cost-effective manner with increased regulation; advisors engaging in inappropriate activities that may adversely affect their clients and our business; and other risks. Additionally, certain sources of revenues that have historically been available to the Company have been or may be reduced or eliminated in the future, including 12b-1 fees, or trail commissions, from the sale of mutual fund shares, as well as remuneration paid by our clearing brokers. Our results may also be negatively impacted by recent and future reductions in interest rates, as well as from decreases in certain compensation amounts paid by insurance companies, mutual funds and alternative investment sponsors with whom we do business. Additionally, increased regulations, and the related cost of compliance therewith, could also impact our margins. A proposal to treat financial advisors licensed with independent broker-dealers as employees, rather than as independent contractors, could also adversely affect our business.

NOTE 2—STOCKHOLDERS’ EQUITY

Basic earnings per share is computed by dividing the net income available to common shareholders for the relevant period by the weighted average number of shares of common stock issued and outstanding during the period. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock and the number of dilutive common stock equivalents (“CSEs”). The number of dilutive CSEs includes the effect of stock options, warrants, and deferred stock calculated using the treasury stock method and the number of issuable common shares upon the conversion of preferred stock using the “if converted” method. For purposes of computing the diluted earnings per share for the three- and nine-month periods ended September 30, 2013 and 2012, the Company has assumed the exercise, delivery or conversion of those securities as follows:

(Shares in 000’s)

	For The Three Months Ended September 30,														For The Nine Months Ended September 30,
	2013							2012							2013							2012
	Total		Dilutive			Non- Dilutive		Total		Dilutive			Non- Dilutive		Total		Dilutive			Non- Dilutive		Total		Dilutive			Non- Dilutive
Options		18,967		10,148			8,819		17,396		12,103			5,293		18,967		9,745			9,222		17,396		12,103			5,293
Warrants		559		509			50		559		509			50		559		509			50		559		509			50
Deferred Stock		2,800		1,200			1,600		2,800		800			2,000		2,800		1,200			1,600		2,800		800			2,000
Preferred		144		—			144		144		—			144		144		—			144		144		—			144
Total CSEs		22,470		11,857			10,613		20,899		13,412			7,487		22,470		11,454			11,016		20,899		13,412			7,487
Shares Deemed Repurchased				(6,717	)						(8,260	)						(6,519	)						(8,280	)
Net Shares Deemed Issued				5,140							5,152							4,935							5,132
Basic Weighted Avg. Shares				20,362							26,670							20,328							26,616
Total Shares and CSEs				25,502							31,822							25,263							31,748

As of September 30, 2013, the Company had options, warrants and deferred shares outstanding entitling the holders thereof to purchase a total of approximately 22.3 million shares of common stock. The Company also had outstanding shares of preferred stock convertible into approximately 144,000 shares of common stock. See Note 7 (Subsequent Events) with respect to the redemption of the Company’s preferred stock.

On September 24, 2012, the Company repurchased an aggregate of 200,000 shares of its common stock owned by a shareholder, who is not an affiliate of the Company, in a privately negotiated transaction, at a purchase price of $0.50 per share.

7

Stock-Based Awards

The Company accounts for stock-based compensation using a fair market value method. Most often, options are granted for the provision of future services, such as continued employment or, in the case of independent financial advisors, their affiliation with the Company. Consequently, the options typically provide for vesting over a period of years, with a certain percentage of the options vesting each year upon the anniversary date of the grant if the grantee is then still affiliated with the Company. Any unearned stock compensation is generally amortized over the period the underlying options are earned, which is typically the vesting period. The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The amortization of earned stock expense related to issuances to employees is included in the accompanying condensed consolidated statements of income under the caption “Employee Compensation and Benefits”, while the amortization of earned stock expense related to issuances to non-employees is included under the caption “Other Operating Expenses.”

The following schedule reflects activity resulting in changes to the number of CSEs outstanding during the three- and nine-month periods ended September 30, 2013 and 2012, respectively. The schedule also reflects earned stock expense during the three- and nine-month periods ended September 30, 2013 and 2012, respectively, related to the issuance of all CSEs, regardless of the time of issuance.

	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2013			2012			2013			2012
Shares
Option grants – employees		614,333			1,000			1,206,350			267,000
Option grants – non-employees		—			10,852			20,410			30,852
Grants of replacement options – employees		600,000			25,000			600,000			165,000
Grants of replacement options – non-employees		—			72,494			—			72,494
Exercised options – employees		(61,772	)		—			(81,772	)		(97,500	)
Exercised options – non-employees		(28,332	)		(123,254	)		(58,674	)		(145,459	)
Forfeited or expired – employees		(31,352	)		(27,964	)		(181,352	)		(189,583	)
Forfeited or expired – non-employees		(22,845	)		(273,806	)		(86,356	)		(387,588	)
Cancelled options – employees		(600,000	)		(25,000	)		(600,000	)		(165,000	)
Cancelled options – non-employees		—			(72,494	)		—			(72,494	)
Net change in shares underlying CSEs		470,032			(413,172	)		818,606			(522,278	)
Fair Market Value–Net
Options issued – employees	$	183,713		$	(1,970	)	$	339,817		$	85,062
Options issued – non-employees		—			8,418			930			10,612
Net fair market value	$	183,713		$	6,448		$	340,747		$	95,674
Earned Stock Expense
Earned stock expense, net – employees	$	135,523		$	109,770		$	426,944		$	492,354
Earned stock expense, net – non-employees		39,402			30,623			112,067			112,685
Net earned stock expense	$	174,925		$	140,393		$	539,011		$	605,039

8

NOTE 3—INCOME TAXES

For the three- and nine-month periods ended September 30, 2013, the Company’s provision for income taxes reflects an estimated income tax accrual of approximately $100,000 and $1.33 million, respectively, based on the Company’s estimated effective tax rate for the year ending December 31, 2013. For the three- and nine-month periods ended September 30, 2012, the Company’s provision for income taxes reflects an estimated income tax accrual of approximately $329,000 and $1.00 million, respectively, based on the Company’s estimated effective tax rate for the year ended December 31, 2012. The Company’s income tax provision in any period will be affected by, among other things, permanent, as well as temporary differences in the deductibility of certain items, including stock-based compensation and the amortization of intangible assets. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, its current tax expense divided by pre-tax book income) from period to period. For 2013, the Company expects its effective tax rate to decline compared to 2012 due primarily to compensation related to the exercise of non-qualified stock options expiring in 2013 that will reduce the Company’s taxable income.

NOTE 4—NET CAPITAL REQUIREMENT

Summit Brokerage Services, Inc., the Company’s wholly owned broker-dealer subsidiary (“Summit Brokerage” or “SBS”), is subject to the SEC Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. At September 30, 2013, Summit Brokerage had net capital of approximately $4.6 million, which was approximately $4.3 million in excess of its SEC-required minimum net capital of $0.3 million. Under SEC Rule 15c3-1, Summit Brokerage’s aggregate indebtedness to net capital ratio was 1.02 to 1 at September 30, 2013. The amount of net capital during any period will fluctuate based on a number of factors, including the operating results for SBS. Net capital will also be impacted by contributions of capital to SBS from the Company, as well as distributions of capital from SBS to SFSG. During the nine-month period ended September 30, 2013, SBS distributed $2,775,000 to SFSG, of which $875,000 was distributed in the quarter ended September 30, 2013. During the nine-month period ended September 30, 2012, SBS distributed $1,900,000 to SFSG, of which $900,000 was distributed in the quarter-ended September 30, 2012.

NOTE 5—CONTINGENCIES

The Company is, or may become, a party to legal proceedings relating to various claims and lawsuits arising in the normal course of business. Management has provided an accrual for estimated probable losses which could result from asserted matters. Management believes that, to the best of its knowledge, the range of potential net losses resulting from the currently asserted proceedings in excess of the accrued amount, if any, will not be material to the Company’s financial position or results of operations.

NOTE 6—RECLASSIFICATIONS

The Company has made certain reclassifications to the prior period’s financial statements to conform to the current period presentation. These reclassifications had no impact on previously reported net income.

NOTE 7—SUBSEQUENT EVENTS

On October 30, 2013, the Company redeemed all 125,000 outstanding shares of its 12% Series A Cumulative Convertible Preferred Stock, par value $.0001 per share (the “Preferred Stock”), pursuant to the terms governing the Preferred Stock. The total redemption price was equal to the aggregate liquidation amount of $125,000 plus accumulated and unpaid dividends thereon to the date of redemption totaling approximately $42,000.

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of its operations for the three- and nine-month periods ended September 30, 2013 and 2012 should be read in conjunction with the Company’s condensed consolidated financial statements included as Item 1 herein. When used in the following discussions, the words “believes,” “anticipates,” “intends,” “expects,” and similar expressions are intended to identify forward-looking statements. As further explained in the section entitled “Forward Looking Statements” on page 2 herein, such statements are subject to certain risks and uncertainties, which could cause results to differ materially from those projected.

Overview

The Company is a Florida-based financial services holding company that provides, through its Summit Brokerage Services, Inc. (“Summit Brokerage”) operating subsidiary, a broad range of securities brokerage and investment services primarily to individual investors. Summit Brokerage also sells insurance products, predominantly fixed and variable annuities and life insurance, under licenses held by its SBS Insurance Agency of Florida, Inc. (“SBSIA”) subsidiary (or by SBSIA’s subsidiary entities). Summit Brokerage also provides, through its SEC-registered investment advisor subsidiary, Summit Financial Group, Inc. (“SFG”), asset management and investment advisory services. SFSG was incorporated under the laws of the State of Florida in 2003.

Summit Brokerage is registered as a broker-dealer with the SEC, is a member of the Financial Industry Regulatory Authority (“FINRA”) (f/k/a National Association of Securities Dealers, Inc. (“NASD”)), the Municipal Securities Rule Making Board (“MSRB”), the National Futures Association (“NFA”) and the Securities Investor Protection Corporation (“SIPC”), and is licensed to conduct its brokerage activities in all 50 states, plus the District of Columbia. SFG is registered or eligible to conduct business as an investment advisor in 37 states and the District of Columbia. SBSIA, directly or through its subsidiary entities, is licensed to sell insurance, or is not required to be so licensed, in all jurisdictions where the Company conducts its brokerage activities.

As of October 31, 2013, we had approximately 305 financial advisors operating from approximately 230 offices located throughout the United States. Our financial advisors service retail, and to a much lesser extent, institutional clients. The number of financial advisors in each affiliate office typically ranges from one to five, although the number of financial advisors in certain offices may exceed this amount. With the exception of our Boca Raton, Florida branch (the “Boca Branch”), all of our branch offices and satellite locations are owned and operated by independent owners, who we refer to as affiliates, who maintain all appropriate licenses and are responsible for all of their respective office overhead and expenses. Our financial advisors offer a broad range of investment products and services. These products and services allow us to generate both commissions (from transactions in securities and other investment products) and fee income (for providing investment advisory services, namely managing a client’s account). The investment products and services offered include mutual funds, annuities, insurance, individual stocks and bonds, and managed money accounts. Historically, many of our affiliates have also provided financial planning services to their clients, wherein the financial advisor evaluates a client’s financial needs and objectives, develops a detailed plan, and then implements the plan with the client’s approval. When the implementation of such objectives involves the purchase or sale of securities (including the placement of assets within a managed account) such transactions are effected through Summit Brokerage, for which we earn either a commission or a fee. The following table reflects the various sources of revenue and the percentage of total revenues for the three- and nine-month periods ended September 30, 2013 and 2012:

	For The Three Months Ended September 30,								For The Nine Months Ended September 30,
	2013				2012				2013				2012
Insurance-related products	$	6,144,690	27	%	$	6,430,371	35	%	$	18,791,834	29	%	$	18,300,217	34	%
Investment advisory fees		4,171,212	19			3,526,412	19			12,319,766	19			10,412,040	19
Mutual funds		2,934,043	13			2,543,743	14			8,982,500	14			7,421,389	14
Equities		2,674,119	12			2,398,541	13			8,706,848	13			7,162,499	13
Other commission income(1)		4,543,341	20			2,461,853	13			11,987,383	18			7,259,078	14
Miscellaneous		1,935,499	9			1,081,235	6			4,513,834	7			3,235,578	6
Total	$	22,402,904	100	%	$	18,442,155	100	%	$	65,302,165	100	%	$	53,790,801	100	%

(1) Includes commission revenue related to fixed income securities, unit investment trusts, and alternative investment products.

We do not hold any funds or securities of our customers, but instead utilize, on a fully disclosed basis, the services of First Clearing, LLC (an affiliate of Wells Fargo & Company) and Pershing, LLC (an affiliate of the Bank of New York Mellon) as our clearing brokers (the “Clearing Brokers”). Our clearing arrangements provide us with back-office support, transaction processing services on all principal national and international securities exchanges, and access to many other financial services and products. These arrangements allow us to offer a range of products and services that are generally offered only by firms that are larger and have more capital than Summit Brokerage.

By their nature, our business activities are highly competitive and are subject to, among other things, general market conditions, including the volatility of the trading markets and the attractiveness of various forms of investment products. Consequently, our revenues and net income or loss are subject to substantial positive and negative fluctuations due to a variety of factors that cannot be determined from period to period. Furthermore, our mix of business in any particular period will be impacted by several factors, including the attractiveness of any particular type of investment when compared with other types of investments, and the types of investments sold by newly added financial advisors to our Company, many of whom specialize in the sale of specific types of investment products.

In general, our financial results can be impacted by a number of factors, including general market conditions and volatility, as well as our ability to recruit and retain financial advisors. During the three- and nine-month periods ended September 30, 2013, our revenues were positively impacted by an increase in investor confidence, as reflected by the increases in the major market indices. As a result, the average production per financial advisor increased during both the three- and nine-month periods when compared with the respective 2012 periods.

Although not cyclical, per se, significant movement of financial advisors among independent firms occurs from time to time, based on a number of factors, none of which can be predicted with any degree of certainty. As a result, our overall recruiting efforts may be negatively impacted during less active periods of advisor movement, as was the case during the nine-month period ended September 30, 2013, as compared to the corresponding 2012 period. If this were to continue through the balance of 2013, we may not grow as quickly as in prior periods.

Additionally, our recruiting efforts could be impacted by the difference between the amounts that we offer in the form of transition assistance to recruited advisors versus the amounts offered by other firms. Historically, we believe that we have offered less transition assistance, on average, than many of our competitors. As a result, in order for us to continue to grow, we may have to increase the amount of transition assistance offered. Such increases may negatively affect our working capital and gross margins.

Although we expect our results, in general, to be impacted by macroeconomic forces, such as the state of the economy, as well as overall market conditions and investor confidence, we may experience fluctuations in our revenue that do not follow such trends, or mirror trends experienced by the financial services industry as a whole. This is because, given our size, we may add or lose financial advisors who generate a significant amount of commissions from the sale of a particular type of investment product. As we grow larger, we anticipate that the ability of any branch office to impact the overall revenue mix will be diminished. Currently, we do not have any independent branch that accounts for more than 2.5% of total commission revenue. However, due to our size, it is possible that the addition or loss of financial advisors (and their clients), who focus on certain products over other products, will be a factor in causing fluctuations in our revenue and/or revenue mix from period to period, which may not be representative of results in other periods or reflective of general market conditions or economic trends.

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Broker-dealers, and their affiliated registered representatives, operate in a highly regulated industry. For 2013 and beyond, we expect our operating results to be impacted by the continued increase in the rules and regulations that govern how we and our advisors are required to conduct business. Many of these new rules, which were designed in response to the factors leading up to the market turmoil of 2008, as well as the Madoff scandal and other instances of corporate fraud, will require Summit Brokerage to devote considerable resources to their implementation, and subsequent monitoring. Significant new rules and regulations have and are being implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2011. Compliance with these provisions, as well as other regulatory initiatives, has resulted in, and is likely to continue to result in, increased costs. Moreover, to the extent the Dodd-Frank Act and other regulations impact the operations, financial condition, liquidity and capital requirements of financial institutions with which we do business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us. In addition, changes in regulations may have the effect of reducing certain types of compensation received by Summit Brokerage, such as the SEC’s consideration of a rule that would limit the amount of 12b-1 fees that could be paid to a broker-dealer.

For the balance of 2013, we expect to continue to focus our business plan on increasing our network of affiliated financial advisors, primarily through recruiting efforts. Although we will continue to attempt to recruit those financial advisors who serve as financial planners (who sell primarily annuities, insurance, mutual funds and fee-based products), we also intend to pursue the addition of financial advisors who focus on the sale of different types of products and securities, namely investment advisory services and equity and fixed income products. Because of the numerous factors influencing a financial advisor’s decision to affiliate with us, there can be no assurance that we will be successful in our recruiting efforts.

As we continue to grow, we may also incur increases in expenses related to, among other things, commission expense (for financial advisors receiving accelerated payouts), marketing and recruiting, personnel, office space, compliance, and the amortization of forgivable loans provided to newly recruited financial advisors. There can also be no assurance that any increase in the Company’s overall gross margin from revenue growth will be sufficient to offset any increased expenses, or that the Company’s current gross margin (as both a percentage of total revenues, as well as in absolute dollars) will not otherwise be adversely affected by factors beyond the control of the Company. For example, as described above, recent legislation, as well as initiatives undertaken by the regulatory agencies charged with overseeing the financial services industry, will have the effect of not only reducing sources of revenue to the Company, but also increasing the cost of compliance. Furthermore, the Company’s strategy of reinvesting a portion of its earnings into the development of its infrastructure and its recruiting and business development efforts, including through the payment of upfront amounts to financial advisors, may negatively impact our working capital and future earnings should our future revenue growth be less than anticipated.

To a large extent, the Company is subject to the same types of risks inherent within the retail financial services industry as a whole. For example, clients that purchased fixed income securities, such as bonds, through their financial advisors may find that the value of these bonds may decrease substantially in the event of a significant rise in interest rates. Despite suitability determinations and extensive disclosure to clients about the risks and rewards of such investments, the resulting declines in value could have negative consequences to the Company.

Based on our anticipated level of operating activities, we believe that our operations and current capital resources will be sufficient to fund our working capital needs over the next 12 months. However, depending on our ability to recruit new financial advisors, our strategy of growth may necessitate additional debt and/or equity financing, although there can be no assurance that this will happen. Our failure to obtain sufficient financing for this purpose could have a material, adverse effect on our ability to execute our growth strategy to the extent desired.

Results of Operations

The following discussion relates to the results of operations for the three months ended September 30, 2013 (the “2013 Quarter”) and the comparable period in the prior year (the “2012 Quarter”), as well as the results of operations for the nine months ended September 30, 2013 (the “2013 Period”) and the comparable period in the prior year (the “2012 Period”). All amounts are approximate unless otherwise indicated.

Comparison of Three Months Ended September 30, 2013 and September 30, 2012

Revenue:

Commission revenue of $20.5 million for the 2013 Quarter represents an increase of $3.1 million, or 18%, over the $17.4 million of commission revenue reported for the 2012 Quarter. For the 2013 Quarter, our revenues were positively impacted by, among other things, an increase in investor confidence, as reflected by the increases in the major market indices. As a result, the average production per financial advisor increased during the 2013 Quarter when compared with the 2012 Quarter.

In any period, our mix of business will be impacted by several factors, including, among other things, investor confidence, as reflected by the movements of the equities markets, and the attractiveness of non-equity-related investment products, such as fixed income securities. Additionally, during any period, we may add, or lose, a significant number of financial advisors who focus only on the sale of a particular type or types of investment product(s) (e.g., insurance, equities, fixed income, etc.).

Interest and dividends decreased by $30,000, or 13%, from $232,000 in the 2012 Quarter to $202,000 in the 2013 Quarter. Interest and dividend income is comprised primarily of that portion of the interest income earned from, and the interest expense charged to, clients of Summit Brokerage that are received from our Clearing Brokers. This decline is due to an overall reduction in the interest income earned by our Clearing Brokers resulting from the overall decline in interest rates. As a result, the amounts received by Summit Brokerage have declined over amounts received in prior periods. Going forward, we believe that the likelihood of additional reductions is great should interest rates remain at their low levels. Unless Summit Brokerage is able to offset these decreases with proportionate increases in the balances upon which such amounts are earned, our earnings will continue to be negatively impacted, as was the case in 2012. A significant reduction in such overall compensation may have a material, adverse impact on the Company’s operating results.

Other revenue increased by $885,000, or 104%, from $849,000 in the 2012 Quarter to approximately $1.733 million in the 2013 Quarter. This increase is due primarily to the inclusion within the Quarter of revenues associated with Summit Brokerage’s annual national convention, which in 2012 did not take place until the fourth quarter.

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Expenses:

Commissions and related costs increased to $17.3 million in the 2013 Quarter, which represents an increase of $2.5 million, or 17%, from the $14.8 million reported for the 2012 Quarter. In general, commissions and related costs are directly related to commission revenue, and will typically increase or decrease proportionately as commission revenue rises or falls. Commissions and related costs, as a percentage of commission revenue, decreased in the 2013 Quarter to 84.5% from 85.5% in the 2012 Quarter. Commissions and related costs as a percentage of commission revenues can also be impacted by several other factors. For example, commissions and related costs as a percentage of commission revenue may increase as a result of certain newly recruited advisors electing to take a greater payout for a limited period of time in lieu of upfront, forgivable loans. Conversely, commissions and related costs as a percentage of commission revenues would decline upon the expiration of such limited periods. The Company also includes within commissions and related costs the amortization related to the issuance of forgivable notes receivable. Prospectively, we would expect our commission expense, as a whole, to increase over the long term as we recruit more independent financial advisors, although the actual percentage in any period may be more or less than the prior period. Because our independent financial advisors are responsible for the payment of all costs associated with operating their offices, we must pay them a higher percentage of the commissions they generate (typically 80% to 90%), than we pay to those financial advisors working from the Boca Branch, where we pay the costs associated with operating the Boca Branch.

Employee compensation and benefits increased to $1.91 million in the 2013 Quarter, which represents an increase of approximately $280,000, or 17%, from the $1.63 million reported for the 2012 Quarter. This increase was due primarily to an increase in wages and employee benefit costs. Additionally, we include within employee compensation and benefits the amortization of unearned stock-based compensation related to the issuance of CSEs, such as options and warrants, to our employees. For the 2013 and 2012 Quarters, a total of $136,000 and $110,000, respectively, was expensed (net of recaptured amortization).

Other operating expenses include the general and administrative costs incurred by the Company, to the extent such costs are not included elsewhere. Other operating expenses increased by $734,000, or 78%, to $1.68 million during the 2013 Quarter from $946,000 for the 2012 Quarter. This increase was due in part to the inclusion of those expenses associated with Summit Brokerage’s annual national convention, which in 2012 did not take place until the fourth quarter. Additionally, during the 2013 Quarter, increases in director’s fees of $91,000 and legal and litigation costs of $111,000 were only partially offset by decreases in consulting costs of $31,000. Additionally, we include within other operating expenses the amortization of unearned stock-based compensation related to the issuance of CSEs, such as options and warrants, to non-employees. For the 2013 and 2012 Quarters, a total of $39,000 and $31,000, respectively, was expensed (net of recaptured amortization).

Provision for income taxes was $100,000 and $329,000 for the 2013 and 2012 Quarters, respectively, representing an effective tax rate of 9% and 50%, respectively. Our provision for income taxes in any period will be affected by, among other things, permanent, as well as temporary differences in the deductibility of certain items, including stock-based compensation and the amortization of intangible assets. For 2013, we expect our effective tax rate to decline compared to 2012 due primarily to compensation related to the exercise of non-qualified stock options expiring in 2013 that will reduce our taxable income.

Net Income:

For the 2013 Quarter, we generated net income of $1.06 million, or $0.05 per basic and $0.04 per diluted share, as compared to net income for the 2012 Quarter of $326,000, or $0.01 per basic and $0.01 per diluted share. Earnings per share increased not only as a result of an increase in the Company’s net income, but also as a result of the repurchase and retirement, during the fourth quarter of 2012, of 6.56 million shares of the Company’s common stock.

Comparison of Nine Months Ended September 30, 2013 and September 30, 2012

Revenue:

Commission revenue of $60.8 million for the 2013 Period represents an increase of $10.2 million, or 20%, over the $50.6 million of commission revenue reported for the 2012 Period. Our revenues were positively impacted by, among other things, an increase in investor confidence, as reflected by the increases in the major market indices. As a result, the average production per financial advisor increased during the 2013 Period when compared with the 2012 Period.

In any period, our mix of business will be impacted by several factors, including, among other things, investor confidence, as reflected by the movements of the equities markets, and the attractiveness of non-equity-related investment products, such as fixed income securities. Additionally, during any period, we may add, or lose, a significant number of financial advisors who focus only on the sale of a particular type or types of investment product(s) (e.g., insurance, equities, fixed income, etc.).

Interest and dividends decreased by $132,000, or 18%, from $738,000 in the 2012 Period to $606,000 in the 2013 Period. Interest and dividend income is comprised primarily of that portion of the interest income earned from, and the interest expense charged to, clients of Summit Brokerage that are received from our Clearing Brokers. This decline is due to an overall reduction in the interest income earned by our Clearing Brokers resulting from the overall decline in interest rates. As a result, the amounts received by Summit Brokerage have declined over amounts received in prior periods. Going forward, we believe that the likelihood of additional reductions is great should interest rates remain at their low levels. Unless Summit Brokerage is able to offset these decreases with proportionate increases in the balances upon which such amounts are earned, our earnings will continue to be negatively impacted, as was the case in 2012. A significant reduction in such overall compensation may have a material, adverse impact on the Company’s operating results.

Other revenue increased by $1.4 million or 56%, from $2.5 million in the 2012 Period to approximately $3.9 million in the 2013 Period. This increase is due primarily to the inclusion within the Period of revenues associated with Summit Brokerage’s annual national convention, which in 2012 did not take place until the fourth quarter.

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Expenses:

Commissions and related costs increased to $51.4 million in the 2013 Period, which represents an increase of $8.3 million, or 19%, from the $43.1 million reported for the 2012 Period. In general, commissions and related costs are directly related to commission revenue, and will typically increase or decrease proportionately as commission revenue rises or falls. Commissions and related costs, as a percentage of commission revenue, decreased in the 2013 Period to 84.5% from 85.2% in the 2012 Period. Commissions and related costs as a percentage of commission revenues can also be impacted by several other factors. For example, commissions and related costs as a percentage of commission revenue may increase as a result of certain newly recruited advisors electing to take a greater payout for a limited period of time in lieu of upfront, forgivable loans. Conversely, commissions and related costs as a percentage of commission revenues would decline upon the expiration of such limited periods. The Company also includes within commissions and related costs the amortization related to the issuance of forgivable notes receivable, which amounts increased by $8,000 during the 2013 Period when compared to the 2012 Period. Prospectively, we would expect our commission expense, as a whole, to increase as we recruit more independent financial advisors. Because our independent financial advisors are responsible for the payment of all costs associated with operating their offices, we must pay them a higher percentage of the commissions they generate (typically 80% to 90%), than we pay to those financial advisors working from the Boca Branch, where we pay the costs associated with operating the Boca Branch.

Employee compensation and benefits increased to $5.69 million in the 2013 Period, which represents an increase of approximately $721,000, or 15%, from the $4.97 million reported for the 2012 Period. This increase was due primarily to an increase in wages and employee benefits costs. Additionally, we include within employee compensation and benefits the net expenses related to the issuance of common stock and CSEs to our employees. For the 2013 and 2012 Periods, a total of $427,000 and $492,000, respectively, was expensed (net of recaptured amortization), all of which related to the amortization of unearned stock compensation for employees.

Other operating expenses include the general and administrative costs incurred by the Company, to the extent such costs are not included elsewhere. Other operating expenses increased by $828,000, or 34%, to $3.30 million during the 2013 Period from $2.47 million for the 2012 Period. This increase was due in part to the inclusion of those expenses associated with Summit Brokerage’s annual national convention, which in 2012 did not take place until the fourth quarter. Additionally, during the 2013 Period, increases in legal and litigation costs of $235,000, director’s fees of $91,000, the reserve for certain amounts due from advisors of $74,000 and contributions and donations of $29,000 were only partially offset by decreases in consulting costs of $130,000, and licensing and regulatory costs of $27,000. Additionally, we include within other operating expenses those net expenses related to the issuance of common stock and CSEs, such as options, to non-employees. For the 2013 and 2012 Periods, a total of $112,000 and $113,000, respectively, was expensed (net of recaptured amortization) for such issuances, all of which related to the amortization of unearned stock compensation.

Provision for income taxes was $1.33 million and $1.00 million for the 2013 and 2012 Periods, respectively, representing effective tax rates of 35% and 45%, respectively. Our provision for income taxes in any period will be affected by, among other things, permanent, as well as temporary differences in the deductibility of certain items, including stock-based compensation and the amortization of intangible assets. For 2013, we expect our effective tax rate to decline compared to 2012 due primarily to compensation related to the exercise of non-qualified stock options expiring in 2013 that will reduce our taxable income.

Net Income:

For the 2013 Period, we generated net income of $2.52 million, or $0.12 per basic and $0.10 per diluted share, as compared to net income for the 2012 Period of $1.21 million, or $0.05 per basic and $0.04 per diluted share. Earnings per share increased not only as a result of an increase in the Company’s net income, but also as a result of the repurchase and retirement, during the fourth quarter of 2012, of 6.56 million shares of the Company’s common stock.

Liquidity and Capital Resources

Cash provided by, or used in, operating activities for any period includes the net income for that period adjusted for non-cash items and the effects of changes in working capital. Net cash provided by operating activities during the 2013 Period totaled $3.45 million compared to $1.74 million for the 2012 Period. This increase was due primarily to higher net income of $2.52 million for the 2013 Period increased by non-cash adjustments of $539,000 related to net stock-based compensation, $149,000 related to depreciation and amortization, $134,000 related to the amortization of advisor notes and $106,000 as a result of the net changes in certain balance sheet accounts.

Net cash used in investing activities during the 2013 Period was $98,000 compared to $37,000 for the 2012 Period. This represented the purchase of property and equipment.

Net cash provided by financing activities during the 2013 Period was $57,000, resulting from the receipt of $75,000 from the exercise of stock options. The receipts were partially offset by the payment of $17,000 in dividends on our Series A Preferred Stock. For the 2012 Period, net cash used in financing activities totalled $34,000, resulting from the payments of $99,000 for a common stock repurchase, $41,000 for legal fees related to the issuance of stock options and $11,000 for dividends on our Series A Preferred Stock. The payments were partially offset by the receipt of $117,000 from the exercise of stock options and warrants.

Overall, cash and cash equivalents increased during the 2013 Period by approximately $3.41 million to approximately $11.37 million at September 30, 2013 from approximately $7.97 million at December 31, 2012. This increase was due primarily to cash provided by operations, as described above.

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Item 4. Controls and Procedures

The Company’s Chief Executive Officer and the Company’s Chief Financial Officer evaluated the Company’s disclosure controls and procedures as of September 30, 2013. Based upon this evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.

During the quarter ended September 30, 2013, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 6. Exhibits

Number	Name
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

15

SUMMIT FINANCIAL SERVICES GROUP, 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.

Date: November 14, 2013	Summit Financial Services Group, Inc. (Registrant)
		/S/ MARSHALL T. LEEDS
		Marshall T. Leeds,
		Chairman of the Board, Chief Executive Officer and President
		(Principal Executive Officer)
Date: November 14, 2013		/S/ STEVEN C. JACOBS
		Steven C. Jacobs,
		Executive Vice President and Chief Financial Officer
		(Principal Accounting Officer)

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EXHIBIT INDEX

EXHIBIT NUMBER	DESCRIPTION
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

17