10-Q 1 cpfh_10q.htm QUARTERLY REPORT cpfh_10q.htm


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, 2014

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.)

1 Main Street North
Minot, North Dakota  58703
(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
þ
No
o

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
þ
No
o

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

Large accelerated filer
o  
Accelerated filer
o
Non-accelerated filer
o  
Smaller reporting company
þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
o
No
þ
 
As of March 31, 2014, there were 1,241 common shares of the issuer outstanding.
 


 
 
 
 
 
FORM 10-Q

CAPITAL FINANCIAL HOLDINGS, INC.

INDEX
 
PART I
FINANCIAL INFORMATION
 
Page #
       
Item 1.
Financial Statements
  3
       
 
Unaudited Condensed Consolidated Balance Sheets - March 31, 2014 and December 31, 2013
 
3
       
 
Unaudited Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2014 and 2013
 
5
       
 
Unaudited Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2014 and 2013
  6
       
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
7
       
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
11
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
14
       
Item 4.
Controls and Procedures
 
14
       
PART II
OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
15
       
Item 1A.
Risk Factors
 
15
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
15
       
Item 3.
Defaults Upon Senior Securities
 
16
       
Item 4.
Removed and Reserved
 
16
       
Item 5.
Other Information
 
16
       
Item 6.
Exhibits
 
16
       
SIGNATURES   17

 
2

 
 
PART I - FINANCIAL INFORMATION
 
Item 1.   Financial Statements
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
 
    (Unaudited)  
    March 31,     December 31,  
    2014     2013  
             
CURRENT ASSETS
           
 Cash and cash equivalents
  $ 1,218,661     $ 1,665,123  
 Accounts receivable (net of an allowance of $24,000 for 2014 and 2013)
    2,020,402       1,733,765  
 Prepaids
    69,166       77,915  
                 
 Total current assets
  $ 3,308,229     $ 3,476,803  
PROPERTY AND EQUIPMENT
               
    Property and equipment
  $ 391,524     $ 387,974  
    Less accumulated depreciation
    (308,156 )     (301,207 )
   Net property and equipment
  $ 83,368     $ 86,767  
                 
OTHER ASSETS
               
Goodwill
  $ 2,132,026     $ 2,132,026  
Severance escrow
    257,475       257,412  
Deferred tax asset – non-current
    497,721       501,403  
Other assets (net of accumulated amortization of $214,444 for 2014 and 2013)     180,841        180,663   
                 
Total other assets
  $ 3,068,063     $ 3,071,504  
                 
TOTAL ASSETS
  $ 6,459,660     $ 6,635,074  

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
3

 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
   
(Unaudited)
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
             
CURRENT LIABILITIES
           
Accounts payable
  $ 110,854     $ 340,244  
Commissions payable
    2,032,875       1,861,049  
Settlements payable
    22,000       22,000  
Line of credit
    127,827       200,723  
Other current liabilities
    55,269       48,096  
Total current liabilities
  $ 2,348,825     $ 2,472,112  
                 
TOTAL LIABILITIES
  $ 2,348,825     $ 2,472,112  
                 
STOCKHOLDERS' EQUITY
               
Series A preferred stock – 5,000,000 shares authorized, $.0001 par value; 3,050,000 and 3,050,000 shares issued and 0 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 1,446 shares issued and outstanding, respectively     1,241       1,241  
Additional paid in capital – common stock
    10,221,515       10,221,515  
Accumulated deficit
    (6,336,921 )     (6,284,794 )
Less Treasury stock, 3,050,000 preferred shares at $0.4262
    (1,300,000 )     (1,300,000 )
TOTAL STOCKHOLDERS’ EQUITY
  $ 4,110,835     $ 4,162,962  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 6,459,660     $ 6,635,074  
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
4

 
 
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
(Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
OPERATING REVENUES
 
 
   
 
 
Fee income
  $ 366,267       229,585  
Commissions
    4,968,635       5,109,867  
Interest and other income
    133,928       122,688  
                 
Total revenue
  $ 5,468,830       5,462,140  
                 
OPERATING EXPENSES
               
Compensation and benefits
  $ 301,365       300,349  
Commission expense
    4,866,481       4,758,550  
General and administrative expenses
    331,050       367,042  
Depreciation
    6,949       6,604  
                 
Total operating expenses
  $ 5,505,847       5,432,545  
                 
OPERATING INCOME (LOSS)
  $ (37,017 )     29,595  
                 
OTHER EXPENSES
               
    Interest expense
  $ (6,274 )     (3,907 )
                 
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
    (43,291 )     25,688  
INCOME TAX EXPENSE
  $ (8,836 )     (19,966 )
NET INCOME (LOSS)
  $ (52,127 )     5,722  
                 
NET INCOME PER COMMON SHARE:
               
    Basic
  $ (42 )     4  
    Diluted
  $ (42 )     4  
                 
SHARES USED IN COMPUTING NET PER COMMON SHARE:
               
Basic
    1,241       1,446  
Diluted
    1,241       1,446  

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
5

 
 
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    (Unaudited)  
    Three Months Ended  
    March 31,  
    2014    
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ (52,127 )     5,722  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation
    6,949       6,604  
Provision for income taxes
    24,925       7,126  
(Increase) decrease in:
               
Accounts receivable
    (286,637 )     (145,866 )
Prepaids & other
    8,571       43,803  
Severance escrow
    (63 )     (63 )
Accounts payable
    (229,390 )     (57,293 )
Commissions payable
    171,826       271,345  
Other liabilities
    7,173       (60,779 )
Net cash (used in) provided by operating activities
  $ (370,016 )     70,599  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
  $ (3,550 )     (12,668 )
Net cash used in investing activities
  $ (3,550 )     (12,668 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Payments on short-term borrowings
    (72,896 )     (125,668 )
Increase in Settlements payable
    -       22,000  
Repayment of promissory note
    -       (67,173 )
Net cash used in financing activities
  $ (72,896 )     (170,841 )
                 
NET DECREASE  IN CASH AND CASH EQUIVALENTS
  $ (446,462 )     (112,910 )
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
  $ 1,665,123       1,221,606  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 1,218,661       1,108,696  
                 
                 
SUPPLEMENTAL SCHEDULE OF NONCASH
               
INVESTING AND FINANCING ACTIVITIES:
               
Cash paid for interest
    6,274       5,512  
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
6

 
 
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2014 and 2013

NOTE 1 - BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of Capital Financial Holdings, Inc., a North Dakota corporation, and its subsidiary (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, 2013, of Capital Financial Holdings, Inc., as filed with the SEC.  The condensed consolidated balance sheet at December 31, 2013, 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, 2014, are not necessarily indicative of operating results for the entire year.

NOTE 2 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

A summary of our significant accounting policies is included in Note 1 of our 2013 Form 10-K filed on March 18, 2014.
 
NOTE 3 - RECLASSIFICATION

Certain amounts in the 2013 condensed consolidated financial statements have been reclassified to conform to the 2014 presentation.  These reclassifications had no effect on the Company’s net income (loss).
 
NOTE 4 - GOODWILL

The Company’s goodwill represents the excess of purchase prices over the fair value of the identifiable net assets of previously acquired broker/dealer businesses.  The goodwill is not amortized; instead it is tested for impairment annually or more frequently if the fair value of a reporting unit is below its carrying value. Absent any impairment indicators, the Company performs its annual goodwill impairment testing as of June 30 of each year.

The Company’s policy is to test goodwill for impairment using a fair value approach at the reporting unit level.  The Company performs its goodwill impairment test in two steps.  Step one compares the fair value of the reporting unit to its carrying value, including goodwill.  If the fair value of the unit determined in step one is lower than its carrying value, the Company proceeds to step two, which then compares the carrying value of goodwill to its implied fair value.  Any excess of carrying value of goodwill over its implied fair value at a reporting unit is recorded as impairment.

The valuation methodology the Company utilizes in testing the Company’s goodwill for impairment is based on the income approach.  The income approach is based on a discounted cash flow methodology in which expected future net cash flows are discounted to present value, using a discounted rate that compensates for the risk in attaining the projected cash flows.  This approach is dependent upon a number of significant management estimates about future performance including but not limited to, market performance, income taxes, capital spending and working capital changes.

The Company tests goodwill for impairment annually during the second quarter of each fiscal year.  If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests. There were no events that occurred nor a change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying value during the first quarter in 2014. Therefore, the second step of testing for impairment was not required.

 
7

 

NOTE 5 – PROMISSORY NOTE

On October 21, 2011, the Company issued a promissory note to PawnMart, Inc. in exchange for the repurchase of the 3,050,000 shares of preferred stock.  The note carries an interest rate of 7%, with quarterly payments of $66,801. On March 30, 2012 the Company revised the agreement with PawnMart, Inc. to release the building as security on the original note. The Company made a payment of $925,922. In April of 2012, the Company made a $100,000 payment. The Company was to make quarterly payments of $34,000 with the last payment being $34,965 until maturity April 1, 2014. On March 1, 2013, the Company made a payment of $118,000. On March 28, 2013 the Company paid the promissory note in full plus accrued interest for a total payment of $46,353. Interest expense on this note was $5,512 in 2013. There is no longer a liability related to this note.
 
NOTE 6 – LINE OF CREDIT

On August 9, 2013, the Company signed loan documents for a line of credit with a local bank, American Bank Center, in the amount of $300,000 in order to help fund the cash redemption of less than whole shares which resulted from the 1:10,000 reverse stock split, which occurred on August 14, 2013. The line of credit has a variable interest rate of 1.509 percent above Wall Street Journal U.S. Prime Rate which was 3.25% as of March 31, 2014. The Company makes monthly interest payments. The loan matures August 8, 2014.  The Company has set up monthly payments with an automatic payment of $25,000. As of March 31, 2014, the Company had outstanding $127,827 against its line of credit. As of March 31, 2014 interest expense on this line of credit was $3,661. There are no financial covenants associated with the line of credit.
 
NOTE 7 - 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, 2014 and 2013. Changes are due to the stock buyback and reverse stock split

Option activity for the twelve months ended December 31, 2013 and the three months ended March 31, 2014 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, 2013
    539     $ 5,400     $ 2,800     $ -  
Granted
    -       -       -          
Exercised
    -       -       -          
Canceled
    -       -       -          
Outstanding on December 31, 2013
    539     $ 5,400     $ 2,800     $ -  
Granted
    -       -       -          
Exercised
    -       -       -          
Canceled
    20       -       -          
Outstanding on March 31, 2014
    519     $ 5,400     $ 2,800     $ -  

Exercisable options totaled 538.8113 at December 31, 2013 and totaled 518.8113at March 31, 2014.

 
8

 

NOTE 8 - 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. Changes are due to the stock buyback and reverse stock split. The following reconciles amounts reported in the financial statements:

   
Three Months Ended March 31, 2014
    Three Months Ended March 31, 2013  
   
Numerator
   
Denominator
   
Per Share Amount
   
Numerator
   
Denominator
   
Per Share Amount
 
Net (Loss) Income
  $ (52,127 )                 5,722              
Less:  Preferred Stock Dividends
                                       
Income Available to Common Shareholders – Basic Earnings per Share
  $ (52,127 )     1,241       (42 )     5,722       1,446     $ 4  
Effect of Dilutive Securities:
                                               
Preferred Stock Dividends
                                               
Stock Options and Warrants
                                               
Income Available to Common Shareholders – Diluted Earnings per Share
  $ (52,127 )     1,241       (42 )     5,722       1,446     $ 4  
                                                 
 
Options and warrants to purchase 728.6113 common shares at exercise prices between $3,500 and $14,300 were outstanding at March 31, 2014, but were not included in the computation of diluted earnings per share for the quarter ending March 31, 2014 and March 31, 2013, because their effect was anti-dilutive.

NOTE 9 – FAIR VALUE DISCLOSURES

The Company has adopted a framework for measuring fair value, and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market.  Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value in three broad levels:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company has the ability to access.

Level 2 inputs are inputs (other than quoted prices included within level 1) that are observable for the asset or liability, either directly or indirectly.

Level 3 are unobservable inputs for the asset or liability and rely on management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.  (The unobservable inputs should be developed based on the best information available in the circumstances and may include the Company’s own data.)

The application of valuation techniques applied to similar assets and liabilities has been consistently applied.  The following is a description of the valuation methodologies used for instruments measured at fair value: On February 12, 2009, CFS entered into a settlement agreement with a client, which resulted in CFS purchasing the client’s investment in the Omega 2007 Drilling Program 1, LP.  This limited partnership carries a “presentment” feature which allows CFS to sell the investment to the General Managing Partner of the limited partnership; and this feature has become available.  CFS had determined based off of the information provided by the Limited Partnership that the fair market value of the $76,876 investment was estimated at $45,000 based on discounted cash flows at the time of purchase by CFS which was included in other assets at December 31, 2013. Since then, CFS determined, based off of information provided by the Limited Partnership that, as of March 19, 2013, the fair market value of this $76,876 investment was $12,214, based on discounted cash flows. In May of 2013, CFS opted to exercise the “presentment” feature and was paid the current value of the investment in the amount of $11,923. No balance remains as of December 31, 2013.

The Company has accumulated cash for the possible future payments of severance and benefits for senior management, should they leave. This is an accrual the company has elected to set aside for possible future obligations. These funds are reflected as Severance Escrow on the balance sheet, and consist of cash accounts.
 
 
9

 

 
Carrying Value at March 31, 2014
 
Quarter ended
March 31, 2013
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total Losses
 
Other Investment   $ -     $ -     $ -     $ -     $ -  
Severance Escrow     257,475       257,475       -       -       -  

 
Carrying Value at March 31, 2013
 
Quarter ended
March 31, 2014
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total Losses
 
Other Investment   $ 12,214     $ -     $ -     $ 12,214     $ -  
Severance Escrow     254,259       254,259       -       -       -  
 
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 several legal and/or arbitration proceedings. These proceedings include customer suits and arbitrations related to the failure of Medical Capital, other alternative investments alleged to be unsuitable, the bankruptcy proceedings of the various DBSI entities and the bankruptcy of other various entities. The Company vigorously contests the allegations of the various proceedings and believes that there are multiple meritorious legal and fact based defenses in these matters. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, including the impact on operations or on the financial statements, particularly in the earlier stages of a case. The Company makes provisions for cases brought against it when, in the opinion of management after seeking legal advice, it is probable that a liability exists, and the amount can be reasonably estimated. The current proceedings are subject to uncertainties and, as such, the Company is unable to estimate the possible loss or range of loss that may result from the outcome of these cases; however, results in these cases that are against the interests of the Company could have a severe negative impact on the financial position of the Company. At March 31, 2014, the Company is a defendant in seven on-going suits or arbitrations as discussed above. The Company expects to vigorously defend and ultimately prevail in these cases. In April 2014, the Company settled one of the aforementioned lawsuits in the amount of $6,000. During 2012, the Company settled lawsuits that required a $22,000 payment in 2013 and an additional $22,000 payment during 2014. This payment was made during April of 2014. Subsequent to the quarter ended March 31, 2014, the Company received an additional complaint. Should the complaint become an arbitration, it would be covered under the Company’s liability insurance policy and any amounts of shared coverage by the Company to the insurance company is not material to the financial statements. No further payments will be required on the aforementioned settled proceedings.

 
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 subsidiary.

The Company has been engaged in the financial services business since 1987. The Company was incorporated September 22, 1987, as a North Dakota corporation. The Company’s principal offices are located at 1 Main Street North, Minot, North Dakota 58703. As of March 31, 2014, the Company had 17 full-time employees and 1 part-time employees consisting of officers, securities distribution, data processing, compliance, accounting, and clerical support staff.

CFS is a full-service brokerage firm. CFS is registered with the SEC as an investment advisor and broker-dealer and also with FINRA as a broker-dealer. CFS specializes in providing investment products and services to independent investment representatives, financial planners, and investment advisors and currently supports over 211 investment representatives and investment advisors.

RESULTS OF OPERATIONS

   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
Net income (loss)
    (52,127 )     5,722  
Income per share:
               
Basic
    (42 )     4  
Diluted
    (42 )     4  
 
The Company reported net loss for the quarter ended March 31, 2014, of $52,127, compared to net income of $5,722 for the same quarter in 2013. The loss in the quarter ended March 31, 2014 was due to stagnant growth and an increase in salaries, auditing expenses and commission expense during the first quarter of 2014.

Operating revenues

Total operating revenues for the quarter ended March 31, 2014 were $5,468,830, a slight increase from $5,462,140 for the quarter ended March 31, 2013. The increases for the three month period resulted primarily from increases in fee income received by CFS for assets held under management, the Company’s broker-dealer division.

Fee Income

Fee income for the quarter ended March 31, 2014 was $366,267, an increase of 59% from $229,585 for the quarter ended March 31, 2013.  The increases were due to an increase in fee income received by CFS, as a result of higher values of client assets under management.

The Company earns investment advisory fees in connection with CFS’ 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 6% of the Company’s consolidated revenues for 2014.

Commission Income

Commission income includes CFS commissions.  The Company pays the registered representatives a percentage of this income as commission expense and retains the balance. Commission income for the quarter ended March 31, 2014 was $4,968,635, a decrease of 2% from $5,109,867 for the quarter ended March 31, 2013.  The decreases were due primarily to the decrease in commissions received by CFS due to market conditions. Commission revenues constituted 92% of the Company’s consolidated revenues for 2014.

Other income

Interest and other income for the quarter ended March 31, 2014 was $133,928, an increase of 9% from $122,688 for the quarter ended March 31, 2013.  The increases were due to an increase in the marketing income received related to alternative investment products. Interest and other income constituted 2% of the Company’s consolidated revenues for the three months ended March 31, 2014.

 
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Operating expenses

Total operating expenses for the quarter March 31, 2014 were $5,505,847, an increase of 1% from $5,432,545 for the quarter ended March 31, 2013. The increases resulted from the net increase in the expense categories described below.

Compensation and benefits

Compensation and benefits expense for the quarter ended March 31, 2014 was $301,365, a slight increase from $300,349 for the quarter ended March 31, 2013. The increases resulted from an increase in wages and benefits to employees and payroll taxes.

Commission expense

Commission expense for the quarter ended March 31, 2014 was $4,866,481, an increase of 2% from $4,758,550 for the quarter ended March 31, 2013.  While there was a slight increase in commission expense, overall expense was what the Company expected.

General and administrative expense

Total general and administrative expenses for the quarter ended March 31, 2014 were $331,050, a decrease of 9% from $367,042 for the quarter ended March 31, 2013.  The decreases were due primarily to a decrease in the legal expenses incurred through litigation costs and outside professional services..

Depreciation

Depreciation expense for the quarter ended March 31, 2014 was $6,949, an increase of 5% from $6,604 for the quarter ended March 31, 2013..
 
Liquidity and capital resources

Net cash used in operating activities was $370,016 for the three months ended March 31, 2014, as compared to net cash provided by operating activities of $70,599 during the three months ended March 31, 2013.  The primary difference corresponds to bonus compensation paid to employees during the first quarter of 2014 as compared to bonus compensation paid to employees during the first quarter of 2013. The compensation for bonuses was included within accounts payable as of March 31, 2014.

Net cash used in investing activities was $3,550 for the three months ended March 31, 2014, compared to net cash used in investing activities of $12,668 for the three months ended March 31, 2013.  The primary difference corresponds with the purchases of assets during the first quarter of 2014 as compared to first quarter in 2013.

Net cash used in financing activities was $72,896for the three months ended March 31, 2014, compared to net cash used in financing activities of $170,841 for the three months ended March 31, 2013.  The primary difference corresponds with the early repayment of the promissory note with PawnMart, and the line of credit issued to the Company in 2013.

At March 31, 2014, the Company held $1,218,661 in cash and cash equivalents, as compared to $1,108,696 at March 31, 2013.  The Company is required to maintain certain levels of cash and liquid securities in CFS to meet regulatory net capital requirements.

On August 9, 2013, the Company signed loan documents for a line of credit with a local bank, American Bank Center, in the amount of $300,000 in order to help fund the stock split. The line of credit has a variable interest rate of 1.509 percent above Wall Street Journal U.S. Prime Rate which was 3.25% as of March 31, 2014. The Company makes monthly interest payments. The loan matures August 8, 2014. The Company has set up monthly payments with an automatic payment of $25,000. As of March, the Company had outstanding $127,827 against its line of credit. As of March 31, 2014 interest expense on this line of credit was $6,274. There are no financial covenants associated with the line of credit.

The Company has historically relied upon sales of its equity securities and debt instruments, as well as bank loans, for liquidity and growth. Management believes that the Company’s existing liquid assets, along with cash flow from operations, will provide the Company with sufficient resources to meet its ordinary operating expenses during the next twelve months. Significant, unforeseen or extraordinary expenses may require the Company to seek alternative financing sources, including common or preferred share issuance or additional debt financing.

In addition to the liabilities coming due in the next twelve months, management expects that the principal needs for cash may be broker recruitment, repurchase shares of the Company’s common stock, and debt service. Management also expects to realize increases in consultant expenses as well as increased compliance and legal costs with respect to its broker dealer subsidiary related to regulatory and litigation matters.

 
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FORWARD-LOOKING STATEMENTS

When used herein, in future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company's press releases, and in other Company-authorized written or oral statements, the words and phrases "can be," "expects," "anticipates," "may affect," "may depend," "believes," "estimate," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  Such statements are subject to certain risks and uncertainties, including those set forth in this "Forward-Looking Statements" section, which could cause actual results for future periods to differ materially from those presently anticipated or projected.  The Company does not undertake and specifically disclaims any obligation to update any forward-looking statement to reflect events or circumstances after the date of such statements.
Forward-looking statements include, but are not limited to, statements about the Company’s:

  
Business strategies and investment policies,
  
Possible or assumed future results of operations and operating cash flows,
  
Financing plans and the availability of short-term borrowing,
  
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 accounting rules, policies, practices, and procedures which may adversely affect the business;
  
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.
 
 
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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, 2014, and that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed and summarized, and reported within the time periods specified by the SEC’s rules and forms.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses.

 
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PART II - OTHER INFORMATION
 

Item 1.   Legal Proceedings

The Company operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. Issuers of certain alternative products sold by the Company are in Bankruptcy or may have other financial difficulties. As a result of such alleged failings of alternative products and the uncertainty of client recovery from the various product issuers, the Company is subject to several legal and/or arbitration proceedings. These proceedings include customer suits and arbitrations related to the failure of Medical Capital, other alternative investments alleged to be unsuitable, the bankruptcy proceedings of the various DBSI entities and the bankruptcy of other various entities. The Company vigorously contests the allegations of the various proceedings and believes that there are multiple meritorious legal and fact based defenses in these matters. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, including the impact on operations or on the financial statements, particularly in the earlier stages of a case. The Company makes provisions for cases brought against it when, in the opinion of management after seeking legal advice, it is probable that a liability exists, and the amount can be reasonably estimated. The current proceedings are subject to uncertainties and, as such, the Company is unable to estimate the possible loss or range of loss that may result from the outcome of these cases; however, results in these cases that are against the interests of the Company could have a severe negative impact on the financial position of the Company. At March 31, 2014, the Company is a defendant in seven on-going suits or arbitrations as discussed above. The Company expects to vigorously defend and ultimately prevail in these cases. In April 2014, the Company settled one of the aforementioned lawsuits in the amount of $6,000. During 2012, the Company settled lawsuits that required a $22,000 payment in 2013 and an additional $22,000 payment during 2014. This payment was made during April of 2014. Subsequent to the quarter ended March 31, 2014, the Company received an additional complaint. Should the complaint become an arbitration, it would be covered under the Company’s liability insurance policy and any amounts of shared coverage by the Company to the insurance company is not material to the financial statements.  No further payments will be required on the aforementioned settled proceedings.

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 2014
    -       -       -     $ 597,754  
February 2014
    -       -       -     $ 597,754  
March 2014
    -       -       -     $ 597,754  
Total
    -       -       -     $ 597,754  

 
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Item 3.   Defaults Upon Senior Securities

None
 
Item 4.   (Removed and Reserved)

Item 5.   Other Information

None
 
Item 6.   Exhibits

Exhibits

31.1
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
31.2
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
32.1
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350
32.2
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350


 
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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, 2014
By:
/s/ John Carlson  
   
John Carlson
 
   
Chief Executive Officer & President
 
    (Principal Executive Officer)  
       
       
Date: May 15, 2014
By: /s/ Elizabeth Redding  
   
Elizabeth A. Redding
 
   
Chief Financial Officer & Corporate Secretary
 
   
(Principal Financial Officer)
 

 

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