10-Q 1 cpfh_10q.htm QUARTERLY REPORT Blueprint
 

 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017
 
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 ☑ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐  (Do not check if a smaller reporting company)
Smaller reporting company
☒ 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of March 31, 2017, 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, 2017 and December 31, 2016
3
 

 
 
Unaudited Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2017 and 2016
5
 


 
Unaudited Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2017 and 2016
 6
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
7
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
15
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
 
 
 
Item 4.
Controls and Procedures
18
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
20
 
 
 
Item 1A.
Risk Factors
20
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
20
 
 
 
Item 3.
Defaults Upon Senior Securities
20
 
 
 
Item 4.
Removed and Reserved
20
 
 
 
Item 5.
Other Information
20
 
 
 
Item 6.
Exhibits
21
 
 
 
 
SIGNATURES
 22
 
 
 
2
 
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
 
 
 (Unaudited)  
 
 
 
 March 31,
2017
 
 
December 31,
2016
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $1,190,464 
 $934,711 
Accounts receivable (net of an allowance of $24,000 for 2017 and 2016)
  1,731,318 
  1,932,933 
Prepaids
  49,153 
  61,709 
Current assets of discontinued operations
  19,213 
  6,375 
 
    
    
Total current assets
  2,990,148 
  2,935,728 
 
    
    
PROPERTY AND EQUIPMENT
    
    
Land
  98,409 
  98,409 
Building
  875,682 
  875,682 
 
    
    
Furniture, fixtures and equipment
  547,481 
  543,601 
Less accumulated depreciation
  (433,455) 
  (422,058) 
Property and equipment of discontinued operations
  - 
  72,616 
Net property and equipment
  1,088,117 
  1,168,250 
 
    
    
 
    
    
OTHER ASSETS
    
    
Severance escrow
  258,249 
  258,185 
Deferred tax asset
  409,765 
  417,542 
Other assets
  175,279 
  175,279 
 
    
    
Total other assets
  843,293 
  851,006 
 
    
    
TOTAL ASSETS
 $4,921,558 
 $4,954,985 
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
3
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
(Unaudited)    
 
 
 
 March 31,
2017
 
 
 December 31,
2016
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
Accounts payable
 $326,128 
 $292,987 
Commissions payable
  2,010,148 
  2,027,962 
Income taxes payable
  12,592 
  10,187 
Other current liabilities
  45,041 
  12,963 
Current liabilities of discontinued operations
  19,213 
  7,434 
Total current liabilities
 $2,413,122 
 $2,351,533 
 
    
    
NON CURRENT LIABILITIES
    
    
Non current liabilities of discontinued operations
  - 
  2,907 
Building mortgage
  475,000 
  475,000 
Total noncurrent liabilities
  475,000 
  477,907 
TOTAL LIABILITIES
 $2,888,122 
 $2,829,440 
 
    
    
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 1,241 shares issued and outstanding, respectively
  1,241 
  1,241 
Additional paid in capital – common stock
  10,221,515 
  10,221,515 
Accumulated deficit
  (8,414,320) 
  (8,322,211) 
Less Treasury stock, 3,050,000 preferred shares at $0.4262
  (1,300,000) 
  (1,300,000) 
TOTAL STOCKHOLDERS’ EQUITY
 $2,033,436 
 $2,125,545 
 
    
    
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 $4,921,558 
 $4,954,985 
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
4
 
 
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
  (Unaudited)  
 
 
 
  Three Months Ended  
 
 
 
  March 31,  
 
 
 
 2017
 
 
 2016
 
OPERATING REVENUES
 
 
 
 
 
 
Fee income
 $315,791 
  258,106 
Commissions
  3,508,998 
  3,840,475 
Other fee income
  98,647 
  69,523 
 
    
    
Total revenue
  3,923,436 
  4,168,104 
 
    
    
OPERATING EXPENSES
    
    
Compensation and benefits
  386,497 
  364,075 
Commission expense
  3,282,574 
  3,632,249 
General and administrative expenses
  294,111 
  232,979 
Depreciation
  11,398 
  11,717 
 
    
    
Total operating expenses
  3,974,580 
  4,241,020 
 
    
    
OPERATING LOSS
  (51,144)
  (72,916)
 
    
    
OTHER INCOME (EXPENSES)
    
    
Interest expense
  (5,794)
  - 
Other income
  547 
  9,970 
 
    
    
Total other income (expense)
  (5,247)
  9,970 
 
    
    
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
  (56,391)
  (62,946)
INCOME TAX EXPENSE
  (13,404)
  (5,625)
NET LOSS BEFORE DISCONTINUED OPERATIONS
  (69,795)
  (68,571)
  
    
DISCONTINUED OPERATIONS
  (22,315)
  (6,726)
 
    
    
NET LOSS
 $(92,110)
  (75,297)
 
    
    
NET LOSS PER COMMON SHARE, BASIC AND DILUTED:
 
    
Continuing
 $(56)
  (56)
Discontinued
 $(18)
  (5)
 
    
    
SHARES USED IN COMPUTING NET PER COMMON SHARE:
 
    
Basic and diluted
  1,241 
  1,241 
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
5
 
 
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
  (Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
 2017
 
 
 2016
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net loss
 $(92,110)
  (75,297)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
    
    
Depreciation
  11,398
  11,838
Depletion
  (29,354)
  5,452
Provision for deferred income taxes
  7,777
  (3,933)
(Increase) decrease in:
    
    
Accounts receivable
  201,615
  (92,002)
Income taxes payable
  2,405
  (60,077)
Prepaids
  12,557
  24,961
Severance escrow
  (64)
  (65)
Accounts payable
  25,707
  20,137
Commissions payable
  (17,814)
  (17,252)
Other liabilities
  32,078
  70,565
Net cash (used in) provided by operating activities
 $154,195
  (115,673)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES
    
    
Purchase of property and equipment
 $(3,880)
  (5,189)
Payment of Baron notes receivable
  - 
  500,000
Deductions to oil and gas properties
  105,438
    
Net cash provided by investing activities
 $101,558
  494,811
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES
    
    
Repayment of short-term borrowings
  - 
  (50,000)
Net cash used in financing activities
 $- 
  (50,000)
 
    
    
NET INCREASE IN CASH AND CASH EQUIVALENTS
 $255,753
  329,138
 
    
    
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
 $934,711
  1,038,426
 
    
    
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 $1,190,464
  1,367,564
 
    
    
SUPPLEMENTAL SCHEDULE OF NONCASH
    
    
INVESTING AND FINANCING ACTIVITIES:
    
    
Cash paid for interest on building mortgage
  5,794 
  - 
 
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
6
 
 
CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2017 and 2016
 
NOTE 1 - BASIS OF PRESENTATION
 
The accompanying condensed consolidated financial statements of Capital Financial Holdings, Inc., a North Dakota corporation, and its subsidiaries Capital Financial Services, Inc. (“CFS”) and Capital Natural Resources, Inc. (“CNR”) (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, 2016, of Capital Financial Holdings, Inc., as filed with the SEC. The condensed consolidated balance sheet at December 31, 2016, 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, 2017, are not necessarily indicative of operating results for the entire year.
 
Oil and Gas Properties
 
CNR follows the full cost method of accounting for crude oil and natural gas operations whereby all costs related to the exploration and development of crude oil and natural gas properties are capitalized into a single cost center (“full cost pool”).  Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and exploration activities. 
 
Capitalized costs are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves as determined by independent petroleum engineers.  The costs of unproved properties are withheld from the depletion base until such time as they are either developed or abandoned.  When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion and full cost ceiling calculations.  For the three months ended March 31, 2017, depletion expense was zero.
 
CNR held leasehold interests on acreage located in Gonzalas and Taylor County, Texas, Lincoln County, Colorado and Divide and Williams County, North Dakota. Proceeds from property sales will generally be credited to the full cost pool with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs.  In the first quarter of 2017 these assets were sold for $66,200.
 
The Company assesses all items classified as unproved property on an annual basis, or if certain circumstances exist, more frequently, for possible impairment or reduction in value.  In the first quarter of 2017, non-producing and unproved properties in Lincoln County, Colorado and Divide and Williams County, North Dakota held by the Company were disposed of in transfers deemed effective as of December 31, 2016 by assignment documents in accordance with established practice in the oil and gas industry.
 
Oil and Gas Revenue
 
The Company recognizes oil and gas revenue for only its ownership percentage of total production under the entitlement method. There was no imbalance as of March 31, 2017.
 
Asset Retirement Obligations
 
Asset retirement obligation is included in other noncurrent liabilities and relates to future costs associated with the plugging and abandonment of crude oil and natural gas wells, removal of equipment and facilities from leased acreage and returning the land to its original condition.  Estimates are based on estimated remaining lives of those wells based on reserve estimates, external estimates to plug and abandon the wells in the future, inflation, credit adjusted discount rates and federal and state regulatory requirements.  The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. As of March 31, 2017, asset retirement obligations were zero and for the three months ended March 31, 2017 accretion expense was Zero.
 
As of December 31, 2016, the natural resource segment met the definition of discontinued operations.
 
 
7
 
 
NOTE 2 – ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
 
A summary of our significant accounting policies is included in Note 1 of our 2016 Form 10-K filed on March 30, 2017.
 
ASU 2014-15 —Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendment requires that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company is currently evaluating the impact of its pending adoption of ASU 2014-15.
 
ASU 2016-02 – Leases (Topic 842): - The amendments in this update supersede nearly all existing lease guidance under GAAP. The amendment requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases. Qualitative and quantitative disclosures are required. This update is effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02.
 
NOTE 3 – BUSINESS VENTURES
 
On June 9, 2014, the Company launched a new wholly-owned operating subsidiary, Capital Natural Resources, Inc., by acquiring 1,000,000 shares, .001 par value common stock of Capital Natural Resources, Inc. for the amount of $100,000. Capital Natural Resources, Inc. will seek opportunities related to natural resources in the United States, including petroleum, natural gas and/or other minerals, water resources and land.
 
On April 1, 2015, CNR obtained a non-operating working interest in an oil and gas property consisting of three oil and gas leases in Taylor County, Texas for a purchase price of $90,000 paid in cash.
 
On December 1, 2015, CNR purchased a non-operating working interest in the Kifer Rozella 1, producing oil well, located in the County of Gonzales, state of Texas. The purchase price of $100,000 for CNR’s interest was paid by $50,000 by a promissory note and deed of trust carried by the Seller, Origin Production Company, Inc. Said promissory note has an annual interest rate of 10% per annum and is payable in monthly installment of approximately $1,062 beginning January 1, 2016 with final maturity on December 1, 2020. On February 1, 2016, the Company paid off the promissory note in the amount of approximately $50,847 bringing the balance of the note to zero. Total interest paid on the promissory note was approximately $847. 
 
On July 28, 2015, CNR acquired five year oil and gas leases located in Williams County, North Dakota and two tracts located in Divide County, North Dakota for a combined acquisition cost of $7,676, including lease bonus and prepaid annual rentals. The oil and gas leases were obtained from the State of North Dakota Department of Trust Lands. The leases grant the right to conduct oil and gas operations and extract oil and gas from the property with payment of royalty to the lessor of 3/16 of oil and gas produced. The leases were to expire August 3, 2020 unless held by production, meaning oil and gas is being produced from the properties.
 
On August 20, 2015, CNR acquired a five year oil and gas lease located in Lincoln County, Colorado at an initial acquisition cost of $1,652 including the first annual rental payment of $1,600. The oil and gas lease was obtained from the Colorado State Board of Land Commissioners. The lease grants the right to conduct oil and gas operations and extract oil and gas from the property with payment of royalty to the lessor of 1/6 of oil and gas produced. The lease was to expire August 20, 2020 unless held by production, meaning oil and gas is being produced from the property.
 
The oil and gas leases in North Dakota and Colorado were non-producing properties and non-operating leases.
 
The purchase allocation for all four CNR oil and gas lease transactions was based on the estimated fair value of the assets acquired.
 
On May 19, 2015, CNR acquired interests in coal rights located in Kanawha County, West Virginia with 1,483,451 recoverable tons for a purchase price of $1,275 paid in cash.
 
On June 11, 2015, CNR acquired mineral, water rights and surface interests in Hudspeth County, Texas for a purchase price of $83,350 paid in cash.
 
In the first quarter of 2017, all of the natural resource assets described above were disposed of by CNR. As of December 31, 2016, the natural resource subsidiary, Capital Natural Resources, Inc., met the definition of discontinued operations.
 
NOTE 4DISCONTINUED OPERATIONS
 
On March 2 and 3, 2017 the Company sold the assets in its natural resource segment, Capital Natural Resources, Inc. The sale included all of the leases and coal, mineral, water and surface interests.
 
 
8
 
 
The summarized balance sheet for discontinued operations is presented below:
 
 
 
2017
 
 
2016
 
Current Assets
 
 
 
 
 
 
Accounts receivable
 $- 
  5,626 
Current Long term receivable
    
  - 
Prepaids
  - 
  750 
Total current assets
 $- 
  6,375 
 
    
    
Property and Equipment
    
    
Oil and natural gas properties, Full Cost Method of Accounting
 $- 
  61,829 
Less accumulated depletion
  - 
  (29,354)
Equipment
  - 
  4,690 
Less accumulated depreciation
  - 
  (816)
Other property holdings
  - 
  36,267 
Net property and equipment
 $- 
  72,616 
 
    
    
 
    
    
Total Assets
 $- 
  78,991 
 
    
    
Current liabilities
    
    
Accounts payable
 $19,213 
  7,434 
Total current liabilities
 $19,213 
  7,434 
 
    
    
Noncurrent liabilities
    
    
Asset retirement obligation
 $- 
  2,907 
Total noncurrent liabilities
 $- 
  2,907 
 
    
    
Stockholder’s Equity
    
    
Common Stock
 $270,400 
  300,400 
Accumulated deficit
  (289,613)
  (231,750)
Total stockholder’s equity
 $(19,213)
  68,650 
 
    
    
Total liabilities and stockholder’s equity
 $- 
  78,991 
 
The results of operations of Capital Natural Resources, Inc. are included in the Company’s Consolidated Statements of Operations as discontinued operations.
 
The company recorded impairment on the assets held for sale as of December 31, 2016. The proceeds of the sale, after giving effect to any working capital adjustments, will be allocated among the holding company.
 
 
9
 
 
The summarized income for the three months ended March 31, 2017 and March 31, 2016 from discontinued operations is presented below:
 
 
 
2017
 
 
2016
 
Operating Revenues
 
 
 
 
 
 
Oil lease income
 $- 
  13,676 
Total operating revenue
 $- 
  13,676 
 
    
    
Operating Expenses
    
    
Compensation and benefits
 $- 
  17,778 
Lease operating expense
  - 
  14,468 
General and administrative
  - 
  2,278 
Depletion
  - 
  5,452 
Depreciation
  - 
  120 
Loss from discontinued operations
  (22,315)
    
Total operating expenses
 $(22,315)
  40,096 
 
    
    
Operating loss
 $(22,315)
  (26,420)
 
    
    
Other income (expenses)
    
    
Interest expense
 $- 
  (847)
Interest income
  - 
  16,206 
Total other income (expenses)
 $- 
  15,359 
 
    
    
Loss of discontinued operations before income tax expense
 $(22,315)
  (11,061)
 
    
    
Income tax (expense) benefit
 $- 
  4,335 
 
    
    
Net loss
 $(22,315)
  (6,726)
 
    
    
 
The Company did not reclassify its Statements of Cash Flows to reflect the various discontinued operations. Cash flows from 2017 are combined with the cash flows from continuing operations within each of the categories presented.
 
NOTE 5BARON NOTES RECEIVABLE
 
On June 11, 2014, June 27, 2014, and July 22, 2014, Baron Energy, Inc., issued promissory notes receivable to Capital Natural Resources, Inc. (the “note holder”) in the amounts of $85,000, $40,000 and $375,000 respectively. The three notes carry an interest rate of 15% per annum, payable monthly, and mature on June 12, 2016, June 28, 2016 and July 23, 2016 respectively. The Chairman of the Company has acted, and continues to act, as counsel to the Company while his affiliated law firm has acted and continues to act as counsel to Baron Energy, Inc. Moreover, the Chairman also serves on the management team of the subsidiary that holds the Baron Energy Notes. This related party transaction was reviewed by the Company. At maturity, the notes are convertible at the option of the note holder into specified non-operating minority working interests in Baron Energy, Inc.’s oil and gas operations in Frio County, Texas. As additional compensation to the note holder, at the maturity of the notes, regardless of whether the note holder elects to convert the principal of the notes to non-operating minority working interests, the note holder will be assigned specified non-operating minority working interests in Baron Energy, Inc.’s oil and gas operations in Frio County, Texas. The note holder also has the option to receive additional working interests if it extends the maturity dates of the notes. Interest income earned on the notes was $82,642. On March 21, 2016, the Baron Notes were paid in full in the amount of $500,000 together with accrued interest.
 
NOTE 6 – LINE OF CREDIT
 
On September 12, 2016, the Company signed renewal loan documents for the line of credit with American Bank Center in the amount of $500,000. The line of credit has a variable interest rate of 1.509 percent above Wall Street Journal U.S. Prime Rate which was 4% as of March 31, 2017. The loan matures with principal due on September 12, 2017. As of March 31, 2017, the Company had zero outstanding and zero interest expense against its current line of credit. There are no financial covenants associated with the line of credit.
 
 
10
 
 
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, 2017 and 2016. Changes are due to the stock buyback and reverse stock split.
 
Option activity for the twelve months ended December 31, 2016 and the three months ended March 31, 2017 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, 2016
  207 
 $8,692 
 $4,435 
 $- 
Granted
  - 
  - 
  - 
    
Exercised
  - 
  - 
  - 
    
Canceled
  39 
  - 
  - 
    
Outstanding on December 31, 2016
  168 
 $5,000 
 $3,844 
 $- 
Granted
  - 
  - 
  - 
    
Exercised
  - 
  - 
  - 
    
Canceled
  1 
  - 
  - 
    
Outstanding on March 31, 2017
  167 
 $4,538 
 $4,190 
 $- 
 
Exercisable options totaled 168 at December 31, 2016 and totaled 167 at March 31, 2017.
 
NOTE 8 – INCOME TAXES
 
Deferred taxes arise because of different tax treatment between financial statement accounting and tax accounting, known as “temporary differences.” The Company records the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which the Company has received a tax deduction and has not yet been recorded in the consolidated statement of operations).
 
Management reviews and adjusts those estimates annually based upon the most current information available. However, because the recoverability of deferred taxes is directly dependent upon the future operating results of the Company, actual recoverability of deferred taxes may differ materially from management’s estimates.
 
Due to stock options forfeited, the deferred tax assets associated with stock compensation valued under the Black Scholes model were reduced. As of March 31, 2017, approximately $2,000 was recorded as tax expense for the quarter and an accumulated amount of approximately $434,610 has been recorded as tax expense since the beginning of stock options being forfeited.
 
The effective tax rates for the three months ended March 31, 2017 were different from the statutory rate primarily due to the reduction of the deferred tax assets related to stock compensation.
 
At March 31, 2017, the Company has approximately $398,000 in federal net operation loss carry forward which begins to expire in 2036.
 
 
11
 
 
NOTE 9 - EARNINGS PER SHARE
 
Basic earnings per share are computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common shares had been converted to common shares. The following reconciles amounts reported in the financial statements:
 
 
 
Three Months Ended March 31, 2017
 
 
Three Months Ended March 31, 2016
 
 
 
Numerator
 
 
Denominator
 
 
Per Share Amount
 
 
Numerator
 
 
Denominator
 
 
Per Share Amount
 
Net (Loss) Income of continuing operations
 $(69,795)
     
     
  (68,571)
     
     
Less: Preferred Stock Dividends
    
    
    
    
    
    
Income of Continuing Operations Available to Common Shareholders – Basic and diluted Earnings per Share
 $(69,795)
  1,241 
  (56)
  (68,571)
  1,241 
 $(56)
 
Options and warrants to purchase 377 common shares at exercise prices between $3,500 and $14,300 were outstanding at March 31, 2017, but were not included in the computation of diluted earnings per share for the quarter ending March 31, 2017 and March 31, 2016, because their effect was anti-dilutive.
 
NOTE 10RULE 4110 (c)(1)
 
The Company operates under the provision of FINRA Rule 4410 (c)(1) and, accordingly, the member is restricted from withdrawing equity capital for a period of one year from the date such equity capital is contributed, unless otherwise permitted by FINRA in writing. Subject to the requirements of paragraph (c)(2) of this Rule, this paragraph shall not preclude a member from withdrawing profits earned. On December 28, 2016, the board of the holding company of Capital Financial Services, Inc. approved capital contribution in the amount of $65,000 to be transferred to the Company.
 
NOTE 11 – REGULATORY MATTERS
 
The broker dealer (“BD”) segment of Capital Financial Services, Inc. is subject to periodic examinations by its regulators, the Financial Industry Regulatory Authority (“FINRA”) and the Securities Exchange Commission (“SEC”).
 
 
12
 
 
During 2016, the SEC conducted a routine examination of the CFS BD.  At the conclusion of its examination, the SEC issued an Examination Report with certain findings, asking the Company’s regulated entity to improve its anti-money laundering program, record additional information on the Company’s transaction blotters, and record transactions on the Company’s transaction blotters that are performed at other companies. On November 28, 2016 the broker dealer made its latest response to the routine examination report. The broker dealer is awaiting the closing letter from the SEC and continues to work with its legal counsel with respect to any potential remaining issues.  
 
During the second quarter of 2017, FINRA began conducting a routine examination of the broker dealer segment. The examination is still ongoing. The broker dealer will work closely with its legal counsel with respect to any potential issues.
 
NOTE 12BUILDING PURCHASE
 
On November 16, 2016, the Company closed on the acquisition of a commercial office building and associated property (the “Office Building”) located at 1821 Burdick Expressway West, Minot, North Dakota from Evanmark Enterprises, LLC, an entity unrelated to the Company. The contract purchase price for the Office Building was $975,000, exclusive of closing costs of $9,091, with all built-in fixtures and other furniture, fixtures and equipment in the building remaining with the property. The Company paid $509,091 at closing toward the purchase price of the Office Building with the remaining $475,000 of the purchase price financed by a commercial real estate loan from American Bank Center (“American Bank”) in the principal amount of $675,000, $475,000 of which is being applied to the purchase price of the Office Building and $200,000 of which will be utilized for renovations to the building. The loan will carry a fixed interest rate of 4.879% per annum for five (5) years with the rate to be adjusted at the end of the five (5) year period based on the Wall Street Journal Prime interest rate plus 1.759%. American Bank has a first priority mortgage on the Office Building. On April 7, 2017 the Company was notified by the City of Minot that the address on this property was changing from 1801 Burdick Expressway W to 1821 Burdick Expressway W.
 
NOTE 13 – SEGMENT REPORTING
 
The Company organizes its current business units into three reportable segments: broker dealer services, natural resources (discontinued operation as of December 31, 2016), and holding company. The broker-dealer services segment distributes securities and insurance products to retail investors through a network of registered representatives through its wholly-owned subsidiary, Capital Financial Services, Inc. (“CFS”), a Wisconsin corporation. The natural resources segment sought opportunities related to natural resources in the United States, including petroleum, natural gas and/or other minerals, water resources and land through its wholly-owned subsidiary, Capital Natural Resources, Inc. (“CNR”), a Colorado corporation. As of December 31, 2016, this operation met the definition of discontinued operation. The holding company encompasses cost associated with business development and acquisitions, dispositions of subsidiary entities and results of discontinued operations, dividend income and recognized gains or losses.
 
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.
 
The historical results of Capital Natural Resources, Inc. have been reflected as discontinued operations.
 
 
 
Holding
 
 
Broker-Dealer
 
 
 
 
As of, and for the three months ended:
 
Company
 
 
Services
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
Commissions and fee income
  - 
  3,824,789 
  3,824,789 
Other fee income
  - 
  98,647 
  98,647 
Other income
  60 
  487 
  547 
Interest expense
  (5,794)
  - 
  (5,794)
Depreciation
  1,031 
  10,367 
  11,398 
Income (loss) before income tax benefit (expense)
  (116,488)
  60,096 
  (56,391)
Income tax benefit (expense)
  10,154 
  (23,558)
  (13,404)
Net income (loss) of continued operations
  (106,334)
  36,539 
  (69,795)
Segment assets of continued operations
  1,711,988 
  3,242,997 
  4,954,985 
 
 
13
 
 
 
 
Holding
 
 
Broker-Dealer
 
 
 
 
As of, and for the three months ended:
 
Company
 
 
Services
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
 
 
 
 
 
 
 
 
Commissions and fee income
  - 
  4,098,581 
  4,098,581 
Other fee income
  - 
  69,523 
  69,523 
Other income
  (102)
  10,072 
  9,970 
Depreciation
  534 
  11,183 
  11,717 
Income (loss) before income tax benefit (expense)
  (99,815)
  36,869 
  (62,946)
Income tax benefit (expense)
  9,009 
  (14,634)
  (5,625)
Net income (loss) of continued operations
  (90,806)
  22,235 
  (68,571)
Segment assets of continued operations
  2,024,848 
  2,930,137 
  4,954,985 
 
    
    
    
 
NOTE 14 – LEGAL PROCEEDINGS
 
The Company operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. Issuers of certain alternative products sold by the Company are in Bankruptcy or may have other financial difficulties. As a result of such alleged failings of alternative products and the uncertainty of client recovery from the various product issuers, the Company is subject to several legal and/or arbitration proceedings. These proceedings include customer suits, investments alleged to be unsuitable, and bankruptcies and other issues brought by claimants. The Company vigorously contests the allegations of the various proceedings and believes that there are multiple meritorious legal and fact based defenses in these matters. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, including the impact on operations or on the financial statements, particularly in the earlier stages of a case. The Company makes provisions for cases brought against it when, in the opinion of management after seeking legal advice, it is probable that a liability exists, and the amount can be reasonably estimated. The current proceedings are subject to uncertainties and, as such, the Company is unable to estimate the possible loss or range of loss that may result from the outcome of these cases; however, results in these cases that are against the interests of the Company could have a severe negative impact on the financial position of the Company. As of March 31, 2017, the Company is a defendant in six on-going suits or arbitrations as discussed above. As of March 31, 2016, without admission of liability, the Company recorded $63,000 for a potential settlement for one of the cases stated above, pending the determination of liability, if any. The $63,000 is included in accrued liabilities as of March 31, 2017. In April 2017, the Company issued payment of $62,673 on that matter as a deposit with the court. The Company will continue to defend the case. The Company estimates that the amount stated above is the maximum possible range of loss that may result from the outcome of this case. The Company also recorded a liability of $25,000 on another of the above cases at March 31, 2017 and subsequently settled the case for the same amount in April 2017. The $25,000 is included on the financial statements in accrued liabilities as of March 31, 2017.
 
On April 5, 2011, several broker-dealers and their principals/officers, including the Company and John Carlson, President and Chief Compliance Officer, filed a lawsuit in the Superior Court of California for Orange County against Mayer Hoffman McCann, P.C. (“Mayer Hoffman”) captioned Signature Financial Group, Inc., et al, (“Signature”) v. Mayer Hoffman McCann, P.C., et al. The lawsuit arose out of reviews of the financial statements of Medical Capital Holdings, Inc. (“Medical Capital”) by Mayer Hoffman. In June 2009, Medical Capital was sued by the U.S. Securities and Exchange Commission (“SEC” or “Commission”), a finding was made that Medical Capital was conducting a “Ponzi scheme” and a receiver was appointed to liquidate Medical Capital. The plaintiffs in the Signature lawsuit are broker-dealers and principals of broker-dealers that sold Medical Capital investments to their clients. These plaintiffs sought to recover damages from Mayer Hoffman for the losses and expenses they incurred as a result of the Medical Capital financial deceptions and resulting expenses and losses to the plaintiffs. Specific claims asserted and relief requested included fraud-intentional misrepresentation of fact/concealment of fact; negligent misrepresentation; equitable indemnity and declaratory relief. On September 23, 2014, the Plaintiffs entered into a Confidential Settlement and Mutual Release Agreement (the “Settlement Agreement”) with Mayer Hoffman and entities affiliated with Mayer Hoffman to settle the Plaintiffs’ claims against Mayer Hoffman and all affiliated parties of Mayer Hoffman. The parties acknowledged that as between the Company and Mr. Carlson, one hundred percent (100%) of the settlement proceeds paid to them was for the alleged damage or harm to goodwill (and loss of goodwill). The settlement proceeds were received on December 4, 2014 and charged against goodwill carried on the consolidated financial statements of Capital Financial Holdings, Inc., the parent of the Company. In a matter related to the Settlement Agreement, on or about October 6, 2014, the Company filed a lawsuit seeking declaratory judgment against its former errors and omission insurance carrier - Arch Specialty Insurance Company (“Arch”) - in the Circuit Court of Wisconsin for Milwaukee County (Capital Financial Services, Inc. v. Arch Specialty Insurance Company). On or about November 24, 2014, Arch filed counterclaims against the Company. The actions were for declaratory relief in connection with a dispute over whether Arch was entitled to any portion of the settlement proceeds that the Company received in exchange for dismissing the lawsuit with Mayer Hoffman. On approximately September 14, 2016 the Company and Arch agreed to settle the matter, on October 14, 2016 a Stipulation and Order for Dismissal was filed with the Court and on October 24, 2016 the Court entered an order dismissing the case, including all claims, counterclaims and third party claims with prejudice with no costs assessed to any party.
 
NOTE 15SUBSEQUENT EVENTS
 
On February 23, 2017, the Company entered into a construction agreement with a general contractor for the remodel and upgrade of the office building located at 1821 West Burdick Expressway, Minot, North Dakota 58701 which the Company acquired in the last quarter of 2016. The agreement sets the anticipated cost of completion at $234,600, subject to standard contingencies. The remodel and upgrade is anticipated to be completed by approximately May 31, 2017. On April 12, 2017, the project Architect approved and the Company paid the first work in progress invoice from the general contractor in the amount of $62,709.50. The cost of the remodel and upgrade will be capitalized as a cost of the building.
 
 
14
 
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
GENERAL
 
Capital Financial Holdings, Inc. derives the majority of its revenues and net income from sales of mutual funds, insurance products, and various other securities through Capital Financial Services, Inc. (“CFS”), the Company’s broker dealer segment.
 
The Company has been engaged in the financial services business since 1987. The Company was incorporated September 22, 1987, as a North Dakota corporation. The Company’s principal offices are located at 1 Main Street North, Minot, North Dakota 58703. As of March 31, 2017, the Company had 21 full-time employees employee consisting of officers, principals, data processing, compliance, accounting, and clerical support staff.
 
The Company organized its current business units into three reportable segments: broker dealer services, natural resources (discontinued operation as of December 31, 2016), and holding company. The broker-dealer services segment distributes securities and insurance products to retail investors through a network of registered representatives through its wholly-owned subsidiary, Capital Financial Services, Inc. (“CFS”), a Wisconsin corporation. The natural resources segment sought opportunities related to natural resources in the United States, including petroleum, natural gas and/or other minerals, water resources and land through its wholly-owned subsidiary, Capital Natural Resources, Inc. (“CNR”), a Colorado corporation. As of December 31, 2016, this operation met the definition of discontinued operations. The holding company encompasses cost associated with business development and acquisitions, dispositions of subsidiary entities and results of discontinued operations, dividend income and recognized gains or losses.
 
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.
 
Capital Financial Holdings, Inc. derives the majority of its revenues and net income from sales of mutual funds, insurance products, and various other securities through Capital Financial Services, Inc. (“CFS”), the Company’s broker dealer segment.
 
CFS is a full-service brokerage firm. CFS is registered with the SEC as an investment advisor and broker-dealer and also with FINRA as a broker-dealer. CFS specializes in providing investment products and services to independent investment representatives, financial planners, and investment advisors and currently supports over 150 investment representatives and investment advisors.
 
RESULTS OF CONTINUED OPERATIONS
 
 
 
 Three Months Ended
 
 
 
 March 31,
 
 
 
2017
 
 
2016
 
Net income (loss)
  (69,795)
  (68,571)
Income (loss) per share:
    
    
Basic and diluted
  (56)
  (56)
 
The Company reported a net loss for the three months ended March 31, 2017, of $69,795, compared to a net loss of $68,571 for the same quarter in 2016. The increase in net loss for the three months ended March 31, 2017 compared to net loss in the same period in 2016 is due to reduced commissions revenues and increased compensation and benefits and general and administrative expenses.
 
 
15
 
 
Operating revenues
 
Total operating revenues for the three months ended March 31, 2017 were $3,923,436, a decrease of 6% from $4,168,104 for the same period ended March 31, 2016. The changes for the three month period net revenue categories are listed below.
 
Fee income
 
Fee income for the three months ended March 31, 2017 was $315,791, an increase of 22% from $258,106 for the same period ended March 31, 2016. The increase is due to an increase in fee income received by the broker dealer segment as a result of higher values of client assets under management.
 
The Company earns investment advisory fees in connection with the broker dealer’s registered investment advisor. The Company pays the registered representatives a portion of this fee income as commission expense and retains the balance. These fees constituted approximately 8% of the Company’s consolidated revenues for the three months ended March 31, 2017 and 6% of the Company’s consolidated revenues for the three months ended March 31, 2016. There is no fee income attributable to the other segments.
 
Commission income
 
Commission income includes broker dealer segment commissions. The Company pays the registered representatives a percentage of this income as commission expense and retains the balance. Commission income for the three months ended March 31, 2017 was $3,508,998, a decrease of 9% from $3,840,475 for the same period ended March 31, 2016. The decreases were due primarily to the decrease in commissions received by the broker dealer segment due to market conditions. Commission revenues constituted approximately 89% of the Company’s consolidated revenues for the three months ended March 31, 2017 and 92% of the Company’s consolidated revenues for the three months ended March 31, 2016. There is no commission income attributable to the other segments.
 
Other fee income
 
Other operating fee income for the three months ended March 31, 2017 was $98,647, an increase of 42% from $69,523 for the same period ended March 31, 2016. The decreases were primarily due to a decrease in the income received related to alternative investment products. There is no other operating fee income attributable to the holding segments. Other operating fee income constituted approximately 3% of the Company’s consolidated revenues for the three months ended March 31, 2017 and approximately 2% of the Company’s consolidated revenues for the three months ended March 31, 2016.
 
Operating expenses
 
Total operating expenses for the three months ended March 31, 2017 were $3,974,580, a decrease of 6% from $4,241,020 for the three months ended March 31, 2016. The decreases resulted from the net decreases in the expense categories described below.
 
Compensation and benefits
 
Consolidated compensation and benefits expense for the three months ended March 31, 2017 was $386,497, a slight increase from $364,075 for the same period ended March 31, 2016.
 
Compensation and benefits for the holding segment for the three months ended March 31, 2017 was $34,340, a decrease of 25% from an expense of $45,946 for the same period ended March 31, 2016. The decrease is primarily due to decreases in paid management compensation.
 
Compensation and benefits for the broker dealer segment for the three months ended March 31, 2017 was $352,156, an 11% increase from $318,129 for the same period ended March 31, 2016. The increases were due to increases in wages paid to employees and insurance benefits.
 
Commission expense
 
Commission expense for the three months ended March 31, 2017 was $3,282,574, a decrease of 10% from $3,632,249 for the same period ended March 31, 2016. The decrease is a result of the lower revenues received by the broker dealer segment during the period ended March 31, 2017. There is no commission expense attributable to the other segments.
 
General and administrative expense
 
Consolidated general and administrative expenses for the three months ended March 31, 2017 were $294,111, an increase of 26% from $232,979 for the same period ended March 31, 2016. The increase resulted from the net increases in the expense categories described below.
 
 
16
 
 
General and administrative expenses for the holding segment for the three months ended March 31, 2017 were $75,380, a 42% increase from $53,233 for the same period ended March 31, 2016. The increases were from an increase in expenses tied to outside services, legal expenses and utility expenses related to the new office building.
 
General and administrative expenses for the broker dealer segment for the three months ended March 31, 2017 were $218,731, an increase of 22% from $179,746 for the same period ended March 31, 2016. The increases are from increases in due diligence, legal, accounting and recruiting expenses.
 
Depreciation
 
Consolidated depreciation expense for the three months ended March 31, 2017 was $11,398, a decrease of 3% from $11,717 for the same period ended March 31, 2016.
 
Depreciation expense for the holding segment for the three months ended March 31, 2017 was $1,032, an increase of 93% from $534 for the same period ended March 31, 2016. The increases in depreciation expenses were due to additional fixed assets purchased related to the new office building.
 
Depreciation expense for the broker dealer segment for the three months ended March 31, 2017 was $10,366, a decrease of 7% from $11,183 for the same period ended March 31, 2016.
 
Interest expense
 
Interest expense for the three months ended March 31, 2017 was $5,794, an increase of 100% from zero for the same period ended March 31, 2016. The increase is due to the interest payments made on the building mortgage during 2016 by the holding segment. There were no interest payments made on the building mortgage in the period ended March 31, 2016. There is no interest expense attributable to the other segments.
 
Liquidity and capital resources
 
Net cash provided by operating activities was $154,195 for the three months ended March 31, 2017, as compared to net cash used in operating activities of $115,673 during the three months ended March 31, 2016. The primary difference corresponds to the timing of accounts receivable and accounts payable.
 
Net cash provided by investing activities was $101,558 for the three months ended March 31, 2017, as compared to net cash provided by investing activities of $494,811 for the three months ended March 31, 2016. The primary difference corresponds with repayment of the Baron notes receivable in early 2016 and the deductions to oil and gas properties attributed to discontinued operations in 2017.
 
Net cash used in financing activities was zero for the three months ended March 31, 2017, as compared to net cash used in financing activities of $50,000 for the three months ended March 31, 2016.
 
The Company has historically relied upon sales of its equity securities and debt instruments, as well as bank loans, for liquidity and growth. Management believes that the Company’s existing liquid assets, along with cash flow from operations, will provide the Company with sufficient resources to meet its ordinary operating expenses during the next twelve months. Significant, unforeseen or extraordinary expenses may require the Company to seek alternative financing sources, including common or preferred share issuance or additional debt financing.
 
In addition to the liabilities coming due in the next twelve months, management expects that the principal needs for cash may be broker recruitment, repurchase of shares of the Company’s common stock, and debt service. Management also expects to realize 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.
 
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.
 
 
17
 
 
Forward-looking statements include, but are not limited to, statements about the Company’s:
 
Business strategies and investment policies,
Possible or assumed future results of operations and operating cash flows,
Financing plans and the availability of short-term borrowing,
Competitive position,
Potential growth opportunities,
Recruitment and retention of the Company’s key employees,
Potential operating performance, achievements, productivity improvements, efficiency and cost reduction efforts,
Likelihood of success and impact of litigation,
Expected tax rates,
Expectations with respect to the economy, securities markets, the market for merger and acquisition activity, the market for asset management activity, and other industry trends,
Competition, and
Effect from the impact of future legislation and regulation on the Company.
 
The following factors, among others, could cause actual results to differ materially from forward-looking statements, and future results could differ materially from historical performance:
 
General political and economic conditions which may be less favorable than expected;
The effect of changes in interest rates, inflation rates, the stock markets, or other financial markets;
Unfavorable legislative, regulatory, or judicial developments;
Adverse findings or rulings in arbitrations, litigation or regulatory proceedings;
Incidence and severity of catastrophes, both natural and man-made;
Changes in commodity pricing due to natural resource investments;
Changes in accounting rules, policies, practices, and procedures which may adversely affect the business; and
Terrorist activities or other hostilities which may adversely affect the general economy.
 
The Company is a financial services holding company that, through its broker dealer subsidiary, provides brokerage, investment advisory, insurance and related services. The Company operates in a highly regulated and competitive industry that is influenced by numerous external factors such as economic conditions, marketplace liquidity and volatility, monetary policy, global and national political events, regulatory developments, competition, and investor preferences. The Company’s revenues and net earnings may be either enhanced or diminished from period to period by such external factors. The Company remains focused on continuing to reduce redundant operating costs, upgrade operating efficiency, recruit quality representatives and grow our revenue base. The Company provides broker-dealer services in support of trading and investment by its representatives’ customers in corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, private placement alternative investments, variable annuities and variable life insurance. The Company also provides investment advisory services for its representative’s customers.
 
A key component of the broker-dealer subsidiary’s business strategy is to recruit well-established, productive representatives who generate substantial revenues from an array of investment products and services. Additionally, the broker-dealer subsidiary assists its representatives in developing and expanding their business by providing a variety of support services and a diversified range of investment products for their clients.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
Not Applicable as a Smaller Reporting Company
 
Item 4.    Controls and Procedures
 
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15c-14(c) under the Exchange Act) as of the end of the period covered by this report, pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2017, 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.
 
 
18
 
 
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
 
We are not currently a “listed company” under SEC rules and are therefore not required to have a board comprised of a majority of independent directors or separate committees comprised of independent directors.  We use the definition of “independence” under the NASDAQ Rules, as applicable and as may be modified or supplemented from time to time and the interpretations thereunder, to determine if the members of our Board are independent.  In making this determination, our Board considers, among other things, transactions and relationships between each director and his immediate family and us, including those reported in its Annual Report under the caption “Certain Relationships and Related Transactions.”  The purpose of this review is to determine whether any such relationships or transactions are material and, therefore, inconsistent with a determination that the directors are independent.  On the basis of such review and its understanding of such relationships and transactions, our Board has determined that none of our Board members is an independent director.
 
 
19
 
 
PART II - OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
The information in response to this item can be found in Note 14 (Legal Proceedings) to Financial Statements in this Report, which information is incorporated by reference into this item.
 
Item 1A.    Risk Factors
 
Not Applicable as a Smaller Reporting Company
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
The Company has issued the following securities in the past quarter without registering the securities under the Securities Act:
 
None
 
Small Business Issuer Repurchases of Equity Securities:
 
In November of 1997, the Board of Directors of the Company authorized the repurchase of up to $2,000,000 of its outstanding common stock from time to time in the open market. The table below displays the dollar value of shares that may yet be purchased under this plan.
 
Period
 
Total Number of Shares Purchased
 
 
Average Price Per Share
 
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
 
January 2017
  - 
  - 
  - 
 $597,754 
February 2017
  - 
  - 
  - 
 $597,754 
March 2017
  - 
  - 
  - 
 $597,754 
Total
  - 
  - 
  - 
 $597,754 
 
Item 3.    Defaults Upon Senior Securities
 
None
 
Item 4.    (Removed and Reserved)
 
Item 5.    Other Information
 
None
 
 
20
 
 
Item 6.    Exhibits
 
Exhibits
 
Exhibit No.
 
Description
31.1
 
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
 
 
 
31.2
 
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act
 
 
 
32.1
 
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350
 
 
 
32.2
 
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101 CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101 DEF
 
XBRL Taxonomy Extension Definition Linkbaset
 
 
 
101 LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101 PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
21
 
 
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 12, 2017
By /s/ John Carlson
 
 
John Carlson
 
 
Chief Executive Officer & President
(Principal Executive Officer)
 
 
 
Date: May 12, 2017
By /s/ Elizabeth Colby
 
 
Elizabeth A. Colby
 
 
Chief Financial Officer & Corporate Secretary
 
 
(Principal Financial Officer)
 
 
 
 
22