NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 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 nine months ended September 30, 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 nine months ended September 30,
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 September 30, 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 September 30, 2017, asset retirement
obligations were zero and for the nine months ended September 30,
2017 accretion expense was zero.
As of
December 31, 2016, the natural resource segment met the definition
of discontinued operations.
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 4
–
DISCONTINUED
OPERATIONS
On
March 2 and 3, 2017 the Company sold the assets in its natural
resource segment, Capital Natural Resources, Inc. The sale included
all of the leases and coal, mineral, water and surface
interests.
The
summarized balance sheet for discontinued operations is presented
below:
|
|
|
Current
Assets
|
|
|
Accounts
receivable
|
$
-
|
5,626
|
Current Long term
receivable
|
|
-
|
Prepaids
|
-
|
749
|
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
|
$
-
|
7,434
|
Total current
liabilities
|
$
-
|
7,434
|
|
|
|
Noncurrent
liabilities
|
|
|
Asset retirement
obligation
|
$
-
|
2,907
|
Total noncurrent
liabilities
|
$
-
|
2,907
|
|
|
|
Stockholder’s
Equity
|
|
|
Common
Stock
|
$
-
|
300,400
|
Accumulated
deficit
|
-
|
(231,750
)
|
Total
stockholder’s equity
|
$
-
|
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.
The
summarized income for the three months ended September 30, 2017 and
September 30, 2016 from discontinued operations is presented
below:
|
|
|
Operating
Revenues
|
|
|
Oil lease
income
|
$
-
|
13,336
|
Total operating
revenue
|
$
-
|
13,336
|
|
|
|
Operating
Expenses
|
|
|
Compensation and
benefits
|
$
-
|
18,132
|
Lease operating
expense
|
-
|
20,500
|
General and
administrative
|
-
|
3,583
|
Depletion
|
-
|
3,301
|
Depreciation
|
-
|
167
|
Loss from
discontinued operations
|
(22,315
)
|
|
Total operating
expenses
|
$
(22,315
)
|
45,683
|
|
|
|
Operating
loss
|
$
(22,315
)
|
(32,347
)
|
|
|
|
|
|
|
Loss
of discontinued operations before income tax expense
|
$
(22,315
)
|
(32,347
)
|
|
|
|
Income
tax benefit
|
$
-
|
11,553
|
|
|
|
Net
loss
|
$
(22,315
)
|
(20,794
)
|
The
summarized income for the nine months ended September 30, 2017 and
September 30, 2016 from discontinued operations is presented
below:
|
|
|
Operating
Revenues
|
|
|
Oil lease
income
|
$
-
|
46,472
|
Total operating
revenue
|
$
-
|
46,472
|
|
|
|
Operating
Expenses
|
|
|
Compensation and
benefits
|
$
-
|
51,067
|
Lease operating
expense
|
-
|
49,139
|
General and
administrative
|
-
|
6,098
|
Depletion
|
-
|
13,743
|
Depreciation
|
-
|
448
|
Loss from
discontinued operations
|
(22,315
)
|
|
Total operating
expenses
|
$
(22,315
)
|
120,495
|
|
|
|
Operating
loss
|
$
(22,315
)
|
(74,023
)
|
|
|
|
Other
income (expenses)
|
|
|
Interest
expense
|
$
-
|
(847
)
|
Interest
income
|
-
|
16,206
|
Total other
income
|
$
-
|
15,359
|
|
|
|
Loss
of discontinued operations before income tax expense
|
$
(22,315
)
|
(58,664
)
|
|
|
|
Income
tax benefit
|
$
-
|
22,996
|
|
|
|
Net
loss
|
$
(22,315
)
|
(35,668
)
|
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 5
—
BARON 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 had a variable interest rate of 1.509
percent above Wall Street Journal U.S. Prime Rate which was 4.25%
as of September 30, 2017. The credit line expired on September 12,
2017 without being used. As of September 30, 2017, the Company had
zero outstanding and zero interest expense against the line of
credit. There were 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 nine months
ended September 30, 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 nine
months ended September 30, 2017 was as follows:
|
|
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
September 30, 2017
|
167
|
$
4,538
|
$
4,190
|
$
-
|
Exercisable
options totaled 168 at December 31, 2016 and totaled 167 at
September 30, 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 September 30, 2017, an accumulated amount of
approximately $434,610 has been recorded as tax expense since the
beginning of stock options being forfeited. There are no additional
stock options subject to forfeiture.
The
effective tax rates for the nine months ended September 30,
2017 were different from the statutory rate primarily due to the
reduction of the deferred tax assets related to stock
compensation.
At
September 30, 2017, the Company has approximately $65,084 in
federal net operation loss carry forward which begins to expire in
2036.
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 September 30, 2017
|
Three Months
Ended September 30, 2016
|
|
|
|
|
|
|
|
Net (Loss) Income
of continuing operations
|
$
48,634
|
|
|
65,534
|
|
|
Less: Preferred
Stock Dividends
|
|
|
|
|
|
|
Income of
Continuing Operations Available to Common Shareholders –
Basic and diluted Earnings per Share
|
$
48,634
|
1,241
|
39
|
65,534
|
1,241
|
$
53
|
|
Nine Months
Ended September 30, 2017
|
Nine Months
Ended September 30, 2016
|
|
|
|
|
|
|
|
Net (Loss) Income
of continuing operations
|
$
(41,366
)
|
|
|
(31,232
)
|
|
|
Less: Preferred
Stock Dividends
|
|
|
|
|
|
|
Income of
Continuing Operations Available to Common Shareholders –
Basic and diluted Earnings per Share
|
$
(41,366
)
|
1,241
|
(33
)
|
(31,232
)
|
1,241
|
$
(25
)
|
Options
and warrants to purchase 377 common shares at exercise prices
between $3,500 and $14,300 were outstanding at September 30, 2017,
but were not included in the computation of diluted earnings per
share for the quarter ending September 30, 2017 and September 30,
2016, because their effect was anti-dilutive.
NOTE 10
–
RULE 4110
(c)(1)
The
Company operates under the provision of FINRA Rule 4410 (c)(1) and,
accordingly, the member is restricted from withdrawing equity
capital for a period of one year from the date such equity capital
is contributed, unless otherwise permitted by FINRA in writing.
Subject to the requirements of paragraph (c)(2) of this Rule, this
paragraph shall not preclude a member from withdrawing profits
earned. On December 28, 2016, the board of the holding company of
Capital Financial Services, Inc. approved capital contribution in
the amount of $65,000 to be transferred to the
Company.
NOTE 11 – 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”).
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 provided its last response to the routine examination
report.
On May
19, 2017, FINRA, the regulatory authority for the Company’s
subsidiary Capital Financial Services, Inc. (the broker dealer
subsidiary) issued its post examination report for the FINRA
examination of the broker dealer subsidiary which began in April
2017. In that report FINRA noted exceptions in its risk assessment
of the firm in the following areas: 1) the need for an adequate
anti-money laundering program to detect and report suspicious
activity, 2) three instances of procedural inadequacy regarding due
diligence or suitability with respect to REIT offerings
participated in by the broker dealer subsidiary and 3) one instance
of inadequate disclosure to a customer of variable annuity fees by
a registered representative of the broker dealer subsidiary. The
broker dealer subsidiary is working to resolve the forgoing
exception issues with FINRA as well as to make improvements in its
procedural processes.
NOTE 12
–
BUILDING
PURCHASE
On November 16, 2016, the Company closed on the acquisition of a
commercial office building and associated property (the
“Office Building”) located at 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 was applied to the purchase price of the Office
Building and $200,000 of which was utilized for renovations to the
building. The loan carries a fixed interest rate of 4.879% per
annum for five (5) years with the rate to be adjusted at the end of
the five (5) year period based on the Wall Street Journal Prime
interest rate plus 1.759%. American Bank has a first priority
mortgage on the Office Building. 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.
Effective in June 2017, the Company’s broker-dealer
subsidiary began paying rent to the Company of $8,500 per month on
a month-to-month basis for a portion of the office facility owned
by the Company. The broker-dealer utilizes approximately 5,817
square feet of office space for its operations out of the 6,188
square feet in the office facility utilized in the Company’s
operations. Rent Income and Rent Expense related to this
Company/Subsidiary arrangement are eliminated in the consolidated
financial statements. Approximately 4,152 square feet in a separate
section of the building remains vacant and is available as on
office rental unit or expansion.
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.
|
|
|
|
As
of, and for the three months ended:
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
Commissions
and fee income
|
-
|
3,645,683
|
3,645,683
|
Other
fee income
|
-
|
102,580
|
102,580
|
Other
income
|
166
|
67,123
|
67,289
|
Interest
expense
|
(8,453
)
|
-
|
(8,453
)
|
Depreciation
|
(1,464
)
|
10,111
|
8,647
|
Income
before income tax expense
|
49,040
|
50,099
|
99,139
|
Income
tax expense
|
(31,572
)
|
(18,933
)
|
(50,505
)
|
Net
income (loss) of continued operations
|
17,468
|
31,166
|
48,634
|
Segment
assets of continued operations
|
1,835,630
|
3,045,393
|
4,881,023
|
|
|
|
|
|
|
|
|
As
of, and for the three months ended:
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Commissions
and fee income
|
-
|
4,600,219
|
4,600,219
|
Other
fee income
|
-
|
112,841
|
112,841
|
Other
income
|
16
|
27,064
|
27,080
|
Depreciation
|
996
|
11,192
|
12,188
|
Income
(loss) before income tax benefit (expense)
|
(128,262
)
|
222,541
|
94,279
|
Income
tax benefit (expense)
|
44,379
|
(73,124
)
|
(28,745
)
|
Net
income (loss) of continued operations
|
(83,883
)
|
149,417
|
65,534
|
Segment
assets of continued operations
|
1,388,992
|
3,386,800
|
4,775,792
|
|
|
|
|
As
of, and for the nine months ended:
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
Commissions
and fee income
|
-
|
11,116,544
|
11,116,544
|
Other
fee income
|
-
|
312,299
|
312,299
|
Other
income
|
260
|
71,710
|
71,970
|
Interest
expense
|
20,714
|
-
|
20,714
|
Depreciation
|
13,061
|
30,993
|
44,054
|
Income
(loss) before income tax benefit (expense)
|
(273,778
)
|
241,738
|
(32,040
)
|
Income
tax benefit (expense)
|
85,433
|
(94,759
)
|
(9,326
)
|
Net
income (loss) of continued operations
|
(188,345
)
|
146,979
|
(41,366
)
|
Segment
assets of continued operations
|
1,835,630
|
3,045,393
|
4,881,023
|
|
|
|
|
|
|
|
|
As
of, and for the nine months ended:
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Commissions
and fee income
|
-
|
13,020,135
|
13,020,135
|
Other
fee income
|
-
|
232,275
|
232,275
|
Other
income
|
(3,480
)
|
29,680
|
26,200
|
Depreciation
|
2,218
|
33,533
|
35,751
|
Income
(loss) before income tax benefit (expense)
|
(318,520
)
|
331,383
|
12,863
|
Income
tax benefit (expense)
|
85,807
|
(129,902
)
|
(44,095
)
|
Net
income (loss) of continued operations
|
(232,713
)
|
201,481
|
(31,232
)
|
Segment
assets of continued operations
|
1,388,992
|
3,386,800
|
4,775,792
|
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 September 30, 2017, the Company is a defendant in
five on-going suits or arbitrations as discussed above. In April
2017, the Company issued payment of $62,673 on a pending litigation
matter as a deposit with the court pursuant to a court order and
recorded a $63,000 accrual for the matter as of December 31,
2016. On August 22, 2017 the matter was settled by payment of
an additional $60,000.
On April 5, 2011, several broker-dealers and their
principals/officers, including the Company and John Carlson, who
was then President and Chief Compliance Officer of the Company,
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 15
–
SUBSEQUENT
EVENTS
None.