ITEM 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
General
Capital
Financial Holdings, Inc. derives the majority of its revenues and
net income from sales of mutual funds, insurance products, and
various other securities through Capital Financial Services, Inc.
(“CFS”), the Company’s broker dealer
segment.
The
Company has been engaged in the financial services business since
1987. The Company was incorporated September 22, 1987, as a North
Dakota corporation. The Company’s principal offices are
located at 1821 Burdick Expressway W, Minot, North Dakota 58701. As
of June 30, 2018, the Company had 16 full-time employees consisting
of officers, principals, data processing, compliance, accounting,
and clerical support staff.
The
Company organized its business units into two reportable segments:
broker dealer services and holding company. The broker-dealer
services segment distributes securities and insurance products to
retail investors through a network of registered representatives
through its wholly-owned subsidiary, Capital Financial Services,
Inc. (“CFS”), a Wisconsin corporation. The holding
company encompasses cost associated with its office building,
business development and acquisitions, dispositions of subsidiary
entities and results of discontinued operations, dividend income
and recognized gains or losses.
The
Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies.
CFS is
a full-service brokerage firm. CFS is registered with the SEC as an
investment advisor and broker-dealer and also with FINRA as a
broker-dealer. CFS specializes in providing investment products and
services to independent investment representatives, financial
planners, and investment advisors and currently supports
approximately 142
investment representatives and
investment advisors.
Results Of Continued Operations
|
|
|
|
|
|
|
Net Gain
(Loss)
|
$
245,824
|
$
(89,999
)
|
Gain (Loss) per
share:
|
|
|
Basic and
diluted
|
$
198
|
$
(73
)
|
The
Company reported a net income for the six months ended June 30,
2018, of $245,824, compared to a net loss of ($112,314) for the
same quarter in 2017. The net income for the six months ended June,
2018 compared to net loss in the same period in 2017 is primarily
due to increased advisory revenues and decreased compensation
benefits and general and administrative expenses.
Operating revenues
Total
operating revenues for the six months ended June 30, 2018 were
$7,726,447, an increase of 1% from $7,680,579 for the same period
ended June 30, 2017. The increase for the six-month period net
revenue categories are listed below.
Fee income
Fee
income for the six months ended June 30, 2018, was $1,026,029, an
increase of 44% from $712,603 for the same period ended June 30,
2017. 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 13% of the Company’s consolidated revenues for
the six months ended June 30, 2018 and 9% of the Company’s
consolidated revenues for the six months ended June 30, 2017. There
is no fee income attributable to the other segment.
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 six months ended June 30, 2018 was $6,656,742, a decrease of 2%
from $6,758,257 for the same period ended June 30, 2017. The
decrease was due primarily to the decrease in commissions received
by the broker dealer segment due to reductions in the number of
registered representatives and increase in managed accounts
generating fee income rather than commission income. Commission
revenues constituted approximately 86% of the Company’s
consolidated revenues for the six months ended June 30, 2018. There
is no commission income attributable to the other
segment.
Other fee income
Other
operating fee income for the six months ended June 30, 2018 was
$43,676, a decrease of 79% from $209,719 for the same period ended
June 30, 2017. The decrease was primarily due to a decrease in the
income received related to alternative investment products. There
is no other operating fee income attributable to the holding
segment. Other operating fee income constituted less than 1% of the
Company’s consolidated revenues for the six months ended June
30, 2018.
Rent income
Effective
in June 2017, the Company’s broker-dealer subsidiary began
paying rent to the Company of $8,500 per month on a month-to-month
basis for a portion of the office facility owned by the Company.
The broker-dealer utilizes approximately 5,817 square feet of
office space for its operations out of a total of 6,188 square feet
utilized by the Company in the office facility. Rent Income and
Rent Expense related to this Company/Subsidiary arrangement are
eliminated in the consolidated financial statements. Rent income of
$1,200 was for rental of storage space outside of the office
building by an unrelated party.
Operating expenses
Total
operating expenses for the six months ended June 30, 2018 were
$7,333,182, a decrease of 6% from $7,812,681 for the six months
ended June 30, 2017. The decrease resulted from the net decreases
in the expense categories described below.
Compensation and benefits
Compensation
and benefits expense for the six months ended June 30, 2018 was
$632,429, a decrease of 17% from $758,025 for the same period ended
June 30, 2017. The decrease was primarily due to decreases in
management compensation.
Commission expense
Commission
expense for the six months ended June 30, 2018 was $6,380,851, an
increase of less than 1% from $6,345,008 for the same period ended
June 30, 2017. The increase is a result of slighter higher
commissions paid to independent representatives in the broker
dealer segment during the period ended June 30, 2018.
General and administrative expense
General
and administrative expenses for the six months ended June 30, 2018
were $283,418, a decrease of 58% from $674,241 for the same period
ended June 30, 2017. The decrease resulted from decreases in legal,
cost of legal settlements, and accounting expenses.
Depreciation
Depreciation
expense for the six months ended June 30, 2018 was $36,484, an
increase of 3% from $35,407 for the same period ended June 30,
2017. The increase in depreciation expenses was due to increased
depreciation on the Company’s Office Building.
Interest expense
Interest
expense for the six months ended June 30, 2018 was $16,270 an
increase of 33% from $12,260 for the same period ended June 30,
2017. The increase is due to the interest payments made on the
building mortgage during 2018.
Liquidity and capital resources
Net
cash provided by operating activities was $313,374 for the six
months ended June 30, 2018, as compared to net cash provided by
operating activities of $74,992 during the six months ended June
30, 2017. The primary difference corresponds to an increase in net
income.
Net
cash used in investing activities was $20,074 for the six months
ended June 30, 2018, as compared to net cash provided by investing
activities of $136,454 for the six months ended June 30, 2017. The
primary difference is attributable to principal payments included
in normal monthly mortgage loan payments made in 2018.
The
Company has historically relied upon sales of its equity securities
and debt instruments, as well as bank loans, for liquidity and
growth. Management believes that the Company’s existing
liquid assets, along with cash flow from operations, will provide
the Company with sufficient resources to meet its ordinary
operating expenses during the next twelve months. Significant,
unforeseen or extraordinary expenses may require the Company to
seek alternative financing sources, including common or preferred
share issuance or additional debt financing.
In
addition to the liabilities coming due in the next twelve months,
management expects that the principal needs for cash may be broker
recruitment, repurchase of shares of the Company’s common
stock, and debt service. Management also expects to realize
increased compliance and legal costs with respect to its broker
dealer subsidiary related to regulatory and litigation
matters.
FORWARD-LOOKING STATEMENTS
When
used herein, in future filings by the Company with the Securities
and Exchange Commission (“SEC”), in the Company's press
releases, and in other Company-authorized written or oral
statements, the words and phrases "can be," "expects,"
"anticipates," "may affect," "may depend," "believes," "estimate,"
or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The Company cautions readers not to place undue
reliance on any such forward-looking statements, which speak only
as of the date made. Such statements are subject to certain risks
and uncertainties, including those set forth in this
"Forward-Looking Statements" section, which could cause actual
results for future periods to differ materially from those
presently anticipated or projected. The Company does not undertake
and specifically disclaims any obligation to update any
forward-looking statement to reflect events or circumstances after
the date of such statements.
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,
●
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,
●
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,
●
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.