Notes to Financial Statements
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Note 1.
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Basis of Presentation and Significant Accounting Principles
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Basis of Presentation
Morgan
Group Holding Co. (“Holding” or “the Company”) was incorporated in November 2001 as a wholly-owned subsidiary
of LICT Corporation (“LICT”) to serve, among other business purposes, as a holding company for LICT’s controlling
interest in The Morgan Group, Inc. (“Morgan”). On January 24, 2002, LICT spun off 2,820,051 shares of Holding common
stock through a pro rata distribution (“Spin-Off”) to its stockholders and retained 235,294 shares.
On October
3, 2002, Morgan ceased its operations when its liability insurance expired and it was unable to secure replacement insurance.
On October 18, 2002, Morgan and two of its operating subsidiaries filed voluntary petitions under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Indiana, South Bend Division for the purpose
of conducting an orderly liquidation of Morgan’s assets. On March 31, 2008, and the bankruptcy court dismissed the proceeding
and it was entirely concluded at that time. The Company received no value for its equity ownership from the bankruptcy proceeding.
Significant Accounting
Principles
Cash and Cash Equivalents
All highly
liquid investments with maturity of three months or less when purchased are considered to be cash equivalents. The carrying value
of a cash equivalent approximates its fair value based on its nature.
At December
31, 2016 and 2015 all cash and cash equivalents were invested in a United States Treasury money market fund, for which an affiliate
of the Company serves as the investment manager.
Stock Based Compensation
During
2012, the Company issued stock options and warrants to two of the Company’s officers, see Note 5. The Company uses a fair
value based method of accounting for stock-based compensation provided to our employees. The estimated fair value of option awards
on the grant date is determined using the Black Scholes option-pricing model. This sophisticated model utilizes a number of assumptions
in arriving at its results, including the estimated life of the option, the risk free interest rate at the date of grant and the
volatility of the underlying common stock. There may be other factors which are not considered in the Black Scholes model but
which may have an effect on the value of the options as well. The effects of changing any of the assumptions or factors employed
by the Black Scholes model may result in a significantly different valuation for the options. No options or warrants were granted
during the years ended December 31, 2016 and 2015.
Earnings per share
Basic earnings
per share is based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share
is based on basic shares plus the incremental shares that would be issued upon the assumed exercise of in-the-money stock options
and unvested restricted stock using the treasury stock method, if dilutive.
Use of Estimates
The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Note 2.
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Fair Value of Financial Instruments
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The Company measures fair value
as the selling price that would be received for an asset, or paid to transfer a liability, in the principal market on the measurement
date. The hierarchy established by the FASB prioritizes fair value measurements based on the types of inputs used in the valuation
technique. The inputs are categorized into the following levels:
Level 1 – Observable inputs
such as quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other
than quoted prices that are observable, either directly or indirectly, for identical or similar assets and liabilities in active
or non-active markets; or model-derived valuations or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liability.
Level 3 – Unobservable
inputs not corroborated by market data, therefore requiring the entity to use the best available information, including management
assumptions.
At December 31, 2016 and 2015,
the Company’s cash equivalents include money market securities. These securities are valued utilizing quoted market prices
from identical instruments and are categorized in Level 1 of the fair value hierarchy.
At December 31, 2016 and 2015,
there were no gross unrealized gains or losses.
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Note 3.
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Investment in Morgan Group, Inc.
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Upon Morgan’s
bankruptcy filing, the Company deconsolidated its investment, as the Company believes it no longer had controlling or significant
influence. At December 31, 2007, the estimated value of Morgan’s assets in liquidation was insufficient to satisfy its estimated
obligations. On March 31, 2008, the bankruptcy proceeding was concluded and the bankruptcy court dismissed the proceeding. The
Company received no value for its equity ownership.
Deferred
income taxes are determined based upon differences between financial reporting and income tax bases of assets and liabilities
and are measured using the enacted income tax rates and laws that will be in effect when the differences are expected to reverse.
The Company recognizes any interest and penalties to unrecognized tax benefits as a component of income tax expense.
No federal
current or deferred income taxes were recorded for the years ended December 31, 2016 and 2015, as the Company's income tax benefits
were fully offset by a corresponding increase to the valuation allowance against its net deferred income tax assets.
The Tax
Reform Act of 1986 limits the annual utilization of net operating loss and tax credit carry forwards, following an ownership change
of the Company. Note that as a result of the Company's equity financings in recent years, the Company underwent changes in ownership
for purposes of the Tax Reform Act. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of any of the Company's
net operating loss carry forwards may be limited if cumulative changes in ownership of more than 50% occur during any three year
period.
At December
31, 2016 and 2015, the Company had federal and state net operating loss carry forwards of $530,000 and $474,000, respectively,
available to offset future taxable income. These net operating loss carry forwards
will expire in varying amounts beginning in 2023 through 2036. At December 31, 2016 and 2015, the Company had federal capital
loss carry forwards of $2,000 available to offset future taxable gains.
The components
of income tax provision (benefit) are as follows:
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December 31,
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2016
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2015
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Current income taxes:
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Federal
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$--
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$--
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State
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--
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--
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Total current income taxes
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--
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--
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Deferred income taxes
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21,937
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24,983
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Change in valuation allowance
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(21,937)
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(24,983)
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Provision (benefit) for income taxes
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$--
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$--
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Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred income taxes
are as follows:
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December 31,
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2016
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2015
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Current deferred income tax assets
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$--
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$--
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Noncurrent deferred income tax assets:
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Net operating loss carryover difference
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205,368
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183,431
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Stock option compensation
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42,338
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42,338
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247,706
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225,769
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Valuation allowance
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(247,706)
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(225,769)
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$--
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$--
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Due to uncertainty surrounding
realization of the deferred income tax assets in future periods, the Company has recorded a 100% valuation allowance against its
net deferred tax assets. If it is determined in the future that it is more likely than not that the deferred income tax assets
are realizable, the valuation allowance will be reduced.
The reconciliation of the provision
for income taxes for the years ended December 31, 2016 and 2015, and the amount computed by applying the U. S, Federal statutory
income tax rate to net loss is as follows:
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December 31,
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2016
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2015
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Tax provision (benefit) at statutory rate
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($19,280)
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($21,967)
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State taxes, net of federal effect
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(2,657)
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(3,016)
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Change of valuation allowance
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21,937
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24,983
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Effective income provision (benefit)
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$--
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$--
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Note 5.
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Commitments and Contingencies
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From time
to time the Company may be subject to certain asserted and unasserted claims. It is the Company’s belief that the resolution
of any such matters will not have a material adverse effect on its financial position.
The Company
has not guaranteed any of the obligations of Morgan and believes it currently has no commitment or obligation to fund any creditors.
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Note 6.
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Shareholders Equity and Stock Options and Warrants
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At the Company’s
Annual Meeting of Stockholders on May 8, 2014, its stockholders voted to amend the Company’s Certificate of Incorporation
(the “Charter Amendment”) to increase the number of authorized shares of common stock, par value $0.01 per share,
from 10,000,000 to 100,000,000. The Company has not yet filed the Amended Certificate of Incorporation with its state of incorporation,
Delaware, to effectuate the authorization.
On December
21, 2012, the Company and Jonathan P. Evans, formerly Chief Executive Officer of the Company (see p. 17, below), entered into
a Nonqualified Stock Option Agreement, whereby the Company granted to Mr. Evans an option (the “Option”) to purchase
800,000 shares of the Company’s Common Stock at an exercise price of $0.15 per share of Common Stock, which was the closing
price of the Common Stock as quoted on the OTC Markets’ inter-dealer quotation service on December 20, 2012. These options
expired unexercised on December 21, 2015 and there were no options outstanding at December 31, 2016 and 2015.
Also on
December 21, 2012, the Company issued a warrant to purchase up to 1,000,000 shares of the Company’s Common Stock at $1.00
per share to Jonathan P. Evans in exchange for $10,000, which was received in 2013. In addition, on that date, the Company issued
a warrant to purchase up to 200,000 shares of the Company’s Common Stock at $1.00 per share to Robert E. Dolan, Chief Financial
Officer of the Company, in exchange for $2,000. Both warrants are exercisable currently through December 21, 2017.
The fair
values of options and warrants granted during the year ended December 31, 2012 were estimated on the date of the grant using the
Black-Sholes option-pricing model with the following assumptions with regard to the option and warrants; respectively, risk-free
rates of 0.38% and 0.74%; dividend yield of 0%; expected volatility of 85%; and estimated lives of 3 and 5 years. Expected volatility
is based on historical volatility of the Company’s common stock. The expected term of the options and warrants represents
the period of time that options and warrants granted are expected to be outstanding and is derived from their terms.