UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(AMENDMENT NO. 1)  

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the third quarter ended September 30, 2014

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-54905

CAPSTONE FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada		46-0684479
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
2600 Michelson Drive, Suite 700, Irvine, CA		92612
(Address of principal executive offices)		(Zip Code)
(866) 798-4478
(Registrant's telephone number, including area code)

 

Copies of Communications to:

Stradling Yocca Carlson & Rauth, P.C.

4365 Executive Drive

Suite 1500

San Diego, CA 92121

(858) 926-3000

 

Indicate by check mark whether the issuer (1) 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 (§232.405 of this chapter) 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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruble 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer(Do not check if a smaller reporting company)	☐	Smaller reporting company	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒ 

The number of shares of Common Stock, $0.001 par value, outstanding on April 15, 2015 was 94,564,648 shares.

*EXPLANATORY NOTE: Capstone Financial Group, Inc. is filing this amendment of its Quarterly Report on Form 10-Q for the third quarter of 2014 in order to (a) correct the reporting of substantial loans by a related party and substantial Company expenses (as a result of which the Company's Board of Directors concluded on November 13, 2014 that for comparative purposes the previously issued unaudited financial statements and certain other financial information contained in certain previously-filed periodic reports should no longer be relied upon, (b) conform the financial statements to the accounting and financial reporting conventions of the investment company industry, in view of the 2014 change in the Company's business focus, (c) revise certain asset valuations, and (d) make certain other corrections.

 

 

CAPSTONE FINANCIAL GROUP, INC.

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

 

Index to Report on Form 10-Q/A

(Amendment No. 1)

 

			Page No.
		PART I - FINANCIAL INFORMATION
Item 1.		Financial Statements	3
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.		Controls and Procedures	24
		PART II - OTHER INFORMATION
Item 1.		Legal Proceedings	25
Item1A.		Risk Factors	25
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.		Defaults Upon Senior Securities	28
Item 4.		Mine Safety Disclosures	28
Item 5.		Other Information	28
Item 6.		Exhibits	29
		Signatures	30

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

CAPSTONE FINANCIAL GROUP, INC.

(FORMERLY CREATIVE APP SOLUTIONS, INC.)

STATEMENT OF FINANCIAL CONDITION

(unaudited)

 

		September 30,				December 31,
		2014				2013
ASSETS
Financial instruments owned, at fair value		$	29,170,180			$	—
Cash			138,091				—
Line of credit receivable, net - related party			1,099,472				580,043
Accrued interest receivable - related party			35,348				6,542
Prepaid expense			—				16,895
Deposit			65,000				100,000
Total assets		$	30,508,091			$	703,480
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable		$	—			$	12,973
Accrued taxes payable			800				800
Accrued payroll liabilities			3,391				11,960
Accrued interest payable - related party			19,598				4,519
Deferred revenue			166,665				—
Warrant put option			9,973,684				—
Deferred tax liability			7,283,827				—
Total liabilities			17,447,965				30,252
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding
as of September 30, 2014 and December 31, 2013			—				—
Common stock, $0.001 par value, 2,000,000,000 shares
authorized; 93,362,884 and 93,025,000 issued and
outstanding, at September 30, 2014 and
December 31, 2013, respectively			94,363				93,025
Additional paid in capital			2,489,539				1,353,677
Common stock subscription - (201,764 shares)			171,500				—
Accumulated equity (deficit)			10,304,724				(773,474	)
Total stockholders' equity			13,060,126				673,228
Total liabilities and stockholders' equity		$	30,508,091			$	703,480

 

See Accompanying Notes to Financial Statements.

 

CAPSTONE FINANCIAL GROUP, INC.

(FORMERLY CREATIVE APP SOLUTIONS, INC.)

STATEMENTS OF OPERATIONS

(unaudited)

 

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2014				2013				2014				2013
Investment Income
Services income		$	33,335			$	121,627			$	33,335			$	121,627
Interest - related party			11,140				291				29,835				291
Total investment income			44,475				121,918				63,170				121,918
Expenses
Payroll expense			57,926				102,599				180,081				102,599
Professional fees			39,745				74,262				225,267				183,358
General and administrative			120,870				107,684				486,806				109,117
Interest expense			—				652				—				2,963
Interest expense - related party			4,276				479				16,107				777
Total expenses			222,817				285,676				908,261				398,814
Realized and Unrealized Gain (Loss) in Investments
Realized gain on investment securities, net			5,874				—				19,458				—
Unrealized gain on investment securities, net			19,190,577				—				19,187,658				—
Gain on investments, net			19,196,451				—				19,207,116				—
Net income (loss) before tax			19,018,109				(163,758	)			18,362,025				(276,896	)
Provision for income taxes			7,283,827				—				7,283,827				—
Net income (loss)		$	11,734,282			$	(163,758	)		$	11,078,198			$	(276,896	)
Net income (loss) per share - basic and diluted		$	0.12			$	(0.00	)		$	0.12			$	(0.00	)
Weighted average shares outstanding - basic and diluted			94,089,281				90,311,848				93,353,609				88,223,040

 

See Accompanying Notes to Financial Statements.

 

CAPSTONE FINANCIAL GROUP, INC.

(FORMERLY CREATIVE APP SOLUTIONS, INC.)

STATEMENT OF CHANGES IN EQUITY

(unaudited)

 

										Additional				Accumulated				Common
		Common Shares								Paid-in				Earnings				Stock				Total
		Shares				Amount				Capital				(Deficit)				Subscription				Equity
December 31, 2013			93,025,000			$	93,025			$	1,353,677			$	(773,474	)			—			$	673,228
February 25, 2014 Issuance of common stock for cash			488,237				488				414,512				—				—				415,000
May 8, 2014 Issuance of common stock for cash			412,000				412				349,788				—				—				350,200
August 29, 2014 Issuance of common stock for cash			437,647				438				371,562				—				—				372,000
Stock subscription for shares issued Q4			—				—				—				—				171,500				171,500
Net  income			—				—				—				11,078,198				—				11,078,198
September 30, 2014			94,362,884			$	94,363			$	2,489,539			$	10,304,724			$	171,500			$	13,060,126

 

See Accompanying Notes to Financial Statements.

 

CAPSTONE FINANCIAL GROUP, INC.

(FORMERLY CREATIVE APP SOLUTIONS, INC.)

STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the nine months ended
		September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	11,078,198			$	(276,896	)
Adjustments to reconcile net loss to net cash used
in operating activities:
Purchase of investments			(8,838	)			—
Net change in unrealized gain on investment securities			(19,187,658	)			—
Forgiveness of debt - related party			—				14,202
(Increase) decrease in operating assets:
Accrued interest receivable - related party			(28,806	)			(264	)
Prepaid expense			16,895				—
Deposits			35,000				—
Increase (decrease) in operating liabilities:
Accounts payable			(12,973	)			5,174
Accrued payroll liabilities			(8,569	)			—
Accrued interest payable - related party			15,079				75
Deferred revenue			166,665				—
Accrued interest payable			—				(501	)
Deferred tax liability			7,283,827				—
Net cash used in operating activities			(651,180	)			(258,210	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net of offering costs			1,137,200				344,000
Proceeds from sale of stock subscriptions received			171,500				—
Net repayments of line of credit - related party			(519,429	)			(91,930	)
Net cash provided by financing activities			789,271				252,070
Increase in cash and cash equivalents			138,091				(6,140	)
Cash and cash equivalents at beginning of period			—				6,140
Cash and cash equivalents at end of period		$	138,091			$	—

 

See Accompanying Notes to Financial Statements.

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Organization

 

Capstone Financial Group, Inc. ("Capstone or the "Company") uses capital to acquire the outstanding stock of other companies. Capstone does not produce goods or services itself.  Rather, its primary purpose is to own and trade shares of other companies. Capstone's principals have previous experience of implementing operational improvements through the exercise of influence at a company, often as a result of becoming one of its largest shareholders. The principals seek to improve privately-held or illiquid companies through operational and strategic initiatives designed to increase their overall value.

Capstone works with the management and boards of its portfolio companies, aiming to significantly enhance the portfolio companies’ long-term earnings power in an effort to increase shareholder value.  While Capstone does not manage the day-to-day operations of these companies, Capstone seeks to maintain a thorough understanding of how these companies operate and evaluates their performance and prospects on an ongoing basis.

 

The Company was incorporated on July 10, 2012 (Date of Inception) under the laws of the State of Nevada, as Creative App Solutions, Inc.  On August 23, 2013, the Company amended its articles of incorporation and changed its name to Capstone Financial Group, Inc.

 

During the period of inception (July 10, 2012) through December 31, 2012, the Company had not commenced significant operations and, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, the Company was considered a development stage company.  During the year ended December 31, 2013, the Company exited the development stage and effective January 1, 2014 transitioned its business plan to that of an investment company.

 

Basis of Presentation

 

The accompanying financial statements have been prepared using the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the accounting and financial reporting conventions of the investment company industry.

 

Reclassifications

 

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassification had no effect on the previous reported results of operations or stockholders’ equity (deficit).

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of 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.

 

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

 

Cash Equivalents

 

The Company considers any investments in short-term money market funds with original maturities of three months or less to be cash equivalents.

 

Investments

 

Investments primarily comprise strategic, non-controlling equity ownership interests in privately held or illiquid businesses. The Company currently values its investments at fair value as determined by internal valuation guidelines as well as outside appraisals.

 

Strategic investments are reviewed on an ongoing basis to ensure that the carrying values of the investments have not been impaired. If the Company determines that an impairment loss on a strategic investment has occurred due to a decline in fair value or other market conditions, the investment is written down to its estimated fair value.

 

Fair Value Measurements

 

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

•

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

•

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

•

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

The Company’s investments are valued by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The valuation methodology for each investment type and discussion of key unobservable inputs is described below.

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Common Stocks

 

Generally, when the Company invests in common stocks that are traded on the NASDAQ Markets or over-the-counter markets (such as OTCBB or Pink Sheets), such common stocks are valued at the last traded price. If there is no trade on a measurement date, the Company will typically value the common stock at the closing bid price. However, in certain circumstances, the closing trading price is not considered to be a fair indication of the value for which the Company can sell the common stock. In such cases, the common stock must be analyzed to determine what exit price the Company would receive when liquidating the position. Investments in non-marketable common stocks at September 30, 2014 were valued based on subsequent transactions with unrelated third parties. These positions are classified as Level 3 securities by the Company.

 

Derivative financial instruments

 

Derivative financial instruments include stock options and call and put warrants at September 30, 2014. Derivatives are accounted for at fair value with changes in fair value reported in operations. The significant unobservable inputs used in the fair value measurement of the Company’s derivative financial instruments include the underlying common stock, duration, volatility and discount rate, which are used in the Black-Scholes model. Changes to any of those inputs in isolation would result in fluctuations in the fair value measurement.

 

Revenue Recognition

 

The Company recognizes revenue for services when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the investment banking service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of fees is probable.

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Earnings Per Share

 

The Company follows ASC Topic 260 to account for the earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.  As of September 30, 2014, there were no dilutive common shares equivalents outstanding.

 

Concentration Risks

 

During the nine months ended September 30, 2014, 100% of the $19,458 in revenue generated from the realized gain on the sale of some of our equity investment related to one investment, and 100% of our interest income of $29,835 was from one related party.

 

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Income Taxes

 

The Company follows ASC Topic 740 for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

 

Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

 

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC Topic 740 only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities. As of September 30, 2014 the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities, therefore this standard has not had a material effect on the Company.

 

Recent Accounting Pronouncements

 

The Company has evaluated the recent accounting pronouncements through the date of this filing, and management does not expect adoption of such pronouncements to have an impact on the Company’s financial statements.

 

NOTE 3 – GOING CONCERN UNCERTAINTY

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business.

 

The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.

 

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 4 – INVESTMENTS

 

Investments in securities and unrealized gains, net are comprised of the following at and for the three and nine month period ended September 30, 2014:
							Estimated			Unrealized
				Cost			Fair Value			Gain (loss)
	ASSETS
	Equities		$	6,215		$	8,350,500		$	8,344,285
	Stock Options			2,623			6,644,680			6,642,057
	Warrants - "A"			-			9,947,368			9,947,368
	Warrants - "B"			-			4,227,632			4,227,632
			$	8,838		$	29,170,180		$	29,161,342
	LIABILITIES
	Warrant put option		$	-		$	(9,973,684	)	$	(9,973,684)

  

During the first quarter of 2014, the Company purchased shares in a company traded on the OTC Markets for a total of $2,919. The Company currently categorizes these holdings as level 3 assets. As of September 30, 2014, this investment is carried at $0 value under management’s valuation guidelines based on the low trading volume of the securities.

 

In August 2014, the Company purchased 10,987,500 split-adjusted shares of common stock of Twinlab Consolidated Holdings, Inc. (“Twinlab”) in private transactions from 25 shareholders for total consideration of $3,296.  In November 2014 the Company sold 436,681 of these shares.

 

In August 2014, the Company purchased options to acquire 8,743,000 outstanding shares of Twinlab’s Common Stock (collectively, the “Stock Option”) in a private transaction, for total consideration of $2,623. The Stock Option is exercisable at $0.0001 per share and expires in August 2015. Such options are immediately exercisable and in February 2015, the Company exercised 7,244,500 of those options.

 

In September 2014, Twinlab issued a Series A Warrant to the Company to purchase up to 52,631,579 shares of Twinlab’s Common Stock at an exercise price of $0.76 per share (the “First Warrant”). In April 2015, the Company exercised 263,158 shares pursuant to the Series A Warrant.

 

Twinlab also issued a Series B Warrant to the Company in September 2014 (the “Second Warrant”). Pursuant to the Second Warrant, the Company has the right to purchase up to 22,368,421 shares of Common Stock at an exercise price of $0.76 per share. Both the First Warrant and the Second Warrant are exercisable from October 2014 through October 2017.

 

Twinlab and the Company also entered into a Common Stock Put Agreement, dated as of September 30, 2014, as amended on December 15, 2014 (the “Put Agreement”). Pursuant to the Put Agreement, if the Company does not exercise the First Warrant by February 16, 2015 at a rate of no less than 1,461,988 shares of Common Stock (“the Minimum Amount”) per month over the term of the First Warrant (the “Minimum Rate”), Twinlab has the right (subject to certain conditions) to require the Company to exercise the First Warrant monthly at the Minimum Rate for the duration of the First Warrant.

 

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 4 – INVESTMENTS (CONTINUED)

 

Fair Value of Financial Instruments

 

The Company's financial instruments recorded at fair value have been categorized based upon a fair value hierarchy in accordance with accounting guidance. The following fair value hierarchy table presents information about the Company's financial instruments measured at fair value.

 

		Assets and Liabilities Measured at
		Fair Value on a Recurring Basis
		September 30, 2014												December 31, 2013
		Level 2				Level 3				Total				Total
Assets
Financial instruments owned, at fair value:
Equities		$	—			$	8,350,500			$	8,350,500			$	—
Options			—				6,644,680				6,644,680				—
Warrants - "A"			—				9,947,368				9,947,368				—
Warrants - "B"			—				4,227,632				4,227,632				—
Total Financial instruments owned, at fair value			—				29,170,180				29,170,180				—
Total assets held at fair value		$	—			$	29,170,180			$	29,170,180			$	—
Liabilities
Financial instruments owed, at fair value:
Warrant put option			—				9,973,684				9,973,684				—
Total liabilities held at fair value		$	—			$	9,973,684			$	9,973,684			$	—

 

 

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For some products or in certain market conditions, observable inputs used in valuing certain financial assets and liabilities were unavailable. In situations where there is little, if any, market activity for an asset or liability at the measurement date, the fair value measurement objective remains to measure the financial asset at the price that would be received by the holder of the financial asset (or liability) in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date.

 

At September 30, 2014 the Company recorded its investment in Twinlab common stock at $0.76 per share which is management's estimate of the fair market value and is based, in part, on the subsequent sale of Twinlab common shares to unrelated parties in 2015 (see Note 10).

 

At September 30, 2014 the Company recorded its investment in Stock Options at the estimated fair market value of $0.76 per option which reflects management’s estimate of the fair market value of the underlying common stock of Twinlab.

 

At September 30, 2014 the Company recorded its investment in Series A and B warrants and its liability under Put Agreement at management's estimate of the fair market value using the Black-Scholes option pricing model with the following weighted-average assumptions (annualized percentages):

 

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 4 – INVESTMENTS (CONTINUED)

 

Fair Value of Financial Instruments (continued)

	Nine months ended
	September 30, 2014
Volatility	44%
Risk - free interest rate	0.58%
Dividend yield	-
Expected life in years	2

 

NOTE 5 – LINE OF CREDIT RECEIVABLE, NET – RELATED PARTY

 

On August 8, 2013, the Company entered into (as borrower) an unsecured $500,000 revolving line of credit with Capstone Affluent Strategies, Inc., which was owned and controlled by the Company’s chief executive officer. The line of credit bore interest at 2% per annum with principal and interest due on August 8, 2015. At September 30, 2014, the balance payable on the line of credit was $1,032,882.

 

On September 13, 2013, the Company entered into (as lender) an unsecured $500,000 revolving line of credit with Capstone Affluent Strategies, Inc., which was owned and controlled by the Company’s chief executive officer. In October 2013, the maximum amount available under this line of credit was increased to $2,000,000. The line of credit bore interest at 2% per annum with principal and interest due on September 13, 2015. At September 30, 2014, the balance receivable on the line of credit was $2,132,354.

The above receivable and payable with Capstone Affluent Strategies, Inc. has been presented as a net receivable in the accompanying statements of financial position in the amount of $1,099,472 due to a right of offset (See Note 7).  As part of the October 2014 acquisition of certain assets and liabilities of Affluent, the receivable balance was forgiven (See Note 10).

 

NOTE 6 – DEPOSIT

 

At December 31, 2013, the Company had made a $100,000 deposit related to an anticipated purchase transaction. In February 2014, the transaction was cancelled, and the $100,000 was repaid to the Company. During the nine months ended September 30, 2014, the Company made a deposit of $65,000 toward an anticipated purchase transaction.

 

NOTE 7 – LINE OF CREDIT PAYABLE – RELATED PARTY

 

On August 8, 2013, the Company (as borrower) executed a revolving credit line with an entity owned and controlled by the Company’s chief executive officer for up to $500,000.  The unsecured line of credit bears interest at 2% per annum with principal and interest due on August 8, 2015.  During the nine months ended September 30, 2014, the Company offset a amount due to the related party against a receivable balance (See Note 5).

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 8 – STOCKHOLDERS’ EQUITY

 

On September 6, 2013, the Company effected a 20-for-1 forward stock split of its $0.001 par value common stock and increased its authorized common stock to 2,000,000,000 shares.

 

All shares and per share amounts have been retroactively restated to reflect the split discussed above.

 

During January 2014, the Company issued 1,000 shares of its restricted common stock in exchange for 100% of Capstone Affluent Strategies, Inc. (“Affluent”). This was rescinded in August 2014 as the acquisition was unwound.

 

During February 2014, the Company issued 488,237 shares of common stock for cash of $415,000.

 

During March 2014, the Company recorded a common stock subscription totaling $50,500.  As of May 8, 2014, a total of 59,412 shares were issued in relation to the stock subscribed.

 

During June 2014, the Company issued 412,000 shares of common stock for cash of $350,200 and recorded a common stock subscription totaling $144,000.

 

During August 2014, the Company issued 437,647 shares of common stock for cash of $372,000 as well as recorded stock subscribed totaling $171,500.

 

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 9 – RESTATEMENT 

 

The table below reflects the original filing on Form 10-Q and the restatement of the original financial statements to correct their omission of certain operating expenses and other matters.

 

 

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 NOTE 9 – RESTATEMENT (CONTINUED)

NOTE 10 – SUBSEQUENT EVENTS

 

In October 2014, the Company acquired directly from Darin Pastor (the former sole shareholder of Affluent), certain fixed assets and prepaid expenses of Affluent amounting to $152,429, and Capstone assumed promissory notes payable of Affluent with an outstanding principal balance of $1,636,633.  In the transaction, liabilities exceeded assets transferred and a deemed dividend was recorded in additional paid in capital of $1,484,204. As the transaction was between related parties, the assets and liabilities transferred were recorded at their carryover basis.  In conjunction with this transaction, the Company's net receivable from Affluent amounting to approximately $1,090,472 was forgiven and has been recorded as a loss.

In November 2014, the Company sold 436,681 Twinlab shares to a third party for approximately $1,000,000.

On November 14, 2014, the Company recorded (as lender) an unsecured $600,000 note receivable from an individual, Thomas Tolworthy, due December 29, 2015 bearing interest at 5%. At December 31, 2014, the principal and interest balance receivable on the note was $603,952.

During the fourth quarter ended December 31, 2014, the Company issued 201,764 shares of Company common stock to a total of five accredited investors for a total purchase price of $171,500.

In February 2015, the Company exercised the Stock Option resulting in the completed acquisition of 7,244,500 Twin lab shares.

 

In March and April of 2015, the Company sold 2,210,736 Twinlab shares to unrelated parties for approximately $1,680,159.

 

In April 2015, the Company partially exercised the First Warrant for 657,895 Twinlab shares with an aggregate exercise price of $500,000.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This document contains “forward-looking statements”.  All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.

 

Forward-looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words.  These forward-looking statements present our estimates and assumptions only as of the date of this report.  Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made.  Except for our ongoing securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.  You should, however, consult further disclosures we make in future filings of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties.  The factors impacting these risks and uncertainties include, but are not limited to, those referenced in or set forth in “Item 1A. Risk Factors” in this document.

 

Throughout this Quarterly Report references to “we”, “our”, “us”, “Capstone”, “CAPP”, “the Company”, and similar terms refer to Capstone Financial Group, Inc.

 

AVAILABLE INFORMATION

 

We file annual, quarterly and other reports and other information with the SEC.  You can read these SEC filings and reports over the Internet at the SEC's website at www.sec.gov or on our website at www.capstonefinancialgroupinc.com.  You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm.  Please call the SEC at (800) SEC-0330 for further information on the operations of the public reference facilities.  We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt to of a written request to us at Capstone Financial Group, Inc., 2600 Michelson Drive, Suite 700, Irvine, CA 92612.

OVERVIEW AND OUTLOOK

 

General Business Development

 

Capstone Financial Group, Inc. (“Capstone” or the “Company”) was incorporated in the State of Nevada in July of 2012 as Creative App Solutions, Inc. Creative App Solutions, Inc. was formed to design and sell mobile apps for smart phones and other mobile platforms such as tablets.

 

On August 26, 2013, we changed our name from Creative App Solutions, Inc. to Capstone Financial Group, Inc.

 

In September 2013, we effectuated a 20-for-1 forward split of the Company’s issued and unissued common stock. Immediately after the forward split, the number of shares issued and outstanding increased to 90,200,000. The number of authorized shares increased from 100,000,000 to 2,000,000,000 common shares.

 

During the second quarter of 2013, we changed our business plan to offer financial services and consulting to businesses. In this business we relied heavily on an officer and director of the Company who holds the proper licensing to conduct such business.

 

On January 15, 2014, the Company completed the reverse triangular merger, pursuant to the Acquisition Agreement and Plan of Merger (“Merger”), by and among Capstone Sub Co., a Nevada corporation and wholly owned subsidiary of the Company, and Capstone Affluent Strategies, Inc. (“Affluent”), a California corporation, whereby Affluent became a wholly owned subsidiary of the Company. The sole stockholder of Affluent was Darin Pastor, and the purpose of the acquisition was to further a new business focus of the Company.

 

Pursuant to the Merger, the Company issued 1,000 shares of its restricted common stock in exchange for 100% of Affluent’s issued and outstanding common stock.

 

On May 14, 2014, the Company executed a Rescission of Acquisition Agreement and Plan of Merger (the “Rescission Agreement”) effectively unwinding the Affluent transaction. The motivation being Affluent’s inability to produce audited financial statements as required per the Merger Agreement.  

 

In August 2014, the Company purchased 10,987,500 shares of common stock of Twinlab Consolidated Holdings, Inc. (“Twinlab”) in private transactions from 25 shareholders, for total consideration of $3,296.

 

Additionally, in August 2014, the Company purchased options to acquire 8,743,000 currently-outstanding shares of Twinlab's Common Stock (collectively, the "Stock Option") from 14 shareholders in a private transaction, for total consideration of $2,623. The Stock Option is exercisable at $0.0001 per share and expires in August 2015. In February 2015 the Company exercised the Stock Option. Optionors honored the exercise price as to 7,244,500 Twinlab shares. Other optionors have not yet honored the exercise, as to at least 1,498,500 Twinlab shares.

 

In September 2014, Twinlab issued a Series A Warrant to the Company to purchase up to 52,631,579 shares of Twinlab’s Common Stock at an exercise price of $0.76 per share (the “First Warrant”). The First Warrant is exercisable from October 2014 through October 2017.

 

Twinlab also issued a Series B Warrant to the Company on September 2014 (the “Second Warrant”). Pursuant to the Second Warrant, the Company has the right to purchase up to 22,368,421 shares of Common Stock at an exercise price of $0.76 per share. The Second Warrant is exercisable from October 2014 through October 2017.

 

Twinlab and the Company also entered into a Common Stock Put Agreement, dated as of September 30, 2014, as amended on December 15, 2014 (the “Put Agreement”). Pursuant to the Put Agreement, if the Company does not exercise the First Warrant by February 16, 2015 at a rate of no less than 1,461,988 shares of Common Stock (“the Minimum Amount”) per month over the term of the First Warrant (the “Minimum Rate”), Twinlab has the right (subject to certain conditions) to require the Company to exercise the First Warrant monthly at the Minimum Rate for the duration of the First Warrant. Twinlab has not yet exercised this right, even though the Company has not yet exercised the First Warrant for the Minimum Amout. The Company partially exercised the First Warrant for 657,895 of shares in April 2015.

 

During the first quarter of 2014 the Company changed its business plan and will use capital to acquire the outstanding stock of other companies, working closely and constructively with the management and boards of those companies, and aiming to significantly enhance their long-term earnings power and thus increase shareholder value. The Company will also seek to actively trade in our strategic investment positions and enter into private securities transactions with those positions to capitalize on price fluctuations and realize profits or minimize losses.

 

Capstone continuously investigates possible acquisitions of positions in new businesses, securities and assets, and evaluates the retention and disposition of our existing holdings.  Changes in the mix of our businesses and investments should be expected.

 

Current Strategic Investments

 

As of September 30, 2014, the Company held equity securities of two issuers, valued at an aggregate of $29,170,180.

 

Competition

 

A large number of entities compete with us to make the types of investments that we target as part of our business strategy.  We compete for such investments with a large number of venture capital funds, private equity firms, mutual funds, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies.  Many of our competitors are substantially larger than us and have considerably greater financial, technical and marketing resources than we do.  In addition, some of our competitors may require less information than we do and/or have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than we can.

 

There can be no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations.  Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

 

Personnel

 

As of the date of this filing, we have 5 full-time employees.

 

RESULTS OF OPERATIONS

 

Results of Operations for the Three Months Ended September 30, 2014 and September 30, 2013

 

Investment Income.  Investment income for the three months ended September 30, 2014 decreased from $121,918 to $44,475 for the same period in 2013, as investment income decreased $88,292 to $33,335 from $121,627 in 2013, due primarily to the nonrecurrence of a relatively large 2013 fee for services earned when we were operating with a different focus, and interest income – related party increased $10,849 to $11,140 during the current quarter.

 

Payroll expense.  Payroll expenses for the three months ended September 30, 2014 and 2013, were $57,926 and $102,599 respectively, as a result of the headcount reduction which we effected when we changed our primary business focus in the first quarter of 2014.

 

Professional fees.  Professional fees for the three months ended September 30, 2014 and 2013 were $39,745 and $74,262, respectively, for a decrease of $34,516 or 46% due to decreased legal fees.

 

General and administrative.  General and administrative expenses (other than payroll and professional fees) for the three months ended September 30, 2014 and 2013, were $120,870 and $107,684, respectively representing an increase of $13,186. The increase was a result of the 2013 period not including a full period of active operations.

 

Interest expense – related party. Interest expense to related parties for the three months ended September 30, 2014, was $4,276 as opposed to $479 in the same period of 2013.

 

Realized and Unrealized Gain (Loss) in Investments. In the three months ending September 30, 2014 we realized $5,874 on sales of one of our investment securities and recorded unrealized gains of $19,190,577 on our Twinlab securities as management assessed the fair value of this investment.

 

Provision for income taxes. For the quarter ended September 30, 2014, we recorded a $7,283,827 deferred tax liability in connection with the unrealized gain on our Twinlab securities. No tax will be realized, or be payable, unless and until we actually realize gain upon a sale of the Twinlab securities.

 

It should be noted that there is currently no liquid market for any Twinlab securities, and Twinlab securities are risky. The Company obtained its entire Twinlab position in the third quarter of 2014.

 

Results of Operations for the Nine Months Ended September 30, 2014 and September 30, 2013

 

Investment Income.  Investment income for the nine months ended September 30, 2014 decreased $58,748 to $63,170 compared to $121,918 in the same period of 2013. Services income decreased $88,292 during the nine months ended September 30, 2014, due primarily to the nonrecurrence of a relatively large 2013 fee for services earned when we were operating with a different focus and interest income increased $29,544 as compared to the nine months ended September 31, 2013.

 

Payroll expense.  Payroll expenses for the nine months ended September 30, 2014 and 2013, were $180,081 and $102,599, respectively, as a result in the changes of our primary business focus in the third quarter of 2013 and first quarter of 2014.

 

Professional fees.  Professional fees for the nine months ended September 30, 2014 and 2013, were $225,267 and $183,358, respectively, for an increase of $41,909 or 23% due to increased legal fees.

 

General and administrative.  General and administrative expenses (other than payroll and professional fees) for the nine months ended September 30, 2014 and 2013 were $486,806 and $109,117, respectively, representing an increase of $377,689. The increase was due to full operations in the first nine months of 2014, whereas we did not have active operations for much of the first nine months of 2013.

 

Interest expense - related parties. Interest expense – related parties, for the nine months ended September 30, 2014 was $16,107 as opposed to $777 in the same period of 2013.

 

Realized and Unrealized Gain (Loss) in Investments. In the nine months ending September 30, 2014 we realized $19,458 on sales of one of our investment securities and recorded unrealized gains of $19,187,658 on our Twinlab securities as management assessed the fair value of this investment.

 

It should be noted that there is currently no liquid market for any Twinlab securities, and Twinlab securities are risky. The Company obtained its entire Twinlab position in the third quarter of 2014.

 

Provision for income taxes. For the nine months ended September 30, 2014, we recorded a $7,283,827 deferred tax liability in connection with the unrealized gain our Twinlab securities. No tax will be realized, or be payable, unless and until we actually realize gain upon a sale of the Twinlab securities.

 

Liquidity and Capital Resources

 

As of September 30, 2014, we had only $138,091 in cash and cash equivalents, although we had $29,170,180 in financial instruments owned at fair value. We are cash poor.  The company's inability to raise additional capital raises questions about our ability to continue as a going concern.  Since inception, we have financed our cash flow requirements through issuance of common stock.  As we continue and expand our activities, we may continue to experience net negative cash flows from operations.

 

The realization of cash proceeds, if any, on sales of our securities positions would likely be “bunchy,” unpredictable and irregular. We can make no assurances and therefore we may incur operating losses in the next twelve months.  Our limited operating history makes predictions of future operating results difficult to ascertain.  In the future, we anticipate obtaining additional financing to fund operations through common stock offerings and related-party debt advances, to the extent available.

 

The following table provides detailed information about our net cash flow for the nine-month periods presented in this Quarterly Report.  

 

		For the nine months ended September 30,
		2014				2013
Net cash used in operating activities		$	(651,180	)		$	(258,210	)
Net cash provided by financing activities			789,271				252,070
Net increase (decrease) in Cash			138,091				(6,140	)
Cash, beginning			—				6,140
Cash, ending		$	138,091			$	—

 

Operating activities

 

Net cash used in operating activities was $651,180 for the period ended September 30, 2014 compared to $258,210 for the nine months ended September 30, 2013. The Company implemented fair value accounting practices for its investments during the first quarter of 2014. 

 

Financing activities

 

Net cash provided by financing activities for the periods ended September 30, 2014 and 2013, was $789,271 and $252,070, respectively, and was mainly attributable to capital raised through the sale of common stock.

 

As we expand our activities, we may continue to experience net negative cash flows from operations, pending receipt of significant operating revenues.  Additionally, we anticipate obtaining financing to fund operations through common stock offerings, to the extent available, or to obtain additional debt financing to the extent necessary to augment our working capital.  In the future, we need to generate sufficient operating revenues in order to eliminate or reduce the need to sell additional stock or obtain loans.  There can be no assurance we will be successful in raising the necessary funds to execute our business plan.

 

Our lack of operating history makes predictions of future operating results difficult to ascertain.  Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by new or emerging companies.  There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities.  We base our estimates and judgments on historical experience and on various other assumptions, we believe to be reasonable under the circumstances.  Future events, however, may differ markedly from our current expectations and assumptions.  See Note 1 – Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

This item is not applicable as we are currently considered a smaller reporting company.

 

 

Item 4.  Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

As required by Rule 13a-15 under the Securities Exchange Act, as of the end of the Company’s 2014 third fiscal quarter, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of the Company’s current management, including the Company’s Chief Executive Officer and Chief Financial Officer, who concluded that the Company’s disclosure controls and procedures are effective. The errors which required the restatement of this Quarterly Report were, in their judgment, not due to the Company’s disclosure controls and procedures.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company reports filed or submitted 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 Company reports filed under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer, and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in internal control over financial reporting

 

We are responsible for preparing our annual consolidated financial statements and for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

-

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

-

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

-

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

We have determined that as of September 30, 2014, we had material weaknesses in our internal control over financial reporting. In making our assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework in 2013. Based on that assessment, our management has identified certain material weaknesses in our internal control over financial reporting.

 

In the three months ended September 30, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

We are not a party to any material legal proceedings.

 

Item 1A.  Risk Factors.

 

We incorporate here by reference, and repeat, all of the Risk Factors set forth in Item 1A of our amended Annual Report on Form 10-K filed with the SEC on February 18, 2015. In addition, readers should consider the following risks:

 

Stockholders do not necessarily have the opportunity to evaluate our strategic investments or trading positions.

 

We have only recently begun to identify potential strategic investments and to trade positions we have acquired.  Stockholders will not necessarily be able to evaluate the economic merits, transaction terms or other financial or operational data concerning our strategic investments and trading positions.  You must rely on us and our board of directors to implement our trading policies, to evaluate our investment and trading opportunities and to structure the terms of our strategic investments.

 

A significant portion of our trading positions will be recorded at fair value as determined in good faith by our board of directors and, as a result, there is and will be uncertainty as to the value of our strategic investments and trading positions.

 

We are required to carry our strategic investments at market value or, if there is no readily available market value, at fair value as determined by our board of directors.  Typically, there is not a liquid public market for the securities of the companies in which we intend to invest.  As a result, we will value these securities quarterly at fair value as determined in good faith by our board of directors.  Decreases in the market values or fair values of our trading positions will be recorded as unrealized depreciation.

 

Certain factors that may be considered in determining the fair value of our trading positions include dealer quotes for securities traded on the secondary market for institutional investors, the earnings, cash flow and ability to make payments on indebtedness of the companies comprising our trading positions, the markets in which the companies that comprise our trading positions do business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. Because such valuations, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed.  Due to this uncertainty, our fair value determinations may cause the value of our trading positions on a given date to be materially understated or overstated compared to the value that we may ultimately realize upon the sale of those trading positions.

 

Given that a large percentage of our assets and comprehensive income are based on our fair value figures for Twinlab securities, acquired in the third quarter of 2014, readers should be especially aware of the risk.

 

Our strategic investments in private companies planning to become reporting and trading and/or in “thinly traded” public companies are extremely risky, and we could lose all our part of our investment.

 

Many factors uncontrollable in their environments and within their company require us to assume a high degree of risk without the ability to mitigate such risk.

 

To date, our strategic investments are in illiquid private and thinly traded public companies.

 

Our entire portfolio is invested in this extremely risky asset class. Some of our strategic investments may never develop a public market. In addition, we hold strategic investments in only a few companies and therefore we do not enjoy the benefits of portfolio diversification.

 

Our due diligence may fail to uncover relevant details that lead to a partial or total loss of the strategic investment.

 

Our access to information about our portfolio companies and their business may be limited or imperfect. Even where issuers file public reports with the SEC, such reporting cannot guarantee the identification or accuracy of relevant success factors for any company that comprises one of our strategic investments.

 

Equity trading positions in strategic investments do not provide the degree of security associated with lending.

 

Equity investments, particularly in illiquid, leveraged and / or untested companies such as our current strategic investments, are very high risk. Equity investments have no contractual right of repayment, no guarantees, and no collateral.

 

We may not realize any dividend or capital gain return from our individual strategic investment or trading positions.

 

The companies comprising our trading positions may all fail and cause a total loss of our investment.

 

Valuation of our strategic investments may be totally inaccurate.

 

Unrestricted securities with market quotations in an active market are valued at the market closing price on the valuation date.  All other assets are valued at fair value as determined in good faith by our Board of Directors and may differ significantly from other opinions of value.  There is no guarantee that we will be able to realize the fair value as evaluated by our Board of Directors upon disposition of the asset.

 

A lack of diversification due to our limited size and limited opportunities increases risk of loss.

 

A limited number of strategic investments and trading positions limits our ability to diversify and creates concentration in all variables associated with these positions. We do not have the resources to materially increase the number of our strategic investments.

 

Changes in debt, equity and other follow-on financial events for a company comprising one of our strategic investments may create substantial loss to the return on and return of investment in that company.

 

The board of such a company may change the financial structure of that company and create leverage that might reduce our financial gain or result in serious loss of value in our stake.

 

Defaults by companies that comprise our future strategic investments will harm our operating results.

 

Failure by a future strategic investment to satisfy financial or operating covenants imposed by lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize that company’s ability to stay in business.

 

A lack of control over the management of a company comprising one of our strategic investments could allow that management to engage in activities that may decrease or destroy the value of that strategic investment.

 

Even though we hope to work closely and constructively with management and boards of the companies that comprise our trading positions, there is no guarantee the management and boards of these companies will heed our advice.  As such, activities by the management of such a company can adversely affect the value of our strategic investment.

 

We generally will not control companies comprising our future strategic investments.

 

We do not expect to control most of the companies that will comprise our future strategic investments, even in any cases where we have board representation or board observation rights.  As a result, we will be subject to the risk that a company in which we take a position may make business decisions with which we disagree and the management of such company may take risks or otherwise act in ways that do not serve our interests as investors.   As a result, a company in which we take a position may make decisions that could decrease the value of that position.

 

Our strategic investments may be relatively illiquid.

 

Due to an expected lack of liquidity for our future positions in non-traded companies, we may not be able to dispose of our positions as readily as we would like, at optimal times, or at an appropriate valuation.  

 

We are dependent on our Board of Directors for their decisions concerning our strategic investments and future advisors.

 

The Board of Directors chaired by Darin Pastor decides and approves of the strategic investments of our company. You may not agree with the decisions they reach.

 

Our strategic investments may be subject to restriction on resale, and we may not be able to sell the positions we hold for amounts equal to their recorded value, if at all.

 

Some of our strategic investments may be or become comprised of thinly traded public companies or remain private companies.  As a result, at any given time a substantial portion of our current strategic investments and trading positions may be subject to legal restrictions on resale.  We cannot assure you that we will be able to sell our positions for amounts equal to the values that we have ascribed to them or at the time we desire to sell.

 

Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

We have a limited number of personnel that are required to perform various roles and duties. We have had issues whereby omitted liabilities and expenses were not included in the previous Form 10-K at December 31, 2013 (and the three subsequent Quarterly Reports on Form 10-Q which have been corrected in the amended Form 10-K/A for December 31, 2013 dated February 18, 2015 (and the three subsequent amended Quarterly Reports on Form 10-Q. These individuals developed our internal control procedures and are responsible for monitoring and ensuring compliance with those procedures. As a result, our internal controls may be inadequate or ineffective, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the three months ended September 30, 2014, we sold 437,647 shares of common stock to accredited investors for a total purchase price of $372,000 all of which was paid in cash.

 

We believe that the issuance and sale of the above securities were exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(a)(2).  The securities were issued directly by us and did not involve a public offering or general solicitation. There were no commissions paid on the issuance and sale of the shares.

 

We did not repurchase any of our equity securities from the time of our inception through the period ended September 30, 2014.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.

 

Item 5.  Other Information.

 

No disclosures required.

 

Item 6. Exhibits.

 

Exhibit No.		Description
10.1*		Stock Option, dated Aug. 1, 2014, from respective holders of common stock of Twinlab Consolidated Holdings, Inc. to the Company.
10.2**		Series A Warrant, dated as of Sept. 30, 2014, issued by Twinlab Consolidated Holdings, Inc. to the Company
10.3**		Series B Warrant, dated as of Sept. 30, 2014, issued by Twinlab Consolidated Holdings, Inc. to the Company
10.4**		Common Stock Put Agreement, dated as of Sept. 30, 2014, between Twinlab Consolidated Holdings, Inc. to the Company
10.5**		Registration Rights Agreement, dated as of Sept. 30, 2014 between Twinlab Consolidated Holdings, Inc. to the Company
10.6***		Amendment No. 1 to Common Stock Put Agreement, dated Dec. 15, 2014
31.1		Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS****		XBRL Instance Document
101.SCH****		XBRL Taxonomy Extension Schema
101.CAL****		XBRL Taxonomy Extension Calculation Linkbase
101.DEF****		XBRL Taxonomy Extension Definition Linkbase
101.LAB****		XBRL Taxonomy Extension Label Linkbase
101.PRE****		XBRL Taxonomy Extension Presentation Linkbase

*		Incorporated by reference to the issuer’s Schedule 13-D Statement, as filed with the SEC on December 17, 2014
**		Incorporated by reference to the issuer’s Current Report, as filed with the SEC on October 6, 2014
***		Incorporated by reference to the issuer’s Current Report, as filed with the SEC on December 16, 2014
****		XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections

SIGNATURE

 

 

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.

 

 

		CAPSTONE FINANCIAL GROUP, INC.
Date: April 17, 2015		By:	/S/ Darin Pastor
			Darin Pastor
			CEO
			(Principal Executive Officer and duly authorized signatory)
		By:	/S/ Halford Johnson
			Halford Johnson
			CFO
			(Principal Financial Officer and Principal Accounting Officer)