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)
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.
2014 (As Originally Recorded) |
Sept. 30, 2014 |
|
2014 (As Restated) |
Sept. 30, 2014 |
Cash |
138,091 |
|
|
|
Note Receivable |
- |
|
ASSETS: |
|
Prepaid expense |
184,555 |
|
Financial instruments owned, at fair value |
$ 29,170,180 |
Total current assets |
322,646 |
|
Cash |
138,091 |
|
|
|
Line of credit receivable, net - related party |
1,099,472 |
Investment securities |
54,529,860 |
|
Accrued interest receivable - related party |
35,348 |
Furniture & Equipment, net |
9,373 |
|
Prepaid expense |
- |
Accrued interest receivable - related party |
- |
|
Deposit |
65,000 |
Deposit receivable |
65,000 |
|
Total assets |
$ 30,508,091 |
Total assets |
54,926,879 |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
LIABILITIES |
|
|
|
|
Accrued taxes payable |
$ 800 |
|
|
|
Accrued payroll liabilities |
3,391 |
Deferred revenue |
166,665 |
|
Accrued interest payable - related party |
19,598 |
Interest payable - related party |
2,383 |
|
Deferred revenue |
166,665 |
Taxes payable |
18,200,000 |
|
Warrant put option |
9,973,684 |
Total current liabilities |
18,369,048 |
|
Deferred tax liability |
7,283,827 |
Note and interest payable - related party |
1,755,041 |
|
Total liabilities |
17,447,965 |
Total liabilities |
20,124,089 |
|
|
|
Total stockholders' equity (deficit) |
34,802,790 |
|
EQUITY |
13,060,126 |
|
54,926,879 |
|
Total liabilities and equity |
30,508,091 |
CAPSTONE
FINANCIAL GROUP, INC.
NOTES
TO FINANCIAL STATEMENTS
(unaudited)
NOTE 9 – RESTATEMENT (CONTINUED)
2014 (As Originally Recorded) | |
Three months | |
Nine months | |
2014 (As Restated) | |
Three months | |
Nine months |
| |
ending | |
ending | |
| |
ending | |
ending |
| |
Sept. 30, 2014 | |
Sept. 30, 2014 | |
| |
Sept. 30, 2014 | |
Sept. 30, 2014 |
Revenue: | |
$ | 52,093,916 | | |
$ | 54,574,184 | | |
Investment Income | |
| | | |
| | |
| |
| | | |
| | | |
Services income | |
$ | 33,335 | | |
$ | 33,335 | |
Operating expenses: | |
| | | |
| | | |
Interest - related party | |
| 11,140 | | |
| 29,835 | |
General and administrative | |
| 222,595 | | |
| 381,423 | | |
Total revenues | |
| 44,475 | | |
| 63,170 | |
Payroll expense | |
| 51,092 | | |
| 165,609 | | |
Expenses | |
| | | |
| | |
Bad debt expense | |
| (3,706 | ) | |
| 40,361 | | |
Payroll expense | |
| 57,926 | | |
| 180,081 | |
| |
| — | | |
| — | | |
Professional fees | |
| 39,745 | | |
| 225,267 | |
| |
| — | | |
| — | | |
General and administrative | |
| 120,870 | | |
| 486,806 | |
Professional fees | |
| 55,046 | | |
| 174,189 | | |
Interest expense | |
| — | | |
| — | |
Total operating expenses | |
| 325,027 | | |
| 761,582 | | |
Interest expense - related party | |
| 4,276 | | |
| 16,107 | |
Other income (expense): | |
| | | |
| | | |
Total expenses | |
| 222,817 | | |
| 908,261 | |
Other income | |
| 33,335 | | |
| 33,335 | | |
Realized and Unrealized Gain (Loss) on Investments | |
| | | |
| | |
Interest expense - related party | |
| (10,853 | ) | |
| (36,001 | ) | |
Realized gain on investment securities, net | |
| 5,874 | | |
| 19,458 | |
Total other income (expense) | |
| 22,482 | | |
| (2,666 | ) | |
Unrealized loss on investment securities, net | |
| 19,190,577 | | |
| 19,187,658 | |
Net loss before benefit for income taxes | |
| 51,791,371 | | |
| 53,809,936 | | |
Gain on investments, net | |
| 19,196,451 | | |
| 19,207,116 | |
Income tax | |
| 17,632,845 | | |
| 18,200,000 | | |
| |
| | | |
| | |
Net loss | |
$ | 34,158,526 | | |
$ | 35,609,936 | | |
Net income (loss) before tax | |
| 19,018,109 | | |
|
18,362,025 |
|
| |
| | | |
| | | |
Income tax (benefit) expense | |
| 7,283,827 | | |
| 7,283,827 | |
| |
| | | |
| | | |
Loss from continuing operations net of tax | |
$ | 11,734,282 | | |
$ | 11,078,198 | |
Weighted average number of common shares outstanding - basic | |
| 93,980,460 | | |
| 93,724,753 | | |
Basic loss earnings per share - basic and diluted | |
$ | 0.12 | | |
$ | 0.12 | |
Net loss per share - basic | |
$ | 0.36 | | |
$ | 0.38 | | |
Shares used in computation of basic and diluted earnings per share | |
| 94,089,281 | | |
| 93,353,609 | |
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) |