Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒

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

For the quarterly period ended June 30, 2015

☐

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.)
8600 Transit Road, East Amherst, NY		14051
(Address of principal executive offices)		(Zip Code)
[phone]
(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

[phone]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ 

 

Indicate by check mark whether the registrant (1) has 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 as of August 3, 2015 was 94,364,648 shares.

CAPSTONE FINANCIAL GROUP, INC.

QUARTERLY REPORT FOR THE QUARTER ENDED

JUNE 30, 2015

 

Index to Report on Form 10-Q

 

PART I		Financial Information	Page
Item 1.		Financial Statements (unaudited)	3
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.		Controls and Procedures	24
PART II		Other Information
Item 1.		Legal Proceedings	26
Item1A.		Risk Factors	26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.		Defaults Upon Senior Securities	26
Item 4.		Mine Safety Disclosures	26
Item 5.		Other Information	26
Item 6.		Exhibits	27

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PART I     Financial Information

 

Item 1.     Financial Statements

 

CAPSTONE FINANCIAL GROUP, INC.

INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

			PAGES
Unaudited Condensed Statements of Financial Condition as of June 30, 2015 and December 31, 2014			4
Unaudited Condensed Statements of Operations for the three months and six months periods ended June 30, 2015 and 2014			5
Unaudited Condensed Statements of Cash Flows for the six months ended June 30, 2015 and 2014			6
Notes to Unaudited Condensed Financial Statements			7

 

-3-

CAPSTONE FINANCIAL GROUP, INC.

UNAUDITED CONDENSED STATEMENTS OF FINANCIAL CONDITION

 

		June 30, 2015				December 31, 2014
ASSETS
Financial instruments owned, at fair value		$	14,154,841			$	28,838,301
Cash			1,560,422				12,685
Accounts receivable			120,000				—
Note receivable			—				603,952
Prepaid expense			20,927				86,209
Furniture and equipment, net			7,539				6,500
Deposits			85,000				65,000
Total assets			15,948,729				29,612,647
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Accrued expenses		$	57,820			$	48,547
Accrued interest payable - related party			12,954				4,431
Short term advances payable - related party			85,131				94,306
Note payable - related party			553,552				1,203,552
Deferred revenue			16,660				116,662
Put and call option liability			847,576				9,973,684
Income taxes payable			201,607				—
Deferred tax liability			5,098,070				6,742,723
Total liabilities			6,873,370				18,183,905
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 2,000,000,000 shares authorized;
94,364,648 and 94,564,648 issued and outstanding as of
June 30, 2015 and December 31, 2014, respectively			94,365				94,565
Additional paid in capital			958,422				1,176,633
Retained earnings			8,022,572				10,157,544
Total stockholders' equity			9,075,359				11,428,742
Total liabilities and stockholders' equity		$	15,948,729			$	29,612,647

 

See Accompanying Notes to Unaudited Condensed Financial Statements.

 

-4-

CAPSTONE FINANCIAL GROUP, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

 

			For the three months ended								For the six months ended
			June 30,								June 30,
			2015				2014				2015				2014
Revenues
Services income		$	50,001			$	—			$	100,002			$	—
Interest – related party			7,014				10,188				14,460				18,695
			57,015				10,188				114,462				18,695
Expenses
Payroll			48,158				45,821				91,545				122,155
Professional fees			340,596				102,960				601,594				185,522
General and administrative			151,617				186,876				308,325				365,936
Interest expense – related party			3,468				7,008				8,524				11,831
			543,839				342,665				1,009,988				685,444
Realized and Unrealized Gain (Loss) on Financial Instruments
Realized gain (loss) on financial instruments, net			(2,286,616	)			13,584				(826,456	)			13,584
Unrealized (loss) on financial instruments, net			(395,876	)			—				(1,856,036	)			(2,919	)
Gain (loss) on financial instruments, net			(2,682,492	)			13,584				(2,682,492	)			10,665
Net (loss) before income taxes			(3,169,316	)			(318,893	)			(3,578,018	)			(656,084	)
Income tax (benefit)			(1,443,046	)			—				(1,443,046	)			—
Net (loss)		$	(1,726,270	)		$	(318,893	)		$	(2,134,972	)		$	(656,084	)
Net (loss) per share – basic and diluted		$	(0.02	)		$	(0.00	)		$	(0.02	)		$	(0.01	)
Weighted average shares outstanding – basic and diluted			94,553,659				93,758,721				94,559,123				93,499,507

 

See Accompanying Notes to Unaudited Condensed Financial Statements.

 

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CAPSTONE FINANCIAL GROUP, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

 

		For the six months ended
		June 30,
		2015				2014
CASH FLOW FROM OPERATING ACTIVITIES
Net loss		$	(2,134,972	)		$	(656,084	)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Sale (purchase) of financial instruments, net			2,754,860				(2,919	)
Net change in unrealized gain on financial instruments			1,856,036				2,919
Net change in realized gain on financial instruments			826,456				—
Depreciation			1,000				—
(Increase) decrease in assets:
Note receivable			400,000				—
Accrued interest receivable – related party			(14,459	)			(18,695	)
Prepaid expense			65,282				14,956
Deposits			(20,000	)			(75,800	)
Increase (decrease) in liabilities:
Accounts payable			—				(12,973	)
Accrued expenses			9,273				(11,032	)
Accrued interest payable – related party			8,523				11,831
Deferred revenue			(100,002	)			—
Net repayments on notes payable – related party			(650,000	)			(151,937	)
Net repayments on short term advances – related party			(9,175	)			—
Income taxes payable			201,607				—
Deferred tax liability			(1,644,653	)			—
Net cash provided by (used) in operating activities			1,549,776				(899,734	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment			(2,039	)			—
Net cash used in investing activities			(2,039	)			—
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net of offering costs			—				909,200
Net cash provided by financing activities			—				909,200
Increase in cash			1,547,737				9,466
Cash at beginning of period			12,685				—
Cash at end of period		$	1,560,422			$	9,466

 

Supplemental Disclosure of Cash Flow Information:

 

Noncash purchase of treasury stock

$

218,411

$

—

 

 See Accompanying Notes to Unaudited Condensed Financial Statements.

 

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CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Organization

 

The business focus of Capstone Financial Group, Inc. (the "Company") is to invest in equity securities of other companies. The Company seeks to discover, unlock and grow value in privately-held or illiquid companies, including through the exercise of friendly influence at a company in support of operational improvements and strategic initiatives. In some cases, the Company might be one of the largest shareholders of the other company.

 

The Company seeks to work closely and constructively with the management and boards of the other companies. While the Company does not manage the day-to-day operations of these companies, the Company seeks to maintain a thorough understanding of how they operate and evaluate their performance and prospects on an ongoing basis.

 

The Company may also seek to actively trade in its strategic investment positions and/or enter into private securities transactions with regard to those positions, to capitalize on price fluctuations and realize profits or minimize losses.

 

The Company was incorporated on July 10, 2012 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.

 

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. Effective in 2014, the Company transitioned its business plan to its current business focus.

 

At June 30, 2015 the Company’s investments are entirely focused in one entity, Twinlab Consolidated Holdings, Inc. (“Twinlab”). Management believes that it will be able to liquidate a sufficient portion of its investment and/or raise additional capital to avoid and/or satisfy its call obligations as and when they become due and/or are exercised. However, no assurance can be given that market conditions in the future will continue to allow the Company to sell its investments in sufficient quantities to enable full warrant exercises or to raise additional capital to do so (see Note 6).

 

-7-

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

NOTE 2 – BASIS OF PRESENTATION

 

The accompanying unaudited condensed financial statements of have been prepared in accordance with financial reporting conventions of the investment company industry and United States generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission (“SEC”) Regulation S-X.  Accordingly, they should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2014, included in the Company’s Annual Report on Form 10-K filed with the SEC on April 30, 2015. The unaudited condensed financial statements contain all normal recurring accruals and adjustments that in the opinion of management, are necessary to present fairly the financial position of the Company at June 30, 2015, the results of the Company’s operations for the three months and six months periods ended June 30, 2015 and the Company’s cash flows for the six months ended June 30, 2015. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three months and six months periods ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

 

NOTE 3 – 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 4 – 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.

 

-8-

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

The Company’s financial instruments 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.

 

Common Stocks

 

Generally, when the Company invests in common stocks that are traded on the NASDAQ Markets or over-the-counter markets (such as the OTCBB, OTCQB or OTC Pink marketplaces), 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 June 30, 2015 and December 31, 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 call and put options and warrants at June 30, 2015 and December 31, 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 and Monte Carlo valuation models. Changes to any of those inputs in isolation would result in fluctuations in the fair value measurement.

 

NOTE 5 – MARKET, CREDIT AND LIQUIDITY RISK

 

Market risk is the potential loss the Company may incur as a result of changes in the market or fair value of a particular financial instrument. Risks arise in options and warrant contracts from changes in the market or fair value of their underlying financial instruments.

 

Credit risk is the potential loss the Company may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Credit risk can arise from investment activities in financially distressed issuers. To manage this risk, the Company may seek to diversify its investment portfolio with respect to specific credits, sectors and asset classes.

 

The Company is also subject to market concentration risk since a significant portion of its investment portfolio has similar characteristics, and is therefore affected similarly by changes in economic conditions.

 

Investments of the Company trade in relatively thin markets and throughout the year, depending upon market conditions, may be considered illiquid. As a result, the market values can be more volatile and difficult to determine relative to other securities. In addition, if the Company is required to liquidate all or a portion of its portfolio quickly, it may realize significantly less than the value at which it previously recorded its financial instruments.

 

-9-

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

NOTE 6 – INVESTMENTS, AT FAIR VALUE

 

Financial instruments, net are comprised of the following at June 30, 2015.

 

		Cost				Estimated Fair Value
ASSETS
Common Stock		$	504,315			$	10,649,197
2014 Call Options			450				1,138,860
Series B Warrants			—				2,366,784
		$	504,765			$	14,154,841
LIABILITIES
Contingent Call Options		$	—			$	(225,599	)
Third-Party Call Options			—				(621,977	)
		$	—			$	(847,576	)

 

The Company records the sales of securities on a trade date basis and at June 30, 2015 had a receivable of $120,000 related to two such sales, both of which were fully settled in July 2015.

 

Financial instruments, net are comprised of the following at December 31, 2014.

 

		Cost				Estimated Fair Value
ASSETS
Common Stocks		$	6,212			$	8,018,621
2014 Call Options			2,492				6,644,680
Series A Warrants			—				9,947,368
Series B Warrants			—				4,227,632
		$	8,704			$	28,838,301
LIABILITIES
Warrant Put Option		$	—			$	(9,973,684	)

 

During the first quarter of 2014, the Company purchased shares in a company (other than Twinlab) traded on the OTC Markets for a total of $2,919. The Company currently categorizes these holdings as Level 3 assets. As of June 30, 2015, this investment is carried at $0 value under management’s valuation guidelines.

 

-10-

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

In August 2014, the Company purchased 10,987,500 split-adjusted shares of common stock of Twinlab in private transactions from 25 shareholders for total consideration of $3,296.

 

In August 2014, the Company purchased options to acquire 8,743,000 outstanding shares of Twinlab’s Common Stock (collectively, the “2014 Call Options”) in a private transaction from 14 stockholders, for total consideration of $2,623. The 2014 Call Options exercise price is $0.0001 per share and the 2014 Call Options expire 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 to the Company a Series A Warrant to purchase up to 52,631,579 shares of Twinlab’s Common Stock at an exercise price of $0.76 per share (the “Series A Warrant”) and a Series B Warrant to purchase up to 22,368,421 shares of Twinlab’s Common Stock at an exercise price of $0.76 per share (the “Series B Warrant”). Both the Series A Warrant and the Series B Warrant were 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 did not exercise the Series A Warrant by February 16, 2015 and thereafter at a rate of no less than 1,461,988 shares of Common Stock (the “Minimum Amount”) per month (the “Minimum Rate”) over the term of the Series A Warrant, Twinlab had the right (subject to certain conditions) to require the Company to exercise the Series A Warrant at the Minimum Rate for the duration of the Series A Warrant.

 

During the six months ended June 30, 2015, the Company sold an aggregate of 3,976,647 units of Twinlab securities to various unrelated third party accredited investors. Each unit consisted of one share of (unrestricted) Twinlab common stock and a detachable call option to purchase from the Company, for $1.00 per share, one (restricted) share of Twinlab common stock. The term of each such call option was three years from the respective unit sale date.

 

-11-

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

Twinlab and the Company also entered into a Compromise Agreement and Release and an Amendment No. 1 to Series B Warrant, each dated as of May 28, 2015, pursuant to which, among other things: (a) the Company surrendered the entire remaining-unexercised portion of the Series A Warrant (51,973,684 warrants) and 4,368,421 of the warrants under the Series B Warrant; (b) the Put Agreement was terminated; (c) the remaining 18,000,000 warrants under the Series B Warrant were deemed divided into four tranches, each with an associated date beyond which it would no longer be exercisable: one tranche for 2,000,000 warrant shares (no longer exercisable after November 30, 2015), one for 4,000,000 warrant shares (no longer exercisable after March 31, 2016), one for 6,000,000 warrant shares (no longer exercisable after July 31, 2016) and another for 6,000,000 warrant shares (no longer exercisable after November 30, 2016); and (d) the Company granted Twinlab three contingent call options, at $0.01 per share, to acquire Twinlab shares from the Company to the extent that upon effective expiration of the second, third and fourth tranches the Company had not exercised the warrants within such tranches (the “Contingent Call Options”). The three Contingent Call Options would be for a number of Twinlab shares equal to 25% of such unexercised warrants (i.e., a maximum of 1,000,000 shares if the Company exercised no warrants from the second tranche, a maximum of 1,500,000 shares if the Company exercised no warrants from the third tranche and a maximum of 1,500,000 shares if the Company exercised no warrants from the fourth tranche). In addition, Twinlab cannot exercise a Contingent Call Option unless it has satisfied such option’s “Liquidity Condition,” namely that for each of the three or four months before the tranche’s effective expiration date Twinlab must have a financial position sufficient to show a 1.15x fixed charge coverage ratio for a certain trailing period, all as defined by Twinlab’s Credit and Security Agreement dated January 22, 2015. Twinlab also agreed in the Compromise Agreement and Release that, given that the Company has identified, and may in the future identify, to Twinlab on a confidential basis persons to whom the Company might sell the Company’s Twinlab shares, Twinlab shall not, without the Company’s prior written consent, privately place Twinlab equity securities to any persons theretofore or thereafter first introduced to Twinlab by the Company; provided that Twinlab may, without the Company’s consent, privately place Twinlab equity securities to such a person at any time after the earlier of (a) the date the entire Series B Warrant has expired and/or been exercised, or (b) the first anniversary of such particular introduction.

 

Fair Value of Financial Instruments

 

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

-12-

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

		Assets and Liabilities Measured at
		Fair Value on a Recurring Basis
		June 30, 2015
			Level 1				Level 2				Level 3				Total
Assets
Financial instruments, at fair value:
Common Stocks		$	—			$	—			$	10,649,197			$	10,649,197
2014 Call Options			—				—				1,138,860				1,138,860
Series B Warrants			—				—				2,366,784				2,366,784
Total financial instruments, at fair value			—				—				14,154,841				14,154,841
Total assets held at fair value		$	—			$	—			$	14,154,841			$	14,154,841
Liabilities
Financial instruments, at fair value:
Third-Party Call Options		$	—			$	—			$	621,977			$	621,977
Contingent  Call Options			—				—				225,599				225,599
Total liabilities held at fair value		$	—			$	—			$	847,576			$	847,576

 

		Assets and Liabilities Measured at
		Fair Value on a Recurring Basis
		December 31, 2014
			Level 1				Level 2				Level 3				Total
Assets
Financial instruments, at fair value:
Common Stocks		$	—			$	—			$	8,018,621			$	8,018,621
2014 Call Options			—				—				6,644,680				6,644,680
Series A Warrants			—				—				9,947,368				9,947,368
Series B Warrants			—				—				4,227,632				4,227,632
Total financial instruments, at fair value			—				—				28,838,301				28,838,301
Total assets held at fair value		$	—			$	—			$	28,838,301			$	28,838,301
Liabilities
Financial instruments, 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.

 

-13-

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

The following table presents a summary of changes in the fair value amounts of the financial instruments classified within Level 3 for the three and six months ended June 30, 2015.

 

		Common Stock				2014 Call Options				Series A Warrants				Series B Warrants				Put Option Liability				Call Option Liability				Total
Fair value, net, January 1, 2015		$	8,018,621			$	6,644,680			$	9,947,368			$	4,227,632			$	(9,973,684	)		$	—			$	18,864,617
Total gains (losses) included in earnings:
Unrealized gains (losses)			4,045,660				(5,505,820	)			—				—				—				—				(1,460,160	)
Fair value, net, March 31, 2015			12,064,281				1,138,860				9,947,368				4,227,632				(9,973,684	)			—				17,404,457
Total gains (losses) included in earnings:
Unrealized gains (losses)			(1,915,084	)			—				—				2,366,784				—				(847,576	)			(395,876	)
Realized gains (losses)			—				—				(9,823,026	)			(4,227,632	)			9,849,013				—				(4,201,645	)
Exercised			500,000				—				(124,342	)			—				124,671				—				500,329
Fair value, net, June 30, 2015		$	10,649,197			$	1,138,860			$	—			$	2,366,784			$	—			$	(847,576	)		$	13,307,265

 

NOTE 7 – INCOME TAXES

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Income tax benefit for the six months ended June 30, 2015 was $1,443,046 at an effective tax rate of 40.33%, which was greater than the federal statutory rate due to the state income tax expense.

 

The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The disclosures regarding the Company's unrecognized tax benefits at December 31, 2014 included in the Company's 2014 Annual Report on Form 10-K continue to be relevant for the periods ended June 30, 2015 as to the Company’s unrecognized tax benefits at June 30, 2015.

 

-14-

CAPSTONE FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

NOTE 8 – SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date the financial statements were available to be issued. Except as noted below, there are no events which require adjustments to, or disclosure in, the financial statements for the periods ended June 30, 2015.

 

In July 2015, the Company sold 168,420 Twinlab shares to unrelated third parties for $128,000. In August 2015 through the date the financial statements were available to be issued, the Company sold 198,000 Twinlab shares to an unrelated third party for $150,480.

 

In July 2015, the Company made two partial exercises of the Series B Warrant and received 657,895 Twinlab shares in exchange for an aggregate exercise price of $500,000.

 

In July 2015, in exchange for $277,500, the Company acquired a 20% interest in privately-held Western New York real estate companies LC Strategic Realty, LLC and LC Strategic Holdings, LLC, as well as in all other business conducted or to be conducted by the firms’ majority holders to the extent such other business has a primary focus on (a) real estate (subject to the exclusion of certain specified projects), (b) media/entertainment/show business, or (c) endorsements/advertisements/personal appearances/use of likeness/monetization of celebrity.

 

-15-

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements and involves risks and uncertainties that could materially affect expected results of operations, liquidity, cash flows, and business prospects. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Part I Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on April 30, 2015, and in particular, the risks discussed under the caption “Risk Factors” in Part I Item 1A thereof, and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

Overview and Outlook

 

Our business focus is to use our own capital to acquire the outstanding equity securities of other companies. We do not produce goods or services ourselves. Rather, our primary purpose is to own and trade shares of other companies. We seek to discover, unlock and grow value in privately-held or illiquid companies, including through the exercise of friendly influence at a company in support of operational improvements and strategic initiatives. In some cases, we might be one of the largest shareholders of the other company.

 

We seek to work closely and constructively with the management and boards of the other companies. While we do not manage the day-to-day operations of these companies, we seek to maintain a thorough understanding of how they operate and evaluate their performance and prospects on an ongoing basis.

 

We may also seek to actively trade in our strategic investment positions and/or enter into private securities transactions with regard to those positions, to capitalize on price fluctuations and realize profits or minimize losses.

 

We were initially formed to design and sell mobile apps for smart phones and other mobile platforms such as tablets. We never launched an active business based on this focus.

 

During the third quarter of 2013, we refocused ourselves as a financial services company.

 

On January 15, 2014, in support of our financial services business focus, we effected a reverse triangular merger whereby Capstone Affluent Strategies, Inc. (“Affluent”), a California corporation, became our wholly owned subsidiary. Affluent, a financial services company, had been wholly owned by Darin Pastor.

 

In March 2014, we refocused ourselves again, to our current business model. We believe our current business model is likely to result in lower expenses levels than would have been associated with our financial services company business model.

 

-16-

On August 11, 2014, we effectively unwound the Affluent merger transaction, due to Affluent’s inability to produce audited financial statements as required and the change in our business focus. In October 2014, we acquired from Darin Pastor certain Affluent assets and assumed certain Affluent liabilities. (Affluent had been dissolved earlier in 2014.)

 

Currently our primary strategic investment position is in securities of Twinlab Consolidated Holdings, Inc. (“Twinlab”). In August 2014, we purchased 10,987,500 shares of common stock of Twinlab in private transactions from 25 shareholders, for nominal consideration. Additionally, in August 2014, we purchased options to acquire 8,743,000 currently-outstanding shares of Twinlab’s common stock (collectively, the “2014 Call Options”) from 14 shareholders in a private transaction, for nominal consideration. The 2014 Call Options exercise price is $0.0001 per share and the 2014 Call Options expiration date was August 2015. (In February 2015, we exercised the Call Options. Optionors honored the exercise as to 7,244,500 Twinlab shares. Other optionors have not yet honored the exercise, as to at least 1,498,500 Twinlab shares. We intend, if necessary, to file suit to enforce the exercises as to those shares.)

 

On September 30, 2014, Twinlab issued to us a Series A Warrant to purchase up to 52,631,579 shares of Twinlab common stock at an exercise price of $0.76 per share (the “Series A Warrant”), and a Series B Warrant to purchase up to 22,368,421 shares of Twinlab common stock at an exercise price of $0.76 per share (the “Series B Warrant”). By their original terms, the Series A Warrant and the Series B Warrant were both exercisable from October 2014 through October 2017.

 

On September 30, 2014, Twinlab and we also entered into the Put Agreement. Pursuant to the Put Agreement, if we did not exercise the Series A Warrant by February 16, 2015 and thereafter at a rate of no less than 1,461,988 shares of Twinlab common stock (the “Minimum Amount”) per month (the “Minimum Rate”) over the term of the Series A Warrant, Twinlab had the right (subject to certain conditions) to require us to exercise the Series A Warrant at the Minimum Rate for the duration of the Series A Warrant. In the event Twinlab exercised its right to require us to exercise the Series A Warrant, the purchase price per share of Twinlab common stock thereunder would have been $0.775.

 

We did not exercise the “Minimum Amount” of shares per the Put Agreement. In April 2015 we exercised the Series A Warrant as to 657,895 Twinlab shares.

 

In November 2014, we sold 436,681 of our Twinlab shares for approximately $1,000,000.

 

During the six months ended June 30, 2015, we sold an aggregate of 3,976,647 units of Twinlab securities to various unrelated third party accredited investors. Each unit consisted of one share of (unrestricted) Twinlab common stock and a detachable call option (“Third-Party Call Options”) to purchase from us, for $1.00 per share, one (restricted) share of Twinlab common stock. The term of each such call option was three years from the respective unit sale date. In each case, the sale price per unit was $0.76. In the first quarter of 2015 we sold 1,921,497 Twinlab shares and Third-Party Call Options for $1,460,340. In the second quarter of 2015 we sold 2,055,150 Twinlab shares and Third-Party Call Options for $1,561,920.

 

In addition, in the second quarter of 2015 we sold 464,466 Twinlab shares (without any associated Third-Party Call Options) for $353,000.

 

In total, during the six months ended June 30, 2015 we sold Twinlab securities for $3,375,260.

 

-17-

On May 28, 2015, we entered into a Compromise Agreement and Release and an Amendment No. 1 to Series B Warrant, each between Twinlab and us. Pursuant to these two agreements:

 

-

The Put Agreement was terminated.

-

We surrendered the entire remaining-unexercised portion of the Series A Warrant (51,973,684 warrants).

-

We surrendered 4,368,421 of the warrants under the Series B Warrant.

-

The remaining 18,000,000 warrants under the Series B Warrant were deemed divided into four tranches, each with an associated date beyond which it would no longer be exercisable: one tranche for 2,000,000 warrant shares (no longer exercisable after November 30, 2015); one for 4,000,000 warrant shares (no longer exercisable after March 31, 2016); one for 6,000,000 warrant shares (no longer exercisable after July 31, 2016); and another for 6,000,000 warrant shares (no longer exercisable after November 30, 2016);

	-	We granted Twinlab three contingent call options, at $0.01 per share, to acquire Twinlab shares from us to the extent that upon effective expiration of the second, third and fourth tranches we had not exercised the warrants within such tranches (the “Contingent Call Options”). The three Contingent Call Options would be for a number of Twinlab shares equal to 25% of such unexercised warrants (i.e., a maximum of 1,000,000 shares if we exercised no warrants from the second tranche, a maximum of 1,500,000 shares if we exercised no warrants from the third tranche and a maximum of 1,500,000 shares if we exercised no warrants from the fourth tranche). In addition, Twinlab cannot exercise a Contingent Call Option unless it has satisfied such option’s “Liquidity Condition,” namely that for each of the three or four months before the tranche’s effective expiration date Twinlab must have a financial position sufficient to show a 1.15x fixed charge coverage ratio for a certain trailing period, all as defined by Twinlab’s Credit and Security Agreement dated January 22, 2015.
	-	Given that we have identified, and may in the future identify, to Twinlab on a confidential basis persons to whom we might sell our Twinlab shares, Twinlab agreed that it shall not, without our prior written consent, privately place Twinlab equity securities to any persons theretofore or thereafter first introduced to Twinlab by us; provided that Twinlab may, without our consent, privately place Twinlab equity securities to such a person at any time after the earlier of (a) the date the entire Series B Warrant has expired and/or been exercised, or (b) the first anniversary of such particular introduction.

 

As a result of these two agreements, our investment position in Twinlab as of immediately after the two agreements was as follows:

 

-

We have no further potential cash obligation to Twinlab under the Put Agreement; an imminent cash obligation to Twinlab of approximately $40.8 million was thereby avoided.

-

We retained all of our 14,476,567 outstanding Twinlab shares (13,818,672 unrestricted, free-trading Twinlab shares and 657,895 restricted Twinlab shares). -          Later in the second quarter of 2015 we sold an additional 464,466 unrestricted, free-trading Twinlab shares to accredited investors. -          Our obligations to our accredited-investor counterparties under the 3,976,647 Third-Party Call options continued unchanged. -          We obtained an additional 526,316 restricted Twinlab shares upon a partial exercise of the Series B Warrant on July 7, 2015. -          We obtained an additional 131,579 restricted Twinlab shares upon a partial exercise of the Series B Warrant on July 23, 2015.

-18-

-

We retained 18,000,000 warrants under the Series B Warrant, at an unchanged $0.76 per share exercise price, with effective expiration dates ranging from November 30, 2015 to November 30, 2016 (and with at least 14 months of remaining term for 12,000,000 of the warrants). -          We exercised 526,316 of such warrants on July 7, 2015. -          We exercised 131,579 of such warrants on July 23, 2015.

-

The Registration Rights Agreement remains in full force and effect to enable the Securities Act registration of all Twinlab shares issued upon exercise of the Series B Warrant.

-

Under the Contingent Call Options, we undertook a contingent obligation to deliver to Twinlab (at $0.01 per share) up to 4,000,000 Twinlab shares, but the obligation would be reduced or entirely eliminated to the extent we exercise the last three deemed tranches of the Series B Warrant and/or to the extent that Twinlab fails to meet a required fixed charge coverage ratio for certain months. The redelivered Twinlab shares would not have to be free-trading Twinlab shares.

 

At June 30, 2015, the fair value of the liability under the 3,976,647 Third-Party Call Options was recorded on our balance sheet at $621,977.

 

At June 30, 2015, the fair value of the liability under the Contingent Call Options was recorded on our balance sheet at $225,599.

 

On October 28, 2014, we entered into a transaction in which we acquired from Darin Pastor certain assets which had been assets of Affluent and assumed certain liabilities which had been liabilities of Affluent, including liabilities under notes in favor of Darin Pastor. At June 30, 2015, the outstanding principal amount of and accrued interest on such assumed notes was $566,506.

 

In July 2015, in exchange for $277,500, we acquired a 20% interest in privately-held Western New York real estate companies LC Strategic Realty, LLC and LC Strategic Holdings, LLC, as well as in all other business conducted by the firms’ majority holders to the extent such other business has a primary focus on (a) real estate (subject to the exclusion of certain specified projects), (b) media/entertainment/show business, or (c) endorsements/advertisements/personal appearances/use of likeness/ monetization of celebrity.

 

On June 17 and 18, 2015, we filed a Form 4 and an amended Schedule 13D statement to report a June 10, 2015 sale by us of 13,157,895 shares of Twinlab common stock to a third party. The third party did not timely honor its payment obligation under the sale contract and still had not honored it as of the filing date of this Quarterly Report on Form 10-Q, and accordingly we will not reflect this “sale” in our financial statements until the quarter (if ever) when the purchase price is actually paid, and until then we will treat the transaction as a non-event for financial reporting purposes.

 

We currently are considering electing to become a Business Development Company and/or filing (or causing an affiliated company to file) an application with the United States Small Business Administration to become a Small Business Investment Company. We can give no assurance that such an application will be filed or that, if filed, it will be granted.

 

-19-

Results of Operations for the Quarterly Periods Ended June 30, 2015 and 2014

 

Revenues.  Total revenues (excluding gain and loss on investment securities) for the quarters ended June 30, 2015 and 2014 were $57,015 and $10,188. The 2015 period included services income of $50,001. Due to our current business focus, we do not expect to regularly generate material amounts of services income.

 

Realized and Unrealized Gain (Loss) on Financial Instruments. We recorded a $2,286,616 realized loss on financial instruments for the quarter ended June 30, 2015 as a result of the May 28, 2015 transaction with Twinlab in which we surrendered the entire remaining-unexercised portion of the Series A Warrants (51,973,684 warrants) and amended the Series B Warrant terms and amount (combined realized loss of $14,050,658) and the Put Agreement was terminated (realized gain of $9,849,013), together with our combined sales of 2,519,616 Twinlab shares to third parties during the quarter (realized gain of $1,915,084). We also recorded a $395,876 unrealized loss on financial instruments for the quarter ended June 30, 2015 as a result of such sales of 2,519,616 Twinlab shares to third parties during the quarter (resulting in a transfer of $1,915,084 of gain from the category of unrealized gain to the category of realized gain) and unrealized loss of $621,977 for the establishment of the Third-Party Call Options and $225,599 for the establishment of the Contingent Call Options, partially offset by $2,366,784 of unrealized gain recorded for the Series B Warrant as amended on May 28, 2015. The overall net loss on financial instruments for the quarter was $2,682,492.

 

If our assessments/estimates of the fair value of our holdings of Twinlab securities were to change from quarter to quarter, there could be significant changes in our unrealized gain on such holdings, which in turn would result in significant gain or loss on our statement of operations for the quarter in question. However, at both March 31, 2015 and June 30, 2015, our determination was that the fair value of Twinlab common stock was $0.76 per Twinlab share. Accordingly, there was no such gain or loss on our statement of operations for the quarter ended June 30, 2015 due to any such change in valuation. Although our sales of Twinlab stock in the second quarter of 2015 generated $1,914,920 (of which $120,000 was not actually received in cash until the third quarter), we did not record an overall net gain on financial instruments on such sales, because the sales prices ($0.76 per share) were the same as the fair value we had determined for our Twinlab stock and at which we were carrying the Twinlab stock on our books. The sales merely resulted in a transfer of unrealized gain to realized gain.

 

We did not own any Twinlab securities in the second quarter of 2014.

 

Payroll.  Payroll for the quarters ended June 30, 2015 and 2014 was $48,158 and $45,821, respectively. We are holding the salaries of our most senior officers at very low levels.

 

Professional Fees.  Professional fees for the quarters ended June 30, 2015 and 2014 were $340,596 and $102,960, respectively. The increase was primarily due to legal fees for preparing documents for production as required by legal process, and accounting and legal fees related to required restatements of financial statements and amendments of previous SEC periodic reports.

 

General and Administrative.  General and administrative expenses (excluding payroll expense and professional fees) for the quarters ended June 30, 2015 and 2014 were $151,617 and $186,876, respectively; the decrease in 2015 was primarily due to the absence of rent expense in April 2015, before the start of our 126-month lease for our East Amherst, New York headquarters building.

 

-20-

Results of Operations for the Six Months Periods Ended June 30, 2015 and 2014

 

Revenues.  Total revenues (excluding gain and loss on investment securities) for the six months periods ended June 30, 2015 and 2014 were $114,462 and $18,695. The 2015 period included services income of $100,002. Due to our current business focus, we do not expect to regularly generate material amounts of services income.

 

Realized and Unrealized Gain (Loss) on Financial Instruments. We recorded a $826,456 realized loss on financial instruments for the six months period ended June 30, 2015 as a result of the May 28, 2015 transaction with Twinlab in which we surrendered the entire remaining-unexercised portion of the Series A Warrants (51,973,684 warrants) and amended the Series B Warrant terms and amount (combined realized loss of $14,050,658) and the Put Agreement was terminated (realized gain of $9,849,013), together with our combined sales of 4,441,113 Twinlab shares to third parties during the six months period (realized gain of $3,375,260). We also recorded a $1,856,036 unrealized loss on financial instruments for the six months period ended June 30, 2015 as a result of such sales of 4,441,113 Twinlab shares to third parties during the six months period (resulting in a transfer of $3,375,260 of gain from the category of unrealized gain to the category of realized gain) and unrealized loss of $621,977 for the establishment of the Third-Party Call Options and $225,599 for the establishment of the Contingent Call Options, partially offset by $2,366,784 of unrealized gain recorded for the Series B Warrant as amended on May 28, 2015. The overall net loss on financial instruments for the six months period ended June 30, 2015 was $2,682,492.

 

If our assessments/estimates of the fair value of our holdings of Twinlab securities were to change from quarter to quarter, there could be significant changes in our unrealized gain on such holdings, which in turn would result in significant gain or loss on our statement of operations for the quarter in question. However, at both December 31, 2014 and June 30, 2015, our determination was that the fair value of Twinlab common stock was $0.76 per Twinlab share. Accordingly, there was no such gain or loss on our statement of operations for the six months period ended June 30, 2015 due to any such change in valuation. Although our sales of Twinlab stock in the first six months of 2015 generated $3,375,260 (of which $120,000 was not actually received in cash until the third quarter), we did not record an overall net gain on financial instruments on such sales, because the sales prices ($0.76 per share) were the same as the fair value we had determined for our Twinlab stock and at which we were carrying the Twinlab stock on our books. The sales merely resulted in a transfer of unrealized gain to realized gain.

 

We did not own any Twinlab securities in the first six months of 2014.

 

Payroll.  Payroll for the six months periods ended June 30, 2015 and 2014 was $91,545 and $122,155, respectively; the decrease in 2015 was primarily due to our change in business focus in March 2014. For most of the first quarter of 2014 our business focus was that of a financial services company. We are holding the salaries of our most senior officers at very low levels.

 

Professional Fees.  Professional fees for the six months periods ended June 30, 2015 and 2014 were $601,594 and $185,522, respectively. The increase was primarily due to legal fees for preparing documents for production as required by legal process, and accounting and legal fees related to required restatements of financial statements and amendments of previous SEC periodic reports.

 

General and Administrative.  General and administrative expenses (excluding payroll expense and professional fees) for the six months periods ended June 30, 2015 and 2014 were $308,325 and $365,936, respectively; the decrease in 2015 was primarily due to our change in business focus in March 2014 and the absence of rent expense in April 2015. For most of the first quarter of 2014 our business focus was that of a financial services company.

 

-21-

Liquidity and Capital Resources

 

As of June 30, 2015, we had $1,560,422 in cash and cash equivalents, Twinlab securities owned which we recorded at a $14,154,841 fair value, and credit for $85,000 of deposits given.  There is no active liquid public market for our Twinlab securities. In addition, we had accounts receivable of $120,000 with respect to sales of 157,895 of our Twinlab shares in June 2015; the fair value of those 157,895 shares is not included in the $14,154,841 fair value figure. We collected all of these accounts receivable in July 2015.

 

In late June 2015, we accepted $400,000 cash and the surrender of 200,000 shares of our outstanding common stock in exchange for the full satisfaction of the $600,000 principal amount of and $18,411 of accrued interest on an unsecured promissory note which we had issued to an accredited investor on November 14, 2014. The scheduled maturity date of the promissory note had been December 29, 2015.

 

We anticipate obtaining additional financing to fund operations through common stock offerings, sales of Twinlab stock and sales of future-acquired strategic investment securities, to the extent available. There can be no assurance we will be successful in raising the necessary funds to execute our business plan. 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 and/or negative cash flows in one or more future periods.  

 

Our current intention is to use meaningful amounts of any free cash flow we generate to make further partial exercises of the Series B Warrant, in order both to help Twinlab maintain and grow its business (thereby benefiting the value of our remaining Twinlab securities), to avoid triggering the exercisability of the Contingent Call Options (or to limit the number of Twinlab shares for which Twinlab could exercise the Contingent Call Options), and to avoid or reduce the risk of in effect having a “short” position in Twinlab stock (as described in the following paragraph).

 

The $9,973,684 warrant put option item on our December 31, 2014 balance sheet arose from the contingent possibility that a Put Agreement obligation might arise in the future. There was no such item on our June 30, 2015 balance sheet, because of our May 28, 2015 compromise agreement with Twinlab which terminated the Put Agreement. However, the June 30, 2015 balance sheet included a $225,599 liability item arising from the contingent possibility that the Contingent Call Options might become exercisable in the future and a $621,977 liability item arising from the Third-Party Call Options we granted to certain accredited investors in connection with our 2015 sales of Twinlab common stock to such investors. Our actual risk under the two types of options would be magnified if, due to sales of Twinlab common stock and/or expiration of unexercised Series B Warrants, we do not have as many Twinlab shares and/or available Series B Warrants as the number of shares we could be obliged to deliver under the options (i.e., to the extent we in effect are “short” Twinlab shares). The expiration date of the Third-Party Call Options is a substantial number of months after the expiration of the Series B Warrants. If we wish to avoid being “short” Twinlab shares in the manner just described, it may be necessary for us to purchase and hold Twinlab shares through the expiration date of the Third-Party Call Options, which would tie up a large amount of otherwise available cash. If insufficient cash is available for this purpose, it may be necessary for us to run the risk of having what in effect is a short position.

 

The $5,098,070 deferred tax liability item on our June 30, 2015 balance sheet represents the income taxes we would owe if we sold, during tax years in which our taxable income levels were large enough to support such current income taxes, all the Twinlab securities which we held as of June 30, 2015, at a price resulting in realization of all of the unrealized gain we recorded for such assets on our balance sheet (based on our fair value assessment as of June 30, 2015. No such taxes would be actually payable unless and until after we sell the Twinlab securities, and the amount of actual taxes payable would depend on the actual sales prices.

 

-22-

From time to time after October 28, 2014 our controlling stockholder Darin Pastor has made advances and direct-payments to assist us in covering expenses; he is not obligated to make any such advances and direct-payments and there can be no assurance that any such advances and direct-payments will continue. In addition, the amounts of these advances and direct-payments are reimbursable to him upon his demand at any time. At June 30, 2015, $85,131 of such advances and direct-payments had not yet been reimbursed.

 

At June 30, 2015, the remaining balance on the notes payable to Darin Pastor, which we assumed as part of our October 2014 transaction involving assets and liabilities of the former Capstone Affluent Strategies, Inc., was $553,552, plus $12,954 of accrued but unpaid interest.

 

We remind readers that our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by emerging companies. Also, our limited operating history makes predictions of future operating results and cash needs difficult to ascertain.

 

The following table provides detailed information about our net cash flow for the respective first six months of our 2015 and 2014 fiscal years.  

 

		For the six month periods ended June 30,
		2015				2014
Net cash provided by (used in) operating activities		$	1,549,776			$	(899,734	)
Net cash provided by (used in) investing activities			(2,039	)			—
Net cash provided by (used in) financing activities			—				909,200
Net increase (decrease) in cash			1,547,737				9,466
Cash, beginning			12,685				—
Cash, ending		$	1,560,422			$	9,466

 

Operating activities

 

Net cash provided by operating activities was $1,549,776 for the first six months of 2015, despite our $2,134,972 after-tax net loss for that six months period. Although our sales of Twinlab securities in the first six months of 2015 generated $3,255,260 in cash proceeds (plus an additional $120,000 of accounts receivable, which were then collected in the third quarter), we did not record an overall net gain on financial instruments on such sales, because the sales prices ($0.76 per share) were the same as the fair value we had determined for our Twinlab stock and at which we were carrying the Twinlab stock on our books. In addition, the $1,856,036 net change in unrealized gain on (i.e., additional net loss on) financial instruments and the $826,456 net change in realized gain on (i.e., additional net loss on) financial instruments were noncash items.

 

Net cash used for operating activities was $899,734 for the first six months period of 2014 (primarily due to our $656,084 net loss for that six months period).

 

Financing activities

 

Net cash provided by financing activities in the first six months of 2014 was attributable to capital raised through the issuance of our common stock.

 

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.

 

-23-

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 2 – Summary of Significant Accounting Policies in our Notes to Financial Statements.

 

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

 

This item is not applicable, as we are classified as a smaller reporting company.

 

Item 4.     Controls and Procedures

 

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 our reports filed or submitted under the Securities 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 our reports filed under the Securities Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15 under the Securities Exchange Act, as of June 30, 2015 we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, who concluded that our disclosure controls and procedures are effective. The errors which required the restatement of financial statements and the amendments of periodic reports, as reported and summarized in our Current Report on Form 8-K filed on November 13, 2014 (as amended on November 24, 2014) and in such amendments and as further stated in the following paragraph of this item, were, in their judgment, not due to ineffectiveness of our disclosure controls and procedures.

 

Our Board of Directors concluded in November 2014 that the previously issued audited consolidated financial statements and other financial information contained in our initially-filed Annual Report on Form 10-K for the fiscal year ended December 31, 2013 failed to properly account for certain financial information.  Consequently, the Board concluded that for comparative purposes the previously issued unaudited financial statements and certain other financial information contained in the initially-filed Quarterly Reports on Form 10-Q for the fiscal periods ended June 30, 2013, September 30, 2013, March 31, 2014, and June 30, 2014, and our earnings releases and other financial communications after the filing of our initially-filed Annual Report on Form 10-K for the fiscal year ended December 31, 2013, should no longer be relied upon.

 

We thereafter filed corrective amendments of these periodic reports.

 

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Internal Control Over Financial Reporting

 

Our management is 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) promulgated under the Securities Exchange Act of 1934 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.

 

All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2015. In making our assessment, we used the framework and criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework in 2014. Based on that assessment, our management has identified certain material weaknesses in our internal control over financial reporting.

 

Our management concluded that as of June 30, 2015 our internal control over financial reporting was not effective, and that material weaknesses existed in the following areas as of June 30, 2015:

 

(1)

we do not employ full time in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions. With respect to material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions;

 

(2)

we have inadequate segregation of duties consistent with the control objectives including but not limited to the disbursement process, transaction or account changes, and the performance of account reconciliations and approval;

 

(3)

we have ineffective controls over the period end financial disclosure and reporting process caused by reliance on third-party experts and/or consultants and insufficient accounting staff; and

 

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(4)

we do not have a functioning audit committee of the Board of Directors and our Board of Directors, in its performance of the functions generally associated with audit committees, lacks a majority of (indeed, lacks any) independent members and lacks a majority of (indeed, lacks any) outside directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls, approvals and procedures.

 

Changes in Internal Control Over Financial Reporting

 

No substantial changes in our internal control over financial reporting occurred during the second quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

 

Item 1.     Legal Proceedings

 

We are not a party to any material legal proceedings.

 

Item 1A.     Risk Factors

 

This item is not applicable, as we are classified as a smaller reporting company. To better inform the readers of this Quarterly Report on Form 10-Q, however, we refer to the Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 30, 2015, and to certain other risks identified within this Quarterly Report on Form 10-Q.

 

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

 

We made no unregistered sales of securities of our securities during the quarter ended June 30, 2015.

 

On June 26, 2015, we entered into a Prepayment and Repurchase Agreement with Thomas A. Tolworthy and accepted $400,000 cash and the surrender of 200,000 outstanding shares of our common stock in exchange for the full satisfaction of the unsecured promissory note (with a $600,000 principal amount and $18,411 of accrued interest) which he had issued to us on November 14, 2014.

 

Item 3.     Defaults Upon Senior Securities

 

None.

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other Information

 

See Part II, Item 2 above. Also, see the description of the Third-Party Call Options in Part I, Item 2 above (Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview and Outlook).

 

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Item 6.     Exhibits

 

 (a) The following exhibits are included as part of this report:

 

						Incorporated by reference
Exhibit				Filed							Filing
Number		Exhibit Description		herewith		Form			Exhibit		date
2.1		Stock Purchase Agreement dated September 6, 2013 between Ryan Faught and Darin Pastor				10-K			2.1		2/18/2015
2.2		Stock Purchase Agreement dated September 6, 2013 between Ryan Faught and George L. Schneider				10-K			2.2		2/18/2015
2.3		Agreement and Plan of Merger among the Company, Capstone Sub Co. and Capstone Affluent Strategies, Inc., dated December 13, 2013				8-K			2.1		12/13/2013
2.3.1		Articles of Merger filed January 15, 2014, between Capstone Sub Co. and Capstone Affluent Strategies, Inc.				8-K			3(i)(d)		1/16/2014
2.3.2		Rescission of Agreement and Plan of Merger among the Company, Capstone Sub Co. and Capstone Affluent Strategies, Inc.				8-K			10.1		5/1/2014
3.1		Articles of Incorporation of Creative App Solutions Inc. dated July 10, 2012				S-1			3(i)(a)		10/17/2012
3.1.1		Certificate of Amendment to Articles of Incorporation filed August 26, 2013				8-K			3(i)(a)		8/29/2013
3.1.2		Certificate of Change filed September 6, 2013				8-K			3(i)(c)		9/12/2013
3.2		Bylaws				S-1			3(ii)		10/17/2012
3.2.1		Amended Bylaws, adopted August 26, 2013				10-K			3.2.1		2/18/2015
10.1		Form of Third-Party Investment Units Purchase Agreement (used from March 25, 2015 through May 28, 2015)		X
10.2		Lease Agreement, dated as of April 29, 2015, between Iskalo 8600 Transit LLC and the Company				10-K			10.15		4/30/2015
10.3		Compromise Agreement and Release, dated May 28, 2015, between Twinlab Consolidated Holdings, Inc. and the Company				8-K			10.1		5/29/2015
10.4		Amendment No. 1 to Series B Warrant, dated May 28, 2015, between Twinlab Consolidated Holdings, Inc. and the Company				8-K			10.2		5/29/2015
10.5		Prepayment and Repurchase Agreement, dated as of June 26, 2015, between Thomas A. Tolworthy and the Company		X
31.1		Certification pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – CEO		X
31.2		Certification pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – CFO		X
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – CEO		X
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – CFO		X

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

By: /s/ Darin R. Pastor

Darin R. Pastor, Chief Executive Officer

Date: August 13, 2015

 

 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature	Title	Date
/s/ Darin R. Pastor	Chairman of the Board of Directors,	August 13, 2015
Darin R. Pastor	Chief Executive Officer (Principal Executive Officer)
/s/ Halford W. Johnson	Chief Financial Officer	August 13, 2015
Halford W. Johnson	(Principal Financial Officer and Principal Accounting Officer)

 

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THIRD-PARTY INVESTMENT UNITS PURCHASE AGREEMENT

This THIRD-PARTY INVESTMENT UNITS PURCHASE AGREEMENT (this “Agreement”) is made as of ________, 2015, by and between Capstone Financial Group, Inc., a Nevada corporation (“Capstone”), and ___________ (the “Purchaser”).

RECITALS

WHEREAS, as of June 1, 2015, Capstone owns or has the right to acquire more than 42,000,000 shares of common stock of Twinlab Consolidated Holdings, Inc., a Nevada corporation (“Twinlab”), including warrants to purchase 18,000,000 shares of restricted Twinlab common stock at an exercise price of $0.76 per share;

WHEREAS, the Purchaser desires to purchase from Capstone, on the terms set forth in this Agreement, investment units (“Units”) consisting of unrestricted shares of Twinlab common stock (“Unrestricted Shares”) and (detachable) three-year options (“Options”) to purchase from Capstone restricted shares of Twinlab common stock (“Restricted Shares”) at an exercise price of $1.00 cash per Restricted Share; and

WHEREAS, Capstone desires to sell and deliver Units to the Purchaser in accordance with the terms hereof.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties, and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.                  Purchase and Sale; Closing.

(a)               Subject to the terms and conditions hereof, the Purchaser hereby agrees to purchase from Capstone and Capstone hereby agrees to sell to the Purchaser _____ Units, each consisting of 1 Unrestricted Share and 1 (detachable) Option, in exchange for $0.76 per Unit in cash (i.e., cashier’s check or a wire transfer to an account designated in writing by Capstone), for total consideration of $______ cash for the Units.

(b)               The Purchaser’s payment in full for the Units shall take place at Capstone’s principal executive office at 1:00 p.m. Eastern Time on the second business day after the date of this Agreement (the “Payment Date”). Upon such payment, the payment shall be nonrefundable, the Purchaser’s purchase shall be irrevocable and nonrescindable, and Capstone’s obligation to deliver the Units as set forth herein shall be unconditional.

(c)                The delivery of the Units to the Purchaser shall take place at Capstone’s principal executive office at 1:00 p.m. Eastern Time on the third business day after the Payment Date or as soon thereafter as practicable (the “Delivery Date”). In the alternative, at Capstone’s option, delivery of the Units to the Purchaser shall take place by hand delivery (or delivery by nationally recognized overnight express delivery service) to an office directed by the Purchaser for receipt on the Delivery Date.

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(d)               On the Delivery Date, Capstone shall (against the Purchaser’s prior payment in full on the Payment Date of the purchase price for the Units) deliver to the Purchaser (i) either (A) a duly-executed Twinlab share certificate, free of restrictive legend, representing all of the Unrestricted Shares and made out in the name of Capstone (the “Transfer Certificate”) and a duly executed and Medallion-guaranty-stamped assignment separate from certificate, in form reasonably satisfactory to the Purchaser, for the assignment and transfer of the Unrestricted Shares from Capstone to the Purchaser (the “Transfer Certificate Stock Power”), or (B) a duly-executed Twinlab share certificate, free of restrictive legend, representing the Unrestricted Shares and made out in the name of the Purchaser (the “New Certificate”), and (ii) an Option Agreement in the form of Exhibit A attached hereto, duly executed by Capstone, representing the Options.

(e)                If Capstone’s delivery on the Delivery Date under Section 1(d)((i)(A) above was of the Transfer Certificate and the Transfer Certificate Stock Power, then Capstone shall have no further obligations hereunder (except as set forth in the following sentence) with respect to the delivery of the Unrestricted Shares and the Purchaser shall have the responsibility to on or promptly following the Delivery Date deliver the Transfer Certificate and the Transfer Certificate Stock Power to Twinlab, requesting that Twinlab accordingly mark the Transfer Certificate “Cancelled,” and issue and deliver to the Purchaser a duly-executed Twinlab share certificate, free of restrictive legend, registered in the Purchaser’s name representing the Unrestricted Shares (and, if applicable, to issue and deliver to Capstone a duly-executed Twinlab share certificate registered in Capstone’s name representing the remainder shares). The parties agree to take all reasonable efforts to cause Twinlab to take such requested actions.

2.                  Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to Capstone that each of the following statements is true and correct as of the date of this Agreement:

(a)               The Purchaser has all necessary power and authority to execute and deliver this Agreement and to carry out its provisions. All action on the Purchaser’s part required for the lawful execution and delivery of this Agreement has been taken. Upon its execution and delivery, this Agreement will be a valid and binding obligation of the Purchaser, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, and (ii) as limited by general principles of equity that restrict the availability of equitable remedies.

(b)               The execution and delivery by the Purchaser of this Agreement, and the consummation of the transaction contemplated hereby, will not (with or without due notice, lapse of time, or both) (i) conflict with or violate the provisions of any law or any judgment, decree, order, regulation, arbitration award or rule of any court or governmental authority; or (ii) conflict with, violate or result in a breach of the terms, conditions or provisions of, or constitute a default or result in the acceleration of any obligation under, or result in the cancellation or modification of, or permit termination of, any material agreement or instrument to which the Purchaser is a party or by which the Purchaser is bound (or, if the Purchaser is an entity, of the Purchaser’s charter documents).

(c)                The Purchaser is aware that the Units, the Options and the Restricted Shares have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and that the Options are and the Restricted Shares would be deemed to constitute “restricted securities” under Rule 144 promulgated under the Securities Act (“Rule 144”). The Purchaser also understands that the Options and the Restricted Shares are being offered and are being/would be sold pursuant to an

2

exemption from registration contained in the Securities Act based in part upon the Purchaser’s representations contained in this Agreement.

(d)               The Purchaser understands that the Options and the Restricted Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser is aware of the provisions of Rule 144, as in effect from time to time, which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the availability of certain current public information about Twinlab, the resale occurring following the required holding period under Rule 144, and the number of shares being sold during any three month period not exceeding specified limitations. The Purchaser acknowledges that it will not be allowed to tack Capstone’s holding period of the Options and/or the Restricted Shares to the Purchaser’s own holding period of the Restricted Shares for Rule 144 purposes.

(e)                The Purchaser acknowledges and agrees that the Options and the Restricted Shares are subject to restrictions on transfer set forth in Section 4 hereof.

(f)                 The Purchaser is obtaining/would obtain the Options and the Restricted Shares for investment purposes acting as a direct principal investor for the Purchaser’s own account and the Purchaser has no present intention of distributing or selling the Options and/or the Restricted Shares except as permitted under the Securities Act and applicable state securities laws.

(g)               The Purchaser has sufficient knowledge and experience in business and financial matters to evaluate Twinlab, its proposed activities and the risks and merits of this investment. The Purchaser has the ability to accept the high risk and lack of liquidity inherent in this type of investment.

(h)               The Purchaser has the capacity to protect its own interests in connection with the purchase of the Units, the Options and the Restricted Shares by virtue of its business or financial expertise.

(i)                 The Purchaser is an “accredited investor” as defined in the regulations under the Securities Act.

(j)                 The Purchaser has had an opportunity to review Twinlab’s SEC filings and to discuss Twinlab’s business, management and financial affairs with directors, officers and management of Twinlab. The Purchaser understands the significant risks of this investment.

(k)               The Purchaser acknowledges that there is only very light public trading in Twinlab common stock, and the quoted or bid/asked price of Twinlab common stock on the public market should not be taken as an indicator of the fair market value of Twinlab common stock nor as an indication that any substantial amount of (or any amount at all of) Twinlab common stock could be bought or sold by Capstone or the Purchaser on the public market at that or any other price.

(l)                 The Purchaser has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of legal counsel and financial and tax advisers before executing this Agreement and fully understands all provisions of this Agreement.

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(m)             The Purchaser has incurred no obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or any other similar payment in connection with this Agreement and will indemnify and hold Capstone harmless from any such payment alleged to be due by or through the Purchaser as a result of the action of the Purchaser or its agents.

3.                  Representations and Warranties of Capstone. Capstone hereby represents and warrants to the Purchaser that each of the following statements is true and correct as of the date of this Agreement:

(a)               Capstone has all necessary power and authority to execute and deliver this Agreement and to carry out its provisions. All action on Capstone’s part required for the lawful execution and delivery of this Agreement has been taken. This Agreement, when executed and delivered, will be a valid and binding obligation of Capstone enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, and (ii) general principles of equity that restrict the availability of equitable remedies.

(b)               The execution and delivery by Capstone of this Agreement, and the consummation of the transaction contemplated hereby, will not (with or without due notice, lapse of time, or both) (i) conflict with or violate the provisions of any law or any judgment, decree, order, regulation, arbitration award or rule of any court or governmental authority; (ii) conflict with, violate or result in a breach of the terms, conditions or provisions of, or constitute a default or result in the acceleration of any obligation under, or result in the cancellation or modification of, or permit termination of, any material agreement or instrument to which Capstone or Twinlab is a party or by which Capstone or Twinlab is bound; or (iii) conflict with or result in a breach of any provision of Twinlab’s articles of incorporation.

(c)                The sale of the Units, the Unrestricted Shares, the Options and the Restricted Shares hereunder is not and will not be subject to any rights of first offer or rights of first refusal that have not been properly waived or complied with as of the date of such sale.

(d)               Capstone has had an opportunity to review Twinlab’s SEC filings and to discuss Twinlab’s business, management and financial affairs with directors, officers and management of Twinlab.

(e)                Capstone acknowledges that there is only very light public trading in Twinlab common stock, and the quoted or bid/asked price of Twinlab common stock on the public market should not be taken as an indicator of the fair market value of Twinlab common stock nor as an indication that any substantial amount of (or any amount at all of) Twinlab common stock could be bought or sold by Capstone or the Purchaser on the public market at that or any other price.

(f)                 Capstone has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of legal counsel and financial and tax advisers before executing this Agreement and fully understands all provisions of this Agreement.

(g)               Capstone has incurred no obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or any other similar payment in connection with this Agreement and will indemnify and hold the Purchaser harmless from any such payment alleged to be due by or through Capstone as a result of the action of Capstone or its agents.

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(h)               To Capstone’s actual knowledge, the authorized capital stock of Twinlab is as set forth in Twinlab’s SEC filings and the outstanding capital stock of Twinlab is as set forth in Twinlab’s SEC filings.

(i)                 Assuming the accuracy of the Purchaser’s representations and warranties contained herein, the offer and sale of the Units, the Unrestricted Shares, the Options and the Restricted Shares to the Purchaser will be exempt from the registration requirements of the Securities Act, and will have been registered or qualified (or will be exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither Capstone nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any Units, Options, Restricted Shares or other shares of common stock of Twinlab to any person or persons so as to bring the sale of the Units, Options and the Restricted Shares by Capstone to the Purchaser within the registration provisions of the Securities Act or any state securities laws.

(j)                 When registered in the name of the Purchaser, the Unrestricted Shares and the Options will be (and, upon due exercise of the Options, the Restricted Shares would be) validly issued, fully paid and non-assessable, and will be free of any liens or encumbrances created by any action or inaction of Capstone; provided, however, that the Options and the Restricted Shares may be subject to restrictions on transfer under Section 4 hereof, or under state and/or federal securities laws at the time a transfer is proposed.

4.                  Restrictions on Transfer.

(a)               The Purchaser hereby agrees (for the benefit of Capstone and also for the benefit of Twinlab as an intended third party beneficiary) not to make any disposition of all or any portion of the (pre-detachment) Units, the Options and the Restricted Shares unless and until:

(i)                 There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or

(ii)               (A) The Purchaser shall have notified Twinlab of the proposed disposition and shall have furnished Twinlab with a detailed statement of the circumstances surrounding the proposed disposition, and (B) if reasonably requested by Twinlab, the Purchaser shall have furnished Twinlab with an opinion of counsel, reasonably satisfactory to Twinlab, that such disposition will not require registration of such shares under the Securities Act. It is expected that Twinlab will request opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances.

(b)               The Purchaser hereby acknowledges and agrees (for the benefit of Capstone and also for the benefit of Twinlab as an intended third party beneficiary) that Twinlab shall not be required (i) to transfer on its books any of the Restricted Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (ii) to treat as the owner of such Restricted Shares or to accord the right to vote or to pay dividends to any transferee to whom such Restricted Shares shall have been so sold or transferred in violation of any of the provisions set forth in this Agreement, and that Capstone shall not be required (iii) to transfer on its books any of the Options which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (iv) to treat as the owner of such Options or to accord the right to exercise such Options to any transferee to whom such

5

Options shall have been so sold or transferred in violation of any of the provisions set forth in this Agreement.

5.                  Restrictive Legends.

All certificates representing the Restricted Shares shall have endorsed thereon the following legends (or legends to a similar effect):

(a)               THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

(b)               Any legend required under applicable state securities laws.

6.                  Miscellaneous.

(a)               Twinlab Neutrality. The parties expressly acknowledge that Twinlab has not recommended to Capstone or to the Purchaser that Capstone or the Purchaser enter into this Agreement and the transaction contemplated hereby, is not guaranteeing or vouching for the performance of any party, is not making any representation or warranty or covenant to any party in connection with this Agreement, and wishes not to “take sides” between the parties or to undertake any duty to one party as against another. Twinlab is not a party to this Agreement (although it is an express third-party beneficiary of certain provisions of this Agreement) and is not bound by this Agreement. The purchase price for the Units, the Unrestricted Shares, the Options and the Restricted Shares was determined by arms-length negotiation between Capstone and the Purchaser.

(b)               Further Assurances. The parties agree to execute such further instruments and to take all such further action as may reasonably be necessary to carry out the intent of this Agreement.

(c)                Adjustments. For all purposes of this Agreement, the number, exercise price and type of Twinlab securities shall be appropriately adjusted for any Twinlab stock split, reverse stock split, stock dividend, recapitalization or reorganization occurring after the date of this Agreement.

(d)               Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or delivery by electronic mail or express courier, or three days after deposit with the United States Postal Service, with postage prepaid, addressed to the other party hereto at its address or electronic mail number hereinafter shown below its signature or at such other address as such party may designate by 10 days’ advance written notice to the other party hereto.

(e)                Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

(f)                 Successors and Assigns. Subject to the restrictions on transfer herein set forth, this Agreement shall inure to the benefit of and shall be binding upon the Purchaser, Capstone and their respective successors and assigns.

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(g)               Entire Agreement; Nonreliance. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and merges all prior or contemporaneous agreements or understandings, whether written or oral, with respect to the subject matter of this Agreement. No representations or warranties have been made to the Purchaser by Capstone (or by Twinlab or anyone else) or to Capstone by the Purchaser (or by Twinlab or anyone else) other than as expressly set forth in this Agreement, and each respective party hereby disclaims reliance on any representations or warranties or other statements which may have been made to it by the other party (or by Twinlab or anyone else) other than as expressly set forth in this Agreement.

(h)               Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the affected portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be interpreted as if such portions/provisions were so excluded and shall be enforceable in accordance with its terms.

(i)                 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Either or both parties may execute this Agreement by scanned signature in PDF format, and any such scanned signature, if identified, legible and complete, shall be deemed an original signature and each of the parties is hereby authorized to rely thereon.

(j)                 Amendment and Waiver. This Agreement may not be amended, modified, waived or terminated, except in writing.

(k)               Survival. The respective parties’ representations and warranties shall all survive the Payment Date and the Delivery Date and the consummation of the transaction contemplated by this Agreement.

(l)                 Pronouns. It is agreed that where applicable the singular shall be deemed to include the plural or vice versa, and pronouns with a masculine, feminine or neutral gender shall be deemed to include another appropriate gender.

(m)             Expenses. Each party shall pay all costs and expenses that it respectively incurs with respect to the negotiation, execution, delivery and performance of this Agreement.

(n)               Delays or Omissions; Waivers; Remedies. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by the other party under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on any party’s part of any breach, default or noncompliance under this Agreement or any waiver on such party’s part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, whether arising under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

IN WITNESS WHEREOF, the parties hereto have executed this Third-Party Investment Units Purchase Agreement as of the date first above written.

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CAPSTONE

Capstone Financial Group, Inc., a Nevada corporation

By: __________________________

Darin R. Pastor, Chief Executive Officer

Address: 8600 Transit Road

East Amherst, NY 14051

 

Email: [e-mail]

 

PURCHASER

________________________________________

Signature

Name: _______________________________

____________________________________

Signature

Name: _______________________________

SSN/FEIN:____________________________

SSN/FEIN:____________________________

Address:  _____________________________

____________________________________

Email:  ______________________________

 

 

 

 

 

 

 

 

8

EXHIBIT A

FORM OF OPTION AGREEMENT

 

 

 

THE SECURITIES REPRESENTED BY AND UNDERLYING THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (A) SUCH TRANSFER IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT, THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS.

 

OPTION AGREEMENT TO PURCHASE THIRD-PARTY COMMON STOCK

Issue Date_______ __, 2015

THIS OPTION AGREEMENT CERTIFIES THAT, for value received, __________ (“Holder”) is entitled to purchase from Capstone Financial Group, Inc., a Nevada corporation (“Capstone”), up to _____ validly-issued, fully-paid and nonassessable shares of the common stock (the “Restricted Shares”) of Twinlab Consolidated Holdings, Inc., a Nevada corporation (“Twinlab”), at an exercise price of $1.00 per Restricted Share (the "Option Price"), all as may be adjusted from time to time pursuant to Section 3 of this Option, subject to the provisions and upon the terms and conditions set forth of this Option.

1.                  TERM. This Option is exercisable, in whole or in part at any time commencing on the Issue Date and ending on the third anniversary of the Issue Date, and the Option shall terminate upon such third anniversary of the Issue Date; provided, that if before such third anniversary Twinlab or its business is acquired for or at a value of less than $1.00 per share of Twinlab common stock, the Option shall terminate immediately upon such acquisition.

2.

EXERCISE.

(a)   Method of Exercise. Holder may exercise this Option by delivering this original Option and a duly executed Notice of Exercise in substantially the form of Appendix 1, attached hereto and incorporated herein by this reference, to the principal office of Capstone. Holder shall also deliver to Capstone payment by wire transfer of immediately available United States funds to an account designated by Capstone or by check for the aggregate Option Price for the Restricted Shares being purchased. Exercise shall not be deemed effective unless and until each of the original Option, the duly executed Notice of Exercise and the Option Price payment have been received by Capstone.

(b)               Delivery of Certificate and New Option. Promptly after (but within five business days after) Holder exercises this Option, Capstone shall deliver to Holder certificates for the Restricted Shares acquired and, if this Option has not been fully exercised and has not expired, a new Option of like tenor representing the Restricted Shares not so acquired.

(c)                Replacement of Options. On receipt of evidence reasonably satisfactory to Capstone of the loss, theft, destruction or mutilation of this Option and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to Capstone or, in the case of mutilation, on surrender and cancellation of this Option, Capstone at its expense shall execute and deliver, in lieu of this Option, a new Option of like tenor.

3.

ADJUSTMENT TO THE RESTRICTED SHARES.

 

(a)               Stock Dividends, Splits, Reverse Splits. If Twinlab subdivides or combines its outstanding common stock into a greater or lesser amount of common stock, or pays a dividend of common stock on common stock, then upon exercise of this Option, for each Restricted Share acquired, Holder shall receive, without extra cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Restricted Shares of record as of the date the subdivision, combination (reverse split) or stock dividend occurred. The Option Price shall be adjusted accordingly.

(b)   Reclassification, Exchange or Substitution. Upon any reclassification exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise of this Option, or any reorganization, consolidation, or merger of Twinlab or any sale, conveyance or other disposition of all or substantially all of the property or business of Twinlab, Holder shall be entitled to receive, upon exercise of this Option, the number and kind of securities and property that Holder would have received for the Restricted Shares if this Option had been exercised immediately before such reclassification, exchange, substitution, or such reorganization, consolidation or merger, or such sale, conveyance or other disposition. Capstone shall promptly issue to Holder, in exchange for this Option Agreement, a new replacement Option for such new securities or other property. The new Option shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 3 including, without limitation, adjustments to the Option Price and to the number of securities or property issuable upon exercise of the new Option. The provisions of this Section 3(b) shall similarly apply to successive reclassifications, exchanges, substitutions, or to successive reorganizations, consolidations or mergers, or successive sales, conveyances or other dispositions of all or substantially all of the property or business.

(c)    Fractional Shares. No fractional Restricted Shares shall be issuable upon exercise or conversion of the Option and the number of Restricted Shares to be issued shall be rounded down to the nearest whole Restricted Share. If fractional share interest arises upon any exercise or conversion of the Option, Capstone shall eliminate such fractional share interest by paying Holder an amount computed by multiplying the fractional interest by the fair market value of a full Restricted Share.

(d)               Certificate as to Adjustments. Upon each adjustment of the Option Price or the number of Restricted Shares issuable upon the exercise of the Option, Capstone at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. Capstone shall, upon written request, furnish Holder a certificate setting forth the new number of Restricted Shares issuable under the Option, and if necessary, the Option Price in effect upon the date thereof and the series of adjustments leading to such change in the number of Restricted Shares issuable under the Option and/or in the Option Price.

4.

MISCELLANEOUS

(a)   Third-Party Investment Units Purchase Agreement. This Option is issued pursuant to, and is subject to the terms and conditions of, and the Restricted Shares issuable upon the exercise of this Option shall be subject to the terms and conditions of, a Third-Party Investment Units Purchase Agreement entered into on or shortly before the Issue Date between Capstone and Holder.

(b)   Twinlab Is Not a Party. Holder, by acceptance of this Option, acknowledges that Twinlab is not a party to this Option and has no contractual obligations with respect to this Option.

(c)    Securities-Law Status. Holder, by acceptance of this Option, acknowledges that the Restricted Shares have not been registered under the Securities Act of 1933, are “restricted securities” under the Securities Act of 1933 and shall bear a customary securities-law restrictive legend, and cannot be transferred by Holder except upon registration thereof under the Securities Act of 1933 or an exemption from such registration.

(d)   Transfer of Option. Until actual delivery to Capstone’s principal office of this original Option accompanied by a duly endorsed instrument of transfer in a form reasonably acceptable to Capstone, Capstone may treat Holder as the sole record and beneficial holder of the Option for all purposes whatsoever, regardless of any notice given or received to the contrary.

(e)                No Rights as Shareholder Until Exercise. This Option does not entitle Holder to any voting rights or other rights as a stockholder of Twinlab before the Restricted Shares have been issued of record to Holder, which might not occur until the fifth business day after the exercise hereof.

(f)                 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed email if sent during normal business hours of the recipient, if not, then on the next business day; (c) three business days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to Capstone at its principal place of business or to Holder at Holder’s address as shown in Capstone’s records, or to such other address as such party may designate by ten days’ advance written notice to the other.

(g)               Amendment and Waiver. Any term of this Option may be amended or waived only with the written consent of Capstone and the holder of the Option. Any amendment or waiver effected in accordance with this Section shall be binding upon Capstone, such holder and each and every transferee of the Option or Restricted Shares.

(h)               Governing Law. This Option shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to its principles regarding conflicts of law.

IN WITNESS WHEREOF, Capstone has executed this Option Agreement as of the date first above written.

CAPSTONE FINANCIAL GROUP, INC.

By: __________________________

Darin R. Pastor, Chief Executive Officer

Address: 8600 Transit Road

East Amherst, NY 14051

 

Email: [e-mail]

 

PURCHASER

________________________________________

Signature

Name: _______________________________

____________________________________

Signature

Name: _______________________________

SSN/FEIN:____________________________

SSN/FEIN:____________________________

Address:  _____________________________

____________________________________

Email:  ______________________________

 

 

 

 

 

 

 

 

APPENDIX 1

NOTICE OF EXERCISE

 

1. The undersigned hereby elects to purchase from Capstone Financial Group, Inc. _____ shares of Common Stock of Twinlab Consolidated Holdings, Inc. pursuant to the terms of the attached Option, and tenders herewith payment of the purchase price of such shares in full.

2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below:

_______________________

(Name)

 

________________________

(Address l)

 

________________________

(Address 2)

3. Said shares are “restricted securities” under the Securities Act of 1933 and shall bear a customary securities-law restrictive legend. The undersigned represents the undersigned is acquiring the shares solely for the undersigned’s own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws.

 

 

 

____________________________

(Signature)

____________________________

(Date)

 

Prepayment and Repurchase agreement

This PREPAYMENT AND REPURCHASE Agreement (the “Agreement”) is made and entered into as of June 26, 2015, by and between Thomas A. Tolworthy (“Tolworthy”) and Capstone Financial Group, Inc. (“Capstone”).

On November 14, 2014, Capstone loaned $600,000 to Tolworthy, against his unsecured promissory note with a principal balance of $600,000 (the “Note”); the Note bears simple interest at 5% per annum and all principal and accrued interest are due and payable in one lump sum on December 29, 2015. Tolworthy has informed Capstone that he considers it to be in his personal best interest to prepay the Note, and he has proposed to Capstone that he satisfy the Note by an immediate payment of $400,000 cash plus the surrender to Capstone of 200,000 shares of Capstone common stock owned by him (the “Shares”). Capstone finds it to be in its best interest to have the Note so prepaid now, on the terms and conditions set forth in this Agreement.

Simple interest at 5% per annum on $600,000 for 224 days (November 14, 2014 to June 26, 2015) is $18,411, and accordingly the indicated surrender value of the Shares to be surrendered is approximately $1.092 per share.

Pursuant to the terms of this Agreement, Tolworthy hereby agrees to prepay the Note in full by an immediate payment of $400,000 cash plus the surrender to Capstone of the Shares, and Capstone hereby agrees to accept such payment and surrender as satisfaction in full of the Note. In addition to the immediate payment of the $400,000 cash (via wire transfer to one or more accounts designated by Capstone) upon execution and delivery of this Agreement, Tolworthy hereby agrees to deliver to Capstone, within three business days after the date hereof, the share certificate representing the Shares, accompanied by a duly executed stock power (with Medallion guaranty stamp) surrendering all of the Shares to Capstone. Time is of the essence. Capstone shall thereupon cancel the Note and return it to Tolworthy.

 

Tolworthy represents and warrants that he owns the Shares free and clear of all liens, claims and encumbrances. Tolworthy has not transferred or assigned any right, title or interest in the Shares to any other person or entity. Tolworthy makes no other representations or warranties in respect of the Shares.

Capstone makes no representations or warranties in respect of the Shares or their value. Tolworthy has had an opportunity to discuss Capstone’s business, management and financial affairs and the status and prospects of Capstone, with directors, officers and management of Capstone. Tolworthy is satisfied with his investigation as to an appropriate surrender price for the Shares. Tolworthy understands the significant risks of surrendering the Shares and forgoing any possible future appreciation. Tolworthy acknowledges that he is a highly sophisticated businessman and investor, with substantial experience in the purchase and sale of securities.

This Agreement cannot be amended except by an express written amendment signed by all the parties.

1

This Agreement contains the entire agreement of the parties hereto with respect to the subject matter of this Agreement, and supersedes any and all prior and contemporaneous commitments, undertakings and agreements, whether written or oral, with respect to the subject matter hereof. The parties acknowledge that each party has not relied, in deciding whether to enter into this Agreement (on this Agreement’s expressly stated terms and conditions), on any representations, warranties, covenants, undertakings, commitments, promises or agreements, which are not expressly set forth within this Agreement.

This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Any action brought by any party to interpret or enforce any provision of this Agreement must be brought in, and each party agrees to and does hereby submit to the exclusive jurisdiction and venue of, the appropriate state or federal courts located in New York City, New York.

Each party agrees to execute and perform such other documents and acts as are reasonably required in order to facilitate the terms of this Agreement and the intent thereof, and to cooperate in good faith in order to effectuate the provisions of this Agreement.

 

This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. A signature page delivered by e-mail shall be deemed an original.

 

IN WITNESS WHEREOF, each party has signed this Prepayment and Repurchase Agreement as of the date first set forth above.

 

CAPSTONE:

 

CAPSTONE FINANCIAL GROUP, INC.

 

 

By: _/s/ Darin R. Pastor____________________________

Name: Darin R. Pastor

Title: Chief Executive Officer

 

TOLWORTHY:

 

_/s/ Thomas A. Tolworthy__

THOMAS A. TOLWORTHY

 

 

 

 

 

2

 

EXHIBIT 31.1

CERTIFICATION

 

I, Darin Pastor, certify that:

 

1.	I have reviewed this Quarterly Report on Form 10-Q of Capstone Financial Group, Inc. (the “Company”);

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4.

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

c.

Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: August 13, 2015

 

		/s/ Darin Pastor
		Darin Pastor
		Chief Executive Officer

 

EXHIBIT 31.2

 

CERTIFICATION

 

I, Halford W. Johnson, certify that:

 

1.	I have reviewed this Quarterly Report on Form 10-Q of Capstone Financial Group, Inc. (the “Company”);

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4.

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

c.

Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

b..

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: August 13, 2015

		/s/ Halford W. Johnson
		Halford W. Johnson
		Chief Financial Officer

 

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Capstone Financial Group, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Darin Pastor, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: August 13, 2015		/s/ Darin Pastor
		Darin Pastor
		Chief Executive Officer

 

 

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Capstone Financial Group, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Halford W. Johnson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: August 13, 2015		/s/ Halford W. Johnson
		Halford W. Johnson
		Chief Financial Officer