UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 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)
(866) 798-4478
(Registrant's telephone number, including area code)
Copies of Communications to:
Stradling Yocca Carlson & Rauth, P.C.
4365 Executive Drive
Suite 1500
San Diego, CA 92121
(858) 926-3000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
| 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 Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2015 was $17,009,495, based on the share price of $1.10.
The number of shares of Common Stock, $0.001 par value, outstanding as of March 24, 2016 was 94,364,148 shares.
No annual report to security holders, proxy or information statement, or prospectus is incorporated by reference into this Annual Report on Form 10-K.
CAPSTONE FINANCIAL GROUP, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2015
Index to Report on Form 10-K
| PART I | Page | |
| Item 1. | Business | 1 |
| Item 1A. | Risk Factors | 8 |
| Item 1B. | Unresolved Staff Comments | 17 |
| Item 2. | Properties | 17 |
| Item 3. | Legal Proceedings | 17 |
| Item 4. | Mine Safety Disclosures | 17 |
| PART III | ||
| Item 10. | Directors, Executive Officers and Corporate Governance | 31 |
| Item 11. | Executive Compensation | 33 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 35 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 36 |
| Item 14. | Principal Accounting Fees and Services | 37 |
| PART IV | ||
| Item 15. | Exhibits, Financial Statement Schedules | 38 |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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: Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “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 this Annual Report on Form 10-K, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A and those discussed in other documents we file with the Securities and Exchange Commission (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.
PART I
Organization
We (as used herein, “we,” “our,” “Capstone” and “the Company” mean Capstone Financial Group, Inc. unless the context indicates otherwise) were incorporated in Nevada on July 10, 2012 as Creative App Solutions, Inc. On August 23, 2013, we amended our articles of incorporation and changed our name to Capstone Financial Group, Inc.
In August and September 2013, Darin Pastor and George Schneider obtained from our then controlling stockholder, for nominal consideration, 80,000,000 (post-split) shares of common stock amounting to approximately 89% of our then outstanding common stock, and they became our two senior officers. Mr. Pastor continues to own a substantial majority of our common stock, is our chief executive officer and chairman, and is the controlling person of the Company.
In September 2013, we effectuated a 20-for-1 forward split of the Company’s issued and unissued common stock. By virtue of the forward split, the number of shares issued and outstanding increased to 90,200,000, and the number of authorized common shares increased from 100,000,000 to 2,000,000,000.
| -1- |
General Business Development
Our current business focus is to invest in stock 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. (Throughout 2012, we had not commenced significant operations and, in accordance with ASC Topic 915, we were considered a development stage company. During 2013, we exited the development stage.)
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.
On May 14, 2014, we effectively unwound the Affluent 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 “Call Options”) from 14 shareholders in a private transaction, for nominal consideration. The Call Options exercise price is $0.0001 per share and the Call Options expire in 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.
| -2- |
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”). The Series A Warrant and the Series B Warrant were both exercisable from October 2014 through October 2017.
Twinlab and we 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 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 be $0.775. We did not exercise the “Minimum Amount” of shares per the agreement. In April 2015 we exercised the Series A Warrant as to 657,895 Twinlab shares.
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 December 31, 2015, the outstanding principal amount of and accrued interest on such assumed notes was $68,416. In addition, as part of the transaction we forgave the $1,089,617 net receivable from Darin Pastor under the crossing lines of credit entered into between Affluent and us in 2013, and the crossing lines of credit were cancelled. As a result of the October 28, 2014 transactions, we recorded an expense item of $1,089,617 and we were deemed to have paid a dividend to Darin Pastor in the amount of $1,484,204.
In November 2014, we sold 436,681 of our Twinlab shares for approximately $1.0 million.
In 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 and the call option was valued at $0.156 per call option. (Our references to “unrestricted” shares mean free-trading shares, and our references to “restricted” shares mean shares that are not free-trading.)
In addition, in 2015 we sold 2,078,255 Twinlab shares (without any associated Third-Party Call Options) for $1,579,480.
In total, during 2015 we sold Twinlab securities for $4,601,732.
| -3- |
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 could not exercise a Contingent Call Option unless it had 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 (the “Noncircumvention Provision”); 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. |
| -4- |
As a result of these two agreements, our investment position in Twinlab as of immediately after the two agreements was as follows:
| - | We had 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 2015 (i.e., after May 28, 2015) we sold an additional 1,749,307 unrestricted, free-trading Twinlab shares and 328,948 restricted Twinlab shares to accredited investors. - 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. |
| - | Our obligations to our accredited-investor counterparties under the 3,976,647 Third-Party Call options continued unchanged. |
| - |
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 then 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. o 1,342,105 of such warrants expired on November 30, 2015. o An additional 4,000,000 of such warrants expired on March 31, 2016. |
| - | 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. - As noted below, the Contingent Call Options were eliminated on October 1, 2015. |
| -5- |
On July 5, 2015, Twinlab and we entered into an Agreement for Limited Waiver of Noncircumvention Provision (the “Limited Waiver Agreement”), pursuant to which we agreed to waive the Noncircumvention Provision as to a particular potential investor (B. Thomas Golisano) whom we had introduced to Twinlab in June 2015 and to whom the Noncircumvention Provision would otherwise apply, in exchange for substantial compensation in cash and Twinlab warrants calculated on the basis of the size and pricing of such investor’s purchase(s) of Twinlab securities.
On October 1, 2015, Twinlab and we entered into an Amendment No. 1 to Agreement for Limited Waiver of Non-Circumvention Provision and to Compromise Agreement and Release, pursuant to which the Limited Waiver Agreement was amended to remove our right to any compensation for the waiver of the Noncircumvention Provision as to B. Thomas Golisano and his affiliates, and the Compromise Agreement and Release was amended to eliminate the three Contingent Call Options.
As of December 31, 2015 our position in Twinlab securities was as follows, and we had no contingent liabilities to Twinlab:
| - | We held 13,056,207 outstanding Twinlab shares (12,069,365 unrestricted, free-trading Twinlab shares and 986,842 restricted Twinlab shares). |
| - | We held 16,000,000 warrants under the Series B Warrant, at a $0.76 per share exercise price, with various effective expiration dates throughout 2016. |
| o | 4,000,000 of such warrants expired on March 31, 2016. |
| - | The Registration Rights Agreement remains in full force and effect to enable the Securities Act registration of all Twinlab shares issued upon prior or future exercises of our Warrants. |
| - | We have a claim against third-party optionors for delivery to us of 1,498,500 Twinlab shares against the Call Options which they granted to us and which we have exercised. |
| - | We are contingently obligated to our accredited-investor counterparties under the 3,976,647 Third-Party Call options. |
| - | We have no actual or potential Put liability or Contingent Call Option liability. |
At December 31, 2015, the fair value of the liability under the 3,976,647 Third-Party Call Options was recorded on our balance sheet at $619,122.
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 we have treated the transaction as a non-event for financial reporting purposes. On December 18, 2015, we terminated the sale contract.
| -6- |
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.
In addition, we are working toward substantial energy-related development projects and substantial international minerals trading projects. We can give no assurance that such projects will come to fruition or, if any one or more of them do come to fruition, that they will be successful.
We continuously investigate possible acquisitions of positions in new businesses, securities and assets, and evaluate the retention and disposition of our existing holdings. Changes in the mix of our businesses and investments should be expected. We have in the past taken preliminary steps toward acquisitions and investments in various companies, which transactions were never completed, and we have made an unsuccessful investment (in Blackcraft Cult, Inc. common stock) which we continue to hold but have written down to a zero valuation.
Current Strategic Investment: Twinlab Consolidated Holdings Inc.
Twinlab Corporation has been the trusted leader for innovative, high performance health and wellness products since 1968. In addition to the extensive line of vitamins, minerals and sports nutrition formulas of its namesake brand, Twinlab Corporation also manufactures and sells other category leaders, including the Metabolife line of diet and energy products, the Reserveage Nutrition family of nutritional supplements, and Alvita teas. Twinlab Corporation’s plant in American Fork, Utah, is a NSF® GMP registered facility from which it manufactures, packages and distributes over 1,000 premium quality products. Twinlab Corporation also operates a research and development facility in Grand Rapids, Michigan. Twinlab products are currently available in over 55 countries worldwide.
Twinlab Consolidated Holdings, Inc., the parent company of Twinlab Corporation, has been established to act as a consolidator in the highly fragmented nutrition segment of the health and wellness industry. Using Twinlab Corporation’s assets and the expertise and experience of its management team, Twinlab intends to capitalize on current market imbalances by combining multiple companies and operations into one larger, cohesive entity. Twinlab believes that the resulting synergies in distribution, manufacturing, advertising and global marketing would increase market share and maximize profitability, establishing Twinlab as a market leader.
Competition
A large number of entities compete with us to make the types of investments that we target as part of our business focus. We compete for such investments with a large number of venture capital funds, private equity firms, mutual funds, pension and other institutional investors, investment banks and advisory firms with managed assets. Many of our competitors are substantially larger than us and have considerably greater financial, research, technical, marketing and reputational resources than we do.
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There can be no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations. Also, as a result of this competition, we may not be able to take advantage of certain attractive investment opportunities, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.
Personnel
As of the date of this filing, we have four full-time employees.
Available Information
We electronically file annual, quarterly and other reports and other information with the United States Securities and Exchange Commission (the “SEC”). You can read these SEC filings and reports over the Internet at the SEC's website at www.sec.gov or on our website at www.capstonefinancialgroupinc.com. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt of a written request to us at Capstone Financial Group, Inc., 8600 Transit Road, East Amherst, NY 14051.
RISK FACTORS
This item is not applicable, as we are classified as a smaller reporting company. To better inform the readers of this Annual Report on Form 10-K, however, we provide the following limited disclosures.
In the course of conducting our business operations, we are exposed to a variety of risks that are inherent to the business and financial services industry. The following paragraphs discuss some of the key inherent risk factors that could affect our business and operations, as well as other risk factors which are particularly relevant to us. Other factors besides those discussed below or elsewhere in this report also could adversely affect our business and operations, and these risk factors should not be considered a complete list of potential risks that may affect us.
We recently changed our business focus.
Since March 2014, our business focus has been to use our own capital to acquire the outstanding stock of other companies.
During the third quarter of 2013, we had refocused ourselves as a financial services company.
We were initially formed to design and sell mobile apps for smart phones and other mobile platforms such as tablets, but we never launched an active business based on this focus.
We have a limited business history, especially in regard to our current business focus.
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It is possible that our business focus could widen or change further. In the second half of 2015 and in 2016 we have explored significant transactions in the areas of energy products refining and international minerals trading.
We may need additional capital in the future to finance our operations, which we may not be able to raise -- or it may only be available on terms unfavorable to us and or our stockholders.
We do not have substantial liquid capital resources. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our business or otherwise respond to competitive pressures would be significantly limited.
Our management has concluded that our internal control over financial reporting is not effective. Material weaknesses in our internal control over financial reporting could cause our financial reporting to be unreliable and could lead to misinformation being disseminated to the public. We have had to restate our financial statements and amend certain of our SEC reports.
Our management concluded that as of December 31, 2015 our internal control over financial reporting was not effective, and that material weaknesses existed in the following areas as of December 31, 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 | |
| (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. |
Ineffectiveness of and material weaknesses in our internal controls could result in our financial reporting being unreliable and lead to misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision. Errors in financial reporting might subject us to lawsuits. Moreover, if investors do not have confidence in our financial reporting, they may be relatively unwilling to buy or hold our stock, which could negatively affect our stock price and our access to capital.
| -9- |
Our Board of Directors concluded on November 13, 2014 that the audited financial statements and other financial information contained in our Annual Report on Form 10-K for the 2013 fiscal year failed to properly account for certain financial information and that for comparative purposes the previously issued unaudited financial statements and certain other financial information contained in certain previously-filed periodic reports should no longer be relied upon. We reported this conclusion on a Form 8-K filed with the SEC that day. Since then, we have filed amended quarterly and annual reports (Forms 10-Q/10-K) with the SEC for the fiscal quarters ended March 31, June 30 and September 30, 2014 and the fiscal year ended December 31, 2013 including (among other things) restatements of the originally-filed financial statements.
We may not be able to add and retain the key personnel we need to sustain and grow our business.
We are thinly staffed and we expect that we will need to add qualified personnel in order to expand our business. Currently we are heavily dependent on the services of Darin Pastor, our Chairman/chief executive officer. We face intense competition for qualified employees from many companies in our industry who have greater resources than we do to identify, recruit and retain valued employees.
Our performance is highly dependent upon our ability to attract, retain, and motivate highly skilled, talented employees. Given our relatively small size, the performance of our business may be especially adversely affected if we cannot do so.
Our common stock currently has low trading volume and any sale of a significant number of shares is likely to depress the trading price.
Our common stock is quoted on the OTCQB marketplace operated by OTC Markets Group Inc. To date, the trading volume of the common stock has been limited. Because of this limited trading volume, holders of our securities may not be able to sell quickly any significant number of such shares, and any attempted sale of a large number of our shares will likely have a material adverse impact on the price of our common stock. Because of the limited number of shares being traded, the price per share is subject to volatility and may continue to be subject to rapid price swings in the future.
| -10- |
If the trading price of our common stock is below $5.00 per share it will be deemed a low-priced “penny” stock and an investment in our common stock should be considered high risk and subject to marketability restrictions.
If our common stock becomes/remains a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act, it will be more difficult for investors to liquidate their investment in the common stock. Until the trading price of the common stock rises above $5.00 per share, if ever, trading in the common stock is subject to the penny stock rules of the Securities Exchange Act specified in Rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting transactions in any penny stock, to:
| · | Deliver to the customer, and obtain a written receipt for, a disclosure document; |
| · | Disclose certain price information about the stock; |
| · | Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer; |
| · | Send monthly statements to customers with market and price information about the penny stock; and |
| · | In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with information specified in the rules. |
Consequently, the penny stock rules may restrict the ability or willingness of broker-dealers to sell the common stock and may affect the ability of holders to sell their common stock in the secondary market and the price at which such holders can sell any such securities. These additional procedures could also limit our ability to raise additional capital in the future.
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Association (FINRA) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Before recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
| -11- |
Two individuals hold a majority of our outstanding voting securities and they can, without the votes of any other stockholders, elect all directors who in turn elect all officers.
Our Chief Executive Officer Darin Pastor and our President George Schneider collectively own a substantial majority of our outstanding voting securities and are the only members of our Board of Directors and, accordingly, have effective control of us and may have effective control of us for the near and long term future. Votes and wishes of other stockholders can have little effect when we are managed by our Board of Directors and operated through our officers, all of whom can be elected by these two individuals.
We have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause our stockholders’ investment to be diluted.
Our articles of incorporation authorize the Board of Directors to issue up to 2,000,000,000 shares of common stock and 10,000,000 shares of preferred stock. The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to shareholder approval. Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting one’s investment.
We do not expect to pay dividends to our stockholders in the near future.
We do not expect to declare or pay any dividends on our common stock in the foreseeable future. The declaration and payment in the future of any cash or stock dividends on the common stock will be at the discretion of our Board of Directors.
We may be subject to additional regulatory requirements.
We are not registered as an investment company under the Investment Company Act of 1940. Although our management believes we are not required to register under that Act, the consequences of being required to register and not having done so would be seriously adverse for our business. In addition, if we registered as an investment company under the Investment Company Act of 1940, we would be subject to additional regulatory requirements thereunder which would impose cost and other burdens on our business.
Our success depends, in significant part, on the results of the companies in which we invest.
Our ability to achieve our business objectives will depend on our ability to effectively manage and deploy our capital, which will depend, in turn, on our management’s ability to identify, evaluate, invest in, and monitor companies that meet our investment criteria. If a major investment has business setbacks it would adversely affect our financial results. Currently we depend heavily on Twinlab. Twinlab, for its part, is subject to very significant risks. Among many other examples of risks, on March 16, 2016 Twinlab replaced much of its senior management team, including its chief executive officer.
| -12- |
Many firms compete with us for investment opportunities, and they may have the ability to outcompete us.
A large number of entities compete with us to make the types of equity investments that we target as part of our business focus. We compete for such investments with a large number of venture capital funds, private equity firms, mutual funds, pension and other institutional investors, investment banks and advisory firms with managed assets. Many of our competitors are substantially larger than us and have considerably greater financial, research, technical, marketing and reputational resources than we do. As a result of this competition, we can offer no assurance that we will be able to make investments that are consistent with our investment objective.
Our stockholders will not necessarily have the opportunity to evaluate our strategic investments or trading positions.
We have only recently begun to identify potential strategic investments and to trade positions we have acquired. Stockholders will not necessarily be able to evaluate the economic merits, transaction terms or other financial or operational data concerning our strategic investments and trading positions; often these things will not be fully available to the public. You must rely on us and our board of directors to implement our trading policies, to evaluate our investment and trading opportunities and to structure the terms of our strategic investments.
Our stockholders must depend on our Board of Directors for their decisions concerning our strategic investments.
Our Board of Directors makes all decisions regarding the acquiring, holding, and partial or complete disposition of our strategic investments. You may not agree with the decisions they reach. In addition, because we have only two Directors, any disagreement between them could result in a deadlock.
Our due diligence investigation of prospective investee companies may fail to uncover relevant details that lead to a partial or total loss of the strategic investment.
Our access to information about our current and prospective investee companies and their businesses may be limited or imperfect. Even where issuers file public reports with the SEC, such reporting cannot guarantee the identification or accuracy of relevant success factors for a company.
| -13- |
A significant portion of our trading positions will be recorded at fair value as determined in good faith by our board of directors (rather than at public-trading-market value) and, as a result, there may be uncertainty as to the true value of our strategic investments and trading positions.
We carry our strategic investments at market value or, if there is no readily available market value, at fair value as determined by our board of directors in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the accounting and financial reporting conventions of the investment company industry. Typically, there is not a liquid public market for the securities of the companies in which we intend to invest. Where a liquid public market exists we would simply use market value, but where there is no public market or where the public market is illiquid (with the result that the reported public trading is not a reliable indicator of true value), we will value these securities quarterly at fair value as determined in good faith by our board of directors.
Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our determinations of the fair value of our trading positions on a given date may be materially understated or overstated compared to the value that we may ultimately realize upon the sale of those positions. Indeed, our determinations might be inaccurate even as of the determination date.
There is no guarantee that we will be able to realize the fair value as evaluated by our Board of Directors upon disposition of the asset.
Given that a large percentage of our assets and net income are based on our fair value figures for Twinlab securities, readers should be especially aware of the risk.
The determination of the fair value of our Twinlab stock and derivative securities as of December 31, 2015 is highly significant to our balance sheet and our income statement. In determining the fair value, our Board of Directors relied upon a valuation report dated March 2, 2016 by FFG Valuations, Inc. of Costa Mesa, California. This valuation report, which we commissioned, values Twinlab common stock at $0.758 per share as of December 31, 2015. Twinlab stock is essentially illiquid; accordingly, valuations such as FFG’s are opinions, and other observers might have valued Twinlab stock differently if they chose to emphasize other factors than FFG did. For example, Twinlab issued significant numbers of shares in the second half of 2015 at prices well below $0.758 per share. If we used in our 2015 financial statements a valuation of Twinlab stock (as of December 31, 2015) which was well below $0.758 per share, with corresponding valuations for our Twinlab derivative securities, our net assets as of December 31, 2015 would have been significantly reduced and we would have had significantly larger net losses in 2015.
| -14- |
Our strategic investments may be subject to practical limitations and/or legal restrictions on resale, and we may not be able to sell the positions we hold when we wish to for amounts equal to their recorded value, if at all.
Some of our strategic investments may be or become comprised of thinly traded public companies or remain private companies, resulting in their being illiquid. Also, at any given time a substantial portion of our current strategic investments and trading positions may be subject to legal restrictions on resale. We cannot assure you that we will be able to sell our positions for amounts equal to the values that we have ascribed to them or at the time we desire to sell.
Our strategic investments in private companies and/or in “thinly traded” public companies are extremely risky, and we could lose all our part of our investment.
Many uncontrollable factors within such companies and in their environments, as well as their typically limited resources, result in stability risk. When we invest in such companies, we inherently assume a high degree of risk without the ability to mitigate such risk.
Our investments are not diversified among various asset classes; to date, our strategic investments are in equities of illiquid private and thinly traded public companies.
Our entire portfolio is invested in this extremely risky asset class. Investing in any single asset class (let alone one which itself is risky) deprives us of the risk mitigation which could be provided by investing in a portfolio which is diversified among several asset classes. Some of our strategic investments may never develop a liquid public market.
A lack of diversification (even within our single asset class) increases risk of loss.
We hold strategic investments in only a few companies and therefore we cannot gain the risk mitigation benefits of portfolio diversification. We do not have the resources to materially increase the number of our strategic investments. The absence of diversification creates concentration in all risk variables associated with these positions.
Equity positions in strategic investments do not provide the degree of security associated with lending.
Equity investments, particularly in illiquid, leveraged and/or untested companies such as our current strategic investments, are very high risk. Equity investments have no contractual right of repayment, no guarantees, and no collateral. Our business model is based upon making equity investments.
We may not realize any dividend or capital gain return from our individual strategic investment or trading positions.
The companies comprising our trading positions may all fail and cause a total loss of our investment. In addition, our investee companies typically would not be expected to pay dividends to their stockholders.
| -15- |
We generally will not control companies comprising our strategic investments.
We do not expect to control most of the companies that will comprise our future strategic investments, even in any cases in which we have board representation or board observation rights. As a result, we will be subject to the risk that a company in which we take a position may make business decisions with which we disagree and the management of such company may take risks or otherwise act in ways that do not serve our interests as investors. As a result, a company in which we take a position may make decisions that could decrease the value of that position. Our strategic investments may be relatively illiquid, and we may not be able to dispose of our positions as readily as we would like, at optimal times, or at an appropriate valuation.
Our lack of control over the management of a company comprising one of our strategic investments could leave us at risk that the management could make decisions or engage in activities that decrease or destroy the value of that strategic investment.
Even though we hope to work closely and constructively with management and boards of the companies that comprise our trading positions, there is no guarantee the management and boards of these companies will heed our advice or act as we would wish. Therefore, decisions or activities by the management of such a company can adversely affect the value of our strategic investment.
Our decision to file reports using the reduced disclosure requirements applicable to emerging growth companies and/or smaller reporting companies may make our common stock less attractive to investors.
We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Many of the exemptions available for emerging growth companies are also available to smaller reporting companies (generally, those having less than $75 million of common stock held by non-affiliates); we qualify as a “smaller reporting company.”
We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be reduced and/or be more volatile.
| -16- |
UNRESOLVED STAFF COMMENTS
This item is not applicable, as we are classified as a smaller reporting company.
PROPERTIES
We are the lessee of 17,335 square feet of space in an office building at 8600 Transit Road, East Amherst, NY 14051, our headquarters office. The lease extends to October 31, 2025. Base rent is $23,113 per month (plus additional rent of $4,898 per month and $639 per month for amortized build-out costs) through April 30, 2016 (following a free base-rent period ending October 31, 2015), with annual 3% monthly base rent increases on each April 30 from 2016 through the end of the lease term.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
MINE SAFETY DISCLOSURES
Not applicable.
| -17- |
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the OTCQB marketplace operated by OTC Markets Group Inc., under the symbol “CAPP”. The following table lists the available quotations for the high and low prices for each quarter within the fiscal years ending December 31, 2014 and December 31, 2015. During the periods reported below, our common stock has generally been traded only thinly and sporadically.
The following table sets forth the high and low prices for our common stock as reported by Yahoo Finance for the applicable quarters. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.
| Period Ended December 31, 2014 | ||||||
| STOCK PRICES | ||||||
| High | Low | |||||
| 1st Quarter | $ | 5.25 | $ | 1.50 | ||
| 2nd Quarter | $ | 7.00 | $ | 1.00 | ||
| 3rd Quarter | $ | 4.80 | $ | 4.00 | ||
| 4th Quarter | $ | 5.00 | $ | 3.50 | ||
| Period Ended December 31, 2015 | ||||||
| STOCK PRICES | ||||||
| High | Low | |||||
| 1st Quarter | $ | 5.00 | $ | 5.00 | ||
| 2nd Quarter | $ | 5.00 | $ | 1.10 | ||
| 3rd Quarter | $ | 1.25 | $ | 0.80 | ||
| 4th Quarter | $ | 0.80 | $ | 0.70 | ||
Holders of Common Stock
As of December 31, 2015, we had approximately 78 stockholders of record of our 94,364,148 shares of common stock outstanding.
Dividends
Any decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
| -18- |
SELECTED FINANCIAL DATA
This item is not applicable, as we are classified as a smaller reporting company.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW AND OUTLOOK
Our business focus is to use our own capital to acquire the outstanding stock 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.
| -19- |
On May 14, 2014, we effectively unwound the Affluent 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. 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 “Call Options”) from 14 shareholders in a private transaction, for nominal consideration. The Call Options exercise price is $0.0001 per share and the Call Options expire in 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.)
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”). 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 be $0.775. We did not exercise the “Minimum Amount” of shares per the agreement. In April 2015 we exercised the Series A Warrant as to 657,895 Twinlab shares.
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 December 31, 2015, the outstanding principal amount of and accrued interest on such assumed notes was $68,416. In addition, as part of the transaction we forgave the $1,089,617 net receivable from Darin Pastor under the crossing lines of credit entered into between Affluent and us in 2013, and the crossing lines of credit were cancelled. As a result of the October 28, 2014 transactions, we recorded an expense item of $1,089,617 and we were deemed to have paid a dividend to Darin Pastor in the amount of $1,484,204.
| -20- |
In November 2014, we sold 436,681 of our Twinlab shares for approximately $1.0 million.
In 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 and the call option was valued at $0.156 per call option. (Our references to “unrestricted” shares mean free-trading shares, and our references to “restricted” shares mean shares that are not free-trading.)
In addition, in 2015 we sold 2,078,255 Twinlab shares (without any associated Third-Party Call Options) for $1,579,480.
In total, during 2015 we sold Twinlab securities for $4,601,732.
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 could not exercise a Contingent Call Option unless it had 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 (the “Noncircumvention Provision”); 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. |
| -21- |
As a result of these two agreements, our investment position in Twinlab as of immediately after the two agreements was as follows:
| - | We had 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 2015 (i.e., after May 28, 2015) we sold an additional 1,749,307 unrestricted, free-trading Twinlab shares and 328,948 restricted Twinlab shares to accredited investors. - 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. |
| - | Our obligations to our accredited-investor counterparties under the 3,976,647 Third-Party Call options continued unchanged. |
| - |
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 then 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. o 1,342,105 of such warrants expired on November 30, 2015. o 4,000,000 of such warrants expired on March 31, 2016. |
| - | 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. - As noted below, the Contingent Call Options were eliminated on October 1, 2015. |
On July 5, 2015, Twinlab and we entered into an Agreement for Limited Waiver of Noncircumvention Provision (the “Limited Waiver Agreement”), pursuant to which we agreed to waive the Noncircumvention Provision as to a particular potential investor (B. Thomas Golisano) whom we had introduced to Twinlab in June 2015 and to whom the Noncircumvention Provision would otherwise apply, in exchange for substantial compensation in cash and Twinlab warrants calculated on the basis of the size and pricing of such investor’s purchase(s) of Twinlab securities.
| -22- |
On October 1, 2015, Twinlab and we entered into an Amendment No. 1 to Agreement for Limited Waiver of Non-Circumvention Provision and to Compromise Agreement and Release, pursuant to which the Limited Waiver Agreement was amended to remove our right to any compensation for the waiver of the Noncircumvention Provision as to B. Thomas Golisano and his affiliates, and the Compromise Agreement and Release was amended to eliminate the three Contingent Call Options.
As of December 31, 2015, our position in Twinlab securities was as follows, and we had no contingent liabilities to Twinlab:
| - | We held 13,056,207 outstanding Twinlab shares (12,069,365 unrestricted, free-trading Twinlab shares and 986,842 restricted Twinlab shares). |
| - | We held 16,000,000 warrants under the Series B Warrant, at a $0.76 per share exercise price, with various effective expiration dates throughout 2016. |
| o | 4,000,000 of such warrants expired on March 31, 2016. |
| - | The Registration Rights Agreement remains in full force and effect to enable the Securities Act registration of all Twinlab shares issued upon prior or future exercises of our Warrants. |
| - | We have a claim against third-party optionors for delivery to us of 1,498,500 Twinlab shares against the Call Options which they granted to us and which we have exercised. |
| - | We are contingently obligated to our accredited-investor counterparties under the 3,976,647 Third-Party Call options. |
| - | We have no actual or potential Put liability or Contingent Call Option liability. |
At December 31, 2015, the fair value of the liability under the 3,976,647 Third-Party Call Options was recorded on our balance sheet at $619,122.
The determination of the fair value of our Twinlab stock and derivative securities as of December 31, 2015 is highly significant to our balance sheet and our income statement. In determining the fair value, our Board of Directors relied upon a valuation report dated March 2, 2016 by FFG Valuations, Inc. of Costa Mesa, California. This valuation report, which we commissioned, values Twinlab common stock at $0.758 per share as of December 31, 2015. Twinlab stock is essentially illiquid; accordingly, valuations such as FFG’s are opinions, and other observers might have valued Twinlab stock differently if they chose to emphasize other factors than FFG did. For example, Twinlab issued significant numbers of shares in the second half of 2015 at prices well below $0.758 per share. If we used in our 2015 financial statements a valuation of Twinlab stock (as of December 31, 2015) which was well below $0.758 per share, with corresponding valuations for our Twinlab derivative securities, our net assets as of December 31, 2015 would have been significantly reduced and we would have had significantly larger net losses in 2015.
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.
| -23- |
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 we have treated the transaction as a non-event for financial reporting purposes. On December 18, 2015, we terminated the sale contract.
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.
In addition, we are working toward substantial energy-related development projects and substantial international minerals trading projects. We can give no assurance that such projects will come to fruition or, if any one or more of them do come to fruition, that they will be successful.
We continuously investigate possible acquisitions of positions in new businesses, securities and assets, and evaluate the retention and disposition of our existing holdings. Changes in the mix of our businesses and investments should be expected. We have in the past taken preliminary steps toward acquisitions and investments in various companies, which transactions were never completed, and we have made an unsuccessful investment (in Blackcraft Cult, Inc. common stock) which we continue to hold but have written down to a zero valuation.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER, 2015 AND 2014
Revenues and Investment Gains. Total revenues (other than gain on financial instruments) for the year ended December 31, 2015 were $141,922, as compared to revenues in the 2014 year of $119,923.
The 2015 year also included realized loss on financial instruments of $5,417, and $2,993,872 of unrealized loss, on Twinlab securities we hold. These losses were primarily due to the surrender and expiration of many of our Twinlab warrants during 2015; our 2015 sales of 6,054,902 shares of Twinlab stock had fairly little effect on these figures, due to the fact that our assessments/estimates of the Twinlab securities’ fair value as of December 31, 2015 and as of December 31, 2014 were nearly the same.
Personnel. Personnel expense for the years ended December 31, 2015 and 2014 was $427,106 and $243,107, respectively; the increase in 2015 was primarily due to expansion of our workforce after we relocated to East Amherst, New York.
Professional Fees. Professional fees for the year ended December 31, 2015 and 2014 were $1,188,762 and $360,241. In both years, this item consisted primarily of legal fees.
General and Administrative. General and administrative expenses (excluding payroll expense and professional fees) for the years ended December 31, 2015 and 2014 were $1,142,357 and $606,740, respectively; the increase in 2015 was primarily due to expansion of our operations and systems after we relocated to East Amherst, New York.
Forgiveness of Receivable - Related Party. On October 28, 2014, as part of a transaction between Darin Pastor, Affluent (dissolved) and us, we forgave the $1,089,617 net receivable from Darin Pastor under the crossing lines of credit entered into between Affluent and us in 2013, and the lines of credit were cancelled.
| -24- |
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2015, we had $136,849 in cash and cash equivalents, illiquid Twinlab securities owned which we recorded at a $13,161,718 value, credit for $4,152 of prepaid expenses, and credit for $63,930 of deposits given in respect of a pending acquisition which has not yet closed.
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) 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 December 31, 2015 balance sheet, because of our May 28, 2015 compromise agreement with Twinlab which terminated the Put Agreement. However, the December 31, 2015 balance sheet included a $619,122 liability item arising from the Third-Party Call Options we granted to certain accredited investors in connection with certain of our 2015 sales of Twinlab common stock to such investors. Our actual risk under the Third-Party Call 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 Third-Party Call 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 $4,552,107 deferred tax liability item on our December 31, 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 December 31, 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 December 31, 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.
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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 December 31, 2015, $96,695 of such advances and direct-payments had not yet been reimbursed.
At December 31, 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 $68,416 plus $135 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 our 2015 and 2014 fiscal years.
| For the years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Net cash provided by (used in) operating activities | $ | 1,266,209 | $ | (464,631 | ) | |||
| Net cash used in investing activities | (8,283 | ) | — | |||||
| Net cash used in (provided by) financing activities | (1,133,762 | ) | 477,316 | |||||
| Net increase (decrease) in cash | 124,164 | 12,685 | ||||||
| Cash, beginning | 12,685 | — | ||||||
| Cash, ending | $ | 136,849 | $ | 12,685 | ||||
Operating activities
Net cash provided by operating activities was $1,266,209 for the 2015 year compared to $(464,631) for the 2014 year. The primary reason this 2015 figure was positive (even though we had a large net loss in 2015) was the fact that our sales of Twinlab securities provided substantial cash to us, even though they had only a small effect on our reported profitability.
Although our sales of Twinlab securities in 2015 generated $4,601,732 in cash proceeds, we actually recorded a small overall net loss on financial instruments on such sales.
Financing activities
Net cash used in financing activities for the 2015 year was $1,133,762 and was mainly attributable to our repayments on notes payable to Darin Pastor.
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Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions, we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. See Note 2 – Summary of Significant Accounting Policies in our Notes to Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable, as we are classified as a smaller reporting company.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules within this Form 10-K.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We reiterate our prior disclosure of the resignation of Seale and Beers, CPAs on August 4, 2014 and our engagement of Squar Milner LLP as our new independent registered public accounting firm on September 5, 2014. No additional matters are required by this item to be disclosed in this Annual Report.
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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 December 31, 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 December 31, 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.
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Our management concluded that as of December 31, 2015 our internal control over financial reporting was not effective, and that material weaknesses existed in the following areas as of December 31, 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 | |
| (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. |
To attempt to remediate these material weaknesses, we have increased (and plan to enhance) our use of external accounting services, adopted policies to improve timely reviews by management and coordination with accounting consultants, and engaged corporate and securities legal counsel with better capabilities than our previous provider’s, and we plan to add financial department employees as our resource priorities allow. We believe these actions will continue to improve items (1), (2) and (3) noted above.
Changes in Internal Control Over Financial Reporting
No substantial changes in our internal control over financial reporting occurred during the fourth quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except that we have increased our use of external accounting services, adopted policies to improve timely reviews by management and coordination with accounting consultants, and engaged corporate and securities legal counsel with better capabilities than our previous provider’s.
OTHER INFORMATION
Not applicable.
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PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information is set forth below regarding our current directors and executive officers. The first two persons listed constitute our Board of Directors.
The members of our Board of Directors serve for one year terms and are elected at the next annual meeting of stockholders, or until their successors have been elected. The officers serve at the pleasure of the Board of Directors.
Darin Pastor, Age 44, CEO and Chairman - Mr. Pastor became our Chairman and Chief Executive Officer in August 2013. He was Chief Executive Officer of Capstone Affluent Strategies, Inc., a financial services firm, from September 2012 to April 2014. (Capstone Affluent Strategies, Inc. provided broker-dealer services on the LPL Financial LLC trading platform from September 2012 to July 2013.) From June 2011 to September 2012 he was a Managing Director of Prudential Insurance Company of America. From August 2010 to June 2011 he was Territory Sales Manager for the Los Angeles territory of Colonial Life & Accident Insurance Company, and before that he was Senior Vice President and Senior Investment Manager at JPMorgan Chase & Co. since 2006.
Mr. Pastor has two decades of experience in financial services and sales. In 2012, Prudential ranked him as the #1 Managing Director in the nation measured by year over year sales growth, and he was ranked as the top-selling Senior Investment Manager in the nation during his tenure at JPMorgan Chase & Co. At Chase, he and his team managed $6.6 billion in client assets.
Mr. Pastor’s work history also includes extensive experience as an entrepreneur. From 1989 to 1996, he was a Division Manager and owner at Pepsi-Cola Buffalo Bottling Corp. He was the owner of American Mortgage Affiliates from 1996 to 2004, opening seven retail financial center locations throughout New York before selling the company to his partner.
Our conclusion that Mr. Pastor should be elected as a Director was based on his experience as set forth above.
Mr. Pastor is married to Tracy Pastor.
George Schneider, Age 61, President, Chief Investment Officer and a Director - Mr. Schneider became our President and Chief Investment Officer, and joined our Board of Directors, in August 2013. Before that, Mr. Schneider was since 2007 a Managing Member of Cove Partners, LLC, a specialty investment banking and financial advisory firm that focuses on the alternative energy (including renewable energy) and resource recovery related industries. Before Cove Partners, Mr. Schneider was a Managing Member at Red River Capital Partners, LLC, an investment banking and financial advisory firm specializing in the alternative energy, resource recovery, technology and telecommunications industries. Before that, Mr. Schneider served as Head of Investment Banking and Special Advisor to the Board of Directors for Crown Financial Group, Inc., a publicly traded broker-dealer and market maker.
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Mr. Schneider's investment banking experience includes public and private corporate debt, municipal debt and equity capital raises, merger, acquisition and divestiture transactions, structured finance transactions, valuation analyses, fairness opinions, tender and exchange offers and corporate and financial restructurings. In addition to his investment banking and sales and trading experiences, Mr. Schneider has senior investment management qualification and experience, serving as a senior portfolio manager and Director of Bond Management for Prudential Insurance Company and a portfolio manager for General Reinsurance Corporation where his work concerned a wide range of debt and equity securities. Mr. Schneider received a Bachelor of Science in Economics degree from the University of Pennsylvania's Wharton School of Business.
Our conclusion that Mr. Schneider should be elected as a Director was based on his experience as set forth above.
Halford W. Johnson, Age 52, Chief Financial Officer – Mr. Johnson became our Chief Financial Officer in September 2013. From October 2012 to April 2014, Mr. Johnson was the Chief Financial Officer of Capstone Affluent Strategies, Inc., a wealth management firm in Irvine, California. Mr. Johnson worked for JPMorgan Chase-Chase Investment Services Corp from 2000 to 2012 as an Administrative Officer. In all, Mr. Johnson has 30 years of experience in financial services, with emphasis on the areas of investment, business and estate planning, as well as compliance supervision.
Tracy Anne Pastor, Age 34, Chief Brand Officer – Mrs. Pastor became our Chief Brand Officer in March 2014. From October 2012 to April 2014, Mrs. Pastor was the Investment Manager of Capstone Affluent Strategies, Inc., a wealth management firm in Irvine, California. Mrs. Pastor has worked at Prudential as a Manager of Financial Services, US Bank Investments and JP Morgan Chase as a Financial Advisor from 2000 to 2012. Mrs. Pastor has over 16 years of experience in financial services with emphasis on the areas of financial planning, wealth preservation, estate planning and wealth transfer. Mrs. Pastor received her International MBA from the Thunderbird Global School of Management.
Mrs. Pastor is married to Darin Pastor.
Code of Ethics
In 2013, we adopted a corporate code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. As required by SEC regulations, this code of ethics constitutes and relates to written standards that are reasonably designed to deter wrongdoing and to promote:
| (1) | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |
| (2) | Full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with, or submitted to, the SEC and in other public communications made by an issuer; | |
| (3) | Compliance with applicable governmental laws, rules and regulations; |
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| (4) | The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and | |
| (5) | Accountability for adherence to the code. |
We will provide a copy of this code of ethics at no charge upon receipt of a written request to us at Capstone Financial Group, Inc., 8600 Transit Road, East Amherst, NY 14051.
Corporate Governance / Board of Directors Committees
We currently do not have standing audit, nominating and compensation committees of the Board of Directors, or any other Board of Directors committees performing similar functions. Until formal committees are established, our entire Board of Directors performs the same functions as an audit, nominating and compensation committee.
Changes in Director Nomination Procedures
There was no change in 2015 in the procedures by which stockholders might nominate or propose candidates to serve on the Board of Directors. Stockholders wishing to propose director candidates should direct the proposal to our Chairman, Darin Pastor, by letter.
Audit Committee Financial Expert
We currently do not have an audit committee of the Board of Directors. We consider that neither of the persons on our Board of Directors currently qualifies as an “audit committee financial expert,” as defined in SEC regulations. We believe it is unnecessary for our Board of Directors currently to have a member who so qualifies, in view of the facts that our current directors own a substantial majority of our outstanding stock, none of our current directors is “independent” anyway, and recruiting and compensating a director qualifying as an “audit committee financial expert” would place an undue burden on our limited resources.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to us, or written representations from certain reporting persons, we have determined that all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners as to our equity securities were satisfied during the fiscal year ended December 31, 2015, except that Tracy Pastor did not timely file her Form 3.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table details compensation paid to our (2015) executive officers for the years ended December 31, 2014 and December 31, 2015.
| Name | Position | 2014 Salary | 2015 Salary | |
| Darin R. Pastor | Chief Executive Officer, Chairman & Director | $4,897 | $2,789 | |
| George L. Schneider | President, Chief Investment Officer & Director | $44,575 | $22,300 | |
| Halford W. Johnson | Chief Financial Officer | $79,966 | $83,077 | |
| Tracy Anne Pastor | Chief Brand Officer | $10,526 | $139,191 | |
None of our (2015) executive officers received any compensation in 2014 or 2015 other than in the form of salary (i.e., no bonuses, stock awards, option awards, nonequity incentive plan compensation, nonqualified deferred compensation earnings, or other compensation).
Stock Options and Other Equity Compensation
We have not adopted an equity incentive plan and we have never granted any restricted stock awards, stock options, restricted stock units or other equity-based compensation to any service provider.
Overview of Compensation Program
Our Board of Directors does not currently have a compensation committee. Until a formal compensation committee is established, our entire Board of Directors has responsibility for compensation matters. As a result of the size of the Company and only having three executive officers, the Board of Directors evaluates both performance and compensation on an informal basis.
In view of our limited cash resources and the substantial equity positions held by our senior officers, the Board of Directors has maintained salaries at a quite low level for persons who are adequately incentivized by holding large positions in Company stock.
We do not currently have any equity incentive program for our personnel.
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Upon hiring additional executives (whose positions in Company stock are not as large as Darin Pastor’s and George Schneider’s), the Board of Directors intends to establish a Compensation Committee to evaluate both performance and compensation to ensure that we achieve and maintain the ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly-situated executives of our peer companies. To that end, the Board believes executive compensation packages provided by the Company to its executives, including the named executive officers, may need to include both customary cash compensation and stock-based compensation that rewards performance as measured against established goals.
Director Compensation
Our current directors also serve as executive officers of the Company, and they receive no additional compensation for their service on the Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information, to the best of our knowledge, about the beneficial ownership of our common stock on March 24, 2016, relating to the beneficial ownership of our common stock by those persons known to beneficially own more than 5% of our capital stock and by our directors and executive officers. The percentage of beneficial ownership for the following table is based on 94,364,148 shares of common stock outstanding.
Beneficial ownership is determined in accordance with the rules of the SEC and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes shares of common stock that the stockholder has a right to acquire within 60 days after March 24, 2016 pursuant to options, warrants, conversion privileges or other rights. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the SEC, that only the person or entity whose ownership is being reported has exercised/converted options, warrants, etc. for/into shares of our common stock.
None of the persons in the following table beneficially owns any shares by virtue of having a right to acquire such shares within 60 days after March 24, 2016 pursuant to options, warrants, conversion privileges or other rights.
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| Class | Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class |
| Common | Darin R. Pastor, Chief Executive Officer and Director | 69,626,777 | 73.8% |
| Common | George L. Schneider, President and Director | 9,036,000 | 9.6% |
| Common | Halford W. Johnson, Chief Financial Officer | 126,197 | * |
| Common | Tracy Pastor, Chief Brand Officer | 114,497 | * |
| Common | All Directors and Executive Officers as a Group | 78,903,471 | 83.6% |
|
Mr. Pastor’s beneficial ownership is deemed to continue to include 9,436,414 shares which he agreed to sell under an agreement with Aaron Pierce dated October 21, 2015; the counterparty has not yet paid the full purchase price and the shares remain in Mr. Pastor’s name. Mr. Schneider’s beneficial ownership is deemed to continue to include 4,518,000 shares which he gifted to an individual on November 30, 2015, because we consider that he retains indirect beneficial ownership of the gifted shares. The figures for Mr. Pastor in the table do not include shares owned by Mrs. Pastor; Mr. Pastor disclaims beneficial ownership of Mrs. Pastors’s shares. The figures for Mrs. Pastor in the table do not include shares owned by Mr. Pastor; Mrs. Pastor disclaims beneficial ownership of Mr. Pastor’s shares. Mr. Pastor and Mrs. Pastor are married to each other. Except as specified in this paragraph, each person has sole voting power and sole investment power with respect to the shares set forth next to his or her name in this table. The address of Mr. Pastor, Mr. Johnson and Mrs. Pastor is in care of the Company at 8600 Transit Road, East Amherst, NY 14051. The address of Mr. Schneider is 425 North Sycamore Avenue, Los Angeles, CA 90036. * Refers to beneficial ownership of less than 1%. | |||
Changes in Control
There are no arrangements, known to us, including any pledge by any person of securities of the Company, the operation of which may at a later date result in a change in control of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
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 December 31, 2015, the outstanding principal amount of and accrued interest on such assumed notes was $68,416. In addition, as part of the transaction we forgave the $1,089,617 net receivable from Darin Pastor under the lines of credit described above, and the crossing lines of credit were cancelled. As a result of the October 28, 2014 transactions, we recorded an expense item of $1,089,617 and we were deemed to have paid a dividend to Darin Pastor in the amount of $1,484,204.
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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 December 31, 2015, there were outstanding $96,695 of such advances and direct-payments.
We subleased an executive office at 2600 Michelson Drive, Suite 700, Irvine, California 92612 from Affluent and from our chief executive officer Darin Pastor, the successor of Affluent, from September 2013 through March 2015. Our occupancy right, on a prepaid basis, was one of the Affluent assets we obtained from Darin Pastor in the October 28, 2014 transaction. The value of the occupancy right was $28,736 per month.
Director Independence
We currently do not have any independent directors, as the term “independent” is defined in Section 803A of the NYSE Amex LLC Company Guide.
PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES
The following table sets forth the fees billed for professional services provided in connection with the audit of our annual financial statements and review of our quarterly financial statements, etc., for the years ended December 31, 2015 and December 31, 2014:
| Audit Fees | Period Ended December 31, | |||||||
| 2015 | 2014 | |||||||
| Seale and Beers, CPAs | $ | --- | $ | 10,500 | ||||
| Squar Milner LLP | 123,126 | 106,025 | ||||||
| $ | 123,126 | $ | 116,525 | |||||
AUDIT-RELATED FEES
None, for the years ended December 31, 2014 and December 31, 2015.
TAX FEES
None, for the years ended December 31, 2014 and December 31, 2015.
ALL OTHER FEES
None, for the years ended December 31, 2014 and December 31, 2015.
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AUDIT COMMITTEE POLICIES AND PROCEDURES
Our Board of Directors does not have an audit committee. The entire Board of Directors fulfills the function of an audit committee. The Board of Directors does not have formal preapproval policies and procedures of the type contemplated by this item.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statements listed in the "Index to Financial Statements" on page 43 are filed as part of this report.
Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Exhibits included or incorporated herein: See index to Exhibits.
Exhibit Index
| 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 | Promissory Note from Capstone Affluent Strategies, Inc. in favor of Darin Pastor, dated October 4, 2012 | 10-K | 10.1 | 2/18/2015 | ||||||
| 10.2 | Promissory Note from Capstone Affluent Strategies, Inc. in favor of Darin Pastor, dated October 22, 2012 | 10-K | 10.2 | 2/18/2015 | ||||||
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| Incorporated by reference | ||||||||||
| Exhibit | Filed | Filing | ||||||||
| Number | Exhibit Description | herewith | Form | Exhibit | date | |||||
| 10.3 | Promissory Note from Capstone Affluent Strategies, Inc. in favor of Darin Pastor, dated December 31, 2012 | 10-K | 10.3 | 2/18/2015 | ||||||
| 10.4 | Call Options, dated August 1, 2014, from respective holders of common stock of Twinlab Consolidated Holdings, Inc. to the Company | 13D | 2 | 12/17/2014 | ||||||
| 10.5 | Series A Warrant, dated as of September 30, 2014, issued by Twinlab Consolidated Holdings, Inc. to the Company | 8-K | 10.1 | 10/6/2014 | ||||||
| 10.6 | Series B Warrant, dated as of September 30, 2014, issued by Twinlab Consolidated Holdings, Inc. to the Company | 8-K | 10.2 | 10/6/2014 | ||||||
| 10.7 | Common Stock Put Agreement, dated as of September 30, 2014, between Twinlab Consolidated Holdings, Inc. and the Company | 8-K | 10.3 | 10/6/2014 | ||||||
| 10.7.1 | Amendment No. 1 to Common Stock Put Agreement, dated as of December 15, 2014, between Twinlab Consolidated Holdings, Inc. and the Company | 10-K | 10.11.1 | 2/18/2015 | ||||||
| 10.8 | Registration Rights Agreement, dated as of September 30, 2014, between Twinlab Consolidated Holdings, Inc. and the Company | 8-K | 10.4 | 10/6/2014 | ||||||
| 10.9 | Agreement, dated as of October 28, 2014, between Darin Pastor, Capstone Affluent Strategies, Inc. (dissolved) and the Company | 10-K | 10.12 | 4/30/2015 | ||||||
| 10.9.1 | Amendment to Agreement, dated as of December 31, 2014, between Darin Pastor, Capstone Affluent Strategies, Inc. (dissolved) and the Company | 10-K | 10.12.1 | 4/30/2015 | ||||||
| 10.1 | Promissory Note from Thomas Tolworthy in favor of the Company, dated November 14, 2014 | 10-K | 10.13 | 4/30/2015 | ||||||
| 10.11 | Agreement to Reform Promissory Notes Due to Scrivener’s Error, dated December 15, 2014, between Darin Pastor, Capstone Affluent Strategies, Inc. (dissolved) and the Company | 10-K | 10.14 | 2/18/2015 | ||||||
| -39- |
| Incorporated by reference | ||||||||||
| Exhibit | Filed | Filing | ||||||||
| Number | Exhibit Description | herewith | Form | Exhibit | date | |||||
| 10.12 | Form of Third-Party Investment Units Purchase Agreement (used from March 25, 2015 through May 28, 2015) | 10-Q | 10.1 | 8/13/2015 | ||||||
| 10.13 | Lease Agreement, dated as of April 29, 2015, between Iskalo 8600 Transit LLC and the Company | 10-K | 10.15 | 4/30/2015 | ||||||
| 10.14 | Compromise Agreement and Release, dated May 28, 2015, between Twinlab Consolidated Holdings, Inc. and the Company | 8-K | 10.1 | 5/29/2015 | ||||||
| 10.15 | 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 | ||||||
| 10.16 | Prepayment and Repurchase Agreement, dated as of June 26, 2015, between Thomas A. Tolworthy and the Company | 10-Q | 10.5 | 8/13/2015 | ||||||
| 10.17 | Securities Purchase Agreement dated July 24, 2015 among the Company, LC Strategic Realty, LLC, Christopher Naugle and Lorissa Naugle | 10-Q | 10.1 | 11/20/2015 | ||||||
| 10.18 | Members Agreement dated July 24, 2015 among the Company, LC Strategic Realty, LLC, Christopher Naugle and Lorissa Naugle | 10-Q | 10.2 | 11/20/2015 | ||||||
| 10.19 | Non-Competition Agreement dated July 24, 2015 among the Company, LC Strategic Realty, LLC and Christopher Naugle | 10-Q | 10.3 | 11/20/2015 | ||||||
| 10.2 | Non-Competition Agreement dated July 24, 2015 among the Company, LC Strategic Realty, LLC and Lorissa Naugle | 10-Q | 10.4 | 11/20/2015 | ||||||
| 10.21 | Securities Purchase Agreement dated July 24, 2015 among the Company, LC Strategic Holdings, LLC, Christopher Naugle and Lorissa Naugle | 10-Q | 10.5 | 11/20/2015 | ||||||
| 10.22 | Members Agreement dated July 24, 2015 among the Company, LC Strategic Holdings, LLC, Christopher Naugle and Lorissa Naugle | 10-Q | 10.6 | 11/20/2015 | ||||||
| 10.23 | Non-Competition Agreement dated July 24, 2015 among the Company, LC Strategic Holdings, LLC and Christopher Naugle | 10-Q | 10.7 | 11/20/2015 | ||||||
| 10.24 | Non-Competition Agreement dated July 24, 2015 among the Company, LC Strategic Holdings, LLC and Lorissa Naugle | 10-Q | 10.8 | 11/20/2015 | ||||||
| 10.25 | Agreement for Limited Waiver of Noncircumvention Provision, between the Company and Twinlab Consolidated Holdings, Inc., dated July 5, 2015 | 8-K | 10.1 | 10/8/2015 | ||||||
| -40- |
| Incorporated by reference | ||||||||||
| Exhibit | Filed | Filing | ||||||||
| Number | Exhibit Description | herewith | Form | Exhibit | date | |||||
| 10.26 | Amendment No. 1 to Agreement for Limited Waiver of Non-Circumvention Provision and to Compromise Agreement and Release, between the Company and Twinlab Consolidated Holdings, Inc., dated October 1, 2015 | 8-K | 10.2 | 10/8/2015 | ||||||
| 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 | ||||||||
| -41- |
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: May 2, 2016
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, |
May 2, 2016 |
| Darin R. Pastor | Chief Executive Officer (Principal Executive Officer) | |
|
/s/ Halford W. Johnson |
Chief Financial Officer |
May 2, 2016 |
| Halford W. Johnson | (Principal Financial Officer) |
| -42- |
CAPSTONE FINANCIAL GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
| PAGES | |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 44 |
| STATEMENTS OF FINANCIAL CONDITION | 45 |
| STATEMENTS OF OPERATIONS | 46 |
| STATEMENTS OF STOCKHOLDERS' EQUITY | 47 |
| STATEMENTS OF CASH FLOWS | 48 |
| NOTES TO FINANCIAL STATEMENTS | 49 |
| -43- |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Capstone Financial Group, Inc.
We have audited the accompanying statements of financial condition of Capstone Financial Group, Inc. as of December 31, 2015 and 2014, and the related statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capstone Financial Group, Inc. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 3, substantially all of the Company’s investments are in common stock, call options and common stock warrants of one company, whose common stock is not actively traded. Also as discussed in Note 3, 100% of the Company’s investments are classified as Level 3 Fair Value Measurements at December 31, 2015 which have been valued by the Company’s Board of Directors in the absence of an active market. We have reviewed the procedures applied by the Company in valuing such investments and inspected underlying documentation; while in the circumstances, the procedures appear to be reasonable and the documentation appropriate, determination of fair values involves subjective judgment and ultimate amounts realized may significantly vary from values presently estimated. Our opinion is not modified with respect to this matter.
/s/ SQUAR MILNER LLP
(formerly Squar, Milner, Peterson, Miranda & Williamson, LLP)
San Diego, California
May 2, 2016
| -44- |
CAPSTONE FINANCIAL GROUP, INC.
(FORMERLY CREATIVE APP SOLUTIONS, INC.)
STATEMENTS OF FINANCIAL CONDITION
| December 31, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| Financial instruments, at fair value | $ | 13,161,718 | $ | 28,838,301 | ||||
| Cash | 136,849 | 12,685 | ||||||
| Note receivable | — | 603,952 | ||||||
| Prepaid expense | 4,152 | 86,209 | ||||||
| Furniture and equipment, net | 12,645 | 6,500 | ||||||
| Deposits | 63,930 | 65,000 | ||||||
| Total assets | $ | 13,379,294 | $ | 29,612,647 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| Accrued expenses | $ | 267,735 | $ | 48,547 | ||||
| Accrued interest payable - related party | 135 | 4,431 | ||||||
| Short term advances payable - related party | 96,695 | 94,306 | ||||||
| Note payable - related party | 68,416 | 1,203,552 | ||||||
| Deferred revenue | — | 116,662 | ||||||
| Put and call option liability | 619,122 | 9,973,684 | ||||||
| Income taxes payable | 2,400 | — | ||||||
| Deferred tax liability | 4,552,107 | 6,742,723 | ||||||
| Total liabilities | 5,606,610 | 18,183,905 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock, $0.001 par value, 10,000,000 shares | ||||||||
| authorized, no shares issued and outstanding | — | — | ||||||
| Common stock, $0.001 par value, 2,000,000,000 shares | ||||||||
| authorized; 94,364,148 and 94,564,648 issued and outstanding as of December 31, 2015 and 2014, respectively | 94,565 | 94,565 | ||||||
| Treasury stock (500 shares of common stock at $2.03 per share, and | ||||||||
| 200,000 shares of common stock at $1.09 per share), at December 31, 2015 | (219,426 | ) | — | |||||
| Additional paid-in capital | 1,176,633 | 1,176,633 | ||||||
| Retained earnings | 6,720,912 | 10,157,544 | ||||||
| Total stockholders' equity | 7,772,684 | 11,428,742 | ||||||
| Total liabilities and stockholders' equity | $ | 13,379,294 | $ | 29,612,647 | ||||
See Accompanying Notes to Financial Statements.
| -45- |
CAPSTONE FINANCIAL GROUP, INC.
(FORMERLY CREATIVE APP SOLUTIONS, INC.)
STATEMENTS OF OPERATIONS
| For the year ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenues | ||||||||
| Services income | $ | 116,662 | $ | 83,338 | ||||
| Other income | 10,800 | — | ||||||
| Interest income | 14,460 | 36,585 | ||||||
| 141,922 | 119,923 | |||||||
| Expenses | ||||||||
| Personnel | 427,106 | 243,107 | ||||||
| Professional fees | 1,188,762 | 360,241 | ||||||
| General and administrative | 1,142,357 | 606,740 | ||||||
| Forgiveness of receivable - related party | — | 1,089,617 | ||||||
| Interest expense - related party | 10,859 | 20,916 | ||||||
| 2,769,084 | 2,320,621 | |||||||
| Realized and Unrealized (Loss) Gain on Financial Instruments | ||||||||
| Realized (loss) gain on financial instruments, net | (5,417 | ) | 1,019,326 | |||||
| Unrealized (loss) gain on financial instruments, net | (2,993,872 | ) | 18,855,913 | |||||
| (Loss) gain on financial instruments, net | (2,999,289 | ) | 19,875,239 | |||||
| Net (loss) income before income taxes | (5,626,451 | ) | 17,674,541 | |||||
| (Benefit) provision for income taxes | (2,189,819 | ) | 6,743,523 | |||||
| Net (loss) income | $ | (3,436,632 | ) | $ | 10,931,018 | |||
| Net (loss) income per share - basic and diluted | $ | (0.04 | ) | $ | 0.12 | |||
| Weighted average shares outstanding - | ||||||||
| basic and diluted | 94,471,801 | 93,890,264 | ||||||
See Accompanying Notes to Financial Statements.
| -46- |
CAPSTONE FINANCIAL GROUP, INC.
(FORMERLY CREATIVE APP SOLUTIONS, INC.)
STATEMENTS OF STOCKHOLDERS’ EQUITY
| Additional | Retained | Total | ||||||||||||||||||||||
| Common Shares | Treasury | Paid-In | Earnings | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Stock | Capital | (Deficit) | Equity | |||||||||||||||||||
| Balance, December 31, 2013 | 93,025,000 | $ | 93,025 | $ | — | $ | 1,353,677 | $ | (773,474 | ) | $ | 673,228 | ||||||||||||
| February 25, 2014 Issuance of common stock for cash | 488,237 | 488 | — | 414,512 | — | 415,000 | ||||||||||||||||||
| May 8, 2014 Issuance of common stock for cash | 412,000 | 412 | — | 349,788 | — | 350,200 | ||||||||||||||||||
| August 29, 2014 Issuance of common stock for cash | 437,647 | 438 | — | 371,562 | — | 372,000 | ||||||||||||||||||
| Fourth quarter 2014 Issuance of common stock for cash | 201,764 | 202 | — | 171,298 | — | 171,500 | ||||||||||||||||||
| October 28, 2014 Deemed dividend | — | — | — | (1,484,204 | ) | — | (1,484,204 | ) | ||||||||||||||||
| Net income | — | — | — | — | 10,931,018 | 10,931,018 | ||||||||||||||||||
| Balance, December 31, 2014 | 94,564,648 | 94,565 | — | 1,176,633 | 10,157,544 | 11,428,742 | ||||||||||||||||||
| Treasury stock, at cost (200,000 shares at $1.09) | (200,000 | ) | — | (218,411 | ) | — | — | (218,411 | ) | |||||||||||||||
| Treasury stock, at cost (500 shares at $2.03) | (500 | ) | — | (1,015 | ) | — | — | (1,015 | ) | |||||||||||||||
| Net loss | — | — | — | — | (3,436,632 | ) | (3,436,632 | ) | ||||||||||||||||
| Balance, December 31, 2015 | 94,364,148 | $ | 94,565 | $ | (219,426 | ) | $ | 1,176,633 | $ | 6,720,912 | $ | 7,772,684 | ||||||||||||
See Accompanying Notes to Financial Statements.
| -47- |
CAPSTONE FINANCIAL GROUP, INC.
(FORMERLY CREATIVE APP SOLUTIONS, INC.)
STATEMENTS OF CASH FLOWS
| For the year ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (3,436,632 | ) | $ | 10,931,018 | |||
| Adjustments to reconcile net (loss) income to net | ||||||||
| cash used in operating activities: | ||||||||
| Sale (purchase) of investments, net | 3,322,732 | (8,704 | ) | |||||
| Net change in unrealized loss (gain) on investment securities, net | 2,993,872 | (18,855,913 | ) | |||||
| Net change in realized (gain) on investment securities, net | 5,417 | — | ||||||
| Forgiveness of receivable - related party | — | 1,089,617 | ||||||
| Depreciation | 2,138 | 333 | ||||||
| (Increase) decrease in assets: | ||||||||
| Note receivable | 400,000 | (600,000 | ) | |||||
| Accrued interest receivable - related party | — | (32,633 | ) | |||||
| Accrued interest receivable | (14,460 | ) | (3,952 | ) | ||||
| Prepaid expense | 82,057 | 76,282 | ||||||
| Deposits | 1,070 | 35,000 | ||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | — | (12,973 | ) | |||||
| Income taxes payable | 2,400 | 800 | ||||||
| Accrued expenses | 219,189 | 45,524 | ||||||
| Accrued payroll liabilities | — | (10,537 | ) | |||||
| Accrued interest payable - related party | (4,296 | ) | 22,122 | |||||
| Deferred revenue | (116,662 | ) | 116,662 | |||||
| Deferred tax liability | (2,190,616 | ) | 6,742,723 | |||||
| Net cash provided by (used in) operating activities | 1,266,209 | (464,631 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of furniture and equipment | (8,283 | ) | — | |||||
| Net cash used in investing activities | (8,283 | ) | — | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from sale of common stock, net of offering costs | — | 1,308,700 | ||||||
| Short term advances payable - related party | 2,389 | 94,306 | ||||||
| Net repayments on notes payable – related party | (1,135,136 | ) | (925,690 | ) | ||||
| Purchase of treasury stock | (1,015 | ) | — | |||||
| Net cash (used in) provided by financing activities | (1,133,762 | ) | 477,316 | |||||
| Increase in cash | 124,164 | 12,685 | ||||||
| Cash at beginning of period | 12,685 | — | ||||||
| Cash at end of period | $ | 136,849 | $ | 12,685 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Noncash purchase of treasury stock in satisfaction of note receivable | $ | 218,411 | $ | — | ||||
| Assets acquired in acquisition | $ | — | $ | (152,429 | ) | |||
| Liabilities assumed in acquisition | $ | — | $ | 1,636,633 | ||||
| Deemed dividend | $ | — | $ | (1,484,204 | ) | |||
| Interest paid | $ | 10,761 | $ | 43,534 | ||||
See Accompanying Notes to Financial Statements.
| -48- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
The business focus of Capstone Financial Group, Inc. (the "Company") is to invest in stock of other companies. The Company seeks to discover, unlock and grow value in privately-held or illiquid companies, including through the exercise of 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 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 operations and perform continual evaluations of 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.
Market, Credit and Liquidity Risk
At December 31, 2015 and 2014 the majority of Company’s investments are focused in one entity, Twinlab Consolidated Holdings, Inc. Management believes that it will be able to liquidate a sufficient portion of its investment and/or raise additional capital to fund its obligations as and when they become due. 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 fund its obligations or to raise additional capital to do so.
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.
| -49- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments of the Company trade in thin markets and throughout the year, depending upon market conditions, may be considered inactive. 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 investments.
Basis of Presentation
The accompanying financial statements have been prepared using the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the accounting and financial reporting conventions of the investment company industry.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers any investments in short-term money market funds with original maturities of three months or less to be cash equivalents.
Investments
Investments primarily comprise strategic, non-controlling equity ownership interests in privately held businesses or public companies with very illiquid trading markets. These strategic investments are accounted for at fair value as determined by internal valuation guidelines and/or outside appraisals as there are no readily ascertainable fair market value prices in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946-10 and FASB ASC 820-10. Because the Company follows the financial accounting and reporting conventions of the investment company industry, it reports investments at estimated fair value.
FASB ASC 820-10-65-4 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10 when the volume and level of market activity for the asset or liability have significantly decreased. FASB ASC 820-10-65-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. It acknowledges that in these circumstances quoted prices may not be determinative of fair value. FASB ASC 820-10-65-4 emphasizes that even if there has been a significant decrease in the volume and level of market activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Under FASB ASC 820-10-65-4, quoted prices for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly. There is little information, if any, to evaluate if individual transactions are orderly in an inactive market. Accordingly, the Company is required to evaluate the facts and circumstances to determine whether the transaction is orderly based on the weight of the evidence. FASB ASC 820-10-65-4 does not designate a specific method for adjusting a transaction or quoted price; however, it does provide guidance for determining how much weight to give a transaction or quoted price. Price quotes derived from transactions that are not orderly are not considered to be determinative of fair value and should be given less weight, if any, when estimating fair value. In the absence of observable market data at December 31, 2015, the Company's fair value measurements included assumptions about future cash flow and appropriately risk-adjusted discount rates that it believes market participants would make in orderly market transactions.
| -50- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Measurements and Valuation Methodologies
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
| • | Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. |
| • | Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means. |
| • | Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
The Company’s 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.
The Company often invests in common stocks that are thinly traded where the closing trading price is not considered to be a fair indication of the value for which the Company can sell or buy the common stock. In such cases, as in the case of private-company limited liability company membership interests held by the Company, the common stock must be analyzed to determine what exit price the Company would receive when liquidating the position. These positions are classified as Level 3 securities.
The significant unobservable inputs used in the fair value measurement of the Company’s Level 3 common stocks are recent open market and non open-market transactions with unrelated parties. Increases or decreases in any of those inputs in isolation would result in a lower or higher fair value measurement, respectively.
-51-
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has warrants and call options to purchase common stock in illiquid public companies. Generally, there is no established market for these investments. The Company values these warrants and call options by using a model that takes into consideration the exercise or call price of the warrant or call option, the price of the underlying common stock and the expiration date of the warrant or call option.
The significant unobservable inputs used in the fair value measurement of the Company’s warrants and call options includes the price of the underlying thinly traded common stock, duration and discount rate and volatility. Increases or decreases in the premium-to-parity would result in a higher or lower fair value measurement, respectively.
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 December 31, 2015 and December 31, 2014 were valued based, in part, on subsequent transactions with unrelated third parties and at December 31, 2015 were valued by the Company with the assistance of an independent valuation consultant. These positions are classified as Level 3 securities by the Company.
From time to time, the Company has investments in private limited liability companies. Generally, there is no established market for these investments. The Company values these interests by means of both quantitative and qualitative measures, generally including the financial stability of the company, the economic rights of the interests and the economic prospects of the company.
The significant unobservable input used in the fair value measurement of the Company’s limited liability company investments is the expected recovery of contributed capital. Increases or decreases in the expected recovery would result in a higher or lower fair value measurement, respectively.
| -52- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Financial Instruments
Derivative financial instruments include call options and warrants at December 31, 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 option pricing model. Changes to any of those inputs in isolation would result in fluctuations in the fair value measurement.
Investment Transaction, Related Income and Expenses
Purchases and sales of investments are recorded on a trade-date basis. Realized gains and losses on investments are recognized on the first-in, first-out method. Dividend income on investments owned is recognized on the ex-dividend date, net of applicable withholding taxes.
Treasury Stock Purchases
The Company is authorized to repurchase shares of the Company’s common stock in private transactions from time to time. During 2015, the Company repurchased 200,500 shares at an aggregate cost of approximately $220,000, which included approximately $218,000 in satisfaction of an outstanding note receivable.
Revenue Recognition
The Company recognizes revenue for services when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the related service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of fees is probable.
Earnings per Share
The Company follows FASB ASC 260 for earnings per share. Basic earnings per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. As of December 31, 2015 and 2014, there were no dilutive common shares equivalents outstanding.
| -53- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration Risks
During the year ended December 31, 2015, the Company had $116,662 in revenue generated from one customer for consulting services and had interest income from one debtor of $14,460. During the year ended December 31, 2014, the Company had $83,338 in revenue generated from one customer for consulting services and had interest income from a related party of $36,585.
Income Taxes
The Company follows ASC Topic 740 for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC Topic 740 allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. As of December 31, 2015 the Company reviewed its tax positions and determined there were no outstanding or retroactive tax provisions with less than a 50% likelihood of being sustained upon examination by the taxing authorities.
The Company is required to file Federal and New York and California state income tax returns. The Company’s tax return status will remain open until a tax return has been filed.
Advertising costs
Advertising costs are expensed as incurred. For the years ended December 31, 2015 and 2014, advertising costs of $53,051 and $62,816, respectively, were included in general and administrative expenses.
| -54- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards update 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 specifies a comprehensive model to be used in accounting for revenue arising from contracts with customers, and supersedes most of the current revenue recognition guidance, including industry specific guidance. It applies to all contracts with customers except those that are specifically within the scope of other FASB topics, and certain of its provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity's ordinary activities. The core principal of the model is that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the transferring entity expects to be entitled in exchange. To apply the revenue model, an entity will: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. For public companies, ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. Upon adoption, entities can choose to use either a full retrospective or modified approach, as outlined in ASU 2014-09. As compared with current GAAP, ASU 2014-09 requires significantly more disclosures about revenue recognition. The Company has not yet assessed the potential impact of ASU 2014-09 on the financial statements.
In May 2015, the FASB issued amended guidance on the disclosures for investments in certain equities that calculate NAV per share (or its equivalent). The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those years.
In February 2016, the FASB issued Accounting Standards update 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires a lessee to recognize a lease asset representing its right to use the underlying asset for the lease term, and a lease liability for the payments to be made to lessor, on its balance sheet for all operating leases greater than 12 months. ASU 2016-02 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has not yet adopted ASU 2016-02 nor assessed its potential impact on the financial statements.
| -55- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS
The Company's financial instruments recorded at fair value have been categorized based upon a fair value hierarchy in accordance with accounting guidance. The following fair value hierarchy tables set forth the Company’s recurring fair value measurements at December 31, 2015 and December 31, 2014.
| Assets and Liabilities Measured at | ||||||||||||||||
| Fair Value on a Recurring Basis | ||||||||||||||||
| December 31, 2015 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Financial instruments, at fair value: | ||||||||||||||||
| Common Stocks | $ | — | $ | — | $ | 9,896,605 | $ | 9,896,605 | ||||||||
| Real Estate Company Investments | — | — | 277,500 | 277,500 | ||||||||||||
| 2014 Call Options | — | — | 1,135,863 | 1,135,863 | ||||||||||||
| Series B Warrants | — | — | 1,851,750 | 1,851,750 | ||||||||||||
| Total Financial instruments, at fair value | — | — | 13,161,718 | 13,161,718 | ||||||||||||
| Total assets held at fair value | $ | — | $ | — | $ | 13,161,718 | $ | 13,161,718 | ||||||||
| Liabilities | ||||||||||||||||
| Financial instruments, at fair value: | ||||||||||||||||
| Third Party Call Options | — | — | 619,122 | 619,122 | ||||||||||||
| Total liabilities held at fair value | $ | — | $ | — | $ | 619,122 | $ | 619,122 | ||||||||
| 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 | $ | — | $ | — | $ | 8,350,500 | $ | 8,350,500 | ||||||||
| 2014 Call Options | — | — | 6,312,801 | 6,312,801 | ||||||||||||
| Series A Warrants | — | — | 9,947,368 | 9,947,368 | ||||||||||||
| Series B Warrants | — | — | 4,227,632 | 4,227,632 | ||||||||||||
| Total Financial instruments owned, 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 | ||||||||
| -56- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
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.
| -57- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
Details of the Company’s recurring fair value measurements are as follow:
| December 31, 2015 | Cost | Estimated Fair Value | Unrealized Gain (Loss) | |||||||||
| ASSETS | ||||||||||||
| Common Stocks | $ | 1,004,992 | $ | 9,896,605 | $ | 8,891,613 | ||||||
| Real Estate Company Investments | 277,500 | 277,500 | — | |||||||||
| 2014 Call Options | 450 | 1,135,863 | 1,135,413 | |||||||||
| Series B Warrants | — | 1,851,750 | 1,851,750 | |||||||||
| $ | 1,282,942 | $ | 13,161,718 | $ | 11,878,776 | |||||||
| LIABILITIES | ||||||||||||
| Third-Party Call Options | $ | — | $ | (619,122 | ) | $ | (619,122 | ) | ||||
| December 31, 2014 | Cost | Estimated Fair Value | Unrealized Gain (Loss) | |||||||||
| ASSETS | ||||||||||||
| Common Stocks | $ | 6,215 | $ | 8,350,500 | $ | 8,344,285 | ||||||
| 2014 Call Options | 2,492 | 6,312,801 | 6,310,309 | |||||||||
| Series A Warrants | — | 9,947,368 | 9,947,368 | |||||||||
| Series B Warrants | — | 4,227,632 | 4,227,632 | |||||||||
| $ | 8,707 | $ | 28,838,301 | $ | 28,829,594 | |||||||
| LIABILITIES | ||||||||||||
| Warrant put options | $ | — | $ | (9,973,684 | ) | $ | (9,973,684 | ) | ||||
| -58- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
For the year ended December 31, 2015, the Company recorded a net unrealized loss on financial instruments of $2,993,872 and a net realized loss on financial instruments of $5,417. For the year ended December 31, 2014, the Company recorded a net unrealized gain on financial instruments of $18,855,913 and a net realized gain on financial instruments of $1,019,326.
During the first quarter of 2014, the Company purchased shares in a company traded on the OTC Markets for a total of $2,919. The Company currently categorizes these holdings as Level 3 assets. As of December 31, 2015, this investment is carried at $0 value under management’s valuation guidelines.
In August 2014, the Company purchased 10,987,500 split-adjusted shares of common stock of Twinlab Consolidated Holdings, Inc. (“Twinlab”) in private transactions from 25 shareholders for total consideration of $3,296. In November 2014, the Company sold 436,681 of these shares.
In August 2014, the Company purchased options to acquire 8,743,000 outstanding shares of Twinlab’s Common Stock (collectively, the “Call Options”) in a private transaction from 14 stockholders, for total consideration of $2,623. The Call Options exercise price is $0.0001 per share and the 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.
In 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 and the call option was valued at $0.156 per call option.
| -59- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
In addition, in 2015, the Company sold an aggregate of 2,078,255 shares of Twinlab common stock (without any associated detachable call options) to various unrelated third party accredited investors, for $0.76 per share.
Twinlab and the Company 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; such tranche of warrants expired mostly unexercised), one for 4,000,000 warrant shares (no longer exercisable after March 31, 2016; see Note 8), 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 could not exercise a Contingent Call Option unless it had 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.
| -60- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
On October 1, 2015, Twinlab and the Company entered into Amendment No. 1 to Agreement for Limited Waiver of Non-Circumvention Provision and to Compromise Agreement and Release, pursuant to which a prior agreement calling for contingent payments of cash and equity to the Company was amended to remove the Company’s right to any such contingent payments of cash and equity compensation, and in return the three Contingent Call Options were immediately cancelled.
As of December 31, 2015, the Company owned less than 10% of Twinlab’s outstanding common stock.
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.
| -61- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
The following tables include a roll forward of the amounts for the year ended December 31, 2015 and for the year ended December 31, 2014 for financial instruments classified within Level 3.
Level 3 Recurring Fair Value Measurements
For the Twelve Months Ended December 31, 2015
| Third-Party | ||||||||||||||||||||||||||||||||
| Real Estate | Call | |||||||||||||||||||||||||||||||
| Common | Company | 2014 Call | Series A | Series B | Put Option | Option | ||||||||||||||||||||||||||
| Stock | Investments | Options | Warrants | Warrants | Liability | Liability | Total | |||||||||||||||||||||||||
| Fair value, net, December 31, 2014 | $ | 8,350,500 | $ | — | $ | 6,312,801 | $ | 9,947,368 | $ | 4,227,632 | $ | (9,973,684 | ) | $ | — | $ | 18,864,617 | |||||||||||||||
| Total gains (losses) included in earnings: | ||||||||||||||||||||||||||||||||
| Unrealized losses | (981,132 | ) | — | (5,176,938 | ) | — | (4,242,666 | ) | — | — | (10,400,736 | ) | ||||||||||||||||||||
| Unrealized gains | — | — | — | — | 2,366,784 | — | 2,855 | 2,369,639 | ||||||||||||||||||||||||
| Realized gains (losses) | — | — | — | (9,823,026 | ) | — | 9,849,013 | — | 25,987 | |||||||||||||||||||||||
| Exercises | — | — | — | (124,342 | ) | — | 124,671 | — | 329 | |||||||||||||||||||||||
| Purchases (1) | 6,505,820 | 277,500 | — | — | — | — | — | 6,783,320 | ||||||||||||||||||||||||
| Sales | (3,978,583 | ) | — | — | — | (500,000 | ) | — | (621,977 | ) | (5,100,560 | ) | ||||||||||||||||||||
| Fair value, net, December 31, 2015 | $ | 9,896,605 | $ | 277,500 | $ | 1,135,863 | $ | — | $ | 1,851,750 | $ | — | $ | (619,122 | ) | $ | 12,542,596 | |||||||||||||||
| Unrealized gains (losses) still held, December 31, 2015 | $ | 8,891,613 | $ | — | $ | 1,135,413 | $ | — | $ | 1,851,750 | $ | — | $ | (619,122 | ) | 11,259,654 | ||||||||||||||||
| 1 | Purchases of 1,315,790 shares of Twinlab common stock were made at various dates in 2015 at $0.76 per share (upon warrant exercises) and purchases of 7,244,500 shares of Twinlab common stock were made at various dates in 2015 for nominal consideration (upon call option exercises). |
| -62- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
Level 3 Recurring Fair Value Measurements
For the Twelve Months Ended December 31, 2014
| Third-Party | ||||||||||||||||||||||||||||||||
| Real Estate | Put | Call | ||||||||||||||||||||||||||||||
| Common | Company | 2014 Call | Series A | Series B | Option | Option | ||||||||||||||||||||||||||
| Stock | Investments | Options | Warrants | Warrants | Liability | Liability | Total | |||||||||||||||||||||||||
| Fair value, net, December 31, 2013 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Total gains (losses) included in earnings: | ||||||||||||||||||||||||||||||||
| Unrealized losses | — | — | — | — | — | (9,973,684 | ) | — | (9,973,684 | ) | ||||||||||||||||||||||
| Unrealized gains | 7,327,142 | — | 6,310,178 | 9,947,368 | 4,227,632 | — | — | 27,812,320 | ||||||||||||||||||||||||
| Realized gains | 1,019,326 | — | — | — | — | — | — | 1,019,326 | ||||||||||||||||||||||||
| Exercises | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Purchases (1) | 6,215 | — | 2,623 | — | — | — | — | 8,838 | ||||||||||||||||||||||||
| Sales | (2,183 | ) | — | — | — | — | — | — | (2,183 | ) | ||||||||||||||||||||||
| Fair value, net, December 31, 2014 | $ | 8,350,500 | $ | — | $ | 6,312,801 | $ | 9,947,368 | $ | 4,227,632 | $ | (9,973,684 | ) | $ | — | $ | 18,864,617 | |||||||||||||||
| Unrealized gains (losses) still held, December 31, 2014 | $ | 8,344,285 | $ | — | $ | 6,310,309 | $ | 9,947,638 | $ | 4,227,632 | $ | (9,973,684 | ) | $ | — | $ | 18,855,910 | |||||||||||||||
| 1 | Purchases of Twinlab common stock were made at various dates at $0.76 per share. |
Quantitative information about the valuation techniques and unobservable inputs is required to be disclosed for certain recurring and nonrecurring fair value measurements.
| -63- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
The following tables present quantitative information about the valuation techniques and unobservable inputs applied to Level 3 fair value measurements for financial instruments measured at fair value on a recurring and nonrecurring basis at December 31, 2015 and 2014.
| Quantitative Information about Level 3 | |||||||||
| Fair Value Measurements at December 31, 2015 | |||||||||
| Fair | Valuation | Unobservable | Range | ||||||
| Value | Technique | Inputs | |||||||
| Assets | |||||||||
| Common Stock | $ | 9,896,605 | Discounted cash flow Guideline company transactions method Guideline publicly-traded company method |
Growth rate Risk premium factors Revenue multiple EBITDA multiple |
13.00%-15.20% (2.50%)-7.00% 1.10-2.10 9.30-13.80 | ||||
| 2014 Call Options | 1,135,863 | Discounted cash flow Guideline company transactions method Guideline publicly-traded company method |
Growth rate Risk premium factors Revenue multiple EBITDA multiple |
13.00%-15.20% (2.50%)-7.00% 1.10-2.10 9.30-13.80 | |||||
| Series B Warrants | 1,851,750 | Option pricing model | Duration Risk-free interest rate Volatility |
0.25-0.92 years 0.16 – 0.62% 50% | |||||
| Investment in Real Estate Companies | 277,500 | Recent transaction | |||||||
| Total assets held at fair value | $ | 13,161,718 | |||||||
| Liabilities | |||||||||
| Call option liability | $ | 619,122 | Option pricing model | Duration Risk-free interest rate Volatility |
2.23-2.40 years 1.12 – 1.16% 50% | ||||
| Total liabilities held at fair value | $ | 619,122 | |||||||
| -64- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – FAIR VALUE MEASUREMENTS (CONTINUED)
| Quantitative Information about Level 3 | |||||||||
| Fair Value Measurements at December 31, 2014 | |||||||||
| Fair | Valuation | Unobservable | Range | ||||||
| Value | Technique | Inputs | |||||||
| Assets | |||||||||
| Common Stock | $ | 8,350,500 | Recent transactions | Price per share | $0.76 | ||||
| 2014 Call Options | 6,312,801 | Recent transactions | Price per share | $0.76 | |||||
| Series A Warrants | 9,947,368 | Option pricing model | |||||||
| Series B Warrants | 4,227,632 | Option pricing model | Duration Risk-free interest rate Volatility |
2 years 0.58% 44% | |||||
| Total assets held at fair value | $ | 28,838,301 | |||||||
| Liabilities | |||||||||
| Put and call option liability | $ | 9,973,684 | Option pricing model | Duration Risk-free interest rate Volatility |
1.2 years 0.58% 44% | ||||
| Total liabilities held at fair value | $ | 9,973,684 | |||||||
| -65- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 – NOTE RECEIVABLE
On November 14, 2014 the Company loaned $600,000 to Twinlab’s chief executive officer/controlling shareholder under an unsecured note due December 29, 2015 bearing interest at 5%. On June 26, 2015 the balance of the receivable on the note of $618,411 was repaid in the form of $400,000 cash and the surrender of 200,000 shares of Company common stock owned by the noteholder.
NOTE 5 – DEPOSITS
In 2015, the Company made a deposit of $63,930 toward an anticipated purchase transaction, which has not closed.
NOTE 6 – RELATED PARTY TRANSACTIONS
Deemed Dividend to Related Party; Forgiveness of Receivable - Related Party
On October 28, 2014, the Company entered into a transaction in which it acquired directly from Darin Pastor (the former sole shareholder of Affluent) certain fixed assets and prepaid expenses of Affluent amounting to $152,429 and assumed certain promissory notes of Affluent (which had been dissolved in April 2014) in favor of Darin Pastor with an aggregate outstanding principal balance of $1,636,633. In the transaction, liabilities exceeded assets transferred and a deemed dividend of $1,484,204 was recorded in additional paid-in capital. As the transaction was between related parties, the assets and liabilities transferred were recorded at their historical cost basis. In connection with such transaction, the crossing revolving lines of credit between the Company and Affluent were cancelled; the Company forgave its $1,089,617 net receivable thereunder and recorded a $1,089,617 loss.
Short-Term Advances from Related Party
After October 28, 2014 the Company’s controlling stockholder Darin Pastor made advances and direct-payments to assist the Company in covering expenses. In addition, the amounts of these advances and direct-payments are reimbursable to him upon his demand at any time. At December 31, 2015 and 2014, the unrepaid balance of such advances and direct-payments was $96,695 and $94,306, respectively.
Notes Payable to Related Party
On October 28, 2014, the Company entered into a transaction in which the Company 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 demand notes in favor of Darin Pastor. At December 31, 2015 and 2014, the outstanding obligation (inclusive of accrued interest) on such assumed notes was $68,416 and $1,203,552, respectively. The interest rate on the demand notes is 2% per annum.
| -66- |
CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
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.
At December 31, 2015 and 2014, the Company had cumulative federal operating loss carryforwards of $2,504,525 and $1,905,580, respectively, which begin to expire in 2032. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code under section 382. The annual limitation may result in the expiration of net operating loss carryforwards before utilization.
The Company recognizes deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income and tax-planning.
Components of net deferred taxes are as follows at December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward | $ | 1,766,444 | $ | 768,417 | ||||
| Net deferred tax assets | 1,766,444 | 768,417 |
| Deferred tax liabilities: | ||||||||
| Unrealized gains | 6,318,548 | 7,511,140 | ||||||
| Net deferred tax liabilities | 6,318,548 | 7,511,140 | ||||||
| Total deferred tax liability, net | $ | 4,552,105 | $ | 6,742,723 |
In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment.
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CAPSTONE FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 – INCOME TAXES (CONTINUED)
A reconciliation between the statutory income tax rate and the effective income tax rate is as follows at December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| Federal statutory rate | 34.0 | % | 34.0 | % | ||||
| State taxes, net of federal benefit | 5.81 | % | 4.15 | % | ||||
| Change in valuation allowance | (0.09) | % | 0 | % | ||||
| Effective tax rate | 39.72 | % | 38.15 | % |
The components of income tax expense (benefit) for the years ended December 31, 2015 and 2014 are as follows:
| 2015 | 2014 | |||||||
| Current tax expense (benefit) | $ | 800 | $ | 800 | ||||
| Deferred tax expense (benefit) | (2,190,619 | ) | 6,742,723 | |||||
| Total income tax expense (benefit) | $ | (2,189,819 | ) | $ | 6,743,523 |
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 period ended December 31, 2015.
In February 2016, the Company sold 1,713,159 Twinlab shares to unrelated third parties for $1,302,000.
On March 31, 2016, a 4,000,000-warrants tranche of the Company’s Twinlab Series B Warrant expired unexercised.
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