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CAPSTONE FINANCIAL GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 19, 2014

FORWARD-LOOKING STATEMENTS

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

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

Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:

· our current lack of working capital;

· inability to raise additional financing;

· the fact that our accounting policies and methods are fundamental to how we

report our financial condition and results of operations, and they may require

our management to make estimates about matters that are inherently uncertain;

· deterioration in general or regional economic conditions;

· adverse state or federal legislation or regulation that increases the costs of

compliance, or adverse findings by a regulator with respect to existing

operations;

· inability to efficiently manage our operations;

· inability to achieve future sales levels or other operating results; and

· the unavailability of funds for capital expenditures.

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see "Item 1A. Risk Factors" in this document.

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

AVAILABLE INFORMATION



We file annual, quarterly and other reports and other information with the SEC. You can read these SEC filings and reports over the Internet at the SEC's website at www.sec.gov or on our website at www.capstonefinancialgroupinc.com. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm. Please call the SEC at (800) SEC-0330 for further information on the operations of the public reference facilities. We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt to of a written request to us at Capstone Financial Group, Inc., 3960 Howard Hughes Parkway, Suite 500, Las Vegas, NV 89169.

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OVERVIEW AND OUTLOOK General Business Development



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

On August 26, 2013, we changed our name from Creative App Solutions, Inc. to Capstone Financial Group, Inc. The amendment occurred as a result of our stockholders approving the amendment at the 2013 Annual Meeting of Stockholders and a subsequent vote by the Board of Directors.

On August 26, 2013, the Company entered into an Assignment, Assumption and Consent Agreement with Darin Pastor, our chief executive officer, wherein Mr. Pastor assigned the rights and obligations of the Engagement Agreement dated July 29, 2013 with Instant BioScan, LLC, an Arizona limited liability company ("IBS"), in exchange for the Company assuming the obligations of performance under the terms and conditions of the Engagement Agreement. The term of the Engagement Agreement was for a period of 270 days from the date of July 29, 2013. The agreement expired on April 25, 2014 and was not subsequently renewed by IBS.

On September 6, 2013, we effectuated a 20 to 1 forward split of the Company's issued and unissued common stock as of September 23, 2013, the record date. Immediately after the forward split, the number of shares issued and outstanding increased to 90,200,000. The number of authorized shares increased from 100,000,000 to 2,000,000,000 common shares.

During the quarter ended September 30, 2013, we changed our business plan to offer financial services and consulting to businesses and we rely heavily on an officer and director of the Company who holds the proper licensing to conduct our business. On December 9, 2013, the Company entered into a binding Letter of Intent (the "LOI") to acquire a National Independent Broker-Dealer and Registered Investment Advisor ("RIA") for the price of $2 million. However, we terminated the acquisition of this firm in February of 2014.

On January 15, 2014, the Company completed the reverse triangular merger, pursuant to the Acquisition Agreement and Plan of Merger ("Merger"), by and among Capstone Sub Co. ("Sub Co"), a Nevada corporation and wholly owned subsidiary of the Company, and Capstone Affluent Strategies, Inc. ("Affluent"), a California corporation, whereby Affluent became a wholly owned subsidiary of the Company.

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

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On February 19, 2014, the Company entered into a binding Letter of Intent (the "LOI") to acquire a California-based Broker-Dealer and Registered Investment Advisor ("RIA") for the price of $100,000. As of the date of this filing, we have postponed this transaction in order to focus on our holdings and trading positions.

On May 14, 2014, the Company executed a Rescission of Acquisition Agreement and Plan of Merger (the "Rescission Agreement") effectively unwinding the Affluent transaction. The motivation being Affluent's inability to produce audited financial statements as required per the Merger Agreement. The Board of Directors has also authorized the cancellation of 1,000 shares issued in exchange for 100% of Affluent's issued and outstanding common stock. On August 18, 2014, the 1,000 shares were cancelled.

During the quarter ended June 30, 2014 the Company changed its business plan and will use its own capital to acquire the outstanding stock of other companies, working closely and constructively with the management and boards of those companies, and aiming to significantly enhance their long-term earnings power and thus increase shareholder value. The Company will also actively trade in our strategic investment positions and will enter into private securities transactions with those positions to capitalize on price fluctuations and realize profits or minimize losses.

Business of Capstone Financial Group, Inc.

We are a holding company headquartered in Las Vegas, Nevada. Capstone uses its own capital to acquire the outstanding stock of other companies. We own equity interests in operating businesses which are accounted for under the equity method of accounting. Our primary source of revenue is trading on short term trends and fluctuations in our equity positions.

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

Current Strategic Investments

Twinlab/Twinlab Consolidation Corporation:

Twinlab 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, and Alvita teas. Twinlab's plant in American Fork, UT, is a NSF® GMP registered facility from which they manufacture, package and distribute over 1,000 premium quality products. Twinlab also operates a Research & Development facility in Grand Rapids, MI, and has its corporate headquarters in New York, NY. Twinlab products are currently available in over 55 countries worldwide.

Twinlab Consolidation Corporation (TCC) 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, TCC intends to capitalize on current market imbalances by combining multiple companies and operations into one larger, cohesive entity. The resulting synergies in distribution, manufacturing, advertising, and global marketing should increase market share and maximize profitability, establishing TCC as a market leader.

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Blackcraft Cult, Inc. (OTCQB: BLCK):

Blackcraft Cult, Inc., a California corporation was founded in 2012 by serial entrepreneurs Robert "Bobby" Schubenski and James "Jim" Somers with a single hundred-dollar bill. The company began selling customized t-shirts and other apparel with inscriptions that advocated thinking for one's self and being responsible for one's own future. Through deep connections in the music industry, the brand started to gain traction, with musicians and artists such as Alice Cooper, Marilyn Manson, Ke$ha, Fallout Boy, Slayer, Deftones, and AFI. Blackcraft gained massive exposure through this medium, with band members wearing Blackcraft shirts in press photos, on stage, and in magazine articles such as Rolling Stone and Alternative Press. Schubenski and Somers have parlayed that exposure into a social media network of over 15 million followers.

In early 2014, Blackcraft shifted to a technology-based focus. The Blackcraft Zodiac dating app for Android and iOS-based smartphones is the brainchild of Schubenski and Somers. Zodiac capitalizes on Blackcraft's massive social media network. Using astrology, cutting-edge push technology and GPS/geolocation technology, Zodiac gives singles the power in the palm of their hand to discover their astrological soul mate and to know exactly where to locate that soul mate in real time. Zodiac generates revenue using a model similar to those of Facebook, Twitter, and LinkedIn.

Competition

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

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

Personnel

As of the date of this filing, we have 6 full-time employees.

RESULTS OF OPERATIONS

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

Revenue. Total revenue for the three months ended June 30, 2014 was $2,442,904, as compared to $0 for the three months ended June 30, 2013.

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General and Administrative. General and administrative expenses increased $62,911 to $63,663 for the period ended June 30, 2014 from $752 for the period ended June 30, 2013. The increase was as largely due to the change in operations from the change in the Company's business plan.Bad Debt Expense. Bad debt expenses increased $44,067 to $44,067 for the period ended June 30, 2014 from $0 for the period ended June 30, 2013. The increase was as largely due to rolled off the balance due to one vendor.

Software Development. Software development expenses increased $ 110,800 to $ 110,800 for the period ended June 30, 2014 from $0 for the period ended June 30, 2013. The increase was as largely due to the change in operations from the change in the Company's business plan and strategic investments in our portfolio companies, namely Blackcraft Cult, Inc.

Professional Fees. Professional fees increased $10,880 to $56,028 in the period ended June 30, 2014 from $45,148 for the period ended June 30, 2013. The increase in professional fees was the result of an increase in legal and accounting fees associated with public company filings.

Interest Income - Related Party. Interest income - related party increased $0 to $0 in the period ended June 30, 2014 from $0 for the period ended June 30, 2013. The increase was the result of a decrease in notes receivable with a related party.

Interest Expense. Interest expense decreased $1,333, or 100% to $0 in the period ended June 30, 2014 from $1,333 for the period ended June 30, 2013. The decrease was the result of a decrease in interest accruals from note payables.

Interest Expense - Related Party. Interest expense - related party decreased $150, or 100% to $0 in the period ended June 30, 2014 from $150 for the period ended June 30, 2013. The decrease was the result of an increase in related party notes payables with interest accruals.

Net Gain. In the period ended June 30, 2014, we generated a net gain of $2,168,346, an increase of $ 2,120,963 from $47,383 for the period ended June 30, 2013. The increase was attributable to increases due to the change in operations from the change in the Company's business plan and the Company's implementation of fair value accounting practices for its investments.

Liquidity and Capital Resources

As of June 30, 2014, we had $10,870 in cash, $0 in accounts receivables and $850 in prepaid expenses. The company's inability to raise additional capital raises questions about our ability to continue as a going concern. Since inception, we have financed our cash flow requirements through issuance of common stock. As we continue and expand our activities, we may continue to experience net negative cash flows from operations.

Even though we have begun to generate revenues, we can make no assurances and therefore we may incur operating losses in the next twelve months. Our limited operating history makes predictions of future operating results difficult to ascertain. In the future, we anticipate obtaining additional financing to fund operations through common stock offerings, to the extent available, or to obtain additional financing to the extent necessary to augment our working capital.

The following table provides detailed information about our net cash flow for all financial statement periods presented in this Annual Report. To date, we have financed a majority of our operations through the issuance of stock and borrowings.

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The following table sets forth a summary of our cash flows for the six months ended June 30, 2014 compared to June 30, 2013.

Six months ended June 30, 2014 2013



Net cash used in operating activities $ (204,414 )$ (49,954 )) Net cash used in investing activities (721,417 )

-



Net cash provided by financing activities 936,701 26.500 Net increase/(decrease) in Cash

10,870 (23,454 ) Cash, beginning - - Cash, ending $ 10,870$ (23,454 ) Operating activities



Net cash used in operating activities was $204,414 for the period ended June 30, 2014, as compared to $110,381 used in operating activities for the same period in 2013. The increase in net cash used in operating activities was primarily due to the Company's implementation of fair value accounting practices for its investments.

Investing activities

Net cash used in investing activities was $721,417 for the period ended June 30, 2014 as compared to $0 used in investing activities for the same period in 2013. The increase is related to the use of trading revenues to fund the purchase of additional marketable securities.

Financing activities

Net cash provided by financing activities for the period ended June 30, 2014 was $936,701, as compared to $0 for the same period in 2013. The increase of net cash provided by financing activities was mainly attributable to capital raised through the sale of common stock and capital provided through our revolving credit grid notes.

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

Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development. Such risks for us include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks, we must, among other things, obtain a customer base, implement and successfully execute our business and marketing strategy, continually develop our line of products, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

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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 1 - Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements.


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