UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2016March 31, 2017
__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 000-28831
CAPSTONE COMPANIES, INC.
(Exact name of small business issuerRegistrant as specified in its charter)
| Florida | 84-1047159 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 350 Jim Moran Boulevard, Suite 120, Deerfield Beach, Florida 33442 |
| (Address of principal executive offices) |
| (954) 570-8889 |
| (Issuer's Telephone Number) |
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 past 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. [X] Yes [__] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [_] | Accelerated filer [_] |
Non-accelerated filer [_] (Do not check if a smaller reporting company) | Smaller reporting company [x] |
| Emerging Growth company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of October 24, 2016,May 4, 2017, there were 48,132,66447,132,664 shares of the issuer's Common Stock, $0.0001 par value per share, issued and outstanding.
1
CAPSTONE COMPANIES, INC.
Quarterly Report of Form 10-Q
Three Months and Nine Months Ended September 30, 2016March 31, 2017
TABLE OF CONTENTS
| PART 1 | FINANCIAL INFORMATION | 3 |
| Item 1. | Financial Statements (Unaudited) | 3 |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operation | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |
| Item 4. | Controls and Procedures | |
| PART II | Other Information | |
| Item 1. | Legal Proceedings | |
| Item 1A. | Risk Factors | |
| Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds | |
| Item 3. | Defaults of Senior Securities | |
| Item 4. | Mine Safety Disclosures (Not Applicable) | |
| Item 5. | Submission of Matters to Vote of Security Holders | |
| Item 6. | Exhibits | |
2
| CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| September 30, | December 31, | |||||||
| 2016 | 2015 | |||||||
| (Unaudited) | ||||||||
| Assets: | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 359,587 | $ | 364,714 | ||||
| Accounts receivable, net | 11,832,358 | 5,077,182 | ||||||
| Inventory | 480,758 | 205,708 | ||||||
| Prepaid expenses | 522,694 | 566,459 | ||||||
| Total Current Assets | 13,195,397 | 6,214,063 | ||||||
| Fixed Assets: | ||||||||
| Computer equipment and software | 19,767 | 19,767 | ||||||
| Machinery and equipment | 396,133 | 380,633 | ||||||
| Furniture and fixtures | 5,665 | 5,665 | ||||||
| Less: Accumulated depreciation | (339,579 | ) | (295,180 | ) | ||||
| Total Fixed Assets | 81,986 | 110,885 | ||||||
| Other Non-current Assets: | ||||||||
| Deposit | 12,193 | 12,193 | ||||||
| Investment (AC Kinetics) | - | 500,000 | ||||||
| Note receivable | 513,654 | - | ||||||
| Goodwill | 1,936,020 | 1,936,020 | ||||||
| Total Other Non-current Assets | 2,461,867 | 2,448,213 | ||||||
| Total Assets | $ | 15,739,250 | $ | 8,773,161 | ||||
| Liabilities and Stockholders' Equity: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 3,023,561 | $ | 2,164,283 | ||||
| Income tax payable | 12,600 | 7,500 | ||||||
| Note payable - Sterling National Bank | 6,620,023 | 2,275,534 | ||||||
| Notes and loans payable to related parties | 1,301,596 | 2,064,034 | ||||||
| Total Current Liabilities | 10,957,780 | 6,511,351 | ||||||
| Commitments and Contingent Liabilities (Note 5): | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares | - | - | ||||||
| Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued -0- shares | - | - | ||||||
| Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued-0-shares | - | - | ||||||
| Common Stock, par value $.0001 per share, authorized 56,666,667 shares, issued 48,132,664 shares | 4,813 | 4,813 | ||||||
| Additional paid-in capital | 7,390,697 | 7,344,115 | ||||||
| Accumulated deficit | (2,614,040 | ) | (5,087,118 | ) | ||||
| Total Stockholders' Equity | 4,781,470 | 2,261,810 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 15,739,250 | $ | 8,773,161 | ||||
| The accompanying notes are an integral part of these financial statements. | ||||||||
| CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| March 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| Assets: | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 1,176,440 | $ | 1,646,128 | ||||
| Accounts receivable, net | 5,732,730 | 4,449,179 | ||||||
| Inventory | 514,198 | 366,330 | ||||||
| Prepaid expenses | 544,381 | 330,020 | ||||||
| Total Current Assets | 7,967,749 | 6,791,657 | ||||||
| Property and Equipment: | ||||||||
| Computer equipment and software | 19,767 | 19,767 | ||||||
| Machinery and equipment | 339,184 | 325,750 | ||||||
| Furniture and fixtures | 5,665 | 5,665 | ||||||
| Less: Accumulated depreciation | (267,961 | ) | (250,465 | ) | ||||
| Total Property & Equipment | 96,655 | 100,717 | ||||||
| Other Non-current Assets: | ||||||||
| Deposit | 12,193 | 12,193 | ||||||
| Note receivable | 539,832 | 526,887 | ||||||
| Goodwill | 1,936,020 | 1,936,020 | ||||||
| Total Other Non-current Assets | 2,488,045 | 2,475,100 | ||||||
| Total Assets | $ | 10,552,449 | $ | 9,367,474 | ||||
| Liabilities and Stockholders' Equity: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 3,732,285 | $ | 2,678,210 | ||||
| Income tax payable | 1,588 | 1,588 | ||||||
| Notes and loans payable to related parties | 1,203,468 | 1,321,721 | ||||||
| Total Current Liabilities | 4,937,341 | 4,001,519 | ||||||
| Long Term Liabilities: | ||||||||
| Deferred tax liabilities | 344,000 | 216,000 | ||||||
| Total Long Term Liabilities | 344,000 | 216,000 | ||||||
| Total Liabilities | 5,281,341 | 4,217,519 | ||||||
| Commitments and Contingencies (Note 6) | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares | - | - | ||||||
| Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued -0- shares | - | - | ||||||
| Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued -0- shares | - | - | ||||||
| Common Stock, par value $.0001 per share, authorized 56,666,667 shares, issued 47,132,664 shares and 48,132,664 shares | 4,713 | 4,813 | ||||||
| Additional paid-in capital | 7,281,747 | 7,411,172 | ||||||
| Accumulated deficit | -2,015,352 | -2,266,030 | ||||||
| Total Stockholders' Equity | 5,271,108 | 5,149,955 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 10,552,449 | $ | 9,367,474 | ||||
| The accompanying notes are an integral part of these financial statements. | ||||||||
3
| CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | ||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | CONSOLIDATED STATEMENTS OF OPERATIONS | CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | March 31, | ||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
| Revenues, net | $ | 11,692,146 | $ | 7,747,450 | $ | 22,672,551 | $ | 8,750,951 | $ | 6,752,196 | $ | 2,078,214 | ||||||||||||
| Cost of sales | (8,841,148 | ) | (5,767,306 | ) | (17,079,271 | ) | (6,410,197 | ) | (5,172,729 | ) | (1,464,658 | ) | ||||||||||||
| Gross Profit | 2,850,998 | 1,980,144 | 5,593,280 | 2,340,754 | 1,579,467 | 613,556 | ||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||
| Sales and marketing | 488,057 | 16,716 | 903,888 | 185,229 | 376,756 | 62,977 | ||||||||||||||||||
| Compensation | 325,283 | 313,953 | 949,753 | 1,007,341 | 359,802 | 308,458 | ||||||||||||||||||
| Professional fees | 111,339 | 56,947 | 286,681 | 202,511 | 204,802 | 104,285 | ||||||||||||||||||
| Product development | 127,367 | 74,747 | 227,552 | 181,157 | 72,025 | 36,274 | ||||||||||||||||||
| Other general and administrative | 195,046 | 158,796 | 501,458 | 407,114 | 178,619 | 142,755 | ||||||||||||||||||
| Total Operating Expenses | 1,247,092 | 621,159 | 2,869,332 | 1,983,352 | 1,192,004 | 654,749 | ||||||||||||||||||
| Net Operating Income | 1,603,906 | 1,358,985 | 2,723,948 | 357,402 | ||||||||||||||||||||
| Operating Income (Loss) | 387,463 | (41,193 | ) | |||||||||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||
| Interest income | 13,664 | - | 13,664 | - | 12,945 | - | ||||||||||||||||||
| Interest expense | (103,363 | ) | (111,654 | ) | (227,522 | ) | (205,933 | ) | (21,730 | ) | (57,736 | ) | ||||||||||||
| Total Other Income (Expense) | (89,699 | ) | (111,654 | ) | (213,858 | ) | (205,933 | ) | (8,785 | ) | (57,736 | ) | ||||||||||||
| Income Before Tax Provision | 1,514,207 | 1,247,331 | 2,510,090 | 151,469 | ||||||||||||||||||||
| Income (Loss) Before Tax Provision | 378,678 | (98,929 | ) | |||||||||||||||||||||
| Provision for Income Tax | (24,412 | ) | - | (37,012 | ) | - | 128,000 | - | ||||||||||||||||
| Net Income | $ | 1,489,795 | $ | 1,247,331 | $ | 2,473,078 | $ | 151,469 | ||||||||||||||||
| Net Income (Loss) | $ | 250,678 | $ | (98,929 | ) | |||||||||||||||||||
| Net Income per Common Share | ||||||||||||||||||||||||
| Net Income (Loss) per Common Share | ||||||||||||||||||||||||
| Basic | $ | 0.031 | $ | 0.026 | $ | 0.051 | $ | 0.003 | $ | 0.005 | $ | (0.002 | ) | |||||||||||
| Diluted | $ | 0.031 | $ | 0.026 | $ | 0.051 | $ | 0.003 | $ | 0.005 | $ | (0.002 | ) | |||||||||||
| Weighted Average Common Shares Outstanding | ||||||||||||||||||||||||
| Weighted Average Shares Outstanding | Weighted Average Shares Outstanding | |||||||||||||||||||||||
| Basic | 48,132,664 | 48,132,664 | 48,132,664 | 46,057,590 | 47,621,553 | 48,132,664 | ||||||||||||||||||
| Diluted | 48,371,158 | 48,132,664 | 48,320,017 | 46,057,590 | 47,883,977 | 48,132,664 | ||||||||||||||||||
| The accompanying notes are an integral part of these financial statements. | The accompanying notes are an integral part of these financial statements. | The accompanying notes are an integral part of these financial statements. | ||||||||||||||||||||||
4
| CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |||||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| For the Nine Months Ended | For the Three Months Ended | |||||||||||||||
| September 30, | March 31, | |||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net Income | $ | 2,473,078 | $ | 151,469 | ||||||||||||
| Adjustments necessary to reconcile net income to net cash (used in) operating activities: | ||||||||||||||||
| Net income (loss) | $ | 250,678 | $ | (98,929 | ) | |||||||||||
| Adjustments necessary to reconcile net income (loss) to net cash provided by (used in) operating activities: | Adjustments necessary to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||
| Depreciation and amortization | 44,400 | 49,311 | 17,495 | 14,061 | ||||||||||||
| Accrued interest on note receivable | (13,654 | ) | - | (12,945 | ) | - | ||||||||||
| Stock based compensation expense | 46,581 | 81,219 | 20,475 | 14,250 | ||||||||||||
| Provision for deferred income tax | 128,000 | - | ||||||||||||||
| Accrued sales allowance | (94,203 | ) | (196,978 | ) | 206,995 | (94,203 | ) | |||||||||
| (Increase) decrease in accounts receivable | (6,755,174 | ) | (6,376,672 | ) | (1,539,687 | ) | 3,835,576 | |||||||||
| (Increase) decrease in inventory | (275,049 | ) | 38,337 | |||||||||||||
| (Increase) decrease in prepaid expenses | 43,764 | (371,317 | ) | |||||||||||||
| (Increase) decrease in other assets | - | 14,456 | ||||||||||||||
| (Increase) in inventory | (147,868 | ) | (26,674 | ) | ||||||||||||
| (Increase) in prepaid expenses | (214,361 | ) | (38,057 | ) | ||||||||||||
| Increase (decrease) in accounts payable and accrued liabilities | 958,580 | 1,167,729 | 1,103,216 | (1,864,020 | ) | |||||||||||
| Increase (decrease) in accrued interest on notes payable | (168,492 | ) | 148,385 | |||||||||||||
| Net cash (used in) operating activities | (3,740,169 | ) | (5,294,061 | ) | ||||||||||||
| Increase in accrued interest on notes payable | (18,253 | ) | 31,282 | |||||||||||||
| Net cash provided by (used in) operating activities | -206,255 | 1,773,286 | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchase of property and equipment | (15,501 | ) | (58,194 | ) | -13,433 | -4,700 | ||||||||||
| Net cash (used in) investing activities | (15,501 | ) | (58,194 | ) | (13,433 | ) | (4,700 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Proceeds from notes payable | 19,393,834 | 5,791,914 | 5,280,373 | 3,643,356 | ||||||||||||
| Repayments of notes payable | (15,049,345 | ) | (1,895,194 | ) | (5,280,373 | ) | (5,564,194 | ) | ||||||||
| Repurchase of shares from Involve, LLC | (150,000 | ) | - | |||||||||||||
| Proceeds from notes and loans payable to related parties | 860,000 | 2,500,000 | - | 360,000 | ||||||||||||
| Repayments of notes and loans payable to related parties | (1,453,946 | ) | (1,100,000 | ) | (100,000 | ) | (108,847 | ) | ||||||||
| Net cash provided by financing activities | 3,750,543 | 5,296,720 | ||||||||||||||
| Net cash (used in) financing activities | -250,000 | -1,669,685 | ||||||||||||||
| Net (Decrease) in Cash and Cash Equivalents | (5,127 | ) | (55,535 | ) | ||||||||||||
| Net (Decrease) Increase in Cash and Cash Equivalents | -469,688 | 98,901 | ||||||||||||||
| Cash and Cash Equivalents at Beginning of Period | 364,714 | 313,856 | 1,646,128 | 364,714 | ||||||||||||
| Cash and Cash Equivalents at End of Period | $ | 359,587 | $ | 258,321 | $ | 1,176,440 | $ | 463,615 | ||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||
| Interest | $ | 396,014 | $ | 57,549 | $ | 39,983 | $ | 60,301 | ||||||||
| Income taxes | $ | 31,912 | $ | - | $ | - | $ | 7,500 | ||||||||
| $ | 427,926 | $ | 57,549 | |||||||||||||
| Non-cash financing and investing activities: | ||||||||||||||||
| Conversion of Series C Preferred Stock to Common Stock | $ | - | $ | 1,000 | ||||||||||||
| Sale of Investment for Note receivable | $ | 500,000 | $ | - | ||||||||||||
| The accompanying notes are an integral part of these financial statements. | The accompanying notes are an integral part of these financial statements. | |||||||||||||||
5
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Capstone Companies, Inc. ("CAPC" or the "Company" or "Capstone"), a Florida corporation (formerly, "CHDT Corporation") and its wholly-owned subsidiaries is presented to assist in understanding the Company's consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently applied in the preparation of the consolidated financial statements.
Basis of Presentation
The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position as of March 31, 2017 and results of operations and cash flows for the three months ended March 31, 2017 and 2016. All significant intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC") relating to interim financial statements and in conformity with U.S. GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Annual Report").
The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.
Reverse Stock Split
On May 24, 2016, the Company's Board and stockholders holding a majority of stockholder's votes approved a reverse split of common stock at a ratio of 15 old for 1 new. The Company effectuated the reverse split on Monday July 25, 2016 and the Company's shares of common stock began trading on a post reverse split basis on July 25, 2016. The par value of the Company's common stock and preferred stock was not adjusted as a result of the reverse split. All issued and outstanding common stock, options for common stock, warrants and per share amounts have been retroactively adjusted to reflect this reverse stock split for all periods presented.
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors in North America. Capstone currently operates in five primary product categories: Induction Charged Power Failure Lights; LED Night Lights and Power Failure Lights; Motion Sensor Lights; Wireless Remote Control Outlets and Wireless Remote Control Accent Lights. The Company's products are typically manufactured in China by third-party manufacturing companies.
Inventory
The Company's inventory, recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $480,758$514,198 and $205,708$366,330 at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively.
6
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Income (Loss) Per Common Share
Basic earnings per common share were computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. At September 30,March 31, 2017 and 2016, and September 30, 2015, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 5,818,7005,182,226 and 5,908,696,5,908,693, respectively.
Basic weighted average shares outstanding is reconciled to diluted weighted shares outstanding as follows:
3 months ended September 30, 2016 | 9 months ended September 30, 2016 | |||||||
| Basic weighted average shares outstanding | 48,132,664 | 48,132,664 | ||||||
| Dilutive warrants | 238,494 | 187,353 | ||||||
| Diluted weighted average shares outstanding | 48,371,158 | 48,320,017 | ||||||
3 months ended March 31, 2017 | 3 months ended March 31, 2016 | |
| Basic weighted average shares outstanding | 47,621,553 | 48,132,664 |
| Dilutive warrants | 259,030 | - |
| Diluted weighted average shares outstanding | 47,883,977 | 48,132,664 |
Revenue Recognition
Product sales are recognized when an agreement of sale exists, product delivery has occurred, pricing is fixed or determinable, and collection is reasonably assured.
Allowances for sales returns, rebates and discounts are recorded as a component of net sales in the period the allowances are recognized. In addition, accrued liabilities contained in the accompanying condensed consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances.
During the nine-month period ending September 30,three months ended March 31, 2017 and 2016, and 2015, Capstone determined that $94,203$47,741 and $196,978,$94,203, respectively of previously accrued promotional allowances were no longer required. The reduction of promotionalaccrued allowances is included in net revenues for the nine month periods ended September 30, 2016March 31, 2017 and 2015.2016.
Advertising and Promotion
Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing expenses. Advertising and promotion expense was $65,406$20,663 and $3,301$3,053 for the three months ended March 31, 2017 and $138,846 and $98,461 for the nine months ended September 30, 2016, and 2015, respectively. As of September 30, 2016, and December 31, 2015, the Company has $275,019 in capitalized advertising costs included in prepaid expenses on the balance sheet.
Shipping and Handling
The Company's shipping and handling costs are included in sales and marketing expenses and amounted to $59,604$16,919 and $11,765$26,255 for the three months ended March 31, 2017 and $117,000 and $45,588 for the nine months ended September 30, 2016, and 2015, respectively.
Accrued Liabilities
Accrued liabilities contained in the accompanying consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potential product returns and various allowances. These estimates could change significantly in the near term.
7
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 740 Income Taxes. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries intend to file consolidated income tax returns.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of optionsthe portion of the award that is determined using the Binomial Lattice (Suboptimal) option pricing model with estimate of option lives, stock price volatility and interest rates, then expressedultimately expected to vest is recognized as expenses over the requisite service periods of service. Changes in the estimated inputs or using option value methods could result in materially different option values and share based compensation expense.Company's consolidated statements of income.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.
Stock-based compensation for the three-month period ended September 30,March 31, 2017 and 2016 totaled $20,475 and 2015 totaled $18,081 and $22,353, respectively. Stock-based compensation for the nine-month period ended September 30, 2016 and 2015 totaled $46,581 and $81,219,$14,250, respectively.
The Company's significant accounting policies are disclosed in the 2015 Annual Report. Since the date of the 2015 Annual Report, there have been no material changes to the Company's significant accounting policies. The preparation of the condensed consolidated financial statements in conformity with "US GAAP"U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts reported inof assets and liabilities and disclosure of contingent assets and liabilities at the condenseddate of the consolidated financial statements and accompanying notes. These estimatesthe reported amounts of revenue and assumptions include valuing equity securities, allowance for doubtful accounts, note receivables, inventory reserves, deferred taxes, and related valuation allowances, andexpenses during the fair value of long lived assets, intangibles, goodwill and contingent consideration.reporting period. Actual results could differ from those estimates, and the estimates.differences could be material.
Recent Accounting Standards
In May 2014, the FASB made available ASU No. 2014-09 was issued,Revenue from Contracts with Customers: Topic 606. Under this ASU 2014-09 affects anyand subsequently issued amendments, an entity using U.S. GAAP that either enters into contracts with customersis required to transfer goods or services or enters into contracts forrecognize the transferamount of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and Intangible Assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amendedit expects to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenueentitled to depictfor the transfer of promised goods or services to customerscustomers. The updated standard will replace most existing revenue recognition guidance in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such these investments may be measured at cost. ASU 2016-01 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-01 is not expected to have a material effect on the Company's consolidated financial statements.
8
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In March 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on effective interest rate method or a straight-line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 will be effective for the Company's fiscal year beginning after December 15, 2018 and subsequent interim periods. The Company is currently evaluating the impact of the adaption of ASU 2016-02 will have on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-015 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230, Statement of Cash Flows, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. ASU 2016-15 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-15 will modify the Company's current disclosures and reclassifications within the consolidated statement of cash flows but is not expected to have a material effect on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Cash Flows: Statement of Cash Flows (Topic 230) - Restricted Cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard is effective at the beginning of our 2018 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. ASU 2017-04 will be effective for the Company's fiscal year beginning after December 15, 2019, and subsequent interim periods. The Company is currently evaluating the impact of the adoption of ASU 2017-04 will have on the Company's consolidated financial statements.
Adoption of New Accounting Standards
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory which simplifies the subsequent measurement of inventory. The updated guidance requires that inventory measured using any method other than last-in, first-out (LIFO) or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) be measured at the lower of cost and net realizable value. This update became effective at the beginning of our 2017 fiscal year. The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.
The Company adopted ASU 2015-17, Income Taxes (Topic 740): Balance sheet Classification of Deferred Taxes, which changed the classification requirements for deferred tax assets and liabilities, effective January 1, 2017. ASU 2015-17 requires long-term classification of all deferred tax assets and liabilities, rather than separately classifying deferred tax assets and liabilities based on their net current and non-current amounts, as was required under the previous guidance. The Company adopted ASU 2015-17on a retrospective basis, therefore prior periods were adjusted to conform to the current period presentation. Consequently, $209,000 of current deferred tax assets previously reported as of December 31, 2016, have been reclassified to long-term deferred tax liabilities.
9
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718) which simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures, effective January 1, 2017. The new standard requires excess tax benefits or deficiencies for share-based payments to be recognized as income tax benefit or expense, rather than within additional paid-in capital, when the awards vest or are settled. Furthermore, cashflows related to excess tax benefits are required to be classified as operating activities in the statement of cash flows rather than financing activities. The adoption of ASU 2016-09 did not have a material effect on the Company's consolidated financial statements.
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company's financials properly reflect the change.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and accounts receivable.
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash and Cash Equivalents
The Company at times has cash andconsiders all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents, with its financial institution in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits. The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks. As of September 30, 2016,to the Company had $0extent the funds in excess of FDIC limits.
Accounts Receivable
The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States and their international locations.locations'. The Company typically does not require collateral from customers. Credit risk is limited due to the financial strength of the customers comprising the Company's customer base and their dispersion across different geographical regions. The
Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.
Major Customers
The Company had two customers who comprised 55%51.2% and 36%48.0% of net revenue during the nine-month period ended September 30, 2016March 31, 2017, and one customer who comprised 84%65.6% and 29.7% of net revenue during the nine-month period ended September 30, 2015.March 31, 2016. The loss of these customers would adversely impact the business of the Company.
Approximately 8%8.5% and 8%48.9% of the Company's net revenue for the nine- monthboth periods ended September 30,March 31, 2017 and 2016, and 2015, respectively, was from international sales.
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NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
| Gross Revenue % | Gross Accounts Receivable | |||||||||||||||
| Periods Ended March 31, | Periods Ended March 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Customer A | 51.2 | % | 65.6 | % | $ | 2,603,277 | $ | 1,337,076 | ||||||||
| Customer B | 48.0 | % | 29.7 | % | 3,512,252 | - | ||||||||||
| 99.2 | % | 95.3 | % | $ | 6,115,529 | $ | 1,337,076 | |||||||||
Major Vendors
The Company had two vendors from which it purchased 89%93.2% and 8%3.8% of merchandise sold during the nine-month period ended September 30, 2016,March 31, 2017, and two vendors from which it purchased 57%85.1% and 3510.4 % of merchandise sold during the nine-month period ended September 30, 2015.March 31, 2016. The loss of these suppliers could adversely impact the business of the Company.
As of September 30, 2016,March 31, 2017, approximately 80% of accounts payable were due to two vendors. As of December 31, 2015, approximately 95%86.7% and 74.1%, respectively, of accounts payable were due to two vendors.
| Purchases % | Accounts Payable | |||||||||||||||
| Periods Ended March 31, | Periods Ended March 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Vendor A | 93.2 | % | 85.1 | % | $ | 2,890,006 | $ | 148,004 | ||||||||
| Vendor B | 3.8 | % | 10.4 | % | 138,183 | 11,311 | ||||||||||
| 97.0 | % | 95. 5 | % | $ | 3,028,189 | $ | 159,315 | |||||||||
NOTE 3 - INVESTMENT AND NOTE RECEIVABLE
On January 15, 2013, the Company entered into an agreement with AC Kinetics, Inc. ("AC Kinetics") to purchase 100 shares of AC Kinetics Series A Preferred Stock for $500,000. These shares carried a liquidation preference in the amount of $500,000, were convertible at the Company's demand into 3% of the outstanding shares of AC Kinetics common stock and had anti-dilution protection.
On June 8, 2016, the Board of Directors approved a Resolution to accept an offer from AC Kinetics to sell back the 100 shares of AC Kinetics Series A Preferred Stock. For consideration, the Company received a note in the face amount of $1,500,000 that will be immediately paid to the Company on completion and funding of a Securities Purchase Agreement with a national company to purchase AC Kinetics. The note is subject to a Subordination Agreement for loans made to AC Kinetics by the national company involved in the Securities Purchase Agreement. As further consideration, the Company also received an option to repurchase 1,666,667 shares of Company common stock held by Involve L.L.C. at an exercise price of $.15. The Agreements were signed June 27, 2016. As the note is subject to a subordination agreement, and the Securities Purchase Agreement between the national company and AC Kinetics and has not been concluded, the Company has determined that the note falls under the Level three category of the fair value hierarchy and that the fair value of the note was determined to be $500,000 at the date of the transaction. The fair value of the note was determined based on an analysis of AC Kinetics ability to repay the note and the value of the collateral issued in connection with the sale of AC Kinetics Series A Preferred Stock. The significant unobservable inputs used in the fair value measurement of the Company's note receivable were the probability of default and the loss severity in the event of the default.
The table below sets forth a summary of changes in the fair value of the Level three note for the period ended March 31, 2017:
| Balance, December 31, 2016 | $ | 526,887 | ||
| Accrued interest income | $ | 12,945 | ||
| Balance, March 31, 2017 | $ | 539,832 |
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NOTE 4 – NOTES PAYABLE AND SUBSEQUENT EVENTS
Sterling National Bank
On September 8, 2010, in order to fund increasing accounts receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank), located in New York, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted. There iswill be a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is .25% above Sterling National Bank's Base Rate which at time of closing was 5%. As of September 30,March 31, 2017, and December 31, 2016, the interest rate on the loan was 5.25%. The amounts borrowed under this agreement are due on demand and securedcollateralized by a right to set-off on or against anysubstantially all the assets of the following (collectively as "Collateral"): all accounts including those at risk, all reserves, instruments, documents, notes, bills and chattel paper, letter of credit rights, commercial tort claims, proceeds of insurance, other forms of obligations owing to Sterling National Bank, bank and other deposit accounts whether or not reposed with affiliates, general intangibles (including without limitation all tax refunds, contract rights, trade names, trademarks, trade secrets, customer lists, software and all other licenses, rights, privileges and franchises), all balances, sums and other property at any time to our credit or in Sterling National Bank's possession or in the possession of any Sterling Affiliates, together with all merchandise, the sale of which resulted in the creation of accounts receivable and in all such merchandise that may be returned by customers and all books and records relating to any of the foregoing, including the cash and non-cash proceeds of all of the foregoing.
As of September 30, 2016,May 1, 2017, the base management fee was reduced to .30% of the gross invoice amount.
As of March 31, 2017 and December 31, 2015, the2016, there was no balance due to Sterling National Bank was $6,620,023 and $2,275,534, respectively.under the note payable.
As of September 30, 2016,March 31, 2017, the maximum amount that can be borrowed on this credit line is $7,000,000.
NOTE 45 – NOTES AND LOANS PAYABLE TO RELATED PARTIES
As of September 30,March 31, 2017 and December 31, 2016, the Company had three notes and loans payable due to one officer, director and related party. Total notes and loan payable due to related parties at September 30,March 31, 2017 and December 31, 2016 was $1,301,596.$1,203,468 and $1,321,721, respectively. These various notes and loans payable carry an 8 % interest rate, with maturities dates of April 3, 2017.January 2, 2018.
NOTE 56 – COMMITMENTS AND CONTINGENCIES
Operating Leases
On June 29, 2007, the Company relocated its principal executive offices and sole operations facility to 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442, which is located in Broward County. This space consists of 4,000 square rentable feet and was leased on a month to month basis.
Capstone entered into a new lease agreement for the same office space as currently located. The new lease agreement dated January 17, 2014, and effective February 1, 2014, has a 3-year term with a base annual rent of $87,678 paid in equal monthly installments. The Company hashad the one-time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term. On October 18, 2016,Effective February 1, 2017, the Company has confirmed that it will be exercisingrenewed the three (3)lease for 3 years renewal optionending January 31, 2020, with a base annual rent of $92,256 and with a total rent expense of $281,711 through the term of the lease.agreement. Under the lease agreement, Capstone is responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.
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| Year Ended December, 31, | US | HK | Total | |||||||||
| 2016 | $ | 66,870 | $ | 37,274 | $ | 104,144 | ||||||
| 2017 | 92,256 | $ | 20,322 | 112,578 | ||||||||
| 2018 | 93,885 | 0 | 93,885 | |||||||||
| 2019 | 95,570 | 0 | 95,570 | |||||||||
| 2020 | 7,964 | 0 | 7,964 | |||||||||
| Total future lease obligation | $ | 356,545 | $ | 57,596 | $ | 414,141 | ||||||
NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)
Consulting Agreements
On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf will be paid $10,500 per month through December 31, 2015 and $12,500 per month from January 1, 2016 through December 31, 2017.
On January 1, 2017, the agreement was amended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 2017 through December 31, 2017. A bonus compensation of $10,000 was paid in the month of January 2017.
The agreement can be terminated upon 30 days' notice by either party. The Company may, in its sole discretion at any time after December 31, 2015 convert
Mr. Wolf to a full-time Executive status. The annual salary and term of employment would be equal to that outlined in the consulting agreement.
Employment Agreements
On February 5, 2008,2016, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $225,000 per annum. As part of the agreement, Mr. Wallach will receive a minimum increase of 5% per year. An amount of $40,233 has been accrued and is included in the September 30, 2016 and December 31, 2015 consolidated balance sheets as part of accounts
On February 5, 2016, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. As part of the agreement, the base salary will be reviewed annually by the Compensation Committee for a potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year. The initial
term of this new agreement began February 5, 2016 and ends February 5, 2018. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed one year in length.
There is a common provision in both Mr. Wallach and Mr. McClinton's employment agreements:
If the officer's employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer's estate or the officer, as the case may be an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to (a) the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of "merit" based bonuses earned by the Executive during the prior calendar year of his termination. Any payments owed by the Company shall be paid from a normal payroll account on a bi-
weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be payout bi-weekly over the course of the year but at no time will be no more than twenty (26)
installments. The Company will also continue to pay the Executive's health and dental insurance benefits for 12 months starting at the Executives date of termination. If the Executive had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against the Executive's severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment.
Licensing Agreements
On February 4, 2015, the Company finalized a Licensing Agreement with a globally recognized floorcare company that allows the Company to market home lighting products under the licensed brand, to discount retailers, warehouse clubs, home centers, on-line retailers and other retail distribution channels in the U.S., Canada and Mexico. The initial term of the agreement is for 3 years. The agreement does not have a Guaranteed Royalty stipulation.
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NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)
On December 29, 2016, the Company finalized the first amendment to the February 4th, 2015 Licensing Agreement with the floorcare company in which the initial term was extended through February 3, 2020 if the Company reaches $10,000,000 of net sales in the initial term. The agreement was further extended out to a second extended term until February 3, 2022 and further extended out to a third extended term if specified sales goals are achieved. The license was also expanded to add an additional product category.
Royalty expense for this agreement was $172,964 and $30,871 for the periods ended March 31, 2017 and 2016, respectively.
On January 9, 2017, the Company finalized a Licensing Agreement with a globally recognized battery company that will allow the Company to market under the licensed brand, a specific product to a specific retailer in the warehouse club distribution channel. This agreement will be effective until December 31, 2018. The agreement does not have a Guaranteed Royalty stipulation, but the Company must meet minimum net sales requirements of $5,000,000 for contract year 1 and $7,000,000 for contract year 2.
Royalty expense for this agreement was $60,049 and $0 for the periods ended March 31, 2017 and 2016, respectively.
Investment Banking Agreement
On March 1, 2017, the Company executed an Investment Banking Agreement with Wilmington Capital Securities, LLC, ("Wilmington"), a registered broker-dealer under the Securities Exchange Act of 1934. The Company entered into the Agreement in order to obtain outside assistance in finding and considering possible opportunities to enhance Company shareholder value through significant corporate transactions or through funding expansion and/or diversification of the Company's primary business lines. The scope of such possible strategic transactions include mergers and acquisitions, asset acquisition or sales and funding through the issuance of Company securities. The agreement has an initial six-month term and renews for an additional, consecutive six-month term if not terminated prior to the term renewal. Wilmington will receive a cash retainer fee of $80,000, payable in monthly installments, in the first six-month term, and a reduced retainer fee of $45,000, payable in monthly installments, in the first renewal of the initial six-month term. Wilmington will also receive a transaction fee for any consummated strategic transaction introduced by Wilmington under the Agreement. The transaction fees are based on the Lehman Scale starting at 8% fee reducing to 4% on transactions from $5,000,000 to in excess of $20,000,000.
The retainer fee for this agreement was $40,000 and $0 for the periods ended March 31, 2017 and 2016, respectively.
NOTE 7 - STOCK TRANSACTIONS AND SUBSEQUENT EVENTS
Warrants
During September and October 2007, the Company issued 2,121,569 shares of common stock for cash at $0.255 per share, or $541,000 total as part of a Private Placement under Rule 506 of Regulation D. Along with the stock, each investor also received a warrant to purchase 30% of the shares purchased in the Private Placement. A total of 636,474 warrants were issued and remain outstanding at September 30,2016.March 31, 2017. The warrants are ten year warrants and have an exercise price of $0.255 per share.
Options
In 2005, the Company authorized the 2005 Equity Plan that made available 666,667shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.
As of the Company and 10,000March 31, 2017, there were 5,182,226 stock options to the Company Secretary. The options vested on August 5, 2015.
NOTE 67 - STOCK TRANSACTIONS (continued)
For the periodperiods ended September 30,March 31, 2017 and 2016, the Company recognized stock based compensation expense of $46,581$20,475 and $14,250, respectively, related to these stock options. Such amounts are included in compensation expense in the accompanying consolidated statements of income. A further compensation expense of $20,475expected to be $28,350 will be recognized for these options in 2016 and a further $48,825 will be recognized in 2017.
Adoption of Stock Repurchase Plan
On August 23, 2016, the Company's Board of Directors authorized the Company to implement a stock repurchase plan for up to $750,000 worth of shares of the Company's outstanding common stock. The stock option activity duringpurchases can be made in the nine months ended September 30, 2016 is presented below:open market, structured repurchase programs, or in privately negotiated transactions. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased will be at the discretion of management and will depend on a number of factors including the price of the Company's common stock, market conditions, corporate developments and the Company's financial condition. The repurchase plan may be discontinued at any time at the Company's discretion.
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Term (Years) | Value | |||||||||||||
| Outstanding, December 31, 2015 | 5,272,227 | $ | 0.435 | 1.73 | $ | - | ||||||||||
| Granted | 210,000 | 0.435 | 5.24 | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited/expired | (300,001 | ) | - | - | - | |||||||||||
| Outstanding, September 30, 2016 | 5,182,226 | $ | 0.435 | 1.01 | $ | - | ||||||||||
| Vested/exercisable at December, 31, 2015 | 5,062,227 | $ | 0.435 | 1.60 | $ | - | ||||||||||
| Vested/exercisable at September, 30, 2016 | 4,972,224 | $ | 0.435 | 1.05 | $ | - | ||||||||||
On December 21, 2016, the Company's Board of Directors approved an extension of the Company's stock repurchase plan through December 31, 2017, subject to an earlier termination at the discretion of the Company's Board of Directors.
On February 13, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 1,000,000 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.
On May 1, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 666,667 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.
On May 2, 2017, the Company's Board of Directors authorized at the Company's discretion to either retain repurchased shares in the treasury or to retire the repurchased shares.
NOTE 78 - INCOME TAXES
As of September 30, 2016,March 31, 2017, the Company had significant net operating loss carry forwards remainingfor income tax reporting purposes of approximately $9,000 that will beginmay be offset against future taxable income through 2034. Current tax laws limit the amount of loss available to expirebe offset against future taxable income when a substantial change in 2033.ownership occurs. Therefore, the amount available to offset future taxable income may be limited. The Company has determined that a full valuation allowance against its net deferred taxes is necessarytax liability as of September 30, 2016March 31, 2017 was $344,000 and December 31, 2015.is reflected in within long-term liabilities in the accompanying balance sheet.
The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant
If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be reportedrecorded as a component of income tax expense.
The provision for income taxes for the three and nine-month periodsmonths ended September 30,March 31, 2017 and 2016 was calculated based on the estimated annual effective rate of 34% and 34 % for the full 2017 and 2016 calendar year,years respectively, adjusted for an income tax benefit from the expected utilization of net operating loss carryforwards.
NOTE 8 – COST METHOD INVESTMENTS AND NOTE RECEIVABLE (continued)
The Companyincome tax provision for the periods ended March 31, 2017 and AC Kinetics also entered into a royalty agreement whereby, the Company would receive a 7% royalty on any licensing revenues received by AC Kinetics for products sold by them. This royalty agreement will terminate upon receipt by the Company of royalties of $500,000.2016 consists of:
| 2017 | 2016 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| Deferred: | ||||||||
| Federal | 128,000 | - | ||||||
| Income Tax Provision | $ | 128,000 | $ | - | ||||
| 2016 | 2015 | |||||||
| AC Kinetics Series A Convertible Preferred Stock | $ | - | $ | 500,000 | ||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this Form 10-Q quarterly report. In addition to historical information, the following discussion contains certain forward-looking statements under the Private Securities Litigation Act of 1995, as amended. See "Special Note Regarding Forward Looking Statements" below for certain information concerning those forward- looking statements. As used below, "our" and "we" refers to the Company and its subsidiaries.
Special Note Regarding Forward Looking Statements
This Form 10-Q quarterly report contains forward-looking statements that are contained principally in the sections describing our business as well as "Risk Factors," and this "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" in our latest annual report on Form 10-K for the fiscal year ended December 31, 2015,2016, as filed with the SEC. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions (including the negative and variants of such words) intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to various risks and uncertainties. Given these uncertainties, a reader of this Form 10-Q quarterly report should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:
Forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q quarterly report. One should read this Form 10-Q quarterly report and the documents that we reference herein and filed as exhibits to this Form 10-Q quarterly report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
The Company is a "penny stock" company under Commission rules and the public stock market price for its Common Stock has been depressed for several consecutive fiscal quarters. The Company's Common Stock lacks sufficient or active primary market makers and institutional investor support in the public market and this lack of support means that any increase in the per share price of our Common Stock in the public market is usually eliminated by selling pressure from profit taking by investors. As of OctoberApril 24, 2016,2017, the Common Stock was trading at $.48$.55 on the Bid Investment in our Common Stock. Investment in our Common Stock is highly risky and should only be considered by investors who can afford to lose their investment and do not require on demand liquidity. Investors should consider risk factors in this quarterly report on Form 10-Q and other SEC filings of the Company. The Company completed a 1-for-15 reverse stock split for the Common Stock on July 25, 2016. The reverse stock split did not change the Company's status as a "penny stock" company.
Use of Certain Defined Terms. Except as otherwise indicated by the context, references in this quarterly report to:
(1) "Capstone Lighting Technologies, L.L.C." or "CLTL" is a wholly owned subsidiary of Capstone Companies, Inc.
(2) "Capstone International Hong Kong Ltd" or "CIHK" is a wholly owned subsidiary of Capstone Companies, Inc. and a Hong Kong SAR registered Company.
(3) "Capstone Industries, Inc.", a Florida corporation and a wholly owned subsidiary of CAPC, may also be referred to as "CAPI.""CAPI" or "Capstone".
(4) "Capstone Companies, Inc.," a Florida corporation, may also be referred to as "we," "us" "our," "Company," or "CAPC." Unless the context indicates otherwise, "Company" includes in its meaning all of Capstone Companies, Inc.'s subsidiaries.
(5) "China" or "PRC" means People's Republic of China.
(6) References to "33 Act" or "Securities Act" means the Securities Act of 1933, as amended.
(7) References to "34 Act" or "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(8) "SEC" or "Commission" means the U.S. Securities and Exchange Commission.
(9) "Subsidiaries" means the following wholly owned subsidiaries of the Company: Capstone Industries, Inc. ("CAPI"), Capstone International H.K Ltd., ("CIHK"), and Capstone Lighting Technologies, Inc. ("CLTL").
(10) "LED" or "LED's" means a light-emitting diode component(s) which can be assembled into light bulbs or can be used in lighting fixtures.
Further, we may use "OEM" which means "original equipment manufacturer."
General.
Capstone Companies, Inc., a Florida corporation, ("CAPC," "Company," "we," or "our") is a public holding company with its Common Stock, $0.0001 par value per share, ("Common Stock") quoted on the OTC QB Venture Market exchange of The OTC Markets Group, Inc. and, since July 6, 2012, under the trading symbol "CAPC." As a result of a 1-for-15 reverse stock split effective as of July 25, 2016, the trading symbol was ("CAPC-D") for twenty (20) days from July 25, 2016. As of August 22, 2016, the trading symbol has reverted back to ("CAPC"). As of August 22, 2016, the Company's Common Stock commenced quotation on the OTC QB Venture Market exchange of The OTC Markets Group, Inc. Prior to this quotation, the Common Stock was quoted on the Pink Tier of The OTC Markets Group Inc. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20152016
Available Information.
The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company's website at http://www.capstonecompaniesinc.com/Investor Relations and on the SEC's website at http://www.sec.gov. The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549, or through the aforesaid website URL's. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing.report. Further, the Company's references to the URLs for these websites are intended to be inactive textual references only.
Introduction
The following discussion and analysis provides an introduction to our Company, its current strategy and customers and summarizes the significant factors affecting: (i) our consolidated results of operations for the three months and nine months ended September 30, 2016March 31, 2017 compared with the same periodsperiod in 20152016 and (ii) financial liquidity and capital resources.
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The Company is a public holding company organized under the laws of the State of Florida. We designThe Company designs and manufacture a line of specialty power failure lighting solutions and other innovative specialtymarkets consumer oriented LED lighting products for distribution globally with a primary focus on the North American and Global retail markets through our operating subsidiaries. Ourmarkets. The primary operating subsidiary is Capstone Industries, Inc., a Florida corporation located in the principal executive offices of the Company ("CAPI"). Capstone International Hong Kong, Ltd., or "CIHK", was established to expand ourits product development, engineering and factory resource capabilities in Hong Kong. OurCapstone's LED lighting product lineportfolio consists of stylish, innovative and easy to use consumer LED lighting products, including power failure multi-function handheld lights, power failure multi-function nightlights, decorative nightlights, wireless motion sensor lights, remote control battery powered accent lights, remote control outlets, bath vanity lights and outdoor LED fixtures. OurThe Company's products are sold under CAPI brand name, "Capstone Lighting," and alsoCapstone Lighting® as well as under a nationally recognized licensed brand named HooverÒ® HOME Home LED. The Company believes that LED. We seek is becoming increasingly more mainstream, and, as such, the Company believes that the component and production costs will continue to lower, which should allow a smaller innovative company like ourselves to capitalize on non-commodity products utilizing LED. The Company's focus is the integration of LED into most commonly used lighting products in today's home. Capstone is positioned well to participate in these expanded product categories which will fuel the Company's further growth.
The Company seeks to deliver strong, consistent business results and superiorincreasing shareholder returns by providing consumersinnovative products on a global basis with unique products that make theirconsumer's lives simpler and safer.safer while delivering growth results to the Company's retail partners.
Strategy
The Company entered the LED Home Lightingconsumer market eight years ago. At that time, it was clear to management that there was a significant opportunity for an innovative low cost LED product lines. We have establishedsupplier as the 'Capstone Lighting' brandlighting industry was on its transition path from traditional lighting technologies to LED.
Capstone was an early integrator in the introduction of lower cost LED lighting solutions within its industry niche that have distinctive aspects to create greater appeal to consumers. The Company's product lines consist of decorative lighting, outdoor fixtures, lighting with built-in power failure technology and wireless motion sensorsafety and security. The power failure lighting and security products were initially sold under its wholly – owned subsidiary Capstone Industries' brand name through 2015.
As the Company initially entered the market with products branded Capstone LightingÒ, the Company was able to stay under the radar and avoid direct competition with the larger brands that were focused on light product linesbulbs and alsocommercial lighting. The strategy was to establish the Company's products in the Remote-Controlled Battery Accent Lightsmarketplace, building on retail success and Wireless Remote Controlled outlet lines. To successfully enter intouser satisfaction.
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Commencing in 2014, Capstone explored and researched branding opportunities that would allow the expanded newCompany to differentiate from its own Capstone LightingÒ brand. The underlying strategy enabled Capstone to effectively provide product to competing retailers within the same channel.
Through product differentiation and a visibly recognized brand launched in 2015, HooverÒ Home LED product lines, we determinedbecame a highly recognized nationalCapstone success story. The Company secured the North America trademark license for the Hoover® brand could be advantageous. In 2014 the Company initiated a search for a brand name that would resonate with consumers. The desired brand had to have a perceived rich heritage, and one trusted by American homeowners for high performance, quality and trustworthiness.LED lighting products. The HooverÒ HOME LED name is a 100-year-old household iconic brand name. Hoover® is a registered trademark of Techtronic Floor Care Technology Limited.
Moreover, in 2014, Capstone also acquired the exclusive license and sub-license to an advanced power failure technology. The Company's proprietary technology is referred to as Capstone Power Control or CPC. It is a patented technology and the U.S. patents were issued August of 2016. The CPC was launcheddeveloped over a two-year period by a group of MIT PhD Engineers operating as AC Kinetics, a private company. This technology can potentially be incorporated into a host of products. The Company is exploring ways to commercialize this technology and we believewhether it will result in any significant financial benefit is uncertain at the time of this report.
In the latter part of 2014, the Company concluded that conventional retail was going to undergo significant change in its LED product and vendor selections resulting from swift retail pricing adjustments. Early LED products, particularly light bulbs, that were deemed early technologies were seen by the Company as too expensive and no longer appropriate for the market. The early products did not look like light bulbs and were not marketed effectively in the opinion of the Company. As such, buying an LED light bulb was potentially confusing to the consumer. Over the course of the next year, retail prices for early LED products plummeted and negatively impacted the supply chain. Capstone forecasted this outcome and determined to focus its primary marketing approach towards the warehouse club channel where low retail mark-ups was deemed to have circumvented this market condition. The Company was timely in this strategic market entry and benefited from the limited number of vendors competing in this arena. The Company concluded that larger LED bulb suppliers were concerned with protecting retail price positions and they could not, as such, effectively market their brands in both conventional retail channels and warehouse club channels.
Over the course of the next three years, Capstone believes that it has been successfully received by retailerseffectively positioned itself in this channel and consumers. Sinceposted successive revenue growth while delivering strong gross margins. The Company is currently expanding its launch, thedistribution into international home improvement centers that accept Capstone's direct import model. The Company has continuedis distributing Capstone Lighting, Hoover® Home LED and will, from time to expand its product offerings under the HooverÒ HOME LED brand.time and in selected markets, offer private label programming to international accounts.
On June 8, 2016, the Board of Directors approved and accepted an offer from AC Kinetics to buy back their 100 shares of AC Kinetics Series A Preferred Stock for a $1,500,000 Note Receivable with an estimated fair market value of $500,000. The Company may continue its technology development relationship with AC Kinetics despite the agreement to sell the 100 shares of A C Kinetics Series A Preferred Stock.
Perceived or Essential Strengths. We have
Capstone's core executive team has been working together for over three decades in business and has successfully built and managed other consumer product companies. CIHK resident management team has extensive experience with low cost off shore OEM manufacturing and is led by an industry leader that has provided sourcing and procurement services to such recognized companies as Circuit City and Dicks Sporting Goods. Operating Management's extensive experience in introducing new products to retail market channelshardline product manufacturing and we believe that this experience provides us a competitive edge in our niche markets. In our early product development, we sought to find niche product opportunities that may have been overlooked or underexploited by competitors, in order to win a profitable niche of the market share with minimal cost of market entry. In May 2016,marketing prepared the Company launched another extensive array of new products atfor its entry into the National Hardware ShowLED market.
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From a market perspective, Capstone's branding strategy is focused on establishing multiple trusted brands allowing for a broader reach into various channels. Capstone Lighting® (2008), Hoover® Home LED (2015) contribute to expanding the Company's retail position. All two brands are currently available in Las Vegas, Nevada. The new products introduced additional functionality to existing categories of products that are deemed meaningful to consumers. the marketplace.
The Company's desired product(s)product characteristics are as follows:suppose to satisfy the following standards:
| · | Designed to make everyday tasks or usage simpler and more enjoyable for consumers; |
| · | While continuing to focus on increased profit margins, the products must be affordable to win at the point of sale and deliver increased revenues for retail partners; |
| · | The products must represent significant value when compared with items produced or marketed by competitive consumer product companies; and |
| · | Wherever feasible, the products must be unique to the market whether this be accomplished though design techniques, added functionality or some proprietary innovation. |
With respect to ourthe Company's goal of sustained profitability, ourthe challenge has been and remains to achieve greater profit margins from our product lines by either innovative product that induce consumers to pay a higher purchase price or increased efficiencies in producing and selling products.products that sustain attractive pricing. This challenge confronts many consumer product companies. Capstone believes that appropriate use of OEM capabilities in innovation and production coupled with design that appeals to consumers are critical factors in meeting this challenge, especially for a smaller or niche competitor.
Due to the extensive, modern manufacturing, design and engineering capabilities in China,with the Company's contract manufacturers, and the lower unit costs in China, we believeCapstone believes that it is more economical and efficient to continue to manufacture certain products in China and have them shipped to the United States rather than to have such products produced in North America. While this resource is available to and used by large numbers of U.S. companies, including our competitors, we believethe Company believes this Chinese manufacturing resource gives usthe Company the level of innovation, production cost and quality that allows usCapstone to be competitive with larger competitors in the United States. However, as design technologies can influence the degree of hand labor in building its future products, the Company expects the advantages it has realized by manufacturing solely in China to be challenged. In these cases,The Company periodically evaluates alternative OEM manufacturing within and outside the Company will evaluate production opportunities in the United States.Pacific Rim.
The Company has expanded its CIHK's operations in Hong Kong, with personnel experienced in engineering and design, product development and testing, product sourcing, international logistics and quality control. These associates work with our OEM Chinese factories to develop and prototype new product concepts and to ensure products meet consumer product regulations and rigorous quality control standards. All products are tested before and during production by Company personnel. This team also provides extensive product development, quality control and logistics support to our factory partners to ensure on time shipments. In anticipation of the Company's
We have expanded our international sales by leveraging our relationships with our existing global retailers and by strengthening our international product offerings. Our Hong Kong office assists us in placing more products into foreign market channels as well. In 2016, we surpassed our initial expansion goal with product sales in Australia, Canada, Japan, South Korea, Taiwan and the United Kingdom. InFor the ninethree months ended September 30,March 31, 2017 and 2016, international sales as compared to the same period 2015, increased by $1,058,700 or 134.3 %.were $574,300 and $1,016,900, respectively. International sales for the ninethree months ended September 30,March 31, 2017 and 2016 were $1,847,300 or 8 % of total net revenue compared to $788,600 or 8 %8.5% and 48.9% of net revenue in the same period in 2015.revenue.
Products and Customers
The Company has earned the recognition associated with being an innovative company as evidenced by the Company being invited to more retail buying reviews than earlier years when we were more focused on proving our ability to perform in the big box retail brick-and-mortar environment while supplying a short line of products. We are now determined to expand ourexpanded its product positioning through the introduction of many more indoor and new outdoor lighting programs both under the "Capstone""Capstone Lighting®" brand and the Hoover® Home LED brand. We will brand and other brands as acquired. Capstone has also be expandingexpanded hardwired solid state products to ourits programs in addition to the existing battery and induction powered product lines, through the expansion of bath vanity fixtures. Hoover® is a registered trademark of Techtronic Floor Care Technology Limited.fixtures and outdoor LED Gooseneck Lanterns. Such expansion involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits.
Based on ourCapstone's experience in the industry, ourthe Company's Chinese contract manufacturing resources and focus on well designed, practical products, we believe our companyCapstone believes it is well positioned to become a leading manufacturer in the rapidly growing LED home lighting and security lighting segments. OurThe Company's efforts to achieve such a goal are ongoing. Sluggish economic growth in North America in past two years and the global angst caused by a decline in the rate of Chinese economic growth in the past year are factors that hinder expansion in the consumer goods market. We believe weCapstone believes it will maintain ourits revenue growth because of ourthe ability to deliver unique products on time, the quality reputation of ourits products, our business relationships with ourCapstone's retailers and ourthe aggressive product expansion strategies currently in place. Such continued progress depends on a number of assumptions and factors, including ones mentioned in "Risk Factors" below. Critical to growth are economic conditions in ourthe markets that foster greater consumer spending as well as success in ourthe Company's initiatives to distinguish ourits brands from competitors by design, quality, and scope of functions and new technology or features. OurThe Company's ability to fund the pursuit of our goals remains a constant, significant factor.
With our newthe Company's branded lighting categories, Capstone has a comprehensive product offering for ourits niche in the industry. We believeThe Company believes that weit will provide retailers with a broad and diversified portfolio of consumer products across numerous product categories, which should add diversity to ourthe Company's revenues and cash flows sources. Within these categories, we seekCapstone seeks to service the needs of a wide range of consumers by providing products to satisfy their different interests, preferences and budgets.
Sales and Marketing
In order for continued sales growth in the retail market, the Company is focused on expanding its market share at existing accounts by expanding its portfolio of both branded and private label LED lighting products. The Company will also be targeting direct to retail clients through CIHK for products that fall outside Capstone's branded categories but are deemed innovative and preferably exclusive to CIHK. This should allow for quicker revenue expansion as time consuming product and brand development efforts are the responsibility of the retailer.
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Capstone depends on e-commerce efforts of Amazon and ourother on-line retail customers in lieu of pursuing our own aggressive in-house e-commerce effort. We believe this reliance on Amazon and other retail customer e-commerce is the most cost efficient and effective approach for the Company in e-commerce.
Company. We maintain a Facebook website at https://www.facebook.com/powerfailuresolutions/ and our sales staff may use Social Media from time to time to promote our products and brands. We have not developed a comprehensivespecific Social Media campaign based on third party sponsors or promoters. Due to the perceived growthpromotors. Facebook is a registered trademark of Social Media as a growth mechanism for products, we may have to invest more resources in the future in expanding our Social Media marketing. Any such investment of resources and any delay in expanding Social Media marketing could adversely impact our performance in the future.Facebook, Inc.
Competitive Conditions
Working Capital Requirements
In order to more effectively support retailers in the U.S. domestic markets, so that retailers can quickly replenish their stock and reduce the impact of lost sales as a result of stock outages, the Company, as required,needed, strategically increases its inventory levels held in ourits leased Anaheim, California warehouse. Combined with the cost ofinvestment in new product molds, product testing and outside certifications, package design work, expansion of the sales support team in the U.S. and further expansion of theits design and engineering capabilities in our Hong Kong office,CIHK, the Company may require additional working capital to fund these strategic projects.
The Company's ability to maintain sufficient working capital is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on the Company's working capital, ability to obtain financing, and its operations in the future. However, achieving expected results as accomplished in 2016, has increased working capital, provided the Company with liquidity and has allowed for the repayment of outstanding bank notes and some old related party loans.
Continued revenue growth and expanded product launches are critical requirements to ensure that product launchesthe Company's continued growth. Such projects are never held back as a resultbecause of funding shortfalls. CertainThe Company budgets for such projects and if necessary certain members of the Company's senior management and Board of Directors have supplemented the cash flow needs as required through short term loans. Access to affordable, timely funding could be critical to our ability to compete and expand our market share.
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Competitive Conditions
The consumer LED products and small electronics businesses are highly competitive and rapidly evolving markets, both in the United States and on a global basis, as large manufacturers with global operations compete for consumer acceptance and, increasingly, limited retail shelf space. Competition is influenced by brand perceptions, product performance and value perception, customer service and price. OurThe Company's principal lighting competitors in the U.S. are Jasco,Amertac, Energizer, and Sylvania. We believeFeit Electric. The Company believes private-label sales by large retailers has some impact on the market in some parts of the world as many national retailers such as Costco, Home Depot, LowesTarget and TargetWal-Mart offer lighting as part of their private branded product lines. Many of the Company's competitors have substantially greater resources and capabilities, including greater brand recognition, research and development budgets and broader geographical market reach. Competitors with greater resources could undermine ourCapstone's expansion efforts by marketing campaigns targeting ourits expansion efforts or engaging usprice competition. Moreover, if one or more of the Company's competitors were to merge, the change in a price competition.the competitive landscape could adversely affect our customer distribution channel.
With trends and technology continually changing, CAPCCapstone will continue to endeavor to invest and rapidly develop new products that are competitively priced with consumer centric features and benefits easily articulated to influence point of sale decision making. Success in the markets we serve depends upon product innovation, pricing, retailer support, responsiveness, and cost management. We continueThe Company continues to invest in developing the technologies and design critical to competing in our markets as evidenced by the launch of many new innovative products at the International Hardware Showour investment in May 2016.Capstone Power Control (CPC) Technology. Our ability to invest is limited by operational cash flow and funding from third parties, including members of management and the Board of Directors.
Research, Product Development, and Manufacturing Activities
To successfully implement Capstone's business strategy, the Company must continually improve its current products and develop new LED products with additional functionality to meet consumer's expectations. The Company's research and development department based in Hong Kong designs and engineers many of the Company's products, with collaboration from its third-party manufacturing partners. Their focus is to introduce product with technology, increasing functionality, enhanced quality, efficient manufacturing processes and cost reductions. CIHK also establishes strict engineering specifications and product testing protocols for the Company's contract manufacturers' factories and ensure the factories adhere to all Chinese Labor and Social Compliance Laws. Under the current political regime in China, sudden and unexpected changes in such laws are possible and could impact the Company's business or financial performance by increasing the cost or ease of conducting business.
Capstone's research and development team ensures its proprietary manufacturing expertise by maintaining control over all outsourced production and critical production molds. In order to ensure the quality and consistency of the Company's products manufactured in China, Capstone uses globally recognized certified testing laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all products are designed and tested to adhere to each country's individual regulatory standards. The Company also employs quality control inspectors who examine and test products to Capstone's specification(s) before shipments are released. CIHK office capabilities have now been expanded to include product development, project management, sourcing management, supply chain logistics, factory compliance auditing, and quality enforcement for all supplier factories located in Hong Kong and mainland China.
Capstone will continue to invest in this area as the Company expands the number of products being developed and as it moves into more technical and innovative product categories. These costs are expensed when incurred and are included in the operating expenses.
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Raw Materials
The principal raw materials used by the CompanyCapstone are sourced in China, as we manufacture our productsthe Company orders product exclusively through contract manufacturers in the region. These contract manufacturers purchase components based on the Company's specifications and provide the necessary facilities and labor to manufacture the Company's products. Capstone allocates the production of specific products to the contract manufacturer the Company believes is more experienced to produce the specific product. In order to ensure the consistent quality of Capstone's products, quality control procedures have been incorporated at each stage of the manufacturing process, ranging from the inspection of raw materials through production and delivery to the customer. These procedures are additional to the manufacturers internal quality control procedures and performed by Company staff.
| · | Raw Materials – Components and supplies are subject to sample inspections upon arrival at the contract manufacturer, to ensure the correct specified components are being used in production. |
| · | Work in Process – Our quality control team conducts quality control tests at different points during the product stages of our manufacturing process to ensure that quality integrity is maintained. |
| · | Finished Goods – Our team performs tests on finished and packaged products to assess product safety, integrity and package compliance. |
Raw materials used in manufacturing include plastic resin, copper, led bulbs, batteries, and corrugated paper. Prices of materials have remained lower and competitive in the last year as a result of lower oil prices and the strengthening U.S. dollar. CAPC believes that adequate supplies of raw materials required for its operations are available at the present time. CAPC, cannot predict the future availability or prices of such materials. These raw materials are generally available from a number of different sources, and the prices of those raw materials are susceptible to currency fluctuations and price fluctuations due to transportation, government regulations, price controls, economic climate, or other unforeseen circumstances. In the past, CAPC has not experienced any significant interruption in availability of raw materials. We believe we have extensive experience in manufacturing and have taken positions to assure supply and to protect margins on anticipated sales volume. Our Hong Kong officeCIHK is responsible for developing and sourcing finished products from Asia in order to grow and diversify our product portfolio. Quality testing for these products is performed both by our Hong Kong officeCIHK and by our globally recognized third party quality testing laboratories.
Section 1502 of Title XV of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires SEC-reporting companies to disclose annually whether any conflict minerals"conflict minerals" are necessary to the functionality or production of a product. Based on our inquiries to our manufacturers, we do not believe as of the date of such inquiries that any conflict minerals are used in making our products.
Distribution and Fulfillment
Seasonality
Sales for household products and electronics are seasonally influenced, with increased purchases by consumers during the key holiday winter season of the fourth fiscal quarter, which requires increases in retailer inventories during the third fiscal quarter. In addition, natural disasters such as hurricanes and tornadoes can create conditions that drive increased needs for portable power and spike power failure light sales. Many retailers now recognize a storm preparedness period and the Company believes that it is well positioned to gain market share in these sales periods. The Company's "Power Failure Solutions" products support this growing awareness. As is true for our lighting products, the Power Failure Solutions faces competition from domestic and international companies, which includes competitors with greater resources, market share and brand recognition.
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Based on industry experience, management expects thatsales history, the new LED Home Lighting product offerings willare not be as influenced by seasonal factors and will provide a more balancednormalized revenue stream during the year once programs are executed fully at retail.year.
Intellectual Property
CAPC subsidiary, CAPI, owns a number of U.S. trademarks and patents which CAPC considers of substantial importance and which are used individually or in conjunction with other CAPC trademarks and patents. These include the following trademarks: Timely Reader, Pathway Lights, Timely Reader Book lights with Timer and Auto Shut Off and 10 LED - Eco-i-Lite Power Failure Light, 5 LED - Eco-i-Lite Power Failure Light, 3 LED - Eco-i-Lite Power Failure Light, 3 LED Slim Line Eco-i-Lite Power Failure Light, LED Induction Charged Headlight. We also have a number of patents pending on our Security Motion Activated Lights and Bathroom Vanity Light. CAPC periodically prepares patent and trademark applications for filing in the United States and China. CAPC will also pursue foreign patent protection in foreign countries if deemed necessary. CAPC's ability to compete effectively in the power failure, portable lighting, and LED Home Lighting categories depends in part, on its ability to maintain the proprietary nature of its technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements, licensing, and cross-licensing agreements. CAPC owns a number of patents, trademarks, trademark and patent applications and other technology which CAPC believes are significant to its business. These relate primarily to lighting device improvements and manufacturing processes.
Value of Patents. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Issued patents or patents based on pending patent applications or any future patent applications may not exclude competitors or may not provide a competitive advantage to us. In addition, patents issued or licensed to us may not be held valid if subsequently challenged and others may claim rights in or ownership of such patents. The validity and breadth of claims in technology patents involve complex legal and factual questions and, therefore, the extent of their enforceability and protection is highly uncertain.
Reverse engineering, unauthorized copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without paying us. We cannot assure shareholders that our competitors have not developed or will not develop similar products, will not duplicate our products, or will not design around any patents issued to or licensed by us. We will assess any loss of these rights and determine whether to litigate to protect our intellectual property rights on a case by case basis.
We rely on trademark, trade secret, patent, and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license intellectual property rights from others to support new product introductions. There can be no assurance that we can acquire licenses under patents belonging to others for technology potentially useful or necessary to us and there can be no assurance that such licenses will be available to us, if at all, on terms acceptable to us. Moreover, there can be no assurance that any patent issued to or licensed by us will not be infringed or circumvented by others, or will not be successfully challenged by others in lawsuits. We do not have a reserve for litigation costs associated with intellectual property matters. The cost of litigating intellectual property rights claims may be beyond our financial ability to fund.
Critical Accounting Policies
We believe that there have been no significant changes to our critical accounting policies during the ninethree months ended September 30, 2016March 31, 2017 as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2015.2016.
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CONSOLIDATED OVERVIEW OF OPERATIONS
Revenue, net
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, total net sales were approximately $11,692,100$6,752,200 and $7,747,500,$2,078,200, respectively, an increase of $3,944,600$4,674,000 or 50.9 % from the previous year.
In the 3 and 9 months ended September 30, 2016March 31, 2017 the Company continued to have a very strong revenue performance in the Accent Light Category in both theall three-brands including Duracell LED Lighting, Capstone Lighting and HooverÒ HOME LEDLED. brands. In the 9-monthsquarter ended September 30, 2016,March 31, 2017, the Company accrued $1,478,600provided $256,100 for marketing and rebate allowances for product promotions. Despite these marketing allowances the Company achieved nearly a $14 million revenue increase in the period. The Company also continued to expand International sales to various overseas markets during the period. International sales for the 93 months ended September 30,March 31, 2017, and 2016 and 2015 were approximately $1,847,300$574,300 or 8%8.5% of total net revenue as compared to $788,600$1,016,900 or 8 %48.9% of total net revenue for the same period in 2015. That represents an international sales increase of $1,058,700 or 134.3% as compared to the same period 2015.2016.
Cost of Sales
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, cost of sales were approximately $8,841,100$5,172,700 and $5,767,300,$1,464,700, respectively, an increase of $3,073,800$3,708,000 or 53.3%253.2% from the previous year. This represented 75.6%represents 76.6% and 74.4%70.5% respectively of total net revenues.revenue for the quarter.
Gross Profit
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, gross profit was approximately $2,851,000$1,579,500 and $1,980,100$613,600 respectively, an increase of $870,900$965,900 or 44 %157.4% from the same period in 2015.2016. Gross profit as a percentage of sales was 24.4%23.4% in the three-month periodquarter compared to 25.6%29.5% for the same quarter in 2015.
Operating Expenses
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, total operating expenses were approximately $1,247,100$1,192,000 and $621,200$654,700 respectively, an increase of $625,900$537,300 or 100.8 %82.0% as compared to same period in 2015.
The following is a summary of the major expense variances by category in the 20162017 period compared to 2015.2016.
Sales and Marketing Expenses
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, sales and marketing expenses were approximately $488,100$376,800 and $16,700$63,000 respectively, an increase of $471,400.$313,800 or 498%. During the quarter ended September 30, 2016, the increased expense resulted mainly from the distribution of royalty payments of $221,200 to TTI Floor Care$233,000 for the Hoover® License branded licenses that was not incurred last year and distribution of representative commissions that increased by $96,000 in 2017 from $1,100 in 2015 to $134,600 in 2016 and we incurred $64,300 in advertising promotions in the quarter.previous year.
Compensation Expense
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, compensation expense was approximately $325,300$359,800 and $314,000$308,500 respectively, an increase of $11,300$51,300 or 3.6%16.6%.
Professional Fees
For the 3 months ended September,March 31, 2017 and 2016, and 2015, professional expenses were approximately $111,300$204,800 and $56,900$104,300 respectively, an increase of $54,400$100,500 or 95.6 %.96.3%.
Product Development Expenses
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, product development expenses were approximately $127,400$72,000 and $74,700,$36,300 respectively, an increase of $52,700$ 35,700 or 70.5%98.3%.
Other General and Administrative
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, other general and administrative expenses were approximately $195,000$178,600 and $158,800$142,800 respectively, an increase of $36,200$35,800 or 22.8 %.25.1%.
Net Operating Income
For the 3 months ended September 30, 2016March 31, 2017 the operating income was approximately $1,603,900$387,500 compared to $1,359,000a loss of $41,200 in 2015.2016. This is an improved performance of $244,900 or 18%$428,700 over the same period 2015.
Interest Expense
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, interest expense was approximately $103,400$21,700 and $111,700,$57,700, respectively, for a reduction of $8,300 or 7.4%$36,000 as compared to the same period in 2015.
Despite having a substantial revenue growth during the 9 months,quarter, we have been able to curtail the need for increased borrowing, and the resulting increased interest expense, by negotiating favorable payment terms with our overseas suppliers, for orders being processed. Thisthis has substantially reduced the need and cost for purchase order fundingfunding. With the increased cashflow resulting from operational profits in 2016, we have also been able to complete order fulfilment.substantially reduce old director loans which also reduced the interest expense.
Provision for Income Tax
For the 3 months ended September 30,March 31, 2017 and 2016, and 2015, the provision for income tax was approximately $24,400$128,000 and $0, respectively.
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Net Income
For the 3 months ended September 30, 2016,March 31, 2017, the Company had a net income of approximately $1,489,800$250,700 as compared to a net incomeloss of $1,247,300 in the same period last year. This is an improved performance of $242,500 or 19.4% from the same period in 2015.
The overall net income improvement in the 9-month periodquarter ended September 30, 2016March 31, 2017 of $2,321,600 or 1,532%$349,600 compared to 2015,2016, was the result of the significant$4,674,000 increase in revenue, supported by strong International sales.resulting from the rollout of 5 new products. This resultperformance was achieved after the Company provided for $1,478,600$261,000 of increased promotion allowances and approximately $886,000$537,300 increased operating expenses mainly resulting from License Royalty payments and reps commission compared to 2015.2016 and the Company has provided for a tax provision of $128,000.
Off-Balance Sheet Arrangements
The Company does not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.
Contractual Obligations
| Payments Due by Period | ||||||||||||||||||||
| Total | 2016 | 2017 | 2018 | After 2019 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Accounts Payable and accrued expense | $ | 3,036,161 | $ | 3,036,161 | $ | - | $ | - | $ | - | ||||||||||
| Notes Payable Sterling Factors | 6,620,023 | 6,620,023 | - | - | - | |||||||||||||||
| Notes and loans payable to related parties-current maturities | 1,301,596 | 1,301,596 | - | - | - | |||||||||||||||
| Operating Leases | 414,141 | 104,144 | 112,578 | 93,885 | 103,534 | |||||||||||||||
| Interest on Short-Term Debt | 40,250 | 20,125 | 20,125 | - | - | |||||||||||||||
| Total Contractual Obligations | $ | 11,412,171 | $ | 11,082,049 | $ | 132,703 | $ | 93,885 | $ | 103,534 | ||||||||||
LIQUIDITY AND CAPITAL RESOURCES
| For the Nine Months Ended | For the Three Months Ended | |||||||||||||||
| (In thousands) | September 30, 2016 | September 30, 2015 | ||||||||||||||
| March 31, 2017 | March 31, 2016 | |||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||
| Operating Activities | $ | (3,740 | ) | $ | (5,294 | ) | $ | (206 | ) | $ | 1,773 | |||||
| Investing Activities | $ | (15 | ) | $ | (58 | ) | $ | (13 | ) | $ | (5 | ) | ||||
| Financing Activities | $ | 3,751 | $ | 5,297 | $ | (250 | ) | $ | (1,670 | ) | ||||||
The Company's borrowing capacity with Sterling National Bank, favorable payment terms with vendors, funding support from certain Company Directors and cash flow from operations provide the Company with the financial resources needed to run operationsoperation's and reinvest in our business.
Operating Activities
Cash used in operating activities was approximately $(3,740,200)$206,000 in the 93 months ended September 30, 2016March 31, 2017 compared with approximately $(5,294,100) used in$1,773,000 provided by operating activities in 2015. During the same period Accounts Receivable increased by2016. Net income of approximately $6,755,200, Inventory increased by approximately $275,000$251,000 in the quarter and Accrued Sales Allowances increased by approximately $94,200. However, this was partly offset by the $2,473,100 profit during the period and ana $1,231,200 increase in Accounts Payable helped to offset cash usage resulting from an increase of Accounts Receivable by approximately $958,600. $1,539,700 and an Inventory increase by approximately $147,900.
The Company's cash flow from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers. Sales are influenced significantly by the timing and launch of new products into the marketplace. With the establishment of our Hong Kong operation we have built an operational structure that, through relationships with factory-suppliers combined with our internal expertise, can develop and release quality products to market substantially quicker than we have been able to accomplish in previous years. Furthermore, in the second quarter of 2016, we negotiated with our largest vendor to receive a credit of approximately $479,000 to cover product returns from 2015 and promotional efforts for 2016. The credit has been applied to vendor invoices in the second and third quarters of 2016.years
Investing Activities
Cash used for investing activities for the quarter ended September 30, 2016March 31, 2017 was approximately $(15,500)$13,400 compared to $(58,200)$4,700 in 2015.2016. The Company will continuecontinues to invest in new product molds and tooling. With the product expansion into new LED home lighting categories, the Company's future capital requirements will increase. Our Hong Kong management team has the task of negotiating favorable payment terms with factories which will reduce the amounts of upfront cash required to have available when initiating a new project. Management believes that our cash flow from operations and additional borrowing will provide for these necessary capital expenditures.
Financing Activities
Cash used in financing activities for the quarter ended March 31, 2017 was approximately $250,000 compared to $1,669,700 in the same period 2016. During the quarter ended March 31, 2017, the Company repurchased $150,000 of Company shares from Involve, LLC and paid off $100,000 of Directors loans outstanding since 2010 and 2013 including all accrued interest. The Company was able to maintain the Sterling Bank loan at zero despite the large sales volume increase. The cash balance at March 31, 2017 was approximately $1,176,400 which is $469,700 reduction from December 31, 2016.
Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future. Net cash provided by financing activities for the 9-month period ended September 30, 2016 was approximately $3,750,500, compared to approximately $5,296,700 cash provided in 2015. With the expansion of the Accounts Receivable balances in the period, the Company increased its credit availability with Sterling National Bank and therefore increased its outstanding bank loans to fund the large order backlog. During the quarter ended September 30, 2016, the Company paid off $714,103 of Directors loans outstanding since 2010 and 2013 including all accrued interest. During the last 9-month period the Company has paid off approximately $1,453,900 of notes and loans payable to related parties.
At September 30, 2016,March 31, 2017, the Company was in compliance with all agreements pursuant to existing credit facilities. Management believes that our cash flow from operations, continued support from Sterling National Bank and support of certain of our Directors will provide sufficient financial resources for the Company during 2016.2017.
Directors and Officers Insurance: The Company currently operates with Directors and Officers insurance and the Company believes the coverage is adequate to cover likely liabilities under such a policy.
Impact of Inflation: The Company's major expense has been the cost of selling and marketing product lines to customers in North America. That effort involves mostly sales staff traveling to make direct marketing and sales pitches to customers and potential customers, trade shows around North America and visiting China to maintain and seek to expand distribution and manufacturing relationships and channels. With the current reduced price of world oil, although labor costs are continuing to increase, the Company expects costs to remain stable with the Chinese manufacturers. The Company generally has been able to reduce cost increases by negotiating volume purchases or re-engineering products. With our Hong Kong office firmly established, the Company expects that prices will remain steady through 2016.2017.
Country Risks Risks:- Changes in foreign, cultural, political and financial market conditions could impair the Company's international manufacturing operations and financial performance.
The Company's manufacturing is currently conducted in China. Consequently, the Company is subject to a number of significant risks associated with manufacturing in China, including:
| · | The possibility of expropriation, confiscatory taxation or price controls; |
| · | Adverse changes in local investment or exchange control regulations; |
| · | Political or economic instability, government nationalization of business or industries, government corruption, and civil unrest; |
| · | Legal and regulatory constraints; |
| · | Tariffs and other trade barriers, including trade disputes between the U.S. and China; |
| · | Political or military conflict between the U.S. and China, or between U.S. and North Korea, resulting in adverse or restricted access by U.S.-based companies to Chinese manufacturing and markets; and |
| · | Possible difficulty in enforcing or registering contractual and intellectual property rights. |
Currency: Currency fluctuations may significantly increase our expenses and affect the results of operations, especially where the currency is subject to intense political and other outside pressures.
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Interest Rate Risk: The Company does not have significant interest rate risk during the period ended September 30, 2016.March 31, 2017.
Credit Risk: The Company has not experienced significant credit risk, as most of our customers are long-term customers with superior payment records. Our managers monitor our receivables regularly and our Direct Import Programs are shipped to only the most financially stable customers or advance payments before shipment are required for those accounts less financially secure.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company maintains "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20152016 and concluded that the disclosure controls and procedures were effective under Rules 13a-15(e) and 15d-15(e) under the Exchange Act and as of September 30, 2016,March 31, 2017, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Commission regulations and forms and (ii) accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in internal controls: There were no changes in our internal controls over financial reporting that occurred during the three months covered by this quarterly report on Form 10-Q or "Report" that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The certifications of our Chief Executive Officer and Chief Financial Officer attached as Exhibits 31 and 32 and to this Report include information concerning our disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in Item 4, including the information incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2015,2016, for a more complete understanding of the matters covered by such certifications.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any material pending or threatened legal proceedings and, to the best our knowledge, no such action by or against us has been threatened. From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions or settlements may occur in such routine lawsuits, we believe that the final disposition of such routine lawsuits will not have material adverse effect on its financial position, results of operations or status as a going concern.
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Other Legal Matters. To the best of our knowledge, none of our Directors, officers or owners of record of more than five percent (5%) of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us in reference to pending litigation.
Item 1A. Risk Factors.
The only material changes in the risk factors from our Form 10-K for the fiscal year ended December 31, 20152016 are:
Economic conditions that impact the Company can also be impacted by labor strikes. Labor strikes at West Coast ports by longshoreman and truckers servicing those ports can adversely impact shipment of our products to the U.S. Such West Coast port strikes occurred in 2015 with the International Longshore and Warehouse Union and in 2016 with truck drivers of companies that move goods out of the West Coast ports. Further, Hanjin Shipping, oneports
Loss of any of our principal customers could significantly decrease our sales and profitability. The Company supplies product to the most recognized big box retailers across America and the highest concentration of its business is in the flourishing warehouse club channel. The Company's sales are made pursuant to purchase orders and we do not have supply agreements or guarantees of minimum purchases from them. As a result, these customers may cancel their purchase orders or reschedule or decrease their level of purchases from us at any time. Any loss or substantial decrease in the volume of purchases by any of the largest deep sea cargo lines, filed for court receivership on August 31, 2016. The financial troubles of Hanjin Shipping may adversely impact shipment of goods from China toCompany's top customers would harm the U.S.Company's sales and profitability.
Liquidity - The Company realized a net income of approximately $2,473,100 for the nine months ended September 30, 2016 as compared to a net income of $151,500 in the same period 2015. Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing and our operations in the future. The Company's liquidity is expected to be sufficient through fiscal year 2016,2017, resulting from the combination of our existing cash position, improved operational cash flow as a result of improvements to our operating results, the Company's borrowing capacity with Sterling National Bank and as needed, funding support from certain Company Directors (see Notes 34 and 45 to the financial statements contained in this report).
Potential Military Conflict between the U.S. and North Korea. Such conflict could adversely impact U.S.-Chinese economic and trade relationships. As of the date of this report, it is uncertain as to the likelihood of such conflict and potential consequences if such conflict did occur.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered issuances of Company securities in the quarter ending September 30, 2016.March 31, 2017.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures (Not Applicable)
Item 5. Submission of Matters to Vote of Security Holders
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Item 6. Exhibits
The following exhibits are filed as part ifof this Report on Form 10-Q or are incorporated herein by reference.
| EXHIBIT # | EXHIBIT TITLE |
| 31.1 | Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ^ |
| 31.2 | Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ^ |
| 32.1 | Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, ^ |
| 32.2 | Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, ^ |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Capstone Companies, Inc.
Dated: November 14, 2016May 15, 2017
/s/ Stewart Wallach | ||
| Stewart Wallach | Chief Executive Officer | |
| Principal Executive Officer | ||
/s/James G. McClinton | ||
| James G. McClinton | Chief Financial Officer and | |
| Principal | Chief Operating Officer |
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