| ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES This summary of accounting policies for Capstone
Companies, Inc. (“CAPC”, “Company”, “we”, “our” or “us”), a Florida 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. Nature
of Business The
Company has its principal executive offices in Deerfield Beach, Florida. Since
2007, the Company, through CAPI, has been primarily engaged in the business of developing, marketing, and selling home LED products
(“Lighting Products”) through national and regional retailers in North America and in certain overseas markets. The
Lighting Products are targeted for applications such as home indoor and outdoor lighting and have different functionalities to
meet consumer’s needs. Over the last few years there has been significant LED price erosion, which has commoditized LED
consumer products. The LED category has matured and is no longer the innovative “must have” consumer product as in
previous years. As such, the Company entered into another home goods product segment by developing a smart interactive mirror
(“Smart Mirror”) for residential use. The Company planned for the Smart Mirror product launch in 2021, but its release
to the retail market was delayed until March 2022 due to product development delays at the Company’s suppliers, resulting
from the impact of COVID-19. The development of the Smart Mirrors is part of the Company’s strategic effort to find new
product lines to replace the Lighting Products. There were no sales of LED lighting products during 2023. The Smart Mirrors have
not provided sufficient sustained revenues to support the Company operations. The
Company’s products are typically manufactured in Thailand and China by contract manufacturing companies. As of the date
of these condensed consolidated financial statements, the Company’s future product development effort is focused on the
development of a “Connected Surfaces” portfolio. The Connected Surfaces portfolio is designed to tap into consumer’s
ever-expanding Internet of Things, wireless connected lifestyles prevalent today, with the initial product launch of the Smart
Mirror, an internet connected and interactive mirror. Subject to adequate funding, the Company’s current business strategy
is to seek to expand the new line of Connected Surfaces in 2023 and 2024. The Company has finalized development of a kitchen appliance,
the “Connected Chef”, which is the world’s first purpose-built tablet form factor with an integrated platform
for cooking accessories, ie: cutting board, and designed to safely deliver and access content on mobile and web based platforms.
The Connected Chef is not yet in production and has not produced revenues as of the second quarter of 2023. The
Company’s operations consist of one reportable segment for financial reporting purposes: Consumer Home Goods. 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 June 30, 2023, and results of operations, stockholders’ equity and cash flows
for the three and six months ended June 30, 2023 and 2022. All material 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 unaudited 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, 2022 (the “2022
Annual Report”) filed with the SEC on March 31, 2023. 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. From
2020 into 2022, the COVID-19 pandemic adversely impacted our Company at the same time as we were implementing a major shift in
product line, from mature LED products to new Connected Surfaces products, amplified the financial impact of COVID-19 pandemic
by disrupting development and production of new Connected Surfaces products in Thailand and China and resulting delay in the Company
being able to promote, market and sell Connected Surfaces products. This delay in launching the new product line coupled with
the decline in sales of the LED product line adversely impacted the Company and created uncertainty about the ongoing viability
of the current product lines of the Company. The Company’s plan to orderly transition from LED lighting products to Connected
Surfaces products as the primary source of revenues was undermined by these delays and disruptions. By the time that the Company
was ready to fill bulk orders for Smart Mirrors, the traditional primary customers for Company products did not place orders and
the Company’s e-commerce initiative did not generate any significant orders. This ‘perfect storm’ of events
has left the Company without a current product line that is generating significant revenues. The Company is evaluating the best
way for the Company to establish a product line or business line that provides a sufficient revenue source to fund working capital
and growth needs of the Company. This evaluation includes possible new Connected Surfaces products, new industry focus for those
products and potential new business lines. The Company has not established a new product line or a new business line in the fiscal
quarter ending June 30, 2023. Principles
of Consolidation The
condensed consolidated financial statements for the periods ended June 30, 2023 and 2022, include the accounts of the parent entity
and its wholly-owned subsidiaries. All intra-entity transactions and balances have been eliminated in consolidation. This
summary of accounting policies for Capstone Companies, Inc. (“CAPC”), a Florida corporation (formerly, “CHDT
Corporation”) and its wholly-owned subsidiaries (collectively referred to as the “Company”, “we”,
“our” or “us”), 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. Liquidity and Going Concern The accompanying unaudited condensed consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. As of June 30, 2023, the Company had negative
working capital of approximately $ 2,407,000 9,893,000 11,000 792,000 390,000 These liquidity conditions raise substantial doubt
about the Company’s ability to continue as a going concern. We are seeking alternative sources of liquidity, including but not limited
to accessing the capital markets, or other alternative financing measures and strategic partnerships. However, instability in, or tightening
of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us. An economic recession
or a slow recovery could adversely affect our business and liquidity. Certain directors have provided necessary
funding including a working capital line to support the Company’s cash needs through this period of revenue development,
but this funding is limited in amount and frequency.
Unless the Company succeeds in raising additional capital or successfully increases cash generated from operations, management
believes there is substantial doubt about the Company’s ability to continue as a going concern and meet its obligations
over the next twelve months from the filing date of this report Inventories The Company’s inventory, which consists of finished
Thin Cast Smart Mirror products for resale to consumers by Capstone, is recorded at the lower of landed cost (first-in, first-out) or
net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces
inventory on hand to its net realizable value on an item-by-item basis when the expected realizable value of a specific inventory item
falls below its original cost. Management regularly reviews the Company’s investment in inventories for such declines in value. During 2022, Management reviewed the valuation
of inventory on hand as of the year ended December 31, 2022, and considered the need for a reserve for slow moving inventory due to sales
not meeting projected forecasts during 2022. Management estimated a 50% reserve for inventory held in domestic warehouses and a 100% reserve
for inventory held in international warehouses, which resulted in an increase in the inventory reserve of $ 533,254 503,873 Goodwill On September 13, 2006, the Company entered
into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (“CAPI”). Capstone was incorporated
in Florida on May 15, 1996 and is engaged primarily in the business of wholesaling technology inspired consumer products to distributors
and retailers in the United States. Under the Stock Purchase Agreement, the Company acquired 100% of the issued and outstanding
shares of CAPI’s Common Stock, and recorded goodwill of $1,936,020. Goodwill acquired in business combinations is initially
computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired. Goodwill is tested
for impairment on December 31 of each year or more frequently if events or changes in circumstances indicate that the asset might
be impaired. The Company will then perform a one-step quantitative impairment text, 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). Goodwill is not amortized. The Company estimates the fair value of its single reporting unit relative
to the Company’s market capitalization. During 2020, the Company recognized $623,538 of impairment charges. There
was no impairment charge for the six months ended June 30, 2023 or for the year ended December 31, 2022. Fair Value Measurement The accounting guidance under Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) “Fair Value Measurements and Disclosures
(ASC 820-10) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10
clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset
or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10
utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad
levels. The three levels of the hierarchy are as follows: Level 1: Observable inputs such as quoted prices
in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices that
are observable for the asset or liability, either directly or indirectly. Level 3: Significant unobservable inputs. Earnings Per Common Share Basic earnings per common share is computed
by dividing net income(loss) by the weighted average number of shares of common stock outstanding as of June 30, 2023 and 2022.
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 earnings per share, the basic weighted average number
of shares is increased by the dilutive effect of stock options and warrants 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. As of June 30, 2023 and 2022, the total number of potentially dilutive common stock equivalents
excluded from the diluted earnings per share calculation was 608,288 options, 199,733 warrants and 15,000 of preferred
B-1 stock convertible into 999,900 shares of common stock for 2023 and 888,288 options, 199,733 warrants and
15,000 of preferred B-1 stock convertible into 999,900 shares of common stock for 2022. Revenue Recognition The Company generates revenue from developing, marketing
and selling consumer products through national and regional retailers. The Company’s products are targeted for applications such
as home indoor and outdoor lighting as well as Internet-of-Thing devices and will have different functionalities. CAPI currently operates
in the consumer home goods products category in the United States. These products may be offered either under the CAPI brand or a private
brand. A sales contract occurs when the customer-retailer
submits a purchase order to buy a specific product, a specific quantity, at an agreed-fixed price, within a shipping window,
from a specific location and on agreed payment terms. The selling price in all of our customers’ orders has been previously
negotiated and agreed to including any applicable discount prior to receiving the customer’s purchase order. The stated
unit price in the customer’s order has already been determined and is fixed at the time of invoicing. The Company recognizes Lighting Product
revenue and Smart Mirror revenue when the Company’s performance obligations as per the terms in the customers
purchase order have been fully satisfied, specifically, when the specified product and quantity ordered has been manufactured
and shipped pursuant to the customers requested ship window, when the sales price as detailed in the purchase order is fixed,
when the product title and risk of loss for that order has passed to the customer, and collection of the invoice is reasonably
assured. This means that the product ordered and to be shipped has gone through quality assurance inspection, customs and commercial
documentation preparation, the goods have been delivered, title transferred to the customer and confirmed by a signed cargo receipt
or bill of lading. Only at the time of shipment when all performance obligations have been satisfied will the judgement be made
to invoice the customer and complete the sales contract. The Company’s revenue recognition policy is in accordance with
ASC 606. Marketing allowances include the cost of underwriting an in-store instant
rebate coupon or a target markdown allowance on a specific product. The Company retains these allowances for a period of 3 to 5 years
in the event the customer chargebacks for a promotional allowance against an open invoice or submits an invoice for their claim. Cash
discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment. These allowances
are evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer and may be released
as other income if deemed not required. Direct-to-consumer orders for the Connected Surfaces
Smart Mirrors are sold initially through e-commerce platforms. The Company also sells the Connected Surfaces Smart Mirror program through
independent retailers. The Company will only bill the customer and recognize revenue upon the customer or retailer obtaining control of
the Smart Mirror order which generally occurs upon delivery. The Company expenses license royalty fees and sales
commissions when incurred and these expenses are recognized during the period the related sale is recorded. These costs are recorded within
sales and marketing expenses. The following table presents net revenue by geographic
location which is recognized at a point in time: Schedule of Net Revenue by Major Source
For the Three Months Ended For the Three Months Ended
Revenues % of Revenue Revenues % of Revenue
Lighting Products- U.S. $ — — % $ — — %
Lighting Products- International — — % — — %
Smart Mirror Products- U.S. 26,645 100 % 19,907 100 %
Total Net Revenue $ 26,645 100 % $ 19,907 100 %
For the Six Months Ended For the Six Months Ended
Revenues % of Revenue Revenues % of Revenue
Lighting Products- U.S. $ — — % $ 202,259 71 %
Lighting Products- International — — % 44,640 16 %
Smart Mirror Products- U.S. 32,197 100 % 35,987 13 %
Total Net Revenue $ 32,197 100 % $ 282,886 100 % We provide our wholesale customers with limited
rights of return for non-conforming product warranty claims. As a policy, the Company does not accept product returns from customers,
however occasionally as part of a customers in store test for new product, we may receive back residual inventory. Sales reductions for allowances and other
promotional coupons are recognized during the period when the related revenue is recorded. The reduction of accrued allowances
is included in net revenues and amounted to $5,335 and $1,300 for the three months ended June 30, 2023 and 2022, respectively
and $ 15,500 and $2,300, for the six months ended June 30,
2023, and 2022, respectively Warranties For the LED product line, the Company provides
the end user with limited rights of return as a consumer assurance warranty on all products sold, stipulating that the product will
function properly for the warranty period. The warranty period for all products is one year from the date of consumer purchase.
Certain retail customers may receive an off invoice-based discount such as a defective/warranty allowance, that will automatically
reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the
cost of any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances
are charged to cost of sales at the time the order is invoiced. For those customers that do not receive a discount off-invoice, the
Company recognizes a charge to cost of sales for anticipated non-conforming returns based upon an analysis of historical product
warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty
claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our
reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our
operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue. The
warranty allowance is included in cost of sales and amounted to $802 and $617 for the three months ended June 30, 2023 and 2022,
respectively and $834 and $1,288 for the six months ended June 30,
2023, and 2022, respectively For the new online Smart Mirror customers the product has a One Year Limited
Warranty. The purchaser must register the product within 30 days from date of purchase with specific product information to activate the
warranty. CAPI warrants the product to be free from defects in workmanship and materials for the warranty period. If the product fails
during normal and proper use within the warranty period, CAPI at its discretion, will repair or replace the defective parts of the product,
or the product itself. 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 $ 3,163 39,110 7,733 160,484 Product Development Our research and development team located in Thailand
working with our designated factories, are responsible for the design, development, testing, and certification of new product releases.
Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All
research and development costs are charged to results of operations as incurred. For
the three months ended June 30, 2023 and 2022, product development expenses were $ 17,614
and $ 44,708 ,
respectively and $ 51,339 and
$ 96,268 for
the six months ended June 30, 2023 and 2022, respectively. The 2023 expenses were related to the development of the Connected Chef, expanding
the Connected Surfaces product portfolio. The 2022 expenses were related to the Smart Mirror development expenses. Accounts Payable and Accrued
Liabilities Schedule of Components of Accounts Payable and Accrued Liabilities The following table summarizes the components of accounts
payable and accrued liabilities as of June 30, 2023, and December 31, 2022, respectively:
June 30, December 31,
2023 2022
Accounts payable $ 101,379 $ 38,056
Accrued warranty reserve 347 1,926
Accrued compensation and deferred wages, marketing allowances, customer deposits. 514,547 269,457
Total $ 616,273 $ 309,439 Income Taxes The Company is subject to income taxes in the U.S.
federal jurisdiction, various state jurisdictions and certain other jurisdictions. The Company accounts for income taxes under the provisions
of 740 Income Taxes The Company recognizes the tax benefit from an uncertain
tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based
on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Tax regulations within each jurisdiction are subject
to the interpretation of the relaxed tax laws and regulations and require significant judgement to apply. The Company is not subject to
U.S. federal, state and local tax examinations by tax authorities generally for a period of 3 years from the later of each return due
date or date filed. If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related
interest expense would be recorded as a component of income tax expense. If the Company were to subsequently record an unrecognized
tax benefit, associated penalties and tax related interest expense would be recorded as a component of income tax expense. On March 27, 2020, the CARES Act was enacted into
law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The
CARES Act includes several significant income and other business tax provisions that, among other things, provided for the Employee Retention
Tax Credit (“ERTC"), a refundable tax credit for businesses that continued to pay employees while shut down due to COVID-19
or had significant declines in gross receipts from March 13, 2022 to December 31, 2021. During the second quarter of 2023, the Company
received a refund of $49,000 and received a refund of $152,000 during the first quarter of 2022, included as other income on the consolidated
statements of operations as of June 30, 2023 and 2022, respectively. Stock Based Compensation The Company accounts for stock-based compensation
under the provisions of ASC 718 Compensation- Stock Compensation Stock-based compensation expense recognized
during the three months ended June 30, 2023, and 2022 was $ 0 3,362 0 6,724 Use of Estimates The preparation of condensed consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing
basis, including those related to revenue recognition, periodic impairment tests, product warranty obligations, valuation of inventories,
tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally
bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Historically, past changes to these estimates have not had a material impact on the Company’s
financial statements. However, circumstances could change, and actual results could differ materially from those estimates. Adoption of New Accounting Standards In June 2016, the FASB issued Accounting Standards
Update (“ASU) 2016-13, “ Financial Instruments – Credit Losses |
