| 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. Organization
and 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 September 30, 2024, and results of operations, stockholders’ equity and cash flows for the three and nine months
ended September 30, 2024 and 2023. 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 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,
2023 (the “2023 Annual Report”) filed with the SEC on March 29, 2024. 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. 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 September 30,
2024, the Company had negative working capital of $ 3,748,008 11,279,023 1,895 2,719,587 320,329 481,807 124,571 For the nine months
ended September 30, 2024 and 2023, the Company reported a $ 47,000 96,000 143,000 80,000 482,000 1,215,000 125,000 574,000 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 debt or equity funding through issuance of securities, or other alternative financing measures. On October 31,
2024 the Company signed an Unsecured Promissory Note (“Note”) with Coppermine Ventures, LLC (“Coppermine”),
a private Maryland limited liability company based in Baltimore County, Maryland, of $ 125,914 (“Principal”)
to the Company. The Principal is to be used to pay the working capital debts of the Company listed in Exhibit Two to the Note. The
Principal accrues interest at a simple annual rate of 7 %.
Principal and accrued interest thereon is due and payable in a single lump sum due on July 31, 2025, unless occurrence of certain
events causes all sums to become due prior to July 31, 2025, including certain events of default. The Note is not secured by
collateral or any other secured interest and does not provide for any conversion of debt-to-equity securities or issuance of any
securities. See Note 6. In addition, as an
inducement to make the loan evidenced by the Note and to make a financial commitment to fund the essential working capital needs of the
Company through March 31, 2025, the Company and Coppermine signed a Management Transition Agreement (“MTA”) on October 31,
2024. MTA provides, in part, that Coppermine will: (1) designate two (2) persons for appointment to the Company’s Board of Directors
to fill vacancies on the Company’s Board of Directors; (2) designate a person to act as Chief Executive Officer and President of
the Company upon the resignation of the incumbent Chief Executive Officer of the Company; and (3) fund certain essential and projected
working capital needs of the Company, as set forth in Attachment Two to the MTA, through March 31, 2025. The “essential working
capital needs” are those Company expenses that are necessary to pay to maintain the Company as a reporting company under the 1934
Act, cover the annual fee for the quotation of the Company’s Common Stock on The OTC Markets Group (“OTC”) QB Venture
Market and OTC Blue Sky monitoring service through August 2025, retain the acting Chief Financial Officer of the Company, retain outside
legal counsel to the Company and maintain Directors’ and Officers’ liability insurance coverage. See Note 6. 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, or finds and consummates an alternative transaction to improve its financial condition, 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 Form 10-Q. Nature of Business The Company
has its principal executive offices in Deerfield Beach, Florida. On
April 13, 2012, the Company established a wholly owned subsidiary in Hong Kong, named Capstone International Hong Kong Ltd (“CIHK”)
which provides support services such as engineering, new product development, product sourcing, factory certification and compliance,
product price negotiating, product testing and quality control and ocean freight logistics for the Company’s other subsidiaries.
With the shift of manufacturing to Thailand from China, the CIHK operation was downsized and dormant as of March 2022. From
2007 until 2022, the Company, through Capstone Industries, Inc “CAPI”, was 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 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 development of the Smart Mirrors was part of the Company’s strategic effort to find new
product lines to replace the Lighting Products. The Smart Mirrors have not provided sufficient sustained revenues to support the Company
operations. The
Company’s products have been typically manufactured in Thailand and China by contract manufacturing companies. As of the date of
these 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. The Company has finalized development of a kitchen appliance, the “Connected Chef”,
which is a purpose-built tablet with an integrated platform for cooking accessories, i.e.: 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 any pre-production
sales orders or revenues as of the nine months ended September 30, 2024. The Company would have to raise funding to pay for the production
and acquisition of inventory for any Connected Chef orders, which funding may not be possible to raise in light of the financial condition
of the Company. The
Company believes the MTA and new management members will serve the best interests of the Company and its public shareholders by potentially
expanding the expertise, funding sources and business development capabilities and networks of the Company and bringing possible new
perspectives and ideas to the efforts to establish a viable business operation for the Company. The Company is currently focused on the
development or acquisition of a new business line capable of generating operating revenues instead of the internal development and launch
of a new consumer product. The development or acquisition of a new business line will require funding in excess of amounts provided under
the Note and MTA. There is no assurance that additional funding can be obtained for development or acquisition of a new business line. The
Company’s operations through September 2024 consisted of one reportable segment for financial reporting purposes: Consumer Home
Goods. Inventories The Company’s
inventory, which consisted of finished Thin Cast Smart Mirror products for resale to consumers by Capstone, was 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. During the fourth quarter of 2023, Management reviewed the valuation of inventory on hand and decided to write
off all Smart Mirror inventory as of December 31, 2023, resulting in a $ 133,775 0 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 no 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 September
30, 2024 and 2023. 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 September 30, 2024 and 2023, the total number of potentially dilutive common stock equivalents excluded
from the diluted earnings per share calculation was 208,288 199,733 15,000 999,900 408,288 199,733 15,000 999,900 Revenue Recognition for Consumer Product
Business The Company has generated
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.
Capstone operated in the consumer electronic products category in the Unites States and in specific overseas markets. These products
were offered either under the Capstone brand or a private brand. The Company does not have a product line that is generating revenues
as of the date of the filing of this Form 10-Q. 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 ship 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. With respect to its former consumer products business,
the Company recognized lighting product 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. 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 were sold initially through e-commerce platforms. The Company also sold the Connected
Surfaces Smart Mirror program through independent retailers. The Company only billed the customer and recognized revenue upon the customer
obtaining control of the Smart Mirror order which generally occurred upon delivery. The Company expensed
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 Nine Months Ended For the Nine Months Ended
Revenues % of Revenue Revenues % of Revenue
Lighting Products – U.S. 57,829 40 % — —
Smart Mirror Products- U.S. 85,439 60 % 95,968 100 %
Total Net Revenue $ 143,268 100 % $ 95,968 100 % 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. Smart Mirror customer
orders were shipped within one to two days of receipt. Revenue was recorded upon processing of the sale with a third-party merchant processor
such as Stripe or Amazon Pay. Lighting Product customer orders received were not long-term orders and were typically shipped within nine
months of the order receipt, but certainly within a one-year period. Our Smart Mirror
customers were charged when executing the e-commerce purchase. We do not have extended payment terms for our Smart Mirror customers.
Our Lighting Product payment terms varied by the type of customer, the customer’s credit standing, the location where the product
will be picked up from and for international customers and which country their corporate office is located. The time between invoicing
date and when payment is due may vary between 30 days and 90 days depending on the customer type. To ensure there are no payment issues,
overseas customers or new customers may be required to provide a deposit or full payment before the order is delivered to the customer. As
of September 30, 2024, the Company was not actively marketing the Smart Mirror products and existing inventory was expensed as of December
31, 2023. Sales reductions
for anticipated discounts, allowances and promotional coupons are recognized during the period the related revenue is recorded. The discounts,
allowances and promotional coupons amounted to approximately $ 840 15,500 Warranties As of September 30,
2024, the Company is not marketing or selling any products, but is focused on developing the Connected Chef as a potential new product
and, as an alternative approach, acquiring or developing a new business line. Efforts to develop the Connected Chef as a new product
line had not succeeded as of September 30, 2024. For the LED product line, the Company provided 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. For the online direct to customer sales of the
had and accordingly no warranties apply. 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 Company accrued warranty liability of $ 0 1,288 Sales and Marketing Sales and marketing
costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing
expenses. Sales and marketing expenses were $ 17,403 66,144 Product Development All research and
development costs are charged to results of operations as incurred. For the nine months
ended September 30, 2024, and 2023, product development expenses were $ 4,268 76,454 Accounts
Payable and Accrued Liabilities The following table
summarizes the components of accounts payable and accrued liabilities as of September 30, 2024, and December 31, 2023, respectively:
Schedule of components of accounts payable and accrued liabilities
September
30, December
31,
2024 2023
Accounts
payable $ 45,058 $ 69,267
Accounts
payable due to related parties 47,899 —
Accrued
warranty reserve — 1,200
Accrued
compensation and deferred wages 969,602 734,156
Total $ 1,062,559 $ 804,623 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. 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 each of the nine months ended September 30, 2024, and 2023 was $0. 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 In November
2023, the FASB issued Accounting Standards Update 2023-07 – Segment Reporting (Topic ASC 280) Improvements to Reportable Segment
Disclosures. The ASU improves reportable segment disclosure requirements, primarily through enhanced disclosure about significant segment
expenses. The enhancements under this update require disclosure of significant segment expenses that are regularly provided to the Chief
Operating Decision Maker ("CODM") and included within each reported measure of segment profit or loss, require disclosure of other
segment items other segment items Recently Issued
Accounting Pronouncements Not Yet Adopted In December
2023, the FASB issued Accounting Standards Update 2023-09 – Income Taxes (Topic ASC 740) Income Taxes. The ASU improves the transparency
of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation
and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income
tax disclosures. The amendments in ASU 2023-09 will become effective beginning of our 2025 fiscal year. Early adoption is permitted for
annual financial statements that have not yet been issued or made available for issuance. We do not expect that this guidance will have
a material impact upon our financial position and results of operations. 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. |
