Company Quick10K Filing
Quick10K
Capstone Companies
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-01 Earnings, Regulation FD, Exhibits
8-K 2019-05-02 Earnings, Regulation FD, Exhibits
8-K 2019-03-19 Earnings, Regulation FD, Exhibits
8-K 2019-03-12 Regulation FD, Other Events, Exhibits
8-K 2019-01-22 Regulation FD, Other Events, Exhibits
8-K 2018-12-19 Other Events, Exhibits
8-K 2018-12-11 Accountant, Exhibits
8-K 2018-11-01 Earnings, Regulation FD, Exhibits
8-K 2018-08-02 Earnings, Regulation FD, Exhibits
8-K 2018-05-15 Enter Agreement, Exhibits
8-K 2018-05-01 Regulation FD, Exhibits
8-K 2018-03-20 Code of Ethics, Exhibits
8-K 2018-03-16 Earnings, Regulation FD, Exhibits
RELX RELX 44,140
MLCO Melco Resorts & Entertainment 10,330
ACH Aluminum Corp of China 5,770
NTB Bank of NT Butterfield & Son 2,150
FG FGL Holdings 1,910
MTOR Meritor 1,850
CRAY Cray 1,180
BSGM Biosig Technologies 177
BIOC Biocept 18
ALRT ALR Technologies 0
CAPC 2019-03-31
Note 1 - Organization and Summary of Significant Accounting Policies
Note 2 - Concentrations of Credit Risk and Economic Dependence
Note 3 - Notes Payable
Note 4 - Commitments and Contingencies
Note 5 - Stock Transactions
Note 6 - Income Taxes
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 Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 form10q033119ex31-1.htm
EX-31.2 form10q033119ex31-2.htm
EX-32.1 form10q033119ex32-1.htm
EX-32.2 form10q033119ex32-2.htm

Capstone Companies Earnings 2019-03-31

CAPC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q033119.htm


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 March 31, 2019


__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 Registrant as specified in its charter)

Florida
84-1047159
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

431 Fairway Drive, Suite 200, Deerfield Beach, Florida    33441
(Address of principal executive offices)

(954) 252-3440
(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, smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [_]
Accelerated filer [_]
Non-accelerated filer [_]
Smaller reporting company [x]
Emerging Growth company [ ]
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [_] Yes [X] No

The number of shares outstanding of each of the issuer’s classes of common stock, as of April 29, 2019, is as follows: 46,946,364 shares of Common Stock, $0.0001 par value per share.  The issuer’s common stock is quoted on the OTCQB Venture Market of the OTC Markets Group, Inc. under the trading symbol “CAPC.”



1



CAPSTONE COMPANIES, INC.
Quarterly Report on Form 10-Q
Three Months Ended March 31, 2019
TABLE OF CONTENTS


PART 1
FINANCIAL INFORMATION
   3
     
Item 1.
Condensed Financial Statements (Unaudited)
   3
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operation
 19
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 36
Item 4.
Controls and Procedures
 36
     
PART II
Other Information
 37
     
Item 1.
Legal Proceedings
 37
Item 1A.
Risk Factors
 37
Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds
 37
Item 3.
Defaults of Senior Securities
 37
Item 4.
Mine Safety Disclosures
 37
Item 5.
Other Information
 37
Item 6.
Exhibits
 37


2



CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
   
March 31,
   
December 31,
 
   
2019
   
2018
 
Assets:
 
(Unaudited)
       
Current Assets:
           
   Cash
 
$
1,622,844
   
$
3,822,359
 
   Accounts receivable, net
   
2,376,699
     
64,511
 
   Inventories
   
17,301
     
27,497
 
   Prepaid expenses
   
76,724
     
243,876
 
   Income tax refundable
   
220,207
     
220,207
 
     Total Current Assets
   
4,313,775
     
4,378,450
 
                 
Property and Equipment:
               
   Computer equipment and software
   
51,195
     
51,195
 
   Machinery and equipment
   
170,567
     
170,567
 
   Furniture and fixtures
   
6,828
     
6,828
 
   Less: Accumulated depreciation
   
(163,700
)
   
(152,870
)
     Total Property & Equipment
   
64,890
     
75,720
 
                 
Other Non-current Assets:
               
   Deposit
   
103,193
     
102,805
 
   Goodwill
   
1,936,020
     
1,936,020
 
      Total Other Non-Current Assets
   
2,039,213
     
2,038,825
 
         Total Assets
 
$
6,417,878
   
$
6,492,995
 
                 
Liabilities and Stockholders’ Equity:
               
Current Liabilities:
               
   Accounts payable and accrued liabilities
 
$
766,276
   
$
461,446
 
   Deferred rent incentive
   
83,827
     
108,844
 
   Income tax payable
   
11,694
     
11,694
 
     Total Current Liabilities
   
861,797
     
581,984
 
                 
Long Term Liabilities:
               
   Deferred tax liabilities
   
-
     
12,000
 
     Total Long-Term Liabilities-
   
-
     
12,000
 
     Total Liabilities
   
861,797
     
593,984
 
                 
Commitments and Contingencies
               
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 47,000,894 shares at March 31, 2019
   and 47,046,364 shares at December 31, 2018.
   
4,701
     
4,704
 
   Additional paid-in capital
   
7,094,632
     
7,092,219
 
   Accumulated deficit
   
(1,543,252
)
   
(1,197,912
)
     Total Stockholders' Equity
   
5,556,081
     
5,899,011
 
     Total Liabilities and Stockholders’ Equity
 
$
6,417,878
   
$
6,492,995
 
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 


3



CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
             
   
For the Three Months Ended
 
   
March 31,
 
   
2019
   
2018
 
             
Revenues, net
 
$
2,978,802
   
$
4,060,168
 
Cost of sales
   
(2,352,215
)
   
(3,040,897
)
        Gross Profit
   
626,587
     
1,019,271
 
                 
Operating Expenses:
               
  Sales and marketing
   
191,875
     
363,061
 
  Compensation
   
374,848
     
375,110
 
  Professional fees
   
157,803
     
148,887
 
  Product development
   
85,229
     
166,566
 
  Other general and administrative
   
163,711
     
174,288
 
       Total Operating Expenses
   
973,466
     
1,227,912
 
                 
Operating Loss
   
(346,879
)
   
(208,641
)
                 
Other Expenses, Net
   
(10,461
)
   
-
 
                 
 Loss Before Tax (Benefit)
   
(357,340
)
   
(208,641
)
                 
(Benefit) for Income Tax
   
(12,000
)
   
(18,000
)
                 
Net Loss
 
$
(345,340
)
 
$
(190,641
)
                 
Net Loss per Common Share
               
Basic
 
(0.007
)
 
(0.004
)
Diluted
 
(0.007
)
 
(0.004
)
                 
Weighted Average Shares Outstanding
               
Basic
   
47,033,670
     
47,046,364
 
Diluted
   
47,033,670
     
47,046,364
 
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.         

4



CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
       
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
       
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND MARCH 31, 2018
       
                                                                   
                                                                   
   
Preferred Stock
   
Preferred Stock
   
Preferred Stock
         
Additional
             
   
Series A
   
Series B
   
Series C
   
Common Stock
   
Paid-In
   
Accumulated
   
Total
 
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Capital
   
Deficit
   
Equity
 
                                                                   
Balance at December 31, 2018
   
-
   
$
-
     
-
   
$
-
     
-
   
$
-
     
47,046,364
   
$
4,704
   
$
7,092,219
   
$
(1,197,912
)
 
$
5,899,011
 
                                                                                         
Stock options for compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
11,025
     
-
     
11,025
 
Repurchase of shares
   
-
     
-
     
-
     
-
     
-
     
-
     
(45,470
)
   
(3
)
   
(8,612
)
   
-
     
(8,615
)
Net Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(345,340
)
   
(345,340
)
Balance at March 31, 2019
(Unaudited)
   
-
     
-
     
-
     
-
     
-
     
-
     
47,000,894
     
4,701
     
7,094,632
     
(1,543,252
)
   
5,556,081
 

                                                                                       
                                                                                         
                                                                                         
                                                                                         
Balance at December 31, 2017
   
-
     
-
     
-
     
-
     
-
     
-
     
47,046,364
     
4,704
     
7,005,553
     
(186,854
)
   
6,823,403
 
Stock options for compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
28,875
     
-
     
28,875
 
Net Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(190,641
)
   
(190,641
)
Balance at March 31, 2018
(Unaudited)
   
-
   
$
-
     
-
   
$
-
     
-
   
$
-
     
47,046,364
     
4,704
   
$
7,034,428
   
$
(377,495
)
 
$
6,661,637
 

                                                                                       
                                                                                         
The accompanying notes are an integral part of these condensed consolidated financial statements.
 



5




CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
For the Three Months Ended
 
   
March 31,
 
   
2019
   
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
             
   Net loss
 
$
(345,340
)
 
$
(190,641
)
Adjustments to reconcile net loss to net cash provided by (used in)     operating activities:
               
      Depreciation and amortization
   
10,830
     
9,133
 
      Stock based compensation expense
   
11,025
     
28,875
 
      Provision (benefit) for deferred income tax
   
(12,000
)
   
9,000
 
     (Decrease) in accrued sales allowance
   
(191,468
)
   
(20,635
)
     (Increase) decrease in accounts receivable, net
   
(2,093,279
)
   
1,689,880
 
      Decrease in inventories
   
10,196
     
77,950
 
      Decrease in prepaid expenses
   
167,152
     
160,569
 
     (Increase) in deposits
   
(388
)
   
-
 
      Increase (decrease) in accounts payable and accrued liabilities
   
277,389
     
(843,679
)
     (Decrease) in deferred rent incentive
   
(25,017
)
   
-
 
     (Decrease) in income tax payable
   
-
     
(613,088
)
     (Increase) in income tax refundable
   
-
     
(113,912
)
  Net cash provided by (used in) operating activities
   
(2,190,900
)
   
193,452
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repurchase of Shares
   
(8,615
)
   
-
 
Net cash (used in) financing activities
   
(8,615
)
   
-
 
                 
Net Increase (Decrease) in Cash
   
(2,199,515
)
   
193,452
 
Cash at Beginning of Period
   
3,822,359
     
3,668,196
 
Cash at End of Period
 
$
1,622,844
   
$
3,861,648
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
 
$
-
   
$
-
 
Income taxes
 
$
-
   
$
700,000
 
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 


6



CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of accounting policies for Capstone Companies, Inc. ("CAPC", "Capstone" or the "Company"), 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.

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 March 31, 2019 and results of operations and cash flows for the three months ended March 31, 2019 and 2018. 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 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, 2018 (the “2018 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.

Nature of Business

Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling home LED products through national and regional retailers in North America and in certain overseas markets. The Company’s products are targeted for applications such as home indoor and outdoor lighting and have different functionalities to meet consumer’s needs.  These products are offered either under the Capstone brand or licensed brands.

The Company’s products are typically manufactured in China by contract manufacturing companies.

The Company’s operations consist of one reportable segment for financial reporting purposes: Lighting Products.

Accounts Receivable

For product revenue, the Company invoices its customers at the time of shipment for the sales value of the product shipped. Accounts receivable are recognized at the amount expected to be collected and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers. As of March 31, 2019 and December 31, 2018, accounts receivable serves as collateral when the Company borrows against its credit facilities.

Allowance for Doubtful Accounts

The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and the Company’s historical payment experience. An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings.  This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available. As of March 31, 2019 and December 31, 2018, management has determined that accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.


7



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The following table summarizes the components of Accounts Receivable, net:

 
March 31,
 
December 31,
 
 
2019
 
2018
 
Trade Accounts Receivables at period end
 
$
2,550,125
   
$
429,405
 
Reserve for estimated marketing allowances, cash discounts and other incentives
   
(173,426
)
   
( 364,894
)
Total Accounts Receivable, net
 
$
2,376,699
   
$
64,511
 

The following table summarizes the changes in the Company's reserve for marketing allowances, cash discounts and other incentives which is included in net accounts receivable:

   
March 31,
   
December 31,
 
   
2019
   
2018
 
Balance at beginning of the period
 
$
(364,894
)
 
$
(194,061
)
     Accrued allowances
   
-
     
(191,468
)
     Reversal of prior year accrued allowances
   
-
     
1,749
 
     Expenditures
   
191,468
     
18,886
 
Balance at period-end
 
$
(173,426
)
 
$
(364,894
)

Marketing allowances include the cost of underwriting an in store instant rebate coupon or a target markdown allowance on a specific product. Cash discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment.

Inventories

The Company's inventory, recorded at lower of cost (first-in, first-out) or net realizable value, consists of finished goods for resale by Capstone.

Prepaid Expenses

The Company’s prepaid expenses consist primarily of deposits on inventory purchases for future orders as well as prepaid insurance, trade show and subscription expense.

Leases

Lease incentives are amortized utilizing the straight-line method over the life of the lease.

Earnings Per Common Share

Basic earnings per common share are computed by dividing net income(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 would 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 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. During the period ended March 31, 2019, 100 thousand stock options expired. At March 31, 2019 and 2018, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 870,001 and 950,003, respectively.

Basic weighted average shares outstanding is reconciled to diluted weighted shares outstanding as follows:

   
3 months ended
   
3 months ended
 
   
March 31, 2019
   
March 31, 2018
 
Basic weighted average shares outstanding
   
47,033,670
     
47,046,364
 
Dilutive options
   
-
     
-
 
Diluted weighted average shares outstanding
   
47,033,670
     
47,046,364
 


8



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition

The Company generates revenue from developing, marketing and selling consumer lighting products through national and regional retailers. The Company’s products are targeted for applications such as home indoor and outdoor lighting and have different functionalities.  Capstone currently operates in the consumer lighting products category in the Unites States and in certain overseas markets. These products may be offered either under the Capstone brand or licensed brands.

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.

The Company recognizes 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.

The Company may enter into a licensing agreement with globally recognized companies, that allows the Company to market products under a licensed brand to retailers for a designated period of time, and whereby the Company will pay a royalty fee, typically a percentage of licensed product revenue to the licensor in order to market the licensed product.

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 disaggregates net revenue by major source:

 
For the 3 Months Ended March 31, 2019
 
For the 3 Months Ended March 31, 2018
 
 
Capstone Brand
 
License Brands
 
Total Consolidated
 
Capstone Brand
 
License Brands
 
Total Consolidated
 
                         
Lighting Products- U.S.
 
$
2,677,627
   
$
-
   
$
2,677,627
   
$
148,301
   
$
3,594,781
   
$
3,743,082
 
Lighting Products-International
   
301,175
     
-
     
301,175
     
165,894
     
151,192
     
317,086
 
     Total Revenue
 
$
2,978,802
   
$
-
   
$
2,978,802
   
$
314,195
   
$
3,745,973
   
$
4,060,168
 

We provide our 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 customer's in store test for new product, we may receive back residual inventory.

Customer orders received are not long-term orders and are typically shipped within six months of the order receipt, but certainly within a one-year period.

Our payment terms may vary by the type of customer, the customer's credit standing, the location where the product will be picked up from and for international customers, which country their corporate office is located. The term between invoicing date and when payment is due may vary between 30 days and 90 days depending on the customer type. In order 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.

The Company selectively supports retailer's initiatives to maximize sales of the Company's products on the retail floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to the customer.  The Company recognizes these incentives at the time they are offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to cost of sales, or marketing expenses depending on the type of sales incentives.


9



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period the related revenue is recorded.

During the three months ended March 31, 2019 and 2018, Capstone determined that $0 and $1,749, respectively of previously accrued allowances were no longer required.

Warranties

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 following table summarizes the changes in the Company's product warranty liabilities which are included in accounts payable and accrued liabilities in the accompanying March 31, 2019 and December 31, 2018 balance sheets:

   
March 31,
   
December 31,
 
   
2019
   
2018
 
Balance at the beginning of the period
 
$
212,495
   
$
328,279
 
     Amount accrued
   
132,852
     
59,981
 
     Expenditures
   
(54,395
)
   
(175,765
)
Balance at period-end
 
$
290,952
   
$
212,495
 

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 $171,457 and $4,918 for the three months ended March 31, 2019 and 2018, respectively.

Product Development

Our research and development team located in Hong Kong 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 March 31, 2019 and 2018, research and development expenses were $85,229 and $166,566, respectively.

Shipping and Handling

The Company's shipping and handling costs are included in sales and marketing expenses and are recognized as an expense during the period in which they are incurred and amounted to $7,866 and $26,353 for the three months ended March 31, 2019 and 2018, respectively.

10



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounts Payable and Accrued Liabilities

The following table summarizes the components of accounts payable and accrued liabilities as of March 31, 2019 and December 31, 2018, respectively:
   
March 31,
   
December 31,
 
   
2019
   
2018
 
Accounts payable
 
$
437,082
   
$
221,568
 
Accrued warranty reserve
   
290,952
     
212,495
 
Accrued compensation, benefits, commissions and other expenses
   
38,242
     
27,383
 
                             Total accrued liabilities
   
329,194
     
239,878
 
   Total
 
$
766,276
   
$
461,446
 

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 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 file consolidated income tax returns.

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, 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 the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company's condensed consolidated statements of operations.

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.

In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.

The Company accounts for forfeitures as they occur.



11



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of Estimates

The preparation of 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, product warrantyobligations, 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.

Recent Accounting Standards

To be Adopted in a Future Period

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 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 was effective for the Company’s fiscal year beginning after December 15, 2018 and subsequent interim periods. The Company has evaluated the adoption of ASU 2016-02 which 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 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

The Company at times has cash with its financial institution in excess of Federal Deposit Insurance Corporation ("FIDC") insurance limits. The Company places its cash with high credit quality financial institutions which minimize these risks.

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. 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. These various anticipated allowances are accrued for but would be deducted from open invoices by the customer.


12



NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)

Major Customers

The Company had one customer who comprised 100% of net revenue during the three months ended March 31, 2019 and two customers who comprised of 26% and 71% of net revenue during the three months ended March 31, 2018.  The loss of these customers would adversely impact the business of the Company.

For the three months ended March 31, 2019 and 2018, approximately 10% and 8%, respectively, of the Company's net revenue resulted from international sales.

Major Customers
 
Net Revenue %
 
Gross Accounts Receivable
 
 
For the Three Months ended March 31,
 
As of March 31,
 
As of December 31,
 
 
2019
 
2018
 
2019
 
2018
 
Customer A
   
100
%
   
26
%
 
$
2,606,110
   
$
402,294
 
Customer B
   
-
%
   
71
%
   
-
     
-
 
 Total
   
100
%
   
97
%
 
$
2,606,110
   
$
402,294
 

Major Vendors

The Company had one vendor from which it purchased 100% of merchandise sold during the period ended March 31, 2019, and two vendors from which it purchased 89% and 8% of merchandise sold during the period ended March 31, 2018. The loss of these suppliers could adversely impact the business of the Company.

 
Purchases %
 
Accounts Payable
 
 
For the Three Months ended March 31,
 
As of March 31,
 
As of December 31,
 
 
2019
 
2018
 
2019
 
2018
 
Vendor A
   
100
%
   
89
%
 
$
333,623
     
63,594
 
Vendor B
   
-
%
   
8
%
   
-
     
-
 
 Total
   
100
%
   
97
%
 
$
333,623
     
63,594
 

NOTE 3 – NOTES PAYABLE

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 is a base management fee equal to .30% 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 7%. As of March 31, 2019 and December 31, 2018, the interest rate on the loan was 7.50% and 7.25%, respectively. The amounts borrowed under this agreement are due on demand and collateralized by substantially all the assets of Capstone.

For the three months ended March 31, 2019 and 2018, the processing fees associated with the agreement were $10,494 and $17,529, respectively.

As of March 31, 2019 and December 31, 2018, there was no balance due to Sterling National Bank.

On July 20, 2018, to support the Company’s future needs, Sterling National Bank expanded the credit line up to $10,000,000 of which $2,000,000 has been allocated as a Capstone expansion working capital line.


13



NOTE 4 – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has operating lease agreements for offices and showroom facilities in Fort Lauderdale, Florida and in Hong Kong, expiring at varying dates. The Company’s principal executive offices was located at 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442, which is located in Broward County.

Effective February 1, 2017, the Company renewed the lease for 3 years ending 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 agreement.  Under the lease agreement, Capstone was responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.

On May 15, 2018, the Company entered into a lease agreement with the previous landlord to provide for a premises relocation, lease termination and new sublease agreement. Under the agreement the Company relocated its principal executive offices located at 350 Jim Moran Blvd, Suite 120, Deerfield Beach, Florida 33442 to 4,694 square feet of office space on the second floor of 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441. The original lease terminated on the relocation date and the parties proceeded under the terms of the new sublease which expires on January 31, 2020. The base annual rent in the new sublease remains at the same rate as the previous agreement until January 31, 2020. At the expiration of the new sublease, the Company has the option to accept the prime lease with another 3 years renewal and with an option to renew for an additional 5-year period. It is not reasonably certain that the Company will be able to exercise the option. If the Company decides to further extend the sublease after January 31, 2020, the Company will be subject to the terms and conditions of the prime lease. The base monthly rent will be $7,312 to January 31, 2019 and then a base rent of $7,514 until January 31, 2020 which includes an estimate for portion of the common area maintenance.

For consideration for the lease amendment, the Company received a rate abatement from the landlord, effective May 1, 2018 and for four months to September 1, 2018. The landlord delivered the relocation premises in a “turnkey” condition with requested renovations made at no expense to the Company. As further consideration, the existing landlord agreed to pay the Company $150,000 incentive to vacate the existing premises on completion of the relocation, which was fully paid as of December 31, 2018 and is being amortized over the life of the lease amendment resulting in the recognition of lease incentive income of $870 per month.

Capstone International Hong Kong Ltd, (CIHK), entered into a lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong.  The original agreement which was effective from February 17, 2014 has been extended various times. The lease was renewed for (12) months ending May 16, 2018 with a base annual rate of $54,193 paid in equal monthly installments. On April 24, 2018, the Company further extended the lease for (3) months ending August 16, 2018 with a base rate increase of $225 per month.  This agreement has been further extended until August 16, 2019 with a base monthly rate of $5,006.

CIHK entered into a six (6) month rental agreement effective from December 1, 2016 for a showroom space at 3F, Wing Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. This agreement has been extended various times. The current lease expires August 16, 2019 with a base monthly rent of $1,290.

The Company's rent expense amounted to $21,264 and $41,493 for the periods ended March 31, 2019 and 2018, respectively. The decreased rent in the period resulted from the $8,383 per month office move incentive that has been amortized over the life of the lease that ends January 31, 2020. The Company did not record a right to use asset and liability under ASC 842 due to the short term length of its current leases.

Consulting Agreements

On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf was paid $10,500 per month through December 31, 2015 increasing to $12,500 per month from January 1, 2016 through December 31, 2017. A bonus compensation of $10,000 was paid in the month of January 2017 related to 2016 sales performance.

On January 1, 2017, the agreement was amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2017 through December 31, 2017. Bonus compensation of $15,000 was paid on December 22, 2017 related to 2017 sales performance.

On January 1, 2018, the agreement was further amended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 2018 through December 31, 2018.

On January 1, 2019, the agreement was further amended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 2019 through December 31, 2020.


14



NOTE 4 – COMMITMENTS AND CONTINGENCIES (continued)

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, 2016, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $287,163 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 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 two years in length.

On February 5, 2018, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. 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 two years in length.

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 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.

On February 5, 2018, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. 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.

On December 29, 2016, the Company finalized the first amendment to the February 4, 2015 Licensing Agreement with the floorcare company in which the initial term was extended through February 3, 2020 and additional renewal terms and periods were also finalized. During this initial extended period through February 3, 2020, if the Company achieves net sales of $5,000,000, then the agreement would automatically be extended 2 years until February 3, 2022 and if during this second extended period the Company achieves net sales of $5,000,000, then the agreement would automatically be further extended 2 years until February 3, 2024. The license also added an additional product category.

On April 12, 2018, the Company finalized the second amendment to the February 4, 2015 Licensing Agreement in which the license was further expanded to add an additional product category.

15



NOTE 4 – COMMITMENTS AND CONTINGENCIES (continued)

Royalty expense related to this agreement for the periods ended March 31, 2019 and 2018, was $0 and $142,208, respectively. On January 9, 2017, the Company finalized a Licensing Agreement with a globally recognized battery company that allowed the Company to market under the licensed brand, a specific product to a specific retailer in the warehouse club distribution channel. This agreement expired on December 31, 2018.

Royalty expense related to this agreement for the period ended March 31, 2019 and 2018, was $0 and $27,054, respectively.

Public Relations Agreement and Subsequent Events

On September 27, 2018, the Company executed a public relations services agreement with Max Borges Agency, (“MBA”), a full – service public relations and communications agency with offices in Miami and San Francisco. The Company entered into the Agreement to obtain assistance from a nationally recognized firm, specializing in the development of, product branding, marketing and launching of technology products. The agreement was effective on October 1, 2018 with a minimum 180 days term, which either party can cancel with 60 days advanced notice in writing on or after the 120th day of the effective date. MBA will receive a monthly fee of $11,250 and $476 subscription fee due on the first of each month.

On February 25, 2019, the agreement was temporarily paused and on April 17, 2019, both Company’s agreed to restart the engagement effective May 1, 2019 with the same statement of work as originally agreed.

Legal Matters

Cyberquest, Inc.  Capstone received a letter in July 2017 from a purported holder of 70,000 shares of a series of preferred stock issued by CBQ, Inc., a predecessor of the Company, in the 1998 acquisition of Cyberquest, Inc., a company that ceased operations by 2002.  The letter was a request to inspect Capstone corporate records.   Capstone investigated these claims and, due to perceived deficiencies in the stock certificate, our inability to substantiate the purported ownership of said preferred stock to date and absence of validation that shares of the series of preferred stock are still outstanding, Capstone refused the purported holder’s request to inspect corporate records per a September 1, 2017 letter to the purported holder.  Capstone did not receive any responsive communications from the purported holder after September 1, 2017, until the purported holder filed a declaratory judgement action in Dallas County, Texas state court on March 21, 2018 seeking validation of purported holder’s ownership of the preferred stock and to compel inspection of Capstone corporate records.  Capstone received notice of the state declaratory action on April 3, 2018.  The Company retained local Dallas, Texas legal counsel and answered the suit, filed a counter claim to recover attorney’s fees, and removed litigation from the State Court to the U.S. District Court in Texas.

The Company and the claimant in the declaratory action pursued court-sponsored mediation which was held on September 12, 2018 in Dallas, Texas and resulted in a settlement agreement dated September 19, 2018. Under this agreement all parties acknowledged and agreed that this matter was amicably resolved without any admission of liability.

On September 27, 2018 both parties to this action filed a Joint Stipulation and Order for Dismissal with Prejudice with the U.S. district Court in Dallas, Texas, thereby ending this dispute.

NOTE 5 - STOCK TRANSACTIONS

Options

In 2005, the Company authorized the 2005 Equity Plan that made available shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.

On May 2, 2017, the Company’s Board of Directors amended the Company’s 2005 Equity Incentive Plan to extend the Plan’s expiration date from December 31, 2016 to December 31, 2021.

On August 29, 2018, the Company granted 100,000 stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation Committee, and 10,000 stock options to the Company Secretary. The Director options have a strike price of $.435 with an effective date of August 6, 2018 and will vest on August 5, 2019 and have a term of 5 years. The Company Secretary options have a strike price of $.435 with an effective date of August 6, 2018 and will vest on August 5, 2019 and have a term of 10 years.

16



NOTE 5 - STOCK TRANSACTIONS (continued)

As of March 31, 2019, there were 870,001 stock options outstanding and 660,001 stock options vested. The stock options have a weighted average expense price of $0.435.

For the three-month period ended March 31, 2019 and 2018, the Company recognized stock-based compensation expense of $11,025 and $28,875, respectively.

Such amounts are included in compensation expense in the accompanying consolidated statements of operations. A further compensation expense expected to be $15,265 will be recognized for these options in 2019.

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 purchases can be made in the 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.

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 and these shares were retired on June 1, 2017.

On December 15, 2017, the Company's Board of Directors approved an extension of the Company's stock repurchase plan for up to $750,000 through June 30, 2018.

On August 29, 2018, the Company’s Board of Directors approved a further extension of the Company’s stock repurchase plan through August 31, 2019. The Board of Directors also approved an increase of the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program from $750,000 to $1,000,000 during the renewal period.

On August 29, 2018, the Company’s Board authorized and directed the Company’s management to establish a trading account at a brokerage firm for the Company to conduct open market purchases of the Company’s Common Stock in accordance with the terms and conditions of the Company’s current stock repurchase program and to fund said account from available cash of the Company but not to exceed such amount that would cause the Company to be unable to pay its bona fide debts.

On December 19, 2018, Company entered into a Purchase Plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, with Wilson Davis & Co., Inc., a registered broker-dealer. Under the Purchase Plan, Wilson Davis & Co., Inc will make periodic purchases of up to an aggregate of 750,000 shares at prevailing market prices, subject to the terms of the Purchase Plan. As of March 31, 2019 the Company has repurchased 45,470 of the Company’s Common Stock.

NOTE 6 - INCOME TAXES

As of December 31, 2018, the Company had utilized all net operating loss carry forwards for income tax reporting purposes that were previously available to be offset against future taxable income through 2034. An operating loss carry forward of approximately $861,000 is available to the Company indefinitely and up to 80% of the operating loss can be used against future taxable income. The net deferred tax (liability)benefit as of March 31, 2019 and December 31, 2018 was $0 and $(12,000), respectively, and is reflected in long-term liabilities in the accompanying consolidated balance sheets.


17



NOTE 6 - INCOME TAXES (continued)

The statement of operations shows an effective rate of 3% and 9% at March 31, 2019 and December 31, 2018, respectively.

The income tax provision (benefit) for the three months ended March 31, 2019 and 2018 consists of:

   
2019
   
2018
 
  Current:
           
     Federal
 
$
-
   
$
(21,000
)
     State
   
-
     
(6,000
)
                 
Deferred:
               
     Federal
   
(11,340
)
   
8,500
 
     State
   
(660
)
   
500
 
  Income Tax (Benefit)
 
$
(12,000
)
 
$
(18,000
)


18



2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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, 2018, as filed with the Commission on April 1, 2019.

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 in "Risk Factors," and in "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, 2018, 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). 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.  Forward looking statements include statements about:

§
Our anticipation about consumer responses to existing and new product lines;
§
Our expectation about consumer demand for our existing and new products;
§
Our belief about future trends in our industry;
§
Our belief or expectation about our ability to compete in our industry and grow our business; and
§
Our expectations about future business and financial results and product development.

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 or current results. 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 our Common stock is impacted by the lack of significant institutional investor and primary market maker support.  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. Potential investors should carefully consider risk factors our SEC filings of the Company.

Use of Certain Defined Terms. Except as otherwise indicated by the context, the following terms have the stated meanings.

(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 registered Company.
(3)
"Capstone Industries, Inc., a Florida corporation and a wholly owned subsidiary of CAPC, may also be referred to as "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.  Subsidiaries.
(5)
"China" means People’s Republic of China.
(6)
"W" means watts.
(7)
References to "33 Act" or "Securities Act" means the Securities Act of 1933, as amended.
(8)
References to "34 Act" or "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(9)
"SEC" or "Commission" means the U.S. Securities and Exchange Commission.
(10)
"Subsidiaries" means Capstone Industries, Inc. ("CAPI"), Capstone International H.K Ltd., ("CIHK"), and Capstone Lighting Technologies, Inc. ("CLTL").
(11)
Any reference to fiscal year in this Annual Report on Form 10-K means our fiscal year, ending December 31st.
(12)
"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.
(13)
"OEM" means "original equipment manufacturer."

19



(14)
“Connected Surfaces” or “Connected Products” means smart home devices with embedded sensors that provide communication and data transfer between the Connected Surface and internet-enabled systems of the Company or associated third parties. Connected Surfaces may permit internet access for defined functions.

We may use "FY" to mean "fiscal year" and "Q" to mean fiscal quarter in this Report.

Overview of our Business

The Company is a public holding company with its Common Stock, $0.0001 par value per share, ("Common Stock") quoted on the OTCQB Venture Market exchange of The OTC Markets Group, Inc. and, since July 6, 2012, quoted under the trading symbol "CAPC."  The Company was incorporated on September 18, 1996 under the name “Freedom Funding, Inc.”  With the acquisition of Capstone Industries, Inc., a Florida corporation, on September 13, 2006, we adopted our current business line and in July 2012 adopted our current corporate name.  We conduct our business through operating subsidiaries.

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 ended March 31, 2019 compared with the same period in 2018 and (ii) financial liquidity and capital resources.

The Company is engaged in the business of developing, marketing, manufacturing and selling consumer products through national and regional retailers in North America and in certain overseas markets. 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 the Company's product development, engineering and factory resource capabilities in Hong Kong. Capstone's products have been to date targeted for applications such as home indoor and outdoor lighting.  The Company's current product portfolio consists of stylish, innovative and easy to use consumer LED lighting products.  The Company's products are currently sold under the CAPI brand name, Capstone Lighting®, as well as under nationally recognized licensed brands-named Hoover® Home LED. LEDs are now mainstream in consumer lighting products, and, as such, the Company believes that the component and production costs of LED lighting products will continue to lower due to technological and production developments, which should allow the Company to compete through its innovations in design and functions that capitalize on products utilizing LED.  The Company's focus has been in the integration of LED into most commonly used lighting products in today's home. We continue to make key investments to ensure that we provide quality LED lighting products. The Company understands and strives to couple well made products with superior customer service.  Customer service is a vital part of consumer loyalty.  Capstone believes that it is positioned well to participate in these expanded product categories designed to fuel the Company's future growth.

Like many consumer product companies, our product lines periodically need updating or revision to attract consumers.  Product lines typically follow a cycle of introduction, peak consumer demand and declining consumer demand.  We need to introduce new product lines or updated product lines from time to time to sustain or grow consumer demand for our products.

The Company seeks to deliver strong, consistent business results and increasing shareholder returns by providing innovative products on a global basis that make consumer's lives simpler and safer while delivering revenue growth to the Company's retail partners.  Whereas the Company's strengths have been demonstrated through the successful executions of its strategic initiatives which have focused on LED lighting products, it believes it is well positioned to exploit categories outside LED lighting that also benefit from these strengths of the Company's management team.  Creating and exploiting niche consumer product categories within our industry focus, through advanced design and low-cost manufacturing, are the core competencies of the Company.

The Company oversees and controls the manufacturing of its products, which are currently made in China by original equipment manufacturers ("OEM"), through three wholly-owned operating subsidiaries: CAPI, CIHK and CLTL. Capstone believes it has commercially favorable payment terms with its OEM's, which terms helps support any instances of the Company's growth.  The Company's direct import business model requires that product shipments meet minimum order quantity or "MOQ" full container loads from OEM's factories directly to retail customers' shipping brokers.   This business model avoids pitfalls resulting from slow moving and obsolete product inventories.  The Company's products are built to fill backlog orders and are typically not warehoused for domestic replenishment programming.  CIHK periodically evaluates its contract manufacturers' ability to determine the best manufacturing arrangement for our Company. Additionally, all manufacturers must meet rigorous compliance, security and equipment evaluation audits to ensure competitive pricing for the highest quality products.  The Company explores alternative manufacturing sources in China and elsewhere in the Pacific Rim as part of its periodic supply chain strategic planning, but the Company has not allocated as of the date of this Form 10-Q report any production to alternative manufacturing sources.


20



Strategy

The Company's focus in recent years has been in the integration of LEDs into most commonly used lighting products in today's home. The LED market, now in its fifth to sixth year of mainstream availability, has stabilized.  LEDs are now mainstream in consumer lighting products. The Company believes that the component and production costs of LED lighting products will continue to lower due to technological and production developments.

Over the last two years there has been significant LED price erosion, which has substantially driven unit sales, as homeowner’s convert to LED, but at the same time has commoditized other LED consumer products.  The LED category is maturing and is no longer the innovative “must have” consumer product as in previous years.

Capstone’s success has been in its ability to identify emerging product categories where Capstone’s management experience can be fully leveraged.  We demonstrated this when the Company entered the LED lighting category.  Our branding and product strategies delivered the Company to a well-respected market position delivering year-over-year growth through 2017.  The Company’s low-cost manufacturing and operations have provided an advantage in delivering great products affordably.

As management recognized that the growth of the LED category was maturing in 2017, we sought a business opportunity that would prove equal to or greater than the LED business.  While we currently continue to develop new LED products, the revenue potential has been lessened and our new looking forward strategy was timely in the effort to update and revise product lines to meet changing consumer demands.

Our expectation is that the new portfolio appeals to a much larger audience, with more relevant products that will hopefully benefit from management’s proven abilities in the areas of low-cost production and operations.  The new Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding connected lifestyles prevalent today.  The products will have both touch screen and voice interfacing, internet access and an operating system capable of running downloadable applications.  The average selling prices will be comparable to that of tablets and smartphones, expected retails to start at $500.00 per unit, with the goal to deliver consumer value for middle income homes.  Whereas, during the day your smartphone/tablet keeps you connected, whether it is work or personal, now when entering your home, Capstone’s new Connected Surfaces products will enable users the same level of connectivity in a more relaxed manner that does not require being tethered to these devices.

The Company competes in competitive consumer product market channels that can be affected by volatility from a number of general business and economic factors, such as consumer confidence, employment levels, credit availability and commodity costs. Demand for the Company’s products is highly dependent on economic drivers such as consumer spending and discretionary income. While we believe that the markets for LED home products will remain competitive during fiscal 2019, we are endeavoring to maintain our revenue stream in the lighting business segment by continuing to introduce new innovative LED products.  The first of these new LED products was launched in the retail marketplace during the first quarter of 2019.

We do not have sufficient operating history with the new Connected Surface product line to validate our expectations about this new product’s  market potential.

Our Growth Strategy

The Company’s looking forward strategy requires continued expansion of our product development and engineering, manufacturing base marketing and distribution of a broadened portfolio of consumer electronic products. The Company will seek new revenue opportunities through the introduction of its “Connected Surfaces” portfolio into expanded channels of distribution including E-Commerce and others that the Company has not previously focused on. The Company also intends to leverage our existing valuable customer base and strong relationships to achieve organic growth initiatives with this new category.

As is true with any product expansion effort, we may encounter unexpected market penetration, technology development and competition as well as unanticipated changes in consumer demand due to technological innovations and these unforeseen factors could impact the success of our product expansion efforts. Further, connected devices for smart homes is a very competitive market that attracts not only consumer product companies like our company, but also attracts large established technology companies, home security companies and start-up companies with innovative technologies. We need to develop products that offer consumers an attractive product option to varied product and technology offerings from competitors.  We need to develop products with consumer appeal in order counter the significantly greater resources, financial and technological, of many competitors in connected devices for the smart home market.


21



Organic Growth Strategy

We intend to pursue various initiatives to execute our organic growth strategy, which is designed to enhance our market presence, expand our customer base and be an industry leader in new product development.  Key elements of our organic growth strategy include:

Connected Surfaces. Historically LED lighting products have been our core business. The Capstone Lighting and Hoover® Home LED brands combined, have sold millions of LED lighting products over the recent years and as a result the Company holds a well-respected position in the retail lighting category. While consistently launching successful lighting programs, the Company has determined that it needs to diversify and expand its core focus in order to continue to meet revenue growth initiatives. The Company has refocused its development and marketing initiatives and is determined to build on its success with a broader product portfolio beyond lighting products only.  Critical to this strategy, the Company has developed and launched in January 2019 at the Consumer Electronics Show (CES), a new line of “Connected Surfaces” products. We intend to expand the new line of “Connected Products” for the next several years.  Our current product roadmap outlines plan for product introductions through 2020 and this will continue to expand as product acceptance validates how our objectives.  We believe this program will leverage existing relationships with our current retail partners and contribute organic growth for the Company.

The Company acknowledges that smart homes will become more mainstream over the next several years and will present growth opportunities for our company and its Connected Surfaces portfolio.  The growth of smart homes will also attract competitors who may elect to compete directly against our smart home products.

We continue to make investments to ensure that we provide quality, useful products. Additionally, the Company continues to enhance its customer service support.  The year 2019 will also mark a vastly expanded commitment to social media marketing.  This will play a vital role in expanding our lifestyle brands and will also serve to establish creditability with the Company’s growing consumer base. This effort will focus on creating a more extensive and aggressive social media presence through use of third-party social media like Facebook, Twitter, YouTube and Instagram as well as measures to increase our “ranking” in search engines.  Since our Internet and social media marketing has recently commenced, we do not have a sufficient operating history to judge the effectiveness of our Internet and social media marketing efforts.

Pursuit and achievement of all of these objectives are subject to adequate cash flow from operations and available, affordable funding as well as putting the demands of existing operations ahead of efforts at expansion of products or exploitation of new technologies.

Perceived or Essential Strengths

Capstone believes that the following competitive strengths have and will continue to serve as a foundation for its business strategy.

In North America, the Company is recognized as an innovator and highly efficient, low-cost manufacturer in several lighting product niches.  Capstone believes that its personal relationships with retail customers combined with its innovative product offerings, strong marketing support and the high level of integrity embedded within the company, will allow the Company to successfully launch the new “Connected Surfaces” category and expand its portfolio in the Home Lighting category.

The Company believes its multiple brand strategy is important in maintaining differentiation in the marketplace and maybe considered in future Connected Surfaces products. Capstone Lighting®, Hoover® Home LED and Duracell® have proven successful in the past in meeting expectations at point of sale and licensing, and once again, within the Connected Surfaces program may be part of our looking forward strategy.

Capstone's core executive team has been working together for over three decades and has successfully built and managed other consumer product companies.  Operating Management's experience in hardline product manufacturing and marketing prepared the Company for its entry into the LED market. From a market perspective, Capstone's branding strategy was focused on establishing multiple trusted brands allowing for a broader reach into various channels.  Capstone Lighting® (2008), Hoover® Home LED (2015) and Duracell® (2017) have contributed to expanding the Company's retail position.

Product Quality: We offer quality products allowing consumers to maximize the benefits of adopting innovative lifestyle products. We design, manufacture and sell quality and reliable products across all of our brands with functional advantages that are cost competitive. We achieve this, in part, through a combination of sourcing quality components, stringent manufacturing quality control and conducting rigorous third-party product testing. To deliver cost-competitive products, we are investing in product advancements, leveraging purchasing volume, capitalizing on strategic vendor relationships and migrating high-volume products to our proprietary manufacturing process.


22



The Company's product characteristics are designed to satisfy the following:

·
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.

Authoritative Knowledge: We invest in employees and manufacturers with extensive knowledge, understanding and experience of technology, and regulatory environments that enables us to continue to provide superior quality products and service for our customers.  Our management team has demonstrated its ability to drive organic growth.

With respect to the Company's goal of sustained profitability, the challenge has been and remains to achieve greater profit margins from our product lines by either innovative products that induce consumers to pay a higher purchase price or increased efficiencies in producing and selling 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 manufacturing, design and engineering capabilities with the Company's OEM contract manufacturers, and the lower unit costs in China, Capstone 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, the Company believes this Chinese manufacturing resource gives the Company the level of innovation, production cost and quality that allows Capstone 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.

The U.S federal government has recently imposed tariffs on certain Chinese imports. Currently the Company’s products are sourced in China and are impacted by the recently imposed tariffs. Future U.S. policy changes that maybe implemented, including further increased tariffs could have a negative consequence on the Company’s financial performance depending how the changes influence many factors, including business and consumer sentiment.

Management’s efforts to mitigate the impact of these added costs include a variety of activities, including the evaluation of alternative OEM manufacturing in Thailand, Vietnam and Taiwan.  We have not committed to using any alternative manufacturing sources.

The Company’s CIHK's operations in Hong Kong include personnel experienced in engineering and design, product development and testing, product sourcing, international logistics and quality control.  These associates work with our OEM 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.

Perceived Weaknesses.

Capstone believes that its competitive weaknesses are:  (1) it does not possess the business, marketing and financial resources of its larger competitors; (2) the Company is actively building its new Social Media marketing programming and  its e-commerce development but does not yet have a prominent social media presence or own e-commerce capabilities; (3) it sells a niche consumer product that is sensitive to a drop in consumer discretionary spending and general economic conditions affecting consumer confidence; (4) its current products lines are focused on consumer LED lighting;  (5) profitability may be limited by attainable profit margins from consumer lighting products as markets mature; (6) Capstone does not have the large internal research and development capability of its largest competitors; (7) Capstone operates with a limited number of employees who are dedicated to executive management, sales and marketing or administrative support; (8) we rely on foreign OEM's for product production; (9) our international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies and (10) as we currently manufacture our products in China, the increased U.S. tariffs imposed on Chinese manufactured goods may negatively impact demand and/or increase the cost for our products at retail, which could negatively impact our business.


23



Products and Customers

The Company has expanded its product portfolio through the introduction of more indoor and outdoor lighting programs under the "Capstone Lighting®", Hoover® Home LED and Duracell® brands and include the following products that are reported under one segment: Lighting Products:

·
Connected Surfaces – Smart Mirror
·
LED Under Cabinet Lights
·
LED Vanity Mirror
·
LED Gooseneck Lantern
·
LED Dual Mode Security Light
·
LED Solar Patio Lights
·
LED Motion Sensor Lights
·
LED Motion Sensor Light with Air Purifier
·
LED Wall Utility Lights
·
CPC Power Failure Bulbs
·
Wireless Remote-Control Outlets
·
Wireless Remote-Controlled LED Accent Lights.

These product offerings encompass solutions for various residential lighting applications for interior and outdoor use.

Such product expansion involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits.  Further, some product lines may fall out of favor with consumers before we can recoup product and market development costs.  While the Company makes significant investments into the 2019 Connected Surfaces portfolio, it is reasonable to expect to post losses while building the market for a new category of products which were launched at the 2019 CES.  Expense categories, including molds, prototyping, engineering, advertising, public relations, tradeshows and social media platforms will all be incurred for six to nine months before shipments and related revenues occur.

The Company has established product distribution relationships with numerous leading international, national and regional retailers, including but not limited to: Amazon, Bunnings, Costco Wholesale, Home Depot, Sam's Club-Walmart, the Container Store and Firefly Buys. These distribution channels may sell the Company's products through the internet as well as through retail storefronts and catalogs/mail order.  The Company believes it has developed the scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche product opportunities in our largest consumer domestic and international markets. While Capstone has traditionally generated the majority of its sales in the U.S. market, urbanization, rising family incomes and increased living standards abroad have spurred a perceived demand for small consumer appliances internationally. To capture this perceived market opportunity, the Company has continued its international sales by leveraging relationships with our existing global retailers and by strengthening our international product offerings.  CIHK assists the Company in placing products into foreign market channels as well.  The Company has introduced Capstone brands to markets outside the U.S., including Australia, France, Iceland, Japan, Mexico, New Zealand, South Korea, Spain, Taiwan, Thailand and the United Kingdom.  International sales for the quarter ended March 31, 2019 were $301.2 thousand or 10.1% of net revenue as compared to $317.1 thousand or 7.8% in the same period 2018. The Company's performance depends on a number of assumptions and factors.  Critical to growth are the economic conditions in the markets that we serve, as well as success in the Company's initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new technology or features.

The Company's products are subject to general economic conditions that impact discretionary consumer spending on non-essential items. Capstone believes it will maintain its presence in the lighting category because of our operational experience, and the quality reputation of its products, business relationships with Capstone's retailers and the aggressive product development 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 the markets that foster greater consumer spending as well as success in the Company's initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new technology or features.  The Company's ability to fund the pursuit of our goals remains a constant, significant factor.


24



The Company believes that it will provide retailers with a broader and more diversified portfolio of consumer products across product categories, which should add diversity to the Company's revenues and cash flows sources.  Within the selection of products offered, Capstone seeks to service the needs of a wide range of consumers by providing products to satisfy their different interests, preferences and budgets.  The Company believes in its ability to serve retailers with an array of branded products and quickly introduce new products to continue to allow Capstone to further penetrate its existing customer bases, while also attracting new customers. The Company's primary, perceived challenge is creating sustained consumer demand for its products in a growing number of markets and attaining sustained profitability, which challenge is complicated by the cost of new product development and costs of penetrating new markets. An extensive product line, especially new product line, increases the investment in product development and, as such, increases operating overhead.

With the Company's lighting products and recently launched “Connected Surfaces” category, Capstone has developed a comprehensive product offering for its niche in the retail industry for consumer lighting. Within the selection of products offered, Capstone seeks to service the needs of a wide range of consumers by providing products to satisfy their different interests, preferences and budgets.  The Company believes in its ability to serve retailers with a broad array of innovative connected products and quickly introduce new products to continue to allow Capstone to further penetrate this developing market.

Tariffs. The current U.S. administration has implemented certain tariffs that directly affect the Company's competitiveness.  While all companies in certain industries are affected equally, the appeal for these products to consumers may be negatively impacted when retail prices are increased due to higher duty rates.  The Company has seen promotional schedules cut back and retailers have expressed concerns for possible pricing adjustments that would not be known to them in advance to products being shipped.  Capstone's business model insulates the Company from paying duties as its retail partners are the importers of record.  The obvious unknown is the final impact of tariffs to the landed costs.  Accordingly, retailers have demonstrated caution in their promotional planning schedules and will continue to do so until the administration has clarified its position enabling importers to calculate estimated landed costs.

Tariffs and trade restrictions imposed or threatened by the current U.S. administration has provoked and may provoke future trade and tariff retaliation by other countries. A "trade dispute" of this nature or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our businesses.

Sales and Marketing

We continue to make investments to expand our sales, marketing, technical applications support and distribution capabilities to sell our product portfolio. We also continue to make investments to promote and build market awareness of the products and brands we offer. Our sales within the U.S. are primarily made by our in-house sales team and our independent sales agencies. Our independent sales agencies are paid a commission based upon sales made in their respective territories. Our sales agencies are recruited, trained and monitored by us directly. We will utilize an agency as needed to help us provide service to our retail customers as required. The sales agency agreements are generally one (1) year agreements, which automatically renew on an annual basis, unless terminated by either party on 30 days’ prior notice. Our international sales to divisions of U.S. based retailers are made by our in-house sales team. Other international sales are made by our Hong-Kong based CIHK office staff.

The Company actively promotes its products to retailers and distributors at North American trade shows, such as the Consumer Electronics Show (“CES”) or the International Hardware Show, but also relies on the retail sales channels to advertise its products directly to the end user consumers through various promotional activities.

In order for continued sales growth in the retail market, the Company is focused on expanding the product portfolio currently offered into new innovative electronic categories that will also allow the Company to expand into different retail departments and channels of distribution.

The Company is also focused on establishing an on-line presence in order to support retail customers requirements and to further support the introduction of the “Connected Surfaces” launch with the ability to ship direct to consumer.


25



We enter 2019 with an expanded social media department and enhanced social media campaign strategy.  This is part of our effort to establish an enhanced on-line marketing and e-commerce presence.  We currently have a presence on the following social media platforms:

FACEBOOK1: https://www.facebook.com/capstoneindustries and https://www.facebook.com/capstoneconnected
INSTAGRAM2: https://www.instagram.com/capstoneconnected
PINTEREST3: https://www.pinterest.com/capstoneconnected
LINKEDIN4: https://www.linkedin.com/company/6251882
1 Facebook is a registered trademark of Facebook, Inc.
2 Instagram is a registered trademark of Instagram.
3 Pinterest is a registered trademark of Pinterest
4 LinkedIn is a registered trademark of LinkedIn Corporation

We have just initiated the effort to establish an on-line presence and we may experience unexpected need to invest more money in promoting an on-line presence and to revise our approach to establishing an on-line presence.  Our efforts may require the need to engage outside consultants for technical or strategic marketing efforts.  We have not engaged “brand promoters” or “celebrity” sponsors who use Twitter, Instagram, YouTube and other Social Media platforms to promote products to their followers.  We are evaluating the impact of our current efforts prior to considering additional methods of promoting an on-line presence.

Focus on International Growth: The Company is pursuing increased international product sales through retailers.  This effort is through CIHK for products that fall outside Capstone's branded categories but are 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 foreign retailer.  International expansion entails additional marketing and distribution costs, additional regulatory costs and burdens  and competition from foreign competitors.  These factors may limit our ability to expand international sales.

Competitive Conditions

The consumer lighting products and small electronics businesses are highly competitive, 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 technological innovation, brand perceptions and changing consumer preferences, product quality and performance, value perception and customer service and price.  The Company's principal lighting competitors in the U.S. are Energizer, Feit Electric and Jasco (GE).  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, Target and Sam’s/Wal-Mart offer lighting as part of their private branded product lines.  Many of the Company's competitors have greater resources and capabilities, including greater brand recognition, research and development budgets and broader geographical market share and reach.  Competitors with greater resources could undermine Capstone's expansion efforts by marketing campaigns targeting our expansion efforts or by product pricing that under cuts our pricing. Moreover, if one or more of the Company's competitors were to merge, the change in the competitive landscape could adversely affect our customer distribution channel.

With trends and technology continually evolving, Capstone will continue 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.  The Company continues to invest in developing the technologies and design critical to competing in our markets.  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

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.  We outsource the manufacture and assembly of our products to a number of contract manufacturers overseas. Our research and development focus includes efforts to:

·
develop product with increasing technology and functionality with enhanced quality and performance, and at a very competitive cost.
·
solidify new manufacturing relationships with contract manufacturers in Thailand and Vietnam.


26



CIHK establishes strict engineering specifications and product testing protocols with the Company's contract manufacturers and ensure that their factories adhere to all Regional Labor and Social Compliance Laws. These contract manufacturers purchase components that we specify and provide the necessary facilities and labor to manufacture our products. We leverage the strength of the contract manufacturers and allocate the manufacturing of specific products to the contract manufacturer best suited to the task. Quality control and product testing is conducted at the contract manufacturers facility and also at third party testing laboratories overseas.

Capstone's research and development team enforces 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 overseas, 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 were 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.

To successfully implement Capstone's business strategy, the Company must improve its current products and develop new product segments with innovative imbedded technologies to meet consumer's growing expectations.

Capstone will invest in more technical and innovative product categories. These costs are expensed when incurred and are included in the operating expenses.

Raw Materials

The principal raw materials used by Capstone are sourced in China, as the 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.  CIHK 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 CIHK 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 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.


27



Distribution and Fulfillment

Since January 2015, the Company has transferred its U.S. domestic warehousing and distribution needs to a third-party warehousing facility situated in Anaheim, California.  The warehouse operator provides full inventory storage, packaging and logistics services including direct to store and direct to consumer shipping capabilities that electronically interface to our existing operations software.  The warehouse operator provides full ERP (Enterprise Resource Planning), Inventory Control and Warehouse Management Systems.  These fulfillment services can be expanded to the east coast in Charleston, South Carolina, if the Company needed to establish an east coast distribution point.  This relationship, if required, will allow us to fully expand our U.S. distribution capabilities and services.

As the Company moves into the e-commerce and on-line consumer marketplace, the Company will need to contract with a specialized fulfillment service which provides secured payment processing capability combined with an efficient quick response fulfilment and logistics service, at a very competitive cost.

Royalties

We have, from time to time, entered into agreements whereby we have agreed to pay royalties for the use of nationally recognized licensed brands on Company product offerings. Royalty expense incurred under such agreements is expensed at the time of shipment.

Royalty expenses related to such agreements for the quarters ended March 31, 2019 and 2018 were $0 and $169,262 respectively, a decrease of $169,262 and a direct result of  no licensed products being shipped in the period. The Duracell® license which had been granted for a specific product promotion, expired at the end of fiscal year 2018 which resulted in reduced revenues as the program started to phase down in early 2018.

Hoover® Home LED licensed products also experienced a reduction in revenue in 2018 as the new product launches had been negatively impacted by the delay in promotional activities resulting from the uncertainty associated with the U.S. tariff increases on products made in China.

Seasonality

Sales for household products and electronics are seasonally influenced. Certain gift products cause consumers to increase purchases during key holiday winter season of the fourth quarter, which requires increases in retailer inventories during the third quarter. In addition, natural disasters such as hurricanes and tornadoes can create conditions that drive increased needs for portable power and power failure light sales. Historically, the lighting products had seasonally lower sales during the first quarter due to the Chinese New Year holiday as factories are closed and shipments are halted during this period.

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: Exclusive license and sub-license to Power Failure Technology; Capstone Power Control, Timely Reader, Pathway Lights, 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; Puck Light (cookie), Puck Light Base, Multi-Color Puck Lights, LED Dual Mode Solar Light, Integrated Light Bulb (Coach Light), LED Gooseneck Lantern, Spotlights, Security Motion Activated Lights, Under Cabinet Lighting 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 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 intellectual property rights relate primarily to lighting device improvements and manufacturing processes.

While the Company may license third party technologies for its products, or may rely on other companies for design, engineering and testing, the Company believes that its oversight of design and function of its products and its marketing capabilities are significant factors in the ability of the Company to sell its products.


28



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.

As is customary in the retail industry, many of our customer agreements requires us to indemnify our customers for third-party intellectual property infringement claims. Such claims could harm our relationships with customers and might deter future customers from doing business with us. With respect to any intellectual property rights claims against us or our customers, we may be required to cease manufacture of the infringing product, pay damages and expend significant Company resources to defend against the claim and or seek a license.

Information Technology

The efficient operation of our business is dependent on our information technology systems. We rely on those systems to manage our daily operations, communicate with our customers and maintain our financial and accounting records. In the normal course of business, we receive information regarding customers, associates, and vendors.  Since we do not collect significant amounts of valuable personal data or sensitive business data from others, our internal computer systems are under a light to moderate level of risk from hackers or other individuals with malicious intent to gain unauthorized access to our computer systems. Cyberattacks are growing in number and sophistication and are an ongoing threat to business computer systems, which are used to operate the business on a day to day basis. Our computer systems could be vulnerable to security breaches, computer viruses, or other events. The failure of our information technology systems, our inability to successfully maintain our information or any compromise of the integrity or security of the data we generate from our systems or an event resulting in the unauthorized disclosure of confidential information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors,  results of operations, product development and make us unable or limit our ability to respond to customers' demands.

We have incorporated into our data network various on and off site data backup processes which should allow us to mitigate any data loss events, however our information technology systems are vulnerable to damage or interruption from:

·
hurricanes, fire, flood and other natural disasters;
·
power outages
·
internet, telecommunications or data network failure.

Environmental Regulations

We believe that the Company is in compliance with environmental protection regulations and will not have a material impact on our financial position and results of operations.


29



Working Capital Requirements and Financing

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 needed, strategically increases its inventory levels held in its leased Anaheim, California warehouse. Combined with investment in new product molds, product testing and outside certifications, package design work, and further expansion of its design and engineering capabilities in 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 2017 and 2016, has increased working capital, provided the Company with liquidity and has allowed for the repayment of all outstanding bank notes and old related party loans.

Continued product expansion are critical requirements to ensure the Company's continued revenue growth.  Such projects are never held back because of funding shortfalls.  The Company allocated funds 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, unsecured loans.

On September 8, 2010, in order to support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank), located in New York City, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted.  There is 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 the time of closing was 6.25%.

As of March 31, 2019, the base management fee is now equal to .30% and the banks base loan interest rate was 7.50%. The amounts borrowed under this agreement are due on demand and secured by a right to set-off on or against any 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.

The Sterling National Bank credit facility over the years has been a major contributing factor that has allowed the Company to increase its revenue and expand its account receivables. For the three months ended March 31, 2019 and 2018, the processing fees associated with the agreement were $10,494 and $17,529, respectively. As of both March 31, 2019 and 2018, the balance due to Sterling National Bank was $0.

On July 20, 2018, to support the Company’s future needs, Sterling National Bank expanded the credit line up to $10,000,000 of which $2,000,000 was allocated as a Capstone expansion working capital line.

The Company's liquidity and cash requirements are discussed more fully in the Management's Discussion and Analysis of Financial Condition and Results of Operations, below.

Critical Accounting Policies

We believe that there have been no significant changes to our critical accounting policies during the three months ended March 31 , 2019 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, 2018. The Company reviewed ASC 842 which had no material effect on the Company’s condensed financial statements.


30



CONSOLIDATED OVERVIEW OF RESULTS OF OPERATIONS

Net Revenues

Revenue is derived from sales of our residential LED lighting products. These products are directed towards consumer home LED lighting for both indoor and outdoor applications. Revenue is subject to both quarterly and annual fluctuations and is impacted by the timing of individually large orders as well as delays or sometimes advancements to the timing of shipments or deliveries. We recognize revenue upon shipment of the order to the customer, when all performance obligations have been completed and title has transferred to the customer and in accordance with the respective sale’s contractual arrangements. Each contract on acceptance will have a fixed unit price. The majority of our sales are to the U.S. market which in 2018 represented 90% of revenues and 90% in the first quarter ended March 31, 2019. We expect the U.S. market to continue to be the major source of revenue for the Company. We also derive a portion of our revenue from overseas sales. All of our revenue is denominated in U.S. dollars.

Cost of Goods Sold

Our cost of goods sold consists primarily of purchased products from contract manufacturers, associated duties and inbound freight. In addition, our cost of goods sold also include inventory adjustments, warranty claims/reserves and freight allowances. We source our manufactured products based on customer orders.

Gross Profit

Our gross profit has and will continue to be affected by a variety of factors, including average sales price for our products, product mix, promotional allowances, our ability to reduce product costs and fluctuations in the cost of our purchased components.

Operating Expenses

Operating expenses include sales and marketing expenses, consisting of licensed brand royalties, sales representatives’ commissions, advertising and trade show expense and costs related to employee's compensation. In addition, operating expense include charges relating to accounting, legal, insurance and stock-based compensation.

CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
 
(In Thousands)
 
   
March 31, 2019
   
March 31, 2018
 
   
Dollars
   
% of Revenue
   
Dollars
   
% of Revenue
 
Net Revenue
 
$
2,979
     
100.0
%
 
$
4,060
     
100.0
%
Cost of sales
   
(2,352
)
   
(79.0
)%
   
(3,041
)
   
(74.9
)%
Gross Profit
   
627
     
21.0
%
   
1,019
     
25.1
%
Operating Expenses:
                               
Sales and marketing
   
192
     
6.4
%
   
363
     
8.9
%
Compensation
   
375
     
12.6
%
   
375
     
9.2
%
Professional fees
   
158
     
5.3
%
   
149
     
3.7
%
Product development
   
85
     
2.8
%
   
167
     
4.1
%
Other general and administrative
   
164
     
5.5
%
   
174
     
4.3
%
Total Operating Expenses
   
974
     
32.6
%
   
1,228
     
30.2
%
Operating Loss
   
(347
)
   
(11.6
)%
   
(209
)
   
(5.1
)%
Other Expenses
                               
Miscellaneous expense, net
   
(10
)
   
(0.4
)%
   
-
     
-
%
Interest expense
   
-
     
-
%
   
-
     
-
%
Total Other Expenses
   
(10
)
   
(0.4
)%
   
-
     
-
%
                                 
Loss Before Tax (Benefit)
   
(357
)
   
(12.0
)%
   
(209
)
   
(5.1
)%
(Benefit) for Income Tax
   
(12
)
   
0.4
%
   
(18
)
   
0.4
%
Net Loss
 
$
(345
)
   
(11.6
)%
 
$
(191
)
   
(4.7
)%


31



Net Revenues

For the three months ended March 31, 2019, net revenues were approximately $3.0 million, a decrease of $1.1 million or 26.8% from $4.1 million in the first quarter 2018.  The decrease in net revenues in the quarter was partially due to the transition of retail customers from licensed branded products to Capstone branded products. At the same time the Company made a major promotional investment into the expansion of  Capstone Lighting battery powered LED products.

The Capstone Lighting program generated all of the $3.0 million of revenue in the first quarter 2019, of which approximately $2.9 million was the newly launched battery powered LED products, compared to $314 thousand of LED products in 2018, an increase of $2.7 million.  In the same quarter 2018, licensed products accounted for $3.7 million or 92.3% of total revenue in the period but had $0 sales in 2019.

The Duracell® license which had $921 thousand of revenue in 2018, expired on December 31, 2018.

The HooverÒ Home program which had $2.9 million of revenue in the first quarter 2018, did not generate revenue in the first quarter 2019.

For the three months ended March 31, 2019 international sales were approximately $301 thousand or 10.1% of revenue as compared to $317 thousand or 7.8 % of revenue in 2018. All of the international sales in the first three months 2019 were for the Capstone brand as compare to 52% in 2018.

To support Capstone LED products in the first quarter 2019, the Company invested approximately $790 thousand in promotional allowances of which $777 thousand was towards 2019 marketing funds, to be used by the retailer to actively promote the  LED product expansion. This was a $765 thousand increase compared to $25 thousand in the same period 2018. As these marketing funds are deducted from gross revenue, they represent the major reason for the reduced revenue in the quarter.

The following table disaggregates revenue by major source:
 
                         
 
For the Three Months Ended March 31, 2019
 
For the Three Months Ended March 31, 2018
 
 
Capstone Brand
 
Licensed Brands
 
Total Consolidated
 
Capstone Brand
 
Licensed Brands
 
Total Consolidated
 
LED Consumer Products- US
 
$
2,677,627
   
$
-
   
$
2,677,627
   
$
148,301
   
$
3,594,781
   
$
3,743,082
 
LED Consumer Products-International
   
301,175
     
-
     
301,175
     
165,894
     
151,192
     
317,086
 
     Total Revenue
 
$
2,978,802
     
-
     
2,978,802
   
$
314,195
   
$
3,745,973
   
$
4,060,168
 
% of Total Revenue
   
100
%
   
-
%
   
100
%
   
7.7
%
   
92.3
%
   
100
%

Gross Profit and Cost of Sales

Gross profit for the three months ended March 31, 2019 and 2018, was approximately $626.6 thousand, and $1.0 million, respectively, a reduction of $392.4 thousand. Gross Profit as a percent of revenue was 21.0% in the first quarter 2019 as compared to 25.1% in 2018.  The $790 thousand marketing fund-promotional allowances resulted in a reduction of gross profit in the period. Without the impact of these marketing fund allowances, gross profit in the quarter would have been $1.4 million or 37.6% of revenue, significantly higher than in 2018. Marketing Funds in same period 2018 were $25 thousand.

Operating Expenses

Sales and Marketing Expenses

For the three months ended March 31, 2019, and 2018, sales and marketing expenses were $191.9 thousand and $363.1 thousand respectively, a reduction of $171.2 thousand or 47.1 %. During the quarter with the reduced revenue for Duracell® and Hoover® branded products, total royalty expense for the three months in 2019 and 2018 were $0 and $169.3 thousand, respectively. Sales representative commission payments were also reduced in the period from $93.7 thousand in 2018 to $0 thousand in 2019. In 2018 we also incurred $56.5 thousand in Merchandise Placement fees which were not incurred in the first quarter 2019. However, part of these savings were offset with a $145.3 thousand Trade Show expense to launch the Smart Mirror category at CES show which had not been previously incurred.


32



Compensation Expenses

For the 3 months ended March 31, 2019, and 2018, compensation expenses were approximately $374.8 thousand and $375.1 thousand respectively.

Professional Fees

For the 3 months ended March 31, 2019, and 2018, professional fees were approximately $157.8 thousand and $148.9 thousand respectively, an increase of $8.9 thousand or 6.0%

Product Development Expenses

For the 3 months ended March 31, 2019, product development expenses were approximately $85.2 thousand as compared to $166.6 thousand, in 2018, a decrease of $81.3 thousand or 48.8%. During the first quarter 2019 the Company invested $47.2 thousand in software and hardware development for the Connected Surfaces project compared to $73.5 thousand in 2018 when the project initially started. Prototype and sample development expense was $2.7 thousand in 2019 compared to $47.2 thousand in 2018 a reduction of 94.2% during the period.

Other General and Administrative Expenses

For the 3 months ended March 31, 2019, other general and administrative expenses were approximately $163.7 thousand as compared to $174.3 thousand in 2018, a decrease of $10.6 thousand or 6.1 %.  During the period we invested $12 thousand in developing the new Connected Surfaces website which was not incurred in 2018.  Rent expenses was $21.3 thousand in 2019 as compared to $41.5 thousand in 2018, a reduction of $20.2 thousand as a result of a rent incentive received from the landlord for moving into new corporate offices.

Total Operating Expenses

For the 3 months ended March 31, 2019 total operating expenses were $ 973.4 thousand or 32.6% of revenue as compared to $1.228 million or 30.1% of revenue in 2018, a decrease of $254.4 or 20.7%

Operating Loss

For the 3 months ended March 31, 2019 the operating loss was $346.8 thousand compared to a loss of $208.6 thousand in 2018, an increase of $138.2 thousand.

Other Expense, Net

For the 3 months ended March 31, 2019, and 2018, other expense, net was $10.5 thousand as compared to zero in 2018.

(Benefit) for Income Tax

For the 3 months ended March 31, 2019 the benefit for income tax was estimated at $12 thousand compared to a benefit of $18 thousand in the same period 2018.

Net Loss

For the 3 months ended March 31, 2019 the net loss was approximately $345.3 thousand compared to a net loss of $190.6 thousand in the same period 2018.

In summarizing the financial performance in the first quarter 2019, Gross Sales were $3.8 million in 2019 compared to $4.0 million in 2018, a decrease of $200 thousand.  However, the net revenue and overall results were negatively impacted in the quarter as the Company invested or incurred substantial additional expense to support managements strategic objectives and to promote revenue growth in the future, namely:

·
$790 thousand for 2019 marketing funds and promotional allowances.
·
$145 thousand for the CES show and the launch of the Smart Mirror project.
·
$47 thousand in continued development of the Connected surfaces software.
·
$12 thousand in website development for Connected Surfaces on line sales.

33



In total $994 thousand of strategic funds were expensed in the quarter, which if not incurred would have turned the $357.3 thousand loss into a $636.7 thousand profit.

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

There were no material changes to contractual obligations for the 3 months ended March 31, 2019.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balances as of March 31, 2019 and December 31, 2018 was $1.6 million and $3.8 million, respectively. The Company also had additional borrowing availability under the bank agreement of approximately $2.0 million and $2.0 million for the Capstone expansion line.

On July 20, 2018, Sterling National Bank expanded our existing line from $7 million up to $10 million. The purpose of this line is to provide $2 million for the development and expansion of the new Smart Mirror category and related infrastructure and $8 million for accounts receivable growth.

As of March 31, 2019, and December 31, 2018 the Sterling Bank loan balance for both periods was $0.

As of March 31, 2019, and December 31, 2018, the notes payable to related parties for both periods was $0.  Based on past performance and current expectations, Management believes that our cash on hand, our availability under the line of credit and anticipated cash flows from operations will be adequate to meet the Company’s cash needs for our daily operations and capital expenditures for at least the next 12 months. With our working capital position, we believe that we have the ability to continue to invest in further development of our products.

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.  As of March 31, 2019 as compared to December 31, 2018, cash decreased by $2.2 million.

 
For the Three Months ended March 31,
 
Summary of Cash Flows
2019
 
2018
 
(In thousands)
       
Net cash provided by (used in):
       
Operating Activities
 
$
(2,191
)
 
$
193
 
Investing Activities
   
-
     
-
 
Financing Activities
   
(9
)
   
-
 
Net increase (decrease) in cash and cash equivalents
 
$
(2,200
)
 
$
193
 

As of March 31, 2019, the Company’s working capital was approximately $3.5 million. Current assets were $4.314 million and current liabilities were $862 thousand and include:
·
Accounts payable of approximately $437.1 thousand due vendors and service providers.
·
Accrued expenses of approximately$38.2 thousand for various services.
·
Warranty provision for estimated defective returns in the amount of approximately $291 thousand.
·
Deferred rent incentive of $84 thousand.
·
Accrued income tax payable for CIHK for approximately $12 thousand.


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Cash Flows provided by Operating Activities

Cash used in operating activities in the three months ended March 31,2019 was approximately $2.2 million compared with approximately $193 provided by operating activities in the same quarter 2018.  The cash usage in the period resulted from the net loss of approximately $345 thousand, a $191 thousand decrease of accrued sales allowances and a 2.1 million increase in the accounts receivables balance. This was partially offset by $167 thousand decrease in prepaid expenses and a $305 thousand increase in accounts payable. The Company's cash position reduced from $3.8 million at March 31, 2018 to $1.6 million at March 31, 2019 but $2.1 million of that reduction went to fund increased accounts receivable.

Cash Flows used in Investing Activities

The use of cash in both the three months ended March 31, 2019 and 2018 was $0. CIHK will negotiate favorable payment terms with our OEM manufacturers to reduce the amounts of upfront cash required when initiating new product line projects.

Cash Flows used in Financing Activities

Cash used in financing activities for the three months ended March 31, 2019 and 2018, was approximately $9 thousand and $0, respectively. As of March 31, 2019, the Company had zero debt outstanding.

At March 31, 2019, the Company was in compliance with all of the terms pursuant to existing credit facilities.  Management believes that our cash flow from operations, continued support from Sterling National Bank and support of our Directors as needed will provide sufficient financial resources for the Company in 2019.
.
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.

Exchange Rates

We sell all of our products in U.S. dollars and pay for all of our manufacturing costs in U.S. dollars. Our factories are located in mainland China and the exchange rate fluctuations between the U.S. dollar and Chinese Yuan have been relatively stable at approximately RMB 6.72 to U.S. $1.00. Operating expenses of the Hong Kong office are paid in either Hong Kong dollars or U.S. dollars. The exchange rate of the Hong Kong dollar to the U.S. dollar has been relatively stable at approximately HK $7.80 to U.S. $1.00 since 1983 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. While exchange rates have been stable for several years, we cannot assure you that the exchange rate between the United States, Hong Kong and Chinese currencies will continue to be stable and exchange rate fluctuations may have a material effect on our business, financial condition or results of operations.

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. Although labor costs are starting to increase, the Company expects purchasing costs to remain stable with the Chinese manufacturers. However the tariff trade dispute between the U.S. and China and with the implementation of higher import tariffs into the U.S., it is expected that consumer retail prices will increase to offset the higher import duties which could adversely impact the demand for Company products.

Country 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.


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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.

Interest Rate Risk: The Company does not have significant interest rate risk during the period ended March 31, 2019.

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.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. As of the date of this Report, Stewart Wallach is our Chief Executive Officer and James Gerald McClinton is our Chief Financial Officer and Chief Operating Officer.

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company.
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
·
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of March 31, 2019. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013 Internal Control-Integrated Framework. Based on their assessment, management concluded that, as of March 31, 2019, the Company's internal control over financial reporting is effective based on those criteria. Based on that evaluation, our management concluded that our internal control over financial reporting, as of March 31, 2019, was effective at the reasonable assurance level.

Because the Company is a smaller reporting company, this annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm.

Changes in internal controls over financial reporting.

There are no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2019, that has materially affected or are reasonable likely to materially affect, our internal control 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 incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2018, for a more complete understanding of the matters covered by such certifications.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings.

The Company is not a party to any other 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.

The previously reported legal proceeding between Cyberquest, Ltd. and the Company was settled on September 27, 2018.

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.

There have been no material changes in reported risk factors from the information reported in our Annual Report on Form 10-K for the year ended December 31, 2018, except as described in this quarterly report on Form 10-Q.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered issuances of Company securities in the fiscal quarter ending March 31, 2019.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

The Company has no information to disclose that was required to be in a report on Form 8-K during the period covered by this report but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

Item 6.  Exhibits

The following exhibits are filed as part of this Report on Form 10-Q or are incorporated herein by reference.

EXHIBIT #
 EXHIBIT TITLE


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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:    May 15, 2019
/s/ Stewart Wallach
 
Stewart Wallach
Chief Executive Officer
Principal Executive Officer
 
   
   
   
/s/James G. McClinton
 
James G. McClinton
Chief Financial Officer and Chief Operating Officer
Principal Financial
Executive and Accounting Officer
 




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