CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Capstone Companies, Inc. (“CAPC”), a Florida corporation (formerly, “CHDT Corporation”) and its wholly-owned subsidiaries (“Subsidiaries”) is presented to assist in understanding the Company's financial statements. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements
Interim Financial Statements
The unaudited financial statements as of September 30, 2013 and for the nine month period ended September 30, 2013 and 2012 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the three months. Operating results for interim periods are not necessarily indicative of the results which can be expected for full years.
Organization and Basis of Presentation
CAPC was initially incorporated September 18, 1986 under the laws of the State of Delaware under the name "Yorkshire Leveraged Group, Incorporated", and then changed its domicile to Colorado in 1989 by merging into a Colorado corporation, named "Freedom Funding, Inc." Freedom Funding, Inc. then changed its name to "CBQ, Inc." by amendment of its Articles of Incorporation on November 25, 1998. In May 2004, the Company changed its name from “CBQ, Inc.” to “China Direct Trading Corporation” as part of a reincorporation from the State of Colorado to the State of Florida. On May 7, 2007, the Company amended its charter to change its name from “China Direct Trading Corporation” to “CHDT Corporation.” This name change was effective as of July 16, 2007 for purposes of the change of its name on the OTC Bulletin Board. With the name change, the trading symbol was changed to “CHDO.” On June 6, 2012, the Company amended its charter to change its name from “CHDT Corporation” to “CAPSTONE COMPANIES, INC.” This name change was effective as of July 6, 2012 for purposes of the change of its name on the OTC Bulletin Board. With the name change, the trading symbol was changed to “CAPC.”
In February 2004, the Company established a new subsidiary, initially named “China Pathfinder Fund, L.L.C.”, a Florida limited liability company. During 2005, the name was changed to “Overseas Building Supply, LLC” (“OBS”) to reflect its shift in business lines from business development consulting services in China for North American companies to trading Chinese-made building supplies in South Florida. This business line was ended in fiscal year 2007 and OBS name was changed to “Black Box Innovations, L.L.C.” (“BBI”) on March 20, 2008. On January 31, 2012 “BBI” name was changed to “Capstone Lighting Technologies, L.L.C” (“CLT”).
On January 27, 2006, the Company entered into a Purchase Agreement with Complete Power Solutions ("CPS") to acquire 51% of the member interests of CPS. CPS was organized by William Dato on September 20, 2004, as a Florida limited Liability Company to distribute power generators in Florida and adjacent states. The Company subsequently sold its 51% membership interest in CPS, pursuant to a Purchase and Settlement Agreement dated and effective as of December 31, 2006.
On September 13, 2006 the Company entered into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (Capstone). Capstone was incorporated in Florida on May 15, 1996 and is engaged primarily in the business of wholesaling low technology consumer products to distributors and retailers in the United States. Under the Stock Purchase Agreement the Company acquired 100% of the issued and outstanding shares of Capstone Common Stock, and recorded goodwill of $1,936,020.
On April 13, 2012 , the Company established a wholly owned subsidiary in Hong Kong, named “ Capstone International Hong Kong Ltd” (CIHK) which will be engaged in selling the Companies products Internationally and will provide other services such as, new product development, product sourcing, quality control, ocean freight logistics, product testing and factory certifications for the Companies other subsidiaries.
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors, in North America. Capstone currently operates in five primary business segments: Induction Charged Power Failure Lights, LED Wall Plate Night Lights and Power Failure Lights, Motion Sensor Lights, Portable Book and Task Lights and Door Security Monitor. The Company’s products are typically manufactured in the Peoples’ Republic of China by third-party manufacturing companies.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents, to the extent the funds are not being held for investment purposes.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. The allowance for bad debt is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the receivables. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.
As of September 30, 2013, management has determined that the accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.
Inventory
The Company's inventory, which is recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $547,106 and $584,370 at September 30 , 2013 and December 31, 2012, respectively.
Property and Equipment
Fixed assets are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated economic useful lives of the related assets as follows:
|
Computer equipment
|
3 - 7 years
|
|
Computer software
|
3 - 7 years
|
|
Machinery and equipment
|
3 - 7 years
|
|
Furniture and fixtures
|
3 - 7 years
|
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell. No impairments were recognized by the Company during 2013 or through December 31, 2012.
Upon sale or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as incurred. Major overhauls and betterments are capitalized and depreciated over their estimated economic useful lives.
Depreciation expense was $47,518 and $ 34,152 for the period ended September 30 , 2013 and 2012, respectively.
Goodwill and Other Intangible Assets
Intangible assets acquired, either individually or with a group of other assets (but not those acquired in a business combination), are initially recognized and measured based on fair value. Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired.
The cost of internally developing, maintaining and restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, are recognized as an expense when incurred.
An intangible asset (excluding goodwill) with a definite useful life is amortized; an intangible asset with an indefinite useful life is not amortized until its useful life is determined to be no longer indefinite. The remaining useful lives of intangible assets not being amortized are evaluated at least annually to determine whether events and circumstances continue to support an indefinite useful life.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
If and when an intangible asset is determined to no longer have an indefinite useful life, the asset shall then be amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangibles that are subject to amortization.
An intangible asset (including goodwill) that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the intangible assets with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. Goodwill is not amortized.
It is the Company's policy to test for impairment no less than annually, or when conditions occur that may indicate impairment. The Company's intangible assets, which consist of goodwill of $1,936,020 recorded in connection with the Capstone acquisition, were tested for impairment and determined that no adjustment for impairment was necessary as of December 31, 2012, whereas the fair value of the intangible asset exceeds its carrying amount.
Net Income (Loss) Per Common Share
Basic earnings per common share were computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. At September 30, 2013 and 2012the total number of potentially dilutive common stock equivalents was 155,946,577 and 160,096,577 respectively.
Principles of Consolidation
The consolidated financial statements for the nine months ended September 30, 2013 and 2012 include the accounts of the parent entity and its wholly-owned subsidiaries Capstone Lighting Technologies, L.L.C (formerly Black Box Innovations, L.L.C.), Capstone Industries, Inc. and Capstone International HK, LTD.
The results of operations attributable to subsidiaries are included in the consolidated results of operations beginning on the date on which the Company’s interest in a subsidiary was acquired.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash, prepaid expenses, accounts receivable, accounts payable and accrued liabilities at September 30, 2013 and 2012 approximates their fair values due to the short-term nature of these financial instruments. The fair value hierarchy under GAAP distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
|
·
|
Level one — Quoted market prices in active markets for identical assets or liabilities;
|
|
·
|
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
|
|
·
|
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.
Cost Method of Accounting for Investment
Investments in equity securities that do not have readily determinable fair values and do not qualify for consolidation or the equity method are carried at cost. Dividends received from those companies are included in other income. Dividends received in excess of the Company’s proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. Other than temporary impairments to fair value are charged against current period income.
Reclassifications
Certain reclassifications have been made in the 2012 financial statements to conform to the 2013 presentation. There were no material changes in classifications made to previously issued financial statements.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Product sales are recognized when an agreement of sale exists, product delivery has occurred, pricing is final or determinable, and collection is reasonably assured.
Allowances for sales returns, rebates and discounts are recorded as a component of net sales in the period the allowances are recognized. In addition, accrued liabilities contained in the accompanying balance sheet include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances. These estimates could change significantly in the near term.
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 $59,800 $ 106,236 for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013 the company has $275,019 in capitalized advertising costs included in prepaid expenses on the balance sheet.
Shipping and Handling
The Company’s shipping and handling costs, are included in sales and marketing expenses and amounted to $91,767 and $82,518 for the nine months ended September 30, 2013 and 2012, respectively.
Accrued Liabilities
Accrued liabilities contained in the accompanying balance sheet include accruals for estimated amounts of credits to be issued in future years based on potentially defective products, other product returns and various allowances. These estimates could change significantly in the near term.
Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (FASB) Statement No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 (now 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 subsidiaries intend to file consolidated income tax returns.
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payments, SFAS 123(R), (now ASC 718) 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 supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations, applied for periods through December 31, 2005. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to ASC 718. The Company has applied the provision of SAB 107 in its adoption of ASC 718.
The Company adopted SFAS 123(R) using the modified prospective application transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year. The Company’s consolidated financial statements as of and for the years ended December 31, 2006 and later, reflect the impact of SFAS 123(R). In accordance with the modified prospective method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SFAS 123(R) 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 consolidated statements of income (loss). Prior to the adoption of ASC 718, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25, as allowed under SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123). Under the intrinsic value method, compensation expense under fixed term option plans was recorded at the date of grant only to the extent that the market value of the underlying stock at the date of grant exceeded the exercise price. Accordingly, for those stock options granted for which the exercise price equaled the fair market value of the underlying stock at the date of grant, no expense was recorded.
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. There was no stock-based compensation expense attributable to options for share-based payment awards granted prior to, but not vested as of December 31, 2005. Such stock-based compensation is based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123. Compensation expense for share-based payment awards granted subsequent to December 31, 2005, are based on the grant date fair value estimated in accordance with the provisions of ASC 718.
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. As stock-based compensation expense is recognized during the period is based on awards ultimately expected to vest, it is subject to reduction for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. As of and for the year ended December 31, 2011, there were no material amounts subject to forfeiture. The Company has not accelerated vesting terms of its out-of-the-money stock options, or made any other significant changes, prior to adopting ASC 718, Share-Based Payments.
On April 23, 2007, the Company granted 130,500,000 stock options to two officers of the Company. The options vest at twenty percent per year beginning April 23, 2007. For the year ended December 31, 2007, the Company recognized compensation expense of $503,075 related to these options. On May 1, 2008, 850,000 of the above stock options were canceled and on May 23, 2008, 74,666,667 of the above stock options were cancelled. For year ended December 31, 2008, the Company recognized compensation expense of $405,198 related to these options. For the year ended December 31, 2009, the Company recognized compensation expense of $156,557 related to these options. For the year ended December 31, 2010, the Company recognized a compensation expense of $156,558 related to these options. For the year ended December 31, 2011, the Company recognized compensation expense of $52,186 related to these options. No further compensation expense will be recognized for these options.
On May 1, 2007, the Company granted 4,000,000 stock options to five employees of the Company. The options vest over two years. For the year ended December 31, 2007, the Company recognized compensation expense of $29,214 related to these options. During 2008 and 2009, 1,500,000 of the above options were cancelled prior to vesting. For the year ended December 31, 2008, the Company recognized compensation expense of $25,131 related to these options. For the year ended December 31, 2009, the Company recognized compensation expense of $10,869 related to these options. As of December 31, 2009 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On October 22, 2007, the Company granted 700,000 stock options to a business associate of the Company. The options vest over two years. For the year ended December 31, 2007, the Company recognized compensation expense of $1,330 related to these options. For the year ended December 31, 2008, the Company recognized compensation expense of $7,978 related to these options. For the year ended December 31, 2009, the Company recognized compensation expense of $6,648 related to these options. As of December 31, 2009 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On January 10, 2008, the Company granted 1,000,000 stock options to an advisor of the Company. The options vest over one year. For the year ended December 31, 2008, the Company recognized compensation expense of $19,953 related to these options. As of December 31, 2008 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On February 5, 2008, the Company granted 3,650,000 stock options to four directors and one employee of the Company. The options vest over two years. For the year ended December 31, 2008, the Company recognized compensation expense of $59,619 related to these options. For the year ended December 31, 2009, the Company recognized compensation expense of $2,603 related to these options. As of December 31, 2009 these options were fully vested and compensation expense fully recognized. During 2010, 3,500,000 of the above options expired. No further compensation expense will be recognized for these options.
On May 1, 2008, the Company granted 850,000 stock options to an employee of the Company. The options vest over two years. For the year ended December 31, 2008, the Company recognized compensation expense of $5,242 related to these options. For the year ended December 31, 2009, the Company recognized compensation expense of $7,862 related to these options. For the year ended December 31, 2010, the Company recognized compensation expense of $2,620 related to these options. No further expense will be recognized for these options.
On June 8, 2009, the Company granted 4,500,000 stock options to four directors of the Company. The options vest in one year. For the year ended December 31, 2009, the Company recognized compensation expense of $42,663 related to these options. For the year ended December 31, 2010, the Company recognized compensation expense of $33,837 related to these options. No further expense will be recognized for these options. These options expired on June 8, 2011.
On April 23, 2010, the Company granted 4,800,000 stock options to four directors of the Company and the Company Secretary. The options vest in one year. For the year ended December 31, 2010, the Company recognized compensation expense of $27,000 related to these options. For the year ended December 31, 2011 the Company recognized compensation expense of $12,000. No further expense will be recognized for these options.
On July 1, 2011, the Company granted 4,650,000 stock options to four directors of the Company and the Company Secretary. The options vest in one year. For the year ended December 31, 2011 the Company recognized compensation expense of $16,500. For the year ended December 31, 2012, the Company recognized an expense of $16,500. No further expense will be recognized for these options.
On August 6, 2012, the Company granted 4,650,000 stock options to four directors of the Company and the Company Secretary. The options vest in one year. The Company Secretary left the Company and 150,000 stock options were cancelled. For the year ended December 31, 2012, the Company recognized compensation expense of $20,250. For the six months ended June 30, 2013, the Company recognized an expense of $20,250. No further expense will be recognized for these options.
The Company recognizes compensation expense paid with common stock and other equity instruments issued for assets and services received based upon the fair value of the assets/services or the equity instruments issued, whichever is more readily determined.
As of the date of this report the Company has not adopted a method to account for the tax effects of stock-based compensation pursuant to ASC 718 and related interpretations. However, whereas the Company has substantial net operating losses to offset future taxable income and its current deferred tax asset is completely reduced by the valuation allowance, no material tax effects are anticipated.
During the year ended December 31, 2005, the Company valued stock options using the intrinsic value method prescribed by APB 25. Since the exercise price of stock options previously issued was greater than or equal to the market price on grant date, no compensation expense was recognized.
Stock-Based Compensation Expense
Stock-based compensation for the nine months ended September 30, 2013 and 2012 was $20,250 and $27,000 respectively.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Standards
In May 2011, FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820).” The amendments in ASU 2011-04 change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include (1) those that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements and (2) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. In addition, to improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in U.S. GAAP). The amendments that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements include (a) the application of the highest and best use and valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's shareholders' equity, and (c) disclosures about fair value measurements that clarify that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The amendments in this Update that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include (a) measuring the fair value of financial instruments that are managed within a portfolio, (b) application of premiums and discounts in a fair value measurement, and (c) additional disclosures about fair value measurements that expand the disclosures about fair value measurements. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company’s adoption of ASU 2011-04 did not have a material effect on the Company’s financial position, results of operations or cash flows.
In June 2011, FASB issued ASU 2011-05 “Comprehensive Income (Topic 220).” Under the amendments in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The amendments do not require any transition disclosures. The Company’s adoption of ASU 2011-04 did not have a material effect on the Company’s financial position, results of operations or cash flows.
In December 2011, FASB issued ASU 2011-12 “Comprehensive Income (Topic 220).” In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. The amendments are being made to allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s adoption of ASU 2011-04 did not have a material effect on the Company’s financial position, results of operations or cash flows.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In July 2012, the FASB issued ASU 2012-02, "Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"), which permits an entity to make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit's indefinite-lived intangible asset is less than the asset's carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that the fair value of a reporting unit's indefinite-lived intangible asset is more likely than not greater than the asset's carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2012-02 is effective for the Company for annual and interim indefinite-lived intangible asset impairment tests performed beginning October 1, 2012; however, early adoption is permitted. The Company’s adoption of ASU 2012-02 did not have a material impact on its 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.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and the differences could be material.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and accounts receivable.
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash and Cash Equivalents
The Company at times has cash and cash equivalents with its financial institution in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks. As of September 30, 2013, the Company had no cash in excess of FDIC limits.
Accounts Receivable
The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States. 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.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
Major Customers
The Company had three customers who comprised at least ten percent (10%) of gross revenue during the fiscal years ended December 31, 2012 and 2011. The loss of these customers would adversely impact the business of the Company. The percentage of gross revenue and the accounts receivable from each of these customers is as follows:
| |
|
Gross Revenue %
|
|
|
Accounts Receivable
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2012
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Customer A
|
|
60%
|
|
55%
|
|
$
|
2,208,495
|
|
$
|
1,014,690
|
|
Customer B
|
|
10%
|
|
19%
|
|
|
464,601
|
|
|
488,468
|
|
Customer C
|
|
12%
|
|
13%
|
|
|
35,435
|
|
|
0
|
| |
|
82%
|
|
87%
|
|
$
|
2,708,531
|
|
$
|
1,503,158
|
Major Vendors
The Company had two vendors from which it purchased at least ten percent (10%) of merchandise during the fiscal year ended December 31, 2012 and December 31, 2011. The loss of these suppliers would adversely impact the business of the Company. The percentage of purchases, and the related accounts payable from each of these vendors is as follows:
| |
|
Purchases %
|
|
|
Accounts Payable
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2012
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Vendor A
|
|
81%
|
|
62%
|
|
$
|
818,883
|
|
$
|
291,350
|
|
Vendor B
|
|
13%
|
|
35%
|
|
|
28,834
|
|
|
350
|
| |
|
94%
|
|
97%
|
|
$
|
847,717
|
|
$
|
291,700
|
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 will be a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is ¼% above Sterling National Bank Base Rate which at time of closing was 5%. The amounts borrowed under this agreement are 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, 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’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. Capstone Companies, Inc., formerly (CHDT Corp) and Howard Ullman, the previous Chairman of the Board of Directors of CHDT, had personally guaranteed Capstone Industries obligations under the Financial Agreement. As part of the agreement with Sterling National Bank, a subordination agreement was executed with Howard Ullman, a shareholder and director of the Company at that time. These agreements subordinated the debt of $121,263 (plus future interest) and $81,000 (plus future interest) due to Howard Ullman (or his assigns), to the Sterling National Bank loan. No payments will be made on the subordinated debt until the Sterling loan is paid in full. As of December 31, 2012, the balance due to Sterling was $1,245,159. As of September 30, 2013, the balance due to Sterling was $1,076,163
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – NOTES PAYABLE (continued)
On July 21, 2011 Stewart Wallach, the Chief Executive Officer and Director of Capstone Companies, Inc. formerly (CHDT) and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Howard Ullmans notes including the notes subordinated to Sterling National Bank.
On July 15, 2011, Stewart Wallach individually and accepted by Sterling National Bank, agreed to replace Howard Ullman as the sole personal guarantor to Sterling National Bank for all of Capstone Industries, Inc. loans previously guaranteed by Howard Ullman.
Effective July 12, 2011, Capstone Industries, Inc., credit line with Sterling National Bank was increased from $2,000,000 up to $4,000,000 to provide additional funding for increased revenue growth.
Effective October 1st, 2011, Sterling Capital Funding will be conducting business as the Factoring and Trade Division of Sterling National Bank. All obligations under our agreements have been assigned to Sterling National Bank.
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES
Capstone Companies, Inc. - Notes Payable to Officers and Directors
On May 30, 2007, the Company executed a $575,000 promissory note payable to a director of the Company. This note was amended on July 1, 2009 and again on January 2, 2010. As amended, the note carries an interest rate of 8% per annum. All principal is payable in full, with accrued interest, on January 2, 2014. On November 2, 2007, the Company issued 12,074 shares of its Series B Preferred stock valued at $28,975 as payment towards this loan. The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.
On July 12, 2011 Stewart Wallach, the Chief Executive Officer and Director of CHDT and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Howard Ullmans notes including the subordinated notes net of any offsets, monies due by Howard Ullman to the Company. The original terms of all notes would remain the same. On July 12, 2011 this note payable was reassigned by Howard Ullman, equally split between Stewart Wallach Director and JWTR Holdings LLC. The note balance of $466,886 was reduced by $47,940 for offsets due by Howard Ullman. The revised loan balance of $418,946 was reassigned equally $209,473 to Stewart Wallach and $209,473 to JWTR Holdings LLC. As amended the note is due on or before January 2, 2014. At December 31, 2011, the total amount payable on the reassigned notes to Stewart Wallach was $216,498 which includes accrued interest of $7025 and JWTR Holdings, LLC was $216,498 which includes accrued interest of $7,025. At December 31, 2012, the total amount payable on the reassigned notes to Stewart Wallach was $233,256 which includes accrued interest of $23,783 and JWTR Holdings; LLC was $233,256 which includes accrued interest of $23,783. For the revised notes the interest payments are being accrued monthly to the note holders. As of September 30, 2013 the total combined balance due on these two notes was $491,581which includes interest of $72,634.
On July 11, 2008, the Company received a loan from a director of $250,000. As amended, the note is due on or before January 2, 2014 and carries an interest rate of 8% per annum. At December 31, 2012, the total amount payable on this note was $310,000 including interest of $60,000. At September 30, 2013, the total amount payable on this note was $324,959 including interest of $74,959.
As part of this note payable, the Company also issued a warrant to the loan holder to purchase 4,000,000 shares of common stock at a price of $.025 per share. At the date of issuance, the stock price was $.021 per share. The Company accounted for the debt and warrants using APB 14, whereby the proceeds of $250,000 were allocated between the debt and warrants. This resulted in the warrants being valued at $56,375, which was recorded as additional paid-in capital, and a discount on the note of $56,375 being recognized. The discount was amortized over the term of the note (6 months) to interest expense. At December 31, 2008, the discount had been fully amortized resulting in interest expense of $56,375 being recognized.
On March 11, 2010, the Company received a loan from a director of $100,000. As amended, the note is due on or before January 2, 2014 and carries an interest rate of 8% per annum. At December 31, 2012 the total amount payable on this note was $122,466 including interest of $22,466. At September 30, 2013 the total amount payable on this note was $128,450 including interest of $28,450.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
On May 11, 2010, the Company received a loan from a director of $75,000. As amended, the note is due on or before January 2, 2014 and carries an interest rate of 8% per annum. The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal. At December 31, 2012 the total amount payable on this note was $90,847 including interest of $15,847. At September 30, 2013 the total amount payable on this note was $95,335, including interest of $20,335.
On June 11, 2010, the Company received a loan from a director of $150,000. As amended, the note is due on or before January 2, 2014 and carries an interest rate of 8% per annum. The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal. At December 31, 2012 the total amount payable on this note was $180,674 including interest of $30,674. At September 30, 2013 the total amount payable on this note was $189,649 including interest of $39,649.
On April 8, 2013, the Company received a loan from a director of $150,000. The note is due on or before October 8, 2013 and carries an interest rate of 8% per annum. At September 30, 2013 the total amount payable on this note was $155,753 including interest of $5,753. This note was paid off in full including interest in October 2013.
During the quarter ended June 30, 2008, the Company executed three notes payable for a combined total of $200,000 to an officer of the Company. As amended, the notes are due on or before January 2, 2014 and carry an interest rate of 8% per annum. These loans grant to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal. At December 31, 2012 the total amount due on these notes was $248,000, including interest of $48,000. At September 30, 2013 the total amount due on these notes was $259,968 including interest of $59,968
On January 15, 2013, the company received a new loan of $250,000 from Stewart Wallach, the Chief Executive Officer and Director of Capstone Companies, Inc. formerly (CHDT) with due date on or before January 15, 2014 and carries an interest rate of 8% per annum. This loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal. At September 30, 2013 the total amount payable on this note was $264,137 including interest of $14,137.
On January 15, 2013, the company received a new loan of $250,000 from a director of Capstone Companies, Inc. formerly (CHDT) with due date on or before January 15, 2014 and carries an interest rate of 8% per annum. This loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal. At September 30, 2013 the total amount payable on this note was $264,137 including interest of $14,137.
Capstone Industries – Notes Payable to Officers and Directors
On July 16, 2007, Capstone Industries executed a $103,000 promissory note payable to a director of the Company. As amended, the note carries an interest rate of 8% per annum and is due on or before January 2, 2013. In December 2008, the Company borrowed an additional $75,000 from this director. As amended, this note was due on or before January 2, 2013, but it has been extended and is due on or before January 2, 2014. These loans grant to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.
On July 12, 2011 Stewart Wallach, the Chief Executive Officer and Director of CHDT and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase all of Howard Ullman’s notes including the subordinated notes. The original terms of all notes would remain the same. On July 12, 2011 the subordinated note payable was reassigned by Howard Ullman, to Stewart Wallach director and JWTR Holding LLC. The original note balance of $178,000 was reassigned to Stewart Wallach and to JWTR Holdings LLC. For the year 2011 the interest payments were paid monthly to the note holder as of July 31, 2011. As amended, this note was due on or before January 2, 2013 but it has been extended and is due on or before January 2, 2014.
At December 31, 2012 the total amount due on these two notes was $222,472, including interest of $44,472. At September 30, 2013 the total amount due on these two notes was $233,123, including interest of $55,123.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Order Assignment- Funding Agreements
During the Second Quarter 2012, Capstone Industries, Inc. received a $432,000 loan from George Wolf who is a business partner of the CEO. The loan is due on or before August 31, 2012 and carries an interest rate of 1.0% simple interest per month (12% annual). As of December 31, 2012 the note balance was paid in full.
During the First & Second Quarter 2013, Capstone Industries, Inc. received three notes from George Wolf for $305,000, with payment due date of on or before January 02, 2014 and carried an interest rate of 1.0% simple interest per month (12% annual). At September these notes are paid in full.
On August 26, 2013, Capstone Industries, Inc. received a $200,000 loan from George Wolf. The loan is due on or before January 2, 2014 and carries an interest rate of 1.0% simple interest per month. At September 30, 2013, the total amount due on this note was $202,301, including accrued interest of $2,301.
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
During the Second Quarter 2012, Capstone Industries, Inc. received a $746,000 loan from Jeffrey Postal a director of the Company. The loan is due on or before January 2, 2013 and carries an interest rate of 1.0% simple interest per month (12% annual). As of December 31, 2012 the total amount due on these notes was $602,148 including interest of $27,148. During the first Quarter 2013, the loan balance was paid in full and the total amount due on these notes is $0.00.
During the Second Quarter 2013, Capstone Industries, Inc. received total $1,150,000 under three notes from Jeffrey Postal a director of the Company. These notes are due on or before January 2, 2014 and carry an interest rate of 1.0% simple interest per month (12% annual). As of September 30, 2013 these notes were paid in full.$.
During the Third Quarter 2013, Capstone Industries, Inc. received $850,000 against two new notes from Jeffrey Postal a director of the Company. These notes are due on or before January 2, 2014 and carry an interest rate of 1.0% simple interest per month (12% annual). As of September 30, 2013, the total amount due under these notes was $858,334 including accrued interest of $8,334.
During the Second Quarter 2012, Capstone Industries, Inc. received a $375,000 loan from Phyllis Postal. Mrs. Postal is a mother of a director of the Company. The loan was due on or before September 30, 2012 and carried an interest rate of 1.0% simple interest per month (12% annual). During the Third Quarter 2012, an additional $150,000 loan was received and then the entire balance was paid in full in September 2012. As of December 31, 2012 the total amount due on these notes is $0.00.
On October 10, 2012, the Company entered into agreement with Phyllis Postal, which carried a simple interest rate of 1% per month (12% annual), the Company received $200,000 under this agreement which was paid in full with accrued interest as of December 31, 2012. On May 21, 2013, the Company entered into agreement of $300,000 with Phyllis Postal which carried a simple interest rate of 1% per month (12% annual) with payment due date on or before January 2, 2014. This note was paid in full on August 14, 2013.
On September 15th 2013, Capstone Industries, Inc. received a $340,000 loan from Phyllis Postal. The loan is due on or before January 2, 2014 and carries an interest rate of 1.0% simple interest per month (12% annual). As of September 30, 2013, the total amount due is $341,565 including accrued interest of $1,565.
During the Third Quarter 2012, Capstone Industries, Inc. received a $220,000 loan from Everett Fleisig who is the father in law of an officer of the company. The loan is due on or before January 2, 2013 and carries an interest rate of 1.0% simple interest per month (12% annual). As of December 31, 2012 the total amount due on this note was $0.00.
Working Capital Loan Agreements
On April 1st 2012, the Company signed a working capital loan agreement with Postal Capital Funding, LLC, (“PCF”) a private capital funding company owned by Jeffrey Postal and James McClinton who is a director and director and senior officer of the Company. Pursuant to the agreement, the company may borrow up to a maximum of $1,000,000 of revolving credit from PCF. Amounts borrowed were to be repaid by April 1, 2013 at an interest rate of 8%. As amended, this note is due on or before January 2, 2014. As of December 31, 2012, the loan balance under this agreement was $382,310 including interest of $7,310. During the first two quarters 2013, additional $123,000 loan was received by the company. As of September 30, 2013, the loan balance under this agreement was $533,585 including interest of $35,585.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes and Loans Payable to Related Parties – Maturities
The total amount payable to officers, directors and related parties as of September 30, 2013 was $4,342,877 including accrued interest of $432,930. The maturities under the notes and loan payable to related parties for the next five years are:
|
Year Ended December, 31,
|
|
|
2013
|
$155,753
|
|
2014
|
4,187,124
|
|
2015
|
-
|
|
2016
|
-
|
|
2017
|
-
|
|
Total future maturities
|
4,342,877
|
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
On June 29, 2007, the Company relocated its principal executive offices and sole operations facility to 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442, which is located in Broward County. This space consists of 4,000 square rentable feet and is leased on a month to month basis. Monthly payments are approximately $4,650 per month.
Rental expense under these leases was approximately $41,903 and $42,190 for the periods ended September 30, 2013 and 2012, respectively.
Employment Agreements
On February 5, 2008, the Company entered into an Employment Agreement with Stewart Wallach, the Company’s Chief Executive Officer and President, whereby Mr. Wallach will be paid $225,000 per annum. As part of the agreement, Mr. Wallach will receive a minimum increase of 5% per year. For 2009, Mr. Wallach was paid $236,250, and for 2010 Mr. Wallach was paid $175,412. For 2011 Mr. Wallach was paid $180,000 and for 2012 he was paid $260,033. An amount of $40,233 has been accrued and is included on the balance sheet as part of accounts payable and accrued expenses for deferred wages in 2011. This balance remains unpaid at December 31, 2012 and continues to be reported as part of accounts payable and accrued expenses. The term of the contract begins February 5, 2008 and ends on February 5, 2011, but the term of the contract was extended for a further two years through February 5, 2013. The Compensation Committee has further extended the agreement with the same terms for a further two years through February 5, 2015.
On February 5, 2008, the Company entered into an Employment Agreement with Gerry McClinton, the Company’s Chief Operating Officer, whereby Mr. McClinton will be paid $150,000 per annum. As part of the agreement, Mr. McClinton will receive a minimum increase of 5% per year. For 2009, Mr. McClinton was paid $157,500 and for 2010 Mr. McClinton was paid $113,546. For 2011, Mr McClinton was paid $146,250 and for 2012 he was paid $187,000. An amount of $572 has been accrued and is included on the balance sheet as part of accounts payable and accrued expenses for deferred wages in 2011. This balance remains unpaid at December 31, 2012 and continues to be reported as part of accounts payable and accrued expenses. The term of the contract begins February 5, 2008 and ends on February 5, 2011 but the term of the contract was extended for a further two years through February 5, 2013. The Compensation Committee has further extended the agreement with the same terms for a further two years through February 5, 2015.
On February 5, 2008, the Company entered into an Employment Agreement with Howard Ullman, the Chairman of Board of Directors of the Company, whereby Mr. Ullman will be paid $100,000 per annum. For 2010 Mr. Ullman was paid $73,444. The term of the contract began February 5, 2008 and ended on February 5, 2011 and was been extended until June 30, 2011. As of July 1st 2011 Mr. Ullman is no longer an employee of the Company.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS
Series “C” Preferred Stock
On July 9, 2009, the Company authorized and issued 1,000 shares of Series C Preferred Stock in exchange for $700,000. The 1,000 shares of Series C Stock are convertible into 67,979,725 common shares. The par value of the Series C Preferred shares is $1.00.
Warrants
The Company has outstanding stock warrants that were issued in prior years to its officers and directors for a total of 5,975,000 shares of the Company's common stock. 1,975,000 of these warrants had an exercise price of $.05 and expired on November 11, 2011. The remaining 4,000,000 warrants expire July 20, 2014. The warrants have an exercise price of $.03.
The Company issued a stock warrant to each of two former officers of the Company in December 2003 for a total of 35,000 shares of the Company's common stock. Each of the stock warrants expires on July 20, 2014, and entitles each former officer to purchase 10,000 and 25,000 shares, respectively, of the Company's common stock at an exercise price of $0.05.
During September and October 2007, the Company issued 31,823,529 shares of common stock for cash at $.017 per share, or $541,000 total as part of a Private Placement under Rule 506 of Regulation D. Along with the stock, each investor also received a warrant to purchase 30% of the shares purchased in the Private Placement. A total of 9,548,819 warrants were issued. The warrants are ten year warrants and have an exercise price of $.025 per share.
On July 11, 2008, the Company received a loan from a director of $250,000. As part of this note payable, the Company also issued a warrant to the loan holder to purchase 4,000,000 shares of common stock at a price of $.025 per share. At the date of issuance, the stock price was $.021 per share. The Company accounted for the debt and warrants using APB 14, whereby the proceeds of $250,000 were allocated between the debt and warrants. This resulted in the warrants being valued at $56,375 which was recorded as additional paid-in capital, and a discount on the note of $56,375 being recognized. The discount was amortized over the term of the note (6 months) to interest expense. At December 31, 2008, the discount had been fully amortized resulting in interest expense of $56,375 being recognized. These warrants expired as of July 10, 2013.
Options
In 2005, the Company authorized the 2005 Equity Plan that made available 10,000,000 shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units. On May 20, 2005 the Company granted non-qualified stock options under the company’s 2005 Equity Plan for a maximum of 250,000 shares of the Company’s common stock for $0.02 per share. The options expire May 25, 2015 and may be exercised any time after May 25, 2005.
On May 1, 2007, the Company granted 4,000,000 stock options to five employees of the Company under the 2005 Plan. The options vest over two years. During 2008, 1,000,000 of these options were cancelled prior to vesting.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2009 and 2008, the Company recognized compensation expense of $10,869 and $25,131 related to these stock options. The following assumptions were used in the fair value calculations:
Risk free rate – 4.64%
Expected term – 11 years
Expected volatility of stock – 131.13%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS (continued)
On April 23, 2007, the Company granted a ten-year non-qualified, non-statutory stock option for 102,400,000 “restricted” shares of the Company’s common stock to Stewart Wallach, the Company’s CEO, as incentive compensation. The exercise price of the options is $.029 per share, which was the fair market value of the stock on the date of grant. Twenty percent of the options vested on the date of issuance, and twenty percent per year will vest on the anniversary date through April 23, 2011. On May 23, 2008, 74,666,667 of these options were cancelled. Compensation expense was recognized through the date of the cancellation of the options. On July 31st, 2009, 5,000,000 of the fully vested options and fully expensed options were amended and transferred to G. McClinton. Also on April 23, 2007, the Company granted a ten-year non-qualified, non-statutory stock option for 28,100,000 “restricted” shares of the Company’s common stock to Gerry McClinton, the Company’s COO and Secretary, as incentive compensation. The exercise price of the options is $.029 per share, which was the fair market value of the stock on the date of grant. Twenty percent of the options vested on the date of issuance, and twenty percent per year will vest on the anniversary date through April 23, 2011. On May 1, 2008, 850,000 of these options were cancelled. On July 31st, 2009, 5,000,000 of S. Wallach fully vested and fully expensed options were amended and transferred to G. McClinton.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2010 and 2009, the Company recognized compensation expense of $156,558 and $156,557 related to these stock options. The following assumptions were used in the fair value calculations:
Risk free rate – 4.66%
Expected term – 10 years
Expected volatility of stock – 133.59%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
The Company has recognized compensation expense of $52,186 for the year ended December 31, 2011. As of December 31, 2011 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options. No further compensation expense will be recognized for these options after 2011.
On October 22, 2007, the Company granted 700,000 stock options to a business associate of the Company. The options vest over two years.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2009 and 2008, the Company recognized compensation expense of $6,648 and $7,978 related to these stock options. The following assumptions were used in the fair value calculations:
Risk free rate – 4.42%
Expected term – 11 and 12 years
Expected volatility of stock – 134.33%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On January 10, 2008, the Company granted 1,000,000 stock options to an advisor of the Company. The options vest over one year.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS (continued)
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the year ended December 31, 2008, the Company recognized compensation expense of $19,953 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate – 3.91%
Expected term – 10 years
Expected volatility of stock – 133.83%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On February 5, 2008, the Company granted 3,650,000 stock options to four directors and one employee of the Company. The options vest over two years.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2009 and 2008, the Company recognized compensation expense of $2,603 and $59,619 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate – 1.93% to 3.61%
Expected term – 2 to 10 years
Expected volatility of stock – 133.83%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On May 1, 2008, the Company granted 850,000 stock options to an employee of the Company. The options vest over two years.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2010 and 2009, the Company recognized compensation expense of $2,620 and $7,862 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate – 3.78%
Expected term – 11 years
Expected volatility of stock – 133.59%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
The Company recognized compensation expense of $2,620 in 2010 related to these stock options. As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On June 8, 2009, the Company granted 4,500,000 stock options to four directors of the Company. The options vest over one year.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS (continued)
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2010, the Company recognized compensation expense of $33,837 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate – 1.42%
Expected term – 2 years
Expected volatility of stock – 500.5%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. As of June 8, 2011 these options had expired. No further compensation expense will be recognized for these options.
On April 23rd, 2010, the Company granted 4,500,000 stock options to four directors of the Company and 300,000 stock options to the Company Secretary. The options vest over one year.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2010, the Company recognized compensation expense of $27,000 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate – 2.61%
Expected term – 5 to 10 years
Expected volatility of stock – 500.5%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
For the year ended December 31, 2011, the Company recognized compensation expense of $12,000 related to these stock options. As of December 31, 2011 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On July 1, 2011, the Company granted 4,500,000 stock options to four directors of the Company and 150,000 stock options to the Company Secretary. The options vest over one year.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. The following assumptions were used in the fair value calculations:
Risk free rate – 1.80 – 3.22%
Expected term – 5 to 10 years
Expected volatility of stock – 500%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 150
For the six months ended December 31, 2011 and June 30, 2012, the Company recognized compensation expense of $ 16,500 respectively, for a total compensation expense of $33,000 of compensation expense related to these stock options. No further compensation expense will be recognized for these options.
On August 6, 2012, the Company granted 4,500,000 stock options to four directors of the Company and 150,000 stock options to the Company Secretary. The options vest over one year. The Company Secretary has subsequently left the Company and the 150,000 granted options that have been cancelled.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS (continued)
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. The following assumptions were used in the fair value calculations:
Risk free rate – .65 – 1.59%
Expected term – 5 to 10 years
Expected volatility of stock – 500%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 150
For the period ended December31, 2012, the Company recognized compensation expense of $20,250 related to these stock options. For the 6 months ended June 30, 2013, $20,250 compensation expense was recognized. No further compensation expense will be recognized for these options.
The following table sets forth the Company’s stock options outstanding as of September 30, 2013 and December 31, 2012 and activity for the years then ended:
| |
|
|
|
|
Weighted
|
|
|
| |
|
|
Weighted
|
|
Average
|
|
|
| |
|
|
Average
|
|
Remaining
|
|
Aggregate
|
| |
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
| |
Shares
|
|
Price
|
|
Term (Years)
|
|
Value
|
| |
|
|
|
|
|
|
|
|
Outstanding, January 1, 2012
|
69,883,333
|
|
$ 0.029
|
|
5.26
|
|
$ -
|
|
Granted
|
4,650,000
|
|
0.029
|
|
-
|
|
-
|
|
Exercised
|
-
|
|
-
|
|
-
|
|
-
|
|
Forfeited/expired
|
150,000
|
|
0.029
|
|
-
|
|
-
|
| |
|
|
|
|
|
|
|
|
Outstanding, December31 , 2012
|
74,383,333
|
|
$ 0.029
|
|
4.28
|
|
$ -
|
|
Granted
|
0
|
|
-
|
|
-
|
|
-
|
|
Exercised
|
-
|
|
-
|
|
-
|
|
-
|
|
Forfeited/expired
|
|
|
-
|
|
-
|
|
-
|
|
Outstanding, September 30, 2013
|
74,383,333
|
|
$ 0.029
|
|
3.53
|
|
$ -
|
| |
|
|
|
|
|
|
|
|
Vested/exercisable at December 31, 2012
|
69,883,333
|
|
$ 0.029
|
|
4.26
|
|
$ -
|
|
Vested/exercisable at September 30, 2013
|
74,383,333
|
|
$ 0.029
|
|
3.53
|
|
$ -
|
The following table summarizes the information with respect to options granted, outstanding and exercisable under the 2005 plan:
|
Exercise Price
|
Options Outstanding
|
Remaining Contractual Life in Years
|
Average Exercise Price
|
Number of Options Currently Exercisable
|
|
$.02
|
250,000
|
1.67
|
$.020
|
250,000
|
|
$.029
|
54,983,333
|
3.58
|
$.029
|
54,983,333
|
|
$.029
|
2,500,000
|
4.58
|
$.029
|
2,500,000
|
|
$.029
|
700,000
|
5.54
|
$.029
|
700,000
|
|
$.029
|
1,000,000
|
4.25
|
$.029
|
1,000,000
|
|
$.029
|
150,000
|
4.33
|
$.029
|
150,000
|
|
$.029
|
850,000
|
5.67
|
$.029
|
850,000
|
|
$.029
|
4,500,000
|
1.58
|
$.029
|
4,500,000
|
|
$.029
|
300,000
|
6.58
|
$.029
|
300,000
|
|
$.029
|
4,500,000
|
2.75
|
$.029
|
4,500,000
|
|
$.029
|
150,000
|
7.75
|
$.029
|
150,000
|
|
$.029
|
4,500,000
|
3.83
|
$.029
|
4,500,000
|
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
As of December 31, 2012, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $4,600,000 that may be offset against future taxable income through 2031. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax benefit has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carry forwards will expire unused. Accordingly, the potential tax benefits of the loss carryforwards are offset by a valuation allowance of the same amount.
| |
|
2012
|
|
|
2011
|
|
|
Net Operating (Profit) Losses
|
|
$ |
1,564,000 |
|
|
$ |
1,326,000 |
|
|
Valuation Allowance
|
|
|
(1,564,000 |
) |
|
|
(1,326,000 |
) |
| |
|
$ |
- |
|
|
$ |
- |
|
The provision for income taxes differ from the amount computed using the federal US statutory income tax rate as follows:
| |
|
2012
|
|
|
2011
|
|
|
Provision (Benefit) at US Statutory Rate
|
|
$ |
(206,000 |
) |
|
$ |
196,000 |
|
|
State Income Tax
|
|
|
- |
|
|
|
(32,000 |
) |
|
Depreciation and Amortization
|
|
|
(68,000 |
) |
|
|
(60,000 |
) |
|
Accrued Officer Compensation
|
|
|
- |
|
|
|
14,000 |
|
|
Non-Deductible Stock Based Compensation
|
|
|
12,000 |
|
|
|
27,000 |
|
|
Other Differences
|
|
|
24,000 |
|
|
|
25,000 |
|
|
Increase (Decrease) in Valuation Allowance
|
|
|
238,000 |
|
|
|
(170,000 |
) |
|
Income Tax Provision (Benefit)
|
|
$ |
- |
|
|
$ |
- |
|
The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances change and cause a change in management’s judgment about the recoverability of deferred tax assets, the impact of the change on the valuation is reflected in current income.
The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the Florida Department of Revenue for the years ending December 31, 2009 through 2012. The Company recognizes interest and penalties related to income taxes in income tax expense. The Company had incurred no penalties and interest for the years ended December 31, 2012 and 2011.
NOTE 8 – OTHER ASSETS
Other Assets at September 30, 2013 and 2012 consists of the following:
| |
|
2013
|
|
|
2012
|
|
|
Life in
Years
|
|
| |
|
|
|
|
|
|
|
|
|
|
Packaging Artwork and Design
|
|
$ |
299,404 |
|
|
|
262,092 |
|
|
|
2 |
|
|
Less: Accumulated Amortization
|
|
|
(271,215 |
) |
|
|
(241,898 |
) |
|
|
|
|
| |
|
$ |
28,189 |
|
|
|
20,194 |
|
|
|
|
|
Amortization expense for the year ended September 30, 2013 and 2012 was $23,063 and $14,050
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – COST METHOD INVESTMENTS
On January 15, 2013, the Company entered into an agreement with AC Kinetics, Inc. to purchase 100 shares of AC Kinetics Series A Preferred Stock for $500,000. These shares carry a liquidation preference in the amount of $500,000, are convertible at the companies demand into 3% of the outstanding shares of AC Kinetics common stock and have anti-dilution protection.
In addition, the Company and AC Kinetics have agreed to cooperate in the development and commercialization of consumer and industrial products to be solely owned by the Company. AC Kinetics will be the Company’s advanced product developer. AC Kinetics will notify the appropriate technology departments at Massachusetts Institute of Technology (“MIT”) of the Company’s ability and desire to commercialize consumer and industrial products developed in the MIT incubator departments.
The Company and AC Kinetics also entered into a royalty agreement whereby, the Company will receive a 7% Royalty on any licensing revenues received by AC Kinetics for products sold by them. This royalty agreement will terminate upon receipt by the Company of royalties of $500,000.
The aggregate carrying amount of cost method investments at September30, 2013 and 2012 consisted of the following:
| |
|
2013
|
|
|
2012
|
|
|
AC Kinetics Series A Convertible Preferred Stock
|
|
$ |
500,000 |
|
|
$ |
0 |
|
It was not practicable to estimate fair value of AC Kinetics Series A Convertible Preferred Stock and such an estimate was not made because, during the six months ended September 30, 2013, there were no events or changes in circumstances that could have had a significant adverse effect on the fair value of such investments.