NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Capstone Companies, Inc. (“CAPC”), a Florida 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, 2014 and for the nine month period ended September 30, 2014 and 2013 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 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 six 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, Door Security Monitor and Wireless Remote Control Outlets. The Company’s products are typically manufactured in the Peoples’ Republic of China by third-party manufacturing companies.
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.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2014, management has determined that the accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.
Accounts Receivable Pledged as Collateral
As of September 30, 2014, 100% of the accounts receivable serve as collateral for the companies notes payable.
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 $213,184 and $298,099 at Septemebr30, 2014 and December 31, 2013, 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:
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Computer equipment
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3 - 7 years
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Computer software
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3 - 7 years
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Machinery and equipment
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3 - 7 years
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Furniture and fixtures
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3 - 7 years
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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 September 30, 2014.
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 $ 45,818 and $ 47,518 for the period ended September 30, 2014 and 2013, 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, 2013, 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, 2014 and 2013, the total number of potentially dilutive common stock equivalents was 155,061,577 and 155,946,577 respectively.
Principles of Consolidation
The consolidated financial statements as of September 30, 2014 and December 31, 2013 and for the nine months ended September 30, 2014 and 2013 include the accounts of the parent entity and its wholly-owned subsidiaries Capstone Lighting Technologies, 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, 2014 and 2013 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:
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Level one — Quoted market prices in active markets for identical assets or liabilities;
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·
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Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
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·
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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.
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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 2014 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 $138,518 and $59,800 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014 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 $52,818 and $91,767 for the nine months ended September 30, 2014 and 2013, 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 period ended September 30, 2014, 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 27, 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 leaving 54,983,333 options outstanding. 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. 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. These 54,983,333 options are set to expire April 27, 2017.
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. These 4,000,000 options are set to expire May 1, 2018.
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. Of these 700,000 options, 350,000 are set to expire October 22, 2018 and 350,000 are set to expire October 22, 2019.
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. These 1,000,000 options are set to expire January 10, 2018.
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 leaving 150,000 options outstanding. No further compensation expense will be recognized for these options. These 150,000 options are set to expire February 5, 2018.
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. As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further expense will be recognized for these options. These 850,000 options are set to expire May 1, 2019.
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. As of December 31, 2011 these options were fully vested and compensation expense fully recognized. No further expense will be recognized for these options. Of these 4,800,000 options, 4,500,000 are set to expire April 23, 2015 and 300,000 are set to expire June 15, 2020.
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 six months ended June 30, 2012, the Company recognized an expense of $16,500. As of December 31, 2012 these options were fully vested and compensation expense fully recognized. No further expense will be recognized for these options. Of these 4,650,000 options, 4,500,000 are set to expire July 1, 2016 and 150,000 are set to expire July 1, 2021.
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. Prior to vesting, the Company Secretary left the Company and 150,000 stock options were cancelled leaving 4,500,000 options outstanding. For the year ended December 31, 2012, the Company recognized compensation expense of $20,250. For the three months ended June 30, 2013, the Company recognized an expense of $20,250. As of December 31, 2013 these options were fully vested and compensation expense fully recognized. No further expense will be recognized for these options. These 4,500,000 options are set to expire August 6, 2017.
On January 1, 2014, the Company granted 3,150,000 stock options to two directors of the Company and the Company Secretary. The options vest in 8 months. For the nine months ended September 30, 2014, the Company recognized compensation expense of $43,500. As of September 30, 2014 these options were fully vested and compensation expense fully recognized. No further expense will be recognized for these options.. Of these 3,150,000 options, 3,000,000 are set to expire July 1, 2019 and 150,000 are set to expire July 1, 2024.
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, 2014 and 2013 was $ 43,500 and $20,250 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 July 2013, the FASB issued ASU 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"), An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, prospectively, with retrospective application permitted. The Company’s adoption of ASU 2013-11 did not have a material impact on its consolidated financial statements.
In May 2014, the FASB has made available Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.
In June 2014, the FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The issue is the result of a consensus of the FASB Emerging Issues Task Force (EITF). The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning
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 (continued)
after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. Entities may apply the amendments in this ASU either:
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(a) prospectively to all awards granted or modified after the effective date; or
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(b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.
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If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company does not expect the adoption of ASU 2014-12 to 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, 2014, the Company had $0 funds in excess of FDIC limits.
Accounts Receivable
The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States. The Company typically does not require collateral from customers. Credit risk is limited due to the financial strength of the customers comprising the Company’s customer base and their dispersion across different geographical regions. The Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
Major Customers
The Company had three customers who comprised at least ten percent (6%) of gross revenue during the fiscal years ended December 31, 2013 and 2012. The loss of these customers would adversely impact the business of the Company. The percentage of gross revenue and the accounts receivable from each of these customers is as follows:
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Gross Revenue %
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Accounts Receivable
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2013
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2012
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2013
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2012
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Customer A
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62%
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60%
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$
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6,418,071
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$
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2,208,495
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Customer B
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22%
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10%
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70,974
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464,601
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Customer C
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6%
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12%
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336,432
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35,435
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| |
|
90%
|
|
82%
|
|
$
|
6,825,477
|
|
$
|
2,708,531
|
Major Vendors
The Company had two vendors from which it purchased at least ten percent (5%) of merchandise during the fiscal year ended December 31, 2013 and December 31, 2021. 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
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2013
|
|
2012
|
|
|
2012
|
|
|
2011
|
|
Vendor A
|
|
93%
|
|
81%
|
|
$
|
1.320,945
|
|
$
|
818,883
|
|
Vendor B
|
|
5%
|
|
13%
|
|
|
112,952
|
|
|
28,8340
|
| |
|
98%
|
|
94%
|
|
$
|
1,433,897
|
|
$
|
847,717
|
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. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – NOTES PAYABLE (continued)
Capstone Companies, Inc., 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, 2013, the balance due to Sterling was $4,237,144. As of September 30, 2014, the loan balance due to Sterling was $4,090,093.
On July 21, 2011 Stewart Wallach, the Chief Executive Officer and Director of Capstone Companies, Inc. 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.
During the period from July 2013 through February 2014, the Company’s credit line with Sterling National Bank was temporarily increased from $4,000,000 up to $6,000,000 to provide additional funding to cover the increased sales volume during the holiday season. As of February 28, 2014, the maximum amount that can be borrowed on this credit line is $4,000,000.
During the period from July 2014 through February 2015, the Company’s credit line with Sterling National Bank was temporarily increased from $4,000,000 up to $7,000,000 to provide additional funding to cover the increased sales volume during the holiday season.
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, 2015. 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, 2014 the total combined balance due on these two notes was $525,096 which includes accrued interest of $106,150 ..
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
On July 11, 2008, the Company received a loan from a director of $250,000. As amended, the note is due on or before April 1, 2014 and carries an interest rate of 8% per annum. 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. The warrants expired July 10, 2013. At December 31, 2013, the total amount payable on this note was $330,000 including interest of $80,000. This note along with accrued interest was paid in full on April 23, 2014.
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, 2015 and carries an interest rate of 8% per annum. At December 31, 2013 the total amount payable on this note was $130,466 including interest of $30,466. At September 30, 2014 the total amount payable on this note was $136,450 including interest of $36,450.
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, 2015 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, 2013 the total amount payable on this note was $96,847 including interest of $21,847. At September 30, 2014 the total amount payable on this note was $101,335 including interest of $26,335.
On June 11, 2010, the Company received a loan from a director of $150,000. As amended, the note is due on or before April 1, 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, 2013 the total amount payable on this note was $192,674 including interest of $42,674. This note and interest was paid in full on April 1, 2014.
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 April 1, 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, 2013 the total amount due on these notes was $264,000 including interest of $64,000. This note and interest was paid in full on April 23, 2014.
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. with due date on or before January 2, 2015 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, 2014 the total amount payable on this note was $284,137 including interest of $34,137.
On January 15, 2013, the company received a new loan of $250,000 from a director of Capstone Companies, Inc. with due date on or before January 2, 2015 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, 2014 the total amount payable on this note was $ 284,137 including interest of $.34,137.
Purchase Order Assignment- Funding Agreements
On June 14, 2014, Capstone Industries, Inc. received a $125,000 loan from George Wolf. This loan is due on or before December 31, 2014 and carries an interest rate of 1.0% simple interest per month. The loan balance at September 30, 2014 is $129,356 including accrued interest of $4,356.
On December 11, 2013, Capstone Industries, Inc. received $620,000 against new note from Jeffrey Postal a director of the Company. The note is due on or before July 2, 2014 and carries an interest rate of 1.0% simple interest per month (12% annul). As of December 31, 2013, the total amount due under this note was $624,077 including accrued interest of $4,077. This note was paid in full during the first quarter 2014 and no amount is due at March 31, 2014.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
On June 9, 2014, Capstone Industries, Inc. received $825,000 against two new notes from Jeffrey Postal a director of the Company. The notes are due on or before December 31, 2014 and carry an interest rate of 1.0% simple interest per month (12% annul). As of September 30, 2014, these notes were paid in full.
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 & 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 carry an interest rate of 8%. As amended, this loan is due on or before January 2, 2015. As of December 31, 2013, the loan balance under this agreement was $543,626 including interest of $45,626. As of September 30, 2014, the loan balance under this agreement was $573,424 including interest of $75,424.
Notes and Loans Payable to Related Parties – Maturities
The total amount payable to officers, directors and related parties as of September 30, 2014 was 2,033,934 including accrued interest of $316,988. The maturities under the notes and loan payable to related parties for the next five years are:
|
Year Ended December 31,
|
|
|
2014
|
$ 129,356
|
|
2015
|
1,904,578
|
|
2016
|
-
|
|
2017
|
-
|
|
2018
|
-
|
|
Total future maturities
|
$ 2,033,934
|
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 was leased on a month to month basis.
Capstone Industries entered into a new lease agreement for the same office space as currently located. The new lease agreement dated January 17, 2014 and effective February 1, 2014, has a 3 year lease with a base annual rent of $46,810 paid in equal monthly installments. The company has the one time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term. Under the new lease agreement, Additionally, Capstone is responsible for portion of Cam charges and any other utility consumed in the leased premises.
Capstone International Hong Kong Ltd. Entered in a two year lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong. The agreement is for the period from February 17, 2014 to February 16, 2016. This lease has a base annual rent of $48,000 (HK$ 372,000) paid in equal monthly installments.
Rental expense for the period ending September 30, 2014 under above two lease agreements was $86,359 and $41,903 for the periods ending September 30, 2014 for Deerfield Beach, Florida & Wanchai, Hong Kong location.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases (continued)
The lease obligations under these agreements for the next five years are as follows:
|
Year Ended December, 31,
|
US
|
HK
|
Total
|
|
2014
|
$42,909
|
$42,000
|
$84,909
|
|
2015
|
48,083
|
48,000
|
96,083
|
|
2016
|
49,520
|
6,000
|
55,520
|
|
2017
|
4,137
|
-
|
4,137
|
|
2018
|
-
|
-
|
-
|
|
Total lease obligation
|
$144,649
|
$96,000
|
$240,649
|
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 was paid $175,412. For 2011 he was paid $180,000 and for 2012 he was paid $272,336. For the year 2013 Mr. Wallach was paid $285,586. 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, 2013 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 three years through February 5, 2016.
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 was paid $113,546. For 2011, Mr. McClinton was paid $146,250 and for 2012 he was paid $181,403. For the year 2013 Mr. McClinton was paid $ 190,398. 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, 2013 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 three years through February 5, 2016.
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 had an exercise price of $.03 and expired on July 20, 2014.
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. These warrants expired July 20, 2014.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS
Warrants (continued)
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 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.
On April 27, 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.
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 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.
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.
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, 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.
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.
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 $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.
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.
On January 1, 2014, the Company granted 3,000,000 stock options to two directors of the Company and 150,000 stock options to the Company Secretary. The options vest on August 5, 2014.
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 – 1.72 – 3.0%
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 September, 30 2014, the Company recognized compensation expense of $43,500 related to these stock options. 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, 2014 and December 31, 2013 and activity for the years then ended:
| |
|
|
|
|
Weighted
|
|
|
| |
|
|
Weighted
|
|
Average
|
|
|
| |
|
|
Average
|
|
Remaining
|
|
Aggregate
|
| |
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
| |
Shares
|
|
Price
|
|
Term (Years)
|
|
Value
|
| |
|
|
|
|
|
|
|
|
Outstanding, January 1, 2013
|
74,383,333
|
|
$ 0.029
|
|
4.28
|
|
$ -
|
|
Granted
|
-
|
|
0.029
|
|
-
|
|
-
|
|
Exercised
|
-
|
|
-
|
|
-
|
|
-
|
|
Forfeited/expired
|
-
|
|
0.029
|
|
-
|
|
-
|
| |
|
|
|
|
|
|
|
|
Outstanding, December31 , 2013
|
74,383,333
|
|
$ 0.029
|
|
3.28
|
|
$ -
|
|
Granted
|
3,150,000
|
|
0.029
|
|
-
|
|
-
|
|
Exercised
|
-
|
|
-
|
|
-
|
|
-
|
|
Forfeited/expired
|
-
|
|
-
|
|
-
|
|
-
|
|
Outstanding, September 30, 2014
|
77,533,333
|
|
$ 0.029
|
|
2.61
|
|
$ 0.022
|
| |
|
|
|
|
|
|
|
|
Vested/exercisable at December, 31, 2013
|
74,383,333
|
|
$ 0.029
|
|
3.28
|
|
$ -
|
|
Vested/exercisable at September 30, 2014
|
77,533,333
|
|
$ 0.029
|
|
2.61
|
|
$ 0.022
|
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
|
.67
|
$.020
|
250,000
|
|
$.029
|
54,983,333
|
2.58
|
$.029
|
54,983,333
|
|
$.029
|
2,500,000
|
3.58
|
$.029
|
2,500,000
|
|
$.029
|
700,000
|
4.58
|
$.029
|
700,000
|
|
$.029
|
1,000,000
|
3.25
|
$.029
|
1,000,000
|
|
$.029
|
150,000
|
3.33
|
$.029
|
150,000
|
|
$.029
|
850,000
|
4.67
|
$.029
|
850,000
|
|
$.029
|
4,500,000
|
.58
|
$.029
|
4,500,000
|
|
$.029
|
300,000
|
5.58
|
$.029
|
300,000
|
|
$.029
|
4,500,000
|
1.75
|
$.029
|
4,500,000
|
|
$.029
|
150,000
|
6.75
|
$.029
|
150,000
|
|
$.029
|
4,500,000
|
2.83
|
$.029
|
4,500,000
|
|
$.029
|
3,000,000
|
4.25
|
$.029
|
3,000,000
|
|
$.029
|
150,000
|
9.25
|
$.029
|
150,000
|
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
(Formerly CHDT Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
As of December 31, 2013, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $3,800,000 that may be offset against future taxable income through 2033. 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.
| |
|
2013
|
|
|
2012
|
|
|
Net Operating (Profit) Losses
|
|
$ |
1,292,000 |
|
|
$ |
1,564,000 |
|
|
Valuation Allowance
|
|
|
(1,292,000 |
) |
|
|
(1,564,000 |
) |
| |
|
$ |
- |
|
|
$ |
- |
|
The provision for income taxes differ from the amount computed using the federal US statutory income tax rate as follows:
| |
|
2013
|
|
|
2012
|
|
|
Provision (Benefit) at US Statutory Rate
|
|
$ |
247,000 |
|
|
$ |
(206,000 |
) |
|
State Income Tax
|
|
|
- |
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
(41,000 |
) |
|
|
(68,000 |
) |
|
Accrued Officer Compensation
|
|
|
- |
|
|
|
- |
|
|
Non-Deductible Stock Based Compensation
|
|
|
7,000 |
|
|
|
12,000 |
|
|
Other Differences
|
|
|
59,000 |
|
|
|
24,000 |
|
|
Increase (Decrease) in Valuation Allowance
|
|
|
(272,000 |
) |
|
|
238,000 |
|
|
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, 2010 through 2013. 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, 2013 and 2012.
NOTE 8 – OTHER ASSETS
Other Assets at September 30, 2014 and December 31, 2013 consists of the following:
| |
|
2014
|
|
|
2013
|
|
|
Life in
Years
|
|
| |
|
|
|
|
|
|
|
|
|
|
Packaging Artwork and Design
|
|
$ |
43,587 |
|
|
|
299,404 |
|
|
|
2 |
|
|
Less: Accumulated Amortization
|
|
|
(38,671 |
) |
|
|
(279,740 |
) |
|
|
|
|
| |
|
$ |
4,916 |
|
|
|
19,664 |
|
|
|
|
|
Amortization expense for the nine months ended September 30, 2014 and 2013 was $14.748 and $23,063.
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 December 31, 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 twelve months ended December 31, 2013, there were no events or changes in circumstances that could have had a significant adverse effect on the fair value of such investments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General – Capstone Companies, Inc., a Florida corporation, (“CAPC,” “Company,” “we,” or “our”) is a public holding company with its Common Stock, $0.0001 par value per share, (“Common Stock”) quoted on the QB system of The OTC Markets Group, Inc. and since July 6, 2012 under the trading symbol “CAPC.” 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, 2013.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the U.S. Securities and Exchange Commission or “SEC”. Such reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.capstonecompaniesinc.com/Investor Relations and on the SEC’s website at http://www.sec.gov. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549, or through the aforesaid SEC website URL’s. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
Forward Looking Statements
Management’s Discussion and Analysis contains “forward-looking” statements within the meaning of Private Securities Litigation Reform Act of 1995, as amended, as well as historical information. The expectations reflected in these forward-looking statements may prove to be incorrect or could change with changing circumstances. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors – many of those factors being beyond our control or ability to predict. Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “hope,” “foresee,” “understand,” “project,” “plan,” “will,” “shall,” “could,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable at the time made, these statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Actual results may differ significantly from anticipated business and financial results.
The Company is a “penny stock” under Commission rules and the public stock market price for its Common Stock has historically been depressed for several consecutive fiscal quarters. In the nine months of fiscal year 2014, the average Bid price for the Common Stock has increased from trading at or under one cent per share Bid price to trading between three cents to five cents per share Bid price. The Company believes that any increase in the average Bid price of the Common Stock is based on improved financial performance of the Company and the general increase in investment in public company stocks. The Company has also previously announced in its SEC filings that the Company was seeking new business lines and/or products in an effort to enhance the Company’s business and financial performance. The previously announced cooperative efforts with AC Kinetics, Inc. are an example of such an effort. However, the Company’s Common Stock lacks sufficient or active market maker and institutional investor support in the public market and this lack of support typically means that any increase in the per share price of our Common Stock in the public market may be eliminated or reduced by selling pressure from profit taking by investors. At a minimum, the lack of primary market makers and institutional support of our Common Stock in the public markets means that the Bid price of the Common Stock may be volatile or unpredictable. As of October 27 1, 2014, the Common Stock was trading at $.027 on the Bid Investment in our Common Stock. An 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 liquidity. Investors should consider risk factors in this Report and other SEC filings of the Company.
All forward-looking statements attributable to us are expressly qualified in their entirety by the above and all other applicable risk factors, which risk factors are set forth in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and other SEC filings. We undertake no obligation to update or revise these forward-looking statements, except as required by law, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.
Note: Unless stated otherwise, any reference to a year herein means the fiscal annual period. For instance, “2013” means “fiscal year 2013.”
Introduction
The following discussion and analysis provides an introduction to our company, its current strategy and customers and summarizes the significant factors affecting: (i) our consolidated results of operations for the three months and nine months ended September 30, 2014 compared with the same periods in 2013 and (ii) final liquidity and capital resources.
We are a public holding company organized under the laws of the State of Florida and we design and manufacture through our operating subsidiary a line of specialty power failure lighting solutions and other innovative specialty consumer products for the North American and Latin American retail markets. Our product line consists of stylish, innovative and easy to use consumer products, including portable booklights, portable multi-task lights, decorative led sconce nightlights, wireless under cabinet lighting, remote control wireless accent lighting, power failure multi-function handheld lights, power failure multi-function wall plate nightlights ,wireless motion sensor lights, wireless remote control outlets, and under final development, hardwired led motion security lighting, outdoor coach led lighting and outdoor utility lighting, all designed to make today’s lifestyles simpler and safer. Our products are sold under the trade and brand name of our wholly-owned subsidiary, Capstone Industries, Inc. as well as being private labeled for our retailer customers as programs require. Company seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers on a global basis with unique products that make their lives simpler and safer.
We oversee the manufacturing of our products, which are currently all made in China by contract manufacturers, and are primarily marketed and sold by our wholly-owned subsidiary, Capstone Industries, Inc., a Florida corporation organized in 1997 and acquired on September 13, 2006 by the Company (“Capstone”). Our other wholly owned subsidiaries are: (a) Capstone International Hong Kong Ltd, a Hong Long limited liability company organized in 2012 (“CIHK”) and (b) Capstone Lighting Technologies, LLC, a Florida limited liability Company organized in 2004 (“CLTL”). CLTL has no significant business operations at this time. Capstone International (Hong Kong), Ltd. will support the development of innovative products outside the Company’s current categories, provide quality control and logistics support to contract manufacturers and sell products internationally from Hong Kong
Strategy
Our strategy is to increase the Company’s profitability, cash flow and revenues through the ongoing development of innovative and technologically advanced ideas and concepts to the consumer product categories that have become synonymous with our brands, while maintaining low competitive prices. We seek to leverage our product successes by an ongoing effort to expand our product channels as our product categories and brand recognition continue to gain traction at retail levels by merchandisers, buyers and consumers. Based on expanding channels, the Company's expanded distribution footprint is expected to continue to yield annual sales growth throughout 2014. Planning for this result, the Company initiated a rebranding effort that was finalized in mid-year 2013 and which, we believe, based on our review of sales, enhanced its market image further and better reflected the Company's product innovations and technology advancements within its product categories. Gross Sales for the nine months ending September 30, 2014 have increased by $6,196,600 or 82.1% over the same period in 2013, which increase we believe is in part due to our channel expansion efforts. Further, to the point of technology advancements and our strategy to continue to nourish the Company’s product development endeavors, the Company invested in a private U.S. company, AC Kinetic Technologies, in 2013 to confidentially explore and develop certain inventive concepts the Company has conceived that are very complex and that would yield intellectual property which will further distance the companies’ products from off the shelf products commonly marketed at retail. The Company plans to exploit the trade secret technologies within its own products and also make the technologies available for licensing to companies that have distribution channels or markets not currently served by our company or its affiliates. The first of these products should be introduced to the market in fourth fiscal quarter of 2014. The Company also continues to seek out and, if a suitable fit with our strategy, explore selectively acquiring or investing in suitable businesses with perceived superior technical product development capabilities or that could benefit from our market position and strategic direction. All forward planning product development roadmaps are also assessing possible benefits to be realized from U.S. based production. We have not entered into any agreements or commitments with respect to such efforts, but the effort is ongoing and part of our growth strategy and strategy to enhance shareholder value.
We have extensive experience in introducing new products to retail market channels and believe that provides us a competitive edge. In our early development, we sought to find niche product opportunities that may have been overlooked or underexploited by competitors, in order to win a profitable niche of the market share with minimal cost of entry. In fourth quarter ending December 31, 2014, the Company plans to make presentations of new products that is expected to expand the Company’s distribution beyond its current product placements. We believe that the new products will not only introduce additional functionality to existing categories of products that are meaningful to consumers but will also revitalize categories that have grown stale due to minimal investment and creativity by competitors. The Company’s product(s) characteristics are as follows:
|
·
|
Designed to make everyday tasks or usage simpler and more enjoyable for consumers;
|
|
·
|
While continuing to focus on increased profit margins, the products must be affordable to win at the point of sale and deliver increased revenues for retail partners;
|
|
·
|
The products must represent significant value when compared with items produced or marketed by competitive consumer product companies; and
|
|
·
|
Wherever feasible, the products must be unique to the market whether this be accomplished though design techniques, added functionality or some proprietary innovation.
|
Due to the extensive, modern manufacturing, design and engineering capabilities in China, and the lower labor costs in China, we believe that it is more economical and efficient to continue to manufacture certain products in China and have them shipped to the United States rather than to have such products produced in North America. While this resource is available to and used by large numbers of U.S. companies, including our competitors, we believe this Chinese manufacturing resource gives us the level of production cost and quality that allows us to be competitive with larger competitors in the United States. However, as design technologies can influence the degree of hand labor in building its future products the Company expects the advantages it has realized by manufacturing solely in China to be challenged. In these cases, the Company will evaluate production opportunities in the United States.
The Company has begun to utilize U.S. based industrial design support to augment the Capstone International HK Ltd. Hong Kong based team, and to isolate and protect some of the Company's latest intellectual property or “IP” which will find its way into specific products planned for the fourth fiscal quarter of 2014. These products will be in the Outdoor Lighting segment of our business line.
The Company has expanded Capstone International HK operations in Hong Kong, with additional personnel experienced in Electrical Engineering and Design, Product Development, International Logistics and Quality Control. These associates work with our OEM Chinese factories to develop and prototype new product concepts and to ensure products meet Consumer Product Regulations and rigorous Quality Control standards. All products are tested before and during production by Company personnel. This team also provides extensive, product development, quality control and logistics support to our factory partners to ensure on time shipments. The Company initiated its expansion in Hong Kong in 2012 as product line extensions and increased number of factories utilized became factors. In anticipation of the Company’s expected growth, we have continued our investment to ensure overseas factory performance meets stringent tolerances which maintain our competitiveness and operational excellence. Capstone International Ltd. Hong Kong is intended not only to support our product development but also act as a catalyst for sourcing new innovative items and for supporting our International Market growth.
Products and Customers
The Company believes that it has earned the industry recognition associated with being an innovative company as evidenced by the Company being invited to more retail buying reviews than in earlier years when we were more focused on proving our ability to perform in the big box environment while supplying a short line of products. Our 2013 top line results are indicative of this increased interest and our strategy for market positioning which was forged in 2008-2009 period has been proven sound. We are now determined to expand our product positioning through the introduction of several more indoor and all new outdoor lighting programs for the residential markets. Additionally, we will be adding hardwired products to our programs in addition to the existing battery and induction powered product lines. Such endeavors will require increased investment in infrastructure and product development, which increases may adversely impact on future financial results. The extent of such impact is not known as of the date of this Report.
In the Company's earlier development years the largest selling product group was the Eco-i-Lite power failure light program and represented a majority of the sales. In 2013 this program accounted for 24.4% of revenues as compared to 84.8% of revenues in 2012, 57.7% in 2011, 63.8%, in 2010. In 2013 we launched new products that were well received by retailers. A new wireless motion sensor light program and a new multi-function power failure light in a wall plate configuration. These new introductions accounted for approximately 60% of the 2013 net revenue. Our other products include Pathway Lights® book and multi-task lights, and Door Security Monitor which was planned as our entry into the security products sector. The security lighting category is a prime target for the Company in 2014 in terms of new market penetration. Since 2009 our branded products have been consistently focused on security and safety.
Since inception, we have focused on establishing and growing relationships with numerous leading international, national and regional retailers including but not limited to: Costco, Home Depot, Lowes, Office Depot, Sam’s Club, Target, The Container Store, True Value, Canadian Tire and Wal-Mart. These distribution channels may sell our products through the Internet as well as through retail storefronts and catalogs/mail order. We do not have a vigorous internal e-commerce effort at this time.
Our experience in management, operations, and the export business has enabled us to develop the scale, manufacturing efficiencies and design expertise that serves as the foundation for us to aggressively pursue niche product opportunities in the largest consumer markets and growing international market opportunities. While we have traditionally generated the majority of our sales in the domestic U.S. market, urbanization, rising family incomes and increased living standards have spurred demand for small consumer appliances internationally. In order to pursue this market opportunity, we introduced the Capstone Industries brands to markets outside the U.S., including Central and South America, Mexico, Taiwan and we anticipate further expansion into Canada, Australia as well as other markets where our US customers have strong global initiatives. Due to the rate of natural and man-made occurrences resulting in loss of electricity worldwide, we are optimistic about the potential growth rate in fiscal years 2014 and 2015 for our power failure lighting programs (assuming sufficient marketing support and response of competition and key markets). This assumption is not based on independent market surveys or marketing data, but rather is based on our understanding of our industry segments and market demand in each such segment. A key component in the rebranding effort was to create a powerful umbrella identity on the retail package that would serve to rationalize a retail destination within lighting more focused on power failure solutions than mere illumination, which is more competitive segment in terms of number and variety of competitors and competing products.
We believe the Company is well positioned to pursue role in what we perceive as the rapidly growing home emergency lighting and security lighting sectors and we will seek to establish and maintain a market leader status in power-failure lighting solutions for consumers. Absent a significant change in risk factors and our circumstances, we believe we will maintain our revenue growth because of our ability to deliver products on time, the quality reputation of our products, our business relationships with our retailers and our aggressive product expansion strategies currently in place. Such continued progress depends on a number of assumptions and factors, including ones mentioned in “Risk Factors” below and in other filings with the SEC. A significant risk factor underlying this assumption of growth is an assumption by us that our technology will not be undermined by new technologies and no substantial changes in the competitive environment in this segment. We also assume that a larger competitor will not devote considerable resources to eliminate competition in this segment.
Sales and Marketing
The Company’s products are marketed primarily through a direct independent sales force, distributors and wholesalers. The sales force markets our products through numerous retail locations worldwide, including mass merchandisers, warehouse clubs, food, drug and convenience stores, department stores and hardware centers. We actively promote our products to retailers and distributors at North American trade shows, but rely on the retail sales channels to advertise our products directly to the end consumer. Domestically and internationally, the sales teams market our full portfolio of product offerings. All sales activities at major account levels involved direct company executive staff participation. The Company will also be targeting direct sales to retail clients through its Capstone International staff for products that fall outside Capstone’s branded categories but are innovative and preferably exclusive to Capstone International. This is intended to allow for quicker revenue expansion as time consuming product and brand development efforts are the responsibility of the retailer.
Working Capital Requirements
Management assesses the Company's liquidity in terms of its overall ability to generate cash to fund its operating and investing activities. Of particular importance in the management of liquidity are cash flows generated from operating activities, capital expenditure levels and adequate lines of credit. Any future acquisitions are expected to be financed through internal cash, borrowings and equity, or a combination thereof.
The Company is currently meeting its working capital needs through cash on hand, as well as internally generated cash from operations, and funding from lenders.
During 2013, the Company reaffirmed its strategic decision to extend its business model to expand distribution, so that products could now be offered from our Los Angeles warehouse for U.S. domestic shipments, to such noted retailers as Home Depot, Target, Office Depot, True Value and Wal-Mart for non-seasonal periods. This enables retailers to stock our products daily and replenish inventory based on rates of sale in their stores. This has not only allowed Capstone Industries, Inc. to add these retailers to its distribution but has helped to normalize future business by minimizing the spikes in activity associated with the majority of the Company's business being promotional or seasonal. This program will require a larger amount of inventory particularly at key selling periods and therefore will require additional funding needs as we ship orders based on retailer weekly or on demand replenishment. In 2013 to support our capital needs, Sterling National Bank in New York City approved access to our available bank line for domestic inventory funding. Our liquidity and cash requirements are discussed more fully in Part II, Item 6, Management’s Discussion and Analysis of Operations below.
Competitive Conditions
The consumer 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 and competitive online markets. Competition is influenced by brand perceptions, product performance and value perception, changes in consumer tastes, customer service and price. Our principal lighting competitors in the U.S. are Jasco, Energizer and Sylvania. We believe private-label sales by large retailers have some impact on the market in some parts of the world as many national retailers such as Target, Wal-Mart, Home Depot, and Costco offer lighting as part of their private branded product lines.
With trends and technology continually changing, the Company will continue to endeavor to invest and rapidly develop new products that are competitively priced with consumer centric features and benefits easily articulated to influence point of sale decision making. Success in the markets we serve depends upon product innovation, pricing, retailer support, responsiveness, and cost management. We continue to invest in developing the technologies and design critical to competing in our markets as evidenced by our recent investment in AC Kinetic Technologies. Our ability to invest in such opportunities is limited by available cash reserves and cash flow and the availability of affordable funding.
Raw Materials
The principal raw materials used by us are sourced in China, as we manufacture our products exclusively through contract manufacturers in the region. Although prices of materials have fluctuated over time, the Company believes that adequate supplies of raw materials required for its operations are available at the present time. Company, of course, 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, the Company 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.
CONSOLIDATED OVERVIEW OF OPERATIONS
Revenue
For the 3 months ended September 30, 2014 and 2013, total net revenues were approximately $7,738,900 and $5,653,900, respectively, an increase of $2,085,000 or 36.9% from the previous year. We would note that gross sales for the 3rd quarter ended September 30, 2014 were $8,466,900 as compared to $5,767,500 in same period in 2013, an increase of $2,699,400 or 46.8%. The difference between gross and net revenues is due to our offering marketing and promotional allowances to retailers as part of a strategic marketing effort. During the 3rd quarter ended September 30, 2014, gross sales were reduced by approximately $728,000 as part of our strategic marketing effort, with approximately $293,000 of these promotional allowances being used during the 3rd quarter ended September 30, 2014, and the balance of $435,000 of marketing and promotional allowances to be used during the 4th quarter ending December 31, 2014, to support retail sales movement during the holiday period.
For the 9 months ended September 30, 2014 and 2013, total net revenues were approximately $13,008,600 and $7,340,800 respectively, that’s an increase of $5,667,800 or 77.2%. Gross Sales for the nine months ended September 30, 2014, were $13,743,600 compared to $7,547,000 for the same period in 2013, an increase of $6,196,600 or 82.1% over 2013. For the nine months ended September 30, 2014, gross sales were reduced by $735,000 for marketing and promotional allowances of which $435,000 will be used during the 4th quarter ending December 31, 2014, as compared to $206,200 in same fiscal period in 2013. Approximately $2,000,000 of gross sales shipments were expedited into the 3rd quarter ending September 30, 2014, that had originally been scheduled for the 4th quarter ending December 31, 2014, to ensure sufficient inventories were available in the stores to support the above referenced 4th quarter ended December 31, 2014, marketing promotional support.
Cost of Sales
For the 3 months ended September 30, 2014 and 2013, cost of sales were approximately $6,621,600 and $4,102,800, respectively, an increase of $2,518,800 or 61.4% from the previous year. The increased Cost of Sales during the period was mainly the result of the higher sales volumes, however during the 3rd quarter we incurred approximately $225,000 of additional manufacturing expenses in connection with an order for an important warehouse club customer, as the original factory could not process the order. As a result, the product had to be reengineered by another factory at a significantly higher unit cost, resulting from new molds, higher priced electronic components and premium materials and labor costs required to expedite the order so it could be shipped on time. This decision to fulfil the order even at increased expense reflects our Company philosophy and is part of our commitment to our customer. This is a non-recurring, one-time expense.
For the 9 months ended September 30, 2014 and 2013, Cost of Sales were approximately $10,232,000 and $5,398,900 respectively. That’s an increase of $4,833,100 and is mainly the result of the increase in sales volume. Cost of Sales as a percent of revenues for the nine months was 78.7% in 2014 as compared to 73.5 % in 2013. The higher Cost of Sales percent to sales was impacted by the $735,000 marketing allowances to approximately 4.3% and the $225,000 once off additional order by approximately 1.8% for a combined effect of 5.9%. Overall manufacturing material and labor costs have remained steady during the 9 months ended September 30, 2014.
Gross Profit
For the 3 months ended September 30, 2014 and 2013, gross profit was approximately $1,117,300 and $1,551,100 respectively, a reduction of $433,800 or 28.0% as compared to the comparable period in 2013. Gross Profit as a percentage of revenues was 14.4 % in the quarter compared to 27.4 % in the same quarter in 2013. Gross Profit was reduced as a result of the $728,000 marketing and promotional allowances provided for in the quarter and a once off order expedite expense of $225,000, This combined effect was to reduce Gross Profit in the period by 10.1% of sales.
For the 9 months ended September 30, 2014 and 2013, gross profit was approximately $2,776,700 and $1,941,800 respectively, an increase of $ 834,900 or 43.0% over 2013 This increase was achieved after the Gross Profit had been reduced by $735,000 market promotional allowances and the $225,000 order expedite charge for a combined total of $960,000 for the 9 months ended September 30, 2014.
The significant increase in revenue is attributed to the continued strong sales performance of our Wireless Motion Sensor Light, Power Failure Light and the newly launched Wireless Remote Control Outlets. Gross Profit as a percentage of revenues for the nine months was 21.3% in 2014 as compared to 26.5% in 2013. The $960,000 of allowances and charges referenced above accounted for approximately 5.9% of the Gross Profit percentage reduction.
Operating Expenses
For the 3 months ended September 30, 2014 and 2013, operating expenses were approximately $759,200 and $ 511,400 respectively, an increase of $247,800 or 48.5%% as compared to same period in 2013.
For the 9 months ended September 30, 2014 and 2013, operating expenses were $2,413,300 and $1,631,800 respectively an increase of $781,500 or 47.9%.
Expenses for the 3rd quarter ended September 30, 2014, were higher than in the same quarter in 2013 because we have incurred the added expense of our Hong Kong office, additional sales staff in our U.S. office, and we have continued investment in new product development. There are also increased variable expenses related to the higher sales volume in the quarter. The following summarizes the major expense variances by category in the nine month period compared to same period in 2013.
Sales and Marketing Expenses - for the 9 months ended September 30, 2014 and 2013 were approximately $455,100 and $210,200 respectively, an increase of $244,900 or 116.5%. During the nine month period ended September 30, 2014, the Company continued its marketing-product promotion strategy and invested $323,700 in retail product advertising and promotions, to further stimulate consumer response.
Compensation Expenses - for the 9 months ended September 30, 2014 and 2013 were $1,045,900 and $690,700 respectively, an increase of $355,200or 51.4%. This increase is the result of added sales personnel in the United States and staff in our Capstone International Hong Kong office. Some of this expense increase has been offset by $125,000 in expense reductions in professional fees as we transitioned personnel from consultant status to employees in our Hong Kong office.
Professional Fees - for the 9 months ended September 30, 2014 and 2013 were approximately $144,700 and $269,700 respectively, a reduction of $125,000 or 46.4%. As noted above, to support our Hong Kong office, we have reduced our dependency on consultants and hired qualified personnel.
Product Development Expenses - for the 9 months ended September 30, 2014 and 2013 was approximately $312,300 and $157,600 respectively that is an increase of $154,700 or 98.2% in the period. We have continued to make significant investments in developing, sourcing and testing new innovative products for future revenue growth. In an effort to accelerate the launch of new products incorporating the AC Kinetics technology, we engaged an additional industrial design firm stateside to help the overseas team execute at factory levels in the most effective way possible.
Other General Administrative - for the 9 months ended September 30, 2014 and 2013 were approximately $455,200,000 and $303,600 respectively, an increase of $151,600 or 49.9%. This expense increase was the result of additional rental expense with the opening of the Hong Kong office; increased insurance premiums associated with the Company’s higher revenue volumes and increased travel expense related to sales and operational activities.
Total Operating Expenses - for the 9 months ended September 30, 2014 and 2013 were approximately $2,413,300 and $1,631,800 respectively, an increase of $781,500 or 47.9%. During this period, we have continued to invest for future growth, specifically, $388,000 in the establishment of our Hong Kong operation, $323,700 in product advertising and marketing to further develop consumer product awareness and $157,600 in new product development and technology, totaling $869,300 of investment and are the main reasons for the overall increase in Operating Expenses in the period
Net Operating Income (Loss)
For the 3 months ended September 30, 2014 and 2013, Operating Income was approximately $358,100 and $1,039,700, respectively, for a net income reduction of $681,600 as compared to same period in 2013.
For the 9 months ended September 30, 2014 and 2013, Operating Income was approximately $363,400 and $310,100, respectively this represents a $53,300 net improvement over last year.
Interest Expense
For the 3 months ended September 30, 2014 and 2013, interest expenses were approximately $71,600 and $110,600, respectively, a reduction of $39,000 or 35.3%, as compared to same period in 2013.
For the 9 months ended September 30, 2014 and 2013, interest expenses were approximately $229,400 and $265,700, respectively, a reduction of $36,300 or 13.7% from 2013. Despite having significant revenue increases over last year, we have been able to reduce interest expense less than 2013 expense. This has been achieved by paying off some of our old outstanding loans and eliminating that interest, combined with having increased loan availability at Sterling National Bank, which reduced our need to use more expensive financing.
Net Income (Loss)
For the 3 months ended September 30, 2014 and 2013, the Company had a net income of approximately $286,500 as compared with a net income in the same period last year of 929,100. That’s a net income reduction of $642,600.
For the 9 months ended September 30, 2014 and 2013, the Company had a net income of approximately $134,000 and $44,300 respectively. That’s a net income improvement of $89,700 during the nine months.
In summary, we achieved significant sales growth in the 9 months, with gross sales at $13.7 million compared to $7.5 million in same period for 2013. Strategically, we decided to allocate $735,000 to further develop brand awareness and stimulate product sell through during the holiday shopping period. We incurred $225,000 in a one-time manufacturing expense, to support a very important customer, and we increased operating expenses by $781,000 in expanding our company’s infrastructure, product advertising and product development. This represents a combined total of $1.741 million that has been reduced from our net income for the period
With the current retail interest in our product offerings, expansion of distribution channels through the domestic purchase program, the launch of new products this year and the opportunities provided by Capstone International HK Ltd, the Company expects its sales volumes to grow and produce gross revenues in the projected range of $20 million within the fiscal year 2015, subject to economic conditions not deteriorating and other factors impacting on consumer sales (including, without limitation, competitors’ new products and sales efforts, changes in consumer purchasing habits and tastes, technological developments in our industry, and other risk factors set forth in our Securities Exchange Act of 1934 filings with the SEC). The Company anticipates this growth potential as a result of the increased retail distribution achieved in 2013, the rebranding of Capstone’s Power Failure Product line and the new product launches at the National Hardware Show in May of 2014, and we anticipate additional projects and programs through Capstone International. Having attended for the first time last year, the International Hotel, Motel and Restaurant Show, we are actively pursuing opportunities with our Power Failure Solutions products and Door Security Monitor in this new distribution channel. These assumptions would have to be accurate to achieve the projected gross revenues. Further, since our products are mostly discretionary spending items for the general public, general economic conditions impact the market appeal and performance of our products to the extent that consumers defer or cancel discretionary spending on non-essential products in response to poor economic conditions.
Off Balance Sheet Arrangements
We do 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
The following table represents contractual obligations as of September 30, 2014:
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Payments Due by Period*
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|
|
|
|
Total
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|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
After 2016
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
$
|
2,967
|
|
|
$
|
2,967
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Short-Term Debt
|
|
|
6,124
|
|
|
|
4,091
|
|
|
|
2,033
|
|
|
|
-
|
|
|
|
-
|
|
|
Long-Term Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Operating Leases
|
|
|
177
|
|
|
|
21
|
|
|
|
96
|
|
|
|
56
|
|
|
|
4
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Other Long-Term Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total Contractual Obligations
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|
$
|
9,268
|
|
|
$
|
7,079
|
|
|
$
|
2,129
|
|
|
$
|
56
|
|
|
$
|
4
|
|
*Notes to Contractual Obligations Table
Purchase Obligations — Purchase obligations are comprised of the Company’s commitments for goods and services in the normal course of business.
Note Payable and Long-Term Debt — See Item 8, Financial Statements and Supplementary Data, Note 4 in this report.
Operating Leases — Operating lease obligations are primarily related to facility leases for our operations in the US and in Hong Kong.
LIQUIDITY AND CAPITAL RESOURCES
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|
September 30, 2014
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|
September 30, 2013
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(In thousands)
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|
|
|
|
|
|
|
Net cash provided (used) by:
|
|
|
|
|
|
|
|
Operating Activities
|
|
$ |
1,411 |
|
|
$ |
(1,010 |
) |
|
Investing Activities
|
|
$ |
(45 |
) |
|
$ |
(513 |
) |
|
Financing Activities
|
|
$ |
(1,485 |
) |
|
$ |
1,419 |
|
Our borrowing capacity with Sterling National Bank, funding support from directors and cash flow from operations provide us with the financial resources needed to run our operations and reinvest in our business.
Operating Activities
Cash flow provided by operating activities was approximately $1,411,000 in the nine months ended September 30, 2014 compared with approximately $1,009,900 used in the same period 2013.
Our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers. Sales are influenced significantly by the build rates of products, which are subject to general economic conditions. Our sales are also impacted by our ability to obtain new orders.
Investing Activities
Cash used for investing activities in the nine months ended September 30, 2014 was $44,700, compared to $512,700 in the same period in 2013. In 2013, the Company invested $500,000 in AC Kinetics, Inc. in return for a preferred stock interest.
Future capital requirements depend on numerous factors, including expansion of existing product lines and introduction of new products. Management believes that our cash flow from operations and current borrowing sources will provide for these necessary capital expenditures.
Financing Activities
Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing and our operations in the future. Net cash used by financing activities for the nine months as of September 30, 2014 was $1,485,000 as compared to $1,419,000 provided in 2013. The cash was used to repay outstanding notes and loans, some of which had been outstanding for some time. It is our stated objective to pay off and reduce loans, whenever cash flow allows, so that we can reduce our interest expense. As of September 30, 2014, the Company was in compliance with all of the covenants pursuant to existing credit facilities.
The Company’s cash needs for working capital, debt service and capital equipment during 2014 are expected to be met by cash flows from operations, cash balances, the existing bank loan facility, a working capital loan funded by a director, and if necessary additional notes payable funding from established sources.
Directors & Officers Insurance: We currently operate with directors’ and officers’ insurance and we believe our coverage is adequate to cover likely liabilities under such a policy.
Impact of Inflation: Our major expenses have 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. As a result of world economic conditions and the current price of world oil and resulting increased material costs, there are now pressures from contract Chinese Manufacturers to increase costs. We generally have been able to reduce cost increases by negotiating, volume purchases or re-engineering products, but may have to increase the price of our products in fiscal year 2014 in response to such inflationary pressures and any dollar currency depreciation with the Chinese currency. Since we operate in industries where the consumer tends to be price sensitive, any such increase in the prices of our products may adversely impact our sales and financial results in fiscal year 2014.
Country Risks- Changes in foreign, cultural, political and financial market conditions could impair Company’s international manufacturing operations and financial performance.
Company’s manufacturing is currently conducted in China. Consequently, Company is subject to a number of significant risks associated with manufacturing business in China, including:
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·
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the possibility of expropriation, confiscatory taxation or price controls;
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·
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adverse changes in local investment or exchange control regulations;
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·
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political or economic instability, government nationalization of business or industries, government corruption, and civil unrest;
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·
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legal and regulatory constraints;
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·
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tariffs and other trade barriers, including trade disputes between the U.S. and China; and
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·
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difficulty in enforcing contractual and intellectual property rights.
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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 pressure.
Interest Rate Risk- We do not have significant interest rate risk during the fiscal quarter ended September 30, 2014.
Credit Risk- We have 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 secured.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013 and concluded that the disclosure controls and procedures were effective under Rules 13a-15(e) and 15d-15(e) under the Exchange Act and as of March 30, 2014, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Commission regulations and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Item 4(T). Controls and Procedures.
Changes in internal controls. There were no changes in our internal controls over financial reporting that occurred during the three months covered by this Report of Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Laurie Holtz, a former director and certified public accountant, headed our internal control review until his resignation on January 7, 2014. We intend to use another outside director to fulfill Mr. Holtz’s prior role in internal review commencing in the fourth quarter of fiscal year 2014. Our chief financial officer has handled Mr. Holtz’s internal review functions since Mr. Holtz’s resignation. Mr. Holtz resigned for health reasons.
The certifications of our chief executive officer and chief financial officers attached as Exhibits 31.1, 31.2, 32.1 (which Exhibit 32.1 includes the principal executive officer and principal financial and accounting officer certifications) to this Report include information concerning our disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in Item 4, including the information incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2013, for a more complete understanding of the matters covered by such certifications.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any material pending or threatened legal proceedings and, to the best our knowledge, no such action by or against us has been threatened. From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions or settlements may occur in such routine lawsuits, we believe that the final disposition of such routine lawsuits will not have material adverse effect on its financial position, results of operations or status as a going concern.
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.
In addition to risk factors set forth herein and in the Company’s Form 10-K for the fiscal year ended December 31, 2013, and other Commission filings, the following risk factors should be considered in any evaluation of the Company.
Investment in new business strategies and marketing and sales strategies could present risks not originally contemplated. The Company has invested, and in the future may invest, in new business strategies or marketing and sales strategies. Such endeavors may involve significant risks and uncertainties, including insufficient revenue to offset liabilities assumed and expenses associated with the strategy, inadequate return of capital, and unidentified issues not discovered in the Company’s evaluation. These new strategies may be inherently risky and may not be successful.
Company relies on equity or debt funding from members of management or outside investors from time to time to meet working capital needs. Company receives equity or debt funding from time to time from members of management or outside investors to fund working capital needs. Such funding may not always be available or adequate to meet such essential needs. The lack of primary market makers and institutional investors for our publicly traded common stock makes it difficult for the Company’s common stock to appreciate in value, which, in turn, makes it difficult for the Company to raise money from outside investors or in the public markets by offering the Common Stock. We believe that we need to develop new products or new product lines with higher profit margins to attain better financial results and, through any improved financial results, to possibly attract greater support for our Common Stock in the public markets. We believe that greater market support for our Common Stock would assist in any efforts to raise working capital by the Company. We may be unable to develop higher profit margin products or achieve or sustain profitability and that failure would probably result in the aforementioned weakness in the public market for our Common Stock.
From time to time, we have sought primary market makers for our Common Stock, but such efforts have not yielded desired results as of the date of this Report. The Company believes that sustain growth in revenues and net income will be required to attract primary market maker support of the Common Stock.
Company competes against larger competitors with greater resources and market share and recognition. The Company is relatively small in comparison to larger competitors with superior financial and technical resources and greater market recognition and market share in certain product categories. This discrepancy in resources and market share makes it difficult for our company to attain a larger market share in certain regions or in certain product categories.
Any enhanced financial performance or expansion of products and markets will require efficient management responses and planning and adequate and affordable funding arrangements by our senior management. The inability to properly plan and handle any future growth in revenues, markets and products could adversely impact on our future business and financial performance.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered issuances of Company securities in the quarter ending September30, 2014.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information
None.
Item 6. Exhibits
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EXHIBIT #
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DESCRIPTION OF EXHIBIT
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Stewart Wallach, Chief Executive Officer^
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by James G. McClinton, Chief Financial Officer and Chief Operating Officer^
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Stewart Wallach, Chief Executive Officer and by James G. McClinton, Chief Financial Officer and Chief Operating Officer
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------------------------------------------
^ Filed herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Capstone Companies, Inc.
Dated: November 14, 2014
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/s/ Stewart Wallach
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Stewart Wallach
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Chief Executive Officer
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|
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Principal Executive Officer
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| |
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|
| |
|
|
|
/s/James G. McClinton
|
|
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James G. McClinton
|
Chief Financial Officer and
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|
Principal Operation Executive
|
Chief Operating Officer
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|