10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

X     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2016

__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission File Number: 000-28831

CAPSTONE COMPANIES, INC.

(Exact name of small business issuer as specified in its charter)

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

350 Jim Moran Boulevard, Suite 120, Deerfield Beach, Florida    33442

(Address of principal executive offices)

(954) 570-8889

(Issuer's Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [__] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]     No [_]

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [_]	Accelerated filer [_]
Non-accelerated filer [_] (Do not check if a smaller reporting company)	Smaller reporting company [x]

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of October 24, 2016, there were 48,132,664 shares of the issuer's Common Stock, $0.0001 par value per share, issued and outstanding.

1

CAPSTONE COMPANIES, INC.

Quarterly Report of Form 10-Q

Three Months and Nine Months Ended September 30, 2016

TABLE OF CONTENTS

PART 1	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operation	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	27
PART II	Other Information	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	28
Item 3.	Defaults of Senior Securities	28
Item 4.	Mine Safety Disclosures (Not Applicable)	28
Item 5.	Submission of Matters to Vote of Security Holders	29
Item 6.	Exhibits	29

2

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
	September 30,			December 31,
	2016			2015
	(Unaudited)
Assets:
Current Assets:
Cash	$	359,587		$	364,714
Accounts receivable, net		11,832,358			5,077,182
Inventory		480,758			205,708
Prepaid expenses		522,694			566,459
Total Current Assets		13,195,397			6,214,063
Fixed Assets:
Computer equipment and software		19,767			19,767
Machinery and equipment		396,133			380,633
Furniture and fixtures		5,665			5,665
Less: Accumulated depreciation		(339,579	)		(295,180	)
Total Fixed Assets		81,986			110,885
Other Non-current Assets:
Deposit		12,193			12,193
Investment (AC Kinetics)		-			500,000
Note receivable		513,654			-
Goodwill		1,936,020			1,936,020
Total Other Non-current Assets		2,461,867			2,448,213
Total Assets	$	15,739,250		$	8,773,161
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable and accrued liabilities	$	3,023,561		$	2,164,283
Income tax payable		12,600			7,500
Note payable - Sterling National Bank		6,620,023			2,275,534
Notes and loans payable to related parties		1,301,596			2,064,034
Total Current Liabilities		10,957,780			6,511,351
Commitments and Contingent Liabilities (Note 5):
Stockholders' Equity:
Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares		-			-
Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued -0- shares		-			-
Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued-0-shares		-			-
Common Stock, par value $.0001 per share, authorized 56,666,667 shares, issued 48,132,664 shares		4,813			4,813
Additional paid-in capital		7,390,697			7,344,115
Accumulated deficit		(2,614,040	)		(5,087,118	)
Total Stockholders' Equity		4,781,470			2,261,810
Total Liabilities and Stockholders' Equity	$	15,739,250		$	8,773,161
The accompanying notes are an integral part of these financial statements.

3

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues, net	$	11,692,146		$	7,747,450		$	22,672,551		$	8,750,951
Cost of sales		(8,841,148	)		(5,767,306	)		(17,079,271	)		(6,410,197	)
Gross Profit		2,850,998			1,980,144			5,593,280			2,340,754
Operating Expenses:
Sales and marketing		488,057			16,716			903,888			185,229
Compensation		325,283			313,953			949,753			1,007,341
Professional fees		111,339			56,947			286,681			202,511
Product development		127,367			74,747			227,552			181,157
Other general and administrative		195,046			158,796			501,458			407,114
Total Operating Expenses		1,247,092			621,159			2,869,332			1,983,352
Net Operating Income		1,603,906			1,358,985			2,723,948			357,402
Other Income (Expense):
Interest income		13,664			-			13,664			-
Interest expense		(103,363	)		(111,654	)		(227,522	)		(205,933	)
Total Other Income (Expense)		(89,699	)		(111,654	)		(213,858	)		(205,933	)
Income Before Tax Provision		1,514,207			1,247,331			2,510,090			151,469
Provision for Income Tax		(24,412	)		-			(37,012	)		-
Net Income	$	1,489,795		$	1,247,331		$	2,473,078		$	151,469
Net Income per Common Share
Basic	$	0.031		$	0.026		$	0.051		$	0.003
Diluted	$	0.031		$	0.026		$	0.051		$	0.003
Weighted Average Common Shares Outstanding
Basic		48,132,664			48,132,664			48,132,664			46,057,590
Diluted		48,371,158			48,132,664			48,320,017			46,057,590
The accompanying notes are an integral part of these financial statements.

4

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	For the Nine Months Ended
	September 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	2,473,078		$	151,469
Adjustments necessary to reconcile net income to net cash (used in)  operating activities:
Depreciation and amortization		44,400			49,311
Accrued interest on note receivable		(13,654	)		-
Stock based compensation expense		46,581			81,219
Accrued sales allowance		(94,203	)		(196,978	)
(Increase) decrease in accounts receivable		(6,755,174	)		(6,376,672	)
(Increase) decrease in inventory		(275,049	)		38,337
(Increase) decrease in prepaid expenses		43,764			(371,317	)
(Increase) decrease in other assets		-			14,456
Increase (decrease) in accounts payable and accrued liabilities		958,580			1,167,729
Increase (decrease) in accrued interest on notes payable		(168,492	)		148,385
Net cash (used in) operating activities		(3,740,169	)		(5,294,061	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(15,501	)		(58,194	)
Net cash (used in) investing activities		(15,501	)		(58,194	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		19,393,834			5,791,914
Repayments of notes payable		(15,049,345	)		(1,895,194	)
Proceeds from notes and loans payable to related parties		860,000			2,500,000
Repayments of notes and loans payable to related parties		(1,453,946	)		(1,100,000	)
Net cash provided by financing activities		3,750,543			5,296,720
Net (Decrease) in Cash and Cash Equivalents		(5,127	)		(55,535	)
Cash and Cash Equivalents at Beginning of Period		364,714			313,856
Cash and Cash Equivalents at End of Period	$	359,587		$	258,321
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	396,014		$	57,549
Income taxes	$	31,912		$	-
	$	427,926		$	57,549
Non-cash financing and investing activities:
Conversion of Series C Preferred Stock to Common Stock	$	-		$	1,000
Sale of Investment for Note receivable	$	500,000		$	-
The accompanying notes are an integral part of these financial statements.

5

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of accounting policies for Capstone Companies, Inc. ("CAPC" or the "Company" or "Capstone"), a Florida corporation (formerly, "CHDT Corporation") and its wholly-owned subsidiaries is presented to assist in understanding the Company's consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently applied in the preparation of the consolidated financial statements.

Reverse Stock Split

On May 24, 2016, the Company's Board and stockholders holding a majority of stockholder's votes approved a reverse split of common stock at a ratio of 15 old for 1 new. The Company effectuated the reverse split on Monday July 25, 2016 and the Company's shares of common stock began trading on a post reverse split basis on July 25, 2016. The par value of the Company's common stock and preferred stock was not adjusted as a result of the reverse split. All issued and outstanding common stock, options for common stock, warrants and per share amounts have been retroactively adjusted to reflect this reverse stock split for all periods presented.

Basis of Presentation

The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position as of September 30, 2016 and results of operations and cash flows for the three months and nine months ended September 30, 2016 and 2015. All significant intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC") relating to interim financial statements and in conformity with US GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Annual Report").

The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.

Nature of Business

Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors in North America.  Capstone currently operates in five primary product categories: Induction Charged Power Failure Lights; LED Night Lights and Power Failure Lights; Motion Sensor Lights; Wireless Remote Control Outlets and Wireless Remote Control Accent Lights.  The Company's products are typically manufactured in China by third-party manufacturing companies.

Inventory

The Company's inventory, recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $480,758 and $205,708 at September 30, 2016 and December 31, 2015, respectively.

Net Income (Loss) Per Common Share

Basic earnings per common share were computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.  At September 30, 2016 and September 30, 2015, the total number of potentially dilutive common stock equivalents was 5,818,700 and 5,908,696, respectively.

6

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

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

	3 months ended September 30, 2016		9 months ended September 30, 2016
Basic weighted average shares outstanding		48,132,664		48,132,664
Dilutive warrants		238,494		187,353
Diluted weighted average shares outstanding		48,371,158		48,320,017

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.

Revenue Recognition

Product sales are recognized when an agreement of sale exists, product delivery has occurred, pricing is fixed 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 condensed consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances.

On April 22, 2016, the Company received a credit of approximately $479,000 from its major vendor to cover customer returns of products from sales that occurred in 2015 and promotional allowances for 2016 sales. A credit of $126,000 was applied to invoices due to the vendor during the period ended June 30, 2016 and the remaining credit balance of $353,000 was applied to invoices due to the vendor during the period ended September 30, 2016.

During the nine-month period ending September 30, 2016 and 2015, Capstone determined that $94,203 and $196,978, respectively of previously accrued promotional allowances were no longer required. The reduction of promotional allowances is included in net revenues for the nine month periods ended September 30, 2016 and 2015.

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 $65,406 and $3,301 for the three months and $138,846 and $98,461 for the nine months ended September 30, 2016 and 2015, respectively.  As of September 30, 2016, and December 31, 2015, 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 $59,604 and $11,765 for the three months and $117,000 and $45,588 for the nine months ended September 30, 2016 and 2015, respectively.

.

Income Taxes

The Company accounts for income taxes under the provisions of Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 740 Income Taxes. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries intend to file consolidated income tax returns.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.

7

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

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 options is determined using the Binomial Lattice (Suboptimal) option pricing model with estimate of option lives, stock price volatility and interest rates, then expressed over the periods of service. Changes in the estimated inputs or using option value methods could result in materially different option values and share based compensation expense.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.

In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.  As stock-based compensation expense is recognized during the period 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 for the periods ended September 30, 2016 and 2015, there were no material amounts subject to forfeiture.

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.

Stock-based compensation for the three-month period ended September 30, 2016 and 2015 totaled $18,081 and $22,353, respectively.  Stock-based compensation for the nine-month period ended September 30, 2016 and 2015 totaled $46,581 and $81,219, respectively.

Significant Accounting Policies and Estimates

The Company's significant accounting policies are disclosed in the 2015 Annual Report. Since the date of the 2015 Annual Report, there have been no material changes to the Company's significant accounting policies. The preparation of the condensed consolidated financial statements in conformity with "US GAAP" requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions include valuing equity securities, allowance for doubtful accounts, note receivables, inventory reserves, deferred taxes, and related valuation allowances, and the fair value of long lived assets, intangibles, goodwill and contingent consideration. Actual results could differ from the estimates.

Recent Accounting Standards

In May 2014, the FASB made available 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.

In August 2015, the effective date of this guidance was deferred by one year and now will be effective for the Company's annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted.

8

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

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), ("ASU 2016-08"). This ASU clarifies the implementation guidance on principal versus agent considerations. The updated guidance improves the understandability of determining whether an entity is a principal or agent, the nature of the good or service, and involvement of other parties in a sale. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) ("ASU 2016-10"). ASU 2016-10

clarifies two aspects of Topic 606: identifying performance obligation and the licensing implementation guidance, while retaining the related principles for those areas.  The amendments in ASU 2016-08 and ASU 2016-10 are effective in conjunction with ASU 2015-14. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such these investments may be measured at cost. ASU 2016-01 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-01 is not expected to have a material effect on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on effective interest rate method or a straight-line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 will be effective for the Company's fiscal year beginning after December 15, 2018 and subsequent interim periods. The Company is currently evaluating the impact of the adaption of ASU 2016-02 will have on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company's fiscal year beginning after December 15, 2016 and subsequent interim periods. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-015 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230, Statement of Cash Flows, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. ASU 2016-15 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-15 will modify the Company's current disclosures and reclassifications within the consolidated statement of cash flows but is not expected to have a material effect on the Company's consolidated financial statements.

The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company's financials properly reflect the change.

NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE

Financial instruments that potentially subject the Company to credit risk consist principally of cash and 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, 2016, the Company had $0 funds in excess of FDIC limits.

9

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

Accounts Receivable

The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States and their international locations. The Company typically does not require collateral from customers.  Credit risk is limited due to the financial strength of the customers comprising the Company's customer base and their dispersion across different geographicalregions.  The

Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.

Major Customers

The Company had two customers who comprised 55% and 36% of net revenue during the nine-month period ended September 30, 2016 and one customer who comprised 84% of net revenue during the nine-month period ended September 30, 2015.  The loss of these customers would adversely impact the business of the Company.

Approximately 8% and 8% of the Company's net revenue for the nine- month periods ended September 30, 2016 and 2015, respectively, was from international sales.

As of September 30, 2016, approximately 97% of accounts receivable were from two customers. As of December 31, 2015, approximately 99% of accounts receivable were from two customers.

Major Vendors

The Company had two vendors from which it purchased 89% and 8% of merchandise sold during the nine-month period ended September 30, 2016, and two vendors from which it purchased 57% and 35 % of merchandise sold during the nine-month period ended September 30, 2015. The loss of these suppliers could adversely impact the business of the Company.

As of September 30, 2016, approximately 80% of accounts payable were due to two vendors. As of December 31, 2015, approximately 95% of accounts payable were due to two vendors.

NOTE 3 – NOTES PAYABLE

Sterling National Bank

On September 8, 2010, in order to fund increasing accounts receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank), located in New York, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted.  There is a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is .25% above Sterling National Bank's Base Rate which at time of closing was 5%. As of September 30, 2016, the interest rate on the loan was 5.25%. The amounts borrowed under this agreement are due on demand and secured by a right to set-off on or against any of the following (collectively as "Collateral"): all accounts including those at risk, all reserves, instruments, documents, notes, bills and chattel paper, letter of credit rights, commercial tort claims, proceeds of insurance, other forms of obligations owing to Sterling National Bank,  bank and other deposit accounts whether or not reposed with affiliates, general intangibles (including without limitation all tax refunds, contract rights, trade names, trademarks, trade secrets, customer lists, software and all other licenses, rights, privileges and franchises), all balances, sums and other property at any time to our credit or in Sterling National Bank's possession or in the possession of any Sterling Affiliates, together with all merchandise, the sale of which resulted in the creation of accounts receivable and in all such merchandise that may be returned by customers and all books and records relating to any of the foregoing, including the cash and non-cash proceeds of all of the foregoing.

Capstone and Howard Ullman, the previous Chairman of the Board of Directors of CAPC, had personally guaranteed Capstone's obligations under the Financing Agreement.

On July 15, 2011, Stewart Wallach, Chief Executive Officer, 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's loans previously guaranteed by Howard Ullman.

Effective June 15, 2016, Sterling National Bank released Stewart Wallach of all obligations of Capstone ("the Guaranty") assumed by him by the Letter Agreement dated July 15, 2011.

10

NOTE 3 – NOTES PAYABLE (continued)

As of September 30, 2016, and December 31, 2015, the balance due to Sterling National Bank was $6,620,023 and $2,275,534, respectively.

As of September 30, 2016, the maximum amount that can be borrowed on this credit line is $7,000,000.

NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES

As of September 30, 2016, the Company had three notes and loans payable due to one officer, director and related party.  Total notes and loan payable due to related parties at September 30, 2016 was $1,301,596. These various notes and loans payable carry an 8 % interest rate, with maturities dates of April 3, 2017.

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 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 term with a base annual rent of $87,678 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. On October 18, 2016, the Company has confirmed that it will be exercising the three (3) years renewal option of the lease. Under the lease agreement, Capstone is responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.

Capstone International Hong Kong Ltd. entered into a two-year lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong.  The agreement was 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. This lease has been extended for a further three (3) months until May 16, 2016. This lease has been further renewed for another (12) months ending May 16, 2017 with a base annual rate of $48,775 paid in equal monthly installments.

Rent expense amounted to $35,610 and $35,144 for the three-month periods ended September 30, 2016 and 2015, respectively.  Rent expense amounted to $107,245 and $105,503 for the nine month periods ended September 30, 2016 and 2015, respectively.

The future lease obligation under these agreements are as follows:

Year Ended December, 31,	US		HK		Total
2016	$	66,870	$	37,274	$	104,144
2017		92,256	$	20,322		112,578
2018		93,885		0		93,885
2019		95,570		0		95,570
2020		7,964		0		7,964
Total future lease obligation	$	356,545	$	57,596	$	414,141

Consulting Agreements

On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf will be paid $10,500 per month through December 31, 2015 and $12,500 per month from January 1, 2016 through December 31, 2017. The agreement can be terminated upon 30 days' notice by either party. The Company may, in its sole discretion at any time after December 31, 2015 convert

Mr. Wolf to a full-time Executive status. The annual salary and term of employment would be equal to that outlined in the consulting agreement.

Employment Agreements

On February 5, 2008, the Company entered into an Employment Agreement with Stewart Wallach, 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. An amount of $40,233 has been accrued and is included in the September 30, 2016 and December 31, 2015 consolidated balance sheets as part of accounts

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NOTE 5 – COMMITMENTS AND CONTINGENCIES (continued)

payable and accrued expenses for deferred wages from 2011. The initial term of the contract began February 5, 2008, ended on February 5, 2011, but the term of the contract was extended for an additional two years through February 5, 2013. The Company's Compensation Committee further extended the agreement with the same terms for an additional three years.

On February 5, 2016, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $287,163 per annum.  As part of the agreement, the base salary will be reviewed annually by the Compensation Committee for a

potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year. The initial term of this new agreement began February 5, 2016 and ends February 5, 2018. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed two years in length.

On February 5, 2008, the Company entered into an Employment Agreement with James McClinton, Chief Financial Officer. Mr. McClinton was paid $150,000 per annum.  As part of the agreement, Mr. McClinton received a minimum increase of 5% per year. An amount of $572 has been accrued and is included in the September 30, 2016 and December 31, 2015 consolidated balance sheets as part of accounts payable and accrued expenses for deferred wages from 2011. The term of the initial contract began February 5, 2008, and ended February 5, 2011, but the term of the contract was extended for an additional two years through February 5, 2013. The Company's Compensation Committee further extended the agreement with the same terms for an additional three years through February 5, 2016.

On February 5, 2016, the Company entered into a new Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum.  As part of the agreement, the base salary will be reviewed annually by the Compensation Committee for a potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year. The initial term of this new agreement began February 5, 2016 and ends February 5, 2018. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed one year in length.

NOTE 6 - STOCK TRANSACTIONS

Warrants

During September and October 2007, the Company issued 2,121,569 shares of common stock for cash at $0.255 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 636,474 warrants were issued and remain outstanding at September 30,2016. The warrants are ten year warrants and have an exercise price of $0.255 per share.

Options

In 2005, the Company authorized the 2005 Equity Plan that made available 666,667 of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.

On January 2, 2015, the Company granted 200,000 stock options to two directors of the Company and 10,000 stock options to the Company Secretary.  The options vested on August 5, 2015.

On August 6, 2015, the Company granted 200,000 stock options to two directors of the Company and 10,000 stock options to the Company Secretary.  The options will vest on August 5, 2016.

On July 20, 2016, the Company granted 200,000 stock options to two directors of the Company and 10,000 stock options to the Company Secretary. These options have a strike price of $.435 with an effective date of August 6, 2016 and will vest on August 5, 2017.

In applying the Binomial Lattice (Suboptimal) option pricing model to stock option granted, the Company used the following weighted average assumptions: The following assumptions were used in the fair value calculations of options granted during the nine month periods ended September 30, 2016 and 2015:

Risk free interest rate – 1.13 – 2.23%

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

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NOTE 6 - STOCK TRANSACTIONS (continued)

The risk-free interest rate is based on rates of treasury securities with the same expected term as the options. The Company uses the expected term of employee and director stock-based options. The Company is utilizing an expected volatility figure based on a review of the Company's historical volatility, over a period of time, equivalent to the expected life of the instrument being valued.

The expected dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the near future.

For the period ended September 30, 2016, the Company recognized compensation expense of $46,581 related to these stock options. A further compensation expense of $20,475 will be recognized for these options in 2016 and a further $48,825 will be recognized in 2017.

A summary of the stock option activity during the nine months ended September 30, 2016 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
Outstanding, December 31, 2015		5,272,227		$	0.435		1.73	$	-
Granted		210,000			0.435		5.24		-
Exercised		-			-		-		-
Forfeited/expired		(300,001	)		-		-		-
Outstanding, September 30, 2016		5,182,226		$	0.435		1.01	$	-
Vested/exercisable at December, 31, 2015		5,062,227		$	0.435		1.60	$	-
Vested/exercisable at September, 30, 2016		4,972,224		$	0.435		1.05	$	-

NOTE 7 - INCOME TAXES

As of September 30, 2016, the Company had significant net operating loss carry forwards remaining that will begin to expire in 2033. The Company has determined that a full valuation allowance against its net deferred taxes is necessary as of September 30, 2016 and December 31, 2015.

The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant

judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for the years 2012 and prior.

 If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be reported as a component of income tax expense.

The provision for income taxes for the three and nine-month periods ended September 30, 2016 was calculated based on estimated annual effective rate for the full 2016 calendar year, adjusted for an income tax benefit from the expected utilization of net operating loss carryforwards.

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.

NOTE 8 – COST METHOD INVESTMENTS AND NOTE RECEIVABLE

On January 15, 2013, the Company entered into an agreement with AC Kinetics, Inc. ("AC Kinetics") 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 Company's demand into 3% of the outstanding shares of AC Kinetics common stock and have anti-dilution protection.

In addition, the Company and AC Kinetics 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

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NOTE 8 – COST METHOD INVESTMENTS AND NOTE RECEIVABLE (continued)

the appropriate technology departments at the 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 would 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 September 30, 2016 and December 31, 2015 consisted of the following:

	2016		2015
AC Kinetics Series A Convertible Preferred Stock	$	-	$	500,000

On June 8, 2016, the Board of Directors approved a Resolution to accept an offer from AC Kinetics to sell back the 100 shares of AC Kinetics Series A Preferred Stock. With acceptance of this offer the royalty agreement will also terminate.  For consideration, the Company received a note for $1,500,000 that will be immediately paid to the Company on completion and funding of a Securities Purchase Agreement with a national company to purchase AC Kinetics.  The note is subject to a Subordination Agreement for loans made to AC Kinetics by the national company involved in the Securities Purchase Agreement.  As the note is subject to a subordination agreement, and the Securities Purchase Agreement between the national company and AC Kinetics has not been concluded, the Company has determined a $500,000 fair value of this note at September 30, 2016. As further consideration, the Company also, received an option to repurchase 1,666,667 shares of Company Common Stock held by Involve L.L.C. at an exercise price of $.15. The Agreements were signed June 27, 2016 and the option period is the 12-month period between the first option exercise date and the 36-month anniversary of the effective date of the option agreement.

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

The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this Form 10-Q quarterly report. In addition to historical information, the following discussion contains certain forward-looking statements under the Private Securities Litigation Act of 1995, as amended. See "Special Note Regarding Forward Looking Statements" below for certain information concerning those forward- looking statements.  As used below, "our" and "we" refers to the Company and its subsidiaries.

Special Note Regarding Forward Looking Statements

This Form 10-Q quarterly report contains forward-looking statements that are contained principally in the sections describing our business as well as "Risk Factors," and this "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" in our latest annual report on Form 10-K for the fiscal year ended December 31, 2015, as filed with the SEC. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions (including the negative and variants of such words) intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to various risks and uncertainties. Given these uncertainties, a reader of this Form 10-Q quarterly report should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:

· our expectations regarding growth and changes in the consumer product markets in which we sell our products and in the consumer specialty lighting industry;

· our expectation regarding increasing demand for our products and changes in consumer tastes;

· our belief that we will be able to effectively compete with our competitors and increase or maintain our market share as well as our prospects in new geographical markets and in any new ventures or product lines;

· our expectations with respect to increased revenue growth and our ability to achieve profitability resulting from increases in our production volumes or changes or expansion of our product lines;

· our ability to obtain affordable funding when required; and

· our future business development and results of operations and financial condition, including any efforts to penetrate new markets in the world or to launch new product lines.

Forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q quarterly report. One should read this Form 10-Q quarterly report and the documents that we reference herein and filed as exhibits to this Form 10-Q quarterly report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

The Company is a "penny stock" company under Commission rules and the public stock market price for its Common Stock has been depressed for several consecutive fiscal quarters.  The Company's Common Stock lacks sufficient or active primary market makers and institutional investor support in the public market and this lack of support means that any increase in the per share price of our Common Stock in the public market is usually eliminated by selling pressure from profit taking by investors.  As of October 24, 2016, the Common Stock was trading at $.48 on the Bid Investment in our Common Stock. Investment in our Common Stock is highly risky and should only be considered by investors who can afford to lose their investment and do not require on demand liquidity. Investors should consider risk factors in this quarterly report on Form 10-Q and other SEC filings of the Company.   The Company completed a 1-for-15 reverse stock split for the Common Stock on July 25, 2016. The reverse stock split did not change the Company's status as a "penny stock" company.

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Use of Certain Defined Terms. Except as otherwise indicated by the context, references in this quarterly report to:

(1) "Capstone Lighting Technologies, L.L.C." or "CLTL" is a wholly owned subsidiary of Capstone Companies, Inc.

(2) "Capstone International Hong Kong Ltd" or "CIHK" is a wholly owned subsidiary of Capstone Companies, Inc. and a Hong Kong SAR registered Company.

(3) "Capstone Industries, Inc.", a Florida corporation and a wholly owned subsidiary of CAPC, may also be referred to as "CAPI."

(4) "Capstone Companies, Inc.," a Florida corporation, may also be referred to as "we," "us" "our," "Company," or "CAPC." Unless the context indicates otherwise, "Company" includes in its meaning all of Capstone Companies, Inc.'s subsidiaries.

(5) "China" or "PRC" means People's Republic of China.

(6) References to "33 Act" or "Securities Act" means the Securities Act of 1933, as amended.

(7) References to "34 Act" or "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(8) "SEC" or "Commission" means the U.S. Securities and Exchange Commission.

(9) "Subsidiaries" means the following wholly owned subsidiaries of the Company:  Capstone Industries, Inc. ("CAPI"), Capstone International H.K Ltd., ("CIHK"), and Capstone Lighting Technologies, Inc. ("CLTL").

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 OTC QB Venture Market exchange of The OTC Markets Group, Inc. and, since July 6, 2012, under the trading symbol "CAPC."  As a result of a 1-for-15 reverse stock split effective as of July 25, 2016, the trading symbol was ("CAPC-D") for twenty (20) days from July 25, 2016.  As of August 22, 2016, the trading symbol has reverted back to ("CAPC"). As of August 22, 2016, the Company's Common Stock commenced quotation on the OTC QB Venture Market exchange of The OTC Markets Group, Inc.  Prior to this quotation, the Common Stock was quoted on the Pink Tier of The OTC Markets Group Inc. 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, 2015

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 those 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 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, D.C. 20549, or through the aforesaid 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.

Factors Affecting our Financial Performance.

Our operating results are or may be primarily affected by the following factors:

* Our ability to achieve and maintain profitability and positive cash flow, which in turn is dependent on the following factors:

- Our ability to develop and effectively update and market our products;

- Our ability to procure and maintain on commercially reasonable terms relationships with third parties from whom we acquire product inventory;

- Our ability to identify and pursue channels through which we will be able to market our products;

- Our ability to attract new customers for our products;

- Our ability to manage our costs and maintain low overhead as well as access affordable funding on a timely basis; and

- Our ability to attract retail customers on cost-effective terms to brick and mortar retail locations or to on-line retailer Amazon.com.

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Studies like The Neilson Company's August 2014 "E-Commerce: Evolution or Revolution in the Fast-Moving Consumer Goods World," document that e-commerce is increasingly important in consumer goods industry. With the growing importance of e-commerce and online purchase of consumer goods, coupled with the consumers' use of Internet search engines like Google and Bing in selection of consumer goods, marketing through online mediums like Facebook, Pinterest, Yahoo!(R) Groups and YouTube.com, as well as "viral" marketing through Twitter or Instagram and online blogs, are increasingly important marketing tools for consumer goods.  We recognize a need to enhance our non-traditional Social Media marketing avenues. We may be unable to successfully develop such non-traditional marketing strategies and efforts or may lack the available funds to do so as long as traditional marketing and sales through retailers and their stores remain our central marketing and sales strategy. Reliance on traditional brick-and-mortar retailers is itself a risk factor for our company. The Company reviews possible expansion of Social Media based marketing from time to time, but the Company has not developed a formal Social Media marketing program as of the date of this Form 10-Q quarterly report.

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, 2016 compared with the same periods in 2015 and (ii) financial liquidity and capital resources.

We are a public holding company organized under the laws of the State of Florida. We design and manufacture a line of specialty power failure lighting solutions and other innovative specialty consumer lighting products for the North American and Global retail markets through our operating subsidiaries.  Our primary operating subsidiary is Capstone Industries, Inc., a Florida corporation located in the principal executive offices of the Company ("CAPI").   Capstone International Hong Kong, Ltd., or "CIHK", was established to expand our product development, engineering and factory resource capabilities in Hong Kong.  Our LED lighting product line consists of stylish, innovative and easy to use consumer lighting products, including power failure multi-function handheld lights, power failure multi-function nightlights, decorative nightlights, wireless motion sensor lights, remote control battery powered accent lights, remote control outlets, bath vanity lights and outdoor LED fixtures.  Our products are sold under CAPI brand name, "Capstone Lighting," and also under a nationally recognized licensed brand named Hoover^Ò HOME LED.  We seek 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 OEM contract manufacturers, through our three wholly-owned operating subsidiaries: CAPI, CIHK and CLTL.  Our Chinese contract manufacturers may participate in the design of our products.  We believe that we have commercially reasonable terms with our Chinese contract manufacturers. Our products are typically shipped from our Chinese contract manufacturers and stored in warehouses or with distributors in our markets.  From time to time, we evaluate our relationship with existing contract manufacturers as well as alternative contract manufacturing sources in China and elsewhere as part of our contingent planning.

Strategy

Our objective is to increase profitability, cash flow and revenues while enhancing our position as a leading manufacturer, marketer and distributor through the ongoing development of innovative and technologically advanced ideas and concepts for the LED Home Lighting consumer product categories.  We plan to leverage our product successes by expanding our offerings into all categories of the LED Home Lighting product lines.  We have established the 'Capstone Lighting' brand in the power failure and wireless motion sensor light product lines and also in the Remote-Controlled Battery Accent Lights and Wireless Remote Controlled outlet lines.  To successfully enter into the expanded new Home LED product lines, we determined a highly recognized national brand could be advantageous.  In 2014 the Company initiated a search for a brand name that would resonate with consumers.  The desired brand had to have a perceived rich heritage, and one trusted by American homeowners for high performance, quality and trustworthiness.  The Hoover^Ò HOME LED brand was launched and we believe that it has been successfully received by retailers and consumers.  Since its launch, the Company has continued to expand its product offerings under the Hoover^Ò HOME LED brand.

Our 2013 investment in AC Kinetic Technologies, an Armonk, New York technology development company, has allowed us to develop certain innovative concepts that the Company has conceived and that are complex and which has yielded intellectual property that we believe will further distinguish the Company's products from other off-the-shelf products commonly marketed at the retail level.  The Company plans to exploit the trade secret technologies developed and completed by AC Kinetic Technologies within the Company's own products, both labeled under "Capstone" and under the Hoover^Ò HOME LED brand.

On June 8, 2016, the Board of Directors approved and accepted an offer from AC Kinetics to buy back their 100 shares of AC Kinetics Series A Preferred Stock for a $1,500,000 Note Receivable with an estimated fair market value of $500,000.  The Company may continue its technology development relationship with AC Kinetics despite the agreement to sell the 100 shares of A C Kinetics Series A Preferred Stock.

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Perceived or Essential Strengths. We have extensive experience in introducing new products to retail market channels and we believe that this experience provides us a competitive edge in our niche markets.  In our early product 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 market entry.  In May 2016, the Company launched another extensive array of new products at the National Hardware Show in Las Vegas, Nevada.  The new products introduced additional functionality to existing categories of products that are deemed meaningful to consumers.  The Company's desired 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.

With respect to our goal of sustained profitability, our challenge has been and remains to achieve greater profit margins from our product lines by either innovative product that induce consumers to pay a higher purchase price or increased efficiencies in producing and selling products.

Due to the extensive, modern manufacturing, design and engineering capabilities in China, and the lower unit 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 expanded its CIHK's operations in Hong Kong, with personnel experienced in engineering and design, product development and testing, product sourcing, 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.  In anticipation of the Company's growth we have continued our investment to ensure overseas factory performance meets stringent tolerances to maintain our competitiveness and operational excellence.

We have expanded our international sales by leveraging our relationships with our existing global retailers and by strengthening our international product offerings.  Our Hong Kong office assists us in placing more products into foreign market channels as well.  In 2016 we surpassed our initial expansion goal with product sales in Australia, Canada, Japan, South Korea, Taiwan and the United Kingdom. In the nine months ended September 30, 2016 international sales, as compared to the same period 2015, increased by $1,058,700 or 134.3 %. International sales for the nine months ended September 30, 2016 were $1,847,300 or 8 % of total net revenue compared to $788,600 or 8 % of net revenue in the same period in 2015.

Products and Customers

The Company has earned the recognition associated with being an innovative company as evidenced by the Company being invited to more retail buying reviews than earlier years when we were more focused on proving our ability to perform in the big box retail brick-and-mortar environment while supplying a short line of products.  We are now determined to expand our product positioning through the introduction of many more indoor and new outdoor lighting programs both under the "Capstone" brand and the Hoover^® Home LED brand.  We will also be expanding hardwired solid state products to our programs in addition to the existing battery and induction powered product lines, through the expansion of bath vanity fixtures. Hoover^® is a registered trademark of Techtronic Floor Care Technology Limited.  Such expansion involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits.

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Since inception, we have focused on establishing and growing relationships with numerous leading international, national and regional retailers, including but not limited to: Amazon, Canadian Tire, Costco Wholesale, Home Depot, Lowes, Office Depot, Sam's Club, The Container Store and Wal-Mart. These distribution channels may sell our products through the Internet as well as through retail storefronts and catalogs/mail order.  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 our 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 abroad have spurred a perceived demand for small consumer appliances internationally.  In order to capture this market opportunity, we introduced the Capstone brands to markets outside the U.S., including Central and South America, Taiwan, South Korea, Australia, Japan, the United Kingdom and Canada. This continues to be a successful distribution channel with international sales for the nine months ended September 30, 2016, increasing 134% from the same period in 2015 and representing 8 % of total net revenue in 2016 with the other 92 % of total net revenue originating in the United States. Based on our experience in the industry, our Chinese contract manufacturing resources and focus on well designed, practical products, we believe our company is well positioned to become a leading manufacturer in the rapidly growing LED home lighting and security lighting segments. Our efforts to achieve such a goal are ongoing.  Sluggish economic growth in North America in past two years and the global angst caused by a decline in the rate of Chinese economic growth in the past year are factors that hinder expansion in the consumer goods market.  We believe we will maintain our revenue growth because of our ability to deliver unique 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. Critical to growth are economic conditions in our markets that foster greater consumer spending as well as success in our initiatives to distinguish our brands from competitors by design, quality, and scope of functions and new technology or features.  Our ability to fund the pursuit of our goals remains a constant, significant factor.

With our new branded lighting categories, Capstone has a comprehensive product offering for our niche in the industry.  We believe that we will provide retailers with a broad and diversified portfolio of consumer products across numerous product categories, which should add diversity to our revenues and cash flows sources.  Within these categories, we seek to service the needs of a wide range of consumers by providing products to satisfy their different interests, preferences and budgets.

We believe our ability to serve retailers with a broad array of branded products and quickly introduce new products will continue to allow us to further penetrate our existing customer bases, while also attracting new customers. Our primary, perceived challenge is creating sustained consumer demand for our products in a growing number of markets and attaining sustained profitability, which challenge is complicated by the cost of new product development and costs of penetrating new markets.

Sales and Marketing

CAPC'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 involve direct executive management participation.  The Company will also be targeting direct to retail clients through CIHK for products that fall outside Capstone's branded categories but are deemed innovative and preferably exclusive to CIHK.  This should allow for quicker revenue expansion as time consuming product and brand development efforts are the responsibility of the retailer.

We depend on e-commerce efforts of Amazon and our retail customers in lieu of pursuing our own aggressive in-house e-commerce effort.  We believe this reliance on Amazon and retail customer e-commerce is the most efficient and effective approach for the Company in e-commerce.

We maintain a Facebook website at https://www.facebook.com/powerfailuresolutions/ and our sales staff may use Social Media from time to time to promote our products and brands.  We have not developed a comprehensive Social Media campaign based on third party sponsors or promoters.  Due to the perceived growth of Social Media as a growth mechanism for products, we may have to invest more resources in the future in expanding our Social Media marketing.  Any such investment of resources and any delay in expanding Social Media marketing could adversely impact our performance in the future.

Competitive Conditions

We believe that the following competitive strengths have and will continue to serve as a foundation for our business strategy:

We believe that the specialized nature of our existing niche categories and the market share that it has provided us will allow us to introduce and launch our new expanded LED Home Lighting programs.

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We believe our licensed brand is a recognized domestic brand that will assist our initiatives for innovative new LED products.  Overall, we believe this brand recognition and consumer awareness, coupled with the quality of our products, will help promote significant customer loyalty for any future innovative LED products.  We will be providing retailers with a broad and diversified portfolio of consumer LED products across numerous product categories, which should add diversity to our revenues and cash flows.  Within these categories, we intend to service the needs of a wide range of consumers by providing products to satisfy their different interests, preferences and budgets.

Working Capital Requirements

In order to more effectively support retailers in the U.S. domestic markets, so that retailers can quickly replenish their stock and reduce the impact of lost sales as a result of stock outages, the Company as required, strategically increases its inventory levels held in our Anaheim, California warehouse. Combined with the cost of new product molds, product testing and certifications, package design work, expansion of the sales support team in the U.S. and further expansion of the design and engineering capabilities in our Hong Kong office, the Company may require additional working capital to fund these strategic projects.

As required, additional funding options will be considered to ensure that product launches are never held back as a result of funding shortfalls.  Certain members of Company's management and Board of Directors have supplemented the cash flow needs as required through short term loans.  Access to affordable, timely funding could be critical to our ability to compete and expand our market share.

The low market price of our Common Stock hinders our ability to access capital markets, but the enhancement of our Common Stock's market price requires, in our opinion, sustained profitability coupled with revenue growth. Sustain profitability and revenue growth is deemed to be required to attract market maker and institutional support for our Common Stock, which support we deem vital to any possible, sustained increase in the market price of our Common Stock.

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.  Competition is influenced by brand perceptions, product performance and value perception, 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 has some impact on the market in some parts of the world as many national retailers such as Home Depot, Lowes and Target offer lighting as part of their private branded product lines.  Many of competitors have substantially greater resources and capabilities, including greater brand recognition, research and development budgets and broader geographical market reach.  Competitors with greater resources could undermine our expansion efforts by marketing campaigns targeting our expansion efforts or engaging us in a price competition.

With trends and technology continually changing, CAPC 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 the launch of many new innovative products at the International Hardware Show in May 2016.  Our ability to invest is limited by operational cash flow and funding from third parties, including members of management and the Board of Directors.

Raw Materials

The principal raw materials used by the Company are sourced in China, as we manufacture our products exclusively through contract manufacturers in the region.  Raw materials used in manufacturing include plastic resin, copper, led bulbs, batteries, and corrugated paper. Prices of materials have remained lower and competitive in the last year as a result of lower oil prices and the strengthening U.S. dollar. CAPC believes that adequate supplies of raw materials required for its operations are available at the present time.  CAPC cannot predict the future availability or prices of such materials.  These raw materials are generally available from a number of different sources, and the prices of those raw materials are susceptible to currency fluctuations and price fluctuations due to transportation, government regulations, price controls, economic climate, or other unforeseen circumstances.  In the past, CAPC has not experienced any significant interruption in availability of raw materials.  We believe we have extensive experience in manufacturing and have taken positions to assure supply and to protect margins on anticipated sales volume.  Our Hong Kong office is responsible for developing and sourcing finished products from Asia in order to grow and diversify our product portfolio.  Quality testing for these products is performed both by our Hong Kong office and by our globally recognized third party quality testing laboratories.

Section 1502 of Title XV of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires SEC-reporting companies to disclose annually whether any conflict minerals are necessary to the functionality or production of a product.  Based on our inquiries to our manufacturers, we do not believe as of the date of such inquiries that any conflict minerals are used in making our products.

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Seasonality

Sales for household products and electronics are seasonally influenced, with increased purchases by consumers during the key holiday winter season of the fourth fiscal quarter, which requires increases in retailer inventories during the third fiscal quarter.  In addition, natural disasters such as hurricanes and tornadoes can create conditions that drive increased needs for portable power and spike power failure light sales.  Many retailers now recognize a storm preparedness period and the Company believes that it is well positioned to gain market share in these sales periods. The Company's "Power Failure Solutions" products support this growing awareness.   As is true for our lighting products, the Power Failure Solutions faces competition from domestic and international companies, which includes competitors with greater resources, market share and brand recognition.

Based on industry experience, management expects that the new LED Home Lighting product offerings will not be as influenced by seasonal factors and will provide a more balanced revenue stream during the year once programs are executed fully at retail.

Intellectual Property

CAPC subsidiary, CAPI, owns a number of U.S. trademarks and patents which CAPC considers of substantial importance and which are used individually or in conjunction with other CAPC trademarks and patents.  These include the following trademarks: Timely Reader, Pathway Lights, Timely Reader Book lights with Timer and Auto Shut Off and 10 LED - Eco-i-Lite Power Failure Light, 5 LED - Eco-i-Lite Power Failure Light, 3 LED - Eco-i-Lite Power Failure Light, 3 LED Slim Line Eco-i-Lite Power Failure Light, LED Induction Charged Headlight.  We also have a number of patents pending on our Security Motion Activated Lights and Bathroom Vanity Light.  CAPC periodically prepares patent and trademark applications for filing in the United States and China.  CAPC will also pursue foreign patent protection in foreign countries if deemed necessary.  CAPC's ability to compete effectively in the power failure, portable lighting, and LED Home Lighting categories depends in part, on its ability to maintain the proprietary nature of its technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements, licensing, and cross-licensing agreements.  CAPC owns a number of patents, trademarks, trademark and patent applications and other technology which CAPC believes are significant to its business. These relate primarily to lighting device improvements and manufacturing processes.

Value of Patents. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Issued patents or patents based on pending patent applications or any future patent applications may not exclude competitors or may not provide a competitive advantage to us. In addition, patents issued or licensed to us may not be held valid if subsequently challenged and others may claim rights in or ownership of such patents. The validity and breadth of claims in technology patents involve complex legal and factual questions and, therefore, the extent of their enforceability and protection is highly uncertain.

Reverse engineering, unauthorized copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without paying us. We cannot assure shareholders that our competitors have not developed or will not develop similar products, will not duplicate our products, or will not design around any patents issued to or licensed by us.  We will assess any loss of these rights and determine whether to litigate to protect our intellectual property rights on a case by case basis.

We rely on trademark, trade secret, patent, and copyright laws to protect our intellectual property rights.  We cannot be sure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted.  There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license intellectual property rights from others to support new product introductions.  There can be no assurance that we can acquire licenses under patents belonging to others for technology potentially useful or necessary to us and there can be no assurance that such licenses will be available to us, if at all, on terms acceptable to us.  Moreover, there can be no assurance that any patent issued to or licensed by us will not be infringed or circumvented by others, or will not be successfully challenged by others in lawsuits.  We do not have a reserve for litigation costs associated with intellectual property matters.  The cost of litigating intellectual property rights claims may be beyond our financial ability to fund.

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Distribution and Fulfillment

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

Research, Product Development, and Manufacturing Activities

Our research and development department based in Hong Kong designs and engineers many of our products, with collaboration from our third-party manufacturing partners.  They also establish strict engineering specifications and product testing protocols for our contract manufacturers' factories and ensure the factories adhere to all Chinese Labor and Social Compliance Laws.  Under the current political regime in China, sudden and unexpected changes in such laws are possible and could impact our business or financial performance by increasing the cost or ease of conducting business.

Our research and development team ensures our proprietary manufacturing expertise by maintaining control over all outsourced production and critical production molds.  In order to ensure the quality and consistency of our products manufactured in China, we use globally recognized certified testing laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all products are designed and tested to adhere to each countries individual regulatory standards.  We also employ quality control inspectors who examine and test products to our specification before shipments are approved.  Our Hong Kong office capabilities have now been expanded to include product development, project management, sourcing management, supply chain logistics, factory compliance auditing, and quality enforcement for all supplier factories located in Hong Kong and mainland China.

We will continue to invest in this area as we expand the number of products being developed and as we move into more technical and innovative product categories.  These costs are expensed when incurred and are included in the operating expenses.

Critical Accounting Policies

We believe that there have been no significant changes to our critical accounting policies during the nine months ended September 30, 2016 as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2015.

CONSOLIDATED OVERVIEW OF OPERATIONS

Revenue, net

For the 3 months ended September 30, 2016 and 2015, total net sales were approximately $11,692,100 and $7,747,500, respectively, an increase of $3,944,600 or 50.9 % from the previous year.

For the 9 months ended September 30, 2016 and 2015, total net sales were approximately $22,672,600 and $8,751,000, respectively, an increase of $13,921,600 or 159.1 % from the previous year.

In the 3 and 9 months ended September 30, 2016 the Company continued to have a very strong revenue performance in the Accent Light Category in both the Capstone Lighting and Hoover^Ò HOME LED brands. In the 9-months ended September 30, 2016, the Company accrued $1,478,600 for marketing allowances for product promotions. Despite these marketing allowances the Company achieved nearly a $14 million revenue increase in the period. The Company also continued to expand International sales to various overseas markets during the period. International sales for the 9 months ended September 30, 2016 and 2015 were approximately $1,847,300 or 8% of total net revenue as compared to $788,600 or 8 % of total net revenue for the same period in 2015. That represents an international sales increase of $1,058,700 or 134.3% as compared to the same period 2015.

Cost of Sales

For the 3 months ended September 30, 2016 and 2015, cost of sales were approximately $8,841,100 and $5,767,300, respectively, an increase of $3,073,800 or 53.3% from the previous year. This represented 75.6% and 74.4% respectively of total net revenues.

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For the 9 months ended September 30, 2016 and 2015, cost of sales were approximately $17,079,300 and $6,410,200, respectively, an increase of $10,669,100 or 166.4 % from the previous year. This cost represents 75.3% and 73.2 % respectively of total net revenues. For the nine-month period, 4.6% of the cost percentage to revenue increase was the result of $1,478,600 marketing allowance that reduced net revenue. Cost of sales has also increased as a result of the increased volume of units sold, however overall product unit costs continued to remain stable during the period.

Gross Profit

For the 3 months ended September 30, 2016 and 2015, gross profit was approximately $2,851,000 and $1,980,100 respectively, an increase of $870,900 or 44 % from the same period in 2015. Gross profit as a percentage of sales was 24.4% in the three-month period compared to 25.6% for the same quarter in 2015.

For the 9 months ended September 30, 2016 and 2015, gross profit was approximately $5,593,300 and $2,340,800 respectively, an increase of $3,252,500 or 139% from the same period in 2015. Gross profit as a percentage of sales was 24.7% in the nine-month period compared to 25.6% in the same period in 2015.

During the 9 months ended ending September 30, 2015, the Company determined that $196,977 of previously accrued promotional allowances were no longer required. The reduction of promotional allowances was included in revenue for the period ended September 30, 2015 and had the impact of increasing gross profit in that period.

Operating Expenses

For the 3 months ended September 30, 2016 and 2015, total operating expenses were approximately $1,247,100 and $621,200 respectively, an increase of $625,900 or 100.8 % as compared to same period in 2015.

For the 9 months ended September 30, 2016 and 2015, total operating expenses were approximately $2,869,300 and $1,983,400 respectively, an increase of $885,900 or 44.7% as compared to same period in 2015.

The following is a summary of the major expense variances by category in the 2016 period compared to 2015.

Sales and Marketing Expenses

For the 3 months ended September 30, 2016 and 2015, sales and marketing expenses were approximately $488,100 and $16,700 respectively, an increase of $471,400. During the quarter ended September 30, 2016, the increased expense resulted mainly from the distribution of royalty payments of $221,200 to TTI Floor Care for the Hoover^® License that was not incurred last year, representative commissions that increased from $1,100 in 2015 to $134,600 in 2016 and we incurred $64,300 in advertising promotions in the quarter.

For the 9 months ended September 30, 2016 and 2015, sales and marketing expenses were approximately $903,900 and $185,200 respectively, an increase of $718,700. During the period royalty payments to TTI Floor Care for the Hoover^® License were $406,400, that did not incur last year, representative commissions were $227,500 and we incurred $138,100 in advertising and trade show expense, which were the main reasons for the expense increase.

Compensation Expense

For the 3 months ended September 30, 2016 and 2015, compensation expense was approximately $325,300 and $314,000 respectively, an increase of $11,300 or 3.6%.

For the 9 months ended September 30, 2016 and 2015, compensation expense was approximately $949,800 and $1,007,300 respectively, a reduction of $57,500 or 5.7 %.

Overall compensation expense has been reduced as a result of the reduction of personnel, however, consulting professional fees have increased as we replaced a sales position with a sales consultant.

Professional Fees

For the 3 months ended September, 2016 and 2015, professional expenses were approximately $111,300 and $56,900 respectively, an increase of $54,400 or 95.6 %.

For the 9 months ended September 30, 2016 and 2015, professional expenses were approximately $286,700 and $202,500 respectively, an increase of $84,200 or 41.6 %. The higher expense in the quarter and 9-month period is mainly the result of the Company engaging the services of a sales consultant to support the U.S. office marketing effort.

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Product Development Expenses

For the 3 months ended September 30, 2016 and 2015, product development expenses were approximately $127,400 and $74,700, respectively, an increase of $52,700 or 70.5%.

For the 9 months ended September 30, 2016 and 2015, product development expenses were approximately $227,600 and $181,200, respectively, an increase of $46,400 or 25.6%. This expense increase is the result of increased certification testing for new products, development costs related to our lighting technology and prototype and new sample costs.

Other General and Administrative

For the 3 months ended September 30, 2016 and 2015, other general and administrative expenses were approximately $195,000 and $158,800 respectively, an increase of $36,200 or 22.8 %.

For the 9 months ended September 30, 2016 and 2015, other general and administrative expenses were approximately $501,500 and $407,100 respectively, an increase of $94,400 or 23.2%. The expense increase is mainly the result of increased Sterling Bank fees associated with the higher total net revenue during the 9 months ended September 30, 2016.

Net Operating Income

For the 3 months ended September 30, 2016 the operating income was approximately $1,603,900 compared to $1,359,000 in 2015. This is an improved performance of $244,900 or 18% over the same period 2015.

For the 9 months ended September 30, 2016 the operating income was approximately $2,724,000 compared to a $357,400 net income in the same period last year. This is an improved performance of $2,366,600 or 662.2% over the same period 2015. Net Operating Margin was 12.0% of net revenue compared to 4.1% in for the nine months ended September 30, 2015.

Interest Expense

For the 3 months ended September 30, 2016 and 2015, interest expense was approximately $103,400 and $111,700, respectively, for a reduction of $8,300 or 7.4% as compared to the same period in 2015.

For the 9 months ended September 30, 2016 and 2015, interest expense was approximately $227,500 and $205,900, respectively, for an increase of $21,600 or 10.5% as compared to same period in 2015.

Despite having a substantial revenue growth during the 9 months, we have been able to curtail the need for increased borrowing and the resulting increased interest expense, by negotiating favorable payment terms with our overseas suppliers for orders being processed. This has substantially reduced the need for purchase order funding to complete order fulfilment.

Provision for Income Tax

For the 3 months ended September 30, 2016 and 2015, the provision for income tax was approximately $24,400 and $0, respectively.

For the 9 months ended September 30, 2016 and 2015, the provision for income tax was approximately $37,000 and $0, respectively.

Net Income

For the 3 months ended September 30, 2016, the Company had a net income of approximately $1,489,800 as compared to a net income of $1,247,300 in the same period last year. This is an improved performance of $242,500 or 19.4% from the same period in 2015.

For the 9 months ended September 30, 2016, the Company had a net income of approximately $2,473,100 as compared to a net income of $ 151,500 in the same period last year.

The overall net income improvement in the 9-month period ended September 30, 2016 of $2,321,600 or 1,532% compared to 2015, was the result of the significant increase in revenue, supported by strong International sales. This result was achieved after the Company provided for $1,478,600 of increased promotion allowances and approximately $886,000 increased operating expenses mainly resulting from License Royalty payments and reps commission compared to 2015.

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Off-Balance Sheet Arrangements

The Company does not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.

Contractual Obligations

The following table represents contractual obligations as of September 30, 2016:

	Payments Due by Period
	Total		2016		2017		2018		After 2019
(In thousands)
Accounts Payable and accrued expense	$	3,036,161	$	3,036,161	$	-	$	-	$	-
Notes Payable Sterling Factors		6,620,023		6,620,023		-		-		-
Notes and loans payable to related parties-current maturities		1,301,596		1,301,596		-		-		-
Operating Leases		414,141		104,144		112,578		93,885		103,534
Interest on Short-Term Debt		40,250		20,125		20,125		-		-
Total Contractual Obligations	$	11,412,171	$	11,082,049	$	132,703	$	93,885	$	103,534

Notes to Contractual Obligations Table

Purchase Obligations — Accounts Payable and accrued expenses are comprised of the Company's commitments for goods and services in the normal course of business.

Notes Payable — See notes 3 and 4 of the Financial Statements footnotes contained in this report.

Operating Leases — Operating lease obligations are primarily related to facility leases for our operations in the U.S. and in Hong Kong.

LIQUIDITY AND CAPITAL RESOURCES

	For the Nine Months Ended
(In thousands)	September 30, 2016				September 30, 2015
Net cash provided by (used in):
Operating Activities		$	(3,740	)		$	(5,294	)
Investing Activities		$	(15	)		$	(58	)
Financing Activities		$	3,751			$	5,297

The Company's borrowing capacity with Sterling National Bank, funding support from Directors and cash flow from operations provide the Company with the financial resources needed to run operations and reinvest in our business.

Operating Activities

Cash used in operating activities was approximately $(3,740,200) in the 9 months ended September 30, 2016 compared with approximately $(5,294,100) used in operating activities in 2015.  During the period Accounts Receivable increased by approximately $6,755,200, Inventory increased by approximately $275,000 and Accrued Sales Allowances increased by approximately $94,200. However, this was partly offset by the $2,473,100 profit during the period and an increase in Accounts Payable of approximately $958,600. The Company's cash flow from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers.  Sales are influenced significantly by the timing and launch of new products into the marketplace. With the establishment of our Hong Kong operation we have built an operational structure that, through relationships with factory-suppliers combined with our internal expertise, can develop and release quality products to market substantially quicker than we have been able to accomplish in previous years. Furthermore, in the second quarter of 2016, we negotiated with our largest vendor to receive a credit of approximately $479,000 to cover product returns from 2015 and promotional efforts for 2016. The credit has been applied to vendor invoices in the second and third quarters of 2016.

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Investing Activities

Cash used for investing activities for the quarter ended September 30, 2016 was approximately $(15,500) compared to $(58,200) in 2015.  The Company will continue to invest in new product molds and tooling.  With the product expansion into new LED home lighting categories, the Company's future capital requirements will increase.  Our Hong Kong management team has the task of negotiating favorable payment terms with factories which will reduce the amounts of upfront cash required to have available when initiating a new project.  Management believes that our cash flow from operations and additional borrowing 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 provided by financing activities for the 9-month period ended September 30, 2016 was approximately $3,750,500, compared to approximately $5,296,700 cash provided in 2015.  With the expansion of the Accounts Receivable balances in the period, the Company increased its credit availability with Sterling National Bank and therefore increased its outstanding bank loans to fund the large order backlog.  During the quarter ended September 30, 2016, the Company paid off $714,103 of Directors loans outstanding since 2010 and 2013 including all accrued interest. During the last 9-month period the Company has paid off approximately $1,453,900 of notes and loans payable to related parties.

At September 30, 2016, the Company was in compliance with all agreements pursuant to existing credit facilities.  Management believes that our cash flow from operations, continued support from Sterling National Bank and support of certain of our Directors will provide sufficient financial resources for the Company during 2016.

Directors and Officers Insurance: The Company currently operates with Directors and Officers insurance and the Company believes the coverage is adequate to cover likely liabilities under such a policy.

Impact of Inflation: The Company's major expense has been the cost of selling and marketing product lines to customers in North America.  That effort involves mostly sales staff traveling to make direct marketing and sales pitches to customers and potential customers, trade shows around North America and visiting China to maintain and seek to expand distribution and manufacturing relationships and channels. With the current reduced price of world oil, although labor costs are continuing to increase, the Company expects costs to remain stable with the Chinese manufacturers. The Company generally has been able to reduce cost increases by negotiating volume purchases or re-engineering products. With our Hong Kong office firmly established, the Company expects that prices will remain steady through 2016.

Country Risks - Changes in foreign, cultural, political and financial market conditions could impair the Company's international manufacturing operations and financial performance.

The Company's manufacturing is currently conducted in China.  Consequently, the Company is subject to a number of significant risks associated with manufacturing in China, including:

· The possibility of expropriation, confiscatory taxation or price controls;

· Adverse changes in local investment or exchange control regulations;

· Political or economic instability, government nationalization of business or industries, government corruption, and civil unrest;

· Legal and regulatory constraints;

· Tariffs and other trade barriers, including trade disputes between the U.S. and China;

· Political or military conflict between the U.S. and China resulting in adverse or restricted access by U.S.-based companies to Chinese manufacturing and markets; and

· Possible difficulty in enforcing contractual and intellectual property rights.

Currency: Currency fluctuations may significantly increase our expenses and affect the results of operations, especially where the currency is subject to intense political and other outside pressures.

Interest Rate Risk: The Company does not have significant interest rate risk during the period ended September 30, 2016.

Credit Risk: The Company has not experienced significant credit risk, as most of our customers are long-term customers with superior payment records.  Our managers monitor our receivables regularly and our Direct Import Programs are shipped to only the most financially stable customers or advance payments before shipment are required for those accounts less financially secure.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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Item 4.  Controls and Procedures

Evaluation of disclosure controls and procedures.  The Company maintains "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under 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, 2015 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 September 30, 2016, 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.

Changes in internal controls:  There were no changes in our internal controls over financial reporting that occurred during the three months covered by this quarterly report on Form 10-Q or "Report" that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The certifications of our Chief Executive Officer and Chief Financial Officer attached as Exhibits 31 and 32 and to this Report include information concerning our disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information 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, 2015, for a more complete understanding of the matters covered by such certifications.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings.

The Company is not a party to any 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.

The only material changes in the risk factors from our Form 10-K for the fiscal year ended December 31, 2015 are:

Economic conditions that impact the Company can also be impacted by labor strikes. Labor strikes at West Coast ports by longshoreman and truckers servicing those ports can adversely impact shipment of our products to the U.S.  Such West Coast port strikes occurred in 2015 with the International Longshore and Warehouse Union and in 2016 with truck drivers of companies that move goods out of the West Coast ports.  Further, Hanjin Shipping, one of the largest deep sea cargo lines, filed for court receivership on August 31, 2016.  The financial troubles of Hanjin Shipping may adversely impact shipment of goods from China to the U.S.

Liquidity - The Company realized a net income of approximately $2,473,100 for the nine months ended September 30, 2016 as compared to a net income of $151,500 in the same period 2015.  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.  The Company's liquidity is expected to be sufficient through fiscal year 2016, resulting from the combination of our existing cash position, improved operational cash flow as a result of improvements to our operating results, the Company's borrowing capacity with Sterling National Bank and as needed, funding support from certain Company Directors (see Notes 3 and 4 to the financial statements contained in this report).

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

There were no unregistered issuances of Company securities in the quarter ending September 30, 2016.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures (Not Applicable)

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Item 5.  Submission of Matters to Vote of Security Holders

The following corporate actions were approved on May 24, 2016, by written consents of Common Stock shareholders holding and representing 385,618,423 shares of Common Stock, or 53.4% of the issued and outstanding shares of Common Stock eligible to vote on these corporate actions (based on 721,989,957 shares of Common Stock being issued and outstanding as of May 20, 2016, the record date ("Record Date") to determine shareholders entitled to vote or consent on the following corporate actions).

1. Election of the following five nominees of the Company management for election to the Board of Directors for the term commencing upon their election and assumption of the office until the election and assumption of office by their successors at 2017 annual meeting of Shareholders or other 2017 election of directors:

a. Stewart Wallach;

b. James G. McClinton;

c. Jeffrey Postal;

d. Jeffrey Guzy; and

e. Larry Sloven.

2. Ratification of the appointment of Mayer Hoffman McCann, P.C. as our independent registered public accounting firm for the fiscal year ending December 31, 2016.

3. Approval of a proposed reverse stock split of the outstanding shares of the Common Stock at the ratio of 1-for-15 and a corresponding reduction in the number of authorized shares of Common Stock and Preferred Stock (the "Reverse Stock Split").

4. Approval of a proposed amendment to Article VI of the Company Amended and Restated Articles of Incorporation to provide that the Company's Board of Directors may amend the Articles of Incorporation without shareholder approval to the extent allowed under Florida laws.

5. Approval of three-year "say on pay" (an advisory, non-binding approval) for the senior executive officers of the Company.

The Reverse Stock Split was effective as of July 25, 2016 and the Amendment to the Amended and Restated Articles of Incorporation was effective for state law purposes on date of filing with the State of Florida Secretary of State, being June 8, 2016.  All of the above actions were effective for federal securities law purposes twenty (20) days after the mailing of the information statement on Schedule 14C reporting those actions, which effective was on or about July 23, 2016.

Item 6.  Exhibits

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

EXHIBIT #	EXHIBIT TITLE
3.1	Amendment to Amended and Restated Articles of Incorporation of Capstone Companies, Inc., dated June 7, 2016 *
31.1	Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ^
31.2	Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ^
32.1	Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, ^
32.2	Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, ^

*Incorporated by reference and filed as Exhibit 3.1 to the Form 8-K filed by Capstone Companies, Inc., dated and filed with Commission on June 8, 2016.

29

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, 2016

/s/ Stewart Wallach
Stewart Wallach	Chief Executive Officer
Principal Executive Officer
/s/James G. McClinton
James G. McClinton	Chief Financial Officer and
Principal Operation Executive	Chief Operating Officer

30

EX-31.1

Exhibit 31.1

Section 302 Certifications

I, Stewart Wallach, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Capstone Companies, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)            Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)            Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: November 14, 2016

/s/ Stewart Wallach

Stewart Wallach

CEO, Director

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Section 302 Certifications

I, James G. McClinton, certify that:

1.            I have reviewed this quarterly report on Form 10-Q of Capstone Companies, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)            Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)            Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: November 14, 2016

/s/ James G. McClinton

James G. McClinton,

Chief Financial Officer,

Chief Operating Officer, Director

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Capstone Companies, Inc. ("Company") on Form 10-Q for the period ended September 30, 2016, filed with the Securities and Exchange Commission (the "Report"), I, Stewart Wallach, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Stewart Wallach

Stewart Wallach

CEO, Director

(Principal Executive Officer)

November 14, 2016

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to §18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Capstone Companies, Inc. ("Company") on Form 10-Q for the period ended September 30, 2016, filed with the Securities and Exchange Commission (the "Report"), I, James G. McClinton, Chief Operating Officer of the Company,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ James G. McClinton

James G. McClinton

Chief Operating Officer, Director

(Principal Operations Executive)

November 14, 2016

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Oct. 24, 2016
Document and Entity Information
Entity Registrant Name	CAPSTONE COMPANIES, INC.
Entity Trading Symbol	capc
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Amendment Flag	false
Entity Central Index Key	0000814926
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		48,132,664
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current Assets:
Cash	$ 359,587	$ 364,714
Accounts receivable, net	11,832,358	5,077,182
Inventory	480,758	205,708
Prepaid expenses	522,694	566,459
Total Current Assets	13,195,397	6,214,063
Fixed Assets:
Computer equipment and software	19,767	19,767
Machinery and equipment	396,133	380,633
Furniture and fixtures	5,665	5,665
Less: Accumulated depreciation	(339,579)	(295,180)
Total Fixed Assets	81,986	110,885
Other Non-current Assets:
Deposit	12,193	12,193
Investment (AC Kinetics)	0	500,000
Note receivable	513,654	0
Goodwill	1,936,020	1,936,020
Total Other Non-current Assets	2,461,867	2,448,213
Total Assets	15,739,250	8,773,161
Current Liabilities:
Accounts payable and accrued liabilities	3,023,561	2,164,283
Income tax payable	12,600	7,500
Note payable - Sterling National Bank	6,620,023	2,275,534
Notes and loans payable to related parties	1,301,596	2,064,034
Total Current Liabilities	10,957,780	6,511,351
Commitments and Contingent Liabilities (Note 5):
Stockholders' Equity:
Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares	0	0
Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued -0- shares	0	0
Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued-0-shares	0	0
Common Stock, par value $.0001 per share, authorized 56,666,667 shares, issued 48,132,664 shares	4,813	4,813
Additional paid-in capital	7,390,697	7,344,115
Accumulated deficit	(2,614,040)	(5,087,118)
Total Stockholders' Equity	4,781,470	2,261,810
Total Liabilities and Stockholders' Equity	$ 15,739,250	$ 8,773,161

XML

CONSOLIDATED BALANCE SHEETS PARENTHETICALS - $ / shares	Sep. 30, 2016	Dec. 31, 2015
Parentheticals
Preferred Stock, Series A, par value	$ 0.001	$ 0.001
Preferred Stock, Series A, shares authorized	6,666,667	6,666,667
Preferred Stock, Series A, shares issued	0	0
Preferred Stock, Series B-1, par value	$ 0.0001	$ 0.0001
Preferred Stock, Series B-1, shares authorized	3,333,333	3,333,333
Preferred Stock, Series B-1, shares issued	0	0
Preferred Stock, Series C, par value	$ 1.00	$ 1.00
Preferred Stock, Series C, shares authorized	67	67
Preferred Stock, Series C, shares issued	0	0
Common Stock, par value	$ 0.0001	$ 0.0001
Common Stock, shares authorized	56,666,667	56,666,667
Common Stock, shares issued	48,132,664	48,132,664

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Revenues:
Revenues, net	$ 11,692,146	$ 7,747,450	$ 22,672,551	$ 8,750,951
Cost of sales	(8,841,148)	(5,767,306)	(17,079,271)	(6,410,197)
Gross Profit	2,850,998	1,980,144	5,593,280	2,340,754
Operating Expenses:
Sales and marketing	488,057	16,716	903,888	185,229
Compensation	325,283	313,953	949,753	1,007,341
Professional fees	111,339	56,947	286,681	202,511
Product development	127,367	74,747	227,552	181,157
Other general and administrative	195,046	158,796	501,458	407,114
Total Operating Expenses	1,247,092	621,159	2,869,332	1,983,352
Net Operating Income	1,603,906	1,358,985	2,723,948	357,402
Other Income (Expense):
Interest income	13,664	0	13,664	0
Interest expense	(103,363)	(111,654)	(227,522)	(205,933)
Total Other Income (Expense)	(89,699)	(111,654)	(213,858)	(205,933)
Income Before Tax Provision	1,514,207	1,247,331	2,510,090	151,469
Provision for Income Tax	(24,412)	0	(37,012)	0
Net Income	$ 1,489,795	$ 1,247,331	$ 2,473,078	$ 151,469
Net Income per Common Share
Basic.	$ 0.031	$ 0.026	$ 0.051	$ 0.003
Diluted.	$ 0.031	$ 0.026	$ 0.051	$ 0.003
Weighted Average Common Shares Outstanding
Basic	48,132,664	48,132,664	48,132,664	46,057,590
Diluted	48,371,158	48,132,664	48,320,017	46,057,590

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$ 2,473,078	$ 151,469
Adjustments necessary to reconcile net income to net cash (used in) operating activities:
Depreciation and amortization	44,400	49,311
Accrued interest on note receivable	(13,654)	0
Stock based compensation expense	46,581	81,219
Accrued sales allowance	(94,203)	(196,978)
(Increase) decrease in accounts receivable	(6,755,174)	(6,376,672)
(Increase) decrease in inventory	(275,049)	38,337
(Increase) decrease in prepaid expenses	43,764	(371,317)
(Increase) decrease in other assets	0	14,456
Increase (decrease) in accounts payable and accrued liabilities	958,580	1,167,729
Increase (decrease) in accrued interest on notes payable	(168,492)	148,385
Net cash (used in) operating activities	(3,740,169)	(5,294,061)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(15,501)	(58,194)
Net cash (used in) investing activities	(15,501)	(58,194)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable	19,393,834	5,791,914
Repayments of notes payable	(15,049,345)	(1,895,194)
Proceeds from notes and loans payable to related parties	860,000	2,500,000
Repayments of notes and loans payable to related parties	(1,453,946)	(1,100,000)
Net cash provided by financing activities	3,750,543	5,296,720
Net (Decrease) in Cash and Cash Equivalents	(5,127)	(55,535)
Cash and Cash Equivalents at Beginning of Period	364,714	313,856
Cash and Cash Equivalents at End of Period	359,587	258,321
Cash paid during the period for:
Interest	396,014	57,549
Income taxes	31,912	0
Total Cash paid during the period	427,926	57,549
Non-cash financing and investing activities:
Conversion of Series C Preferred Stock to Common Stock	0	1,000
Sale of Investment for Note receivable	$ 500,000	$ 0

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2016

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of accounting policies for Capstone Companies, Inc. ("CAPC" or the "Company" or "Capstone"), a Florida corporation (formerly, "CHDT Corporation") and its wholly-owned subsidiaries is presented to assist in understanding the Company's consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently applied in the preparation of the consolidated financial statements.

Reverse Stock Split

On May 24, 2016, the Company's Board and stockholders holding a majority of stockholder's votes approved a reverse split of common stock at a ratio of 15 old for 1 new. The Company effectuated the reverse split on Monday July 25, 2016 and the Company's shares of common stock began trading on a post reverse split basis on July 25, 2016. The par value of the Company's common stock and preferred stock was not adjusted as a result of the reverse split. All issued and outstanding common stock, options for common stock, warrants and per share amounts have been retroactively adjusted to reflect this reverse stock split for all periods presented.

Basis of Presentation

The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position as of September 30, 2016 and results of operations and cash flows for the three months and nine months ended September 30, 2016 and 2015. All significant intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC") relating to interim financial statements and in conformity with US GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Annual Report").

The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.

Nature of Business

Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors in North America.  Capstone currently operates in five primary product categories: Induction Charged Power Failure Lights; LED Night Lights and Power Failure Lights; Motion Sensor Lights; Wireless Remote Control Outlets and Wireless Remote Control Accent Lights.  The Company's products are typically manufactured in China by third-party manufacturing companies.

Inventory

The Company's inventory, recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $480,758 and $205,708 at September 30, 2016 and December 31, 2015, respectively.

Net Income (Loss) Per Common Share

Basic earnings per common share were computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.  At September 30, 2016 and September 30, 2015, the total number of potentially dilutive common stock equivalents was 5,818,700 and 5,908,696, respectively.

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

	3 months ended September 30, 2016		9 months ended September 30, 2016
Basic weighted average shares outstanding		48,132,664		48,132,664
Dilutive warrants		238,494		187,353
Diluted weighted average shares outstanding		48,371,158		48,320,017

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.

Revenue Recognition

Product sales are recognized when an agreement of sale exists, product delivery has occurred, pricing is fixed 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 condensed consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances.

On April 22, 2016, the Company received a credit of approximately $479,000 from its major vendor to cover customer returns of products from sales that occurred in 2015 and promotional allowances for 2016 sales. A credit of $126,000 was applied to invoices due to the vendor during the period ended June 30, 2016 and the remaining credit balance of $353,000 was applied to invoices due to the vendor during the period ended September 30, 2016.

During the nine-month period ending September 30, 2016 and 2015, Capstone determined that $94,203 and $196,978, respectively of previously accrued promotional allowances were no longer required. The reduction of promotional allowances is included in net revenues for the nine month periods ended September 30, 2016 and 2015.

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 $65,406 and $3,301 for the three months and $138,846 and $98,461 for the nine months ended September 30, 2016 and 2015, respectively.  As of September 30, 2016, and December 31, 2015, 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 $59,604 and $11,765 for the three months and $117,000 and $45,588 for the nine months ended September 30, 2016 and 2015, respectively.

.

Income Taxes

The Company accounts for income taxes under the provisions of Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 740 Income Taxes. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries intend to file consolidated income tax returns.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.

ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of options is determined using the Binomial Lattice (Suboptimal) option pricing model with estimate of option lives, stock price volatility and interest rates, then expressed over the periods of service. Changes in the estimated inputs or using option value methods could result in materially different option values and share based compensation expense.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.

In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.  As stock-based compensation expense is recognized during the period 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 for the periods ended September 30, 2016 and 2015, there were no material amounts subject to forfeiture.

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.

Stock-based compensation for the three-month period ended September 30, 2016 and 2015 totaled $18,081 and $22,353, respectively.  Stock-based compensation for the nine-month period ended September 30, 2016 and 2015 totaled $46,581 and $81,219, respectively.

Significant Accounting Policies and Estimates

The Company's significant accounting policies are disclosed in the 2015 Annual Report. Since the date of the 2015 Annual Report, there have been no material changes to the Company's significant accounting policies. The preparation of the condensed consolidated financial statements in conformity with "US GAAP" requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions include valuing equity securities, allowance for doubtful accounts, note receivables, inventory reserves, deferred taxes, and related valuation allowances, and the fair value of long lived assets, intangibles, goodwill and contingent consideration. Actual results could differ from the estimates.

Recent Accounting Standards

In May 2014, the FASB made available 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.

In August 2015, the effective date of this guidance was deferred by one year and now will be effective for the Company's annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), ("ASU 2016-08"). This ASU clarifies the implementation guidance on principal versus agent considerations. The updated guidance improves the understandability of determining whether an entity is a principal or agent, the nature of the good or service, and involvement of other parties in a sale. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) ("ASU 2016-10"). ASU 2016-10

clarifies two aspects of Topic 606: identifying performance obligation and the licensing implementation guidance, while retaining the related principles for those areas.  The amendments in ASU 2016-08 and ASU 2016-10 are effective in conjunction with ASU 2015-14. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such these investments may be measured at cost. ASU 2016-01 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-01 is not expected to have a material effect on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on effective interest rate method or a straight-line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 will be effective for the Company's fiscal year beginning after December 15, 2018 and subsequent interim periods. The Company is currently evaluating the impact of the adaption of ASU 2016-02 will have on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company's fiscal year beginning after December 15, 2016 and subsequent interim periods. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-015 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230, Statement of Cash Flows, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. ASU 2016-15 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-15 will modify the Company's current disclosures and reclassifications within the consolidated statement of cash flows but is not expected to have a material effect on the Company's consolidated financial statements.

The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company's financials properly reflect the change.

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CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE

9 Months Ended

Sep. 30, 2016

CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE

CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE

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, 2016, 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 and their international locations. The Company typically does not require collateral from customers.  Credit risk is limited due to the financial strength of the customers comprising the Company's customer base and their dispersion across different geographical regions.  The

Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.

Major Customers

The Company had two customers who comprised 55% and 36% of net revenue during the nine-month period ended September 30, 2016 and one customer who comprised 84% of net revenue during the nine-month period ended September 30, 2015.  The loss of these customers would adversely impact the business of the Company.

Approximately 8% and 8% of the Company's net revenue for the nine- month periods ended September 30, 2016 and 2015, respectively, was from international sales.

As of September 30, 2016, approximately 97% of accounts receivable were from two customers. As of December 31, 2015, approximately 99% of accounts receivable were from two customers.

Major Vendors

The Company had two vendors from which it purchased 89% and 8% of merchandise sold during the nine-month period ended September 30, 2016, and two vendors from which it purchased 57% and 35 % of merchandise sold during the nine-month period ended September 30, 2015. The loss of these suppliers could adversely impact the business of the Company.

As of September 30, 2016, approximately 80% of accounts payable were due to two vendors. As of December 31, 2015, approximately 95% of accounts payable were due to two vendors.

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NOTES PAYABLE

9 Months Ended

Sep. 30, 2016

NOTES PAYABLE

NOTES PAYABLE

NOTE 3 – NOTES PAYABLE

Sterling National Bank

On September 8, 2010, in order to fund increasing accounts receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank), located in New York, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted.  There is a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is .25% above Sterling National Bank's Base Rate which at time of closing was 5%. As of September 30, 2016, the interest rate on the loan was 5.25%. The amounts borrowed under this agreement are due on demand and secured by a right to set-off on or against any of the following (collectively as "Collateral"): all accounts including those at risk, all reserves, instruments, documents, notes, bills and chattel paper, letter of credit rights, commercial tort claims, proceeds of insurance, other forms of obligations owing to Sterling National Bank,  bank and other deposit accounts whether or not reposed with affiliates, general intangibles (including without limitation all tax refunds, contract rights, trade names, trademarks, trade secrets, customer lists, software and all other licenses, rights, privileges and franchises), all balances, sums and other property at any time to our credit or in Sterling National Bank's possession or in the possession of any Sterling Affiliates, together with all merchandise, the sale of which resulted in the creation of accounts receivable and in all such merchandise that may be returned by customers and all books and records relating to any of the foregoing, including the cash and non-cash proceeds of all of the foregoing.

Capstone and Howard Ullman, the previous Chairman of the Board of Directors of CAPC, had personally guaranteed Capstone's obligations under the Financing Agreement.

On July 15, 2011, Stewart Wallach, Chief Executive Officer, 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's loans previously guaranteed by Howard Ullman.

Effective June 15, 2016, Sterling National Bank released Stewart Wallach of all obligations of Capstone ("the Guaranty") assumed by him by the Letter Agreement dated July 15, 2011.

As of September 30, 2016, and December 31, 2015, the balance due to Sterling National Bank was $6,620,023 and $2,275,534, respectively.

As of September 30, 2016, the maximum amount that can be borrowed on this credit line is $7,000,000.

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NOTES AND LOANS PAYABLE TO RELATED PARTIES

9 Months Ended

Sep. 30, 2016

NOTES AND LOANS PAYABLE TO RELATED PARTIES

NOTES AND LOANS PAYABLE TO RELATED PARTIES

NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES

As of September 30, 2016, the Company had three notes and loans payable due to one officer, director and related party.  Total notes and loan payable due to related parties at September 30, 2016 was $1,301,596. These various notes and loans payable carry an 8 % interest rate, with maturities dates of April 3, 2017.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2016

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

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 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 term with a base annual rent of $87,678 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. On October 18, 2016, the Company has confirmed that it will be exercising the three (3) years renewal option of the lease. Under the lease agreement, Capstone is responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.

Capstone International Hong Kong Ltd. entered into a two-year lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong.  The agreement was 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. This lease has been extended for a further three (3) months until May 16, 2016. This lease has been further renewed for another (12) months ending May 16, 2017 with a base annual rate of $48,775 paid in equal monthly installments.

Rent expense amounted to $35,610 and $35,144 for the three-month periods ended September 30, 2016 and 2015, respectively.  Rent expense amounted to $107,245 and $105,503 for the nine month periods ended September 30, 2016 and 2015, respectively.

The future lease obligation under these agreements are as follows:

Year Ended December, 31,	US		HK		Total
2016	$	66,870	$	37,274	$	104,144
2017		92,256	$	20,322		112,578
2018		93,885		0		93,885
2019		95,570		0		95,570
2020		7,964		0		7,964
Total future lease obligation	$	356,545	$	57,596	$	414,141

Consulting Agreements

On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf will be paid $10,500 per month through December 31, 2015 and $12,500 per month from January 1, 2016 through December 31, 2017. The agreement can be terminated upon 30 days' notice by either party. The Company may, in its sole discretion at any time after December 31, 2015 convert

Mr. Wolf to a full-time Executive status. The annual salary and term of employment would be equal to that outlined in the consulting agreement.

Employment Agreements

On February 5, 2008, the Company entered into an Employment Agreement with Stewart Wallach, 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. An amount of $40,233 has been accrued and is included in the September 30, 2016 and December 31, 2015 consolidated balance sheets as part of accounts

payable and accrued expenses for deferred wages from 2011. The initial term of the contract began February 5, 2008, ended on February 5, 2011, but the term of the contract was extended for an additional two years through February 5, 2013. The Company's Compensation Committee further extended the agreement with the same terms for an additional three years.

On February 5, 2016, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $287,163 per annum.  As part of the agreement, the base salary will be reviewed annually by the Compensation Committee for a

potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year. The initial term of this new agreement began February 5, 2016 and ends February 5, 2018. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed two years in length.

On February 5, 2008, the Company entered into an Employment Agreement with James McClinton, Chief Financial Officer. Mr. McClinton was paid $150,000 per annum.  As part of the agreement, Mr. McClinton received a minimum increase of 5% per year. An amount of $572 has been accrued and is included in the September 30, 2016 and December 31, 2015 consolidated balance sheets as part of accounts payable and accrued expenses for deferred wages from 2011. The term of the initial contract began February 5, 2008, and ended February 5, 2011, but the term of the contract was extended for an additional two years through February 5, 2013. The Company's Compensation Committee further extended the agreement with the same terms for an additional three years through February 5, 2016.

On February 5, 2016, the Company entered into a new Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum.  As part of the agreement, the base salary will be reviewed annually by the Compensation Committee for a potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year. The initial term of this new agreement began February 5, 2016 and ends February 5, 2018. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed one year in length.

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STOCK TRANSACTIONS

9 Months Ended

Sep. 30, 2016

STOCK TRANSACTIONS

STOCK TRANSACTIONS

NOTE 6 - STOCK TRANSACTIONS

Warrants

During September and October 2007, the Company issued 2,121,569 shares of common stock for cash at $0.255 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 636,474 warrants were issued and remain outstanding at September 30,2016. The warrants are ten year warrants and have an exercise price of $0.255 per share.

Options

In 2005, the Company authorized the 2005 Equity Plan that made available 666,667 of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.

On January 2, 2015, the Company granted 200,000 stock options to two directors of the Company and 10,000 stock options to the Company Secretary.  The options vested on August 5, 2015.

On August 6, 2015, the Company granted 200,000 stock options to two directors of the Company and 10,000 stock options to the Company Secretary.  The options will vest on August 5, 2016.

On July 20, 2016, the Company granted 200,000 stock options to two directors of the Company and 10,000 stock options to the Company Secretary. These options have a strike price of $.435 with an effective date of August 6, 2016 and will vest on August 5, 2017.

In applying the Binomial Lattice (Suboptimal) option pricing model to stock option granted, the Company used the following weighted average assumptions: The following assumptions were used in the fair value calculations of options granted during the nine month periods ended September 30, 2016 and 2015:

Risk free interest rate – 1.13 – 2.23%

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

The risk-free interest rate is based on rates of treasury securities with the same expected term as the options. The Company uses the expected term of employee and director stock-based options. The Company is utilizing an expected volatility figure based on a review of the Company's historical volatility, over a period of time, equivalent to the expected life of the instrument being valued.

The expected dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the near future.

For the period ended September 30, 2016, the Company recognized compensation expense of $46,581 related to these stock options. A further compensation expense of $20,475 will be recognized for these options in 2016 and a further $48,825 will be recognized in 2017.

A summary of the stock option activity during the nine months ended September 30, 2016 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
Outstanding, December 31, 2015		5,272,227		$	0.435		1.73	$	-
Granted		210,000			0.435		5.24		-
Exercised		-			-		-		-
Forfeited/expired		(300,001	)		-		-		-
Outstanding, September 30, 2016		5,182,226		$	0.435		1.01	$	-
Vested/exercisable at December, 31, 2015		5,062,227		$	0.435		1.60	$	-
Vested/exercisable at September, 30, 2016		4,972,224		$	0.435		1.05	$	-

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INCOME TAXES

9 Months Ended

Sep. 30, 2016

INCOME TAXES

INCOME TAXES

NOTE 7 - INCOME TAXES

As of September 30, 2016, the Company had significant net operating loss carry forwards remaining that will begin to expire in 2033. The Company has determined that a full valuation allowance against its net deferred taxes is necessary as of September 30, 2016 and December 31, 2015.

The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant

judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for the years 2012 and prior.

 If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be reported as a component of income tax expense.

The provision for income taxes for the three and nine-month periods ended September 30, 2016 was calculated based on estimated annual effective rate for the full 2016 calendar year, adjusted for an income tax benefit from the expected utilization of net operating loss carryforwards.

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.

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COST METHOD INVESTMENTS

9 Months Ended

Sep. 30, 2016

COST METHOD INVESTMENTS

COST METHOD INVESTMENTS

NOTE 8 – COST METHOD INVESTMENTS AND NOTE RECEIVABLE

On January 15, 2013, the Company entered into an agreement with AC Kinetics, Inc. ("AC Kinetics") 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 Company's demand into 3% of the outstanding shares of AC Kinetics common stock and have anti-dilution protection.

In addition, the Company and AC Kinetics 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 the 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 would 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 September 30, 2016 and December 31, 2015 consisted of the following:

	2016		2015
AC Kinetics Series A Convertible Preferred Stock	$	-	$	500,000

On June 8, 2016, the Board of Directors approved a Resolution to accept an offer from AC Kinetics to sell back the 100 shares of AC Kinetics Series A Preferred Stock. With acceptance of this offer the royalty agreement will also terminate.  For consideration, the Company received a note for $1,500,000 that will be immediately paid to the Company on completion and funding of a Securities Purchase Agreement with a national company to purchase AC Kinetics.  The note is subject to a Subordination Agreement for loans made to AC Kinetics by the national company involved in the Securities Purchase Agreement.  As the note is subject to a subordination agreement, and the Securities Purchase Agreement between the national company and AC Kinetics has not been concluded, the Company has determined a $500,000 fair value of this note at September 30, 2016. As further consideration, the Company also, received an option to repurchase 1,666,667 shares of Company Common Stock held by Involve L.L.C. at an exercise price of $.15. The Agreements were signed June 27, 2016 and the option period is the 12-month period between the first option exercise date and the 36-month anniversary of the effective date of the option agreement.

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2016

SIGNIFICANT ACCOUNTING POLICIES (Policies)

Reverse Stock Split

Reverse Stock Split

On May 24, 2016, the Company's Board and stockholders holding a majority of stockholder's votes approved a reverse split of common stock at a ratio of 15 old for 1 new. The Company effectuated the reverse split on Monday July 25, 2016 and the Company's shares of common stock began trading on a post reverse split basis on July 25, 2016. The par value of the Company's common stock and preferred stock was not adjusted as a result of the reverse split. All issued and outstanding common stock, options for common stock, warrants and per share amounts have been retroactively adjusted to reflect this reverse stock split for all periods presented.

Basis of Presentation

Basis of Presentation

The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position as of September 30, 2016 and results of operations and cash flows for the three months and nine months ended September 30, 2016 and 2015. All significant intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC") relating to interim financial statements and in conformity with US GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Annual Report").

The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.

Nature of Business

Nature of Business

Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors in North America.  Capstone currently operates in five primary product categories: Induction Charged Power Failure Lights; LED Night Lights and Power Failure Lights; Motion Sensor Lights; Wireless Remote Control Outlets and Wireless Remote Control Accent Lights.  The Company's products are typically manufactured in China by third-party manufacturing companies.

Inventory

Inventory

The Company's inventory, recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $480,758 and $205,708 at September 30, 2016 and December 31, 2015, respectively.

Net Income (Loss) Per Common Share

Net Income (Loss) Per Common Share

Basic earnings per common share were computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.  At September 30, 2016 and September 30, 2015, the total number of potentially dilutive common stock equivalents was 5,818,700 and 5,908,696, respectively.

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

	3 months ended September 30, 2016		9 months ended September 30, 2016
Basic weighted average shares outstanding		48,132,664		48,132,664
Dilutive warrants		238,494		187,353
Diluted weighted average shares outstanding		48,371,158		48,320,017

Cost Method of Accounting for Investment

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.

Revenue Recognition, Policy

Revenue Recognition

Product sales are recognized when an agreement of sale exists, product delivery has occurred, pricing is fixed 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 condensed consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances.

On April 22, 2016, the Company received a credit of approximately $479,000 from its major vendor to cover customer returns of products from sales that occurred in 2015 and promotional allowances for 2016 sales. A credit of $126,000 was applied to invoices due to the vendor during the period ended June 30, 2016 and the remaining credit balance of $353,000 was applied to invoices due to the vendor during the period ended September 30, 2016.

During the nine-month period ending September 30, 2016 and 2015, Capstone determined that $94,203 and $196,978, respectively of previously accrued promotional allowances were no longer required. The reduction of promotional allowances is included in net revenues for the nine month periods ended September 30, 2016 and 2015.

Advertising and Promotion

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 $65,406 and $3,301 for the three months and $138,846 and $98,461 for the nine months ended September 30, 2016 and 2015, respectively.  As of September 30, 2016, and December 31, 2015, the Company has $275,019 in capitalized advertising costs included in prepaid expenses on the balance sheet.

Shipping and Handling

Shipping and Handling

The Company's shipping and handling costs, are included in sales and marketing expenses and amounted to $59,604 and $11,765 for the three months and $117,000 and $45,588 for the nine months ended September 30, 2016 and 2015, respectively.

Income Taxes

Income Taxes

The Company accounts for income taxes under the provisions of Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 740 Income Taxes. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries intend to file consolidated income tax returns.

Stock-Based Compensation

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.

ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of options is determined using the Binomial Lattice (Suboptimal) option pricing model with estimate of option lives, stock price volatility and interest rates, then expressed over the periods of service. Changes in the estimated inputs or using option value methods could result in materially different option values and share based compensation expense.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.

In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.  As stock-based compensation expense is recognized during the period 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 for the periods ended September 30, 2016 and 2015, there were no material amounts subject to forfeiture.

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.

Stock-based compensation for the three-month period ended September 30, 2016 and 2015 totaled $18,081 and $22,353, respectively.  Stock-based compensation for the nine-month period ended September 30, 2016 and 2015 totaled $46,581 and $81,219, respectively.

Significant Accounting Policies and Estimates

Significant Accounting Policies and Estimates

The Company's significant accounting policies are disclosed in the 2015 Annual Report. Since the date of the 2015 Annual Report, there have been no material changes to the Company's significant accounting policies. The preparation of the condensed consolidated financial statements in conformity with "US GAAP" requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions include valuing equity securities, allowance for doubtful accounts, note receivables, inventory reserves, deferred taxes, and related valuation allowances, and the fair value of long lived assets, intangibles, goodwill and contingent consideration. Actual results could differ from the estimates.

Recent Accounting Standards

Recent Accounting Standards

In May 2014, the FASB made available 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.

In August 2015, the effective date of this guidance was deferred by one year and now will be effective for the Company's annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), ("ASU 2016-08"). This ASU clarifies the implementation guidance on principal versus agent considerations. The updated guidance improves the understandability of determining whether an entity is a principal or agent, the nature of the good or service, and involvement of other parties in a sale. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) ("ASU 2016-10"). ASU 2016-10

clarifies two aspects of Topic 606: identifying performance obligation and the licensing implementation guidance, while retaining the related principles for those areas.  The amendments in ASU 2016-08 and ASU 2016-10 are effective in conjunction with ASU 2015-14. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such these investments may be measured at cost. ASU 2016-01 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-01 is not expected to have a material effect on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on effective interest rate method or a straight-line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 will be effective for the Company's fiscal year beginning after December 15, 2018 and subsequent interim periods. The Company is currently evaluating the impact of the adaption of ASU 2016-02 will have on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company's fiscal year beginning after December 15, 2016 and subsequent interim periods. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-015 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230, Statement of Cash Flows, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. ASU 2016-15 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-15 will modify the Company's current disclosures and reclassifications within the consolidated statement of cash flows but is not expected to have a material effect on the Company's consolidated financial statements.

The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company's financials properly reflect the change.

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NET INCOME (LOSS) PER COMMON SHARE (Tables)

9 Months Ended

Sep. 30, 2016

NET INCOME (LOSS) PER COMMON SHARE (Tables):

NET INCOME (LOSS) PER COMMON SHARE (Tables)

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

	3 months ended September 30, 2016		9 months ended September 30, 2016
Basic weighted average shares outstanding		48,132,664		48,132,664
Dilutive warrants		238,494		187,353
Diluted weighted average shares outstanding		48,371,158		48,320,017

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LEASES (TABLES)

9 Months Ended

Sep. 30, 2016

Leases:

Schedule of Future Minimum Lease Payments for Capital Leases

The future lease obligation under these agreements are as follows:

Year Ended December, 31,	US		HK		Total
2016	$	66,870	$	37,274	$	104,144
2017		92,256	$	20,322		112,578
2018		93,885		0		93,885
2019		95,570		0		95,570
2020		7,964		0		7,964
Total future lease obligation	$	356,545	$	57,596	$	414,141

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STOCK TRANSACTIONS (Tables)

9 Months Ended

Sep. 30, 2016

STOCK TRANSACTIONS (Tables)

Schedule of Company's stock options outstanding

A summary of the stock option activity during the nine months ended September 30, 2016 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
Outstanding, December 31, 2015		5,272,227		$	0.435		1.73	$	-
Granted		210,000			0.435		5.24		-
Exercised		-			-		-		-
Forfeited/expired		(300,001	)		-		-		-
Outstanding, September 30, 2016		5,182,226		$	0.435		1.01	$	-
Vested/exercisable at December, 31, 2015		5,062,227		$	0.435		1.60	$	-
Vested/exercisable at September, 30, 2016		4,972,224		$	0.435		1.05	$	-

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COST METHOD INVESTMENTS (Tables)

9 Months Ended

Sep. 30, 2016

COST METHOD INVESTMENTS (Tables)

Aggregate carrying amount of cost method investments

The aggregate carrying amount of cost method investments at September 30, 2016 and December 31, 2015 consisted of the following:

	2016		2015
AC Kinetics Series A Convertible Preferred Stock	$	-	$	500,000

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Organization and Summary of Significant Accounting Policies Narrative (Details) - USD ($)	Sep. 30, 2016	Apr. 22, 2016	Dec. 31, 2015	Sep. 30, 2015
Organization and Summary of Significant Accounting Policies Details
Inventory finished goods for resale	$ 480,758		$ 205,708
Potentially dilutive common stock Shares	5,818,700			5,908,696
Received a credit from major vendor to cover customer returns of products		$ 479,000
Invoices due to the vendor	$ 353,000
Capitalized advertising costs included in prepaid expenses	$ 275,019

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Basic Weighted average shares outstanding is reconciled to diluted weighted shares outstanding (Details) - shares	3 Months Ended	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2016
Basic Weighted average shares outstanding is reconciled to diluted weighted shares outstanding Details
Basic weighted average shares outstanding	48,132,664	48,132,664
Dilutive warrants	238,494	187,353
Diluted weighted average shares outstanding	48,371,158	48,320,017

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Organization and Summary of Significant Accounting Policies Expenses (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Organization and Summary of Significant Accounting Policies Expenses
Shipping and Handling Costs	$ 59,604	$ 11,765	$ 117,000	$ 45,588
Stock based compensation	18,081	18,081	46,581	81,219
Advertising and promotion expenses	$ 65,406	$ 3,301	138,846	98,461
Accrued promotional allowances			$ 94,203	$ 196,978

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Concentrations of credit risk (Details)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Concentrations of credit risk Details
One customer who comprised of net revenue		84.00%
Two customers who comprised of gross revenue	55.00%	36.00%
Company's gross revenue for the periods ended	8.00%	8.00%
Major Vendors
Two vendors purchased of merchandise	89.00%	8.00%
Two vendors which it purchased of merchandise	57.00%	35.00%

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Major Customers (Details)	Sep. 30, 2016	Dec. 31, 2015
Accounts receivable
Accounts receivable from two customers	97.00%	99.00%
Accounts payable:
Accounts payable due to one vendor		95.00%
Accounts payable due to two vendors	80.00%

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Notes Payable Sterling National Bank (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015	Sep. 08, 2010
Notes Payable Sterling National Bank
Percentage of net invoices to be submitted			85.00%
Percentage of gross invoices			0.45%
Interest rate of loan advance on Sterling National Bank Base Rate			0.25%
Closing rate of Sterling National Bank Base Rate			5.00%
Interest rate on the loan	5.25%
Balance due to Sterling	$ 6,620,023	$ 2,275,534
Borrowed credit line	$ 7,000,000

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Notes And Loans Payable To Related Parties (Details)	Sep. 30, 2016 USD ($)
Notes Payable And Loans Payable To Related Parties
Total notes and loan payable due to related parties	$ 1,301,596
Interest rate on notes and loans payable	8.00%

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Leases Principal Executive Offices (Details)	Feb. 01, 2014 USD ($)	Jun. 29, 2007
Leases Principal Executive Offices
Rental space area		4,000
Base annual rent paid in equal monthly installments	$ 87,678
Option to renew lease for 3years to increase per each year of the renewal term	3.00%

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Leases Principal Executive Office Rental (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)
Leases Principal Executive Office Rental
Lease agreement for office space in years	2
New lease agreement for the same office space with a base annual rent paid in equal monthly installments	$ 48,000
New lease agreement for the same office space with a base annual rent paid in equal monthly installments in HK	372,000
Lease has been further renewed for another (12) months ending May 16, 2017 with a base annual rate paid in equal monthly installments	48,775
Rental expenses	$ 35,610	$ 35,144	$ 107,245	$ 105,503

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Lease obligations under agreements as follows (Details) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2016	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Lease obligations under agreements as follows:
lease obligations under agreements US	$ 356,545	$ 7,964	$ 95,570	$ 93,885	$ 92,256	$ 66,870
lease obligations under agreements HK	57,596	0	0	0	20,322	37,274
Total future lease obligation US and HK	$ 414,141	$ 7,964	$ 95,570	$ 93,885	$ 112,578	$ 104,144

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Consulting Agreements (Details)	Sep. 30, 2016 USD ($)
Consulting Agreements Details
Company entered into a consulting agreement from July 1, 2015 through December 31, 2015 with George Wolf whereby paid Mr. Wolf	$ 10,500
Company entered into a consulting agreement from January 1, 2016 through December 31, 2017 with George Wolf whereby paid Mr. Wolf	$ 12,500

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Commitments Employment Agreement (Details) - USD ($)	Sep. 30, 2016	Feb. 05, 2016	Dec. 31, 2015	Feb. 05, 2008
Commitments Employment Agreement
Amount paid to Wallach				$ 225,000
Percentage of increase per year to Wallach				5.00%
Amount paid to Wallach for 2016				$ 40,233
Amount paid to Wallach for 2015				40,233
Accrued amount for deferred wages in 2011 Wallach				40,233
Amount paid to Wallach for 2016 again				287,163
Amount paid to McClinton				$ 150,000
Percentage of increase per year to McClinton				5.00%
Amount paid to McClinton for 2015				$ 191,442
Amount paid to McClinton for 2014				$ 191,442
Accrued amount for deferred wages in 2011 McClinton	$ 572		$ 572
Amount paid to McClinton for 2016		$ 191,442

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Stock Transactions Warrant (Details)	Oct. 31, 2007 USD ($) $ / shares shares
Stock Transactions Warrant
Issuance of shares of common stock as part of a private placement | shares	2,121,569
Per share value of shares of common stock as part of a private placement | $ / shares	$ 0.255
Value of shares as part of private placement | $	$ 541,000
Warrant to purchase shares in Private Placement	30.00%
Total warrants were issued | shares	636,474
Warrants exercise price | $ / shares	$ 0.255

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Stock Transactions Options (Details) - shares	Sep. 30, 2016	Jul. 20, 2016	Aug. 06, 2015	Jan. 02, 2015
Stock Transactions Options Details
Available shares for issuance of common stock	666,667
Stock Transactions Options granted to Company Secretary.		10,000	10,000	10,000
Stock Transactions Option granted to two Directors.		200,000	200,000	200,000

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Stock Transactions assumptions in the fair value calcuations (Details)	9 Months Ended
	Sep. 30, 2016 $ / shares
Stock Transactions assumptions in the fair value calcuations
Risk free interest rates minimum	1.13%
Risk free interest rates maximum	2.23%
Expected term minimum	5
Expected term maximum	10
Expected volatility of stock	500.00%
Expected dividends	0.00%
Suboptimal Exercise Behavior Multiple	$ 2
Number of Steps	150

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Stock Transactions Compensation Expense (Details)	9 Months Ended
	Sep. 30, 2016 USD ($)
Stock Transactions Compensation Expense
Compensation expense recognized to these stock options	$ 46,581
Further compensation expense in 2016	20,475
Further compensation expense in 2017	$ 48,825

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Summary of the stock option activity during the period (Details)	9 Months Ended
	Sep. 30, 2016 USD ($) $ / shares shares
Shares:
Outstanding, December 31, 2015	$ 5,272,227
Shares Granted | shares	210,000
Forfeited/expired Shares | shares	(300,001)
Outstanding, September 30, 2016	$ 5,182,226
Vested/exercisable at December, 31, 2015	5,062,227
Vested/exercisable at September 30, 2016	4,972,224
Weighted-Average Exercise Price
Outstanding, December 31, 2015	$ 0.435
Granted | $ / shares	$ 0.435
Outstanding, September 30, 2016	$ 0.435
Vested/exercisable at December, 31, 2015	0.435
Vested/exercisable at September 30, 2016	0.435
Weighted-Average Remaining Contractual Term (Years)
Outstanding, December 31, 2015	$ 1.73
Granted Weighted-Average Remaining Contractual Term	5.24
Outstanding, September 30, 2016	$ 1.01
Vested/exercisable at December, 31, 2015	1.60
Vested/exercisable at September 30, 2016	1.05
Aggregate Intrinsic Value
Outstanding, December 31, 2015	0
Outstanding, September 30, 2016	0
Vested/exercisable at December, 31, 2015	0
Vested/exercisable at September 30, 2016	$ 0

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Cost Method Investments (Details) - USD ($)	Sep. 30, 2016	Jun. 08, 2016	Dec. 31, 2015	Jan. 15, 2013
Cost Method Investments Details
Purchase shares of AC Kinetics Series A Preferred Stock		100		100
Value of purchase shares of AC Kinetics Series A Preferred Stock		$ 1,500,000		$ 500,000
Shares carry a liquidation preference				$ 500,000
Convertible outstanding shares of AC Kinetics common stock				3.00%
Royalty on any licensing revenues received by AC Kinetics for products sold				7.00%
Royalty agreement will terminate upon receipt by the company of royalties				$ 500,000
AC Kinetics Series A Convertible Preferred Stock	$ 500,000		$ 500,000
Company has determined fair value of note	$ 500,000
Option to repurchase shares of Company Common Stock held by Involve L.L.C.	1,666,667
Option to repurchase shares of Company Common Stock held by Involve L.L.C. at an exercise price	$ 0.15