This summary of accounting policies for Capstone Companies, Inc. ("CAPC" or the "Company"), a Florida corporation (formerly, "CHDT Corporation") and its wholly-owned subsidiaries is presented to assist in understanding the Company's consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently applied in the preparation of the consolidated financial statements.
Interim Financial Statements
The unaudited consolidated financial statements for the three month periods ended March 31, 2016 and 2015 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the periods. Operating results for interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the Company's business. Certain prior period amounts have been reclassified in order to conform to the covered periods presentation. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
Organization and Basis of Presentation
CAPC was initially incorporated September 18, 1986, under the laws of the State of Delaware under the name Yorkshire Leveraged Group, Incorporated, and then changed its domicile to Colorado in 1989 by merging into a Colorado corporation, named Freedom Funding, Inc. Freedom Funding, Inc. then changed its name to CBQ, Inc. by amendment of its Articles of Incorporation on November 25, 1998. In May 2004, the Company changed its name from CBQ, Inc. to China Direct Trading Corporation as part of a reincorporation from the State of Colorado to the State of Florida. On May 7, 2007, the Company amended its charter to change its name from "China Direct Trading Corporation" to CHDT Corporation. This name change was effective as of July 16, 2007, for purposes of the change of its name on the OTC Bulletin Board. With the name change, the trading symbol was changed to CHDO. On June 6, 2012, the Company amended its charter to change its name from CHDT Corporation to CAPSTONE COMPANIES, INC. This name change was effective as of July 6, 2012, for purposes of the change of its name on the OTC Bulletin Board. With the name change, the trading symbol was changed to CAPC.
In February 2004, the Company established a new subsidiary, initially named China Pathfinder Fund, L.L.C., a Florida limited liability company. During 2005, the name was changed to Overseas Building Supply, LLC ("OBS") to reflect its shift in business lines from business development consulting services in China for North American companies to trading Chinese-made building supplies in South Florida. This business line was ended in fiscal year 2007 and the OBS name was changed to Black Box Innovations, L.L.C. ("BBI") on March 20, 2008. On January 31, 2012, the BBI name was changed to Capstone Lighting Technologies, L.L.C ("CLT").
On September 13, 2006, the Company entered into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation ("Capstone"). Capstone was incorporated in Florida on May 15, 1996 and is engaged primarily in the business of wholesaling low technology
consumer products to distributors and retailers in the United States. Under the Stock Purchase Agreement, the Company acquired 100% of the issued and outstanding shares of Capstone Common Stock, and recorded goodwill of $1,936,020.
On April 13, 2012, the Company established a wholly owned subsidiary in Hong Kong, named Capstone International Hong Kong Ltd ("CIHK") which is engaged in selling the Company's products internationally and provides other services such as new product development, product sourcing, quality control, ocean freight logistics, product testing and factory certifications for the Company's other subsidiaries.
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors in North America. Capstone currently operates in five primary 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.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents, to the extent the funds are not being held for investment purposes.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. The allowance for bad debt is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the receivables. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.
As of both March 31, 2016 and December 31, 2015, management has determined that accounts receivables are fully collectible. As such, management has not recorded an allowance for doubtful accounts.
Accounts Receivable Pledged as Collateral
As of both March 31, 2016, and December 31, 2015, 100% of accounts receivable serve as collateral for the Company's notes payable.
Inventory
The Company's inventory, is recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $232,384 and $205,708 at March 31, 2016 and December 31, 2015, respectively.
Prepaid Expenses
The Company's prepaid expenses consist primarily of deposits on inventory for future orders as well as other prepaid advertising expense.
Property and Equipment
Fixed assets are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated economic useful lives of the related assets as follows:
Computer equipment
|
3 - 7 years
|
Computer software
|
3 - 7 years
|
Machinery and equipment
|
3 - 7 years
|
Furniture and fixtures
|
3 - 7 years
|
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell. No impairment losses were recognized by the Company during 2015 or during the period ended March 31, 2016.
Upon sale or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as incurred. Major overhauls and betterments are capitalized and depreciated over their estimated economic useful lives.
Depreciation expense was $14,061 and $12,687for the periods ended March 31, 2016 and 2015, respectively.
Goodwill and Other Intangible Assets
Intangible assets acquired, either individually or with a group of other assets (but not those acquired in a business combination), are initially recognized and measured based on fair value. Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The cost of internally developing, maintaining and restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, are recognized as an expense when incurred.
An intangible asset (excluding goodwill) with a definite useful life is amortized; an intangible asset with an indefinite useful life is not amortized until its useful life is determined to be no longer indefinite. The remaining useful lives of intangible assets not being amortized are evaluated at least annually to determine whether events and circumstances continue to support an indefinite useful life.
If and when an intangible asset is determined to no longer have an indefinite useful life, the asset shall then be amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangibles that are subject to amortization.
An intangible asset (including goodwill) that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the intangible assets with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. Goodwill is not amortized.
It is the Company's policy to test for impairment no less than annually, or when conditions occur that may indicate impairment. The Company's intangible assets, which consist of goodwill of $1,936,020 recorded in connection with the Capstone acquisition, were tested for impairment and determined that no adjustment for impairment was necessary as of December 31, 2015, whereas the fair value of the intangible asset exceeds its carrying amount.
Net Income (Loss) Per Common Share
Basic earnings per common share were computed by dividing net 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 and restricted share awards, determined 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 March 31, 2016 and March 31, 2015, the total number of potentially dilutive common stock equivalents was 88,630,388 and 158,208,813, respectively.
Principles of Consolidation
The consolidated financial statements for the periods ended March 31, 2016 and 2015 include the accounts of the parent entity and its wholly-owned subsidiaries Capstone Lighting Technologies, L.L.C., Capstone Industries, Inc. and Capstone International HK, LTD. All significant intra-entity transactions and balances have been eliminated in consolidation.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash, prepaid expenses, accounts receivable, accounts payable and accrued liabilities at March 31, 2016 and December 31, 2015 approximates their fair values due to the short-term nature of these financial instruments.
The fair value hierarchy under U.S. GAAP distinguishes between assumptions based on market data (observable inputs) and an entity's own assumptions (unobservable inputs). The hierarchy consists of three levels:
·
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Level one
— Quoted market prices in active markets for identical assets or liabilities;
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·
|
Level two
— Inputs other than level one inputs that are either directly or indirectly observable; and
|
·
|
Level three
— Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
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Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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.
During the three-month periods, ending March 31, 2016 and 2015, the Company determined that $94,203 and $181,978, respectively of previously accrued promotional allowances were no longer required. The reduction of promotional allowances is included in net revenues for the periods ended March 31, 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 $3,053 and $3,596 for the periods ended March 31, 2016 and 2015, respectively. As of both March 31, 2016 and December 31, 2015, the Company has $275,019 in capitalized advertising costs included in prepaid expenses on the consolidated balance sheets.
Shipping and Handling
The Company's shipping and handling costs are included in sales and marketing expenses and amounted to $26,255 and $14,288 for the periods ended March 31, 2016 and 2015, respectively.
Accrued Liabilities
Accrued liabilities contained in the accompanying balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective products, other product returns and various allowances. These estimates could change significantly in the near term.
Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board ("FASB") 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 the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statements of operations.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 March 31, 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 periods ended March 31, 2016 and 2015 totaled $14,250 and $29,433, respectively.
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 June 2014, the FASB issued ASU No. 2014-12,
Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
. The issue is the result of a consensus of the FASB Emerging Issues Task Force. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718,
Compensation – Stock Compensation
, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The Company adopted the provisions of this ASU during the quarter ended March 31, 2016 and there was no material impact on the consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02,
Consolidations (Topic 225-20): Amendments to the Consolidation Analysis
, which affects current consolidation guidance. The guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The Company adopted the provisions of this ASU during the quarter ended March 31, 2016 and there was no material impact on the consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Interest-Imputation of Interest (Topic 225-20): Simplifying the Presentation of
Debt Issue Costs
, that simplifies the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. The Company adopted the provisions of this ASU during the quarter ended March 31, 2016 and there was no material impact on the consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330), Simplifying the Measurement of Inventory
, that simplifies the measurement of inventory and more closely aligns the U.S. GAAP measurement of inventory with the measure of inventory under International Financial Reporting Standards. The guidance requires entities utilizing the first-in, first-out method to measure inventory at the lower of cost and net realizable value, with net realizable value defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. This amendment should be applied prospectively and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 is not expected to have a material effect on the Company's consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which requires that all deferred income taxes be classified as noncurrent in the balance sheet, rather than being separated into current and noncurrent amounts. This standard is effective for annual reporting periods beginning after December 15, 2016. The adoption of ASU
2015-17 is not expected to have a material effect on the Company's 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 terms 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.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company's financials properly reflect the change.
Pervasiveness of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and the differences could be material.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and accounts receivable.
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash and Cash Equivalents
The Company at times has cash and cash equivalents with its financial institution in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits. The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks. As of March 31, 2016, the Company had $129,729 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 61% and 30% of gross revenue during the period ended March 31, 2016 and two customers who comprised 52% and 27% of gross revenue during the period ended March 31, 2015. The loss of these customers would adversely impact the business of the Company.
Approximately 50% and 52% of the Company's gross revenue for the periods ended March 31, 2016 and 2015, respectively was from international sales.
As of March 31, 2016, approximately 96% of accounts receivable were from one customer. 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 81% and 10% of merchandise during the period ended March 31, 2016, and two vendors from which it purchased 61% and 30% of merchandise during the period ended March 31, 2015. The loss of these suppliers would adversely impact the business of the Company.
As of March 31, 2016, approximately 65% of accounts payable were due to two vendors. As of December 31, 2015, approximately 95% of accounts payable were due to two customers.
NOTE 3 – NOTES PAYABLE
Sterling National Bank
On September 8,
2010, in order to fund increasing accounts receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank), located in New York, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted. There will be a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is .25% above Sterling National Bank's Base Rate which at time of closing was 5%. As of March 31, 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 CHDT, had personally guaranteed Capstone's obligations under the Financing Agreement. As of March 31, 2016 and December 31, 2015, the balance due to Sterling was $354,697 and $2,275,534, respectively.
As of March 31, 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 AND SUBSEQUENT EVENTS
Capstone Companies, Inc. - Notes Payable to Officers and Directors
On May 30, 2007, the Company executed a $575,000 promissory note payable to a Director of the Company. This note was amended on July 1, 2009 and again on January 2, 2010. As amended, the note carries an interest rate of 8% per annum. All principal was payable in full, with accrued interest, on January 2, 2014. On November 2, 2007, the Company issued 12,074 shares of its Series B Preferred stock valued at $28,975 as payment towards this loan. The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal. On July 12, 2011, Stewart Wallach, and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, whereby they would purchase equally all of Mr. Ullman's notes net of any offsets, monies due from Mr. Ullman to the Company. The original terms of all notes would remain the same. On July 12, 2011, this note payable was reassigned by Howard Ullman, equally split between Stewart Wallach, and JWTR Holdings LLC. The note balance of $466,886 was reduced by $47,940 for offsets due by Howard Ullman. The revised loan balance of $418,946 was reassigned equally $209,473 to Stewart Wallach and $209,473 to JWTR Holdings LLC. As amended the note is due on or before October 3, 2016. As of March 31, 2016, the total combined balance due on these two notes was $575,416 which includes accrued interest of $156,470.
On March 11, 2010, the Company received a loan from a Director in the amount of $100,000. As amended, the note is due on or before October 3, 2016 and carries an interest rate of 8% per annum. At March 31, 2016, the total amount payable on this note was $148,461 including interest of $48,461.
On May 11, 2010, the Company received a loan from Stewart Wallach in the amount of $75,000. As amended, the note is due on or before October 3, 2016 and carries an interest rate of 8% per annum. The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal. At March 31, 2016, this note was paid in full.
On January 15, 2013, the Company received a loan in the amount of $250,000 from Stewart Wallach. The loan carries an interest rate of 8% per annum. This loan was amended and the due date has been extended until October 3, 2016. This loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal. At March 31, 2016, the total amount payable on this note was $314,164 including interest of $64,164. On April 1, 2016, the Company received notification from Stewart Wallach that all rights and title to the $250,000 note and accrued interest of $64,164 had been assigned to Jeffrey Postal under the same terms and obligations of the original note.
4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES AND SUBSEQUENT EVENTS (continued)
On January 15, 2013, the Company received a loan in the amount of $250,000 from a Director of Capstone Companies, Inc. The loan carries an interest rate of 8% per annum. This loan was amended and the due date has been extended until October 3, 2016. At March 31, 2016, the total amount payable on this note was $314,164 including interest of $64,164. This loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal.
Purchase Order Assignment- Funding Agreements
On March 18, 2016, Capstone Industries, Inc. received $360,000 against a note from Group Nexus LLC. The note is due on or before September 30, 2016, and carries an interest rate of 8% simple interest per year. As of March 31, 2016, the total amount payable on this note was $361,026 which included interest of $1,026.
Working Capital Loan Agreements
On April 1, 2012, the Company signed a working capital loan agreement with Postal Capital Funding, LLC ("PCF"), a private capital funding company
owned by Jeffrey Postal and James McClinton, the Company's Chief Financial Officer
. Pursuant to the agreement, the Company may borrow up to a maximum of $1,000,000 of revolving credit from PCF. Amounts borrowed carry an interest rate of 8%. This loan was amended and the due date has been extended until October 3, 2016. As of March 31, 2016, the loan balance under this agreement was $ 633,239 including interest of $135,239.
Notes and Loans Payable to Related Parties – Maturities
The total amount payable to officers, directors and related parties as of March 31, 2016, was $2,346,469 including accrued interest of $469,524. The notes and loan payable to related parties mature during 2016.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
On June 29, 2007, the Company relocated its principal executive offices and sole operations facility to 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442, which is located in Broward County. This space consists of 4,000 square rentable feet and was leased on a month to month basis.
Capstone Industries entered into a new lease agreement for the same office space as currently located. The new lease agreement dated January 17, 2014, and effective February 1, 2014, has a 3-year 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. Under the new 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 $35,413 and $35,021 for the three months ended March 31, 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
|
|
|
7,559
|
|
|
$
|
20,322
|
|
|
|
27,881
|
|
Total future lease obligation
|
|
$
|
74,429
|
|
|
$
|
57,596
|
|
|
$
|
132,025
|
|
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
NOTE 5 – COMMITMENTS AND CONTINGENCIES (continued)
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 March 31, 2016 and December 31, 2015 consolidated balance sheets as part of accounts payable and accrued expenses for deferred wages in 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. 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 March 31, 2016 and December 31, 2015 consolidated balance sheets as part of accounts payable and accrued
expenses for deferred wages in 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 31,823,529 shares of common stock for cash at $0.017 per share, or $541,000 total as part of a Private Placement under Rule 506 of Regulation D. Along with the stock, each investor also received a warrant to purchase 30% of the shares purchased in the Private Placement. A total of 9,547,055 warrants were issued. The warrants are ten year warrants and have an exercise price of $0.017 per share.
Options
In 2005, the Company authorized the 2005 Equity Plan that made available 10,000,000 shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.
On January 2, 2015, the Company granted 3,000,000 stock options to two directors of the Company and 150,000 stock options to the Company Secretary. The options vested on August 5, 2015.
On August 6, 2015, the Company granted 3,000,000 stock options to two directors of the Company and 150,000 stock options to the Company Secretary. The options will vest on August 5, 2016.
NOTE 6 – STOCK TRANSACTIONS (continued)
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. The following assumptions were used in the fair value calculations of options granted during the year ended December 31, 2015:
Risk free rate – 1.61 – 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
For the period ended March 31, 2016, the Company recognized compensation expense of $14,250 related to these stock options. A further compensation expense of $19,731 will be recognized for these options in 2016.
The following table sets forth the Company's stock options outstanding as of March 31, 2016 and December 31, 2015 and activity for the periods then ended:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2015
|
|
|
77,533,333
|
|
|
$
|
0.029
|
|
|
|
2.36
|
|
|
$
|
-
|
|
Granted
|
|
|
6,300,000
|
|
|
|
0.029
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(4,750,000
|
)
|
|
|
0.029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
79,083,333
|
|
|
$
|
0.029
|
|
|
|
1.73
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
0.029
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
-
|
|
|
|
0.029
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, March 31, 2016
|
|
|
79,083,333
|
|
|
$
|
0.029
|
|
|
|
1.48
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/exercisable at December, 31, 2015
|
|
|
75,933,333
|
|
|
$
|
0.029
|
|
|
|
1.60
|
|
|
$
|
-
|
|
Vested/exercisable at March, 31, 2016
|
|
|
75,933,333
|
|
|
$
|
0.029
|
|
|
|
1.35
|
|
|
$
|
-
|
|
The following table summarizes the information with respect to options granted, outstanding and exercisable under the 2005 plan:
Exercise Price
|
|
|
Options Outstanding
|
|
|
Remaining Contractual Life in Years
|
|
|
Average Exercise Price
|
|
|
Number of Options Currently Exercisable
|
|
$
|
.029
|
|
|
|
54,983,333
|
|
|
|
1.08
|
|
|
$
|
.029
|
|
|
|
54,983,333
|
|
$
|
.029
|
|
|
|
2,500,000
|
|
|
|
2.08
|
|
|
$
|
.029
|
|
|
|
2,500,000
|
|
$
|
.029
|
|
|
|
700,000
|
|
|
|
3.08
|
|
|
$
|
.029
|
|
|
|
700,000
|
|
$
|
.029
|
|
|
|
1,000,000
|
|
|
|
1.58
|
|
|
$
|
.029
|
|
|
|
1,000,000
|
|
$
|
.029
|
|
|
|
150,000
|
|
|
|
1.83
|
|
|
$
|
.029
|
|
|
|
150,000
|
|
$
|
.029
|
|
|
|
850,000
|
|
|
|
3.17
|
|
|
$
|
.029
|
|
|
|
850,000
|
|
$
|
.029
|
|
|
|
300,000
|
|
|
|
4.17
|
|
|
$
|
.029
|
|
|
|
300,000
|
|
$
|
.029
|
|
|
|
4,500,000
|
|
|
|
0.25
|
|
|
$
|
.029
|
|
|
|
4,500,000
|
|
$
|
.029
|
|
|
|
150,000
|
|
|
|
5.25
|
|
|
$
|
.029
|
|
|
|
150,000
|
|
$
|
.029
|
|
|
|
4,500,000
|
|
|
|
1.33
|
|
|
$
|
.029
|
|
|
|
4,500,000
|
|
$
|
.029
|
|
|
|
3,000,000
|
|
|
|
2.75
|
|
|
$
|
.029
|
|
|
|
3,000,000
|
|
$
|
.029
|
|
|
|
150,000
|
|
|
|
7.75
|
|
|
$
|
.029
|
|
|
|
150,000
|
|
$
|
.029
|
|
|
|
3,000,000
|
|
|
|
3.75
|
|
|
$
|
.029
|
|
|
|
3,000,000
|
|
$
|
.029
|
|
|
|
150,000
|
|
|
|
8.75
|
|
|
$
|
.029
|
|
|
|
150,000
|
|
$
|
.029
|
|
|
|
3,000,000
|
|
|
|
4.33
|
|
|
$
|
.029
|
|
|
|
-
|
|
$
|
.029
|
|
|
|
150,000
|
|
|
|
9.33
|
|
|
$
|
.029
|
|
|
|
-
|
|
NOTE 7 - INCOME TAXES
As of March, 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 March 31, 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 month period ended March 31, 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
On January 15, 2013, the Company entered into an agreement with AC Kinetics, Inc. to purchase 100 shares of AC Kinetics Series A Preferred Stock for $500,000. These shares carry a liquidation preference in the amount of $500,000, are convertible at the 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 have agreed to cooperate in the development and commercialization of consumer and industrial products to be solely owned by the Company. AC Kinetics will be the Company's advanced product developer. AC Kinetics will notify the appropriate technology departments at 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 will receive a 7% royalty on any licensing revenues received by AC Kinetics for products sold by them. This royalty agreement will terminate upon receipt by the Company of royalties of $500,000.
The aggregate carrying amount of cost method investments at March 31, 2016 and December 31, 2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
AC Kinetics Series A Convertible Preferred Stock
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
It was not practicable to estimate fair value of AC Kinetics Series A Convertible Preferred Stock and such an estimate was not made because, at March 31, 2016 and December 31, 2015, there were no events or changes in circumstances that could have had a significant adverse effect on the fair value of such investments.
NOTE 9 – SUBSEQUENT EVENTS
On April 22, 2016, the Company received a credit of approximately $479,000 from its major vendor to cover customer returns of defective products from sales that occurred in 2015 and promotional allowances for 2016 sales. The credit will be applied to invoices due to the vendor during the second and third quarters of 2016.