Independent Directors.
The Board of the Company is currently comprised of five directors, one of whom is an independent director under the listing standards of quotation systems like The NASDAQ Stock Market. The Company has sought unsuccessfully to recruit qualified independent directors. Although we have D&O insurance, we believe that our chronic losses and chronically low public stock market price discourages qualified candidates from serving as independent directors. This is a problem commonly faced by micro-cap, "penny stock" companies like our Company.
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success or survival.
The Company faces a number of risks, including, without limit: (1) low public stock market price, which hinders our ability to fund and grow our business; (2) reliance on regional and national distributors and retailers to sell our products in a highly competitive market filled with competitors who possess significantly greater resources and market share than our Company; (3) customary operational risks; (4) reliance on key personnel and the lack of key man insurance that pays for replacements; (5) lack of primary markets and lack of institutional support for our publicly traded Common Stock; (6) low market price of our Common Stock hindering our ability to consummate or attract merger and acquisition candidates; (7) lack of assets (other than accounts receivable) to attain commercially reasonable financing for operations; and (8) the risks faced by any product company in today's challenging environment.
We rely on China for the manufacture of our products. Any conflict between the U.S. and China could disrupt our product supply and force us to find alternative manufacturers. From time to time, we research the possibility of using non-Chinese manufacturing sources.
Our senior officers are responsible for the day-to-day management of risks the Company faces, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the Board of Directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. To do this, the Chairman of the Board and other non-officer directors met quarterly on average with management to discuss strategy and the risks facing the Company. Senior management, each member being also a director, attends the Board meetings and is available to address any questions or concerns raised by the Board on risk management and any other matters. The Chairman of the Board and members of the Board work together to provide strong, independent oversight of the Company's management and affairs through its standing committees and, when necessary, special meetings of directors. Since most of the directors are located in the same area, informal meetings between directors and officers also occur to discuss business risk and appropriate responses.
Director - Minimum Qualifications
. The Compensation and Nominating Committee has adopted a set of criteria that it considers when it selects individuals not currently on the Board of Directors to be nominated for election to the Board of Directors. A candidate must meet the eligibility requirements set forth in the Company's Bylaws. A candidate must also meet any qualification requirements set forth in any Board or committee governing documents.
If the candidate is deemed eligible for election to the Board of Directors, the Compensation and Nominating Committee will then evaluate the prospective nominee to determine if he or she possesses the following qualifications, qualities or skills:
·
|
contributions to the range of talent, skill and expertise appropriate for the Board;
|
·
|
financial, regulatory and business experience, knowledge of the operations of public companies and ability to read and understand financial statements;
|
·
|
familiarity with the Company's market;
|
·
|
personal and professional integrity, honesty and reputation;
|
·
|
the ability to represent the best interests of the shareholders of the Company and the best interests of the institution;
|
·
|
the ability to devote sufficient time and energy to the performance of his or her duties; and
|
·
|
independence under applicable Commission and listing definitions.
|
The Compensation and Nominating Committee will also consider any other factors it deems relevant. With respect to nominating an existing director for re-election to the Board of Directors, the Compensation and Nominating Committee will consider and review an existing director's Board and committee attendance and performance; length of Board service; experience, skills and contributions that the existing director brings to the Board; and independence.
Director Nomination Process
. The process that the Compensation and Nominating Committee follows when it identifies and evaluates individuals to be nominated for election to the Board of Directors is as follows:
For purposes of identifying nominees for the Board of Directors, the Compensation and Nominating Committee relies on personal contacts of the committee members and other members of the Board of Directors, and will consider director candidates recommended by stockholders in accordance with the policy and procedures set forth above. The Compensation and Nominating Committee has not used an independent search firm to identify nominees.
In evaluating potential nominees, the Compensation and Nominating Committee determines whether the candidate is eligible and qualified for service on the Board of Directors by evaluating the candidate under the selection criteria, which are discussed in more detail below. If such individual fulfills these criteria, the Compensation and Nominating Committee will conduct a check of the individual's background and interview the candidate to further assess the qualities of the prospective nominee and the contributions he or she would make to the Board of Directors.
Consideration of Recommendation by Stockholders.
It is the policy of the Compensation and Nomination Committee of the Board of Directors of the Company to consider director candidates recommended by stockholders who appear to be qualified to serve on the Company's Board of Directors. The Compensation and Nominating Committee may choose not to consider an unsolicited recommendation if no vacancy exists on the Board of Directors and the Compensation and Nomination Committee does not perceive a need to increase the size of the Board of Directors. To avoid the unnecessary use of the Compensation and Nominating Committee's resources, the Compensation and Nomination Committee will consider only those director candidates recommended in accordance with the procedures set forth below.
Stockholder Proposal Procedures.
To submit a recommendation of a director candidate to the Compensation and Nomination Committee, a stockholder should submit the following information in writing, addressed to the Chairperson of the Compensation and Nomination Committee, care of the Corporate Secretary, at the main office of the Company:
1.
|
The name of the person recommended as a director candidate;
|
2.
|
All information relating to such person that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934;
|
3.
|
The written consent of the person being recommended as a director candidate to being named in the proxy statement as a nominee and to serving as a director if elected;
|
4.
|
The name and address of the stockholder making the recommendation, as they appear on the Company's books; provided, however, that if the stockholder is not a registered holder of the Company's common stock, the stockholder should submit his or her name and address along with a current written statement from the record holder of the shares that reflects ownership of the Company's common stock; and
|
5.
|
A statement disclosing whether such stockholder is acting with or on behalf of any other person and, if applicable, the identity of such person.
|
In order for a director candidate to be considered for nomination at the Company's annual meeting of stockholders, when and if one is held, or to be considered prior to a written consent vote on director nominees, the recommendation must be received by the Compensation and Nominating Committee at least 30 days before the date of the annual meeting or, in the case of an information statement and no shareholder meeting being held, prior to April 1st.
MANAGEMENT OF THE COMPANY
CURRENT OFFICERS. The current officers of the Company are:
1.
|
Stewart Wallach, age 65, was appointed as Chief Executive Officer and President of the Company on April 23, 2007. Mr. Wallach is also the senior executive officer and director of Capstone.
|
2.
|
Gerry McClinton, age 61, is the Chief Financial Officer and Chief Operating Officer and a director (appointed as a director on February 5, 2008) of the Company. Mr. McClinton is also a senior executive of Capstone.
|
3.
|
Aimee Gaudet, age 38, was appointed on January 16, 2013 as Company Secretary. She is also Executive Assistant to Stewart Wallach at CAPC.
|
FAMILY RELATIONSHIP
: There is no family relationship between members of Company management.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Executive officers, directors and greater than ten percent stockholders also are required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the Company or other written representations, the Company believes that all of Section 16(a) filing requirements were met during fiscal year 2016 by the Company's directors and officers.
Item 11. Executive Compensation.
Executive Compensation Philosophy, Strategy and Objectives
The principal objectives of our senior officer compensation are to attract, motivate and retain the services of qualified officers who can lead the Company to achieve its business goals and enhance public stockholder value. The Company's business goals are to achieve consistent profitability in operations and attain long-term profitability. Our approach is based on the following compensation philosophy, align stockholder and officer interest. Besides a base salary sufficient to attract qualified personnel, we provide non-qualified, long term stock options to tie the interests of our officers with the interests of the stockholders in long term profitability of the Company.
Performance Based Compensation: Our grant of options and stock are designed to reward and encourage officers to achieve Company goals in financial and business performance.
Compensation Benchmark - Competitive Market
We have one Independent Director and also professional advisors who check the compensation level of other microcap companies in consumer goods from time to time to ensure that our compensation levels are reasonable. In 2016, we did benchmark compensation. Previously, compensation was last benchmarked in 2014. The Independent Director and outside legal counsel reviewed compensation of executives at several peer companies holding equivalent positions or having similar responsibilities as our senior officers. The peer companies utilized in the 2016 analysis were engaged in some segment of consumer goods and were microcap companies, some having less or greater resources and operating income than our Company.
The companies used for the 2016 benchmark were:
-
|
Cyalume Technologies Holdings, Inc.
|
-
|
Lighting Science Group, Inc.
|
Role of the Compensation and Nominating Committee
The Compensation and Nominating Committee operates independently of management and currently consists of the sole Independent Director, Jeffrey Guzy, who is independent under applicable SEC standards and is an "Outside Director" for purposes of Section 162(m) of the Internal Revenue Code of 1986 (the "Code") and Dr. Jeffrey Postal. The Compensation and Nominating Committee receives recommendations from our Chief Executive Officer regarding the compensation of the senior officers (other than the Chief Executive Officer).
The Compensation and Nominating Committee is responsible for establishing and implementing our executive compensation plans as well as continually monitoring adherence to and effectiveness of those plans, including:
·
|
reviewing the structure and competitiveness of our executive compensation programs to attract and retain superior executive officers, motivate officers to achieve business goals and objectives, and align the interests of executive officers with the long-term interests of our shareholders;
|
·
|
reviewing and evaluating annually the performance of officers in light of Company goals and objectives and approving their compensation packages, including base salaries (if at issue or in consideration), long-term incentive and stock based compensation and perquisites;
|
·
|
monitoring the effectiveness of the Company's sole incentive stock option plan and approving annual financial targets for officers; and
|
·
|
determining whether to award incentive bonuses that qualify as "performance-based compensation" for executive officers whose compensation is covered by Code Section 162(m), the elements of such compensation, whether performance goals have been attained and, if appropriate, certifying in writing prior to payment of such compensation that the performance goals have been met.
|
Role of Management
The Company believes that it is important to have our Chief Executive Officer's input in the design of compensation programs for his direct reports. The Chief Executive Officer reviews his direct reports' compensation programs annually with the Committee, evaluating the adequacy relative to the marketplace, inflation, internal equity, external competitiveness, business and motivational challenges and opportunities facing the Company and its executives. In particular, he considers base salary a critical component of compensation to remain competitive and retain his executives. All final decisions regarding compensation for the Chief Executive Officer's direct reports listed in the Summary Compensation Table are made by the Compensation Committee. The Chief Executive Officer does not make recommendations with regard to his own compensation.
Role of the Compensation Consultant
While we may consult industry sources on compensation for executives, we have not engaged a consultant to analyze our compensation levels.
For 2016, the principal components of compensation for each officer were:
·
|
long-term incentive compensation (restricted stock awards); and
|
·
|
perquisites and other benefits.
|
Our Company endeavors to strike an appropriate balance between long-term and current cash compensation. The current executives are key to the ability of the Company to conduct its business because of their individual experience and relationships in our current business line. Their compensation reflects their individual value to the ability of the Company to conduct its current business.
EXECUTIVE COMPENSATION
Name & Principal Position
|
|
Year
|
|
|
Salary $
|
|
|
Bonus $
|
|
|
Stock Awards $
|
|
|
Non-Equity Incentives $
|
|
|
All Others $
|
|
|
TOTAL
|
|
Stewart Wallach,
|
|
2016
|
|
|
$
|
327,396
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
427,396
|
|
Chief Executive Officer
(1,2,5,6,8,9,)
|
|
2015
|
|
|
$
|
287,163
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
287,163
|
|
|
|
2014
|
|
|
$
|
287,163
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
287,163
|
|
|
|
2013
|
|
|
$
|
287,163
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
287,163
|
|
|
|
2012
|
|
|
$
|
273,488
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
273,488
|
|
|
|
2011
|
|
|
$
|
180,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
180,000
|
|
|
|
2010
|
|
|
$
|
186,923
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
186,923
|
|
|
|
2009
|
|
|
$
|
236,250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
236,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James G. McClinton,
|
|
2016
|
|
|
$
|
192,013
|
|
|
$
|
20,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
212,013
|
|
Chief Financial Officer
|
|
2015
|
|
|
$
|
191,442
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
191,442
|
|
& COO
(3,4,5,7,10,11)
|
|
2014
|
|
|
$
|
191,442
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
191,442
|
|
|
|
2013
|
|
|
$
|
191,442
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
191,442
|
|
|
|
2012
|
|
|
$
|
182,325
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
182,325
|
|
|
|
2011
|
|
|
$
|
146,250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
146,250
|
|
|
|
2010
|
|
|
$
|
124,615
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
124,615
|
|
|
|
2009
|
|
|
$
|
157,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
157,500
|
|
Footnotes:
(1)
|
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.
|
(2)
|
An amount of $40,233 had been accrued for deferred wages due Stewart Wallach from 2011. This amount was paid in December 2016.
|
(3)
|
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.
|
(4)
|
An amount of $572 had been accrued for deferred wages due James McClinton from 2011. This amount was paid in December 2016.
|
(5)
|
Each Employment Agreement provided for an annual minimum salary increase of 5% up to year 2015, however Stewart Wallach earned $287,163 in 2015 and Gerry McClinton earned $191,442 in 2015 the same as amounts earned in 2014.
|
(6)
|
Although approved for a salary of $301,521, Stewart Wallach earned $287,163 in 2014.
|
(7)
|
Although approved for a salary of $201,014, Gerry McClinton earned $191,442 in 2014.
|
(8)
|
Although approved for a salary of $260,465, Stewart Wallach took a voluntary salary reduction and earned $180,000 in 2011.
|
(9)
|
Although approved for a salary of $248,060, Stewart Wallach took a voluntary salary reduction and earned $186,923 in 2010.
|
(10)
|
Although approved for a salary of $173,643, Gerry McClinton took a voluntary salary reduction and earned $146,250 in 2011.
|
(11)
|
Although approved for a salary of $165,375, Gerry McClinton took a voluntary salary reduction and earned $124,615. In 2010.
|
(12)
|
The Company has no non-equity incentive plans.
|
(13)
|
The Company has no established bonus plan. Any bonus payments are made ad hoc upon recommendation of Compensation Committee and approval by Board of Directors. Bonuses are only paid on a performance basis.
|
EMPLOYMENT AGREEMENTS
Stewart Wallach, Chief Executive Officer and President.
The 2008 employment agreement provides for an annual salary of $225,000 with a minimum annual increase in base salary of 5%. Mr. Wallach may, at his option, elect to receive restricted shares of Common Stock in lieu of cash compensation, which shares are subject to piggyback registration rights. In 2015, Mr. Wallach was entitled to a base salary of $316,597, however he earned $287,163. In 2014, Mr. Wallach was entitled to a base salary of $301,521, however he earned $287,163. In 2013 Mr. Wallach was entitled and earned a base salary of $287,163.
Mr. Wallach was entitled to and earned $273,488 in base salary for fiscal year 2012. Mr. Wallach was entitled to a base salary of $260,465 for fiscal year 2011; however, his actual base salary in fiscal year 2011 was $180,000 because of a voluntary salary reduction for 2011. An amount of $40,233 was accrued and is included in the December 31, 2015 consolidated balance sheet as part of accounts payable and accrued expenses for deferred wages from 2011. This amount was paid on December 9, 2016.
Mr. Wallach was entitled to a base salary of $248,060 for fiscal year 2010; however, his actual base salary in fiscal year 2010 was $186,923 because of a voluntary salary reduction for 2010.
On March 1
st
, 2013, the employment agreements which have a three-year term, have been amended for the second time, to extend the term for an additional 3 years (from February 5, 2013 until February 5, 2016). These employment agreements can be extended by mutual consent of the parties for up to three (3) additional years. Previously, on February 1, 2011, the employment agreements for Stewart Wallach and Gerry McClinton were extended to February 5, 2013, unanimously approved by the Board of Directors on February 1, 2011.
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
th
, 2016 and ends February 5
th
, 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 agreement may not exceed two years in length.
Gerry McClinton, Chief Operating Officer and Chief Financial Officer.
The 2008 employment agreement provides for an annual salary of $150,000 with a minimum annual increase in base salary of 5%. Mr. McClinton may, at his option, elect to receive restricted shares of Common Stock in lieu of cash compensation, which shares are subject to piggyback registration rights. In 2014, Mr. McClinton was entitled to a base salary of $201,014 but earned $191,442. In 2013, Mr. McClinton was entitled to and earned a base salary of $191,442. In 2012, Mr. McClinton was entitled to and earned $182,326. Mr. McClinton was entitled to a base salary of $173,643 in fiscal year 2011; however, his actual base salary in fiscal year 2011 was $146,250 because of a voluntary salary reduction for 2011. An amount of $572 was accrued and is included in the December 31, 2015 consolidated balance sheet as part of accounts payable and accrued expenses for deferred wages from 2011. This amount was paid on December 9, 2016.
Mr. McClinton was entitled to a base salary of $165,375 in fiscal year 2010; however, his actual base salary in fiscal year 2010 was $124,615 because of a voluntary salary reduction for 2010.
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
th
, 2016 and ends February 5
th
, 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 agreement may not exceed one year in length.
Common Provisions in both new Employment Agreements:
The following provisions are contained in each of the above employment agreements:
If the officer's employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer's estate or the officer, as the case may be an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to (a) the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of "merit" based bonuses earned by the Executive during the prior calendar year of his termination. Any payments owed by the Company shall be paid from a normal payroll account on a bi-weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be payout bi-weekly over the course of the year but at no time will be no more than twenty (26) installments. The Company will also continue to pay the Executive's health and dental insurance benefits for 12 months starting at the Executives date of termination. If the Executive had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against the Executive's severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment.
The above summary of the employment agreements is qualified by reference to the actual employment agreements, which are filed as exhibits to the Form 10-K by the Company for fiscal year ended December 31, 2016 (as filed by the Company with the Commission on March 27, 2017.
These amended agreements supersede any existing employment agreements and are the only employment agreements with Company officers:
SUMMARY TABLE OF OPTION GRANTS TO OFFICERS OF COMPANY
As of December 31, 2016
Name
|
No. of Shares
Underlying
|
% of Total Options
Granted Employees
in 2016
|
Expiration
Date
|
Restricted
Stock Grants
|
No. Shares
underlying Options
Options Granted
in 2016
|
Stewart Wallach
|
1,515,556
|
-
|
4/27/2017
|
-
|
-
|
Gerry McClinton
|
2,150,000
|
-
|
4/27/2017
|
-
|
-
|
OTHER COMPENSATION
(1)
NAME/POSITION
|
YEAR
|
SEVERANCE
PACKAGE
|
CAR
ALLOWANCE
|
CO. PAID
SERVICES
|
TRAVEL
LODGING
|
TOTAL($)
|
Stewart Wallach
|
2016
|
-
|
-
|
-
|
-
|
-
|
Chief Executive
|
2015
|
-
|
-
|
-
|
-
|
-
|
Officer
|
2014
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Gerry McClinton
|
2016
|
-
|
-
|
-
|
-
|
-
|
Chief Operating
|
2015
|
-
|
-
|
-
|
-
|
-
|
Officer & Chief
|
2014
|
-
|
-
|
-
|
-
|
-
|
Financial Officer
|
|
|
|
|
|
|
FOOTNOTES: (1) There were no 401(k) matching contributions by the Company and no medical supplemental payments by the Company in any of the years specified.
OUTSTANDING EQUITY AWARDS FOR YEAR END 2016 TABLE
OPTIONS
(1)
NAME
|
Securities Underlying
Unexercised Options
|
Option Exercise
Price
|
Option
Expiration Date
|
Stewart Wallach
|
1,515,556
|
.435
|
4/27/2017
|
Stewart Wallach
(2)
|
117,648
|
.255
|
10/01/2017
|
Gerry McClinton
|
2,150,000
|
.435
|
4/27/2017
|
Footnotes:
(1)
|
The Company does not have any stock awards for the years specified.
|
(2)
|
Mr. Wallach acquired 117,648 Company warrants on 10/01/2007 as part of $100,000 investment in the Company's 2007 private placement under rule 506 of restricted shares of common stock.
|
2016 OPTION EXERCISES AND VESTED OPTIONS
Name
|
Number of Shares
Acquired on Exercise
|
Value Realized on
Exercise
|
Stewart Wallach
|
-
|
-
|
Gerry McClinton
|
-
|
-
|
POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT
|
|
SALARY
SEVERANCE
|
|
|
BONUS
SEVERANCE
|
|
|
GROSS UP
TAXES
|
|
|
BENEFIT
COMPENSATION
|
|
|
GRAND TOTAL
TOTAL
|
|
Stewart Wallach
|
|
$
|
287,163
|
|
|
|
-
|
|
|
$
|
13,200
|
|
|
$
|
10,000
|
|
|
$
|
310,363
|
|
Gerry McClinton
|
|
$
|
191,442
|
|
|
|
-
|
|
|
$
|
11,800
|
|
|
$
|
10,000
|
|
|
$
|
213,242
|
|
Indemnification.
CAPC has entered into indemnification agreements with its directors and executive officers. Under these agreements, CAPC has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments CAPC could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the CAPC maintains directors and officer's liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The sole class of voting Common Stock of the Company as of March 10, 2017, that are issued and outstanding is the Common Stock, $0.0001 par value per share, or "Common Stock". The table below sets forth, as of March 10, 2017, ("Record Date"), certain information with respect to the Common Stock beneficially owned by (i) each Director, nominee and executive officer of the Company; (i) each person who owns beneficially more than 5% of the Common Stock; and (iii) all Directors, nominees and executive officers as a group. There were 48,132,664 shares of Common Stock outstanding on the Record Date
OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
|
as of December 31, 2016.
|
|
|
|
|
|
ALL OPTION WARRANT SHARES
|
NAME, ADDRESS & TITLE
|
STOCK OWNERSHIP
|
PERCENTAGE OF STOCK OWNERSHIP
|
STOCK OWNERSHIP AFTER CONVERSION OF ALL OPTIONS & WARRANTS PLUS THOSE EXERCISEABLE WITHIN THE NEXT 60 DAYS
|
% OF STOCK OWNERSHIP AFTER CONVERSION OF ALL OPTIONS & WARRANTS PLUS THOSE EXERCISEABLE WITHIN THE NEXT 60 DAYS
|
VESTED
|
EXPIRED
|
NOT VESTED
|
|
|
|
|
|
|
|
|
Stewart Wallach, CEO, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL 33442
|
9,841,255
|
20.4%
|
11,474,459
|
21.3%
|
1,633,204
|
-
|
-
|
|
|
|
|
|
|
|
|
Gerry McClinton, CFO, & Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL 33442
|
33,663
|
0.1%
|
2,183,663
|
4.0%
|
2,150,000
|
-
|
-
|
|
|
|
|
|
|
|
|
Jeff Postal, Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL 33442
|
8,558,783
|
17.8%
|
9,058,783
|
16.8%
|
400,000
|
66,667
|
100,000
|
|
|
|
|
|
|
|
|
Aimee C. Gaudet, Secretary, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL 33442
|
-
|
0.0%
|
40,000
|
0.1%
|
30,000
|
-
|
10,000
|
|
|
|
|
|
|
|
|
Jeff Guzy, Director, 3130 19th Street North, Arlington, VA 22201
|
55,467
|
0.1%
|
555,467
|
1.0%
|
400,000
|
100,000
|
100,000
|
|
|
|
|
|
|
|
|
Larry Sloven, Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL 33442
|
52,800
|
0.1%
|
119,467
|
0.2%
|
66,667
|
66,667
|
-
|
|
|
|
|
|
|
|
|
ALL OFFICERS & DIRECTORS AS A GROUP
|
18,541,968
|
38.5%
|
23,431,839
|
43.4%
|
4,679,871
|
233,334
|
210,000
|
|
|
|
|
|
|
|
|
PRINCIPAL SHAREHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involve, LLC c/o Michael Harris, Esq.; Nason, Yeager, Gerson, White & Lioce, PA, 1645 Palm Beach Lakes Blvd. 12th Floor, WPB, FL 33401
|
4,531,962
|
9.4%
|
4,531,962
|
8.4%
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
SUBTOTAL PRINCIPAL SHAREHOLDERS
|
4,531,962
|
9.4%
|
4,531,962
|
8.4%
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
TOTAL
|
23,073,930
|
47.9%
|
27,963,801
|
51.8%
|
4,679,871
|
233,334
|
210,000
|
Notes to Table
(1) Unless otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(2) Total shares include 1,515,556 shares that Mr. Wallach has the current right to acquire under a non-qualified stock option and 117,648 shares of Common Stock issuable under the warrants issued to Mr. Wallach as part of his $100,000 investment in Company's 2007 private placement under Rule 506 of restricted shares of Common Stock. Mr. Wallach was appointed Chief Executive Officer and President of the Company on April 23, 2007.
(3) Total shares include 2,150,000 shares of Common Stock that Mr. McClinton has the current right to acquire under a non-qualified stock option currently dated April 27, 2007.
I
tem 13. Certain Relationships and Related Transactions, and Director Independence.
INDEPENDENT DIRECTORS
The Company is a "controlled company" under typical stock exchange corporate governance rules, that is a company where 50% or more of the voting power is owned by a person or a group, and does not currently have to meet requirements for a board of directors with a majority of "independent directors." Currently, only Jeffrey Guzy qualifies as an "independent director" under the listing standards of most stock exchanges or quotation systems. No other director qualifies as an "independent director" under those rules because they are officers of the Company or have business relationships with the Company.
The CAPC Board adopted a written policy for approval of transactions between the Company and its directors, director nominees, executive officers, greater than 5% beneficial owners and their respective immediate family members. The policy governs transaction in which the value exceeds or is expected to exceed $120,000 in a single calendar year.
The policy provides that the Audit Committee reviews transactions subject to the policy and determines whether or not to approve or ratify those transactions. The Audit Committee takes into account, among other factors it deems appropriate, the following factors:
·
|
Benefits derived by the related person from the transaction versus the benefits derived by the Company;
|
·
|
Total value of the transaction;
|
·
|
Whether the transaction was undertaken in the ordinary course of business of the Company; and
|
·
|
Were the terms and conditions of the transaction usual and customary and commercially reasonable.
|
The Audit Committee does not have any policies on expedited or pre-approval of certain routine related person transactions.
From time to time, the Company borrows working capital on a short-term basis, usually with maturity dates of less than a year, from Company directors and officers. The Company believes that these working capital loans are commercially reasonable, especially in light of the inability of the Company to obtain such short-term financing from traditional funding sources. A summary of the current working capital loans from Company officers and directors is set forth below.
Name of Lending Officer or Director
|
|
Amount of Principal of Loan as of December, 31, 2016
|
|
|
Interest Rate
|
|
Maturity Date
|
|
Principal Balance as of March 3, 2017
|
|
Postal Capital Funding
|
|
$
|
498,000
|
|
|
|
8
|
%
|
04/03/2017
|
|
$
|
398,000
|
|
Jeffrey Postal
|
|
$
|
250,000
|
|
|
|
8
|
%
|
04/03/2017
|
|
$
|
250,000
|
|
Jeffrey Postal
|
|
$
|
250,000
|
|
|
|
8
|
%
|
04/03/2017
|
|
$
|
250,000
|
|
Total
|
|
$
|
998,000
|
|
|
|
|
|
|
|
$
|
898,000
|
|
On September 19, 2016, the disinterested directors of the Board of Directors of the Company approved the use of up to $750,000 dividend distribution from Capstone Industries, Inc., a Florida corporation and a wholly owned subsidiary of the Company, to pay down working capital loans made by Stewart Wallach and Jeffrey Postal to the Company. Mr. Wallach is the Chief Executive Officer and Chairman of the Board of Directors of the Company and Mr. Postal is a director of the Company. The proposed use of the cash dividend was also approved by disinterested directors of the Company under the Company's related party transaction guidelines. After the pay down, the remaining loans will have an aggregate outstanding principal balance of $998,000.
Item 14. Principal Accountant Fees & Services
The following is a summary of the fees billed to us by CBIZ and Mayer Hoffman McCann P.C. for professional services rendered for the years ended December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Audit Fees
|
|
$
|
94,000
|
|
|
$
|
83,000
|
|
Tax Fees
|
|
$
|
4,500
|
|
|
$
|
4,550
|
|
Total
|
|
$
|
98,500
|
|
|
$
|
87,550
|
|
Audit Fees.
Consists of fees billed for professional services rendered for the audits of our consolidated financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the Commission and related comfort letters and other services that are normally provided by the Independent Registered firm in connection with statutory and regulatory filings or engagements.
Tax Fees
. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
MHM has advised us that MHM leases substantially all of its personnel, who work under the control of MHM's shareholders, from wholly-owned subsidiaries of CBIZ, Inc., in an alternative practice structure. Accordingly, substantially all of the hours expended on MHM's engagement to audit our consolidated financial statements for the year ended December 31, 2016 were attributed to work performed by persons other than MHM's fulltime, permanent employees.
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The Audit Committee is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services as allowed by law or regulation. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specifically approved amount. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval and the fees incurred to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
The Audit Committee pre-approved 100% of the Company's 2016 audit fees, audit-related fees, tax fees, and all other fees to the extent the services occurred after the effective date of the SEC's final pre-approval rules.
Part IV
Item 15. Exhibits, and Reports on Form 8-K
(a) The following documents are filed as part of this Report.
1. FINANCIAL STATEMENTS
F-1 Report of Independent Registered Public Accountants
F-2 Consolidated Balance Sheets as of December 31, 2016, and 2015
F-3 Consolidated Statements of Income for the Years ended December 31, 2016 and 2015
F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2016 and 2015
F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2016 and 2015
F-6 Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. EXHIBITS
Exhibits Required by Item 601 of Regulation S-K. Pursuant to the Instructions to Exhibits, certain instruments defining the rights of holders of long-term debt securities of the Company and its consolidated subsidiaries are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. A copy of such instrument will be furnished to the Securities and Exchange Commission upon request.
2.1
|
Stock Purchase Agreement dated September 15, 2006, by and between CHDT Corporation, and Capstone Industries, Inc.
|
|
Incorporated by reference to Exhibit 2.1 to the Form 8-K filed by CHDT Corporation with the Commission on September 18, 2006.
|
3.1
|
Articles of Incorporation of CHDT Corp. Incorporated by reference to Annex G to the Special Meeting Proxy Statement, Dated April 15, 2004, filed by CHDT Corporation with the Commission on April 20, 2004.
|
3.1.1
|
Amended and Restated Articles of Incorporation of Capstone Companies, Inc. Incorporated by reference to Exhibit 3.1 to Form 8-K filed by Capstone Companies, Inc. with the Commission on July 14, 2009.
|
3.1.1.1
|
Amendment to Amended and Restated Articles of Incorporation of Capstone Companies, Inc., as filed with Florida Secretary of State on June 8, 2016. Incorporated by reference to Exhibit 3.1 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on June 6, 2016.
|
3.2
|
By-laws of Capstone Companies, Inc. Incorporated by reference to Annex H the Special Meeting Proxy Statement, Dated April 15, 2004, filed by CHDT Corporation with the Commission on April 20, 2004.
|
3.3
|
Certificate of Designation of the Preferences, Limitations, and Relative Rights of Series B Convertible Preferred Stock of CHDT Corp. Incorporated by reference to Exhibit 99.2 to the Form 8-K filed by CHDT Corp. with the Commission on November 6, 2007.
|
10.1
|
Purchase Agreement, dated December 1, 2007, by Capstone Industries, Inc. and Magnet World, Ltd. for sale of operating assets of Souvenir Direct, Inc. Incorporated by reference to Exhibit 99 to the Form 8-K filed by CHDT Corp. with the Commission on December 3, 2007.
|
10.2
|
2005 Equity Plan of CHDT Corp. Incorporated by reference to Exhibit 10.6 to the Form 10-K filed by CHDT Corp. for the fiscal year ended December 31, 2007 and filed with the Commission on March 31, 2008.
|
10.3
|
2016 Employment Agreement by Stewart Wallach and Capstone Companies, Inc. Incorporated by reference to Exhibit 10.7 to the Form 10-K for fiscal year ended December 31, 2016 and filed by Capstone Companies, Inc. with the Commission on March 23, 2016.
|
10.4
|
2016 Employment Agreement by James Gerald (Gerry) McClinton and Capstone Companies, Inc. Incorporated by reference to Exhibit 10.8 to the Form 10-K for fiscal year ended December 31, 2016 and filed by Capstone Companies, Inc. with the Commission on March 23, 2016.
|
10.5
|
Working Capital Loan Agreement, dated April 1, 2012, between Capstone Companies, Inc. and Postal Capital Funding, L.L.C. Incorporated by reference to Exhibit 10.1 to Form 8-K filed by Capstone Companies, Inc. with the Commission on April 6, 2012.
|
10.6
|
Option
Agreement, dated June 27, 2016, by Capstone Companies, Inc. and Involve, LLC.
Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
|
10.7
|
Promissory Note, dated June 27, 2016, by Neil Singer in favor of Capstone Companies, Inc.
Incorporated by reference to Exhibit 10.2 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
|
10.8
|
Subordination Agreement, dated June 27, 2016, by Capstone Companies, Inc. and Koch Minerals, LLC.
Incorporated by reference to Exhibit 10.3 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
|
10.9
|
Securities Purchase Agreement, dated June 27, 2016, by Capstone Companies, Inc., Neil Singer and AC Kinetics, Inc.
Incorporated by reference to Exhibit 10.4 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
|
10.10
|
Termination Agreement, dated June 27, 2016, by Capstone Companies, Inc. and AC Kinetics, Inc.
Incorporated by reference to Exhibit 10.5 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
|
14
|
Code of Ethics Policy, dated December 31, 2006. Incorporated by reference to Exhibit 14 to the Form 10-KSB for the fiscal year ended December 31, 2006 and filed by CHDT Corp. with the Commission on April 17, 2007.
|
21.1
|
Subsidiaries of Capstone Companies, Inc. ^
|
31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Stewart Wallach, Chief Executive Officer^
|
31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Gerry McClinton, Chief Financial Officer and Chief Operating Officer^
|
32.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Stewart Wallach, Chief Executive Officer. ^
|
32.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Gerry McClinton, Chief Financial Officer & Chief Operating Officer^
|
Note: CHDT Corp. is a prior name of Capstone Companies, Inc.
(
b) Reports on Form 8-K filed.
The following Exchange Act reports were filed during the 2016 year: Form 8-K, filed December 22, 2016; Form 8-K/A, filed November 18, 2016; Form 8-K, filed November 1, 2016; Form 8-K, filed September 20, 2016; Form 8-K, filed August 29, 2016;
Form 8-K, filed August 16, 2016; Form 8-K, filed July 25, 2016; Form 8-K, filed July 12, 2106; Form 8-K, filed June 8, 2016; Form 8-K, filed May 19, 2016; Form 8-K, filed May 18, 2016; Form 8-K/A, filed March 31, 2016; and Form 8-K, filed March 11, 2016.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Capstone Companies, Inc. has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Broward County, Florida on this 27th day of March 2017.
CAPSTONE COMPANIES, INC.
Dated: March 27, 2017
By
: /s/ Stewart Wallach
Stewart Wallach
Chief Executive Officer and Director
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of Capstone Companies, Inc. and in the capacities and on the dates indicated.
/s/ Stewart Wallach
Stewart Wallach
Principal Executive Officer
Director and Chief Executive Officer
March 27, 2017
/s/ Gerry McClinton
Gerry McClinton
Chief Financial Officer
Chief Operating Officer and Director
March 27, 2017
/s/ Jeffrey Guzy
Jeffrey Guzy
Director
March 27, 2017
/s/ Jeffrey Postal
Jeffrey Postal
Director
March 27, 2017
/s/ Larry Sloven
Larry Sloven
Director
March 27, 2017
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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's 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.
Reverse Stock Split
On May 24, 2016, the Company's Board of Directors 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.
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 an original 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 doubtful accounts 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 December 31, 2016 and 2015, management has determined that the accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.
Accounts Receivable Pledged as Collateral
As of both December 31, 2016 and 2015, 100% of the accounts receivable serve as collateral for the Company's notes payable.
Inventory
The Company's inventory, which is recorded at the lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $366,330 and $205,708 as of December 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 prepaid advertising
. As of December 31, 2016 and 2015, the Company has $186,019 and $275,019, respectively, in prepaid advertising credits included in prepaid expenses on the consolidated balance sheets.
Property and Equipment
Property and equipment 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 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 2016 or 2015.
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 $63,678 and $71,590 for the years ended December 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 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 during the fourth quarter, 2016, and we determined that no adjustment for impairment was necessary as of December 31, 2016, as the fair value of goodwill exceeds its carrying amount.
Net Income Per Common Share
Basic earnings per common share was computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for each 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 December 31, 2016 and December 31, 2015, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 5,182,226 and 5,272,227, respectively.
Basic weighted average shares outstanding is reconciled to diluted weighted shares outstanding as follows:
|
December 31, 2016
|
|
December 31, 2015
|
Basic weighted average shares outstanding
|
48,132,664
|
|
46,580,622
|
Dilutive Warrants
|
209,366
|
|
135,545
|
Diluted weighted average shares outstanding
|
48,342,030
|
|
46,716,167
|
|
|
|
|
Principles of Consolidation
The consolidated financial statements for the years ended December 31, 2016 and 2015 include the accounts of the parent entity and its wholly-owned subsidiaries CLT, Capstone and CIHK. 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, accounts receivable and accounts payable at December 31, 2016 and 2015 approximates their fair values due to the short-term nature of these financial instruments. The carrying value of the Company's notes payable approximate their fair value based on market rates for similar loans. 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:
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
·
|
Level one
— Quoted market prices in active markets for identical assets or liabilities;
|
·
|
Level two
— Inputs other than level one inputs that are either directly or indirectly observable; and
|
·
|
Level three
— Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.
Cost Method of Accounting for Investment
Investments in equity securities that do not have readily determinable fair values and do not qualify for consolidation or the equity method are carried at cost. Dividends received from those companies are included in other income. Dividends received in excess of the Company's proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. Other than temporary impairments to fair value are charged against current period income.
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 which are based on historical authorized returns.
During the years ended December 31, 2016 and 2015, Capstone determined that $94,203 and $196,977, respectively of previously accrued promotional allowances were no longer required. The reduction of promotional allowances is included in net revenues for the years ended December 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 $149,938 and $101,101 for the years ended December 31, 2016 and 2015, respectively.
Shipping and Handling
The Company's shipping and handling costs are included in sales and marketing expenses and amounted to $140,118 and $60,768 for the years ended December 31, 2016 and 2015, respectively.
Accrued Liabilities
Accrued liabilities contained in the accompanying consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potential 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
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries file consolidated income tax returns.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC 718
Compensation- Stock Compensation
, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company's consolidated statements of income.
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 of and for years ended December 31, 2016 and 2015, there were no material amounts subject to forfeiture.
Stock-based compensation for the years ended December 31, 2016 and 2015 totaled $67,057 and $95,469, respectively.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets 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.
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. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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 2016-08,
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 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 does not expect that the adoption of ASU 2016-09 will have a material effect on its 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 its consolidated financial statements.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment,
which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. ASU 2017-04 will be effective for the Company's fiscal year beginning after December 15, 2019, and subsequent interim periods. The Company is currently evaluating the impact of the adoption of ASU 2017-04 will have on the Company's consolidated financial statements.
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.
Reclassifications
Certain reclassifications have been made to the 2015 consolidated financial statements to conform to the 2016 presentation. Total stockholders' equity and net income are unchanged due to these reclassifications.
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.
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 64% and 35% of net revenue during the year ended December 31, 2016, and 89% and 7% of net revenue during the year ended December 31, 2015. The loss of these customers would adversely impact the business of the Company.
Approximately 8% of the Company's net revenue for both of the years ended December 31, 2016 and 2015, was from international sales.
|
Gross Revenue %
|
|
Gross Accounts Receivable
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Customer A
|
|
|
64
|
%
|
|
|
89
|
%
|
|
$
|
3,760,755
|
|
|
$
|
4,610,852
|
|
Customer B
|
|
|
35
|
%
|
|
|
7
|
%
|
|
|
1,823,785
|
|
|
|
1,063,755
|
|
|
|
|
99
|
%
|
|
|
96
|
%
|
|
$
|
5,584,540
|
|
|
$
|
5,674,607
|
|
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
Major Vendors
The Company had two vendors from which it purchased 88% and 7% of merchandise sold during the year ended December 31, 2016, and 73% and 18 % of merchandise sold during the year ended December 31, 2015. The loss of these suppliers could adversely impact the business of the Company.
As of December 31, 2016 and 2015, approximately 88% and 93%, respectively, of accounts payable were due to two vendors.
|
|
Purchases %
|
|
|
Accounts Payable
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
|
88
|
%
|
|
|
73
|
%
|
|
$
|
1,507,671
|
|
|
$
|
1,486,648
|
|
Vendor B
|
|
|
7
|
%
|
|
|
18
|
%
|
|
|
545,066
|
|
|
|
350,770
|
|
|
|
|
95
|
%
|
|
|
91
|
%
|
|
$
|
2,052,737
|
|
|
$
|
1,837,418
|
|
NOTE 3 - INVESTMENT 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 carried a liquidation preference in the amount of $500,000, were convertible at the Company's demand into 3% of the outstanding shares of AC Kinetics common stock and had 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 would be the Company's advanced product developer. AC Kinetics would 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 would terminate upon receipt by the Company of royalties of $500,000.
The aggregate carrying amount of cost method investments at December 31, 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 also terminated. For consideration, the Company received a note in the face amount of $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 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. As the note is subject to a subordination agreement, and the Securities Purchase Agreement between the national company and AC Kinetics and has not been concluded, the Company has determined that the note falls under the Level three category of the fair value hierarchy and that the fair value of the note was determined to be $500,000 at the date of the transaction. The fair value of the note was determined based on an analysis of AC Kinetics ability to repay the note and the value of the collateral issued in connection with the sale of AC Kinetics Series A Preferred Stock. The significant unobservable inputs used in the fair value measurement of the Company's note receivable were the probability of default and the loss severity in the event of the default.
NOTE 3 - INVESTMENT AND NOTE RECEIVABLE (continued)
The table below sets forth a summary of changes in the fair value of the Level three note for the year ended December31, 2016:
Balance, June 27, 2016
|
|
$
|
500,000
|
|
Appreciation in fair value
|
|
$
|
26,887
|
|
Balance, December 31, 2016
|
|
$
|
526,887
|
|
NOTE 4 – 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 December 31, 2016, and 2015, the interest rate on the loan was 5.25
%
. The amounts borrowed under this agreement are due on demand and collateralized by substantially all the assets of Capstone.
As of December 31, 2016, and 2015, the balance due to Sterling National Bank was $0 and $2,275,534, respectively.
As of December 31, 2016, the maximum amount that can be borrowed on this credit line is $7,000,000.
NOTE 5 – NOTES AND LOANS PAYABLE TO RELATED PARTIES
Capstone Companies, Inc. - Notes Payable to Officers and Directors
On May 30, 2007, the Company executed a $575,000 promissory note payable to a Director of the Company. This note was amended on July 1, 2009 and again on January 2, 2010. As amended, the note carries an interest rate of 8% per annum. All principal 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, the Chief Executive Officer and Director of the Company and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman (former Chairman), 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 Mr. Ullman, equally split between Stewart Wallach, Chief Executive Director and Director, and JWTR Holdings LLC. The note balance of $466,886 was reduced by $47,940 for offsets due by Mr. 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 was due on or before April 3, 2017. As of December 31, 2015, the total combined balance due on these two notes including accrued interest was $567,060. On September 19, 2016, this note was paid in full to both parties. Each party was paid $295,558 which included principal of $209,473 and interest of $86,085.
On March 11, 2010, the Company received a loan from a Director in the amount of $100,000. As amended, the note was due on or before April 3, 2017 and carried an interest rate of 8% per annum. At December 31, 2015, the total balance due on this note including accrued interest was $146,466. On September 22, 2016, this note was paid in full including accrued interest of $52,296.
On May 11, 2010, the Company received a loan from Stewart Wallach in the amount of $75,000. As amended, the note was due on or before April 1, 2016 and carried an interest rate of 8% per annum. At December 31, 2015, the total balance due on this note including accrued interest was $108,847. On March 2, 2016, this note was paid in full including accrued interest of $34,866.
On January 15, 2013, the Company received a loan in the amount of $250,000 from Stewart Wallach. The loan carried an interest rate of 8% per annum. This loan was amended and the due date was extended until April 3, 2017. At December 31, 2015, the total balance due on this note including accrued interest was $309,178. On April 1, 2016, Stewart Wallach transferred ownership of this note and all accrued interest to Director, Jeffrey Postal. The amount transferred was $250,000 and accrued interest of $64,164. This loan was cancelled and a new loan entered into with Jeffrey Postal on April 1, 2016.
NOTE 5 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
On January 15, 2013, the Company received a loan in the amount of $250,000 from a Director of Capstone. The loan carries an interest rate of 8% per annum. This loan was amended and the due date has been extended until April 3, 2017. At December 31, 2016 and 2015, the total amount payable on this note was $329,233 and $309,178, respectively, including accrued interest of $79,233 and $59,178, respectively. 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 received $360,000 against a note from Group Nexus. The note was due on or before September 30, 2016, and carried an interest rate of 8.0% per year. The note with accumulated interest of $5,287 was paid off in full on May 24, 2016.
On April 19, 2016, Capstone received $500,000 against a note from George Wolf, a consultant. The note was due on or before December 31, 2016, and carried an interest rate of 8% per year. On June 1, 2016, the note was paid off in full with accumulated interest of $4,712.
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.
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 April 3, 2017. As of December 31, 2016, and 2015, the loan balance under this agreement was $663,255 and $623,306, respectively, including accrued interest of $165,255 and $125,306, respectively.
Notes and Loans Payable to Related Parties – Interest Expense
During the years ended December 31, 2016 and 2015, interest expense on the notes payable to related parties amounted to $120,963 and $236,277, respectively.
NOTE 6 – 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 lease agreement dated January 17, 2014, and effective February 1, 2014, had 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 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.
CIHK 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 was extended for a further three (3) months until May 16, 2016. The 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. The Company entered into a six (6) month rental agreement from December 1, 2016 until May 31, 2017 for showroom space at 3F, Wing Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. The monthly rent is $1,290 with total rent for the period costing $7,742.
Rent expense amounted to $144,181 and $140,647 for the years ended December 31, 2016 and 2015, respectively.
NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)
The future lease obligations under these agreements are as follows:
Year Ended December, 31,
|
|
|
US
|
|
|
HK
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
$
|
92,256
|
|
|
$
|
26,774
|
|
|
$
|
119,030
|
|
|
2018
2019
2020
|
|
|
|
93,885
95,570
7,964
|
|
|
|
-
-
-
|
|
|
|
93,885
95,570
7,964
|
|
Total future lease obligation
|
|
|
$
|
289,675
|
|
|
$
|
26,774
|
|
|
$
|
316,449
|
|
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.
On January 1, 2017, the agreement was amended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 2017 through December 31, 2017. A bonus compensation of $10,000 will also be paid in the month of January 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 as amended, 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 was accrued and is included in the December 31, 2015 consolidated balance sheet as part of accounts payable and accrued expenses for deferred wages from 2011. This amount was paid on December 9, 2016.
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 as amended, 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 was accrued and is included in the December 31, 2015 consolidated balance sheet as part of accounts payable and accrued expenses for deferred wages from 2011. This amount was paid on December 9, 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, 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.
There is a common provision in both Mr. Wallach and Mr. McClinton's employment agreements:
If the officer's employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer's estate or the officer, as the case may be an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to (a) the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of "merit" based bonuses earned by the Executive during the prior calendar year of his termination. Any payments owed by the Company shall be paid from a normal payroll account on a bi-
NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)
weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be payout bi-weekly over the course of the year but at no time will be no more than twenty (26) installments. The Company will also continue to pay the Executive's health and dental insurance benefits for 12 months starting at the Executives date of termination. If the Executive had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against the Executive's severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment.
NOTE 7 - STOCK TRANSACTIONS
Series C Preferred Stock
On July 9, 2009, the Company authorized and issued 67 shares of Series C Preferred Stock in exchange for $700,000. The 67 shares of Series C Stock were convertible into 4,531,962 common shares. The par value of the Series C Preferred shares is $1.00.
On May 5, 2015, the 67 Series C Preferred shares were converted into 4,531,962 common shares.
Warrants
During September and October of 2007, the Company issued 2,121,569 shares of common stock for cash at $0.255 per share, 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 remain outstanding at December 31, 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 have an exercise price of $0.435 and 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 have an exercise price of $0.435 and vested on August 5, 2016.
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 year ended December 31, 2015:
Risk free interest 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
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 an exercise price of $0.435 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 year ended December 31, 2016:
NOTE 7 - STOCK TRANSACTIONS (continued)
Risk free interest rate – 1.13 – 1.59%
Expected term – 5 to 10 years
Expected volatility of stock – 500%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 150
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 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 years ended December 31, 2016 and 2015, the Company recognized stock based compensation expense of $67,057 and $95,469, respectively, related to these stock options. Such amounts are included in compensation expense in the accompanying consolidated statements of income. A further compensation expense expected to be $48,825 will be recognized for these options in 2017.
The following table sets forth the Company's stock options outstanding as of December 31, 2016, and December 31, 2015 and activity for the years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Fair Value
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2015
|
|
|
5,168,894
|
|
|
$
|
0.435
|
|
|
$
|
0.294
|
|
|
|
2.36
|
|
|
$
|
-
|
|
Granted
|
|
|
420,000
|
|
|
|
0.435
|
|
|
|
0.182
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(316,667
|
)
|
|
|
0.435
|
|
|
|
0.099
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
5,272,227
|
|
|
$
|
0.435
|
|
|
$
|
0.303
|
|
|
|
1.73
|
|
|
$
|
-
|
|
Granted
|
|
|
210,000
|
|
|
|
0.435
|
|
|
|
0.390
|
|
|
|
4.82
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(300,001
|
)
|
|
|
0.435
|
|
|
|
0.105
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
|
5,182,226
|
|
|
$
|
0.435
|
|
|
$
|
0.318
|
|
|
|
.97
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/exercisable at December, 31, 2015
|
|
|
5,062,227
|
|
|
$
|
0.435
|
|
|
$
|
0.315
|
|
|
|
1.60
|
|
|
$
|
-
|
|
Vested/exercisable at December, 31, 2016
|
|
|
4,972,226
|
|
|
$
|
0.435
|
|
|
$
|
0.315
|
|
|
|
.80
|
|
|
$
|
-
|
|
NOTE 7 - STOCK TRANSACTIONS (continued)
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
|
|
$
|
.435
|
|
|
|
3,665,556
|
|
|
|
0.33
|
|
|
$
|
.435
|
|
|
|
3,665,556
|
|
$
|
.435
|
|
|
|
166,668
|
|
|
|
1.33
|
|
|
$
|
.435
|
|
|
|
166,668
|
|
$
|
.435
|
|
|
|
46,668
|
|
|
|
2.33
|
|
|
$
|
.435
|
|
|
|
46,668
|
|
$
|
.435
|
|
|
|
66,667
|
|
|
|
0.83
|
|
|
$
|
.435
|
|
|
|
66,667
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
1.08
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
56,667
|
|
|
|
2.42
|
|
|
$
|
.435
|
|
|
|
56,667
|
|
$
|
.435
|
|
|
|
20,000
|
|
|
|
3.42
|
|
|
$
|
.435
|
|
|
|
20,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
4.50
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
300,000
|
|
|
|
0.58
|
|
|
$
|
.435
|
|
|
|
300,000
|
|
$
|
.435
|
|
|
|
200,000
|
|
|
|
2.00
|
|
|
$
|
.435
|
|
|
|
200,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
7.00
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
200,000
|
|
|
|
3.00
|
|
|
$
|
.435
|
|
|
|
200,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
8.00
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
200,000
|
|
|
|
3.58
|
|
|
$
|
.435
|
|
|
|
200,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
8.58
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
200,000
|
|
|
|
4.58
|
|
|
$
|
.435
|
|
|
|
-
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
9.58
|
|
|
$
|
.435
|
|
|
|
-
|
|
Adoption of Stock Repurchase Plan
On August 23, 2016, the Company's Board of Directors authorized the Company to implement a stock repurchase plan for up to $750,000 shares of the Company's outstanding common stock. The stock purchases can be made in the open market, structured repurchase programs, or in privately negotiated transactions. Any repurchase will have the status of treasury shares. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased will be at the discretion of management and will depend on a number of factors including the price of the Company's common stock, market conditions, corporate developments and the Company's financial condition. The repurchase plan maybe discontinued at any time at the Company's discretion and the continuance of the program will be reviewed by the Board of Directors prior to the end of December 31, 2016.
On December 21, 2016, the Company's Board of Directors approved an extension of the Company's stock repurchase plan through December 31, 2017, subject to an earlier termination at the discretion of the Company's Board of Directors.
NOTE 8 - INCOME TAXES
As of December 31, 2016, the Company had net operating loss carry forwards for income tax reporting purposes of approximately $357,000 that may be offset against future taxable income through 2034. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.
As of December 31, 2015, the Company had significant net operating loss carry forwards for income tax reporting purposes of approximately $3,187,000. No tax benefit was reported in the financial statements, because the Company believed there was a 50% or greater chance the carry forwards would expire unused. The Company therefore determined that a full valuation allowance against its net deferred tax assets was necessary as of December 31, 2015.
For the years ended December 31, 2016 and 2015, the Company recorded a change in the valuation allowance of $756,000 and $263,000, respectively, on the basis of management's reassessment of the amount of its deferred tax assets that are more likely than not to be realized. As of each reporting date, management considers new evidence, both positive and negative, that could affect its determination of the future realization of deferred tax assets. As of December 31, 2016, in part because in the current year the Company achieved two years of pretax income, management determined that there is sufficient positive evidence to conclude that it is more likely than
NOTE 8 - INCOME TAXES (continued)
not that the deferred taxes are realizable. Management therefore reduced the valuation allowance accordingly and the impact of the change is reflected in current income.
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 judgement to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for the years 2013 and prior.
If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be recorded as a component of income tax expense.
The provision for income taxes for the year ended December 31, 2016 and 2015 was calculated based on the estimated annual effective rate for the full 2016 and 2015 calendar years, adjusted for an income tax benefit from the expected utilization of net operating loss carryforwards.
The income tax provision consists of:
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
51,000
|
|
|
|
7,500
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
216,000
|
|
|
|
-
|
|
Income Tax Provision
|
|
$
|
267,000
|
|
|
$
|
7,500
|
|
The provision for income taxes differ from the amount computed using the federal US statutory income tax rate as follows:
|
|
2016
|
|
|
2015
|
|
Provision at U.S. statutory rate
|
|
$
|
1,050,000
|
|
|
$
|
240,000
|
|
Alternative minimum tax
|
|
|
51,000
|
|
|
|
7,500
|
|
Depreciation and amortization
|
|
|
(37,000
|
)
|
|
|
(29,000
|
)
|
Accrued liabilities and sales allowances
|
|
|
38,000
|
|
|
|
(31,000
|
)
|
Non-deductible stock based compensation
|
|
|
23,000
|
|
|
|
32,000
|
|
Other differences
|
|
|
(102,000
|
)
|
|
|
51,000
|
|
Decrease in valuation allowance
|
|
|
(756,000
|
)
|
|
|
(263,000
|
)
|
Income tax provision
|
|
$
|
267,000
|
|
|
$
|
7,500
|
|
The tax effects of temporary differences and carry forwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
121,000
|
|
|
$
|
1,084,000
|
|
Liabilities and reserves
|
|
|
88,000
|
|
|
|
50,000
|
|
Property and equipment and inventory
|
|
|
14,000
|
|
|
|
17,000
|
|
Valuation allowance
|
|
|
-
|
|
|
|
(756,000
|
)
|
|
|
|
223,000
|
|
|
|
395,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(439,000
|
)
|
|
|
(395,000
|
)
|
|
|
|
(439,000
|
)
|
|
|
(395,000
|
)
|
Net deferred tax assets and liabilities
|
|
$
|
(216,000
|
)
|
|
$
|
-
|
|
NOTE 9 – SUBSEQUENT EVENTS
On January 9, 2017, the Company finalized a Licensing Agreement with a globally recognized battery company that will allow the Company to market under the licensed brand, a specific product to a specific retailer in the warehouse club distribution channel.
On February 13, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 1,000,000 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share. A further 666,667 of Company common stock remains available under the agreement for a 12 month-period starting February 7, 2018.
On March 1, 2017, the Board of Directors approved an Investment Banking Agreement, dated March 1, 2017 with Wilmington Capital Securities, LLC, ("Wilmington") and a registered broker-dealer under the Securities Exchange Act of 1934. The Company entered into the Agreement in order to obtain outside assistance in finding and considering possible opportunities to enhance Company shareholder value through significant corporate transactions or through funding expansion and/or diversification of the Company's primary business lines. The scope of such possible strategic transactions include mergers and acquisitions, asset acquisition or sales and funding through the issuance of Company securities. The agreement has an initial six-month term and renews for an additional, consecutive six-month term if not terminated prior to the term renewal. Wilmington will receive a cash retainer fee of $80,000, payable in monthly installments, in the first six-month term, and a reduced retainer fee of $45,000, payable in monthly installments, in the first renewal of the initial six-month term. Wilmington would also receive a transaction fee for any consummated strategic transaction introduced by Wilmington under the Agreement. The transaction fees are based on the Lehman Scale starting at 8% fee up to $5,000,000 transaction reducing to 4% for a $20,000,000 and above transaction.