NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for the years ended December 31, 2018 and 2017 include the accounts of the
parent entity and its wholly-owned subsidiaries. All material intra-entity transactions and balances have been eliminated in consolidation.
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
Capstone Companies, Inc. is headquartered in Deerfield Beach, Florida.
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.
On April 13, 2012, the Company established a wholly owned subsidiary in Hong Kong, named Capstone International Hong
Kong Ltd (“CIHK”) which provides support services such as engineering, new product development, product sourcing, factory certification and compliance, product price negotiating, product testing and quality control and ocean freight logistics for
the Company’s other subsidiaries. CIHK is also engaged in selling the Company’s products internationally.
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing,
marketing and selling home LED products through national and regional retailers in North America and in certain overseas markets. The Company’s products are targeted for applications such as home indoor and outdoor lighting and have different
functionalities to meet consumer’s needs. These products are offered either under the Capstone brand or licensed brands.
The Company’s products are typically manufactured in China by contract manufacturing companies.
The Company’s operations consist of one reportable segment for financial reporting purposes: Lighting Products.
Accounts Receivable
For product revenue, the Company invoices its customers at the time of shipment for the sales value of the product
shipped. Accounts receivable are recognized at the amount expected to be collected and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers. As of both
Decembers 31, 2018 and 2017, accounts receivable serves as collateral when the Company borrows against its credit facilities.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the
Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance against amounts due, and thereby reduce the net
recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due and consideration
of other factors such as industry conditions, the current business environment and the Company’s historical payment experience. An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad
debts charged to earnings. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.
As of both Decembers 31, 2018 and 2017, management has determined that accounts receivable are fully collectible. As
such, management has not recorded an allowance for doubtful accounts.
The following table summarizes the components of Accounts Receivable, net:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Trade Accounts Receivables at year end
|
|
$
|
429,405
|
|
|
$
|
4,561,782
|
|
Reserve for estimated marketing allowances, cash discounts and other incentives
|
|
|
(364,894
|
)
|
|
|
(194,061
|
)
|
Total Accounts Receivable, net
|
|
$
|
64,511
|
|
|
$
|
4,367,721
|
|
The following table summarizes the changes in the Company’s reserve for marketing allowances, cash discounts and other
incentives which is included in net accounts receivable:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of the year
|
|
$
|
(194,061
|
)
|
|
$
|
(1,200,792
|
)
|
Accrued allowances
|
|
|
(191,468
|
)
|
|
|
( 921,833
|
)
|
Reversal of prior year accrued allowances
|
|
|
1,749
|
|
|
|
58,867
|
|
Expenditures
|
|
|
18,886
|
|
|
|
1,869,697
|
|
Balance at year-end
|
|
$
|
(364,894
|
)
|
|
$
|
(194,061
|
)
|
Marketing allowances include the cost of underwriting an in store instant rebate coupon or a markdown allowance on a
specific product. Cash discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment.
Inventory
The Company's inventory, which consists of finished LED lighting products for resale by Capstone, are recorded at the
lower of cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis
when the expected realizable value of a specific inventory item falls below its original cost. Management regularly reviews the Company’s investment in inventories for such declines in value. The write-downs are recognized as a component of cost
of sales. During the fiscal year 2018 and 2017, inventory written down was $0 and $84,576, respectively. As of December 31, 2018, and 2017, respectively, the inventory was valued at $27,497 and $140,634.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Prepaid Expenses
The Company’s prepaid expenses consist primarily of deposits on inventory purchases for future orders as well as
prepaid insurance, trade show and subscription expense. As of December 31, 2016, the Company had $186,019, in prepaid advertising credits included in prepaid expenses on the consolidated balance sheet which was written off during 2017.
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 2018 or 2017.
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 and amortization expense was $45,510 and $80,940 for the years ended December 31, 2018 and 2017,
respectively.
Leases
Lease incentives per ASC 840 are amortized utilizing the straight-line method over the life of the lease.
Goodwill
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 technology inspired 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.
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.
Goodwill is tested for impairment on December 31 of each year or more frequently if events or changes in circumstances
indicate that the asset might be impaired. If the carrying amount exceeds its fair value, an impairment loss is recognized. Goodwill is not amortized.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill is subject to ongoing periodic impairments tests based on fair value of the reporting unit compared to its
carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. At December 31, 2018 and 2017, the required annual impairment test of goodwill was performed, and no impairment existed as of
the valuation dates.
Earnings Per Common Share
Basic earnings per common share were computed by dividing net income(loss) by the weighted average number of shares of
common stock outstanding as of December 31, 2018 and 2017. 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 earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants 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, 2018, the total number of potentially dilutive common stock equivalents excluded from the diluted
earnings per share calculation was 970,001.
Basic weighted average shares outstanding is reconciled to diluted weighted shares outstanding as
follows:
|
Year Ended
December 31, 2018
|
Year Ended
December 31, 2017
|
Basic weighted average shares outstanding
|
47,046,364
|
47,007,296
|
Dilutive options
|
-
|
181,154
|
Diluted weighted average shares outstanding
|
47,046,364
|
47,188,450
|
Revenue Recognition
The Company generates revenue from developing, marketing and selling consumer lighting products through national and
regional retailers. The Company’s products are targeted for applications such as home indoor and outdoor lighting and have different functionalities. Capstone currently operates in the consumer lighting products category in the Unites States and
in certain overseas markets. These products may be offered either under the Capstone brand or licensed brands.
A sales contract occurs when the customer-retailer submits a purchase order to buy a specific product, a specific
quantity, at an agreed-fixed price, within a ship window, from a specific location and on agreed payment terms.
The selling price in all of our customers’ orders has been previously negotiated and agreed to including any
applicable discount prior to receiving the customer’s purchase order. The stated unit price in the customer’s order has already been determined and is fixed at the time of invoicing.
The Company recognizes product revenue when the Company’s performance obligations as per the terms in the customers
purchase order have been fully satisfied, specifically, when the specified product and quantity ordered has been manufactured and shipped pursuant to the customers requested ship window, when the sales price as detailed in the purchase order is
fixed, when the product title and risk of loss for that order has passed to the customer, and collection of the invoice is reasonably assured. This means that the product ordered and to be shipped has gone through quality assurance inspection,
customs and commercial documentation preparation, the goods have been delivered, title transferred to the customer and confirmed by a signed cargo receipt or bill of lading. Only at the time of shipment when all performance obligations have been
satisfied will the judgement be made to invoice the customer and complete the sales contract.
The Company may enter into a licensing agreement with globally recognized companies, that allows the Company to market
products under a licensed brand to retailers for a designated period of time, and whereby the Company will pay a royalty fee, typically a percentage of licensed product revenue to the licensor in order to market the licensed product.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company expenses license royalty fees and sales commissions when incurred and these expenses are recognized during
the period the related sale is recorded. These costs are recorded within sales and marketing expenses.
The following table disaggregates net revenue by major source:
|
For the Year Ended December 31, 2018
|
|
For the Year Ended December 31, 2017
|
|
|
Capstone Brand
|
|
License Brands
|
|
Total Consolidated
|
|
Capstone Brand
|
|
License Brands
|
|
Total Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Products- U.S.
|
|
$
|
4,732,927
|
|
|
$
|
6,827,308
|
|
|
$
|
11,560,235
|
|
|
$
|
3,815,342
|
|
|
$
|
31,125,297
|
|
|
$
|
34,940,639
|
|
Lighting Products-International
|
|
|
639,130
|
|
|
|
630,959
|
|
|
|
1,270,089
|
|
|
|
1,361,256
|
|
|
|
450,918
|
|
|
|
1,812,174
|
|
Total Revenue
|
|
$
|
5,372,057
|
|
|
$
|
7,458,267
|
|
|
$
|
12,830,324
|
|
|
$
|
5,176,598
|
|
|
$
|
31,576,215
|
|
|
$
|
36,752,813
|
|
We provide our customers with limited rights of return for non-conforming product warranty claims. As a policy, the
Company does not accept product returns from customers, however occasionally as part of a customer’s in store test for new product, we may receive back residual inventory.
Customer orders received are not long-term orders and are typically shipped within six months of the order receipt,
but certainly within a one-year period.
Our payment terms may vary by the type of customer, the customer’s credit standing, the location where the product
will be picked up from and for international customers, which country their corporate office is located. The term between invoicing date and when payment is due may vary between 30 days and 90 days depending on the customer type. In order to
ensure there are no payment issues, overseas customers or new customers may be required to provide a deposit or full payment before the order is delivered to the customer.
The Company selectively supports retailer’s initiatives to maximize sales of the Company’s products on the retail
floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to the customer. The Company recognizes these incentives at the time they are offered to the customers and records a credit to
their account with an offsetting charge as either a reduction to revenue, increase to cost of sales, or marketing expenses depending on the type of sales incentives.
Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period the
related revenue is recorded.
During the year ended December 31, 2018 and 2017, Capstone determined that $1,749 and $58,867, respectively of
previously accrued allowances were no longer required. The reduction of accrued allowances is included in net revenues for the years ended December 31, 2018 and 2017.
Warranties
The Company provides the end user with limited rights of return as a consumer assurance warranty on all products sold,
stipulating that the product will function properly for the warranty period. The warranty period for all products is one year from date of consumer purchase.
Certain retail customers may receive an off-invoice based discount such as a defective /warranty allowance, that will
automatically reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the cost of any returned units from consumers and therefore negate the need to ship defective units back
to the Company. Such allowances are charged to cost of sales at the time the order is invoiced.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
For those customers that do not receive a discount off-invoice, the Company recognizes a charge to cost of sales for
anticipated non-conforming returns based upon an analysis of historical product warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency
of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results.
Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.
The following table summarizes the changes in the Company’s product warranty liabilities which are included in
accounts payable and accrued liabilities in the accompanying December 31, 2018 and 2017 balance sheets:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at the beginning of the year
|
|
$
|
328,279
|
|
|
$
|
294,122
|
|
Amount accrued
|
|
|
59,981
|
|
|
|
940,291
|
|
Amount expensed
|
|
|
(175,765
|
)
|
|
|
(906,134
|
)
|
Balance at year-end
|
|
$
|
212,495
|
|
|
$
|
328,279
|
|
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 $113,474 and $181,436 for the years ended December 31, 2018 and 2017, respectively.
Research and Development
Our research and development team located in Hong Kong working with our designated factories, are responsible for the
design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All research and development costs are
charged to results of operations as incurred.
For the year ended December 31, 2018 and 2017, research and development expenses were
$518,969 and $376,981,
respectively.
Shipping and Handling
The Company’s shipping and handling costs are included in sales and marketing expenses and are recognized as an
expense during the period in which they are incurred and amounted to $59,896 and $78,531 for the years ended December 31, 2018 and 2017, respectively.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts Payable and Accrued Liabilities
The following table summarizes the components of accounts payable and accrued liabilities at December 31, 2018 and
2017, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts payable
|
|
$
|
221,568
|
|
|
$
|
2,132,894
|
|
|
|
|
|
|
|
|
|
|
Accrued warranty reserve
|
|
|
212,495
|
|
|
|
328,279
|
|
Accrued compensation, benefits, commissions and other expenses
|
|
|
27,383
|
|
|
|
272,343
|
|
Total accrued liabilities
|
|
|
239,878
|
|
|
|
600,622
|
|
Total
|
|
$
|
461,446
|
|
|
$
|
2,733,516
|
|
Income Taxes
The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other
jurisdictions.
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting
Standard Codification (“ASC”) 740
Income Taxes
. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected
future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries file consolidated income tax returns.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon settlement.
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 generally for a period of 3 years from the later of each return due date or date filed.
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.
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.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
The Company accounts for forfeitures as they occur.
Stock-based compensation for the years ended December 31, 2018 and 2017 totaled $86,666 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, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to
revenue recognition, product warranty obligations, valuation of inventories, impairments, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its
estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change, and actual results could
differ materially from those estimates.
Recent Accounting Standards
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 has evaluated the adoption of ASU 2016-02 which
will not have a material effect on the Company’s consolidated financial statements.
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.
Adoption of New Accounting Standards
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
which simplifies the subsequent measurement of inventory. The updated guidance requires that inventory measured using any method other than last-in, first-out (LIFO) or
the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) be measured at the lower of cost and net realizable value. This update became effective at the beginning of our 2017 fiscal year. The
adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company adopted ASU 2015-17,
Income Taxes (Topic 740): Balance sheet Classification of Deferred Taxes,
which changed the classification requirements for deferred tax assets and liabilities, effective January 1, 2017. ASU 2015-17 requires
long-term classification of all deferred tax assets and liabilities, rather than separately classifying deferred tax assets and liabilities based on their net current and non-current amounts, as was required under the previous guidance. The
Company adopted ASU 2015-17 on a retrospective basis, therefore prior periods were adjusted to conform to the current period presentation.
The Company adopted ASU 2016-09,
Compensation - Stock Compensation (Topic 718)
which simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows
and forfeitures, effective January 1, 2017. The new standard requires excess tax benefits or deficiencies for share-based payments to be recognized as income tax benefit or expense, rather than within additional paid-in capital, when the awards
vest or are settled. Furthermore, cashflows related to excess tax benefits are required to be classified as operating activities in the statement of cash flows rather than financing activities.
Under ASU 2016-09 the Company can elect a policy to account for forfeitures as they occur rather than on an estimated basis. The adoption of ASU 2016-09 did not have a material effect on the Company’s consolidated
financial statements, related disclosures and ongoing financial reporting.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, which provides guidance for revenue
recognition
.
The standard’s core principle is that a company recognizes revenue when it transfers promised goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies need to use more judgment and make more estimates than under previous guidance. In August 2015,
the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year. Accordingly, public business entities would apply the guidance in ASU 2014-09 to annual reporting periods (including interim periods within
those periods) beginning after December 15, 2017.
ASC 606 established a principles-based approach for accounting for revenue arising from contracts with customers and
supersedes existing revenue recognition guidance. ASC 606 provided that an entity should apply a five-step approach for recognizing revenue, including (1) identify the contract with a customer; (2) identify the performance obligations in the
contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide
various disclosures concerning the nature, amount and timing of revenue and cash flows arising from contracts with customers.
The Company
completed its study on the impact that implementing this standard would have on its consolidated financial
statements, related disclosures and our internal control over financial reporting as well as whether the effect would be material to our revenue. Changes were made to our internal control over financial reporting processes to ensure all
contracts are reviewed for each of the five revenue recognition steps. Additionally, the Company’s revenue disclosures changed in fiscal 2018. The new disclosures required more granularity into our sources of revenue, as well as the
assumptions about recognition timing, and include our selection of certain practical expedients and policy elections. We used the modified retrospective approach upon adoption of this guidance effective January 1, 2018. We reviewed our current
accounting policies and practices to identify potential differences resulting from the application of the new requirements to our sales contracts, including evaluation of performance obligations in the sales contract, the transaction price,
allocating the transaction price to each separate performance obligation and accounting treatment of costs to obtain and fulfill contracts. In addition, we updated certain disclosures, as applicable, included in our consolidated financial
statements to meet the requirements of the new guidance.
The adoption of ASC 606 did not have a material impact on our consolidated financial statements or operations.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 modified how entities measure equity investments and present changes in
the fair value of financial liabilities. Under the new guidance, entities 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 applies 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 was
effective for the Company’s fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-01 did not have a material effect on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU
2016-15”). ASU 2016-15 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 was effective for the Company’s fiscal
year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-15 did not have a material effect on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Cash Flows: Statement of Cash Flows (Topic 230) - Restricted Cash.
The update required that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. This standard was effective at the beginning of our fiscal year and subsequent interim periods beginning after December 31, 2017.
The adoption of ASU 2016-18 did not have a material effect on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting”
(“ASU 2017-09”), clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as
a modification. This new accounting standard required modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award.
The new guidance is effective for us on a prospective basis beginning on January 1, 2018. We typically do not change either the terms or conditions of share-based payment awards once they are granted, therefore; this new guidance did not have a
material impact on our consolidated financial statements.
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company.
Where it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls
in place to ascertain that the Company’s financials properly reflect the change.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to credit risk consist principally of cash and 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
The Company at times has cash with its financial institution in excess of Federal Deposit Insurance Corporation
("FIDC") insurance limits. The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
Accounts Receivable
The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the
United States and their international locations. The Company typically does not require collateral from customers. Credit risk is limited due to the financial strength of the customers comprising the Company’s customer base and their dispersion
across different geographical regions. The Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. These various anticipated allowances are accrued for but would be
deducted from open invoices by the customer.
Major Customers
The Company had two customers who comprised 60% and 36% of net revenue during the year ended December 31, 2018, and
57% and 42% of net revenue during the year ended December 31, 2017. The loss of these customers would adversely impact the business of the Company.
For the years ended December 31, 2018 and 2017, approximately 10% and 5% respectively, of the Company’s net revenue
resulted from international sales.
Major Customers
|
Net Revenue %
|
|
Gross Accounts Receivable
|
|
|
Year Ended
December 31,
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Customer A
|
|
|
60
|
%
|
|
|
57
|
%
|
|
$
|
-
|
|
|
$
|
2,259,769
|
|
Customer B
|
|
|
36
|
%
|
|
|
42
|
%
|
|
|
402,294
|
|
|
|
2,268,426
|
|
Total
|
|
|
96
|
%
|
|
|
99
|
%
|
|
$
|
402,294
|
|
|
$
|
4,528,195
|
|
Major Vendors
The Company had two vendors from which it purchased 60% and 16% of merchandise sold during the year ended December 31,
2018, and 87% and 11% of merchandise sold during the year ended December 31, 2017. The loss of this supplier could adversely impact the business of the Company.
As of December 31, 2018 and 2017, approximately 29% and 77%, respectively, of accounts payable were due to the two
vendors.
|
Purchases %
|
|
Accounts Payable
|
|
|
Year Ended
December 31,
|
|
Year Ended December 31
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Vendor A
|
|
|
60
|
%
|
|
|
87
|
%
|
|
$
|
63,594
|
|
|
$
|
922,310
|
|
Vendor B
|
|
|
16
|
%
|
|
|
11
|
%
|
|
|
-
|
|
|
|
768,164
|
|
Total
|
|
|
76
|
%
|
|
|
98
|
%
|
|
$
|
63,594
|
|
|
$
|
1,690,474
|
|
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.
On June 8, 2016, the Board of Directors approved a Resolution to accept an offer from AC Kinetics to sell the Company
100 shares of AC Kinetics Series A Preferred Stock. For consideration, the Company received a note in the face amount of $1,500,000 that would 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 was 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.
The options also had termination dates being the earlier of the 12-month anniversary of the first option exercise date
or 36 months from the agreement effective date. The agreement was signed June 27, 2016 and the options would have expired on June 27, 2019.
On June 27, 2016 in assessing the fair value of the note, management had to first consider the probability of the
Securities Purchase Agreement between AC Kinetics and a national company being finalized. The completion of the Securities Purchase Agreement involved the development, testing and marketing of technologically advanced motor-control software which
was still in its development stages. Payment of the note was also subject to a subordination agreement for loan advances made by the national company to AC Kinetics to fund the project which at the time of the transaction were several million
dollars.
In evaluating the note management determined that other than the intrinsic fair value of the option agreement, any
added value to the note was dependent on the completion of the Securities Purchase Agreement between AC Kinetics and a national company and if the Securities Purchase agreement did not close, then AC Kinetics would not have the financial ability
to pay the note, particularly as the note was subordinated to substantial loan advances made to AC Kinetics to fund the product development.
In evaluating the note management also determined that the best estimate of fair value should be based on the value of
the option to repurchase common stock from Involve L.L.C. which represented the spread between the market price and the exercised price of the 1,666,667 shares of common stock to be repurchased with an estimated value of $500,000.
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.
On May 1, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 666,667 shares of
Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.
On May 2, 2017, the Company's Board of Directors authorized at the Company's discretion to either retain repurchased
shares in the treasury or to retire the repurchased shares and these shares were retired on June 1, 2017.
As of September 30, 2017 management were advised by a principal of AC Kinetics that the national company had not
exercised its securities purchase rights per the agreement, that the national company had stopped advancing loans to fund the project, that the national company had not entered into a revised loan agreement and that the project leader for the
national company coordinating the project had been laid off and there was no guarantee that the securities purchase option would be completed.
NOTE 3 - INVESTMENT AND NOTE RECEIVABLE (continued)
With the exercise of all available options under the repurchase agreement and as the collateral used to substantiate
the value of the note receivable was no longer available and as the possibility of the securities purchase agreement coming to a completion was doubtful, management determined that the fair value of the note at December 31, 2018 and December 31,
2017 was $0.
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 is a base management fee equal to .30% 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 7.0%. As of December 31,
2018 and 2017, the interest rate on the loan was 7.25
%
and 6.50%, respectively. The amounts borrowed under this agreement are due on demand
and collateralized by substantially all the assets of Capstone.
For the years ended Decembers 31, 2018 and 2017, the processing fees associated with the agreement were $45,157 and
$129,531, respectively.
As of both Decembers 31, 2018 and December 31, 2017, there was no balance due to Sterling National Bank.
On July 20, 2018, to support the Company’s future needs, Sterling National Bank expanded the credit line up to
$10,000,000 of which $2,000,000 has been allocated as a Capstone expansion working capital line.
NOTE 5 – NOTES AND LOANS PAYABLE TO RELATED PARTIES
Capstone Companies, Inc. - Notes Payable to Officers and Directors
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 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. On December 18, 2017 this loan was paid in full including accrued interest of $98,520.
On January 15, 2013, the Company received a loan in the amount of $250,000 from a Director of Capstone. The loan
carried an interest rate of 8% per annum. On December 18, 2017 this loan was paid in full including accrued interest of $98,521.
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 had extended until January 2, 2018.
On February 2, 2017, the Company paid down $137,129 against this loan including $37,129 of accumulated interest.
On June 16, 2017, the Company paid down $167,092 against this loan including $44,092 of accumulated interest.
NOTE 5 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
During September 2017, Director, Jeffrey Postal entered into a Conversion and Option Agreement to satisfy the
remaining balance of the working capital loans totaling $275,000 with accrued interest of $104,318. The Agreement resulted in $217,500 of outstanding notes payable being satisfied as payment for exercised stock options and a further $23,400 of
notes payable being satisfied as payment for the purchase of 50,000 of the Company's common shares. On September 14, 2017, the remaining balance of that note payable, $138,418 was paid to this related party.
As of December 31, 2018, and December 31, 2017, the Company had $0 notes payable to related parties.
During the years ended December 31, 2018 and 2017, interest expense on the notes payable to related parties amounted
to $0 and $58,859, respectively.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating lease agreements for offices and showroom facilities in Fort Lauderdale, Florida and in Hong
Kong, expiring at varying dates. The Company’s principal executive offices was located at 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442, which is located in Broward County.
Effective February 1, 2017, the Company renewed the lease for 3 years ending January 31, 2020, with a base annual rent
of $92,256 and with a total rent expense of $281,711 through the term of the agreement. Under the lease agreement, Capstone was responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.
On May 15, 2018, the Company entered into a lease agreement with the previous landlord to provide for a premises
relocation, lease termination and new sublease agreement. Under the agreement the Company relocated its principal executive offices located at 350 Jim Moran Blvd, Suite 120, Deerfield Beach, Florida 33442 to 4,694 square feet of office space on
the second floor of 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441. The original lease terminated on the relocation date and the parties proceeded under the terms of the new sublease which expires on January 31, 2020. The base
annual rent in the new sublease remains at the same rate as the previous agreement until January 31, 2020. At the expiration of the new sublease, the Company has the option to accept the prime lease with another 3 years renewal and with an option
to renew for an additional 5-year period. If the Company decides to further extend the sublease after January 31, 2020, the Company will be subject to the terms and conditions of the prime lease. The base monthly rent will be $7,312 to January
31, 2019 and then a base rent of $7,514 until January 31, 2020 which includes an estimate for portion of the common area maintenance.
For consideration for the lease amendment, the Company received a rate abatement from the landlord, effective May 1,
2018 and for four months to September 1, 2018. The landlord delivered the relocation premises in a “turn key” condition with requested renovations made at no expense to the Company. As further consideration, the existing landlord agreed to pay
the Company $150,000 incentive to vacate the existing premises on completion of the relocation, which was fully paid as of December 31, 2018 and is being amortized over the life of the lease amendment resulting in the recognition of lease
incentive income of $870 per month.
Capstone International Hong Kong Ltd, (CIHK), entered into a lease agreement for office space at 303 Hennessy Road,
Wanchai, Hong Kong. The original agreement which was effective from February 17, 2014 has been extended various times. The lease was renewed for (12) months ending May 16, 2018 with a base annual rate of $54,193 paid in equal monthly
installments. On April 24, 2018, the Company further extended the lease for (3) months ending August 16, 2018 with a base rate increase of $225 per month. This agreement has been further extended until August 16, 2019 with a base monthly rate of
$5,006.
NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)
CIHK entered into a six (6) month rental agreement effective from December 1, 2016 for a showroom space at 3F, Wing
Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. This agreement has been extended various times. The current lease expires August 16, 2019 with a base monthly rent of $1,290.
The Company's rent expense amounted to $108,024 and $163,060 for the years ended December 31, 2018 and 2017,
respectively.
The future lease obligations under these agreements are as follows:
Year Ended December 31,
|
|
US
|
|
|
HK
|
|
|
Total
|
|
2019
|
|
$
|
89,966
|
|
|
$
|
56,535
|
|
|
$
|
146,501
|
|
2020
|
|
|
7,514
|
|
|
|
-
|
|
|
|
7,514
|
|
Total future lease obligation
|
|
$
|
97,480
|
|
|
$
|
56,535
|
|
|
$
|
154,015
|
|
Consulting Agreements
On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf was paid $10,500
per month through December 31, 2015 increasing to $12,500 per month from January 1, 2016 through December 31, 2017. A bonus compensation of $10,000 was paid in the month of January 2017 related to 2016 sales performance.
On January 1, 2017, the agreement was amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2017
through December 31, 2017. Bonus compensation of $15,000 was paid on December 22, 2017 related to 2017 sales performance.
On January 1, 2018, the agreement was further amended, whereby Mr. Wolf will be paid $13,750 per month from January 1,
2018 through December 31, 2018.
On January 1, 2019, the agreement was further amended, whereby Mr. Wolf will be paid $13,750 per month from January 1,
2019 through December 31, 2020.
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, 2016, the Company entered into an 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 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, 2018, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach will
be paid $301,521 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. 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.
NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)
On February 5, 2016, the Company entered into an 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 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.
On February 5, 2018, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton will
be paid $191,442 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. 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-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.
Licensing Agreements
On February 4, 2015, the Company finalized a Licensing Agreement with a globally recognized floorcare company that
allows the Company to market home lighting products under the licensed brand, to discount retailers, warehouse clubs, home centers, on-line retailers and other retail distribution channels in the U.S., Canada and Mexico. The initial term of the
agreement is for 3 years. The agreement does not have a guaranteed royalty stipulation.
On December 29, 2016, the Company finalized the first amendment to the February 4, 2015 Licensing Agreement with the
floorcare company in which the initial term was extended through February 3, 2020 and additional renewal terms and periods were also finalized. During this initial extended period through February 3, 2020, if the Company achieves net sales of
$5,000,000, then the agreement would automatically be extended 2 years until February 3, 2022 and if during this second extended period the Company achieves net sales of $5,000,000, then the agreement would automatically be further extended 2
years until February 3, 2024. The license also added an additional product category.
On April 12, 2018, the Company finalized the second amendment to the February 4, 2015 Licensing Agreement in which the
license was further expanded to add an additional product category.
Royalty expense related to this agreement for the years ended December 31, 2018 and 2017, was $312,225 and $777,626,
respectively.
NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)
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. This agreement will be effective until December 31, 2018. The agreement does not have a guaranteed royalty
stipulation, but the Company must meet minimum net sales requirements of $5,000,000 for contract year 1 and $7,000,000 for contract year 2.
Royalty expense related to this agreement for the years ended December 31, 2018 and 2017, was $35,559 and $504,584,
respectively.
Investment Banking Agreement
On March 1, 2017, the Company executed an Investment Banking Agreement with Wilmington Capital Securities, LLC,
("Wilmington"), 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 included mergers and acquisitions, asset acquisition
or sales and funding through the issuance of Company securities. The agreement had an initial six-month term and renewed for an additional, consecutive six-month term. Wilmington received a cash retainer fee of $80,000, paid in monthly
installments, in the first six-month term, and a reduced retainer fee of $45,000, paid in monthly installments, in the first renewal of the initial six-month term. Wilmington will 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 reducing to 4% on transactions from $5,000,000 to in excess of $20,000,000.
The retainer fee paid for this agreement for the year ended December 31, 2017 was $120,000. A further retainer fee of
$5,000 that remained on the agreement was paid in January 2018.
Public Relations Agreement
On September 27, 2018, the Company executed a public relations services agreement with Max Borges Agency, (“MBA”), a
full – service public relations and communications agency with offices in Miami and San Francisco. The Company entered into the Agreement to obtain assistance from a nationally recognized firm, specializing in the development of product branding,
marketing and launching of technology products. The agreement was effective on October 1, 2018 with an initial 180 days term, which either party can cancel with 60 days advanced notice in writing on or after the 120
th
day of the
effective date. MBA will receive a monthly fee of $11,250 and $476 subscription fee due on the first of each month.
NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)
Legal Matters
Cyberquest, Inc
.
Capstone received a letter in July 2017 from a purported holder of 70,000 shares of a series of preferred stock issued by CBQ, Inc., a predecessor of the Company, in the 1998 acquisition of Cyberquest, Inc., a company that ceased operations by
2002. The letter was a request to inspect Capstone corporate records. Capstone investigated these claims and, due to perceived deficiencies in the stock certificate, our inability to substantiate the purported ownership of said preferred stock
to date and absence of validation that shares of the series of preferred stock are still outstanding, Capstone refused the purported holder’s request to inspect corporate records per a September 1, 2017 letter to the purported holder. Capstone
did not receive any responsive communications from the purported holder after September 1, 2017, until the purported holder filed a declaratory judgement action in Dallas County, Texas state court on March 21, 2018 seeking validation of purported
holder’s ownership of the preferred stock and to compel inspection of Capstone corporate records. Capstone received notice of the state declaratory action on April 3, 2018. The Company retained local Dallas, Texas legal counsel and answered the
suit, filed a counter claim to recover attorney’s fees, and removed litigation from the State Court to the U.S. District Court in Texas.
The Company and the claimant in the declaratory action pursued court-sponsored mediation which was held on September
12, 2018 in Dallas, Texas and resulted in a settlement agreement dated September 19, 2018. Under this agreement all parties acknowledged and agreed that this matter was amicably resolved without any admission of liability.
On September 27, 2018 both parties to this action filed a Joint Stipulation and Order for Dismissal with Prejudice
with the U.S. district Court in Dallas, Texas, thereby ending this dispute.
NOTE 7 - STOCK TRANSACTIONS
Warrants
During September and October 2007, the Company issued 2,121,569 shares of common stock for cash at $0.255 per share,
or $541,000 total as part of a Private Placement under Rule 506 of Regulation D. Along with the stock, each investor also received a warrant to purchase 30% of the shares purchased in the Private Placement. In September 2017, an investor
exercised a warrant option for 29,412 shares at the exercise price of $.255 per share. During October 2017 the remaining 607,062 outstanding warrants expired.
Options
In 2005, the Company authorized the 2005 Equity Plan that made available shares of common stock for issuance through
awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.
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 vested on August 5, 2017.
On May 2, 2017, the Company’s Board of Directors amended the Company’s 2005 Equity Incentive Plan to extend the Plan’s
expiration
date from December 31, 2016 to December 31, 2021.
On August 6, 2017, 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 $.435 with an effective date of August 6, 2017 and vested on August 5, 2018.
NOTE 7 - STOCK TRANSACTIONS (continued)
During the quarter ended September 30, 2017, Jeffrey Postal entered into a Conversion and Option Agreement with the
Company and exercised his option to purchase 500,000 of his vested stock options at the grant price of $.435 per share and with a total value of $217,500. As part of the Agreement, the $217,500 payment for these stock options resulted in the
satisfaction of $217,500 of notes payable due Mr. Postal since 2012.
On August 29, 2018, the Company granted 100,000 stock options each to two directors of the Company for their
participation as members of the Audit Committee and Nominating and Compensation Committee, and 10,000 stock options to the Company Secretary. The Director options have an exercise price of $.435 with an effective date of August 6, 2018 and will
vest on August 5, 2019 and have a term of 5 years. The Company Secretary options have an exercise price of $.435 with an effective date of August 6, 2018 and will vest on August 5, 2019 and have a term of 10 years.
As of December 31, 2018, there were 970,001 stock options outstanding and 760,001 stock options vested. The stock
options have a weighted average expense price of $0.435.
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:
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
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, 2017:
Risk free interest rate – 1.82 – 2.27%
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
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, 2018:
Risk free interest rate – 2.80 – 2.94%
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
NOTE 7 - STOCK TRANSACTIONS (continued)
The risk-free interest rate is based on rates of treasury securities with the same expected term as the options. The
Company uses the expected term of employee and director stock-based options. The Company is utilizing an expected volatility 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, 2018 and 2017, the Company recognized stock-based compensation expense of $86,666 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 $26,290 will be recognized for these
options in 2019.
The following table sets forth the Company’s stock options outstanding as of December 31, 2018, and December 31, 2017
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, 2017
|
|
|
5,182,226
|
|
|
$
|
0.435
|
|
|
$
|
0.318
|
|
|
|
.97
|
|
|
$
|
77,733
|
|
Granted
|
|
|
210,000
|
|
|
|
0.435
|
|
|
|
0.550
|
|
|
|
5.20
|
|
|
|
-
|
|
Exercised
|
|
|
(500,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,000
|
)
|
Forfeited/expired
|
|
|
(3,865,556
|
)
|
|
|
0.435
|
|
|
|
0.323
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
December 31, 2017
|
|
|
1,026,670
|
|
|
|
0.435
|
|
|
|
0.345
|
|
|
|
2.45
|
|
|
|
87,267
|
|
Granted
|
|
|
210,000
|
|
|
|
0.435
|
|
|
|
0.210
|
|
|
|
6.52
|
|
|
|
(59,010
|
)
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(266,669
|
)
|
|
|
0.435
|
|
|
|
0.371
|
|
|
|
-
|
|
|
|
74,934
|
|
Outstanding,
December 31, 2018
|
|
|
970,001
|
|
|
$
|
0.435
|
|
|
$
|
0.308
|
|
|
|
2.77
|
|
|
$
|
(272,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/exercisable at December 31, 2017
|
|
|
816,670
|
|
|
$
|
0.435
|
|
|
$
|
0.292
|
|
|
|
1.83
|
|
|
$
|
69,417
|
|
Vested/exercisable at December 31, 2018
|
|
|
760,001
|
|
|
$
|
0.435
|
|
|
$
|
0.336
|
|
|
|
2.20
|
|
|
$
|
(213,560
|
)
|
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
|
|
|
|
23,334
|
|
|
|
0.81
|
|
|
$
|
.435
|
|
|
|
23,334
|
|
$
|
.435
|
|
|
|
56,667
|
|
|
|
0.33
|
|
|
$
|
.435
|
|
|
|
56,667
|
|
$
|
.435
|
|
|
|
20,000
|
|
|
|
1.46
|
|
|
$
|
.435
|
|
|
|
20,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
2.50
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
100,000
|
|
|
|
0.01
|
|
|
$
|
.435
|
|
|
|
100,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
5.01
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
100,000
|
|
|
|
1.00
|
|
|
$
|
.435
|
|
|
|
100,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
6.50
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
100,000
|
|
|
|
1.60
|
|
|
$
|
.435
|
|
|
|
100,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
6.60
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
100,000
|
|
|
|
2.60
|
|
|
$
|
.435
|
|
|
|
100,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
7.60
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
200,000
|
|
|
|
3.60
|
|
|
$
|
.435
|
|
|
|
100,000
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
8.60
|
|
|
$
|
.435
|
|
|
|
10,000
|
|
$
|
.435
|
|
|
|
200,000
|
|
|
|
4.60
|
|
|
$
|
.435
|
|
|
|
-
|
|
$
|
.435
|
|
|
|
10,000
|
|
|
|
9.60
|
|
|
$
|
.435
|
|
|
|
-
|
|
Stock Purchase
During the quarter ended September 30, 2017, Jeffrey Postal entered into a Conversion and Option Agreement with the
Company. As part of the Agreement, Jeffrey Postal purchased 50,000 shares of common stock for $23,400.
As part of the Agreement, the payment
for these shares resulted in the satisfaction of $23,400 of notes payable due to Mr. Postal since 2012.
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 worth of 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. 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 may be discontinued at any time at the Company's discretion.
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.
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.
On May 1, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 666,667 shares of
Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.
NOTE 7 - STOCK TRANSACTIONS (continued)
On May 2, 2017, the Company's Board of Directors authorized at the Company's discretion to either retain repurchased
shares in the treasury or to retire the repurchased shares and these shares were retired on June 1, 2017.
On December 15, 2017, the Company's Board of Directors approved an extension of the Company's stock repurchase plan
for up to $750,000 through June 30, 2018.
On August 29, 2018, the Company’s Board of Directors approved a further extension of the Company’s stock repurchase
plan through August 31, 2019. The Board of Directors also approved an increase of the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program from $750,000 to $1,000,000 during the renewal
period.
On August 29, 2018, the Company’s Board authorized and directed the Company’s management to establish a trading
account at a brokerage firm for the Company to conduct open market purchases of the Company’s Common Stock in accordance with the terms and conditions of the Company’s current stock repurchase program and to fund said account from available cash
of the Company but not to exceed such amount that would cause the Company to be unable to pay its bona fide debts.
On December 19, 2018, Company entered
into a Purchase Plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, with Wilson Davis & Co., Inc., a registered broker-dealer. Under the Purchase Plan, Wilson Davis & Co., Inc will make periodic purchases of up to an
aggregate of 750,000 shares at prevailing market prices, subject to the terms of the Purchase Plan.
NOTE 8 - INCOME TAXES
As of December 31, 2018, the Company had utilized all net operating loss carry forwards for income tax reporting
purposes that were previously available to be offset against future taxable income through 2034. An operating loss carry forward of approximately $861,000 is available to the Company indefinitely and up to 80% of the operating loss can be used
against future taxable income. The net deferred tax (liability)benefit as of December 31, 2018 and December 31, 2017 was $(12,000) and $(251,000), respectively, and is reflected in long-term liabilities in the accompanying consolidated balance
sheets.
The provision for income taxes differ from the amount computed using the federal US statutory income tax rate as
follows:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Tax provision at U.S. statutory rate
|
|
$
|
(273,007
|
)
|
|
$
|
981,000
|
|
State income taxes, net of federal benefit
|
|
|
(105,808
|
)
|
|
|
75,000
|
|
Tas effect of foreign operations
|
|
|
136,696
|
|
|
|
11,694
|
|
Non-deductible items
|
|
|
706
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
(31,000
|
)
|
Accrued liabilities
|
|
|
-
|
|
|
|
31,000
|
|
Other
|
|
|
(47,562
|
)
|
|
|
82,000
|
|
Impact of tax reform
|
|
|
-
|
|
|
|
(120,000
|
)
|
Income tax provision
|
|
$
|
(288,975
|
)
|
|
$
|
1,029,694
|
|
On December 22, 2017, President Trump signed into law the legislation generally known as Tax Cut and Jobs Act of 2017.
The tax law includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward and a deemed repatriation transition
tax. In accordance with ASC 740, the impact of a change in tax law is recorded in the period of enactment. During the fourth quarter of 2017, the Company recorded a non-cash change in its net deferred income tax balances of approximately $120,000
related to the tax rate change.
NOTE 8 - INCOME TAXES (continued)
The income tax provision for the years ended December 31, 2018 and year ended December 31,2017 consists of:
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(39,000
|
)
|
|
$
|
870,000
|
|
State
|
|
|
(11,000
|
)
|
|
|
113,000
|
|
Foreign
|
|
|
-
|
|
|
|
12,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(187,000
|
)
|
|
|
34,000
|
|
State
|
|
|
(52,000
|
)
|
|
|
1,000
|
|
Income Tax Provision (Benefit)
|
|
$
|
(289,000
|
)
|
|
$
|
1,030,000
|
|
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:
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
218,000
|
|
|
$
|
-
|
|
Liabilities and reserves
|
|
|
116,000
|
|
|
|
88,000
|
|
Property and equipment and inventory
|
|
|
9,000
|
|
|
|
20,000
|
|
Stock options
|
|
|
75,000
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
1,000
|
|
|
|
|
418,000
|
|
|
|
109,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Defective warranty allowance
|
|
|
(29,000
|
)
|
|
|
-
|
|
Gain/loss on disposal
|
|
|
(8,000
|
)
|
|
|
-
|
|
Intangible assets
|
|
|
(393,000
|
)
|
|
|
(360,000
|
)
|
|
|
|
(430,000
|
)
|
|
|
(360,000
|
)
|
Net deferred tax assets and liabilities
|
|
$
|
(12,000
|
)
|
|
$
|
(251,000
|
)
|
Deferred tax assets are to be reduced by a valuation allowance if it is more likely than not that some portion or all
of the deferred asset will not be realized. The deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that a portion or all of the deferred assets will not be realized.
The Companies will continue to assess the need for a valuation allowance and, to the extent it is determined that such allowance is necessary, the tax effect will be recognized in the future.