UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2015March 31, 2016


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

For the transition period from _____________ to _____________

Commission File Number: 000-28831

CAPSTONE COMPANIES, INC.

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

Florida84-1047159
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

350 Jim Moran Boulevard, Suite 120, Deerfield Beach, Florida    33442
(Address of principal executive offices)

(954) 252-3440
(Issuer’sIssuer's Telephone Number)

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  oYes Yes xNo

APPLICABLE ONLY TO CORPORATE ISSUERS.ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of September 30, 2015,May 2, 2016, there were 721,989,957 shares of the issuer's Common Stock, $0.0001 par value per share, issued and outstanding.


1


CAPSTONE COMPANIES, INC.

Quarterly Report of Form 10-Q
Three Months and Nine Months Ended September 30, 2015March 31, 2016

TABLE OF CONTENTS


PART 1FINANCIAL STATEMENTS 3
   
Item 1.Financial Statements 3
Item 2.Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operation 2018
Item 3.Quantitative and Qualitative Disclosures about Market Risk 2930
Item 4.Controls and Procedures 30
   
PART IIOther Information 30
   
Item 1.Legal Proceedings 30
Item 1A.Risk Factors 30
Item 2.Unregistered Sale of Equity Securities and Use of Proceeds 31
Item 3.Defaults of Senior Securities 31
Item 4.Submission of Matters to Vote of Security Holders 3132
Item 5.Other Information 3132
Item 6.Exhibits 32


2


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.Statements

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES    
CONSOLIDATED BALANCE SHEETS    
       
  September 30,  December 31, 
  2015  2014 
Assets: (Unaudited)    
Current Assets:      
   Cash $258,321  $313,856 
   Accounts receivable, net  7,551,247   977,597 
   Advances  -   14,456 
   Inventory  90,649   128,984 
   Prepaid expenses  729,359   358,046 
     Total Current Assets  8,629,576   1,792,939 
         
Fixed Assets:        
   Computer equipment and software  19,767   12,272 
   Machinery and equipment  350,393   299,693 
   Furniture and fixtures  5,665   5,665 
   Less: Accumulated depreciation  (272,901)  (223,589)
     Total Fixed Assets  102,924   94,041 
         
Other Non-current Assets:        
   Deposit  12,193   12,193 
   Investment (AC Kinetics)  500,000   500,000 
   Goodwill  1,936,020   1,936,020 
      Total Other Non-current Assets  2,448,213   2,448,213 
         Total Assets $11,180,713  $4,335,193 
         
Liabilities and Stockholders’ Equity:        
Current Liabilities:        
   Accounts payable and accrued liabilities $1,812,358  $644,629 
   Note payable - Sterling Factors  4,183,663   286,945 
   Notes and loans payable to related parties - current maturities  3,485,064   1,936,679 
     Total Current Liabilities  9,481,085   2,868,253 
         
         
Commitments and Contingent Liabilities (Note 5)        
         
Stockholders' Equity:        
   Preferred Stock, Series A, par value $.001 per share, authorized 100,000,000 shares, issued -0- shares  -   - 
   Preferred Stock, Series B-1, par value $.0001 per share, authorized 50,000,000 shares, issued -0- shares  -   - 
   Preferred Stock, Series C, par value $1.00 per share, authorized 1,000 shares, issued -0- shares at September 30, 2015 and 1,000 shares at December 31, 2014  -   1,000 
   Common Stock, par value $.0001 per share, authorized 850,000,000 shares, issued 721,989,957 shares at September 30, 2015 and 654,010,532 at December 31, 2014  72,199   65,401 
   Additional paid-in capital  7,262,479   7,187,058 
   Accumulated deficit  (5,635,050)  (5,786,519)
     Total Stockholders' Equity  1,699,628   1,466,940 
     Total Liabilities and Stockholders’ Equity $11,180,713  $4,335,193 
         
The accompanying notes are an integral part of these financial statements. 

 
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES    
CONSOLIDATED BALANCE SHEETS    
     
  March 31,  December 31, 
  2016  2015 
  (Unaudited)   
Assets:    
Current Assets:    
   Cash $463,615  $364,714 
   Accounts receivable, net  1,391,497   5,077,182 
   Inventory  232,384   205,708 
   Prepaid expenses  604,517   566,459 
     Total Current Assets  2,692,013   6,214,063 
         
Fixed Assets:        
   Computer equipment and software  19,767   19,767 
   Machinery and equipment  385,333   380,633 
   Furniture and fixtures  5,665   5,665 
   Less: Accumulated depreciation  (309,241)  (295,180)
     Total Fixed Assets  101,524   110,885 
         
Other Non-current Assets:        
   Deposit  12,193   12,193 
   Investment (AC Kinetics)  500,000   500,000 
   Goodwill  1,936,020   1,936,020 
      Total Other Non-current Assets  2,448,213   2,448,213 
         Total Assets $5,241,750  $8,773,161 
         
Liabilities and Stockholders' Equity:        
Current Liabilities:        
   Accounts payable and accrued liabilities $363,452  $2,164,283 
   Income tax payable  -   7,500 
   Note payable - Sterling National  354,697   2,275,534 
   Notes and loans payable to related parties - current maturities  2,346,469   2,064,034 
     Total Current Liabilities  3,064,618   6,511,351 
         
         
Commitments and Contingent Liabilities (Note 5)        
         
Stockholders' Equity:        
   Preferred Stock, Series A, par value $.001 per share, authorized 100,000,000 shares, issued -0- shares  -   - 
   Preferred Stock, Series B-1, par value $.0001 per share, authorized 50,000,000 shares, issued -0- shares  -   - 
   Preferred Stock, Series C, par value $1.00 per share, authorized 1,000 shares, issued -0- shares at March 31, 2016 and at December 31, 2015  -   - 
   Common Stock, par value $.0001 per share, authorized 850,000,000 shares, issued 721,989,957 shares at March 31, 2016 and at December 31, 2015  72,199   72,199 
   Additional paid-in capital  7,290,980   7,276,729 
   Accumulated deficit  (5,186,047)  (5,087,118)
     Total Stockholders' Equity  2,177,132   2,261,810 
     Total Liabilities and Stockholders' Equity $5,241,750  $8,773,161 
         
The accompanying notes are an integral part of these financial statements.        
3
CAPSTONE COMPANIES, INC. AND SUBSIDIARIESCAPSTONE COMPANIES, INC. AND SUBSIDIARIES CAPSTONE COMPANIES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS 
(UNAUDITED) 
(Unaudited) (Unaudited)  
                
 For the Three Months Ended For the Nine Months Ended  For the Three Months Ended 
 September 30,  September 30,  March 31,   
 2015  2014  2015  2014  2016  2015 
                
Revenues, net $7,747,450  $7,738,884  $8,750,951  $13,008,632  $2,078,214  $713,517 
Cost of sales  (5,767,306)  (6,621,599)  (6,410,197)  (10,231,965)  (1,464,658)  (406,167)
Gross Profit  1,980,144   1,117,285   2,340,754   2,776,667   613,556   307,350 
                        
Operating Expenses:                        
Sales and marketing  16,716   81,083   185,229   455,082   62,977   36,672 
Compensation  313,953   375,807   1,007,341   1,045,937   308,458   361,108 
Professional fees  56,947   38,656   202,511   144,681   104,285   96,173 
Product development  74,747   95,410   181,157   312,341   36,274   45,658 
Other general and administrative  158,796   168,260   407,114   455,243   142,755   121,355 
Total Operating Expenses  621,159   759,216   1,983,352   2,413,284   654,749   660,966 
                        
Net Operating Income  1,358,985   358,069   357,402   363,383 
Net Operating (Loss)  (41,193)  (353,616)
                        
Other Income (Expense):                        
Interest expense  (111,654)  (69,448)  (205,933)  (223,018)  (57,736)  (37,156)
Total Other Income (Expense)  (111,654)  (69,448)  (205,933)  (223,018)  (57,736)  (37,156)
                        
Income Before Tax Provision  1,247,331   288,621   151,469   140,365 
(Loss) Before Tax Provision  (98,929)  (390,772)
                        
Provision for Income Tax
  -   (2,129)  -   (6,387)  -   - 
                        
Net Income $1,247,331  $286,492  $151,469  $133,978 
Net (Loss) $(98,929) $(390,772)
                        
Net Income per Common Share                
Net Loss per Common Share        
Basic $0.00  $0.00  $0.00  $0.00  $0.00  $0.00 
Diluted $0.00  $0.00  $0.00  $0.00  $0.00  $0.00 
                        
Weighted Average Shares OutstandingWeighted Average Shares Outstanding Weighted Average Shares Outstanding 
Basic  721,989,957   654,010,532   690,863,847   655,046,444   721,989,957   654,010,532 
Diluted  721,989,957   809,072,109   690,863,847   809,758,922   721,989,957   654,010,532 
                        
The accompanying notes are an integral part of these financial statements.The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements. 
 
 
4
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES    
CONSOLIDATED STATEMENTS OF CASH FLOWS    
(Unaudited)    
     
  For the Three Months Ended 
  March 31,   
  2016  2015 
CASH FLOWS FROM OPERATING ACTIVITIES:    
     
   Net (Loss) $(98,929) $(390,772)
Adjustments necessary to reconcile net (loss) to net cash provided by operating activities:        
      Depreciation and amortization  14,061   12,687 
     Stock based compensation expense  14,250   29,433 
      Accrued sales allowance  (94,203)  (181,978)
     (Increase) decrease in accounts receivable  3,835,576   747,014 
     (Increase) decrease in inventory  (26,674)  (57,470)
     (Increase) decrease in prepaid expenses  (38,057)  (12,083)
     (Increase) decrease in other assets  -   14,456 
      Increase (decrease) in accounts payable and accrued liabilities  (1,864,020)  82,314 
      Increase (decrease) in accrued interest on notes payable  31,282   34,692 
  Net cash provided by  operating activities  1,773,286   278,293 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of property and equipment  (4,700)  (2,284)
Net cash (used in) investing activities  (4,700)  (2,284)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from notes payable  3,643,356   607,276 
Repayments of notes payable  (5,564,194)  (1,249,273)
Proceeds from notes and loans payable to related parties  360,000   200,000 
Repayments of notes and loans payable to related parties  (108,847)  - 
Net cash (used in) financing activities  (1,669,685)  (441,997)
         
Net Increase (Decrease) in Cash and Cash Equivalents  98,901   (165,988)
Cash and Cash Equivalents at Beginning of Period  364,714   313,856 
Cash and Cash Equivalents at End of Period $463,615  $147,868 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
Interest $60,301  $2,464 
Income taxes $7,500  $- 
         
The accompanying notes are an integral part of these financial statements.        
 
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES      
CONSOLIDATED STATEMENTS OF CASH FLOWS      
 (UNAUDITED)      
       
  For the Nine Months Ended 
  September 30,    
  2015  2014 
CASH FLOWS FROM OPERATING ACTIVITIES:      
       
   Net Income $151,469  $133,978  
   Adjustments necessary to reconcile net income to net cash (used in) operating activities:     
      Stock cancellation  -   (28,876)
      Depreciation and amortization  49,311   60,566 
      Compensation expense from stock options  81,219   43,500 
      Accrued sales allowance  (196,978)  517,269 
     (Increase) decrease in accounts receivable  (6,376,672)  (1,189,147)
     (Increase) decrease in inventory  38,337   84,915 
     (Increase) decrease in prepaid expenses  (371,317)  680,306 
     (Increase) decrease in other assets  14,456   (12,193)
      Increase (decrease) in accounts payable and accrued liabilities  1,167,729   968,744 
      Increase (decrease) in accrued interest on notes payable  148,385   151,842 
  Net cash provided by (used in) operating activities  (5,294,061)  1,410,904 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of property and equipment  (58,194)  (44,728)
Net cash (used in) investing activities  (58,194)  (44,728)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from notes payable  5,791,914   11,686,401 
Repayments of notes payable  (1,895,194)  (11,833,452)
Proceeds from notes and loans payable to related parties  2,500,000   950,000 
Repayments of notes and loans payable to related parties  (1,100,000)  (2,287,982)
Net cash provided by (used in) financing activities  5,296,720   (1,485,033)
         
Net (Decrease) in Cash and Cash Equivalents  (55,535)  (118,857)
Cash and Cash Equivalents at Beginning of Period  313,856   436,592 
Cash and Cash Equivalents at End of Period $258,321  $317,735 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
Interest $57,549  $314,158 
         
Non-cash financing activities:        
Conversion of Series C Preferred Stock to Common Stock $1,000  $- 
         
The accompanying notes are an integral part of these financial statements.     

5
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of accounting policies for Capstone Companies, Inc. (“CAPC”("CAPC" or the “Company”"Company"), a Florida corporation (formerly, “CHDT Corporation”"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”GAAP") and have been consistently applied in the preparation of the consolidated financial statements.

Interim Financial Statements

The unaudited consolidated financial statements for the three and nine month periods ended September 30,March 31, 2016 and 2015 and 2014 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the periods. Operating results for interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the Company’sCompany's business.  Certain prior period amounts have been reclassified in order to conform to the covered periods presentation. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

Organization and Basis of Presentation

CAPC was initially incorporated September 18, 1986, under the laws of the State of Delaware under the name Yorkshire Leveraged Group, Incorporated, and then changed its domicile to Colorado in 1989 by merging into a Colorado corporation, named Freedom Funding, Inc. Freedom Funding, Inc. then changed its name to CBQ, Inc. by amendment of its Articles of Incorporation on November 25, 1998. In May 2004, the Company changed its name from CBQ, Inc. to China Direct Trading Corporation as part of a reincorporation from the State of Colorado to the State of Florida.  On May 7, 2007, the Company amended its charter to change its name from “China"China Direct Trading Corporation”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”("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”("BBI") on March 20, 2008. On January 31, 2012, the BBI name was changed to Capstone Lighting Technologies, L.L.C (“CLT”("CLT").

On September 13, 2006, the Company entered into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (“Capstone”("Capstone").  Capstone was incorporated in Florida on May 15, 1996 and is engaged primarily in the business of wholesaling low technology consumer products to distributors and retailers in the United States.  Under the Stock Purchase Agreement, the Company acquired 100% of the issued and outstanding shares of Capstone Common Stock, and recorded goodwill of $1,936,020.

On April 13, 2012, the Company established a wholly owned subsidiary in Hong Kong, named Capstone International Hong Kong Ltd (“CIHK”("CIHK") which is engaged in selling the Company’sCompany'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’sCompany's other subsidiaries.

Nature of Business

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


6
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents, to the extent the funds are not being held for investment purposes.

6
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for Doubtful Accounts

An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings.  The allowance for bad debt is evaluated on a regular basis by management and is based upon management’smanagement'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 September 30, 2015March 31, 2016 and December 31, 2014,2015, management has determined that the accounts receivablereceivables are fully collectible.  As such, management has not recorded an allowance for doubtful accounts.

Accounts Receivable Pledged as Collateral

As of both September 30, 2015March 31, 2016, and December 31, 2014,2015, 100% of the accounts receivable serve as collateral for the Company’sCompany's notes payable.

Inventory

The Company's inventory, which is recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $90,649$232,384 and $128,984$205,708 at September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively.

Prepaid Expenses

The Company’sCompany's prepaid expenses consist primarily of deposits on inventoriesinventory for future orders as well as other prepaid advertising expense.

Property and Equipment

Fixed assets are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated economic useful lives of the related assets as follows:

Computer equipment3 - 7 years
Computer software3 - 7 years
Machinery and equipment3 - 7 years
Furniture and fixtures3 - 7 years

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable.  When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset.  Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.  No impairment losses were recognized by the Company during 20142015 or during the nine month period ended September 30, 2015.March 31, 2016.

Upon sale or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination of income or loss.

Expenditures for maintenance and repairs are charged to expense as incurred. Major overhauls and betterments are capitalized and depreciated over their estimated economic useful lives.

Depreciation expense was $20,072$14,061 and $15,740 for$12,687for the three month periods ended September 30,March 31, 2016 and 2015, and 2014, respectively.  Depreciation expense was $49,311 and $45,818 for the nine month periods ended September 30, 2015 and 2014, respectively.

7
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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.

7

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

The cost of internally developing, maintaining and restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, are recognized as an expense when incurred.

An intangible asset (excluding goodwill) with a definite useful life is amortized; an intangible asset with an indefinite useful life is not amortized until its useful life is determined to be no longer indefinite.  The remaining useful lives of intangible assets not being amortized are evaluated at least annually to determine whether events and circumstances continue to support an indefinite useful life.

If and when an intangible asset is determined to no longer have an indefinite useful life, the asset shall then be amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangibles that are subject to amortization.

An intangible asset (including goodwill) that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The impairment test consists of a comparison of the fair value of the intangible assets with its carrying amount.  If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. Goodwill is not amortized.

It is the Company's policy to test for impairment no less than annually, or when conditions occur that may indicate impairment.  The Company's intangible assets, which consist of goodwill of $1,936,020 recorded in connection with the Capstone acquisition, were tested for impairment and determined that no adjustment for impairment was necessary as of December 31, 2014,2015, whereas the fair value of the intangible asset exceeds its carrying amount.

Net Income (Loss) Per Common Share

Basic earnings per common share were computed by dividing net income or loss by the weighted average number of shares of common stock outstanding duringfor the year.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 September 30,March 31, 2016 and March 31, 2015, and December 31, 2014, the total number of potentially dilutive common stock equivalents was 88,630,388 and 155,058,813,158,208,813, respectively.

Principles of Consolidation

The consolidated financial statements for the periods ended September 30,March 31, 2016 and 2015 and 2014 include the accounts of the parent entity and its wholly-owned subsidiaries Capstone Lighting Technologies, L.L.C., Capstone Industries, Inc. and Capstone International HK, LTD.  All significant intra-entity transactions and balances have been eliminated in consolidation.

Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, including cash, prepaid expenses, accounts receivable, accounts payable and accrued liabilities at September 30, 2015March 31, 2016 and December 31, 20142015 approximates their fair values due to the short-term nature of these financial instruments.

The fair value hierarchy under U.S. GAAP distinguishes between assumptions based on market data (observable inputs) and an entity’sentity's own assumptions (unobservable inputs). The hierarchy consists of three levels:

·
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


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CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

·
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.

8

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

Cost Method of Accounting for Investment

Investments in equity securities that do not have readily determinable fair values and do not qualify for consolidation or the equity method are carried at cost.  Dividends received from those companies are included in other income.  Dividends received in excess of the Company’sCompany'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.  These estimates could change significantly in the near term.

During the threethree-month periods, ending March 31, 2016 and nine month period ending September 30, 2015, the Company determined that $0$94,203 and   $196,977$181,978, respectively of previously accrued promotional allowances were no longer required, respectively.required. The reduction of promotional allowances is included in net revenues for the periods ended September 30,March 31, 2016 and 2015.

Advertising and Promotion

Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing expenses.  Advertising and promotion expense was $3,301$3,053 and $14,806$3,596 for the three monthsperiods ended March 31, 2016 and $98,461 and $138,518 for the nine months ended September 30, 2015, and 2014, respectively.  As of September 30, 2015both March 31, 2016 and December 31, 2014,2015, the Company has $275,019 in capitalized advertising costs included in prepaid expenses on the consolidated balance sheets.

Shipping and Handling

The Company’sCompany's shipping and handling costs are included in sales and marketing expenses and amounted to $11,765$26,255 and $15,101$14,288 for the three monthsperiods ended March 31, 2016 and $45,588 and $52,818 for the nine months ended September 30, 2015, and 2014, respectively.

Accrued Liabilities

Accrued liabilities contained in the accompanying balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective products, other product returns and various allowances.  These estimates could change significantly in the near term.

Income Taxes

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


9
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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 expensesexpense over the requisite service periods in the Company’sCompany's consolidated statements of operations.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.
9

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

In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.  As stock-based compensation expense is recognized during the period is based on awards ultimately expected to vest, it is subject to reduction for estimated forfeitures.  ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  As of and for the periods ended September 30,March 31, 2016 and 2015, and 2014, there were no material amounts subject to forfeiture.

The Company recognizes compensation expense paid with common stock and other equity instruments issued for assets and services received based upon the fair value of the assets/services or the equity instruments issued, whichever is more readily determined.

As of the date of this report, the Company has not adopted a method to account for the tax effects of stock-based compensation pursuant to ASC 718 and related interpretations.  However, whereas the Company has substantial net operating losses to offset future taxable income and its current deferred tax asset is completely reduced by the valuation allowance, no material tax effects are anticipated.

Stock-Based Compensation Expense

Stock-based compensation for the three month periodperiods ended September 30,March 31, 2016 and 2015 totaled $14,250 and 2014 totaled $22,353 and $8,156, respectively.  Stock-based compensation for the nine month period ended September 30, 2015 and 2014 totaled $81,219 and $43,500,$29,433, respectively.

Recent Accounting Standards

In May 2014, the FASB made available ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and Intangible Assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.


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CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), ("ASU 2016-08"). This ASU clarifies the implementation guidance on principal versus agent considerations. The updated guidance improves the understandability of determining whether an entity is a principal or agent, the nature of the good or service, and involvement of other parties in a sale. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) ("ASU 2016-10"). ASU 2016-10 clarifies two aspects of Topic 606: identifying performance obligation and the licensing implementation guidance, while retaining the related principles for those areas.  The amendments in ASU 2016-08 and ASU 2016-10 are effective in conjunction with ASU 2015-14. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The issue is the result of a consensus of the FASB Emerging Issues Task Force. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining
10

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

requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments inCompany adopted the provisions of this ASU are effective for annual periodsduring the quarter ended March 31, 2016 and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. Entities may apply the amendments in this ASU either:

(a) prospectively to all awards granted or modified after the effective date; or
(b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.

If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company does not expect the adoption of ASU 2014-12 to have athere was no material impact on itsthe consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidations (Topic 225-20): Amendments to the Consolidation Analysis, which affects current consolidation guidance. The guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance must be applied using one of two retrospective application methods and will be effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluatingadopted the impact, if any, of the adoptionprovisions of this newly issued guidance to itsASU during the quarter ended March 31, 2016 and there was no material impact on the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Topic 225-20): Simplifying the Presentation of Debt Issue Costs, that simplifies the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. This guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluatingadopted the impact, if any, of the adoptionprovisions of this newly issued guidance to itsASU during the quarter ended March 31, 2016 and there was no material impact on the consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory, that simplifies the measurement of inventory and more closely aligns the U.S. GAAP measurement of inventory with the measure of inventory under International Financial Reporting Standards. The guidance requires entities utilizing the first-in, first-out method to measure inventory at the lower of cost and net realizable value, with net realizable value defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. This amendment should be applied

11
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

prospectively and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 is not expected to have a material effect on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that all deferred income taxes be classified as noncurrent in the balance sheet, rather than being separated into current and noncurrent amounts. This standard is effective for annual reporting periods beginning after December 15, 2016. The adoption of ASU 2015-17 is not expected to have a material effect on the Company's consolidated financial statements.

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

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

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company's fiscal year beginning after December 15, 2016 and subsequent interim periods. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the Company's consolidated financial statements.
11

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

The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company’sCompany'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’sCompany's financials properly reflect the change.

Liquidity

The Company had net income of $151,469 for the nine months ended September 30, 2015 as compared to a net income of $133,978 in the same period 2014. As of September 30, 2015 the Company had a working capital deficit of ($851,509) compared to a working capital deficit of ($1,075,314) as of December 31, 2014. The Company has an accumulated deficit of ($5,635,050) and ($5,786,519) as of September 30, 2015 and December 31, 2014, respectively. The Company’s liquidity is expected to be sufficient through 2015, resulting from the combination of  our existing cash position, improved operational cash flow as a result of improvements to our operating results, the Company’s borrowing capacity with Sterling National Bank and as needed, funding support from  Company Directors (Note 4).

Pervasiveness of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and the differences could be material.

NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE

Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and accounts receivable.

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.

Cash and Cash Equivalents

The Company at times has cash and cash equivalents with its financial institution in excess of Federal Deposit Insurance Corporation (“FDIC”("FDIC") insurance limits.  The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks.  As of both September 30, 2015 and 2014,March 31, 2016, the Company had no funds$129,729 in excess of FDIC limits.

Accounts Receivable

The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States and their international locations. The Company typically does not require collateral from customers.  Credit risk is limited due to the financial strength of the customers comprising the Company’sCompany'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 at least ten percent (10%)61% and 30% of gross revenue during the yearsperiod ended DecemberMarch 31, 20142016 and 2013.two customers who comprised 52% and 27% of gross revenue during the period ended March 31, 2015.  The loss of these customers would adversely impact the business of the Company.


12
CAPSTONE COMPANIES, INC. AND SUBSIDIARIESApproximately 50% and 52% of the Company's gross revenue for the periods ended March 31, 2016 and 2015, respectively was from international sales.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)As of March 31, 2016, approximately 96% of accounts receivable were from one customer. As of December 31, 2015, approximately 99% of accounts receivable were from two customers.

Major Vendors

The Company had one vendortwo vendors from which it purchased at least ten percent (10%)81% and 10% of merchandise during the yearsperiod ended DecemberMarch 31, 20142016, and 2013.two vendors from which it purchased 61% and 30% of merchandise during the period ended March 31, 2015. The loss of this supplierthese suppliers would adversely impact the business of the Company.

As of March 31, 2016, approximately 65% of accounts payable were due to two vendors. As of December 31, 2015, approximately 95% of accounts payable were due to two customers.

12

NOTE 3 – NOTES PAYABLE

Sterling National Bank

On September 8,2010, in order to fund increasing accounts receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank), located in New York, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted.  There will be a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is .25% above Sterling National Bank’sBank's Base Rate which at time of closing was 5%. As of March 31, 2016, the interest rate on the loan was 5.25%. The amounts borrowed under this agreement are due on demand and secured by a right to set-off on or against any of the following (collectively as “Collateral”"Collateral"): all accounts including those at risk, all reserves, instruments, documents, notes, bills and chattel paper, letter of credit rights, commercial tort claims, proceeds of insurance, other forms of obligations owing to Sterling National Bank,  bank and other deposit accounts whether or not reposed with affiliates, general intangibles (including without limitation all tax refunds, contract rights, trade names, trademarks, trade secrets, customer lists, software and all other licenses, rights, privileges and franchises), all balances, sums and other property at any time to our credit or in Sterling National Bank’sBank's possession or in the possession of any Sterling Affiliates, together with all merchandise, the sale of which resulted in the creation of accounts receivable and in all such merchandise that may be returned by customers and all books and records relating to any of the foregoing, including the cash and non-cash proceeds of all of the foregoing.

Capstone Companies, Inc., and Howard Ullman, the previous Chairman of the Board of Directors of CHDT, had personally guaranteed Capstone’sCapstone's obligations under the Financing Agreement. As part of the agreement with Sterling National Bank, a subordination agreement was executed with Mr. Ullman. These agreements subordinated the debt of $121,263 (plus future interest) and $81,000 (plus future interest) due to Mr. Ullman (or his assignees), to the Sterling National Bank loan.  No payments will be made on the subordinated debt until the Sterling loan is paid in full.  As of September 30, 2015March 31, 2016 and December 31, 2014,2015, the balance due to Sterling was $4,183,663$354,697 and $286,945,$2,275,534, respectively.

On July 21, 2011, Stewart Wallach, the Chief Executive Officer and Director of Capstone Companies, Inc. and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Mr. Ullman’s notes including the notes subordinated to Sterling National Bank.

On July 15, 2011, Stewart Wallach individually and accepted by Sterling National Bank, agreed to replace Howard Ullman as the sole personal guarantor to Sterling National Bank for all of Capstone’s loans previously guaranteed by Howard Ullman.

Effective July 12, 2011, Capstone’s credit line with Sterling National Bank was increased from $2,000,000 up to $4,000,000 to provide additional funding for increased revenue growth.

During the period from July 2013 through February 2014, the Company’s credit line with Sterling National Bank was temporarily increased from $4,000,000 to $6,000,000 to provide additional funding to cover the increased sales volume during the holiday season.

During the period from July 2014 through September 2015, the Company’s credit line with Sterling National Bank was temporarily increased from $4,000,000 to $7,000,000 to provide additional funding to cover the increased sales volume during the holiday season. As of September 30, 2015,March 31, 2016, the maximum amount that can be borrowed on this credit line is $7,000,000.


13
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES AND SUBSEQUENT EVENTS

Capstone Companies, Inc. - Notes Payable to Officers and Directors

On May 30, 2007, the Company executed a $575,000 promissory note payable to a Director of the Company.  This note was amended on July 1, 2009 and again on January 2, 2010. As amended, the note carries an interest rate of 8% per annum.  All principal was payable in full, with accrued interest, on January 2, 2014.  On November 2, 2007, the Company issued 12,074 shares of its Series B Preferred stock valued at $28,975 as payment towards this loan.  The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal.  On July 12, 2011, Stewart Wallach, the Chief Executive Officer and Director of CHDT and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Mr. Ullman’s notes including the subordinatedUllman's notes net of any offsets, monies due from Mr. Ullman to the Company. The original terms of all notes would remain the same. On July 12, 2011, this note payable was reassigned by Howard Ullman, equally split between Stewart Wallach, Director, and JWTR Holdings LLC. The note balance of $466,886 was reduced by $47,940 for offsets due by Howard Ullman. The revised loan balance of $418,946 was reassigned equally $209,473 to Stewart Wallach and $209,473 to JWTR Holdings LLC. As amended the note is due on or before April 1,October 3, 2016. As of September 30, 2015March 31, 2016, the total combined balance due on these two notes was $558,612,$575,416 which includes accrued interest of $139,666.$156,470.

On March 11, 2010, the Company received a loan from a Director in the amount of $100,000. As amended, the note is due on or before April 1,October 3, 2016 and carries an interest rate of 8% per annum.  At September 30, 2015,March 31, 2016, the total amount payable on this note was $144,449$148,461 including interest of $44,449.$48,461.

On May 11, 2010, the Company received a loan from a Director and Chief Executive OfficerStewart Wallach in the amount of $75,000. As amended, the note is due on or before April 1,October 3, 2016 and carries an interest rate of 8% per annum.  The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal. At September 30, 2015, the total amount payable onMarch 31, 2016, this note was $107,335 including interest of $32,335.paid in full.

On January 15, 2013, the Company received a loan in the amount of $250,000 from Stewart Wallach, the Chief Executive Officer and Director of Capstone Companies, Inc.Wallach. The loan carries an interest rate of 8% per annum. This loan was amended and the due date has been extended until April 1,October 3, 2016. This loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal.  At September 30, 2015,March 31, 2016, the total amount payable on this note was $304,137$314,164 including interest of $54,137.$64,164. On April 1, 2016, the Company received notification from Stewart Wallach that all rights and title to the $250,000 note and accrued interest of $64,164 had been assigned to Jeffrey Postal under the same terms and obligations of the original note.

13

4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES AND SUBSEQUENT EVENTS (continued)

On January 15, 2013, the Company received a loan in the amount of $250,000 from a Director of Capstone Companies, Inc. The loan carries an interest rate of 8% per annum. This loan was amended and the due date has been extended until April 1,October 3, 2016.  At September 30, 2015,March 31, 2016, the total amount payable on this note was $304,137,$314,164 including interest of $54,137.$64,164.  This loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal.

Purchase Order Assignment- Funding Agreements

On February 9, 2015,March 18, 2016, Capstone Industries, Inc. received $200,000$360,000 against a note from Jeffrey Postal. The note was due on or before December 31, 2015, and carried an interest rate of 1.0% simple interest per month. This note was paid in full during the quarter ended June 30, 2015.

On May 19, 2015, Capstone Companies, Inc. received $250,000 against a note from an entity related to the Company’s Chief Executive Officer.Group Nexus LLC. The note is due on or before December 31, 2015,September 30, 2016, and carries an interest rate of 1.0%8% simple interest per month.year. As of September 30, 2015,March 31, 2016, the total amount due underpayable on this note was $261,014 including accrued$361,026 which included interest of $11,014.

On May 19, 2015, Capstone Companies, Inc. received $250,000 against a note from Jeffrey Postal. The note is due on or before December 31, 2015, and carries an interest rate of 1.0% simple interest per month. As of September 30, 2015, the total amount due under this note was $261,014 including accrued interest of $11,014.

On May 20, 2015, Capstone Industries, Inc. received $500,000 against a note from Jeffrey Postal. The note was due on or before December 31, 2015, and carried an interest rate of 1.0% simple interest per month.  This note was paid in full during the quarter ended September 30, 2015.

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CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)

On June 15, 2015, Capstone Industries, Inc. received $400,000 against a note from Phyllis Postal,   mother of Jeffrey Postal. The note was due on or before December 31, 2015, and carried an interest rate of 1.0% simple interest per month.  This note was paid in full during the quarter ended September 30, 2015.

On June 16, 2015, Capstone Industries, Inc. received $500,000 against a note from Jeffrey Postal. The note is due on or before December 31, 2015, and carries an interest rate of 1.0% simple interest per month. As of September 30, 2015, the total amount due under this note was $517,425 including accrued interest of $17,425.

On June 18, 2015, Capstone Industries, Inc. received $400,000 against a note from George Wolf, a consultant. The note is due on or before December 31, 2015, and carries an interest rate of 1.0% simple interest per month. As of September 30, 2015, the total amount due under this note was $413,677 including accrued interest of $13,677.$1,026.

Working Capital Loan Agreements

On April 1, 2012, the Company signed a working capital loan agreement with Postal Capital Funding, LLC (“PCF”("PCF"), a private capital funding company owned by Jeffrey Postal and James McClinton, the Company’sCompany's Chief Financial Officer.Officer.  Pursuant to the agreement, the Company may borrow up to a maximum of $1,000,000 of revolving credit from PCF. Amounts borrowed carry an interest rate of
8%. This loan was amended and the due date has been extended until April 1,October 3, 2016. As of September 30, 2015,March 31, 2016, the loan balance under this agreement was $613,264$ 633,239 including interest of $115,264.$135,239.

Notes and Loans Payable to Related Parties – Maturities

The total amount payable to officers, directors and related parties as of September 30, 2015,March 31, 2016, was $3,485,064$2,346,469 including accrued interest of $493,118.$469,524. The notes and loan payable to related parties mature during 2015 and 2016.

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Operating Leases

On June 29, 2007, the Company relocated its principal executive offices and sole operations facility to 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442, which is located in Broward County.  This space consists of 4,000 square rentable feet and was leased on a month to month basis.

Capstone Industries entered into a new lease agreement for the same office space as currently located. The new lease agreement dated January 17, 2014, and effective February 1, 2014, has a 3 year3-year term with a base annual rent of $87,678 paid in equal monthly installments. The Company has the one timeone-time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term. Under the new lease agreement, Capstone is responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.

Capstone International Hong Kong Ltd. entered into a two yeartwo-year lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong.  The agreement iswas for the period from February 17, 2014, to February 16, 2016.  This lease has a base annual rent of $48,000 (HK$ 372,000) paid in equal monthly installments. This lease has been extended for a further three (3) months until May 16, 2016. This lease has been further renewed for another (12) months ending May 16, 2017 with a base annual rate of $48,775 paid in equal monthly installments.

Rent expense amounted to $35,144$35,413 and $34,655$35,021 for the three month periodsmonths ended September 30,March 31, 2016 and 2015, and 2014, respectively.  Rent expense amounted to $105,503 and $86,359 for the nine month periods ended September 30, 2015 and 2014, respectively.

The future lease obligationsobligation under these agreements for the next five years are as follows:

Year Ended December, 31,USHKTotal
     2015$89,150$48,000$137,150
     201690,7106,00096,710
     20177,559-7,559
         Total lease obligation$187,419$54,000$241,419


15
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – COMMITMENTS AND CONTINGENCIES (continued)
Year Ended December, 31, US  HK  Total 
     2016 $66,870  $37,274  $104,144 
     2017  7,559  $20,322   27,881 
         Total future lease obligation $74,429  $57,596  $132,025 

Consulting Agreements

On July 1, 2015, the Company entered into a consulting agreement with a Consultant,George Wolf, whereby the ConsultantMr. Wolf will be paid $10,500 per month through December 31, 2015 and $12,500 per month from January 1, 2016 through December 31, 2017. The agreement can be terminated upon 30 day’sdays' notice by either party. The Company may, in its sole discretion at any time after December 31, 2015 convert the Consultant
14

NOTE 5 – COMMITMENTS AND CONTINGENCIES (continued)

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

Employment Agreements

On February 5, 2008, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $225,000 per annum.  As part of the agreement, Mr. Wallach will receive a minimum increase of 5% per year. During 2014 and 2013,

Mr. Wallach was paid $287,164 and $285,586 under the Employment Agreement. An amount of $40,233 has been accrued and is included in the September 30, 2015March 31, 2016 and December 31, 20142015 consolidated balance sheets as part of accounts payable and accrued expenses for deferred wages in 2011. The initial term of the contract began February 5, 2008, and ended on February 5, 2011, but the
term of the contract was extended for an additional two years through February 5, 2013.  The Company’sCompany's Compensation Committee has further extended the agreement with the same terms for an additional three years throughyears.

On February 5, 2016.2016, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $287,163 per annum.  As part of the agreement, the base salary will be reviewed annually by the Compensation Committee for a potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year. The initial term of this new agreement began February 5, 2016 and ends February 5, 2018. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed two years in length.

On February 5, 2008, the Company entered into an Employment Agreement with James McClinton. Mr. McClinton will bewas paid $150,000 per annum.  As part of the agreement, Mr. McClinton will receivereceived a minimum increase of 5% per year. During 2014 and 2013, Mr. McClinton was paid $191,442 and $190,398, respectively under the Employment Agreement. An amount of $572 has been accrued and is included in the September 30, 2015March 31, 2016 and December 31, 20142015 consolidated balance sheets as part of accounts payable and accrued

expenses for deferred wages in 2011. The term of the initial contract began February 5, 2008, and ended February 5, 2011, but the term of the contract was extended for an additional two years through February 5, 2013. The Company’sCompany's Compensation Committee has further extended the agreement with the same terms for an additional three years through February 5, 2016.

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

NOTE 6 - STOCK TRANSACTIONS

Series C Preferred Stock

On July 9, 2009, the Company authorized and issued 1,000 shares of Series C Preferred Stock in exchange for $700,000.  The 1,000 shares of Series C Stock are convertible into 67,979,425 common shares.  The par value of the Series C Preferred shares is $1.00.  On May 5, 2015 the 1,000 Series C Preferred shares were fully converted into 67,979,425 common shares.

Common Stock

During 2014 the Company entered into a settlement agreement with a consultant under which 3,750,000 shares of previously issued common stock were surrendered and canceled in consideration for a payment to the consultant in the amount of $50,000.

Warrants

During September and October 2007, the Company issued 31,823,529 shares of common stock for cash at $.017$0.017 per share, or $541,000 total as part of a Private Placement under Rule 506 of Regulation D. Along with the stock, each investor also received a warrant to purchase 30% of the shares purchased in the Private Placement.  A total of 9,547,055 warrants were issued.  The warrants are ten year warrants and have an exercise price of $.025$0.017 per share.

Options

In 2005, the Company authorized the 2005 Equity Plan that made available 10,000,000 shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.  On May 20, 2005, the Company granted non-qualified stock options under the Company’s 2005 Equity Plan for a maximum of 250,000 shares of the Company’s common stock for $0.02 per share. The options expired May 25, 2015.


16
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - STOCK TRANSACTIONS (continued)

On May 1, 2007, the Company granted 4,000,000 stock options to five employees of the Company under the 2005 Plan.  The options vested over two years.  During 2008, 1,000,000 of these options were cancelled prior to vesting.  During 2010, an additional 500,000 of these options were also cancelled prior to vesting.  As of December 31, 2010, these options were fully vested and compensation expense fully recognized.

On April 27, 2007, the Company granted a ten-year non-qualified, non-statutory stock option for 102,400,000 “restricted” shares of the Company’s common stock to Stewart Wallach, as incentive compensation.  The exercise price of the options is $.029 per share, which was the fair market value of the stock on the date of grant.  Twenty percent of the options vested on the date of issuance, and twenty percent per year vested on the anniversary date through April 23, 2011.  On May 23, 2008, 74,666,667 of these options were cancelled.   On July 31, 2009, 5,000,000 of the fully vested options were amended and transferred to James McClinton.  Also on April 23, 2007, the Company granted a ten-year non-qualified, non-statutory stock option for 28,100,000 “restricted” shares of the Company’s common stock to James McClinton as incentive compensation.  The exercise price of the options is $.029 per share, which was the fair market value of the stock on the date of grant.  Twenty percent of the options vested on the date of issuance, and twenty percent per year vested on the anniversary date through April 23, 2011.  On May 1, 2008, 850,000 of these options were cancelled.

On October 22, 2007, the Company granted 700,000 stock options to a business associate of the Company.  The options vested over two years.

On January 10, 2008, the Company granted 1,000,000 stock options to an advisor of the Company. The options vested over one year.

On February 5, 2008, the Company granted 3,650,000 stock options to four directors and one employee of the Company.  The options vested over two years.  During 2010, 3,500,000 of these options were cancelled.

On May 1, 2008, the Company granted 850,000 stock options to an employee of the Company.  The options vested over two years.

On April 23, 2010, the Company granted 4,500,000 stock options to four Directors of the Company and 300,000 stock options to the Company Secretary.  The options vested over one year.  During the three month period ended June 30, 2015, 4,500,000 of these options expired.

On July 1, 2011, the Company granted 4,500,000 stock options to four Directors of the Company and 150,000 stock options to the Company Secretary.  The options vested over one year.

On August 6, 2012, the Company granted 4,500,000 stock options to four Directors of the Company and 150,000 stock options to the Company Secretary.  The options vested over one year.  The Company Secretary has subsequently left the Company and the 150,000 granted options have been canceled.

On January 1, 2014, the Company granted 3,000,000 stock options to two directors of the Company and 150,000 stock options to the Company Secretary.  The options vested on August 5, 2014.

On January 2, 2015, the Company granted 3,000,000 stock options to two directors of the Company and 150,000 stock options to the Company Secretary.  The options vested on August 5, 2015.

On August 6, 2015, the Company granted 3,000,000 stock options to two directors of the Company and 150,000 stock options to the Company Secretary.  The options will vest on August 5, 2016.

15

NOTE 6 – STOCK TRANSACTIONS (continued)

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted.  The following assumptions were used in the fair value calculations:calculations of options granted during the year ended December 31, 2015:

Risk free rate – .651.61 – 3.0%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

17
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - STOCK TRANSACTIONS (continued)

For the nine month period ended September, 30 2015,March 31, 2016, the Company recognized compensation expense of $81,219$14,250 related to these stock options. A further compensation expense of $14,250$19,731 will be recognized for these options in 2015 and $33,981 in 2016.

The following table sets forth the Company’sCompany's stock options outstanding as of September 30, 2015March 31, 2016 and December 31, 20142015 and activity for the periods then ended:

    Weighted       Weighted   
  Weighted Average     Weighted  Average   
  Average Remaining Aggregate   Average  Remaining  Aggregate 
  Exercise Contractual Intrinsic   Exercise  Contractual  Intrinsic 
Shares Price Term (Years) Value Shares  Price  Term (Years)  Value 
               
Outstanding, December 31, 201374,383,333 $    0.029 3.28 $          -
Granted3,150,000 0.029 - -
Exercised- - - -
       
Outstanding, December 31 , 201477,533,333 $    0.029 2.36 $           -
Outstanding, January 1, 2015  77,533,333  $0.029   2.36  $- 
Granted        6,300,000 0.029 - -  6,300,000   0.029   -   - 
Exercised- - - -  -   -   -   - 
Forfeited/expired(4,750,000) 0.029 - -  (4,750,000)  0.029   -   - 
Outstanding, September 30, 201579,083,333 $    0.029 1.98 $          -
                       
Outstanding, December 31, 2015  79,083,333  $0.029   1.73  $- 
Granted  -   0.029   -   - 
Exercised  -   -   -   - 
Forfeited/expired  -   0.029   -   - 
Outstanding, March 31, 2016  79,083,333  $0.029   1.48  $- 
                       
Vested/exercisable at December, 31, 201477,533,333 $    0.029 2.36 $          -
Vested/exercisable at September 30, 201575,933,333 $    0.029 1.85 $          -
Vested/exercisable at December, 31, 2015  75,933,333  $0.029   1.60  $- 
Vested/exercisable at March, 31, 2016  75,933,333  $0.029   1.35  $- 

The following table summarizes the information with respect to options granted, outstanding and exercisable under the 2005 plan:

Exercise PriceOptions OutstandingRemaining Contractual Life in YearsAverage Exercise PriceNumber of Options Currently Exercisable
$.02954,983,3331.58$.02954,983,333
$.0292,500,0002.58$.0292,500,000
$.029700,0003.58$.029700,000
$.0291,000,0002.08$.0291,000,000
$.029150,0002.33$.029150,000
$.029850,0003.67$.029850,000
$.029300,0004.75$.029300,000
$.0294,500,000.75$.0294,500,000
$.029150,0005.75$.029150,000
$.0294,500,0001.83$.0294,500,000
$.0293,000,0003.25$.0293,000,000
$.029150,0008.25$.029150,000
$.0293,000,0004.25$.0293,000,000
$.029150,0009.25$.029150,000
$.0293,000,0004.83$.029-
$.029150,0009.83$.029-


18
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
Exercise Price  Options Outstanding  Remaining Contractual Life in Years  Average Exercise Price  Number of Options Currently Exercisable 
$.029   54,983,333   1.08  $.029   54,983,333 
$.029   2,500,000   2.08  $.029   2,500,000 
$.029   700,000   3.08  $.029   700,000 
$.029   1,000,000   1.58  $.029   1,000,000 
$.029   150,000   1.83  $.029   150,000 
$.029   850,000   3.17  $.029   850,000 
$.029   300,000   4.17  $.029   300,000 
$.029   4,500,000   0.25  $.029   4,500,000 
$.029   150,000   5.25  $.029   150,000 
$.029   4,500,000   1.33  $.029   4,500,000 
$.029   3,000,000   2.75  $.029   3,000,000 
$.029   150,000   7.75  $.029   150,000 
$.029   3,000,000   3.75  $.029   3,000,000 
$.029   150,000   8.75  $.029   150,000 
$.029   3,000,000   4.33  $.029   - 
$.029   150,000   9.33  $.029   - 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16


NOTE 7 - INCOME TAXES

As of September 30, 2015,March, 2016, the Company had significant net operating loss carry forwards remaining that will begin to expire in 2022.2033. The Company has determined that a full valuation allowance against its net deferred taxes is necessary as of both September 30, 2015March 31, 2016 and December 31, 2014.2015.

The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant
judgment to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for the years 20112012 and prior.

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

The provision for income taxes for the three and nine month periodsperiod ended September 30, 2015 and 2014March 31, 2016 was calculated based on the estimated annual effective rate for the full 2015 and 20142016 calendar years,year, adjusted for an income tax benefit from the expected utilization of net operating loss carryforwards.

The Company evaluates its valuation allowance requirements based on projected future operations.  When circumstances change and cause a change in management’smanagement's judgment about the recoverability of deferred tax assets, the impact of the change on the valuation is reflected in current income.

NOTE 8 – COST METHOD INVESTMENTS

On January 15, 2013, the Company entered into an agreement with AC Kinetics, Inc. to purchase 100 shares of AC Kinetics Series A Preferred Stock for $500,000. These shares carry a liquidation preference in the amount of $500,000, are convertible at the Company’sCompany's demand into 3% of the outstanding shares of AC Kinetics common stock and have anti-dilution protection.

In addition, the Company and AC Kinetics have agreed to cooperate in the development and commercialization of consumer and industrial products to be solely owned by the Company.  AC Kinetics will be the Company’sCompany's advanced product developer. AC Kinetics will notify the appropriate technology departments at the Massachusetts Institute of Technology (“MIT”("MIT") of the Company’sCompany's ability and desire to commercialize consumer and industrial products developed in the MIT incubator departments.

The Company and AC Kinetics also entered into a royalty agreement whereby, the Company will receive a 7% royalty on any licensing revenues received by AC Kinetics for products sold by them.  This royalty agreement will terminate upon receipt by the Company of royalties of $500,000.

The aggregate carrying amount of cost method investments at September 30, 2015March 31, 2016 and December 31, 20142015 consisted of the following:

 20152014
AC Kinetics Series A Convertible Preferred Stock$500,000$500,000
  2016  2015 
AC Kinetics Series A Convertible Preferred Stock $500,000  $500,000 

It was not practicable to estimate fair value of AC Kinetics Series A Convertible Preferred Stock and such an estimate was not made because, at September 30, 2015March 31, 2016 and December 31, 2014,2015, there were no events or changes in circumstances that could have had a significant adverse effect on the fair value of such investments.

NOTE 9 – SUBSEQUENT EVENTS

On April 22, 2016, the Company received a credit of approximately $479,000 from its major vendor to cover customer returns of defective products from sales that occurred in 2015 and promotional allowances for 2016 sales. The credit will be applied to invoices due to the vendor during the second and third quarters of 2016.
1917



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

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

Special Note Regarding Forward Looking Statements.Statements

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

·our expectations regarding growth and changes in the consumer product markets in which we sell our products and in the consumer specialty lighting industry and our other industries in general;industry;
·our expectation regarding increasing demand for our products and changes in consumer tastes;
·our belief that we will be able to effectively compete with our competitors and increase or maintain our market share as well as our prospects in new geographical markets and in any new ventures or product lines;
·our expectations with respect to increased revenue growth and our ability to achieve profitability resulting from increases in our production volumes or changes or expansion of our product lines;
·our ability to obtain affordable funding when required; and
·our future business development, results of operations and financial condition, including any efforts to penetrate new markets in the world or to launch new product lines.

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

The Company is a “penny stock”"penny stock" under Commission rules and the public stock market price for its Common Stock has been depressed for several consecutive fiscal quarters.  The Company’sCompany's Common Stock lacks sufficient or active primary market makermakers and institutional investor support in the public market and this lack of support means that any increase in the per share price of our Common Stock in the public market is usually eliminated by selling pressure from profit taking by investors.  As of October 20, 2015,May 2, 2016, the Common Stock was trading at $.02 on the Bid Investment in our Common Stock. Investment in our Common Stock is highly risky and should only be considered by investors who can afford to lose their investment and do not require on demand liquidity. Investors should consider risk factors in this Reportquarterly report on Form 10-Q and other SEC filings of the Company.

18

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

“Exchange Act”(1) "Capstone Lighting Technologies, L.L.C." or "CLTL" is a wholly owned subsidiary of Capstone Companies, Inc.
(2) "Capstone International Hong Kong Ltd" or "CIHK" is a wholly owned subsidiary of Capstone Companies, Inc. and a Hong Kong registered Company.
(3) "Capstone Industries, Inc., a Florida corporation and a wholly owned subsidiary of CAPC, may also be referred to as "CAPI."
(4) "Capstone Companies, Inc.," a Florida corporation, may also be referred to as "we," "us" "our," "Company," or "CAPC." Unless the context indicates otherwise, "Company" includes in its meaning all of Capstone Companies, Inc.  Subsidiaries.
(5) "China" or "PRC" means Peoples' Republic of China.
(6) References to "33 Act" or "Securities Act" means the Securities Act of 1933, as amended.
(7) References to "34 Act" or "Exchange Act" means the Securities Exchange Act of 1934, as amended.

“PRC”(8) "SEC" or “China” means the People’s Republic of China and Hong Kong Special Administrative Region (“Hong Kong”).

“SEC” and “Commission”"Commission" means the U.S. Securities and Exchange Commission.


20
(9) "Subsidiaries" means Capstone Industries, Inc. (CAPI), Capstone International H.K Ltd., (CIHK), and Capstone Lighting Technologies, Inc. ("CLTL").

General.

Capstone Companies, Inc., a Florida corporation, (“("CAPC,” “Company,” “we,”" "Company," "we," or “our”"our") is a public holding company with its Common Stock, $0.0001 par value per share, (“("Common Stock”Stock") quoted on the OTCQB system of The OTC Markets Group, Inc. and, since July 6, 2012, under the trading symbol “CAPC.”"CAPC."  This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2014.2015.

Available Information.

The Company’sCompany's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company’sCompany's website at http://www.capstonecompaniesinc.com/Investor Relations and on the SEC’sSEC's website at http://www.sec.gov. The public may read and copy any materials filed by the Company with the SEC at the SEC’sSEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549, or through the aforesaid website URL’s.URL's. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’sCompany's references to the URLs for these websites are intended to be inactive textual references only.

Factors Affecting our Financial Performance.

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

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

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

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

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

* Our ability to attract new customers to our websites who are interested in purchasing* Our ability to attract new customers for our products;

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

* Our sales are dependent on our ability to attract retail customers on cost-effective terms. Studies like The Neilson Company’s August 2014 “E-Commerce: Evolution or Revolution in the Fast Moving Consumer Goods World,”
19

* Our sales are currently dependent on our ability to attract retail customers on cost-effective terms to brick and mortar retail locations or to on-line retailer Amazon.com. Studies like The Neilson Company's August 2014 "E-Commerce: Evolution or Revolution in the Fast Moving Consumer Goods World," document that e-commerce is increasingly important in consumer goods industry. With the growing importance of e-commerce and Web-based or online marketing through online mediums like Facebook, My Space, Yahoo!(R) Groups and amateur websites such as YouTube.com, as well as “viral” marketing through online mediums like Facebook, Pinterest, Yahoo!(R) Groups and  YouTube.com, as well as "viral" marketing through Twitter or Instagram, online blogs and consumer use of Internet search engines like Google and Bing, we recognize a need to enhance our such non-traditional Social Media marketing avenues, but we may be unable to successfully develop such non-traditional marketing strategies and efforts or may lack the available funds to do so as long as traditional marketing and sales through retailers and their stores remain our central marketing and sales strategy. Reliance on traditional brick-and-mortar retailers is itself a risk factor for our company.

Introduction.Introduction

The following discussion and analysis provides an introduction to our company, its current strategy and customers and summarizes the significant factors affecting: (i) our consolidated results of operations for the three months and nine months ended September 30, 2015March 31, 2016 compared with the same period in 20142015 and (ii) financial liquidity and capital resources.


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We are a public holding company organized under the laws of the State of Florida and weFlorida. We design and manufacture through our operating subsidiary, a line of specialty power failure lighting solutions and other innovative specialty consumer lighting products for the North American and Latin AmericanGlobal retail markets. We oversee the manufacturing ofmarkets through our products, which are currently all made in China by contract manufacturers, and are primarily marketed and sold by our wholly-ownedoperating subsidiaries.  Our primary operating subsidiary is Capstone Industries, Inc., a Florida corporation organizedlocated in 1997 and acquired on September 13, 2006, bythe principal executive offices of the Company (“Capstone”("CAPI"). Our other wholly owned subsidiaries are: (a)   Capstone International Hong Kong, Ltd, a Hong Long limited liability company organized in 2012 (“CIHK”) and (b) Capstone Lighting Technologies, LLC, a Florida limited liability Company organized in 2004 (“CLTL”). CLTL has no significant business operations at this time. CIHKLtd., or "CIHK", was established as part of our strategic plan to expand our product development, engineering and factory resource capabilities in Hong Kong.  Our product line consists of stylish, innovative and easy to use consumer lighting products, including power failure multi-function handheld lights, power failure multi-function nightlights and wall-plates, decorative accent lighting, power failure multi-function nightlight wall-plates,nightlights, wireless motion sensor lights, remote control outlets, remote controlbattery powered accent lights and under final development, hardwired led motion security lighting, outdoor coach led lighting and outdoor utility lighting, all designed to make today’s lifestyles simpler and safer.remote control outlets.  Our products are sold under the trade andCAPI brand name, of our wholly-owned subsidiary, Capstone Industries, Inc., as well as being private labeled for our retail customers as programs require."Capstone Lighting," and also under a nationally recognized licensed brand.  We seek to deliver strong, consistent business results and superior shareholder returns by providing consumers on a global basis with unique products that make their lives simpler and safer.

Strategy.We oversee the manufacturing of our products, which are currently all made in China by contract manufacturers, through our three wholly-owned operating subsidiaries: CAPI, CIHK and CLTL.  Our Chinese contract manufacturers may participate in the design of our products.  We believe that we have commercially reasonable terms with our Chinese contract manufacturers. Our products are typically shipped from China contract manufacturers and stored in warehouses or distributors in our markets.  From time to time, we evaluate our relationship with existing contract manufacturers as well as alternative contract manufacturing sources in China and elsewhere as part of our contingent planning.

Strategy

Our objective is to increase revenues, profitability, and cash flow and revenues while enhancing our position as a leading manufacturer, marketer and distributor through the ongoing development of innovative and technologically advanced ideas and concepts for the LED Home Lighting consumer product categories.  We plan to leverage our product successes by expanding our offerings into all categories of the LED Home Lighting segments.product lines.  We have established the 'Capstone Lighting' brand in the power failure and wireless motion sensor light product lines and also in the Remote Controlled Battery Accent Lights and Wireless Remote Controlled outlet lines.  To successfully enter into the expanded new Home LED segments,product lines, we determined a highly recognized national brand wouldcould be advantageous to gain market entry with specific retailers focused on national brands.  With this strategy in place, in earlyadvantageous.  In 2014 the Company initiated a search for a brand name and marketing campaign that would resonate with consumers.  The desired brand had to have a perceived rich heritage, and one hopefully trusted by American homeowners for high performance, quality and innovative products.  Capstone commissioned a brand extension research study to understand consumer perspectives when it comes to Hoover as a lighting brand.  With the study validating the value of the brand for LED productsname secured and the product strategymarketing campaign finalized, the Company introducedsuccessfully launched (in terms of gross sales) its expanded product lineslargest expansion of Hoover LED Home brandnew products in the Company's history at the International Hardware Show in May 2015.  The Company will continue its focus on product expansion with major product releases scheduled for the International Hardware Show in May 2016.

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Our 2013 investment in AC Kinetic Technologies, an Armonk, New York technology development company, in 2013 has allowed us to develop certain innovative concepts that the Company has conceived that are complex and that will hopefully yield intellectual property which will further differentiatedistinguish the Company’sCompany's products from other off-the-shelf products commonly marketed at retail.  The Company plans to exploit the trade secret technologies developed by AC Kinetic Technologies within itsthe Company's own products, both labeled under Capstone"Capstone" and under the Hoover.Ò HOME LED brand.  The first of these products was introduced to the market in May 2015 at the International Hardware Show andShow.  Retailers have been presented to various major retailers since the launch.shown interest in certain programs which are currently being finalized.

Perceived or Essential Strengths. We have provenextensive experience in introducing new products to retail market channels and believe that provides the Companyus a competitive edge.edge in our niche markets.  In the Company’sour early development, we sought to find niche product opportunities that may have been overlooked or underexploited by competitors, in order to win a profitable position inniche of the market share with minimal cost of entry.  In 2015,May 2016, the Company has launched its largest offerplans to launch another extensive array of new products that is expected to expandat the Company’s distribution beyond its current product placements.International Hardware Show.  The new products will not only introduce additional functionality to existing categories of products that are meaningful to consumers but iswill also intendedseek to revitalize categories that have grown stale due to perceived minimal investment and creativity by competitors.  The Company’sCompany's desired product(s) characteristics are as follows:

·Designed to make everyday tasks or usage simpler and more enjoyable for consumers;
·While continuing to focus on increased profit margins, the products must be affordable to win at the point of sale and deliver increased revenues for retail partners;
·The products must represent significant value when compared with items produced or marketed by competitive consumer product companies; and
·Wherever feasible, the products must be unique to the market whether this be accomplished though design techniques, added functionality or some proprietary innovation.


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

Due to the extensive, modern manufacturing, design and engineering capabilities in China, and the lower laborunit costs in China, we believe that it is more economical and efficient to continue to manufacture certain products in China and have the productthem shipped to the U.S.United States rather than to have such products produced in North America.  While this resource is available to and used by large numbers of U.S. companies, including our competitors, we believe this Chinese manufacturing resource gives us the level of production cost and quality that allows us to be competitive with larger competitors in the U.S.United States.  However, as design technologies can influence the degree of manualhand labor in building its future products, the Company expects the advantages it has realized by manufacturing solely in China to be challenged.  In these cases, the Company will evaluate production opportunities in the U.S.United States.

The Company has begunbegan in 2015 to utilize U.S. based industrial design support to augment the Capstone International HK Ltd. (CIHK)CIHK's Hong Kong based design team, and to isolate and protect some of the Company's latest intellectual property or “IP”"IP".  These products are currently going through final certification and testing and will be available by the end of the year.

In 2013, as a result of the increased number of product lines and factory partners, theThe Company further expanded CIHK’sCIHK's operations in Hong Kong in 2014, with additional personnel experienced in engineering and design, product development, international logistics and quality control. As of the date of this Report on Form 10-Q, we have filled key management and staff positions and CIHK’s operations are fully operational.  These associates work with our OEM Chinese factories to develop and prototype new product concepts and to ensure products meet consumer product regulationsConsumer Product Regulations and quality controlrigorous Quality Control standards.  All products are tested before and during production by Company personnel.  This team also provides extensive product development, quality control and logistics support to our factory partners to ensure timelyon time shipments.  The Company initiated its expansion in Hong Kong in 2013 as product line extensions and increased number of factories utilized became factors.  In anticipation of the Company’s expectedCompany's growth we have continued our investment to ensure overseas factory performance meets stringent tolerances which are designed to maintain our competitiveness and operational excellence.

We believe that the Company can expand itshave expanded our international sales primarily by leveraging our relationships with our existing global retailers and by strengthening our international network.product offerings.  With our Hong Kong office in place, and our extensive products launch campaigns underway, they will assist us in placing more products into foreign market channels.  We have achievedIn 2015 we surpassed our initial expansion goal to establishwith product sales and presence in Taiwan,Australia, Canada, Japan, South Korea, AustraliaTaiwan and have just recently shipped into the United Kingdom. International sales represented 7% of total net revenue with 93% of net revenue originating from the United States.
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WeAny expansion into international markets will notrequire a sustained product development and marketing-sales efforts, which in turn will require ongoing investment of resources and funding.  Our ability to penetrate new markets will be abledependent in part on adequate, affordable funding or available cash flow from operations.  The lack of such money will hamper our ability to judge the results of our strategypenetrate and effortsmaintain or grow market share in Hong Kong as well as new product lines discussed below until fiscal year 2016.markets.

Products and Customers.Customers

The Company has earned the recognition associated with being an innovative company as evidenced by the Company being invited to more retail buying reviews than earlier years when we were more focused on proving our ability to perform in the big box retail brick-and-mortar environment while supplying a short line of products.  We are now determined to expand our product positioning through the introduction of many more indoor and new outdoor lighting programs both under the Capstone"Capstone" brand and our new licensed brand,the Hoover.® Home LED brand.  We will also be addingexpanding hardwired solid state products to our programs in addition to the existing battery and induction powered product lines.lines, through the expansion of bath vanity fixtures. Hoover®is a registered trademark of Techtronic Floor Care Technology Limited.

From time to time,Since inception, we may explore relationships or ventures with other companies or groups in Hong Kong as part of our efforts to expand our product presence or business and financial capabilities in China.

Over the past 7 years, the Company hashave focused on establishing and growing supply relationships with numerous leading international, national and regional retailers including but not limited to: Costco Wholesale, Home Depot, Lowes, Office Depot, Sam’sSam's Club, Target, The Container Store, True Value, Wal-Mart, Canadian Tire and Canadian Tire.Amazon. These distribution channels may sell our products onlinethrough the Internet as well as through conventional brickretail storefronts and mortar retail stores.

catalogs/mail order.  Our experience in management, operations, and the export business has enabled us to develop the scale, manufacturing efficiencies, and design expertise that serves as the foundation for us to aggressively pursue niche product opportunities in our largest consumer markets and targeted, growing international market opportunities.  While we have traditionally generated the majority of our sales in the domestic U.S. market, we perceive the growing urbanization;urbanization, rising family incomes and increased living standards abroad have spurred potentiala perceived demand for small consumer appliances internationally.  In order to capture this market opportunity, we introduced the Capstone Industries brands to markets outside the U.S. including Central and South America, Mexico, Taiwan, South Korea, Australia, Japan CanadaUnited Kingdom and the United Kingdom.  We anticipate further expansion into Europe as well as other markets where our U.S. customers have strong global initiatives.  Due to the rateCanada. This has been a very successful introduction with International sales representing 7% of natural and man-made occurrences resultingrevenue in loss of electricity worldwide, we are optimistic about the continued growth rate in fiscal years 2015 and 2016 for our power failure lighting programs.  This assumption is not based on independent market surveys or marketing data, but rather is based on our understanding50% of our industry segments and market demandrevenue in each such segment.  We do not anticipate being able to fully evaluate efforts to expand our geographical markets until fiscal yearthe quarter ended March 31, 2016.

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WeBased on our experience in the industry, our Chinese contract manufacturing resources and focus on well designed, practical products, we believe the CompanyCAPC is well positioned to become a leading manufacturer in what we perceive as the rapidly growing LED home lighting and security lighting segmentssegments. Our efforts to achieve such a goal are ongoing.  Sluggish economic growth in its marketsNorth America in past two years and we intend to continue to bethe global angst caused by a leaderdecline in the rate of power-failure lighting solutions for consumersChinese economic growth in our distribution channels.the past year are factors that hinder expansion in the consumer goods market.  We believe we will maintain our revenue growth because of our past ability to deliver unique products on time, the quality reputation of our products, our business relationships with our retailers and our aggressive product expansion strategies currently in place.  Such continued progress and actual results dependsdepends on a number of assumptions and factors, including ones mentioned in “Risk Factors”"Risk Factors" below. Critical to growth are economic conditions in our markets that foster greater consumer spending as well as success in our initiatives to distinguish our brands from competitors by design, quality, and scope of functions and new technology or features.  Our ability to fund the pursuit of our goals remains a constant, significant factor.

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

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

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Sales and Marketing.Marketing

OurCAPC's products are marketed primarily through a direct independent sales force, distributors and wholesalers.  The sales force markets our products through numerous retail locations worldwide, including mass merchandisers, warehouse clubs, food, drug and convenience stores, department stores and hardware centers.  We actively promote our products to retailers and distributors at North American trade shows, but rely on the retail sales channels to advertise our products directly to the end consumer.  Domestically and internationally, the sales teams market our full portfolio of product offerings.  All sales activities at major account levels involve the Company’sdirect executive team.management participation.  The Company will also be targeting direct to retail clients through its CIHK’s staffCIHK for products that fall outside Capstone’sCapstone's branded categories but are deemed innovative and preferably exclusive to CIHK, in some cases supplied under retailers private label brands.CIHK.  This should allow for normalized year roundquicker revenue expansion as time consuming product and brand development efforts are the responsibility of the retailer.

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

ConsumerWe maintain a Facebook website at https://www.facebook.com/powerfailuresolutions/ and our sales staff may use Social Media from time to time to promote our products and brands.  We have not developed a comprehensive Social Media campaign based on third party sponsors or promoters.

Competitive Conditions

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

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

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

Working Capital Requirements

The Company has reaffirmed its decision to extend its business model to expand distribution so that products can be offered from our Anaheim, California warehouse for U.S. domestic shipments to such noted retailers as Home Depot, Office Depot, True Value and Wal-Mart for non-seasonal periods.  This enables retailers to stock our products daily and replenish inventory based on rates of sale in their stores. The Company may require additional working capital to fund the cost of new product molds, product testing and certifications, package design work, expansion of the sales support team in the U.S. and further expansion of the design and engineering capabilities in our Hong Kong office.

As required, additional funding options will be considered to ensure that product launches are never held back as a result of funding shortfalls.  Certain members of Company's management and Board of Directors have supplemented the cash flow needs as required through short term loans.  Access to affordable, timely funding could be critical to our ability to compete and expand our market share.  Our liquidity and cash requirements are discussed more fully in Part II, Item 6, Management's Discussion and Analysis of Operations below.

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

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Competitive Conditions

The consumer products and small electronics businesses are highly competitive, both in the United States and on a global basis, as large manufacturers with global operations compete for consumer acceptance and, increasingly, limited retail shelf space.  Competition is influenced by brand perceptions, product performance and value perception, customer service and price.  Our principal lighting competitors in the U.S. are Jasco, Energizer and Sylvania.  We believe private-label sales by large retailers has some impact on the market in some parts of the world as many national retailers such as Target, Wal-Mart, Home Depot, and Costco offer lighting as part of their private branded product lines.  E-commerce also has an impact on reliance on brick and mortar retail sales strategy.  Many of competitors have substantially greater resources and capabilities, including greater brand recognition, research and development budgets and broader geographical market reach.  Competitors with greater resources could undermine our expansion efforts by marketing campaigns targeting our expansion efforts or price competition.

With trends and technology continually changing, weCAPC will continue to endeavor to invest and rapidly develop new products that are competitively priced with consumer centric features and benefits easily articulated to influence point of sale decision making.  Success in the markets we serve depends upon product innovation, pricing, retailer support, responsiveness, and cost management.  We continue to invest in developing the technologies and design critical to competing in our markets as evidenced by our investment in AC Kinetic Technologies.

Working Capital Requirements.

The Company has reaffirmed its strategic decision  Our ability to extend its business model to expand distribution so that products could now be offeredinvest is limited by operational cash flow and funding from our Los Angeles warehouse for U.S. domestic shipments to such noted retailers as Home Depot, Target, Office Depot, True Value and Wal-Mart for non-seasonal periods. This enables retailers to stock our products daily and replenish inventory based on ratesthird parties, including members of sale in their stores. To support further expansion into direct to store and direct to consumer distribution channels, the Company has transferred its domestic warehousing requirements to a logistics partner based in Anaheim, California that provides omni-channel distribution services using the latest EDI (electronic data interchange) technology software. We believe this is a more efficient arrangement than the Company handling warehousing requirements.


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With any new licensemanagement and the major expansionBoard of product offerings, in order to fund these programs, the Company will require additional working capital to fund the cost of new product molds, product testing and certifications, package design work, expansion of the sales support team in the U.S. and further expansion of the design and engineering capabilities in our Hong Kong office. The new programs will also require a larger amount of inventory particularly at key selling periods and therefore will also require additional funding needs as we ship orders based on retailer weekly or on demand replenishment.

Various funding options are being considered to supplement the Company’s cash flow needs. Access to affordable, timely funding could be critical to our ability to compete and expand our market share.Directors.

Raw Materials.Materials

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

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

Seasonality

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

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

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Intellectual Property

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

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

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

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

Distribution and Fulfillment

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

Research, Product Development, and Manufacturing Activities

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

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

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

Critical Accounting Policies

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

CONSOLIDATED OVERVIEW OF OPERATIONS.OPERATIONS

Revenue, net.net

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, total net sales were approximately $7,747,400$2,078,200 and $7,738,900,$713,500, respectively, a slight$1,364,700 or 191% increase from the previous year but this represents a record revenue quarter for the Company.year.

For the 9 months ended September 30, 2015 and 2014, total net sales were approximately $8,751,000 and $13,008,600, respectively, a reduction of $4,257,600 or 32.7% from the previous year.

As discussed in the Form 10-Q report for the fiscal quarter ending June 30, 2015, revenue in the first six months of 2015 was adversely impacted by the West Coast Port Dispute and our strategic decision to curtail orders until our new products were launched in May 2015. The revenue in the third quarter ended September 30, 2015,  is attributed to the May 2015 launch of the Company’s innovative new products such as the Wireless Remote Control Puck Lights, the next generation Wireless Remote Control Outlets and the new version of our 3 in 1 LED Power Failure Light. The Company also continued to increase shipmentshave strong International sales to various overseas markets during the period. International sales were approximately $1,050,000 or 50.5% of total revenue for the quarter.

Cost of Sales.Sales

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, cost of sales were approximately $5,767,300$1,464,700 and $6,621,600,$406,200, respectively, a reductionan increase of $854,300$1,058,500 or 12.9%260% from the previous year. Even though net revenue in the quarter has increased over last year, costCost of sales has been greatly reducedincreased as a result of engineering andthe increased sales volume, however overall product design efficiencies in our new products combined with aggressive price negotiations with the factories by our Hong Kong office.

For the 9 months ended September 30, 2015 and 2014, cost of sales were approximately $6,410,200 and $10,232,000, respectively, a reduction of $3,821,800 or 37.4% from the previous year. The reduced cost of sales was the result of the lower sales volumes in the period and the lower unit costs associated with the product mix that was sold incontinue to remain stable during the period.


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Gross Profit.Profit

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, gross profit was approximately $1,980,100$613,600 and $1,117,300$307,400 respectively, an increase of $862,800$306,200 or 77.2%99.6 % higher than the same period in 2014.2015. Gross profit as a percentage of sales was 25.6%29.5% in the three monththree-month period compared to 14.443.1 % in the same quarter in 2014. This represents a significant margin improvement over last year. In2015.  During the third quarter 2014 we provided $728,000 of marketing allowances and incurred a $225,000 once off manufacturing cost that greatly reduced the gross profit for that period.

For the 9 months ended September 30,period ending March 31, 2015, and 2014, gross profit was approximately $2,340,800 and $2,776,700 respectively, a reduction of $435,900 as compared to the same period in 2014. The lower gross profit for the nine months ended September 30, 2015 was mainly the result of lower sales volume incurred during the first six months of 2015.

Gross profit as a percentage of sales was 26.7% in the nine month period compared to 21.3 % in the same period in 2014. The increased gross profit as a percentage of sales for the 9 months ended September 30, 2015 is mainly the result of a reduction in promotional expenses provided to retailers during the period. As previously referenced above, in the 9 months ended September 30, 2014 the Company incurred approximately $953,000determined that $181,978 of previously accrued promotional allowances were no longer required. The reduction of promotional allowances was included in revenue for the period ended March 31, 2015 and other expense that erodedalso had the impact of increasing gross profit in that period.

Operating Expenses.Expenses

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, total operating expenses were approximately $621,200$654,700 and $759,200$661,000 respectively, a reduction of $138,000$6,300 or 18.2%1% as compared to same period in 2014.2015.

For the 9 months ended September 30, 2015 and 2014, total operating expenses were approximately $1,983,400 and $2,413,300 respectively, a reduction of $429,900 or 17.8 % as compared to same period in 2014.

For the three months and nine months ended September 30, 2015, total expenses were lower than the same periods last year. The following summarizesis a summary of the major expense variances by category as compared to 2014.category.

Sales and Marketing Expenses.Expenses

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, sales and marketing expenses were approximately $16,700$63,000 and $81,100$36,700 respectively, a reductionan increase of $64,400$26,300 or 79.4%71.7%. During the quarter ended March 31, 2016, we distributed royalty payments of $31,000 to Hoover Inc. that we did not incur in the same period last year.

For the 9 months ended September 30, 2015 and 2014, sales and marketing expenses were $185,200 and $455,100 respectively, a reduction of $269,900 or 59.3%. With the launch of the new product lines and the resulting strong sales with consumers, the Company has not been required to provide as much advertising promotions funds for the period as compared to last year when the Company provided $323,700 in retail promotion expense.
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Compensation Expenses.Expense

For the 3 months ended September 30,March 31, 2016 and 2015, compensation expense was approximately $308,500 and 2014, compensation expenses were approximately $314,000 and $375,800$361,100 respectively, a reduction of $61,800$52,600 or 16.414.6 %.

For the 9 months ended September 30, 2015 and 2014, compensation expenses were $1,007,300 and $1,045,900 respectively, a reduction of $38,600 or 3.7 %.  Overall compensation expenses haveexpense has been reduced as a result of the reduction of personnel, however, consulting professional fees have increased as we replaced a sales position with a sales consultant.

Professional Fees.Fees

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, professional expenses were approximately $56,900$104,300 and $38,700$96,200 respectively, an increase of $18,200$8,100 or 47.0%.

For the 9 months ended September 30, 2015 and 2014, professional expenses were approximately $202,500 and $144,700 respectively, an increase of $57,800 or 40.0%8.4%. The higher expense is partly the result of the Company engaging the services of a sales consultant to support the U.S. office marketing efforts.effort.

Product Development Expenses.Expenses

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, product development expenses were approximately $74,700$36,300 and $95,400,$45,700, respectively, a reduction of $20,700$9,400 or 21.7%20.6%.


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For This expense reduction is the 9 months ended September 30, 2015 and 2014, product development expenses were approximately $181,200 and $312,300, respectively, a reductionresult of $131,100 or 42.0%. In 2014, the product development expense levels were very high as the Company was developingour Hong Kong office being able to negotiate favorable start up terms for new products that incorporated A.C. Kinetics technology. In 2015, these expenses are running atitems with some of our normal historical level.factory partners.

Other General and Administrative.Administrative

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, other general and administrative expenses were approximately $158,800$142,800 and $168,300$121,400 respectively, a reductionan increase of $9,500$21,400 or 5.6%.

For the 9 months ended September 30, 2015 and 2014, other general and administrative expenses were approximately $407,100 and $455,200, respectively, a reduction of $48,100 or 10.6%17.6%. This reduction was primarilyThe expense increase is mainly the result of reduced bankingincreased Sterling Bank fees caused byassociated with the lower sales volumehigher revenue during the first half of the 2015 fiscal year.period.

Net Operating Income.Loss

For the 3 months ended September 30, 2015 and 2014,March 31, 2016 the operating incomeloss was approximately $1,359,000 and $358,000, respectively, for$(41,200) compared to a $(353,600) net operating loss in 2015. This is an increased operating incomeimproved performance of $1,001,000 or 280% as compared to$312,400 over the same period in 2014.

For the 9 months ended September 30, 2015 and 2014, the operating income was approximately $ 357,400 and $363,400, respectively, for an operating income reduction of $6,000 as compared to the same period in 2014.

With a record gross profit of $1,980,100, reduced operating expenses of $621,100, the Company has achieved a record Net Operating Income of $1,359,000, for the 3 months ended September 30, 2015. In comparison to the same quarter 2014, the Company has been able to improve gross profit by $862,800, reduce operating expenses by $138,000 for a combined Net Operating Income improvement of approximately $1,001,000 or 280% in the quarter.

Interest Expense.Expense

For the 3 months ended September 30,March 31, 2016 and 2015, and 2014, interest expensesexpense was approximately $111,700$57,700 and $69,500,$37,200, respectively, for an increase of $42,200$ 20,500 or 60.7%55.1% as compared to same period in 2014.2015.

For the 9 months ended September 30, 2015 and 2014,The higher interest expenses were approximately $205,900 and $223,000, respectively, for a reduction of $17,100 or 7.6% as compared to same period in 2014.

Interest expense in the third fiscalfirst quarter ended March 31, 2016 is the result of September 30, 2015, has increased, resulting from the additionalhigher bank funding required to support the purchase of raw materials for the large order backlog and the expansion of Accounts Receivable balances resultingbalance carried over from the higher volume of shipments.fourth quarter 2015, combined with an increase in Accounts Receivable in the first quarter 2016 compared to 2015.

Net Income.Loss

For the 3 months ended September 30, 2015,March 31, 2016, the Company had a net incomeloss of approximately $1,247,300$(98,900) as compared to $286,500a net loss of $(390,800) in the same period last year for an increased net income of $960,800 or 335%.year.

ForThe overall net improvement of $291,900 in our typically weakest quarter was the 9 months ended September 30, 2015,result of improved revenue, supported by strong International sales. In the Company had a net income2016 quarter we incurred the added expense of approximately $151,500 as compared with a net income of $134,000the Hoover royalty payments and increased sales commissions that we didn't have in the same period last year for a net increase of $17,500 or 13.1%.

The third quarter 2015, performance, with the increased revenue, higher gross margins and reduced operatinghowever total expenses has reversedcame in below last year's level as a half year lossresult of $(1,095,900) into a nine month profit of $151,500. This represents a net income improvement of $1,247,300 in the third quarter 2015 quarter. The significant improvement in gross margin during the period has confirmed the Company’s earlier strategic decision to curtail sales in the first half, as the higher new margins could have been reduced by promotional allowances to retailers to sell off older products. With the release of many other new products and the launch of the Hoover brand we have a $7,000,000 backlog to be shipped in the fourth quarter 2015 and a strong backlog moving into the first quarter 2016.our continuing expense reduction program.

Off-Balance Sheet Arrangements.Arrangements

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


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Contractual Obligations.Obligations

The following table represents contractual obligations as of September 30, 2015:March 31, 2016:

 Payments Due by Period 
 Total 2015 2016 2017 After 2018 Payments Due by Period 
           Total 2016 2017 2018 After 2019 
(In thousands)                
Accounts Payable and accrued expense $1,812 $1,812 $- $- $-  $363  $363  $-  $-  $- 
Notes Payable Sterling Factors 4,184  4,184 - - -   355   355   -   -   - 
Notes and loans payable to related parties-current maturities 3,485 1,453 2,032 - -   2,346   2,346   -   -   - 
Operating Leases 139 35 96 8 -   132   104   28   -   - 
Interest on Short-Term Debt  121  74  47  -  -   105   105   -   -   - 
Total Contractual Obligations $9,741 $7,558 $2,175 $8 $-  $3,301  $3,273  $28  $-  $- 

Notes to Contractual Obligations Table.Table

Purchase Obligations — Purchase obligations are comprised of the Company’sCompany's commitments for goods and services in the normal course of business.

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

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

LIQUIDITY AND CAPITAL RESOURCES.RESOURCES

  For the Three Months Ended 
(In thousands) March 31, 2016  March 31, 2015 
        
Net cash provided by (used in):    
Operating Activities $1,773  $278 
Investing Activities $(5) $(2)
Financing Activities $(1,670) $(442)
  For the Nine Months Ended 
(In thousands) September 30, 2015  September 30, 2014 
Net cash provided by (used in):      
Operating Activities $(5,294) $1,411 
Investing Activities $(58) $(45)
Financing Activities $5,297  $(1,485)

The Company’sCompany's borrowing capacity with Sterling National Bank, funding support from Directors and cash flow from operations provide usthe Company with the financial resources needed to run our operations and reinvest in our business. However to fund the development, expansion, marketing and inventory of the new branded product line, the Company will require additional working capital during this development phase. The Company will review alternate sources to supplement funding for working capital and debt service. However, Company’s Chief Executive Officer and Director Stewart Wallach and Company Director Dr. Jeffrey Postal have provided additional temporary funding to supplement funding shortfalls during this launch phase.

Operating Activities.Activities

OurCash provided by operating activities was approximately $1.773 million in the 3 months ended March 31, 2016 compared with approximately $278,000 provided by operating activities in 2015.  During the quarter the Company collected $3.8 million of Accounts Receivable and used approximately $1.9 million in reducing accounts payable and accrued liabilities. The Company's cash flowsflow from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers.

In  Sales are influenced significantly by the first nine monthstiming and launch of 2015 Cash (used in) operating activities was approximately ($5,294,000) comparednew products into the marketplace. With the establishment of our Hong Kong operation we have built an operational structure that, through relationships with approximately $1,410,900 provided by operating activitiesfactory-suppliers combined with our internal expertise, can develop and release quality products to market substantially quicker than we have been able to accomplish in previous years. Furthermore, in the same period 2014. Duringsecond quarter of 2016, we negotiated with our largest vendor to receive a credit of approximately $479,000 to cover defective product sales from 2015 dueand promotional efforts for 2016. The credit will be applied to the increase in revenue, the Company’s Accounts Receivables increased by $6,377,000 which was the main reason for the increased in Cash used, however it was slightly offset by an increase in Accounts Payable of $1,168,000.

Investing Activities.

Cash (used in) investing activitiesvendor invoices in the first nine months 2015 was $(58,200) compared to $(44,700) in the same period 2014 which related to the purchasesecond and third quarters of property and equipment.2016.


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Investing Activities

Cash used for investing activities for the quarter ended March 31, 2016 was approximately $(4,700) compared to $(2,200) in 2015.  The Company will continue to invest in new product molds and tooling.  With the product expansion into new LED home lighting categories, the Company's future capital requirements will increase.  Our Hong Kong management team will be able to negotiate favorable payment terms with factories that will reduce the amounts of upfront cash we will need to have available when initiating a new project.  Management believes that our cash flow from operations and additional borrowing will provide for these necessary capital expenditures.

Financing Activities.Activities

Net cash provided by or (used in) financing activities for the nine months ending September 30, 2015 was $5,296,700 and $(1,485,000) in the same period 2014. During 2015 the Company has increased notes payable from both the bank and related parties in order to fund the large orders being processed. The Company’sOur ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future.

As discussed  Net cash used in Note 3, Notes Payable, duringfinancing activities for the period from July 2014 through September 2015,ended March 31, 2016 was approximately $(1.670) million compared to $(442,000) used in 2015.  With the Company’s credit line withcollection of the Accounts Receivable balances in the quarter the Company paid down outstanding loans to the Sterling National Bank was temporarily increased from $4,000,000 to $7,000,000 to provide additionaland other Note Holders. The Company also paid off an old related party loan with interest totaling $109,000 and opened a new note for $360,000 as partial funding to coverfor the increased sales volume during the holiday season. As of September 30, 2015, the maximum amount that can be borrowedlarge order back log on this credit line is $7,000,000.hand.

As of September 30, 2015,At March 31, 2016, the Company was in compliance with all of the covenantsagreements pursuant to existing credit facilities.  Management believes that our cash flow from operations, continued support from Sterling National Bank and support of our Directors will provide sufficient financial resources for the Company during 2016.

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

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

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

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

·The possibility of expropriation, confiscatory taxation or price controls;
·Adverse changes in local investment or exchange control regulations;
·Political or economic instability, government nationalization of business or industries, government corruption, and civil unrest;
·Legal and regulatory constraints;
·Tariffs and other trade barriers, including trade disputes between the U.S. and China; and
·Difficulty in enforcing contractual and intellectual property rights.

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

Interest Rate Risk: The Company does not have significant interest rate risk during the period ended September 30, 2015.March 31, 2016.

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

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk.Risk

Not applicable.


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Item 4.  Controls and Procedures.Procedures

Evaluation of disclosure controls and procedures.  The Company maintains “disclosure"disclosure controls and procedures,”" as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20142015 and concluded that the disclosure controls and procedures were effective under Rules 13a-15(e) and 15d-15(e) under the Exchange Act and as of September 30, 2015,March 31 , 2016, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Commission regulations and forms and (ii) accumulated and communicated to the Company’sCompany's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Item 4(T).  Controls and Procedures.

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

The certifications of our Chief Executive Officer and Chief Financial Officer attached as Exhibits 31 and 32 and to this Report include information concerning our disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in Item 4, including the information incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2014,2015, for a more complete understanding of the matters covered by such certifications.

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings.

The Company is not a party to any material pending or threatened legal proceedings and, to the best our knowledge, no such action by or against us has been threatened.  From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of our business.  Although occasional adverse decisions or settlements may occur in such routine lawsuits, we believe that the final disposition of such routine lawsuits will not have material adverse effect on its financial position, results of operations or status as a going concern.

Other Legal Matters.  To the best of our knowledge, none of our Directors, officers or owners of record of more than five percent (5%) of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us in reference to pending litigation.

Item 1A.  Risk Factors.

In addition to risk factors set forth herein and in the Form 10-K for the fiscal year ended December 31, 2014,2015, and other Commission filings, the following risk factors should be considered in any evaluation of the Company.

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Investment in new business strategies and marketing and sales strategies could present risks not originally contemplated.  The Company has invested, and in the future may invest, in new product lines and technologies, attempts to expand our markets, business strategies or marketing and sales strategies.  Such endeavors may involve significant risks and uncertainties, including insufficient revenue to offset liabilities assumed and expenses associated with the strategy, inadequate return of capital, and unidentified issues not discovered in the Company’sCompany's evaluation. These new strategies may be inherently risky and may not be successful.  As a smaller reporting company, we are more vulnerable to the failure of business and marketing and sales strategies than larger competitors.


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The Company relies on equity or debt funding from members of management or outside investors from time to time to meet working capital needs. The Company receives equity or debt funding from time to time from members of management or outside investors to fund working capital needs. Such funding may not always be available or adequate to meet such essential needs.  The lack of primary market makers and institutional investors for our publicly traded Common Stock makes it difficult for the Company’sCompany's common stock to appreciate in value, which, in turn, makes it difficult for the Company to raise money from outside investors or in the public markets. We believe that we need to develop new products or new product lines with higher profit margins to attain better financial results and, through any improved financial results, to possibly attract greater support for our Common Stock in the public markets.  We believe that greater market support for our Common Stock would assist in any efforts to raise working capital by the Company. We may be unable to develop higher profit margin products or achieve or sustain profitability and that failure would probably result in the aforementioned weakness in the public market for our Common Stock.

The Company competes against larger competitors with greater resources and market share and recognition. The Company is relatively small in comparison to larger competitors with superior financial and technical resources and greater market recognition and market share in certain product categories.  This discrepancy in resources and market share makes it difficult for our company to attain a larger market share in certain regions or in certain product categories. We may also be vulnerable to targeted marketing efforts by larger competitors to reduce or eliminate our market share in one or more markets or product lines.

Global Economic Fragility – The ongoing turmoil in the global economy, especially in the U.S., may have an impact on our business and our financial condition, and we may face challenges if economic conditions do not improve. These economic conditions impact levels of consumer spending, which have deteriorated and may remain depressed for the foreseeable future. If demand for our products fluctuates as a result of these economic conditions or otherwise, our revenue and gross margin could be harmed.  Further, since our products are made in China, we are vulnerable to disruptions in processing of shipments of products through ports or in general to trade disputes between the U.S. and China.

Liquidity - The Company realized a net incomeloss of $151,500$(98,929) for the first ninethree months ended September 30, 2015March 31, 2016 as compared to a net incomeloss of $134,000$(390,772) in the same period 2014.2015.  Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing and our operations in the future.  The Company’sCompany's liquidity is expected to be sufficient through 2015,2016, resulting from the combination of our existing cash position, improved operational cash flow as a result of improvements to our operating results, the Company’sCompany's borrowing capacity with Sterling National Bank and as needed, funding support from Company Directors (see Note 4 to the financial statements)statements contained in this report).

Loss of any of our principal customers could significantly decrease our sales and profitability. The Company supplies product to the most recognized big box retailers across America and the highest concentration of its business is in the flourishing warehouse club channel. The Company's sales are made pursuant to purchase orders and we do not have supply agreements or guarantees of minimum purchases from them. As a result, these customers may cancel their purchase orders or reschedule or decrease their level of purchases from us at any time. Any loss or substantial decrease in the volume of purchases by any of the Company's top customers would harm the Company's sales and profitability.

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

There were no unregistered issuances of Company securities in the quarter ending September 30, 2015.March 31, 2016.

Item 3.  Defaults Upon Senior Securities.Securities

None.

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Item 4.  Submission of Matters to Vote of Security Holders.Holders

None.

Item 5.  Other Information.Information

None.


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Item 6.  Exhibits.
Exhibits

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

EXHIBIT #
EXHIBIT TITLE
31.1Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ^
31.2Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ^
32.1Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, ^
32.2Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, ^
101Interactive data files pursuant to Rule 405 of Regulation S-T.  Filed with this Report on Form 10-Q for Capstone Companies, Inc. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or Section 12 of the Securities Act of 1933, as amended, or for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections.



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Capstone Companies, Inc.

Dated:    NovemberMay 16, 20152016



/s/ Stewart Wallach
 
Stewart WallachChief Executive Officer
Principal Executive Officer
  
  
/s/James G. McClinton
 
James G. McClintonChief Financial Officer and
Principal Operation ExecutiveChief Operating Officer


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