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

The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company'sCompany’s financial position as of September 30, 2017March 31, 2020 and results of operations, stockholders’ equity and cash flows for the three months ended March 31, 2020 and nine months ended September 30, 2017 and 2016.2019. All significantmaterial intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC"(“SEC”) relating to interim financial statements and in conformity with U.S. GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 20162019 (the "2016“2019 Annual Report"Report”).

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

Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumerhome LED products through national and regional retailers and distributors in North America.America and in certain overseas markets. The Company’s products are targeted for applications such as home indoor and outdoor lighting and have different functionalities to meet consumer’s needs. The Company has developed a smart interactive mirror for residential use as a variant line for its lighting products, which was launched for market at the Consumer Electronics Show in early 2020. The development of the smart interactive mirror is part of the Company’s strategic effort to find new product lines to replace or supplement existing products that are nearing or at the end of their product life cycle. These products are offered either under the Capstone currently operates in eight primary product categories: Induction Charged Power Failure Lights; LED Night Lights and Power Failure Lights; Motion Sensor Lights; Wireless Remote-Control Outlets; Wireless Remote-Control Accent Lights; Dual Power Solar Lights; Outdoor Light Fixtures and Power Control Light Bulbs.  brand or licensed brands.

The Company'sCompany’s products are typically manufactured in China and Thailand by third-partycontract manufacturing companies.

The Company's inventory, recorded at lower of cost (first-in, first-out) or net realizable value, consists of finished goods for resale by Capstone, totaling $142,065 and $366,330 at September 30, 2017 and December 31, 2016, respectively.Capstone.

The Company'sCompany’s prepaid expenses consist primarily of deposits on inventory purchases for future orders as well as prepaid advertising.insurance, trade show and subscription expense. As of September 30, 2017,March 31, 2020 and December 31, 2016,2019, prepaid expenses were $140,583 and $182,782, respectively.

On September 13, 2006, the Company has $93,010entered into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (“Capstone”). Capstone was incorporated in Florida on May 15, 1996 and $186,019, respectively,is engaged primarily in prepaid advertising credits includedthe business of wholesaling technology inspired consumer products to distributors and retailers in prepaid expensesthe United States. Under the Stock Purchase Agreement, the Company acquired 100% of the issued and outstanding shares of Capstone’s Common Stock, and recorded goodwill of $1,936,020.

The accounting guidance under Accounting Standards Codification 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the consolidated balance sheets.assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are as follows:

Basic earnings per common share wereis computed by dividing net income or loss(loss) by the weighted average number of shares of common stock outstanding for the reporting period.periods. 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 incomeearnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. At September 30, 2017As of March 31, 2020 and 2016,2019, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 0900,000 and 5,818,700870,001, respectively.

A sales contract occurs when the customer-retailer submits a purchase order to buy a specific product, a specific quantity, at an agreed-fixed price, within a ship window, from a specific location and on agreed payment terms.

The Company expenses license royalty fees and sales commissions when incurred and these expenses are recognized when an agreement of sale exists, product delivery has occurred, pricing is fixed or determinable, and collection is reasonably assured.

any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances are recognized.  In addition,charged to cost of sales at the time the order is invoiced.

The following table summarizes the changes in the Company's product warranty liabilities which are included in accounts payable and accrued liabilities contained in the accompanying consolidatedMarch 31, 2020 and December 31, 2019 balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances which are based on historical authorized returns.sheets:

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 were $67,497was $188,808 and $65,406$171,457 for the three months ended March 31, 2020 and $180,7432019, respectively.

The Company's shipping and handling costs are included in sales and marketing expenses and are recognized as an expense during the period in which they are incurred and amounted to $48,952$13,782 and $59,604$7,866 for the three months ended March 31, 2020 and $95,290 and $117,000 for the nine months ended September 30, 2017 and 2016,2019, respectively.

AccruedThe following table summarizes the components of accounts payable and accrued liabilities contained in the accompanying consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potential product returns and various allowances, amounting to $369,061 and $1,200,792 as of September 30, 2017March 31, 2020 and December 31, 2016, respectively. These estimates could change significantly in the near term.2019, respectively:

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.

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

ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company's condensed consolidated statements of income.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.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and liabilitiesexpenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities atthat are not readily apparent from other sources. Historically, past changes to these estimates have not had a material impact on the date of the consolidatedCompany’s financial statementsstatements. However, circumstances could change, and the reported amounts of revenue and expenses during the reporting period. Actualactual results could differ materially from those estimates, and the differences could be material.estimates.

In January 2016,December 2019, the FASB issued ASU 2016-01,2019-12, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial LiabilitiesIncome Taxes (Topic 740) ("(“ASU 2016-01"2019-12”). The amendments in ASU 2016-01 modifies how entities measure equity investments2019-12 seek to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and present changessimplify GAAP in the fair valueother areas 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.Topic 740. ASU 2016-01 will be2019-12 is effective for the Company's fiscal yearyears beginning after December 15, 20172020, 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 January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit'sunit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit'sunit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 will beis effective for the Company's fiscal yearyears beginning after December 15, 2019, and subsequent interim periods.2019. The Company is currently evaluating the impact of the adoption of ASU 2017-04 will have on the Company's consolidated financial statements.

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This new guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. The adoption of ASU 2018-03 did not have a material effect on the Company’s consolidated financial statements.

The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company'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.

The income tax provision(benefit) for the three- month periodthree months ended September 30, 2017March 31, 2020 and 20162019 consists of:

This Form 10-Q quarterly report contains forward-looking statements that are contained principally in the sections describing our business as well as in "Risk Factors," and thisin "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. All statements other than statements of historical facts contained, or incorporated by reference, in this report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects, actions taken or strategies being considered with respect to our liquidity position, valuation and appraisals of our assets and objectives of management for future operations, our ability to weather the impacts of the COVID-19 pandemic, financing opportunities, and future cost mitigation and cash conservation efforts and efforts to reduce operating expenses and capital expenditures are forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" in our latest annual report on Form 10-K for the fiscal year ended December 31, 2016,2019, as filed with the SEC. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions (including the negative and variants of such words) intended to identify forward-looking statements.. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to various risks and uncertainties. Given these uncertainties, a reader of this Form 10-Q quarterly report should not place undue reliance on these forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited, to the impact of:

Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the documentsfuture may be amplified by, the COVID-19 outbreak. It is not possible to predict or identify all such risks. There may be additional risks that we reference herein and filed as exhibits to this Form 10-Q quarterly report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly,consider immaterial 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.which are unknown.

The Company is a "penny stock" company under Commission rules and the public stock market price for itsour Common Stock has been depressed for several consecutive fiscal quarters.  The Company's Common Stock lacks sufficient or activestock is impacted by the lack of significant institutional investor and primary market makers and institutional investor support in the public market and this lack of support means that any increase in the per share price of our Common Stock in the public market is usually eliminated by selling pressure from profit taking by investors.  As of November 2, 2017, the Common Stock was trading at $.50 on the Bid Investment in our Common Stock.maker support. 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. InvestorsPotential investors should carefully consider risk factors in this quarterly reportour SEC filings.

The above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on Form 10-Qour current beliefs, assumptions, expectations, estimates and other SEC filingsprojections regarding our present and future business strategies and the environment in which we expect to operate in the future. These forward-looking statements speak only as of the Company.  The Company completed a 1-for-15 reverse stock split for the Common Stockdate made. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard thereto or any change of events, conditions or circumstances on July 25, 2016. The reverse stock split did not change the Company's statuswhich any such statement was based, except as a "penny stock" company.

Capstone Companies, Inc., a Florida corporation, ("CAPC," "Company," "we," (“Company” or "our"“CAPC”) is a public holding company with its Common Stock, $0.0001 par value per share, ("Common Stock") quoted on the OTC QB Venture Market exchange of The OTC Markets Group, Inc. and, since July 6, 2012,organized under the trading symbol "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, 2016, as filed with the Commission on March 27, 2017.

The Company believes that LED is becoming increasingly more mainstream,reported a net loss of approximately $597 thousand for the three months ended March 31, 2020 compared to a net loss of approximately $345 thousand for the period ended March 31, 2019. The cash generated from operations was negatively impacted and as such, the Company believesutilized $679 thousand of cash.

With orders now shipping to customers in the second quarter 2020, we expect that the componentcash generated from operations will gradually improve in the second and productionfuture quarters in 2020.

As we navigate these unprecedented circumstances, we are focused on preserving our liquidity and managing our cash flows through certain preemptive actions designed to enhance our ability to meet our short-term liquidity needs. We are currently in the final stages of renewing our credit facility with Sterling National Bank, which we expect to execute in the next couple of weeks. In the unlikely event we are unable to renew our credit agreement we will need to seek a new credit facility to fund our operations and future growth. The borrowing costs associated with such financing, are dependent upon market conditions and our credit rating. With our reported losses in recent years, we cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future. Additional actions include, among others, reductions to our discretionary spending and changes to our investment strategies, negotiating payment terms with our customers and vendors, reductions in compensation costs, and limiting certain marketing expenditures. We are also currently evaluating benefits that may be available to us under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and similar legislation in foreign jurisdictions.

With the continuing economic uncertainties caused by the COVID-19 pandemic, the capital markets may continue to lowerhave a downturn and adversely affect the Company’s stock price which will require the Company to test its goodwill for impairment in future reporting periods. The Company estimates the fair value of its single reporting unit relative to the Company's market capitalization.

During the quarter ended March 31, 2020, the Company was negatively impacted by the effects of the worldwide COVID-19 pandemic. Our business operations and financial performance for the foreseeablethree months ended March 31, 2020 were adversely impacted which resulted in a $2.8 million or 95% decrease in net revenue. The Company reported a net loss of approximately $597 thousand for the three months ended March 31, 2020 compared to a net loss of approximately $345 thousand for the three months ended March 31, 2019, a net loss increase of approximately 73%.

The Company’s factory suppliers in Thailand and China are now fully functioning and shipping orders. However with the resurgence of the COVID-19 pandemic in the United States, the future impact on the retail market place remains uncertain, which should allowplaces doubt on the timing of the Company’s new retail programs that are planned to be introduced later in the year, which could result in further reduced revenue and continued losses.

At March 31, 2020, the Company continued to remain debt free, had a cash balance of $2.5 million and aninnovative smaller company like us available credit facility of $7.5 million at Sterling National Bank. This credit facility is currently up for renewal and subject to capitalizeeligible collateral.  However, in the unlikely event that we are unable to renew our credit facility with Sterling National Bank, we would seek a new credit facility to fund our operations and future growth and we would take actions to further reduce our expenditures, including reductions to our discretionary spending and changes to our investment strategies, negotiating payment terms with our customers and vendors, reductions in compensation costs, including through temporary reductions in pay and layoffs, and limiting certain marketing expenditures. In addition, we would seek alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on non-commodity products utilizing LED.  terms acceptable to us. Although we believe we have adequate sources of liquidity over the long-term, an economic recession or a slow recovery could adversely affect our business and liquidity.

The Company's focus isin recent years has been in the integration of LEDLEDs into most commonly used lighting products in today's home. CapstoneThe LED markets are now mainstream in consumer lighting products. The Company believes that the component and production costs of LED lighting products will continue to lower due to technological and production developments.

Our expectation is that the new portfolio appeals to a much larger audience than our traditional LED lighting product line, with more relevant products that will hopefully benefit from management’s proven abilities in the areas of low-cost production and operations. The new Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding connected lifestyles prevalent today. The products will have both touch screen and voice interfacing, internet access and an operating system capable of running downloadable applications. The average selling prices will be comparable to that of tablets and smartphones, expected retails to start at $500.00 per unit, with the goal to deliver consumer value for middle income homes, which is our target market. Whereas, during the day your smartphone/tablet keeps you connected, whether it is positioned wellwork or personal, now when entering your home, Capstone’s new Connected Surfaces products will enable users the same level of connectivity in a more relaxed manner that does not require being tethered to participatethese devices. If we seek to compete in these expanded product categories which are expectedthe upscale market for more expensive smart mirrors with varied and enhanced features, we perceive that we would be directly competing with larger competitors and their significantly greater resources. Retail pricing for upscale smart mirrors typically ranges from $900 to fuel the Company's further growth.$2,000.

The Company seekscompetes in competitive consumer market channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence, employment levels, credit availability and commodity costs. Demand for the Company’s products is highly dependent on economic drivers such as consumer spending and discretionary income. While we believe that the markets for LED home products will remain competitive during fiscal 2020, we are confident in maintaining our revenue stream in the lighting business segment by continuing to deliver strong, consistent business resultsintroduce new innovative LED products. By working diligently overseas with alternate manufacturers located outside China, particularly in Thailand, we anticipate minimal impact to our selling prices and increasing shareholder returnsrelated margins of profit that could otherwise be impacted by providing innovativeongoing trade disputes between the United States and China. The pandemic of COVID-19 has impacted the Chinese economy and could, if it continues to spread in China, hamper shipments of products from China, which produces almost all of our products. Our factory partners in China have been authorized by their local authorities to reopen and their employees have returned to work. However, as a result of the production delays in China, customer orders that were planned to be shipped in the first quarter, 2020 have been rescheduled for shipment in the second and third quarters, 2020. We have identified and had certified a factory in Thailand that started producing orders for the Company in 2020. This will provide the Company with more flexibility in determining which location should produce goods for future orders. With the United States now being impacted by the COVID-19 pandemic we believe the impact of the virus in the U.S. will happen during the first half of this year and view this as a relatively short-term disruption that should not impact our long-term strategy and initiatives.

We are not able to determine the long-term impact of any future reliance on or expanded reliance on production of products in Thailand as of the date of the filing of this Form 10-Q Report due to a global basislack of a sufficient period of operational experience under the expansion and the unknown extent to which we may have to rely more on production in Thailand in the future.

We continue to make investments to ensure that make consumer's lives simplerwe provide quality, useful products. Additionally, the Company continues to enhance its customer service support. In 2019, the Company substantially expanded its investment and safer while delivering growth resultscommitment to social media marketing. With the Company's retail partners.growing importance of on-line commerce and social media to consumers, this marketing should play a vital role in expanding our lifestyle brands and will also serve to establish creditability with the Company’s growing consumer base. This effort will focus on creating a more extensive and aggressive social media presence through use of third-party social media like Facebook, Twitter, YouTube and Instagram as well as measures to increase our “ranking” in search engines.

The Company oversees and controls the manufacturing of its products, which are currently made in China and Thailand by OEM contract manufacturers, through three wholly-ownedwholly owned operating subsidiaries: CAPI, CIHK and CLTL.  Capstone believes it has commercially favorable payment terms with its contract manufacturers, which terms supports the Company's growth. The Company's direct import business model requires that shipments to meet minimum order quantity or "MOQ" full container loads from its factories directly to retail customerscustomers’ shipping brokers. This business model avoids pitfalls resulting from slow moving and obsolete product inventories. The Company's products are built to fill backlog orders and are typically not warehoused for domestic replenishment programming. CIHK continually evaluates its contract manufacturers' ability to meet the Company's growing needs. Additionally, all manufacturers must meet rigorous compliance, security and equipment evaluation audits to ensure competitive pricing for the highest quality products under applicable industry standards.  The Company continuesproducts. Capstone’s business practices have allowed development of excellent relationships with its OEM contract manufacturers and has resulted in commercially favorable payment terms, which over the years has greatly contributed to explore alternative manufacturing sources in China and elsewhere in the Pacific Rim as part of its ongoing supply chain strategic planning.

The global LED lightingCompany’s looking forward strategy requires continued expansion of its product development and engineering, manufacturing base marketing and distribution of a broadened portfolio of consumer electronic products. The Company will seek new revenue opportunities through the introduction of its “Connected Surfaces” portfolio into expanded channels of distribution including e-commerce and others that the Company has not previously focused on. The Company also intends to leverage our existing valuable customer base and strong relationships to achieve organic growth initiatives with this new category.

As the COVID 19 pandemic subsides and markets reopen, we intend to execute our organic growth strategy, which is designed to enhance our market is undergoing a perceived significant transition driven by rapid adoptionpresence, expand our customer base and be an industry leader in new product development. Key elements of energy efficient LED lighting products.our organic growth strategy include:

Connected Surfaces. Historically LED lighting products offer numerous advantages for the user which are driving demand (improved light quality, durability, longer life, cooler temperatures, lower cost of operation). These advantages in addition to increased regulatory requirements banning inefficient lights have accelerated growthbeen our core business. The Capstone Lighting and Hoover^® Home LED brands combined, have sold millions of LED lighting products over the recent years and are expectedconsequently the Company holds a well-respected position in the retail lighting category. While consistently launching successful lighting programs, the Company has determined that it needs to diversify and expand its core focus in order to continue to acceleratemeet revenue growth initiatives. The Company has refocused its development and marketing initiatives and is determined to build on its success with a broader product portfolio beyond lighting products only. Critical to this strategy, the adoptionCompany developed and introduced in January 2019 at the Consumer Electronics Show (CES), a new concept line of energy efficient LED technologies going forward.  According to Allied Market Research,“Connected Surfaces” products. The new category was officially launched in a forecast in September 2014, the global LED market is forecasted to grow to $42 billion by 2020.January 2020 at CES.

The Company enteredintends to expand the LEDnew line of “Connected Products” for the next several years. Our current product roadmap outlines plans for product introductions through 2021 and this will continue to expand as consumer market eight years ago. At that time, it was clear to management that there was a significant opportunityproduct acceptance validates our innovations. We believe this program will leverage existing relationships with our current retail partners and contribute organic growth for an innovative low-cost LED product supplier as the lighting industry was on its transition path from traditional lighting technologies to LED.Company.

The Company's product lines consist of decorative lighting, outdoor fixtures, lighting with built-in power failure technologyCompany believes that smart homes will become more mainstream over the next several years and safetywill present growth opportunities for our company and security.  The power failure lighting and security products were initially sold under its wholly – owned subsidiary Capstone Industries' brand name through 2015.Connected Surfaces portfolio.

Capstone believes that it has effectively positioned itselfthe following competitive strengths have and will continue to serve as a foundation for its business strategy.

In North America, the Company is recognized as an innovator and highly efficient, low-cost manufacturer in this channelseveral lighting product niches. Capstone believes that its personal relationships with retail customers combined with its innovative product offerings, strong marketing support and posted successive revenue growth while delivering strong gross margins.  the high level of integrity embedded within the company, will allow the Company to expand its “Connected Surfaces” portfolio into the Home Lighting category.

The Company believes its multiple brand strategy is currently expanding its distribution into international home improvement centers that accept Capstone's direct import model.  The Company is distributingimportant in maintaining differentiation in the marketplace and maybe considered in future Connected Surfaces products. Capstone Lighting,Lighting®, Hoover^® Home LED and a Duracell^Ò® LED producthave proven successful in the past in meeting expectations at point of sale and will, from time to timelicensing, and in selected markets, offer private label programming to international accounts.

Capstone's core executive team has been working together for over three decades in business and has successfully built and managed other consumer product companies. CIHK resident management team has extensive experience with low cost off shore OEM manufacturing and is led by an industry leader that has provided sourcing and procurement services to such recognized companies as Circuit City and Dicks Sporting Goods.  Operating management's extensiveManagement's experience in hardline product manufacturing and marketing prepared the Company for its entry into the LED market.

Product Quality: We: offer quality products allowing consumers to maximize the benefits of adopting innovative lifestyle products. We design, manufacture and sell quality and reliable products across all of our brands with functional advantages that are currently availablecost competitive. We achieve this, in the marketplace.part, through a combination of sourcing quality components, stringent manufacturing quality control and conducting rigorous third-party product testing. To deliver cost-competitive products, we are investing in product advancements, leveraging purchasing volume, capitalizing on strategic vendor relationships and migrating high-volume products to our proprietary manufacturing process.

With respect to the Company's goal of sustained profitability, the challenge has been and remains to achieve greater profit margins from our product lines by either innovative productproducts that induce consumers to pay a higher purchase price or increased efficiencies in producing and selling products that sustain attractive pricing. This challenge confronts many consumer products’ companies. Due to changing consumer tastes, available disposable income and economic conditions and new technologies, consumer products face an endless challenge of product companies.line maturing and no longer providing reliable or sufficient revenues. The Company’s development of Connected Surfaces products is an effort to diversify into an emerging consumer product line and seek to hedge against maturing LED product lines. Capstone believes that appropriate use of OEM capabilities in innovation and production coupled with design that appeals to consumers are critical factors in meeting this challenge, especially for a smaller or niche competitor.

Due to the extensive, modern manufacturing, design and engineering capabilities withthrough the Company's OEM contract manufacturers, and the lower unit costs in China and Thailand, Capstone believes that it is more economical and efficient to continue to manufacture certain products in China and Thailand and have them shipped to the United States rather than to have such products produced in North America. While this resource is available to and used by large numbers of U.S. companies, including our competitors, the Company believes this Chinese manufacturing resource gives the Company the level of innovation, production cost and quality that allows Capstone to be competitive with larger competitors in the United States. However, as design technologies can influence the degree of hand labor in building its future products, the Company expects the advantages it has realized by manufacturing solely in China and Thailand to be challenged.

The economic impact of a pandemic like COVID-19 reveals how an unexpected event in China can potentially disrupt or adversely impact the integrated global economy product supply chain and the need for companies to diversify or provide for alternative product supply. Due to reliance on China, many product companies face the dilemma of unanticipated distributions in key product and component supply chains. The Company periodically evaluatesfaces this challenge and has been reviewing in the past ways to supplement or provide back-up production sources to China. Currently the Company is transitioning its primary source of products from China to Thailand. The Company intends to continue its analysis of developing a more diverse product sourcing strategy. As a small reporting company, the Company has limited resources for independent diversification of production sources and must rely on subcontracting production to existing OEM’s.

Management’s efforts to mitigate the impact of these added costs include the transition of alternative OEM manufacturing within and outside the Pacific Rim.

The Company's CIHKCompany’s CIHK's operations in Hong Kong is staffed with personnel experienced in engineering and design, product development and testing, product sourcing, international logistics and quality control.  These associatescontrol, work with our OEM factories to develop and prototype new product concepts and to ensure products meet consumer product regulations and rigorous quality control standards. All products are tested before and during production by Company personnel. This team also provides extensive product development, quality control and logistics support to our factory partners to ensure on time shipments.  In anticipation

The Company has consistently expanded its product positioningportfolio over the past several years through the introduction of more indoor and new outdoor lighting programs under the Capstone"Capstone Lighting® brand, the", Hoover^® Home LED brand and Duracell^® brands and include the Duracell^Òbrand.  Capstone has also expanded hardwired solid-statefollowing products to its programs in addition to the existing battery and induction poweredthat are reported under one segment: Lighting Products:

These product lines, through the introduction of vanity fixturesofferings have been focused on solutions for various residential lighting applications for interior and outdoor LED Gooseneck Lanterns.  use.

Such product expansion involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits. Further, some product lines may fall out of favor with consumers before we can recoup product and market development costs. While the Company makes significant investments into the Connected Surfaces portfolio, it is reasonable to expect to post losses while building the market for a new category of products which were formally launched at the 2020 CES. Expense categories including molds, prototyping, engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred for six to nine months before shipments and related revenues occur.

The Company has established product distribution relationships with numerous leading international, national and regional retailers, including but not limited to: Amazon, Bunnings, Costco Wholesale, Home Depot, Home Pro, Sam's Club, TheClub-Walmart, the Container Store and Wal-Mart.Firefly Buys. These distribution channels may sell the Company's products through the Internetinternet as well as through retail storefronts and catalogs/mail order. The Company believes it has developed the scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche product opportunities in our largest consumer domestic and international markets. While Capstone has traditionally generated the majority of its sales in the U.S. market, urbanization, rising family incomes and increased living standards abroad have spurred a perceived demand for small consumer appliances internationally. To capture this market opportunity, the Company has continued its international sales by leveraging relationships with our existing global retailers and by strengthening our international product offerings. CIHK assists the Company in placing more products into foreign market channels as well. The Company introduced Capstone brands to markets outside the U.S., including Australia, France, Iceland, Japan, Mexico, New Zealand, South Korea, Spain, Taiwan, Thailand and the United Kingdom. International sales for the quarters ended March 31, 2020 and 2019 were $100.7 thousand or 68% of net revenue and $301.2 a thousand or 10% of net revenue, respectively. The Company's performance depends on a number of assumptions and factors. Critical to growth are the economic conditions in a growingthe markets that we serve, as well as success in the Company's initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new technology or features. Efforts to expand into new international market. markets may be adversely impacted in the short term by COVID-19 pandemic.

Based on Capstone's experience in the industry, the Company's Chinese contract manufacturing resources and focus on well designed, practical products, Capstone believes it is well positioned to become a leading manufacturer in the growing LED home lighting and security lighting segments.  The Company's effortsproducts are subject to achieve such a goal are ongoing.general economic conditions that impact discretionary consumer spending on non-essential items. Capstone believes it will maintain its revenue growthpresence in the lighting category because of the ability to deliver quality, well designed products on time,its proven abilities in operational excellence, the quality reputation of its products, business relationships with Capstone's retailers and the aggressive product expansiondevelopment strategies currently in place. Such continued progress depends on a number of assumptions and factors, including ones mentioned in "Risk Factors" below. Critical to growth are economic conditions in the markets that foster greater consumer spending as well as success in the Company's initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new technology or features. The Company's ability to fund the pursuit of our goals remains a constant, significant factor. Company products are also sensitive to consumer demand and consumer concerns over economic conditions because the Company products are a discretionary purchase by consumers.

The Company believes that it will provide retailers with a broadbroader and more diversified portfolio of consumer products across numerous product categories, which should add diversity to the Company's revenues and cash flows sources. Within these categories,the selection of products offered, Capstone seeks to service the needs of a wide range of consumers by providing products to satisfy their different interests, preferences and budgets.

The Company'sOur products are marketed primarilysold nationally and internationally through a direct independent sales force. The sales force markets the Company's products through numerous retail locations worldwide, including larger retail warehouse clubs, hardware centers and e-commerce websites. Our sales business model has been designed to support “direct import sales” made directly to the retail customer. However, we also offer “domestic sales” programs which will be further expanded in the future.

In first quarter 2020, the Company had two customers who comprised approximately 82% and 18% of net revenue and one customer who comprised of 100% of net revenues in the same period in 2019. Although we have long established relationships with our customers, we do not have contractual arrangements to purchase a fixed quantity of product annually. A decrease of business or a loss of any of our major account levels involve direct executive management participation.customers could have a material adverse effect on our results of operations and financial condition.

In order for continued sales growth in the retail market to continue , the Company is focused on expanding its market share at existing accounts by expanding itsthe product portfolio of both branded and private label LED lighting products. The Companycurrently offered into new innovative electronic categories that will also be targeting directallow the Company to expand into different retail clients through CIHK for products that fall outside Capstone's branded categories but are innovativedepartments and preferably exclusive to CIHK.  This should allow for quicker revenue expansion as time consuming product and brand development efforts are the responsibilitychannels of the retailer.distribution.