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, 2017

March 31, 2021

__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 Registrant 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,431 Fairway Drive, Suite 120,200, Deerfield Beach, Florida  3344233441
(Address of principal executive offices)

(954) 570-8889252-3440
(Issuer'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 Securities Exchange Act of 1934 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. [X] 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, smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [_]Accelerated filer [_]
Non-accelerated filer [_]
(Do not check if a smaller reporting company)
Smaller reporting company [x]
Emerging Growth company [ ] 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No

State theThe number of shares outstanding of each of the issuer'sissuer’s classes of common equity,stock, as of the latest practical date. As of September 30, 2017, there were 47,046,364April 28, 2021 is as follows: 48,793,031 shares of the issuer's Common Stock, $0.0001 par value per share, issued and outstanding.share. The issuer’s common stock is quoted on the OTCQB Venture Market of the OTC Markets Group, Inc. under the trading symbol “CAPC.”


1

EXPLANATORY NOTE

As used in this Form 10-Q Quarterly Report (Form 10-Q Report)) for the fiscal period ending March 31, 2021, “COVID-19” refers to Coronavirus/COVID 19, a highly contagious novel virus that was declared a global pandemic by the World Health Organization or “WHO” on March 11, 2020. “COVID-19 pandemic” refers to “global pandemic” (as defined by WHO) by COVID-19. COVID-19 pandemic has had a significant, adverse economic disruption in the United States and China, especially the locality of the offices of Capstone Companies, Inc. and its subsidiaries and the Chinese original equipment manufacturers or “OEMs” of the products sold by Capstone Companies, Inc. The products sold by Capstone Companies, Inc. are primarily sold by traditional brick-and-mortar retailers and COVID-19 pandemic significantly, adversely impacted those retailers and our sale of traditional LED products. We have developed a new product line for internet connected surfaces, like smart mirrors, (“Connected Surface”) for residential use, but this new product line as a replacement core product line for the LED lighting products, had not shipped as of March 31, 2021 but is scheduled to ship in the second quarter ending June 20, 2021. The marketing launch of the initial products of the Connected Surface program began in February 2021. The impact of COVID-19 pandemic on the Company’s business and financial performance has been significant and ongoing and, coupled with the development of the Connected Surface product line, has placed a significant financial strain on Capstone Companies, Inc. Despite the ramped up vaccination program in the United States and its beneficial impact on the adverse effects of the COVID-19 pandemic, the threat of new mutations or variants of the virus creates the specter of a vaccine-resistant strain and a future waive of economic disruption from a new wave of pandemic infections.



CAPSTONE COMPANIES, INC.
Quarterly Report ofon Form 10-Q
Three Months and Nine Months Ended September 30, 2017March 31, 2021

TABLE OF CONTENTS


PART 1FINANCIAL INFORMATION
  3
   
Item 1.Condensed Consolidated Financial Statements (Unaudited)  3
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operation 1727
Item 3.Quantitative and Qualitative Disclosures about Market Risk 3249
Item 4.Controls and Procedures 3349
   
PART IIOther Information 3350
   
Item 1.Legal Proceedings 3350
Item 1A.Risk Factors 3350
Item 2.Unregistered Sale of Equity Securities and Use of Proceeds 3453
Item 3.Defaults of Senior Securities 3453
Item 4.Mine Safety Disclosures 3454
Item 5.Other Information 3454
Item 6.Exhibits 3454


2



CAPSTONE COMPANIES, INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED BALANCE SHEETS 
    ��  
  March 31,  December 31, 
  2021  2020 
Assets: (Unaudited)    
Current Assets:      
   Cash $1,461,968  $1,223,770 
   Accounts receivable, net  167,102   120,064 
   Inventories  8,775   8,775 
   Prepaid expenses  67,787   75,622 
   Income tax refundable  285,673   861,318 
     Total Current Assets  1,991,305   2,289,549 
         
   Property and equipment, net  52,388   54,852 
   Operating lease – right of use asset  143,950   158,504 
   Deposit  25,560   25,560 
   Goodwill  1,312,482   1,312,482 
     Total Assets $3,525,685  $3,840,947 
         
Liabilities and Stockholders’ Equity:        
Current Liabilities:        
   Accounts payable and accrued liabilities $971,366  $825,690 
   Operating lease – current portion  64,967   63,307 
     Total Current Liabilities  1,036,333   888,997 
         
Long-Term Liabilities:        
   Operating lease – long-term portion  90,882   107,690 
   Deferred tax liabilities-long-term  259,699   259,699 
     Total Long-Term Liabilities  350,581   367,389 
     Total Liabilities  1,386,914   1,256,386 
         
Commitments and Contingencies (Note 5)        
         
Stockholders' Equity:        
Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares  -   - 
Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued 15,000 shares at March 31, 2021  2   - 
Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued -0- shares  -   - 
Common Stock, par value $.0001 per share, authorized 56,666,667 shares, `outstanding 46,296,364 shares at March 31, 2021 and 46,296,364 shares at December 31, 2020  4,630   4,630 
Additional paid-in capital  7,106,522   7,053,328 
Accumulated deficit  (4,972,383)  (4,473,397)
     Total Stockholders' Equity  2,138,771   2,584,561 
     Total Liabilities and Stockholders’ Equity $3,525,685  $3,840,947 
         
The accompanying notes are an integral part of these condensed consolidated financial statements. 
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES      
CONSOLIDATED BALANCE SHEETS      
       
  September 30,  December 31, 
  2017  2016 
  (Unaudited)    
Assets:      
Current Assets:      
   Cash $3,240,721  $1,646,128 
   Accounts receivable, net  4,660,203   4,449,179 
   Inventory  142,065   366,330 
   Prepaid expenses  349,410   330,020 
     Total Current Assets  8,392,399   6,791,657 
         
Property and Equipment:        
   Computer equipment and software  19,767   19,767 
   Machinery and equipment  371,323   325,750 
   Furniture and fixtures  5,665   5,665 
   Less: Accumulated depreciation  (304,176)  (250,465)
     Total Property & Equipment  92,579   100,717 
         
Other Non-current Assets:        
   Deposit  13,616   12,193 
   Note receivable  -   526,887 
   Goodwill  1,936,020   1,936,020 
      Total Other Non-current Assets  1,949,636   2,475,100 
         Total Assets $10,434,614  $9,367,474 
         
Liabilities and Stockholders' Equity:        
Current Liabilities:        
   Accounts payable and accrued liabilities $2,122,220  $2,678,210 
   Income tax payable  404,088   1,588 
   Notes and loans payable to related parties  688,384   1,321,721 
     Total Current Liabilities  3,214,692   4,001,519 
         
Long Term Liabilities:        
   Deferred tax liabilities  362,000   216,000 
     Total Long Term Liabilities  362,000   216,000 
     Total Liabilities  3,576,692   4,217,519 
         
Commitments and Contingencies (Note 6)        
         
Stockholders' Equity:        
   Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares  -   - 
   Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued -0- shares  -   - 
   Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued -0- shares  -   - 
   Common Stock, par value $.0001 per share, authorized  56,666,667 shares, issued 47,046,364 shares and 48,132,664 shares  4,704   4,813 
   Additional paid-in capital  6,976,678   7,411,172 
   Accumulated deficit  (123,460)  (2,266,030)
     Total Stockholders' Equity  6,857,922   5,149,955 
     Total Liabilities and Stockholders' Equity $10,434,614  $9,367,474 
         
The accompanying notes are an integral part of these financial statements.        


3

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES    
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS    
(Unaudited)    
       
  For the Three Months Ended    
  March 31,    
  2021  2020 
       
Revenues, net $438,423  $148,977 
Cost of sales  (309,776)  (114,821)
        Gross Profit  128,647   34,156 
         
Operating Expenses:        
  Sales and marketing  4,180   211,973 
  Compensation  352,079   376,675 
  Professional fees  127,224   130,530 
  Product development  26,892   51,614 
  Other general and administrative  103,122   144,366 
  Goodwill impairment charge  -   290,059 
       Total Operating Expenses  613,497   1,205,217 
         
Operating Loss  (484,850)  (1,171,061)
         
Other Income (Expense):        
Other income  10,362   - 
Other expense  (24,498)  - 
Net Other Income (Expense)  (14,136)  - 
         
Loss Before Tax Benefit  (498,986)  (1,171,061)
         
Benefit for Income Tax  -   (573,685)
         
Net Loss $(498,986) $(597,376)
         
Net Loss per Common Share        
Basic and Diluted $(0.01) $(0.01)
         
Weighted Average Shares Outstanding        
Basic and Diluted  46,296,364   46,463,365 
         
The accompanying notes are an integral part of these condensed consolidated financial statements.     
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES            
CONSOLIDATED STATEMENTS OF INCOME          
(Unaudited)            
             
  For the Three Months Ended  For the Nine Months Ended 
  September 30,    September 30,    
  2017  2016  2017  2016 
             
Revenues, net $13,817,909  $11,692,146  $30,789,653  $22,672,551 
Cost of sales  (10,707,657)  (8,841,148)  (23,457,070)  (17,079,271)
        Gross Profit  3,110,252   2,850,998   7,332,583   5,593,280 
                 
Operating Expenses:                
  Sales and marketing  928,321   488,057   1,869,596   903,888 
  Compensation  351,915   325,283   1,065,621   949,753 
  Professional fees  109,257   111,339   429,440   286,681 
  Product development  80,991   127,367   219,464   227,552 
  Other general and administrative  189,780   195,046   572,461   501,458 
       Total Operating Expenses  1,660,264   1,247,092   4,156,582   2,869,332 
                 
Net Operating Income  1,449,988   1,603,906   3,176,001   2,723,948 
                 
Other Income (Expense):                
  Interest Income  (12,945)  13,664   -   13,664 
  Interest expense  (56,514)  (103,363)  (113,431)  (227,522)
     Total Other Income (Expense)  (69,459)  (89,699)  (113,431)  (213,858)
                 
Income Before Tax Provision  1,380,529   1,514,207   3,062,570   2,510,090 
                 
    Provision for Income Tax  (390,000)  (24,412)  (920,000)  (37,012)
                 
Net Income $990,529  $1,489,795  $2,142,570  $2,473,078 
                 
Net Income per Common Share                
Basic $0.021  $0.031  $0.046  $0.051 
Diluted $0.021  $0.031  $0.045  $0.051 
                 
Weighted Average Common Shares Outstanding             
Basic  46,660,456   48,132,664   46,989,940   48,132,664 
Diluted  47,152,574   48,371,158   47,462,664   48,320,017 
                 
The accompanying notes are an integral part of these financial statements.          


4


CAPSTONE COMPANIES, INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND MARCH 31, 2020 
(Unaudited) 
                       
 Preferred Stock Preferred Stock Preferred Stock   Additional     
 Series A Series B Series C Common Stock Paid-In Accumulated Total 
 Shares Par Value Shares Par Value Shares Par Value Shares Par Value Capital Deficit Equity 
                       
Balance at December 31, 2020  -  $-   -  $-   -  $-   46,296,364  $4,630  $7,053,328  $(4,473,397) $2,584,561 
                                             
Stock options for compensation  -   -   -   -   -   -   -   -   4,200   -   4,200 
Stock issued to Director’s for loan  -   -   15,000   2   -   -   -   -   48,994   -   48,996 
Net Loss  -   -   -   -   -   -   -   -   -   (498,986)  (498,986)
Balance at March 31, 2021
  -  $-   15,000  $2   -  $-   46,296,364  $4,630  $7,106,522  $(4,972,383) $2,138,771 
                                             
                                             
Balance at December 31, 2019  -  $-   -  $-   -  $-   46,579,747  $4,658  $7,061,565  $(2,089,581) $4,967,642 
Stock options for compensation  -   -   -   -   -   -   -   -   8,925       8,925 
Repurchase of shares  -   -   -   -   -   -   (283,383)  (28)  (36,305)  -   (36,333)
Net Loss  -   -   -   -   -   -   -   -   -   (597,376)  (597,376)
Balance at March 31, 2020  -  $-   -  $-   -  $-   46,296,364  $4,630  $7,034,185  $(2,686,957) $4,351,858 
                                             
The accompanying notes are an integral part of these condensed consolidated financial statements. 

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES       
CONSOLIDATED STATEMENTS OF CASH FLOWS      
(Unaudited)      
       
  For the Nine Months Ended 
  September 30,    
  2017  2016 
CASH FLOWS FROM OPERATING ACTIVITIES:      
       
   Net income $2,142,570  $2,473,078 
Adjustments necessary to reconcile net income to net cash provided by (used in) operating activities: 
      Depreciation and amortization  55,725   44,400 
      Accrued interest on note receivable  26,887   (13,654)
      Stock based compensation expense  66,594   46,581 
      Provision for deferred income tax  146,000   - 
      Accrued sales allowance  (831,731)  (94,203)
     (Increase) decrease in accounts receivable  731,532   (6,755,174)
     (Increase) decrease in inventory  224,265   (275,049)
     (Increase) decrease in prepaid expenses  (20,813)  43,764 
      Increase (decrease) in accounts payable and accrued liabilities  (263,912)  958,580 
     (Decrease) in accrued interest on notes payable  (135,337)  (168,492)
  Net cash provided by (used in) operating activities  2,141,780   (3,740,169)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of property and equipment  (47,587)  (15,501)
Net cash (used in) investing activities  (47,587)  (15,501)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from notes payable  30,559,312   19,393,834 
Repayments of notes payable  (30,559,312)  (15,049,345)
Repurchase of shares from Involve, LLC  (250,000)  - 
Warrant issued  7,500   - 
Proceeds from notes and loans payable to related parties  -   860,000 
Repayments of notes and loans payable to related parties  (257,100)  (1,453,946)
Net cash provided by (used in) financing activities  (499,600)  3,750,543 
         
Net  Increase (decrease) in Cash and Cash Equivalents  1,594,593   (5,127)
Cash and Cash Equivalents at Beginning of Period  1,646,128   364,714 
Cash and Cash Equivalents at End of Period $3,240,721  $359,587 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
Interest  221,881  $396,014 
Income taxes $371,500  $31,912 
         
Non-cash financing and investing activities:        
Sale of Investment for Note receivable $-  $500,000 
         
  Shares issued in satisfaction of loan payable to related party $240,900  $- 
         
The accompanying notes are an integral part of these financial statements.        

5



CAPSTONE COMPANIES, INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Unaudited) 
  For the Three Months Ended 
  March 31, 
  2021  2020 
CASH FLOWS FROM OPERATING ACTIVITIES:      
   Net loss $(498,986) $(597,376)
   Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
      Depreciation and amortization  2,464   6,074 
      Stock based compensation expense  4,200   8,925 
      Non-cash stock issued to Director’s for loan  24,498   - 
      Non-cash lease expense  14,554   13,583 
      Goodwill impairment charge  -   290,059 
      Provision for deferred income tax  -   172,287 
      Increase in accounts receivable, net  (47,038)  (56,515)
      Decrease in inventories  -   11,392 
      Decrease in prepaid expenses  32,333   42,199 
      Decrease in deposits  -   34,874 
      Increase in accounts payable and accrued liabilities  145,676   201,752 
     (Increase) decrease in income tax refundable  575,645   (745,972)
     (Decrease) in operating lease liabilities  (15,148)  (7,807)
  Net cash provided by (used in) operating activities  238,198   (626,525)
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of property and equipment  -   (15,739)
Net cash used in investing activities  -   (15,739)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Repurchase of shares  -   (36,333)
Net cash used in financing activities  -   (36,333)
         
Net Increase (decrease) in Cash  238,198   (678,597)
Cash at Beginning of Period  1,223,770   3,131,249 
Cash at End of Period $1,461,968  $2,452,652 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
Interest $-  $- 
Income taxes $-  $- 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Stocks issued to Directors for prepaid loan fee $24,498  $- 
         
The accompanying notes are an integral part of these condensed consolidated financial statements. 


6

CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of accounting policies for Capstone Companies, Inc. ("CAPC" or the "Company" or "Capstone"(“CAPC”), a Florida corporation (formerly, "CHDT Corporation") and its wholly-owned subsidiaries (collectively referred to as the “Company”, “we”, “our” or “us”), 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.

Organization and Basis of Presentation

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, 2021 and results of operations, stockholders’ equity and cash flows for the three months ended March 31, 2021 and nine months ended September 30, 2017 and 2016.2020. 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, 20162020 (the "2016“2020 Annual Report"Report”). filed with the SEC on March 31, 2021.

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.

Effects of COVID-19

The Company’s top priority has been to take appropriate actions to protect the health and safety of our employees as a result of the COVID-19 pandemic. We have adjusted standard operating procedures within our business operations to ensure the continued safety of our employees and we continually monitor evolving health guidelines to ensure ongoing compliance and protection of our employees. These procedures include expanded and more frequent cleaning within facilities, implementation of appropriate social distancing programs, requiring use of certain personal protective equipment, screening protocols and work from home programs.

In response to COVID-19 and Centers for Disease Control (‘CDC”) guidelines,  the Company has practiced the following actions since March 2020:
Followed the CDC guidelines for social distancing and safe practices.
Placed restrictions on business travel for our employees.
Modified our corporate and division office functions to allow employees to work remotely and attend the office on a rotating schedule.

While all the above-referenced steps were appropriate considering COVID-19, they impacted the Company’s ability to operate the business in its ordinary and traditional course.

Our business operations and financial performance for the period ended March 31, 2021 continued to be adversely impacted by COVID-19. As of March 31, 2021 net revenue was $438 thousand as compared to $149 thousand in the same period 2020, which was also significantly impacted by the start of the pandemic last year. The net loss for the quarters ended March 31, 2021 and 2020 was approximately $499 thousand and $597 thousand, respectively.


7

Net revenue for the period continued to be driven by the uncertainty felt by retail buyers as to the impact on the retail market of COVID-19 and its overall long-term negative impact on the U.S. economy. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the impact of the global pandemic on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global response to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021.

The Company has been building its infrastructure to transition into the online retail business by developing an e-commerce website and has invested in developing a social media presence over the last year and these systems are now ready to launch and ship its Smart Mirror product in the second quarter 2021.  Prior to 2021, the Company relied on brick and mortar retail for sale of its products to consumers and sought to piggyback off retailers’ e-commerce websites as well as dedicated online retailers like Amazon.

The extent to which COVID-19 pandemic will continue to impact the Company’s results will depend primarily on future developments, including the severity and duration of the crisis, the speed and effectiveness of the national vaccine inoculation program, potential mutations of COVID-19 pandemic, and the impact of future actions that will be taken to contain COVID-19 pandemic or treat its impact.  These future developments are highly uncertain and cannot be predicted with confidence, especially if mutations of the COVID-19 virus become widespread and prove resistant to vaccines.

As a result of the continuing economic uncertainties caused by the COVID-19 pandemic, Management determined sufficient indicators existed to trigger the performance of an interim goodwill impairment analysis as of March 31, 2021. The analysis concluded that the Company’s fair value of its single reporting unit exceeded the carrying value and a goodwill impairment charge was not required in the quarter ended March 31, 2021 as the fair value of the reporting unit exceeded the carrying amount based on the Company’s market capitalization.

With the continuing economic uncertainties caused by the COVID-19 pandemic, the capital markets may have 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.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, which we refer to as the “CARES Act.” was enacted into law. The CARES Act includes several significant income and other business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years. The Company was able to carryback the 2018 and the 2019 NOLs to 2017 tax year and generate an estimated refund of previously paid income taxes at an approximate 34% federal tax rate. As of December 31, 2020, the Company had an income tax refundable of approximately $862 thousand of which approximately $576 thousand of income tax was refunded on February 3, 2021 leaving approximately $286 thousand remaining balance to be refunded as of March 31, 2021.

Liquidity and Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

The COVID-19  pandemic resurgence in many states or emergence of new vaccine-resistant strains of the virus could have a continuing negative impact on the brick and mortar retail sector, with consumers’ unwilling to visit retail stores, causing reduced consumer foot traffic and consumer spending. However, with a successful relaunch of the Smart Mirror portfolio using the online retail platform, the Company will not be as dependent on Big Box retailers for our revenue streams as in previous years.

During the period ended March 31, 2021, the Company generated approximately $238 thousand of cash despite a net operating loss of $499 thousand. As of March 31, 2021, the Company had working capital of approximately $955 thousand and an accumulated deficit of $5.0 million. The Company’s cash balance as of March 31, 2021 was $1.5 million.

8

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

On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The short-term loan ends June 30, 2021 (“Initial Period’) but the Company has the option to extend the Initial Period for an additional six consecutive months, ending December 31, 2021. The unpaid principal amount and all accrued interest at 1% is due and payable in full at the end of the Initial Period or expiration of the extended date, being December 31, 2021 (the “Maturity Date”). As of March 31, 2021, the $750,000 credit line was fully available.

Since the termination of the factoring agreement with Sterling National Bank, the Company has been in discussions with alternate funding sources that offer extensive programs that are more in line with the Company’s future business model, particularly a facility that provides funding options that are more suitable for the e-commerce business. The borrowing costs associated with such financing are dependent upon market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future.

During the period ended March 31, 2021, the Company has been in discussions with an investor group that on April 5, 2021 made an equity investment in the Company that will provide sufficient funding to purchase the initial Smart Mirror rollout inventory. Management believes that without additional capital or increased cash generated from operations, there is substantial doubt about the Company’s ability to continue as a going concern and meet its obligations over the next twelve months from the filing date of this report.

As previously reported on Form 8-K dated April 6, 2021, the Company entered into five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares of Company common stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement”).  The five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, (“Securities Act”). The $1,498,000 in proceeds from the Private Placement will be used mostly to purchase start up inventory for the Company’s new Smart Mirror product line, for a major online e-commerce fulfilment company, and the remainder for advertising and working capital (See Note 7). The Company will most likely need additional outside funding in fiscal year 2021 to support the company critical launch of the Smart Mirror product line.

At March 31, 2021, the Company remained debt free, except for accounts payable and accrued liabilities, had a cash balance of $1.5 million and an available credit facility of $750,000.

The Company’s factory suppliers in Thailand and China are functioning and shipping orders. However with the resurgence of the COVID-19 pandemic certain parts of the United States,  reluctance of certain segments of the American population to get vaccinated and the threat of vaccine resistant strains of the virus, the future impact on the retail marketplace remains uncertain, which places uncertainty 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.

Management is closely monitoring its operations, liquidity, and capital resources and is actively working to minimize the current and future impact of this unprecedented situation.

Nature of Business

Capstone Companies, Inc. is headquartered in Deerfield Beach, Florida.


9

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

Since the beginning of fiscal year 2007, the Company through CAPI has been primarily engaged in the business of developing, marketing, and selling consumerhome LED products (“Lighting 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 at the Consumer Electronics Show in early 2020 but its release to the retail market has been delayed due to product development delays at our suppliers, resulting from the impact of COVID-19 pandemic. The development of the smart interactive mirror or “Smart Mirrors” 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 operatesbrand or licensed brands. The Smart Mirrors launch was announced in eight primaryFebruary 2021, but 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.  has not shipped as of March 31, 2021.

The Company'sCompany’s products are typically manufactured in Thailand and China by third-partycontract manufacturing companies. As of the date of these condensed consolidated financial statements, the Company’s future product development effort is focused on the Smart Mirrors category because the Company believes, based on Company’s management understanding of the industry, the Smart Mirrors have the potential for greater profit margin than the Company’s historical LED consumer products. Technological developments and changes in consumer tastes could alter the perceived potential and future viability of Smart Mirrors as a primary product. Aggressive marketing and pricing by larger competitors in the smart mirror market could also adversely impact the Company’s efforts to establish Smart Mirrors as its core product line.  The Company may change its product development strategies and plans as economic conditions and consumer tastes change, which condition and changes may be unforeseeable by the Company or may be beyond the ability of the Company to timely or at all adjust its strategic and product development plans.

The Company’s operations consist of one reportable segment for financial reporting purposes: Lighting Products.

Accounts Receivable

For product revenue, the Company invoices its customers at the time of shipment for the sales value of the product shipped. Accounts receivable are recognized at the amount expected to be collected and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers. Previously in the factoring agreement with Sterling National Bank, accounts receivable served as collateral when the Company borrowed against its credit facilities. With the termination of the factoring agreement, the accounts receivables are unencumbered.

As of March 31, 2021 and December 31, 2020, accounts receivable had not been collateralized against debt.

Allowance for Doubtful Accounts

The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and the Company’s historical payment experience. An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.

As of March 31, 2021 and December 31, 2020, management has determined that accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.


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

The following table summarizes the components of Accounts Receivable, net:
  March 31,  December 31, 
  2021  2020 
Trade Accounts Receivables at period end  $244,204   $197,166 
Reserve for estimated marketing allowances, cash discounts and other incentives   (77,102)   (77,102)
Total Accounts Receivable, net
$167,102  $120,064 

The following table summarizes the changes in the Company’s reserve for marketing allowances, cash discounts and other incentives which is included in net accounts receivable:
  March 31,  December 31, 
  2021  2020 
Balance at beginning of the year $(77,102) $(263,092)
     Accrued allowances  -   - 
     Reclassification of allowance from accounts receivable to accounts payable and accrued liabilities  -   173,426 
     Expenditures  -   12,564 
Balance at year-end $(77,102) $(77,102)

Marketing allowances include the cost of underwriting an in store instant rebate coupon or a target markdown allowance on a specific product. Cash discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment.

During 2020, the Company reclassified an accrued allowance from accounts receivable to accounts payable and accrued liabilities due to the decline in revenues and accounts receivable to offset these credits. The Company could have to pay cash to settle certain marketing allowances and other incentives issued to customers with no outstanding accounts receivable.

Inventory

The Company's inventory, which consists of finished LED lighting products for resale by Capstone, is recorded at the lower of cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value consistson an item-by-item basis when the expected realizable value of finished goodsa specific inventory item falls below its original cost. Management regularly reviews the Company’s investment in inventories for resale by Capstone, totaling $142,065such declines in value. The write-downs are recognized as a component of cost of sales. During the period ended March 31, 2021 and $366,330 at September 30, 20172020, inventory write downs were $0 for each period. As of March 31, 2021, and December 31, 2016, respectively.2020, respectively, the inventory was valued at $8,775 for each period.

Prepaid Expenses

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, 2021 and December 31, 2016,2020, prepaid expenses were $43,289 and $75,622, respectively.

Goodwill

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 creditsthe business of wholesaling technology inspired consumer products to distributors and retailers in the United States.

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

Under the Stock Purchase Agreement, the Company acquired 100% of the issued and outstanding shares of Capstone’s Common Stock, and recorded goodwill of $1,936,020. Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired.

Goodwill is tested for impairment on December 31 of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the carrying amount exceeds its fair value, an impairment loss is recognized. Goodwill is not amortized. The Company estimates the fair value of its single reporting unit relative to the Company's market capitalization.

As a result of the economic uncertainties caused by the COVID-19 pandemic during the quarter ended March 31, 2021, management determined sufficient indicators existed to trigger the performance of interim goodwill impairment analysis for the period ended March 31, 2021. The analysis concluded that the Company’s fair value exceeded the carrying value of its single reporting unit and a goodwill impairment charge was not required.

The following table summarizes the changes in the Company’s goodwill asset which is included in prepaid expensesthe total assets in the accompanying consolidated balance sheets:
 March 31, March 31, 
 2021 2020 
Balance at the beginning of the period $1,312,482  $1,936,020 
Impairment charges  -   (290,059)
Balance at March 31, 2021 $1,312,482  $1,645,961 

 March 31, December 31, 
 2021 2020 
Balance at the beginning of the period $1,312,482  $1,936,020 
Impairment charges  -   (623,538)
Balance at March 31, 2021 $1,312,482  $1,312,482 

With the continuing economic uncertainties caused by the COVID-19 pandemic, the capital markets may have 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’s stock is deemed a “penny stock” under Commission rules.

The Company estimates the fair value of its single reporting unit relative to the Company’s market capitalization which utilizes level 1 inputs.

Fair Value Measurement

The accounting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), “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:

Net Income (Loss)Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3: Significant unobservable inputs.


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

Earnings Per Common Share

Basic earnings per common share wereis computed by dividing net income or lossincome(loss) by the weighted average number of shares of common stock outstanding for the reporting period.as of March 31, 2021 and 2020. 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, 2021 and 2016,2020, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 01,989,900 and 5,818,700900,000, respectively.

6Revenue Recognition

The Company generates revenue from developing, marketing and selling consumer lighting products through national and regional retailers. The Company’s products are targeted for applications such as home indoor and outdoor lighting and have different functionalities Capstone currently operates in the consumer lighting products category and is expanding into the Smart Mirror category in the United States and in certain overseas markets. These products may be offered either under the Capstone brand or licensed brands.

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

The selling price in all of our customers’ orders has been previously negotiated and agreed to including any applicable discount prior to receiving the customer’s purchase order. The stated unit price in the customer’s order has already been determined and is fixed at the time of invoicing.

The Company recognizes product revenue when the Company’s performance obligations as per the terms in the customers purchase order have been fully satisfied, specifically, when the specified product and quantity ordered has been manufactured and shipped pursuant to the customers requested ship window, when the sales price as detailed in the purchase order is fixed, when the product title and risk of loss for that order has passed to the customer, and collection of the invoice is reasonably assured. This means that the product ordered and to be shipped has gone through quality assurance inspection, customs and commercial documentation preparation, the goods have been delivered, title transferred to the customer and confirmed by a signed cargo receipt or bill of lading. Only at the time of shipment when all performance obligations have been satisfied will the judgement be made to invoice the customer and complete the sales contract.

The Company may enter into a licensing agreement with globally recognized companies, that allows the Company to market products under a licensed brand to retailers for a designated period of time, and whereby the Company will pay a royalty fee, typically a percentage of licensed product revenue to the licensor in order to market the licensed product.

The Company expenses license royalty fees and sales commissions when incurred and these expenses are recognized during the period the related sale is recorded. These costs are recorded within sales and marketing expenses.


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

Basic weighted average shares outstandingThe following table presents net revenue by geographic location which is reconciled to diluted weighted shares outstanding as follows:recognized at a point in time:

  
3 months ended
September 30, 2017
  
3 months ended
September 30, 2016
 
Basic weighted average shares outstanding  46,660,456   48,132,664 
Dilutive warrants  313,211   238,494 
Dilutive options  178,907   - 
Diluted weighted average shares outstanding  47,152,574   48,371,158 

  
9 months ended
September 30, 2017
  
9 months ended
September 30, 2016
 
Basic weighted average shares outstanding  46,989,940   48,132,664 
Dilutive warrants  308,219   187,353 
Dilutive options  164,505   - 
Diluted weighted average shares outstanding  47,462,664   48,320,017 
 For the Three Months Ended March 31, 2021 For the Three Months Ended March 31, 2020 
 Capstone Brand  % of Revenue Capstone Brand % of Revenue 
Lighting Products- U.S. $141,900   32% $48,303   32%
Lighting Products-International  296,523   68%  100,674   68%
    Total Revenue $438,423   100% $148,977   100%

Revenue RecognitionWe provide our customers with limited rights of return for non-conforming product warranty claims. As a policy, the Company does not accept product returns from customers, however occasionally as part of a customers in store test for new product, we may receive back residual inventory.

ProductCustomer orders received are not long-term orders and are typically shipped within six months of the order receipt, but certainly within a one-year period.

Our payment terms may vary by the type of customer, the customer's credit standing, the location where the product will be picked up from and for international customers, which country their corporate office is located. The term between invoicing date and when payment is due may vary between 30 days and 90 days depending on the customer type. In order to ensure there are no payment issues, overseas customers or new customers may be required to provide a deposit or full payment before the order is delivered to the customer.

The Company selectively supports retailer's initiatives to maximize sales of the Company's products on the retail floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to the customer. The Company recognizes these incentives at the time they are offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to cost of sales, or marketing expenses depending on the type of sales incentives. Sales reductions for anticipated discounts, allowances and other deductions are recognized 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 induring the period the allowances are recognized.  In addition, accrued liabilities contained in the accompanying consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances which are based on historical authorized returns.

On April 22, 2016, the Company received a credit of approximately $479,000 from its major vendor to cover customer returns of products from sales that occurred in 2015 and promotional allowances for 2016 sales. A credit of $126,000 was applied to invoices due to the vendor during the period ending June 30, 2016 and the remaining credit balance of $353,000 was applied to invoices due to the vendor during the period ended September 30, 2016.

During the nine months ended September 30, 2017 and 2016, Capstone determined that $47,741 and $94,203, respectively of previously accrued allowances were no longer required.related revenue is recorded. The reduction of accrued allowances is included in net revenues and amounted to $7.5 thousand and $30.8 thousand for the nine-month periods ended September 30, 2017March 31, 2021 and 2016.2020, respectively.

Warranties

The Company provides the end user with limited rights of return as a consumer assurance warranty on all products sold, stipulating that the product will function properly for the warranty period. The warranty period for all products is one year from the date of consumer purchase.

Certain retail customers may receive an off-invoice based discount such as a defective/warranty allowance, that will automatically reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the cost of any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances are charged to cost of sales at the time the order is invoiced.

For those customers that do not receive a discount off-invoice, the Company recognizes a charge to cost of sales for anticipated non-conforming returns based upon an analysis of historical product warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.

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

The following table summarizes the changes in the Company's product warranty liabilities which are included in accounts payable and accrued liabilities in the accompanying March 31, 2021 and December 31, 2020 balance sheets:
  March 31,  December 31, 
  2021  2020 
Balance at the beginning of the period $56,465  $247,850 
   Amount accrued  627   46,322 
    Payments and credits  (2,849)  (237,707)
Balance at period-end $54,243  $56,465 

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 were $67,497was $4,010 and $65,406$188,808 for the three months ended March 31, 2021 and $180,7432020, respectively.

Product Development

Our research and $138,846development team located in Hong Kong working with our designated factories, are responsible for the ninedesign, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All research and development costs are charged to results of operations as incurred. With the reduction of revenue during 2020 resulting from the impact of the COVID-19 pandemic and combined with the transfer of manufacturing to Thailand, CIHK eliminated several operational support positions in China.

For the three months ended September 30, 2017March 31, 2021 and 2016,2020, research and development expenses were $26,892 and $51,614, respectively.

Shipping and Handling

The Company's shipping and handling costs are included in sales and marketing expenses and are recognized as an expense during the period in which they are incurred and amounted to $48,952$170 and $59,604$13,782 for the three months ended March 31, 2021 and $95,290 and $117,000 for the nine months ended September 30, 2017 and 2016,2020, respectively.

Accounts Payable and Accrued Liabilities

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, 2021 and December 31, 2016, respectively. These estimates could change significantly in the near term.2020, respectively:
  March 31,  December 31, 
  2021  2020 
Accounts payable $352,740   246,158 
Accrued warranty reserve  54,243   56,465 
Accrued compensation and deferred wages, marketing allowances, customer deposits and other liabilities  564,383   523,067 
                           Total accrued liabilities  618,626   579,532 
 Total $971,366   825,690 

7

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

Income Taxes

The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions.

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

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant judgement to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities generally for a period of 3 years from the later of each return due date or date filed.

On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years.

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

Stock-Based Compensation

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

ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company'sCompany’s 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. In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense. The Company accounts for forfeitures as they occur.

Stock-based compensation expense recognized during the periods ended March 31, 2021 and 2020 was $4,200 and $8,925, respectively.


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

Use of Estimates

The preparation of the condensed 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.

Recent Accounting Standards

To be Adopted in a Future Period

In May 2014,June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses.” This ASU 2014-09 was issued, Revenue from Contracts with Customers. Undersets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In November 2019, the effective date of this ASU and subsequently issued amendments, an entitywas deferred until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is required to recognizein the amountprocess of revenue it expects to be entitled to fordetermining the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP. This ASU provides alternative methods of transition, a full retrospective and a modified retrospective approach. We expect to utilize the modified retrospective approach which would result in recognition of the cumulativepotential impact of a retrospective application as of the beginning of the period of initial application, which in our case is the interim period beginning January 1, 2018. The adoption of ASU 2014-09 is not expected to have a material effectadopting this guidance on the Company'sits consolidated financial statements.

In January 2016,December 2019, the FASB issued ASU 2016-01, 2019-12, “Financial Instruments - Overall: RecognitionIncome Taxes (Topic 740)”. The amendments in ASU 2019-12 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 Measurementsimplify GAAP in other areas of Financial Assets and Financial Liabilities ("Topic 740. 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 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 March 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on effective interest rate method or a straight-line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 will be effective for the Company'speriods within those fiscal year beginning after December 15, 2018 and subsequent interim periods.years. The Company is currently evaluating the impact of the adoption of ASU 2016-02 will2019-12 may have on the Company's consolidated financial statements.

8


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

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-015 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230, Statement of Cash Flows, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. ASU 2016-15 will be effective for the Company's fiscal year beginning after December 15, 2017 and subsequent interim periods. The adoption of ASU 2016-15 will modify the Company's current disclosures and reclassifications within the consolidated statement of cash flows but is not expected to have a material effect on the Company's consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Cash Flows: Statement of Cash Flows (Topic 230) - Restricted Cash.  The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard is effective at the beginning of our 2018 fiscal year. The adoption of ASU 2016-18 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's carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. ASU 2017-04 will be effective for the Company's fiscal year beginning after December 15, 2019, and subsequent interim periods. The Company is currently evaluating the impact of the adoption of ASU 2017-04 will have on the Company's consolidated financial statements.

 In May 2017, the FASB issued ASU No. 2017-09, "Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting" ("ASU 2017-09"), clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. This new accounting standard requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for us on a prospective basis beginning on January 1, 2018, with early adoption permitted. We typically do not change either the terms or conditions of share-based payment awards once they are granted, therefore; this new guidance is not expected to have a material impact on ourCompany’s consolidated financial statements.

Adoption of New Accounting Standards

In July 2015,August 2018, the FASB issued ASU 2015-11, No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – “SimplifyingChanges to the Measurement of InventoryDisclosure Requirements for Fair Value Measurement.” which simplifiesThis new guidance removes certain disclosure requirements related to the subsequentfair value hierarchy modifies existing disclosure requirements related to measurement of inventory.uncertainty and adds new disclosure requirements. The updated guidance requires that inventory measured using any methodnew disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other than last-in, first-out (LIFO) or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) be measuredcomprehensive income for recurring Level 3 fair value measurements held at the lowerend of costthe reporting period and net realizable value. This update becamethe range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective at thefor fiscal years beginning of our 2017 fiscal year. The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.

The Company adopted ASU 2015-17, Income Taxes (Topic 740): Balance sheet Classification of Deferred Taxes, which changed the classification requirements for deferred tax assets and liabilities, effective January 1, 2017. ASU 2015-17 requires long-term classification of all deferred tax assets and liabilities, rather than separately classifying deferred tax assets and liabilities based on their net current and non-current amounts, as was required under the previous guidance. The Company adopted ASU 2015-17 on a retrospective basis, therefore prior periods were adjusted to conform to the current period presentation. Consequently, $209,000 of current deferred tax assets previously reported as ofafter December 31, 2016, have been reclassified to long-term deferred tax liabilities.

The Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718) which simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures, effective January 1, 2017. The new standard requires excess tax benefits or deficiencies for share-based payments to be recognized as income tax benefit or expense, rather than within additional paid-in capital, when the awards vest or are settled. Furthermore, cashflows related to excess tax benefits are required to be classified as operating activities in the statement of cash flows rather than financing activities.15, 2019. The adoption of ASU 2016-092018-03 did not have a material effect on the Company'sCompany’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.

9

17

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

The Company at times has cash and cash equivalents with its financial institution in excess of Federal Deposit Insurance Corporation ("FIDC") insurance limits. The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks.the risk of loss. To date, the Company has not experienced any such losses. As of March 31, 2021 and December 31, 2020, the Company has approximately $660.5 thousand and $431.3 thousand, respectively, in excess of FIDC insurance limits.

Accounts Receivable

The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States and their international locations. The Company typically does not require collateral from customers. Credit risk is limited due to the financial strength of the customers comprising the Company's customer base and their dispersion across different geographical regions. The Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.

Major Customers

The Company had two customers who comprised 55.5%47% and 43.7%32%, respectively, of net revenue during the nine-month periodthree months ended September 30, 2017,March 31, 2021 and 62.8%two customers who comprised 82% and 35.8%18% of net revenue during the nine-month periodthree months ended September 30, 2016.March 31, 2020. The loss of these customers would adversely impact the business of the Company.

Approximately 4.3%For the three months ended March 31, 2021 and 8.1%2020, approximately 68% and 68%, respectively, of the Company's net revenue for the nine-month periods ended September 30, 2017 and 2016, wasresulted from international sales.

  Revenue %  Gross Accounts Receivable 
  
9 Month Periods Ended
September 30,
  As of September 30,  As of December 31, 
  2017  2016  2017  2016 
Customer A  55.5%  62.8% $3,563,515  $3,760,755 
Customer B  43.7%  35.8%  1,447,171   1,823,785 
   99.2%  98.6% $5,010,686  $5,558,540 
As of March 31, 2021, approximately $83 thousand or 50% of net accounts receivable was from one customer and approximately $71 thousand or 42% came from a second customer. As of December 31, 2020, approximately $120.1 thousand or 100% of accounts receivable was from one customer.

Major Vendors

The Company had one vendortwo vendors from which it purchased 90.8%47% and 31%, respectively, of merchandise sold during the nine-month periodthree months ended September 30, 2017,March 31, 2021, and 89.5%two vendors from which it purchased 66% and 18%, respectively, of merchandise sold during the nine-month periodthree months ended September 30, 2016.March 31, 2020. The loss of this supplierthese suppliers could adversely impact the business of the Company.

 Purchases % Accounts Payable 
 
9 Month Periods Ended
September 30,
 As of September 30, As of December 31, 
  2017  2016  2017  2016 
Vendor A  90.8%  89.5% $1,172,314  $1,507,671 

10

As of March 31, 2021, approximately $159 thousand or 45% of accounts payable was due to two vendors. As of December 31, 2020, approximately $115 thousand or 47% of accounts payable were due to one vendor.

NOTE 3 - NOTE RECEIVABLE

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

On June 8, 2016, the Board of Directors approved a Resolution to accept an offer from AC Kinetics to sell back the 100 shares of AC Kinetics Series A Preferred Stock. For consideration, the Company received a note in the face amount of $1,500,000 that will be immediately paid to the Company on completion and funding of a Securities Purchase Agreement with a national company to purchase AC Kinetics.  The note is subject to a Subordination Agreement for loans made to AC Kinetics by the national company involved in the Securities Purchase Agreement.  As further consideration, the Company also received an option to repurchase 1,666,667 shares of Company common stock held by Involve L.L.C. at an exercise price of $.15. The Agreements were signed June 27, 2016. As the note is subject to a subordination agreement, and the Securities Purchase Agreement between the national company and AC Kinetics and has not been concluded, the Company has determined that the note fell under the Level three category of the fair value hierarchy and that the fair value of the note was determined to be $500,000 at the date of the transaction. The fair value of the note was determined based on an analysis of AC Kinetics ability to repay the note and the perceived value of the options available under the repurchase agreement.

The significant unobservable inputs used in the fair value measurement of the Company's note receivable were the probability of default and the loss severity in the event of the default.

On February 13, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 1,000,000 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.

On May 1, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 666,667 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.

On May 2, 2017, the Company's Board of Directors authorized at the Company's discretion to either retain repurchased shares in the treasury or to retire the repurchased shares and these shares were retired on June 1, 2017.

With the purchase of all available options under the repurchase agreement, part of the collateral used to substantiate the value of the note receivable was no longer available and, consequently management has determined that the fair value of the note at September 30, 2017 was $0.

NOTE 4 – NOTES PAYABLE

Sterling National Bank

On September 8,2010, in order to fund increasing accounts receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now calledJuly 31, 2020 the credit facility at Sterling National Bank), located in New York, whereby Capstone receives funds for assigned retailer shipments.Bank was terminated. The assignments provide funding for an amount up to 85% of net invoices submitted.  There is a base management fee equal to .30% of the gross invoice amount. The interest rate of the loan advance is .25% above Sterling National Bank's Base Rate whichCompany has retained its cash operating account at time of closing was 5%. As of September 30, 2017 and December 31, 2016, the interest rate on the loan was 5.25%. The amounts borrowed under this agreement are due on demand and collateralized by substantially all the assets of Capstone.

As of both September 30, 2017 and December 31, 2016, there was no balance due to Sterling National Bank.

As of September 30, 2017, the maximum amount that can be borrowed on this credit line is $7,000,000.

1118


NOTE 3 – NOTES PAYABLE (continued)

The Company has been in discussions with alternate sources of funding, that can provide finance options that are more suitable to the e-commerce business model that the Company is transitioning into. The borrowing costs associated with such financing, are dependent upon market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future or that we will secure affordable funding. The decline in the financial condition and performance of the Company in fiscal year 2020 has adversely impacted efforts to find traditional bank financing.

The Company, through Sterling National Bank, applied for a loan under the Paycheck Protection Program (“PPP”). The PPP was enacted on March 27, 2020 as part of the CARES Act and provides for loans for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. On May 11, 2020, the Company received loan proceeds in the amount of $89,600.

The Company used the proceeds for purposes consistent with the PPP. The Company submitted a loan forgiveness application with the Small Business Administration (“SBA’) on September 16, 2020, which was accepted by the bank and processed to the SBA. . On October 30, 2020, the SBA notified the Company that the PPP loan principal of $89,600 and $428 of accumulated interest had been fully forgiven which was recorded in Other Income on the Consolidated Statement of Operations for the year ended December 31, 2020.

On December 27, 2020, the U.S. administration approved the Consolidated Appropriations Act, 2021.This second stimulus package provided aid to eligible small businesses through a second round of PPP loans (”PPP2”). Like the initial PPP program and provides for loans for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business.

The loans and accrued interest are forgivable if the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees during the eight-week period.

On January 21, 2021, the Company submitted a PPP2 loan application for $139,350 through our bank’s loan processor for consideration by the SBA and is still pending approval as of the filing date of this report.

The unforgiven portion of the PPP2 loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. If approved, the Company will use the proceeds for purposes consistent with the PPP forgiveness rules.

NOTE 54 – NOTES AND LOANS PAYABLE TO RELATED PARTIES

As of September 30, 2017,Notes Payable to Officers, Directors and Related Parties

For the periods ended March 31, 2021 and December 31, 2016,2020, there have been no outstanding loan balances with a Company Officer, Director or related parties and the Company had $0 notes payable due to one officer, directorofficers, directors and related party which totaled $688,384 and $1,321,721, respectively. During the quarter ended September 30, 2017, this related party entered into a Conversion and Option Agreement that resulted in $217,500 of outstanding notes payable being satisfied as payment for exercised stock options and a further $23,400 of notes payable being satisfied as payment for the purchase of 50,000 of the Company's common shares.parties.

On September 14, 2017,December 31, 2020, the remainingBoard of Directors approved and authorized James McClinton, the Company’s Chief Financial Officer to sign a Loan Agreement with Directors Stewart Wallach and Jeff Postal as joint lenders (the “Lenders”) whereby Lenders would make a maximum of Seven Hundred and Fifty Thousand Dollars and No Cents ($750,000) (principal) available as a short-term credit line to the Company for working capital purposes.


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

On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The term of the loan started January 4, 2021 and ends June 30, 2021 (“Initial Period’). The Company may extend the Initial Period for an additional six consecutive months, ending December 31, 2021, under the same terms and conditions of the Initial Period, by providing written notice of the election to extend to the lenders prior to the expiration of the Initial Period. The Company may borrow and reborrow under the agreement up to $750,000 and prepay wholly or partially the unpaid principal amount at any time and do so without pre-pay penalty or charge. The unpaid principal amount and all accrued interest is due and payable in full at the end of the Initial Period or expiration of the extended date, being December 31, 2021 (the “ Extended Maturity Date”).

Interest shall accrue on the unpaid balance of that noteall loan advances at a simple annual interest rate of one percent (1%) (“Interest”) based on a 360 day year.  Accrued and unpaid Interest on principal will be due and payable $138,418in full on the Maturity Date or Extended Maturity Date, as the case may be.

In consideration for the Lenders allowing for loan advances under this agreement, a below market rate of interest and the loan made on an unsecured basis and as payment of a finance fee for the loan, the Company issued a total of seven thousand five hundred shares of Company’s Series B-1 Convertible Preferred Stock, $0.0001 par value per share, (“Preferred Shares”) to each of the Lenders (the “Finance Fee”). Each preferred share converts into 66.66 shares of common stock at option of Lender. The Preferred Shares and any shares of common stock issued under the loan agreement are “restricted” securities under Rule 144 of the Securities Act of 1933, as amended. The Preferred Shares have no further rights, preferences or privileges. The fair value of the Preferred Shares was paiddetermined to this related party, resultingbe $48,996 based on the number of shares of common stock to be issued upon conversion and the market price of the Company’s stock on the date the working capital loan agreement was executed. The Company will amortize the Finance Fee over the Initial Period of the agreement. During the period ended March 31, 2021, $24,498 of the Finance Fee was  recognized as expense and included in other expense on the condensed consolidated statements of operations. The remaining $24,498 has been included in prepaid expenses and will be expensed during the second quarter ending June 30, 2021.

As of March 31, 2021 there was $0 loan balance due and the Company has the full and final payment of the note outstanding since 2012.$750,000 credit line available to use.

The remaining note payable carries an 8% interest rate and matures on of January 2, 2018.

NOTE 65 – COMMITMENTS AND CONTINGENCIES

Operating Leases

On June 29, 2007, theThe Company relocated itshas operating lease agreements for offices in Fort Lauderdale, Florida and in Hong Kong, expiring at varying dates. The Company’s principal executive offices and sole operations facility to 350 Jim Moran Blvd.,office is located at 431 Fairway Drive, Suite 120,200, 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.33441.

Capstone entered into aOn May 9, 2019, per the terms of the lease agreement, the current landlord was notified of the Company’s intent to take over the prime lease.

Effective November 1, 2019, the Company entered a new prime operating lease with the landlord “431 Fairway Associates, LLC” ending June 30, 2023, for the same office space as currently located. The lease agreement dated January 17, 2014,Company’s executive offices located on the second floor of 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 with an annualized base rent of $70,104 and effective February 1, 2014, had a 3-year term with a base annual rentrental adjustment of $87,678 paid in equal monthly installments. The Company had3% commencing July 1, 2020 and on July 1st of each subsequent year during the one-time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term. Effective February 1, 2017, the Company renewed the lease for 3 years ending January 31, 2020, with a base annual rent of $92,256 and with a total rent expense of $281,711 through the term of the agreement. Under the lease agreement, Capstone is also responsible for a portionapproximately 4,694 square feet of common area maintenance charges and any other utility consumed in the leased premises.premises which has been estimated at $12.00 per square foot on an annualized basis.

CIHKThe Company's rent expense is recorded on a straight-line basis over the term of the lease. The rent expense for the period ended March 31, 2021 and 2020 amounted to $35,600 and $47,447, respectively. At the commencement date of the office lease, the Company recorded a right-of-use asset and lease liability under ASU 2016-02, Topic 842.

20

NOTE 5 – COMMITMENTS AND CONTINGENCIES (continued)

Supplemental balance sheet information related to leases as of March 31, 2021 is as follows: 
Assets   
Operating lease - right-of-use asset $143,950 
     
Liabilities    
Current    
Current portion of operating lease $64,967 
     
Noncurrent    
Operating lease liability, net of current portion $90,882 

Supplemental statement of operations information related to leases for the period ended March 31, 2021 is as follows: 
Operating lease expense as a component of other general and administrative expenses $17,460 

Supplemental cash flow information related to leases for the period ended March 31, 2021 is as follows: 
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flow paid for operating lease $18,051 
     
Lease term and Discount Rate    
Weighted average remaining lease term (months)    
Operating lease  27 
     
Weighted average Discount Rate    
Operating lease  7%

Scheduled maturities of operating lease liabilities outstanding as of March 31, 2021 are as follows:
Year Operating Lease 
2021 remaining nine months $55,239 
2022  75,492 
2023  38,304 
Total Minimum Future Payments  169,035 
Less: Imputed Interest  13,184 
Present Value of Lease Liabilities $155,851 

The Company had two short storage rentals with durations of less than twelve months which expired at varying times through December 31, 2020. For the three months ended March 31, 2021 and 2020, rent expense amounted to $749 and $4,522, respectively which is included in other general and administrative on the statements of operations.

Capstone International Hong Kong Ltd, (CIHK), entered into a lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong. The original agreement which was for the periodeffective from February 17, 2014 to February 16, 2016,has been extended various times. On August 17, 2019, the lease was further extended with a base annual rentmonthly rate of $48,000 (HK$ 372,000) paid in equal monthly installments. The lease was extended$5,100 for three (3)six months until MayFebruary 16, 2016. The2020. As the premises was no longer required as the employees were working remotely from their homes, the Company decided not to renew and allowed this lease was renewed for (12) months ending May 16, 2017 with a base annual rate of $48,775 and was further extended for (12) months ending May 16, 2018 with a base annual rate of $54,193 paid in equal monthly installments. The Company entered into a six (6) month rental agreement from December 1, 2016 until May 31, 2017 for showroom space at 3F, Wing Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. This agreement has been further extended until December 31, 2017.

The Company's rent expense amounted to $36,757 and $35,610 for the three-month period ended September 30, 2017 and 2016, respectively and $117,266 and $107,245 for the nine-month period ended September 30, 2017 and 2016, respectively.expire.

Consulting Agreements

On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf was paid $10,500 per month through December 31, 2015 increasing to $12,500 per month from January 1, 2016 through December 31, 2017.


21

NOTE 5 – COMMITMENTS AND CONTINGENCIES (continued)

On January 1, 2017,2018, the agreement was further amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2018 through December 31, 2018.

On January 1, 2019, the agreement was further amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2019 through December 31, 2020.

On January 1, 2021, the sales operations consulting agreement with George Wolf, was further extended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 20172021 through December 31, 2017. A bonus compensation of $10,000 was paid in the month of January 2017. 2021.

The agreement can be terminated upon 30 days' notice by either party. The Company may, in its sole discretion at any time after December 31, 2015 convert Mr. Wolf to a full-time Executive status. The annual salary and term of employment would be equal to that outlined in the consulting agreement.

12


NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)Effective September 1, 2020 through March 31, 2021, payment for fifty percent or $6,875 of the monthly consulting fee or approximately $48,125 for the effective period, was deferred until later in 2021.

Employment Agreements

On February 5, 2016,2020, the Company entered into ana new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $287,163$301,521 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, 20162020 and ends February 5, 2018.2023. 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, 2016,2020, the Company entered into ana 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, 20162020 and ends February 5, 2018. The parties may extend the employment period2022.

Effective September 1, 2020 through March 31, 2021, payments equivalent to fifty percent of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed one yearboth Mr. Wallach and Mr. McClinton’s salary or approximately $92,206 and $58,542 respectively, has been deferred until later in length.2021.

There is a common provision in both Mr. Wallach and Mr. McClinton's employment agreements: 

Ifagreements, if the officer's employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer's estate or the officer, as the case may be an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to (a) the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of "merit" based bonuses earned by the Executive during the prior calendar year of his termination.  Any payments owed by the Company shall be paid from a normal payroll account on a bi-weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be payout bi-weekly over the course of the year but at no time will be no more than twenty (26) installments. The Company will also continue to pay the Executive's health and dental insurance benefits for 12 months starting at the

(a)
the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of "merit" based bonuses earned by the Executive during the prior calendar year of his termination. Any payments owed by the Company shall be paid from a normal payroll account on a bi-weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be payout bi-weekly over the course of the year but at no time will be no more than twenty (26) installments. The Company will also continue to pay the Executive's health and dental insurance benefits for 6 months starting at the Executives date of termination. If the Executive had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against the Executive's severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment.

Licensing Agreements

On February 4, 2015, the Company finalized a Licensing Agreement with a globally recognized floorcare company that allows the Company to market home lighting products under the licensed brand, to discount retailers, warehouse clubs, home centers, on-line retailers and other retail distribution channels in the U.S., Canada and Mexico. The initial termfollowing table summarizes potential payments upon termination of the agreement is for 3 years. The agreement does not have a guaranteed royalty stipulation.employment:

On December 29, 2016, the Company finalized the first amendment to the February 4th, 2015 Licensing Agreement with the floorcare company in which the initial term was extended through February 3, 2020 if the Company reaches $10,000,000 of net sales in the initial

term. The agreement was further extended out to a second extended term until February 3, 2022 and further extended out to a third extended term if specified sales goals are achieved. The license was also expanded to add an additional product category.

Royalty expense for this agreement was $251,559 and $221,219 for the three-month period ended September 30, 2017 and 2016, respectively, and $630,664 and $406,405 for the nine-month period ended September 30, 2017 and 2016, respectively.

On January 9, 2017, the Company finalized a Licensing Agreement with a globally recognized battery company that will allow the Company to market under the licensed brand, a specific product to a specific retailer in the warehouse club distribution channel. This agreement will be effective until December 31, 2018. The agreement does not have a guaranteed royalty stipulation, but the Company must meet minimum net sales requirements of $5,000,000 for contract year 1 and $7,000,000 for contract year 2.

Royalty expense for this agreement was $262,466 for the three-month period ended September 30, 2017 and $412,589 for the nine-month period ended September 30, 2017.
  
Salary
Severance
  
Bonus
Severance
  
Gross up
Taxes
  
Benefit
Compensation
  Grand Total 
Stewart Wallach $301,521  $-  $12,600  $6,600  $320,721 
Gerry McClinton $191,442  $-  $11,000  $6,600  $209,042 

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22

NOTE 65 – COMMITMENTS AND CONTINGENCIES (continued)

Investment BankingDirectors Compensation

On May 31, 2019, the Company approved that effective on June 1, 2019, each independent director, namely Jeffrey Guzy and Jeffrey Postal, would each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation would be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee.

On May 31, 2019, the Company also approved that the independent directors would be offered effective from June 1, 2019, the opportunity to participate as a non-employee in the Company’s Health Benefit Plan, subject to compliance with all plan participation requirements and on acceptance into the plan the director will be responsible to pay 100% of their plan’s participation cost.

On June 10, 2020, the Company approved that effective on August 1, 2020 until August 1, 2021, each independent director, namely Jeffrey Guzy and Jeffrey Postal, would each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation would be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee.

Public Relations Agreement

On March 1, 2017,September 27, 2018, the Company executed an Investment Banking Agreementa public relations services agreement with Wilmington Capital Securities, LLC, ("Wilmington"Max Borges Agency, (“MBA”), a registered broker-dealer under the Securities Exchange Act of 1934.full – service public relations and communications agency with offices in Miami and San Francisco. The Company entered into the Agreement in order to obtain outside assistance from a nationally recognized firm, specializing in findingthe development of product branding, marketing and considering possible opportunities to enhance Company shareholder value through significant corporate transactionslaunching of technology products. The agreement was effective on October 1, 2018 with an initial 180-day term, which either party can cancel with 60 days advanced notice in writing on or through funding expansion and/or diversificationafter the 120th day of the Company's primary business lines. The scope of such possible strategic transactions includes mergers and acquisitions, asset acquisition or sales and funding through the issuance of Company securities. The agreement has an initial six-month term and renews for an additional, consecutive six-month term if not terminated prior to the term renewal. Wilmington willeffective date. MBA would receive a cash retainermonthly fee up to $80,000, payable in monthly installments, inof $11,250 and $476 subscription fee due on the first six-month term, and a reduced retainer fee of $45,000, payable in monthly installments, in the first renewal of the initial six-month term. Wilmington will also receive a transaction fee for any consummated strategic transaction introduced by Wilmington under the Agreement. The transaction fees are based on the Lehman Scale starting at 8% fee reducing to 4% on transactions from $5,000,000 to in excess of $20,000,000.each month.

The retainer fee paidDuring 2019 both Companies agreed to temporarily pause the MBA agreement for specific months and in May 2019 the engagement restarted with the same statement of work and terms as originally agreed.

On January 21, 2020, the Company provided MBA with 60 days cancellation notice and the agreement ended March 31, 2020.

During the three months ended March 31, 2020, the Company incurred $33,750 of services fees and $952 of subscription fees. As the agreement has been cancelled there have been no further charges for this agreement was $30,000 for the three-month period ended September 30, 2017 and $100,000 for the nine-month period ended September 30, 2017.project as of March 31, 2021.

NOTE 76 - STOCK TRANSACTIONS

WarrantsSeries “B-1” Preferred Stock

During SeptemberIn 2009, the Company authorized 3,333,333 shares of Series B-1 preferred stock. The Series B-1 preferred stock are convertible into common shares, at a rate of 66.66 of common stock for each share of series B-1 convertible preferred stock. The par value of the Series B-1 preferred shares is $0.0001.

On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and October 2007,Jeffrey Postal (“Lenders”). In consideration for the Lenders allowing for loan advances under the loan agreement, a below market rate of interest and the loan made on an unsecured basis, as payment of a finance fee for the loan, the Company issued 2,121,569a total of seven thousand five hundred shares of Company’s Series B-1 Convertible Preferred Stock, $0.0001 par value per share, (“Preferred Shares”) to each of the Lenders. Each preferred share converts into 66.66 shares of common stock for cash at $0.255 per share, or $541,000 total as partoption of a Private PlacementLender. The Preferred Shares and any shares of Common Stock issued under the loan agreement are “restricted” securities under Rule 506 of Regulation D. Along with the stock, each investor also received a warrant to purchase 30%144 of the shares purchased in the Private Placement. In September 2017, an investor exercised a warrant option for 29,412 shares at the exercise priceSecurities Act of $.255 per share.  A total of 607,062 issued warrants remain outstanding at September 30, 2017.  Such warrants expired during October 2017.1933, as amended (See Note 4).

23

NOTE 6 - STOCK TRANSACTIONS (continued)

Options

In 2005, the Company authorized the 2005 Equity Plan that made available shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.

On May 2, 2017, the Company’s Board of Directors amended the Company’s 2005 Equity Incentive Plan to extend the Plan’s expiration date from December 31, 2016 to December 31, 2021.

On August 6, 2017,29, 2018, the Company granted 200,000100,000 stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation Committee, and 10,000 stock options to the Company Secretary. TheseThe Director options have an exercise price of $.435 with an effective date of August 6, 2018 and vested on August 5, 2019 and have a term of 5 years. The Company Secretary options have an exercise price of $.435 with an effective date of August 6, 2018 and vested on August 5, 2019 and have a term of 10 years.

On May 31, 2019, the Company granted 100,000 stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation Committee, and 10,000 stock options to the Company Secretary. The Director options have a strike price of $.435 with an effective date of August 6, 20172019 and will vest on August 5, 2018.

During the quarter ended September 30, 2017, Jeffrey Postal (Director) entered into2020 and have a Conversion and Option Agreement with theterm of 5 years. The Company and exercised his option to purchase 500,000 of his vested stockSecretary options at the granthave a strike price of $.435 per sharewith an effective date of August 6, 2019 and withwill vest on August 5, 2020 and have a total valueterm of $217,500.  As part10 years.

On June 10, 2020, the Company granted 100,000 stock options each to two directors of the Agreement,Company for their participation as members of the $217,500 payment for theseAudit Committee and Nominating and Compensation Committee, and 10,000 stock options resulted into the satisfactionCompany Secretary.

The Director options have a strike price of $217,500$.435 with an effective date of notes payable due Mr. Postal since 2012.August 6, 2020 and will vest on August 5, 2021 and have a term of 5 years. The Company Secretary options have a strike price of $.435 with an effective date of August 6, 2020 and will vest on August 5, 2021 and have a term of 10 years.

As of September 30, 2017,March 31, 2021, there were 1,026,670990,000 stock options outstanding, and 816,670780,000 stock options vested. The stock options have a weighted average expense price of $0.435.

ForStock options were issued under Section 4(a)(2) and Rule 506(b) of Regulation D under the three-month periods ended September 30, 2017 and 2016, the Company recognized stock based compensation expenseSecurities Act of $25,644 and $18,081, respectively, related to these stock options.1933.

For the nine-month periods ended September 30, 2017March 31, 2021 and 2016,2020, the Company recognized stock basedstock-based compensation expense of $66,594$4,200 and $46,581,$8,925, respectively, related to these stock options. Such amounts are included in compensation expense in the accompanying consolidated statements of income. A further compensation expense expected to be $28,875 and $68,856$5,813 will be recognized for these options in 2017 and 2018 respectively.

On May 2, 2017, the Company's Board of Directors amended the Company's 2005 Equity Incentive Plan to extend the Plan's expiration date from December 31, 2016 to December 31, 2021.

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NOTE 7 - STOCK TRANSACTIONS (continued)

Stock Purchase

During the quarter ended September 30, 2017, Jeffrey Postal entered into a Conversion and Option Agreement with the Company. As part of the Agreement, Jeffrey Postal purchased 50,000 shares of common stock at a price of $.468 per share being the 30-consecutive trading day average price with a 10% discount resulting in a total value of $23,400. As part of the Agreement, the payment for these shares resulted in the satisfaction of $23,400 of notes payable due to Mr. Postal since 2012.

Adoption of Stock Repurchase Plan

On August 23, 2016, the Company's Board of Directors authorized the Company to implement a stock repurchase plan for up to $750,000 worth of shares of the Company's outstanding common stock. The stock purchases can be made in the open market, structured repurchase programs, or in privately negotiated transactions. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased will be at the discretion of management and will depend on a number of factors including the price of the Company's common stock, market conditions, corporate developments and the Company's financial condition. The repurchase plan may be discontinued at any time at the Company's discretion.

On December 21, 2016,19, 2018, Company entered into a Purchase Plan pursuant to Rule 10b5-1 under the Company's BoardExchange Act, with Wilson Davis & Co., Inc., a registered broker-dealer. Under the Purchase Plan, Wilson Davis & Co., Inc will make periodic purchases of Directors approved an extension of the Company's stock repurchase plan through December 31, 2017, subjectup to an earlier terminationaggregate of 750,000 shares at the discretion of the Company's Board of Directors.

On February 13, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 1,000,000 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.

On May 1, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 666,667 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.

On May 2, 2017, the Company's Board of Directors authorized at the Company's discretion to either retain repurchased shares in the treasury or to retire the repurchased shares and these shares were retired on June 1, 2017.

NOTE 8 - INCOME TAXES

As of September 30, 2017, the Company had utilized all net operating loss carry forwards for income tax reporting purposes that were previously available to be offset against future taxable income through 2034. The net deferred tax liability as of September 30, 2017 was $362,000 and is reflected in long-term liabilities in the accompanying balance sheet.

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 areprevailing market prices, subject to the interpretationterms of the relaxed tax laws and regulations and require significant judgement to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for the years 2013 and prior.Purchase Plan.

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

The provision for income taxes for the nine-months ended September 30, 2017 and 2016 was calculated based on the estimated annual effective rate of 34% for both the full 2017 and 2016 calendar years, adjusted for an income tax benefit from the expected utilization of net operating loss carryforwards.

1524


NOTE 86 - INCOME TAXESSTOCK TRANSACTIONS (continued)

On May 31, 2019, the Company’s Board of Directors approved a further extension of the Company’s stock repurchase plan through August 31, 2020. The income tax provisionBoard of Directors also approved that the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program remained at $1,000,000 during the renewal period.

On September 23, 2019, the Company signed a revised stock Purchase Plan to reflect an extension of the plan to repurchase up to an aggregate of 750,000 shares at prevailing market prices, subject to the terms of the Purchase Plan.

On March 30, 2020, Wilson Davis & CO., Inc., advised the Company that 750,000 of the Company’s Common Stock had been repurchased to complete the authorized Purchase Plan.

On June 10, 2020, the Company’s Board of Directors approved a further extension of the Company’s stock repurchase plan through August 31, 2021. Since the Board of Director approval there have been no further repurchase of the Company’s Common Stock during 2020 and further Stock repurchases have been placed on hold in order to conserve cash during the COVID-19 pandemic.

As of March 31, 2021 and December 31, 2020 a total of 750,000 of the Company’s Common Stock has been repurchased since the program was initiated at a total cost of $107,740.

NOTE 7- SUBSEQUENT EVENTS

Employment Agreements

Since September 1, 2020 through March 31, 2021, compensation payments equivalent to fifty percent of Mr. Wallach, Mr. McClinton and Mr. Sloven’s salary was deferred until later in 2021. Effective April 3, 2021, their salaries have been restored to previously approved levels. An amount of approximately $92.2 thousand, $58.5 thousand and $58.0 thousand respectively, has been deferred for future payment.

Consulting Agreements

Effective April 1, 2021, the sales operations consulting fee with G. Wolf was restored to the contract amount. Since September 1, 2020 through March 31, 2021, payment of fifty percent or $6,875 of the monthly consulting fee or approximately $48,125 for the three- montheffective period, ended September 30, 2017 and 2016 consists of:had been deferred for future payment.

  
3 months ended
September 30, 2017
  
3 months ended
September 30, 2016
 
  Current:      
     Federal $382,000  $- 
  Deferred:        
     Federal  8,000   24,412 
  Income Tax Provision $390,000  $24,412 
Directors Compensation

The income tax provisionOn May 6, 2021, the Company modified and approved the stock participation for each independent director, namely Jeffrey Guzy and Jeffrey Postal. Effective on August 6, 2021 until August 5, 2022, the directors pay value was approved at $15,000 each for the nine-month period ended September 30, 2017term.  Each director would  receive $750 per calendar month or $9,000 per term, as a Form 1099 compensation and 2016 consists of:the $6,000 balance  would be provided in stock options at the market value on August 6, 2021, minus a 20% discount, for their continued services as directors of the Company.

  
9 months ended
September 30, 2017
  
9 months ended
September 30, 2016
 
  Current:      
     Federal $774,000  $- 
  Deferred:        
     Federal  146,000   37,012 
  Income Tax Provision $920,000  $37,012 

1625

NOTE 7- SUBSEQUENT EVENTS (continued)

Stock Purchase Agreements

On April 5, 2021, the Company entered into a Private Equity Placement with five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares (“Shares”) of its Common Stock, $0.0001 par value per share, (“Common Stock”) for an aggregate purchase price $1,498,000. The five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended,(“Securities Act”). The $1,498,000 in proceeds from the Private Placement will be used mostly to purchase start up inventory for the Company’s new Smart Mirror product line, and the remainder for advertising and working capital. Under the SPA, each investor is granted five-year piggyback, ‘best efforts’ registration rights with no penalties. The Shares are ‘restricted securities” under Rule 144 of the Securities Act and are subject to a minimum six month hold period. Based on representations made to the Company, the five investors do not constitute a “group” under 17 C.F.R. §240.13d-3 and have purchased the Shares solely as an investment for each investor’s own account. No individual investor owns more than 2% of the issued and outstanding shares of Common Stock.

The Private Placement was required to raise needed working capital to purchase U.S. domestic inventory, to support the Company’s new Smart Mirror product line that will be sold online in the second quarter 2021.

The Company engaged Wilmington Capital Securities, LLC, a FINRA and SEC registered broker to act as a placement agent to assist to raise capital through a private placement from one or more accredited investors. As compensation for their services Wilmington was paid 7% of the gross proceeds or $104,860 as a placement fee and in addition on the closing date the Company shall issue to Wilmington warrants equal to 8%  the Securities issued or 199,733 warrants. The Warrants shall be a five (5) year warrant, exercisable at a price per share equal to 110% or $0.66 of the price per share paid by the Investors.


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

The following management'sThis discussion and analysis should be read in conjunction with our financial statementsManagement's Discussion and Analysis of Financial Condition and Results of Operations in the notes thereto and the other financial information appearing elsewhere in this Form 10-Q quarterly report and with our annual report on Form 10-K for year ended December 31, 2016. In addition to historical information, the following discussion contains certain forward-looking statements under the Private Securities Litigation Act of 1995, as amended. See "Special Note Regarding Forward Looking Statements" below for certain information concerning those forward- looking statements.  As used below, "our" and "we" refers to the Company and its subsidiaries.Company's  2020 Annual Report.

Special NoteCautionary Statement Regarding Forward LookingForward-Looking Statements

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, as filed with the SEC.2020 Annual Report. 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:

Forward-looking statements represent
COVID-19 pandemic on our estimatesfinancial condition and assumptions only asoperations, which could adversely affect our ability to obtain acceptable financing in an amount equal to the resulting reduction in cash from operations, and the current, and uncertain future, other impacts of the date of this Form 10-Q quarterly report. One should read this Form 10-Q quarterly reportCOVID-19 pandemic outbreak, including its effect on the retail market place and the documentsclosure of retail stores and its effect on consumer confidence and on the ability or desire of consumers to purchase nonessential goods, which are expected to continue to adversely impact our results, operations, outlook, plans, goals, growth, cash flows, liquidity, demand for consumer products and share price.
our success in reducing operating expenses and the impact of any such reductions.
our ability to work with Sterling National Bank to renew our existing credit facility and maintain sufficient collateral.
adverse general economic and related factors, such as fluctuating or increasing levels of unemployment, declines in the securities and real estate markets, and perceptions of these conditions that decrease the level of disposable income of consumers or consumer confidence.
the spread of epidemics, pandemics, and viral outbreaks.
our anticipated need for additional financing, which may not be available on favorable terms, or at all, and may be dilutive to existing shareholders.
our ability to raise sufficient capital and/or take other actions to improve our liquidity position or otherwise meet our liquidity requirements that are sufficient to eliminate the substantial doubt about our ability to continue as a going concern.
an impairment of our goodwill, in future reporting periods.
the risks and increased costs associated with operating internationally.
fluctuations in foreign currency exchange rates.
our expansion into and investments in new categories.
our inability to obtain adequate insurance coverage.
volatility and disruptions in the credit and financial markets, which may adversely affect our ability to borrow.
our inability to recruit or retain qualified personnel or the loss of key personnel.
our inability to keep pace with developments in technology.
other factors are set forth under “Risk Factors” in our 2020 Annual Report.


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Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic 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 report on Form 10-Q and otherour SEC filingsfilings. Increases in the public market price of the Company.  The Company completed a 1-for-15 reverse stock split for the Common Stock on July 25, 2016. The reverse stock split didin first fiscal quarter of 2021 is not changeindicative of potential performance of the Company's status as a "penny stock" company.Common Stock in the public market.

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The above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections 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 date 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 which any such statement was based, except as required by law.

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

(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 SAR registered Company.
(3)
"Capstone Industries, Inc.", a Florida corporation and a wholly owned subsidiary of CAPC, may also be referred to as "CAPI" or "Capstone".
(4)
"Capstone Companies, Inc.," a Florida corporation, may also be referred to as "we," "us" "our," "Company," or "CAPC.""CAPC". Unless the context indicates otherwise, "Company" includes in its meaning all of Capstone Companies, Inc.'s subsidiaries. Subsidiaries.
(5)
"China" or "PRC" means People'sPeople’s Republic of China.
(6)
"Commission" or "SEC"W" means the U.S. Securities and Exchange Commission.watts.
(7)
References to "33 Act" or "Securities Act" means the Securities Act of 1933, as amended.
(8)
References to "34 Act" or "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(9)
"SEC" or "Commission" means the U.S. Securities and Exchange Commission.
(10)
"Subsidiaries" means the following wholly owned subsidiaries of the Company: Capstone Industries, Inc. ("CAPI"), Capstone International H.K Ltd., ("CIHK"), and Capstone Lighting Technologies, Inc. ("CLTL").
(10)(11)
Any reference to fiscal year in this Annual Report on Form 10-K means our fiscal year, ending December 31st.2020.
(12)
"LED" or "LED's" means a light-emitting diode component(s) which can be assembled into light bulbs or can be used in lighting fixtures.
(13)
"OEM" means "original equipment manufacturer."
(14)
“Connected Surfaces” or “Connected Products” means smart home devices with embedded sensors that provide communication and data transfer between the Connected Surface and internet-enabled systems of the Company or associated third parties. Connected Surfaces may permit internet access for defined functions.

We may use "FY" to mean "fiscal year" and "Q" to mean fiscal quarter in this Report.

Further, we may use "OEM" which means "original equipment manufacturer."

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General.Overview of our Business

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.

Available Information.

The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed pursuant to Sections 13(a) and 15(d)laws of the Securities Exchange ActState of 1934, as amended (the "Exchange Act"), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company's website at http://www.capstonecompaniesinc.com/Investor Relations and on the SEC'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's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549, or through the aforesaid website 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 report. Further, the Company's references to the URLs for these websites are intended to be inactive textual references only.

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, 2017 compared with the same periods in 2016 and (ii) financial liquidity and capital resources.

18



Florida. The Company designsis a  designer, manufacturer and marketsmarketer of consumer oriented LED lightinginspired products forthat bridge technological innovations. The Company has global distribution globally with a primary focus onincluding Australia, Japan, Korea, North America, South America, and the North American markets.United Kingdom. The primary operating subsidiary is Capstone Industries, Inc., a Florida corporation located in the principal executive offices of the Company ("CAPI"). Capstone International Hong Kong, Ltd., or "CIHK", was established to expand itsthe Company's product development, engineering and factory resource capabilitiescapabilities. The Company has a history of exploiting technologies in Hong Kong. Capstone's LED lighting portfolio consistsareas of stylish, innovativeinduction charging, power failure control, security and easy to use consumerhome LED lighting products and most recently has entered the electronics market with its introduction of Capstone’s Smart Mirrors.

Effects of COVID-19

The Company’s top priority has been to take appropriate actions to protect the health and safety of our employees as a result of the COVID-19 pandemic. We have adjusted standard operating procedures within our business operations to ensure the continued safety of our employees and we continually monitor evolving health guidelines to ensure ongoing compliance and protection of our employees. These procedures include expanded and more frequent cleaning within facilities, implementation of appropriate social distancing programs, requiring use of certain personal protective equipment, screening protocols and work from home programs.

In response to COVID-19 and Centers for Disease Control (‘CDC”) guidelines,  the Company has practiced the following actions since March 2020:
Followed the CDC guidelines for social distancing and safe practices.
Placed restrictions on business travel for our employees.
Modified our corporate and division office functions to allow employees to work remotely and attend the office on a rotating schedule.

While all the above-referenced steps were appropriate considering COVID-19, they impacted the Company’s ability to operate the business in its ordinary and traditional course.

Our business operations and financial performance for the period ended March 31, 2021 continued to be adversely impacted by COVID-19. As of March 31, 2021 net revenue was $438 thousand as compared to $149 thousand in the same period 2020, which was significantly impacted by the start of the pandemic last year. The net loss for the quarters ended March 31, 2021 and 2020 was approximately $499 thousand and $597 thousand, respectively.

 Net revenue for the period continued to be driven by the uncertainty felt by retail buyers as to the continuing impact on the retail market of COVID-19 and its overall long-term negative impact on the U.S. economy. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the impact of the global pandemic on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021. However, during the quarter ended March 31, 2021, the general U.S. economic indicators show significant signs of improvement including power failure multi-function handheld lights, power failure multi-function nightlights, decorative nightlights, wireless motion sensor lights, remote control battery powered accent lights, remote control outlets, bath vanity lights, outdoor LED fixtures, dual powered solar lightsthe consumer confidence index, Management believes that with the national vaccine inoculation program making major advances, and LED power controlled bulbs.  with increasing consumer confidence, states will continue to open their economies and consumer foot traffic will increase in brick and mortar retailers starting in mid-2021.

The Company'sCompany has been building its infrastructure to transition into the online retail business by developing an e-commerce website and has invested in developing a social media presence over the last year and is now ready to launch shipping product by its online Smart Mirror business in the second quarter 2021.  Prior to 2021, the Company relied on brick and mortar retail for sale of its products are sold under CAPI's brand name, Capstone Lighting®to consumers and sought to piggyback off retailers’ e-commerce websites as well as under two nationallydedicated online retailers like Amazon.

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As a result of the continuing economic uncertainties caused by the COVID-19 pandemic, Management determined sufficient indicators existed to trigger the performance of an interim goodwill impairment analysis as of March 31, 2021. The analysis concluded that the Company’s fair value of its single reporting unit exceeded the carrying value and a goodwill impairment charge was not required in the quarter ended March 31, 2021.

With the continuing uncertainties caused by the COVID-19 pandemic, the capital markets may have 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.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, which we refer to as the “CARES Act.” was enacted into law. The CARES Act includes several significant income and other business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years. The Company was able to carryback the 2018 and the 2019 NOLs to 2017 tax year and generate an estimated refund of previously paid income taxes at an approximate 34% federal tax rate. As of December 31, 2020, the Company had an income tax refundable of approximately $862 thousand of which approximately $576 thousand of income tax was refunded on February 3, 2021 leaving approximately $286 remaining balance to be refunded as of March 31,2021.

Despite the operation obstacles and delays that the COVID 19 pandemic has caused, we are progressing in our goals and intend to execute our organic growth strategy, which is designed to enhance our market presence and expand our customer base.

Goodwill Impairment

As a result of the economic uncertainties caused by the COVID-19 pandemic during the quarter ended March 31, 2021, management determined sufficient indicators existed to trigger the performance of interim goodwill impairment analysis for the period ended March 31, 2021. The analysis concluded that the Company’s fair value exceeded the carrying value of its single reporting unit and a goodwill impairment charge was not required. For the quarter ended March 31, 2020, the Company recognized licensed brand names: Hoover® Home LEDa goodwill impairment charge of $290,059.

With the continuing economic uncertainties caused by the COVID-19 pandemic, the capital markets may have a downturn and DuracellÒadversely 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.

Liquidity and Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

The COVID-19 resurgence in many states could have a continuing negative impact on the brick and mortar retail sector with consumers’ unwilling to visit retail stores, causing reduced consumer foot traffic and consumer spending. However, with a successful launch of the Smart Mirror portfolio using the online retail platform, the Company will not be as dependent on Big Box retailers for our revenue streams as in previous years.

During the period ended March 31, 2021, the Company generated approximately $238 thousand of cash despite a net operating loss of $499 thousand. As of March 31, 2021, the Company had working capital of approximately $955 thousand and an accumulated deficit of $5.0 million.

On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The short-term loan started January 4, 2021 and ends June 30, 2021 (“Initial Period’). The Company may extend the Initial Period for an additional six consecutive months, ending December 31, 2021. The unpaid principal amount and all accrued interest is due and payable in full at the end of the Initial Period or expiration of the extended date, being December 31, 2021 (the “Maturity Date”).

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Since the termination of its factoring agreement with Sterling National Bank, the Company has been in discussions with alternate funding sources that offer extensive programs that are more in line with the Company’s future business model, particularly a facility that provides funding options that are more suitable for the e-commerce business. The borrowing costs associated with such financing are dependent upon market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future.

During the period ended March 31, 2021, the Company has been in discussions with an investor group that on April 5, 2021 made an equity investment in the Company that will provide sufficient funding to purchase the initial Smart Mirror rollout inventory.

See Note 7 of the Condensed Consolidated Financial Statements at Stock Purchase Agreements of this Report.

As previously reported on Form 8-K dated April 6, 2021, the Company entered into five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares of Company common stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement”).  The five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, (“Securities Act”). The $1,498,000 in proceeds from the Private Placement will be used mostly to purchase start up inventory for the Company’s new Smart Mirror product line, for a major online e-commerce fulfilment company, and the remainder for advertising and working capital. The Company will most likely need additional outside funding in fiscal year 2021 to support the company critical launch of the Smart Mirror product line.

At March 31, 2021, the Company remained debt free, except for accounts payable and accrued liabilities, had a cash balance of $1.5 million and an available credit facility of $750,000.

The Company’s factory suppliers in Thailand and China are functioning and shipping orders. However with the resurgence of the COVID-19 pandemic in the United States, the future impact on the retail marketplace remains uncertain, which places uncertainty 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.

Management believes that LEDwithout additional capital or increased cash generated from operations, there is becoming increasingly more mainstream,substantial doubt about the Company’s ability to continue as a going concern and as such,meet its obligations over the Company believes thatnext twelve months from the componentfiling date of this report.

Management is closely monitoring its operations, liquidity, and production costs will continuecapital resources and is actively working to lower forminimize the foreseeablecurrent and future which should allow aninnovative smaller company like us to capitalize on non-commodity products utilizing LED.  impact of this unprecedented situation.

Our Growth Strategy

The Company's focus isin recent years has been in the integration of LEDLEDs into most commonly used lighting products infor today's home. Capstone believes that it is positioned well to participate in these expanded product categories which are expected to fuel the Company's further growth.

The Company seeks to deliver strong, consistent business results and increasing shareholder returns by providing innovative products on a global basis that make consumer's lives simpler and safer while delivering growth results to the Company's retail partners.

The Company oversees and controls the manufacturing of its products, which are currently made in China by OEM contract manufacturers, through three wholly-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 shipments to meet minimum order quantity or "MOQ" full container loads from its factories directly to retail customers 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 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 quality products under applicable industry standards.  The Company continues to explore alternative manufacturing sources in China and elsewhere in the Pacific Rim as part of its ongoing supply chain strategic planning.

Strategy

The global LED lighting market is undergoing a perceived significant transition driven by rapid adoption of energy efficient LED lighting products.  LED lightingnow mainstream and opportunities for growth have been minimized. Further impacting the category were the tariff penalties resulting from the trade dispute between U.S. and China making 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 growth of LED products and are expected to continue to accelerate the adoption of energy efficient LED technologies going forward.  According to Allied Market Research, in a forecast in September 2014, the global LED market is forecasted to grow to $42 billion by 2020.less competitive.

The Company’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 pursue new revenue opportunities through the introduction and expansion of its “Connected Surfaces” portfolio into alternate distribution channels including e-commerce and others that the Company has not previously focused on. The Company also intends to leverage its existing valuable customer base and strong relationships to achieve organic growth initiatives within this new category.

Capstone’s success has been in its ability to identify emerging product categories where Capstone’s management experience can be fully leveraged. We demonstrated this when the Company entered the LED consumerlighting category. Our branding and product strategies delivered the Company to a well-respected market eight years ago. At that time, it was clear to management that there was a significant opportunity forposition. The Company’s low-cost manufacturing and operations have provided an innovative low-cost LED product supplier as the lighting industry was on its transition path from traditional lighting technologies to LED.advantage in delivering great products affordably.

The Company's product lines consist of decorative lighting, outdoor fixtures, lighting with built-in power failure technology and safety and security.  The power failure lighting and security products were initially sold under its wholly – owned subsidiary Capstone Industries' brand name through 2015.


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Our expectation is that the new portfolio advancing in 2021 appeals to a much larger audience than our traditional LED lighting product line.  The new Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding connected lifestyles prevalent today. The products 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 $699.00, with the goal to deliver exceptional consumer value to mainstream America. Whereas, during the day your smartphone/tablet keeps you connected, whether it is work 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 these devices.

AsThe Company competes 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.

By working diligently overseas with alternate manufacturers located in Thailand, we anticipate minimal impact to our selling prices and related margins of profit that could otherwise be impacted by ongoing trade disputes between the United States and China. Although the overseas factories are fully functioning at this time, a resurgence of the global COVID-19 pandemic could impact the overseas factories again and could delay shipments of products from Thailand and China, which produces all of our products. The Company’s new factory in Thailand has produced and shipped orders in 2020. This facility will provide the Company initially enteredwith more flexibility in determining which location should produce goods for future orders. With the market with products branded Capstone LightingÒ,United States now being impacted by the Company was able to stay underresurgence of the radar and avoid direct competition withCOVID-19 pandemic we believe the larger brands that were focused on light bulbs and commercial lighting.  The strategy was to establishimpact of the Company's productsvirus in the marketplace, building on retail success and user satisfaction.

Moreover, in 2014, Capstone acquiredU.S. will continue until the exclusive license and sub-license to an advanced power failure technology.  The Company's proprietary technology is referred to as Capstone Power Control or CPC.  It is a patented technology and the U.S. patents were issued Augustmid-half of 2016.  The CPC was developed over a two-year period by a group of MIT PhD Engineers operating as AC Kinetics, a private company. This technology can potentially be incorporated into a host of products.  The Company is exploring ways to commercialize2021, but this technology, butdisruption has not commercially exploited this technologyimpacted our long-term strategy and initiatives as of the date of this Quarterly Report on Form 10-Q. Whether it will result in any significant financial benefit is uncertain at the timefiling of this Form 10-Q report.

In the latter part of 2014,Last year, the Company concluded that conventional retail was goingexpanded its investment and commitment in Social Media marketing. With our Company’s plan to undergo significant change inshift its LED product and vendor selections resulting from swift retail pricing adjustments.  Early LED products, particularly light bulbs, that were deemed early technologies were seen by the Company as too expensive and no longer appropriate for the market.  The early products did not look like light bulbs and were not marketed effectively in the opinion of the Company. As such, buying an LED light bulb was potentially confusingfocus to the consumer.  Over the course of the next year, retail prices for early LED products plummeted and negatively impacted the supply chain.  Capstone forecasted this outcome and determined to focus its primary marketing approach towards the warehouse club channel where low retail mark-ups was deemed to have circumvented this market condition.  The Company was timely in this strategic market entry and benefited from the limited number of vendors competing in this arena.  The Company concluded that larger LED bulb suppliers were concerned with protecting retail price positions and they could not, as such, effectively market their brands in both conventional retail channels and warehouse club channels.

Commencing in 2014, Capstone explored and researched branding opportunities that would allow the Company to differentiate from its own Capstone LightingÒ brand.  The underlying strategy enabled Capstone to effectively provide product to competing retailers within the same channel.

Through product differentiation and a visibly recognized brand launched in 2015, HooverÒ Home LED became a Capstone success story.  The Company secured the North America trademark license for the Hoover® brand for LED lighting products.  The HooverÒ name is a 100-year-old household iconic brand name. Hoover® is a registered trademark of Techtronic Floor Care Technology Limited.

On January 9, 2017, the Company secured a license from DuracellÒ for a major warehouse club.  The first shipments of the branded product occurredon-line commerce in the first quarter 2017.half of 2021, its Social Media presence will be key to the Company’s growth initiatives. The analytics derived from testing various messaging on social media platforms (i.e., Facebook Ads, Google Ads) has validated consumer interest in the Smart Mirror program. Based on the results from the Smart Mirrors product rollout, the Company’s Social Media marketing efforts may be revised or expanded.  Additional capital may be required to fully exploit an effective Social Media and e-commerce effort to support the company-critical Smart Mirrors product launch.

Capstone believes that it has effectively positioned itself in this channel and posted successive revenue growth while delivering strong gross margins.  Organic Growth Strategy

The Company intends to pursue various initiatives to execute its organic growth strategy, which is currently expandingdesigned to enhance its distribution into international home improvement centers that accept Capstone's direct import model.market presence, expand its customer base and maintain its recognition as an industry leader in new product development. Key elements of our organic growth strategy include:

Connected Surfaces. Historically LED lighting products have been our core business. The Company is distributing Capstone Lighting andHoover® Home LED brands combined, have sold millions of LED lighting products over the recent years and a DuracellÒ LED product and will, from time to time and in selected markets, offer private label programming to international accounts.

Capstone's 2013 investment in AC Kinetic Technologies, an Armonk, New York, private technology development company, allowedconsequently the Company to develop certain innovative concepts thatholds a well-respected position in the retail lighting category. While consistently launching successful lighting programs, the Company conceivedhas determined that it needs to diversify and that are complexexpand its core focus in order to continue to meet revenue growth initiatives. The Company has refocused its development and has yielded intellectual property that we believe will further distinguish the Company'smarketing initiatives and is determined to build on its success with a broader product portfolio beyond lighting products from other off-the-shelf products commonly marketedonly.  The new category “Connected Surfaces” was officially launched in January 2020 at the retail level.CES. The Company intends to exploit, but has not commercially exploitedexpand the new line of “Connected Products” for the next several years.  The Company’s product roadmap outlines plans for product introductions through 2022 and this will continue to expand as ofconsumer product acceptance validates its innovations. The Company believes this program will leverage existing relationships with its current retail partners, deliver on its e-commerce initiatives and collectively contribute organic growth for the date of this Quarterly Report on Form 10-Q,Company.

The Company acknowledges that smart homes will become more mainstream over the patented technologies developednext several years and completed by AC Kinetic Technologies withinwill present significant growth opportunities for the Company's own products, both labeled under "Capstone"Company and under the Hoover® Home LED brand.

its Connected Surfaces portfolio.


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On June 8, 2016,While our focus of Connected Surface products is the Board of Directors approvedsmart home market, smart mirrors are being employed by retailers like Ralph Lauren and accepted an offer from AC KineticsNeiman Marcus to buy back their 100 shares of AC Kinetics Series A Preferred Stockallow customers to compare outfits on fitting room smart mirrors. Further, single application smart mirrors are emerging in the fitness industry for interactive workouts at home as a $1,500,000 Note Receivable with an estimated fair market value of $500,000.
As further consideration, the Company also received an option to repurchase 1,666,667 shares of Company common stock held by Involve L.L.C. at an exercise price of $.15. The Agreements were signed June 27, 2016, at an exercise price of $.15 per share.
On February 13, 2017 and May 1, 2017 as authorized under the Company's stock repurchase plan, the Company repurchased 1,000,000 shares and 666,667 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.
With the purchase of all available options under the repurchase agreement, partresult of the collateral used to substantiateglobal pandemic.

The automobile segment leads the valueSmart Mirror industry as technology has imbedded into automobile mirrors. As of the note receivable was no longer available and, consequently management has determined thatdate of this Form 10-Q Report, the fair value ofCompany’s Connected Surfaces products target the note at September 30, 2017 was $0.smart home segment.

Perceived or Essential Strengths

Capstone believes that the following competitive strengths have and will continue to serve as a foundation for its business strategy.

In North America, the Company has been recognized for more than a decade as an innovator and highly efficient, low-cost manufacturer in several product niches. Capstone believes that its insight into the needs of retail programming and its proven execution track record with noted retailers globally positions it well for future growth.

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 marketinghas prepared the Company for its entrysuccessful entries into the LED market.various consumer product markets.

From a market perspective, Capstone's branding strategy iswas focused on establishing multiple trusted brands through licensing allowing for a broader reach into various channels. Capstone Lighting® Lighting® (2008), Hoover® Home LED (2015) and DuracellÒ®, contribute (2017) have contributed in the past to expanding the Company's retail position. All three brandsMoreover, the knowledge of negotiating and managing such programs may prove beneficial for the Connected Surfaces portfolio.

Product Quality: Through a combination of sourcing quality components, stringent manufacturing quality control and conducting rigorous third-party testing, product experiences by consumers are currently available inof the marketplace.highest ranking. To deliver cost-competitive products without compromising quality standards, we leverage purchasing volume and capitalize on strategic vendor relationships.

Perceived Weaknesses

Capstone believes that its competitive weaknesses are:

It does not possess the business, marketing, and financial resources of larger competitors or the brand recognition or international markets and distribution channels of some of the larger competitors.

The Company'sCompany’s products lines have been focused on consumer LED lighting and long-term revenue prospects of the recent diversification into Connected Surfaces products is uncertain as of the date of this Form 10-Q report. As a mature product characteristics are supposed to satisfy the following standards:
·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 consume 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.
line, LED business is a declining business line and revenue source.

With respect toThe Company does not have the Company's goallarge internal research and development capability of sustained profitability, the 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 that sustain attractive pricing.  This challenge confronts many consumer product companies. 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.its larger competitors.

DueCapstone operates with a limited number of employees whose functions are dedicated to executive management, sales and marketing or administrative support. The limited number of employees may hinder or delay the extensive, modern manufacturing, designability of the Company to identify or respond to consumer preferences or new technology developments in a product line. Hiring may be required with any growth and engineering capabilities withqualified personnel may not be readily available. We cannot match the Company's contract manufacturers,compensation packages to prospective employees that many larger competitors may offer.

The Company relies on OEM's located in Thailand and China, which have been impacted by the COVID-19 pandemic and the lower unit costs in China, Capstone believes that itextent of the continuing economic impact of the COVID-19 pandemic is more economical and efficient to continue to manufacture certain products in China and have them shipped touncertain as of the United States rather than to have such products produced in North America.  Whiledate of 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 to be challenged.  The Company periodically evaluates alternative OEM manufacturing within and outside the Pacific Rim.Form 10-Q report.


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Capstone’s international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies.

The Company's CIHK operationsShould the increased U.S. tariffs imposed on Chinese manufactured goods remain it may negatively impact demand and/or increase the cost for our products at retail.

While we have established new production capacity in Hong Kong,Thailand, there is staffed with personnel experienced in engineering and design, product development and testing, product sourcing, international logistics and quality control.  These associates 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 anticipationno final resolution of the Company's growth, we have continued our investmentU.S. / China trade dispute from which specific components are sourced. Developing a new, efficient OEM relationship in CIHK in ana new country takes time and effort to ensure overseas factory performance meets stringentreach acceptable production efficiencies. We have only a short operational tolerancesexperience with Thai OEM’s and cannot predict long-term effectiveness of the relationship.

If the COVID-19 pandemic were to continue, it could have a detrimental impact on our ability to maintain operations by depressing consumer purchase of our competitivenessproducts – whether online or in retail stores. Withstanding continued losses could cause the Company to consider significant corporate transaction, including, without limitation, a possible merger and operational excellence.

We have expanded our internationalacquisition transaction or reorganization to protect the core operations from the ongoing impact of the COVID-19 pandemic. Like many companies, the Company conducts periodic strategic reviews where the feasibility of significant corporate transactions are considered, including mergers, asset purchases or sales by leveraging our relationships with our existing global retailers and by strengthening our international product offerings.  Our Hong Kong office assists usdiversification or change in placing more products into foreign market channels as well.  In 2017, we have product salesbusiness lines. The Company lacks the financial resources of larger companies to withstand adverse, significant and sustained changes in Australia, Canada, Japan, South Korea, Taiwan, Thailandbusiness and the United Kingdom. For the nine-months ended September 30, 2017 and 2016, international sales were approximately $1,309,800 and $1,847,300 respectively or 4.3% and 8.1%financial condition. This vulnerability necessitates an ongoing consideration of revenue, respectively. This continuesalternatives to be a growing distribution channel for the Company.current operations.

Products and Customers

TheWhile the Company has expandedis expanding its product positioningportfolio through the introduction of more indoor and new outdoorthe Capstone Connected Surfaces program, it still maintains a select number of LED lighting programsproducts under the Capstone Lighting®"Capstone Lighting®” brand the Hoover® Home LED brandat both Costco and the DuracellÒbrand.  Capstone has also expanded hardwired solid-state products to its programs in addition to the existing batterySam’s Wholesale Clubs and induction poweredavailable through Amazon.

The product lines available as of the date of this 10-Q report are as follows:

Connected Surfaces – Smart Mirrors
Standard Rectangular
Wardrobe/Fitness Mirror
LED Puck Lights
LED Undercabinet Light Bars
LED Motion Sensor Lights

The plan to expand the Company’s product portfolio through the introduction of vanity fixtures and outdoor LED Gooseneck Lanterns.  Such expansionConnected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits. 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 Consumer Electronics Show but faced delays to the market as a result of the COVID-19 pandemic.  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

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Over the past ten years, 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. In a post-COVID-19 pandemic environment, these distribution channels may be less valuable as distribution channels, especially for the Smart Mirrors product line.  The effective development of an e-commerce based approach to distribution of products may be critical to the future performance of the Company. 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 sold Capstone brand products to markets outside the U.S., including Australia, Japan, South Korea, and the United Kingdom. International sales for the quarter ended March 31, 2021 were $296.5 thousand or 68% of net revenue as compared to $100.7 thousand or 68% in the same quarter 2020. The Company's performance depends on a growingnumber of assumptions and factors.  Critical to growth are the economic conditions in the 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 near 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.  Capstone believes it will maintain its revenue growth because of the ability to deliver quality, well designed productsgeneral economic conditions that impact discretionary consumer spending on time, the quality reputation of its products, business relationships with Capstone's retailers and the aggressive product expansion strategies currently in place.non-essential items. 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.

With the Company's branded lighting categories, Capstone has a comprehensive product offering for its niche in the industry.  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.

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The Company believes in its ability to serve retailers with a broadan array of branded products and quickly introduce new products to continue to allow Capstone to further penetrate its existing customer bases, while also attracting new customers. The Company's primary, perceived challenge is creating sustained consumer demand for its 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. An extensive product line, especially new product line, increases the investment in product development and, as such, increases operating overhead. This approach will require adequate funding to be effective and sustainable.  There is no assurance of the Company’s ability to provide such funding on an ongoing or sustained basis.

With the Company's “Connected Surfaces” category, Capstone has developed a comprehensive product offering. Within 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 believes in its ability to sell direct to consumers with an array of innovative connected products and quickly introduce additional products to continue to allow Capstone to further penetrate this developing market.

Tariffs. The previous U.S. administration implemented certain tariffs that directly affected the Company's competitiveness.  While all companies in certain industries are affected equally, the appeal for these products to consumers was negatively impacted when retail prices increased due to higher duty rates.  The Company has seen promotional schedules cut back and retailers have requested pricing adjustments that would not be known to them in advance to products being shipped.  Capstone's business model insulates the Company from paying duties as its retail partners are the importers of record.  The obvious unknown is the final impact of tariffs to the landed costs.  Accordingly, retailers have demonstrated caution in their promotional planning schedules and will continue to do so until the administration has clarified its position enabling importers to calculate estimated landed costs.


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Tariffs and trade restrictions imposed by the previous U.S. administration provoked trade and tariff retaliation by other countries. A "trade dispute" of this nature or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our businesses. As of the date of this Report, the new U.S. administration is currently reviewing its future position on this issue and there has not been a resolution of the Chinese-American trade dispute.

Sales and Marketing

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 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 expanded in the future as a result of the Capstone Connected program becomes available.

Direct Import Sales. We currently ship finished products directly to our retail customer from Thailand and China. The sales transaction and title of goods are completed by delivering products to the customers overseas shipping point. The customer takes title of the goods at that point and is responsible for inbound ocean freight and import duties. Direct import sales are made in larger quantities (generally container sized lots) to customers worldwide.

Domestic Sales. The strategy of selling products from a U.S. domestic warehouse enables the Company to provide timely delivery and serve as a domestic supplier of imported goods. With this model the Company imports goods from overseas and is responsible for all related costs including ocean freight, insurance, customs clearance, duties, storage and distribution charges related to such products and therefore such sales command higher sales prices than direct sales. Domestic orders are for a much smaller size and could be as low as a single unit directly to the end consumer if ordered through an online website. To support an effective e-commerce business model, we will be required to warehouse adequate inventory levels enabling the Company to ship orders directly to the end consumer expediently.

To the extent permitted by our current financial condition, we continue to make investments to expand our sales, marketing, technical applications support and distribution capabilities to sell our product portfolio. We also continue to make investments to promote and build market awareness of the products and brands we offer. Our sales within the U.S. are primarily made by our in-house sales team and our independent sales agencies. Our independent sales agencies are paid a commission based upon sales made in their respective territories. Our sales agencies are recruited, trained and monitored by us directly. We will utilize an agency as needed to help us provide service to our retail customers as required. The sales agency agreements are generally one (1) year agreements, which automatically renew on an annual basis, unless terminated by either party on 30 days’ prior notice. Our international sales to divisions of U.S. based retailers are made by our in-house sales team. Other international sales are made by our Hong-Kong based CIHK staff.

The Company actively promotes its products to retailers and distributors at North American trade shows, such as the Consumer Electronics Show (“CES”) or the International Hardware Show, but also relies on the retail sales channels to advertise its products directly to the end consumer.  All sales activities at major account levels involve direct executive management participation.user consumers through various promotional activities. This marketing effort will continue as a complement to the Social Media and e-commerce initiatives.

In order for continuedthe period ended March 31, 2021 and 2020, the Company had two customers who comprised approximately 79% and 100%, respectively, of net revenue. 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 customers could have a material adverse effect on our results of operations and financial condition.

For 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.

The Company has been focused on establishing an on-line e-commerce presence to support the introduction of the “Connected Surfaces” program and deliver direct to consumer.

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During last year, we utilized social media platforms and online advertising campaigns to further grow the Company’s online presence. In addition to Facebook, Instagram, Pinterest and LinkedIn, Capstone dependshas launched a You Tube channel to host Smart Mirror videos and established a Twitter account. The Company has a Social Media presence on e-commerce efforts of Amazon and other on-line retail customers in lieu of pursuing our own aggressive in-house e-commerce effort.  We believe this reliance on Amazon and other retail customer e-commerce is the most cost efficient and effective approach for the Company. We maintain a Facebook website atfollowing Social Media platforms:

FACEBOOK1: https://www.facebook.com /powerfailuresolutions/www.facebook.com/capstoneindustries and our sales staff may use Social Media from time to time to promote our products and brands.  We have not developed or aggressively pursued a specific Social Media campaign based on third party sponsors or promotors.https://www.facebook.com/capstoneconnected
INSTAGRAM2: https://www.instagram.com/capstoneconnected
PINTEREST3: https://www.pinterest.com/capstoneconnected/
LINKEDIN4: https://www.linkedin.com/company/6251882
TWITTER5https://twitter.com/capc capstone
YOUTUBE6 https://www.youtube.com/channel/UCMX5W8PV0Q59qoAdMxKcAig

1 Facebook is a registered trademark of Facebook, Inc. Social Media marketing may become more important in launching and sustaining market demand for products and the Company may have to develop
2 Instagram is a more aggressive Social Media marketing campaign and presence.registered trademark of Instagram.

3 Pinterest is a registered trademark of Pinterest.
Working Capital Requirements4 LinkedIn is a registered trademark of LinkedIn Corporation.

5 Twitter is a registered trademark of Twitter Corporation.
In order to more effectively support retailers in the U.S. domestic markets, so that retailers can quickly replenish their stock and reduce the impact6YouTube is a registered trademark of lost sales as a result of stock outages, the Company, as needed, strategically increases its inventory levels held in its leased Anaheim, California warehouse. Combined with investment in new product molds, product testing and outside certifications, package design work, and further expansion of its design and engineering capabilities in CIHK, the Company may require additional working capital to fund these strategic projects.

The market price of CAPC Common Stock hinders the Company's ability to access capital markets, but the enhancement of Company's Common Stock's market price requires, in the Company's opinion, sustained profitability coupled with revenue growth.  Sustained profitability and revenue growth is deemed to be required to attract market maker and institutional support for CAPC Common Stock, which support the Company deems vital to any possible, sustained increase in the market price of our Common Stock.

The Company's ability to maintain sufficient working capital is highly dependent upon achieving expected operating results.  Failure to achieve expected operating results could have a material adverse effect on the Company's working capital, ability to obtain financing, and its operations in the future.  However, achieving expected results as accomplished in 2016 and through the first three quarters of 2017, has increased working capital, provided the Company with liquidity and has allowed for the repayment of outstanding bank notes and some old related party loans.


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Continued revenue growth and expanded product launches are critical requirements to ensure the Company's continued growth.  Such projects are never delayed because of funding shortfalls.  The Company budgets for such projects and if necessary certain members of the Company's senior management and Board of Directors have supplemented the cash flow needs as required through short term loans.  There is no assurance that senior management and certain directors can supplement the cash flow needs of the Company in all instances or completely.YouTube Corporation.

Competitive Conditions

The consumer LED products and small electronics businesses areCompany operates in a highly competitive and rapidly evolving markets,environment, both in the United States and on a global basis, asinternationally, in the lighting and smart mirror segments. The Company competes with large manufacturersmultinationals with global operations compete for consumer acceptance and, increasingly, limited retail shelf space.  as well as numerous other smaller, specialized competitors who generally focus on narrower markets, products, or particular categories.

Competition is influenced by technological innovation, brand perceptions, product performance andquality, value perception, customer service and price. TheOver the past several years while the Company's focus has been on LED lighting, principal lighting competitors in the U.S. are Amertac,include Energizer, Feit Electric and Feit Electric.Jasco Products Co. (an exclusive licensee of General Electric Company). The Company believes private-label sales by large retailers has some impact on the market in some parts of the world as many national retailers such as Costco, Home Depot, Target and Sam’s/Wal-Mart offer lighting as part of their private branded product lines. Many of the Company's 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 Capstone's expansion efforts by marketing campaigns targeting its expansion efforts or price competition.  Moreover, if one

Other competitive factors include rapid technological changes, product availability, credit availability, speed of delivery, ability to tailor solutions to customer needs, quality and depth of product lines and training, as well as service and support provided by the distributor to the customer. Smart mirrors and other connected surface products are an emerging industry and the Company may be unable to develop or license emerging new technologies that are dominant.

The COVID-19 pandemic has accelerated the decrease in consumer reliance on traditional brick-and-mortar retailing and heightened the importance of e-commerce and online marketing and sales. We have just started our Social Media marketing. Many competitors have more established, widespread and effective e-commerce and Social Media campaigns than we do. We may not be able to effectively compete in e-commerce and Social Media marketing and sales. The COVID-19 pandemic has dramatically impacted marketing and sales of many products and the long-term impact of the Company's competitors were to merge,pandemic remains uncertain as of the change indate of the competitive landscape could adversely affect our customer distribution channel and sales.filing of this Form 10-Q report.

With trends and technology continually changing,evolving, and subject to adequate and affordable funding, Capstone will continue 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. The Company continues to invest in developing the technologies and design critical to competing in our markets as evidenced by our investment in Capstone Power Control (CPC) Technology.markets. Our ability to invest is limited by operational cash flow and funding from third parties, including members of management and the Board of Directors. We face competition from companies with far greater resourcesDirectors, and market presence.by ongoing impact of the COVID-19 pandemic on our business and financial performance.

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In North America,Subject to adequate and affordable funding, absence of unexpected competition or technological developments in connected surface devices, and a curbing of the impact of the COVID-19 pandemic, the Company is highly recognized in several product categories.  Capstone believes that the specialized natureit can effectively pursue and exploit product market niches because of its existing niche categories, andmanagement’s proven track record in delivering innovation to the market share that it has provided has allowed us to introduce and launch its expanded LED Home Lighting programs.

The Company believes its multiple brand strategy is important in maintaining competitiveness in the marketplace. Capstone Lighting®, Hoover® Home LEDcost-effective and DuracellÒbrands have proven successful in meeting Company's expectations at the point of sale.timely manner.

Research, Product Development, and Manufacturing Activities

To successfully implement Capstone's business strategy, the Company must continually improve its current products and develop new LED products with additional functionality to meet consumer's expectations.  The Company's research and development department based in Hong Kong designs and engineers many of the Company's products, with collaboration from its third-party manufacturing partners.  Theirpartners and software developers. The Company outsources the manufacture and assembly of our products to a number of contract manufacturers overseas. Our research and development focus is to introduceincludes efforts to:

develop product with increasing technology increasingand functionality with enhanced quality efficientand performance, and at a very competitive cost.
solidify new manufacturing processes and cost reductions.  relationships with contract manufacturers in Thailand.

CIHK also establishes strict engineering specifications and product testing protocols forwith the Company's contract manufacturers' factoriesmanufacturers and ensure thethat their factories adhere to all ChineseRegional Labor and Social Compliance Laws. UnderThese contract manufacturers purchase components that we specify and provide the current political regime in China, suddennecessary facilities and unexpected changes in such laws are possiblelabor to manufacture our products. We leverage the strength of the contract manufacturers and could impactallocate the Company's business or financial performance by increasingmanufacturing of specific products to the cost or ease of conducting business.


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contract manufacturer best suited to the task. Quality control and product testing is conducted at the contract manufacturers facility and at 3rd party testing laboratories overseas.

Capstone's research and development team ensuresenforces its proprietary manufacturing expertise by maintaining control over all outsourced production and critical production molds. In order toTo ensure the quality and consistency of the Company's products manufactured in China,overseas, Capstone uses 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 country's individual regulatory standards. The Company also employsuses quality control inspectors who examine and test products to Capstone's specification(s) before shipments are released. CIHK 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, China and mainland China.Thailand.

To successfully implement Capstone's business strategy, the Company must continually improve its current products and develop new
product segments with innovative imbedded technologies to meet consumer's growing expectations. The Connected Surfaces product development is our current effort to achieve those expectations. With adequate and affordable funding, Capstone will continue to invest in this area as the Company expands the number of products being developed and as it moves into more technical and innovative product categories. The Company may explore strategic partnerships with others to assistThese costs are expensed when incurred and are included in development of more technical and innovative product categories.the operating expenses.

Raw Materials

The principal raw materials currently used by Capstone are sourced in Thailand and China, as the Company orders product exclusively through contract manufacturers in the region. These contract manufacturers purchase components based on the Company's specifications and provide the necessary facilities and labor to manufacture the Company's products. Capstone allocates the production of specific products to the contract manufacturer the Company believes is more experienced to produce the specific product.   In order toproduct and whose facility is located in the country that most benefits from the U.S. Tariff regulations. To ensure the consistent quality of Capstone's products, quality control procedures have been incorporated at each stage of the manufacturing process, ranging from the inspection of raw materials through production and delivery to the customer. These procedures are additional to the manufacturersmanufacturers' internal quality control procedures and performed by Company staff.Quality Assurance personnel.

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·Raw Materials – Components and supplies are subject to sample inspections upon arrival at the contract manufacturer, to ensure the correct specified components are being used in production.

·Work in Process – Our quality control team conducts quality control tests at different points during the product stages of our manufacturing process to ensure that quality integrity is maintained.
Raw Materials – Components and supplies are subject to sample inspections upon arrival at the contract manufacturer, to ensure the correct specified components are being used in production.
·Finished Goods – Our team performs tests on finished and packaged products to assess product safety, integrity and package compliance.
Work in Process – Our quality control team conducts quality control tests at different points during the product stages of our manufacturing process to ensure that quality integrity is maintained.
Finished Goods – Our team performs tests on finished and packaged products to assess product safety, integrity and package compliance.

Raw materials used in manufacturing include plastic resin, copper, led bulbs, batteries, and corrugated paper. Prices of materials have remained lower and competitive in the last year as a result of lower oil prices and the strengthening U.S. dollar.year. CAPC believes that adequate supplies of raw materials required for its operations are available at the present time. 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, CAPC 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. CIHK 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 CIHK 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"conflict minerals 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.


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Distribution and Fulfillment

The Company'sSince January 2015, the Company transferred its U.S. domestic warehousing and fulfilmentdistribution needs are performed byto a third-party warehousing facility situated in Anaheim, California. The warehouse distributoroperator 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 warehouse distributoroperator 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 needthe Company needed to establish an east coast distribution point. This relationship, if required, will allow us to fully expand our U.S. distribution capabilities and services.

As the Company transitions into the e-commerce and direct to consumer marketplace, the Company has developed a new website with full shopping cart capabilities. To complete this project the Company has negotiated contracts for secured credit card processing capability, state sales tax compliance services and order fulfillment and logistics services, at a very competitive rate. The Company is also planning to warehouse and supply its Smart Mirror program through Amazon fulfilment. The effectiveness of these efforts is unknown as requiredof the date of this Form 10-Q Report due to the lack of operational experience.

Royalties

We have, from time to time, entered into agreements whereby we have agreed to pay royalties for the use of nationally recognized licensed brands on Company product offerings. Royalty expense incurred under such agreements is expensed at the time of shipment.

In recent years the Company’s marketing objective was to transition licensed lighting product lines into the Capstone Lighting brand, which was successfully achieved. The Company’s current focus is on the Connected Surfaces product line and direct sales to consumers as well as distribution through resellers and fulfillment companies.

On February 3, 2020, the remaining royalty license expired as the Company did not achieve the stated net sales volumes for the renewal period.


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Seasonality

SalesIn general, sales for household products and electronics are seasonally influenced, with increasedinfluenced. Certain gift products cause consumers to increase 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 periodClimate change may increase the number and severity of hurricanes, tornadoes and flooding. Historically, 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 onhad lower sales history, the LED Home Lighting product offerings are not as influenced by seasonal factors and will provide a more normalized revenue stream during the year.first quarter due to the Chinese New Year holiday as factories are closed and shipments are halted during this period. Our transition to Thailand manufacturers may reduce the impact of Chinese New Year holiday.

We do not have sufficient operational experience with Connected Surfaces to predict the seasonality of connected surfaces.

Intellectual Property

CAPC subsidiary, CAPI, ownshas filed 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.over the past decade. These include the following trademarks: Exclusive license and sub-license to Power Failure Technology; Capstone Power Control, 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 ourpending; Puck Light (cookie), Puck Light Base, Multi-Color Puck Lights, LED Dual Mode Solar Light, Integrated Light Bulb (Coach Light), LED Gooseneck Lantern, Spotlights, Security Motion Activated Lights, Under Cabinet Lighting 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.necessary to protect a patent and to the extent that we have the available cash to do so. 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 intellectual property rights relate primarily to lighting device improvements and manufacturing processes.

While the Company may license third party technologies for its products, or may rely on other companies, especially OEM’s, for design, engineering and testing, the Company believes that its oversight of design and function of its products and its marketing capabilities are significant factors in the ability of the Company to sell its products.

Value of Patents. 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. Enforcement of intellectual property rights in China is problematic.



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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. The cost of litigating intellectual property rights claims may be beyond our financial ability to fund.

As is customary in the retail industry, many of our customer agreements requires us to indemnify our customers for third-party intellectual property infringement claims. Such claims could harm our relationships with customers and might deter future customers from doing business with us. With respect to any intellectual property rights claims against us or our customers, we may be required to cease manufacture of the infringing product, pay damages and expend significant Company resources to defend against the claim and or seek a license.

Information Technology

The efficient operation of our business is dependent on our information technology systems. We rely on those systems to manage our daily operations, communicate with our customers and maintain our financial and accounting records. In the normal course of business, we receive information regarding customers, associates, and vendors. Since we do not collect significant amounts of valuable personal data or sensitive business data from others, our internal computer systems are under a light to moderate level of risk from hackers or other individuals with malicious intent to gain unauthorized access to our computer systems. Cyberattacks are growing in number and sophistication and are an ongoing threat to business computer systems, which are used to operate the business on a day to day basis. Our computer systems could be vulnerable to security breaches, computer viruses, or other events. The failure of our information technology systems, our inability to successfully maintain our information or any compromise of the integrity or security of the data we generate from our systems or an event resulting in the unauthorized disclosure of confidential information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors, results of operations, product development and make us unable or limit our ability to respond to customers' demands.

As shown by hacking of major commercial and government computer systems and networks, no system that is connected is completely safe from hacking or malware. We have incorporated into our data network various on and off site data backup processes which should allow us to mitigate any data loss events, however our information technology systems are vulnerable to damage or interruption from:

hurricanes, fire, flood and other natural disasters
power outage
internet, telecommunications or data network failure.

Environmental Regulations

We believe that the Company is in compliance with environmental protection regulations and will not have a material impact on our financial position and results of operations.


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Working Capital Requirements and Financing

In order to successfully launch the online Smart Mirror business, the Company will be required to maintain sufficient on hand available inventory levels, to allow for immediate fulfilment of an online order. This will require additional investment in on hand domestic  inventory and require an efficient logistics system that will provide for inventory staged throughout the supply chain to provide for efficient inventory replenishment to support forecasted sales. The Company, as needed, will strategically increase its inventory levels held at its designated fulfilment centers. Combined with investment in new product expansion, new product molds, product testing and outside certifications, package design work, and further expansion of its capabilities in Thailand, the Company may require additional working capital to fund these strategic projects.

Since the termination of the factoring agreement with Sterling National Bank, the Company has been in discussions with alternate funding sources that offer extensive programs that are more in line with the Company’s future business model, particularly a facility that provides funding options that are more suitable for the e-commerce business. The borrowing costs associated with such financing are dependent upon market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future.

On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The term of the loan started January 4, 2021 and ends June 30, 2021 (“Initial Period’). The Company may extend the Initial Period for an additional six consecutive months, ending December 31, 2021, under the same terms and conditions as the Initial Period, by providing written notice of the election to extend to the lenders prior to the expiration of the Initial Period. The Company may borrow and reborrow under the agreement up to $750,000 and prepay wholly or partially the unpaid principal amount at any time and do so without pre-pay penalty or charge. The unpaid principal amount and all accrued interest is due and payable in full at the end of the Initial Period or expiration of the extended date, being December 31, 2021 (the “Maturity Date”), in a single lump sum balloon payment.

During the period ended March 31, 2021, the Company has been in discussions with an investor group that on April 5, 2021 made an equity investment in the Company that will provide sufficient funding to purchase the initial Smart Mirror rollout inventory.

As previously reported on Form 8-K dated April 6, 2021, the Company entered into five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares of Company common stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement”).  The five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, (“Securities Act”). The $1,498,000 in proceeds from the Private Placement will be used mostly to purchase start up inventory for the Company’s new Smart Mirror product line, for a major online e-commerce fulfilment company, and the remainder for advertising and working capital. The Company will most likely need additional outside funding in fiscal year 2021 to support the company critical launch of the Smart Mirror product line.

At March 31, 2021, the Company remained debt free, except for accounts payable and accrued liabilities, had a cash balance of $1.5 million and an available credit facility of $750,000.

Management believes that without additional capital or increased cash generated from operations, there is substantial doubt about the Company’s ability to continue as a going concern and meet its obligations over the next twelve months from the filing date of this report.

Critical Accounting Policies

We believe that there have been no significant changes to our critical accounting policies during the ninethree months ended September 30, 2017March 31 , 2021 as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Annual Report on Form 10-K, for the fiscal year ended December 31, 2016.Report.


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CONSOLIDATED OVERVIEW OF RESULTS OF OPERATIONS

Net Revenues

Revenue net

Foris derived from sales of our residential lighting products. These products are directed towards consumer home LED lighting for both indoor and outdoor applications. Revenue is subject to both quarterly and annual fluctuations and is impacted by the 3 months ended September 30, 2017timing of individually large orders as well as delays or sometimes advancements to the timing of shipments or deliveries. We recognize revenue upon shipment of the order to the customer when all performance obligations have been completed and 2016, net sales were approximately $13,817,900title has transferred to the customer and $11,692,100 respectively, an increase of $2,125,800 or 18.2% fromin accordance with the previous year. During the quarter ended September 30, 2017 the Company provided approximately $1,376,700 in consumer promotional allowances compared to $699,100 in the same quarter 2016, an increase of $677,600 or 96.9% during the quarter.

For the 9 months ended September 30, 2017 and 2016, net sales were approximately $30,789,700 and $22,672,600 respectively, an increase of $8,117,100 or 35.8% from the previous year. During the 9 months ended September 30, 2017 and 2016, the Company provided approximately $1,831,000 and $1,478,600, respectively of consumer promotional allowances, an increase of $352,400 or 23.8% over 2016.

In the 9 months ended September 30, 2017 the Company continued torespective sale’s contractual arrangements. Each contract on acceptance will have a very strong revenue performancefixed unit price. Most of our sales are to the U.S. market which in 2020 represented 75% of revenues and we expect that region to continue to be the Accent Light Category in all three-brands including DuracellÒ, Capstone Lighting® and HooverÒ HOME LED.  The Company also had new product launches including the Gooseneck LED Lantern, the LED Spotlight Accent Light, Dual Mode Motion Security Light, the LED CPC bulb and the swivel base LED Accent Lights.  The $8.1 million revenue increase in the period compared to 2016 was achieved after the Company provided approximately $1.8 million of marketing allowances for new product promotions and transitional allowances.  For the 9 months ended September 30, 2017, and 2016 International sales were approximately $1,309,800 or 4.3%major source of revenue as comparedfor the Company. We also derived 25% of our revenue from overseas sales. Net revenue also includes the cost of instant rebate coupons, and product support allowances provided to $1,847,300 or 8.1%retailers to promote certain products. All of our revenue is denominated in 2016.U.S. dollars.

Cost of SalesGoods Sold

For the 3 months ended September 30, 2017 and 2016,Our cost of sales were approximately $10,707,700goods sold consists primarily of purchased products from contract manufacturers and $8,841,100, respectively, an increase of $1,866,600 or 21.1% from the previous year. This cost equates to 77.5%when applicable associated duties and 75.6% respectively of net revenues in the quarter. The percentage to net revenues increased by 1.9% resulting from the $677,600 additional promotion allowances provided in the quarter compared to 2016.

For the 9 months ended September 30, 2017 and 2016,inbound freight. In addition, our cost of sales were approximately $23,457,100goods sold also include reserves for potential warranty claims and $17,079,300, respectively, an increase of $6,377,800 or 37.3% from the previous year. This cost equates to 76.2% and 75.3% respectively of net revenues. The percentage to net revenues increased by .9% resulting from $352,400 additional promotion allowances provided in the 9 months compared to 2016.


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Manufacturing unit costs continued to remain very stable in the period as a result of effective volume buying with overseas factories, the steady price of oil and the stable U.S. Dollar exchange rates.freight allowances. We source our manufactured products based on customer orders.

Gross Profit

For the 3 months ended September 30, 2017 and 2016,Our gross profit was approximately $3,110,300has and $2,851,000 respectively, an increasewill continue to be affected by a variety of $259,300 or 9.1% from the same period in 2016. Gross profit as a percentage offactors, including average sales was 22.5 %price for our products, product mix, promotional allowances, our ability to reduce product cost fluctuations in the quarter compared to 24.4 % in 2016.

For the 9 months ended September 30, 2017 and 2016, gross profit was approximately $7,332,600 and $5,593,300 respectively, an increasecost of $1,739,300 or 31.1% from the same period in 2016. Gross profit as a percentage of sales was 23.8 % in the 9 months compared to 24.7% in 2016.

The increased gross profit for the period was caused mainly by the 35.8% increase in revenue. The slight reduction of gross profit to sales percentage resulted from the additional transitional allowances provided to retailers.our purchased components.

Operating Expenses

Operating expenses include sales and marketing expenses, consisting of social media advertising, sales representatives’ commissions, advertising, show expense and costs related to employee's compensation. In addition, operating expense includes charges relating to product development, office and warehousing, accounting, legal, insurance and stock-based compensation.


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CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 
(In Thousands) 
  March 31, 2021  March 31, 2020 
  Dollars  % of Revenue  Dollars  % of Revenue 
             
Revenues, net $438   100.0% $149   100.0%
Cost of sales  (309)  (70.5)%  (115)  (77.2)%
  Gross Profit  129   29.4%  34   22.8%
              Operating Expenses:                
              Sales and marketing  4   0.9%  212   142.3%
              Compensation  352   80.4%  377   253.0%
              Professional fees  127   29.0%  130   87.3%
              Product development  27   6.2%  52   34.9%
              Other general and administrative  103   23.6%  144   96.6%
              Goodwill impairment charge  -   -%  290   194.6%
                           Total Operating Expenses  613   140.1%  1,205   808.7%
         Operating Loss  (485)  (110.7)%  (1,171)  (785.9)%
                 
              Other Income (Expense)                
Other income  10   2.4%  -   -%
Other expense  (24)  (5.6)%  -   -%
              Net Other Expense  (14)  (3.2)%  -   -%
                 
Loss Before Tax Benefit  (499)  (113.9)%  (1,171)  (785.9)%
Benefit for Income Tax  -   -%  (574)  385.3%
Net Loss $(499)  (113.9)% $(597)  (400.6)%

Net Revenues

Our business operations and financial performance for the quarter ended March 31, 2021 continued to be adversely impacted by the economic effects of the COVID-19 pandemic to the U.S. and global economy. For the 3period ended March 31, 2021, net revenues were approximately $438 thousand, an increase of approximately $289 thousand or 66% from $149 thousand in the period ended March 31, 2020. Although revenue was higher than the same quarter in 2020 as that was the first period that was impacted by COVID-19, the volume was substantially under our normal expected revenue levels for LED products. As our revenue is dependent on customer orders issued many months in advance, this revenue shortfall continued to be driven by the uncertainty felt by retailers, as to the short and long-term impact on the U.S. retail market of COVID-19 resulting from the reduction of consumer foot traffic in brick and mortar stores. This continued uncertainty resulted in the postponement of promotional opportunities during the period.

For the three months ended September 30, 2017 and 2016, total operating expensesMarch 31, 2021 international sales were approximately $1,660,300$296.5 thousand or 68% of revenue as compared to $100.7 thousand or 68% of revenue in 2020.

In the first quarter 2021, the Company provided approximately $7.5 thousand in allowances to customers, as compared to approximately $30.8 thousand in the same period 2020.

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The following table disaggregates net revenue by major source:
 
For the Three Months Ended
March 31, 2021
 
For the Three Months Ended
March 31, 2020
 
 Capstone Brand % of Revenue Capstone Brand % of Revenue 
Lighting Products- U.S. $141,900   32% $48,303   32%
Lighting Products-International  296,523   68%  100,674   68%
Total Revenue $438,423   100% $148,977   100%

Gross Profit and $1,247,100Cost of Sales

Gross profit for the three months ended March 31, 2021 and 2020, was approximately $128.6 thousand, and $34.2 thousand, respectively, an increase of $413,200 or 33.1%.

For$94.8 thousand. Gross Profit as a percent of revenue was 29.4% in the 9 months ended September 30, 2017 and 2016, total operating expenses were approximately $4,156,600 and $2,869,300 respectively, an increase of $1,287,300 or 44.9%first quarter 2021 as compared to 22.8% in 2020. The Gross Profit increase resulted from the higher revenue in the period, but the margin also increased as we reduced marketing allowance to retailers in the period. In the quarter ended March 31, 2021 we provided $7.5 thousand of marketing allowances as compared to $30.8 thousand in the same period in 2016.last year.

The following is a summary of the major expense variances by category in the 2017 period compared to 2016.Operating Expenses

Sales and Marketing Expenses

For the 3three months ended September 30, 2017March 31, 2021, and 2016,2020, sales and marketing expenses were $4.2 thousand and $212.0 thousand respectively, a decrease of $207.8 thousand or 98.0%. In the period show expenses were approximately $928,300 and $488,100 respectively, an increase of $440,200 or 90.2%. The Company continued to invest heavily$147 thousand lower than in its brands of DuracellÒ, Capstone Lighting® and HooverÒ HOME LED. With the launch of 5 new products2020 as we did not participate in the CES Show in 2021 as it was in a virtual format resulting from COVID-19 restrictions. Retail Advertising and Promotional expenses were also reduced by $34.7 thousand during the period andended March 31, 2021, as compared to last year, resulting from the reduced revenue increase,in the sales and marketing expense increased mainly from royalty license payments of $514,000 for the branded licenses which was $292,800 higher than 2016. Representative commissions also increased by $22,900. The Company also expensed $93,000 of prepaid media credits and invested $36,300 for in store displays setup to promote new products.quarter.

Compensation Expenses

For the 9three months ended September 30, 2017March 31, 2021, and 2016, sales and marketing2020, compensation expenses were approximately $1,869,600$352.1 thousand and $903,900$376.7 thousand, respectively, an increasea decrease of $965,700$24.6 thousand or 106.8%6.5%. Many of the expense increasesThis reduction resulted from the $8,117,100 revenue increase. Royalty license payments of $1,043,300 for the branded licenses were $636,800 higher than in 2016. Representative commissions of $386,500 increased by $159,900 over 2016. The Company also expensed $93,000 of prepaid media credits, invested $36,300 for in store display setupslower health insurance premiums and $180,700 for advertising and trade show expense which increased by $41,900 over 2016.

Compensation Expense

For the 3 months ended September 30, 2017 and 2016,employee compensation expense was approximately $351,900 and $325,300 respectively, an increase of $26,600 or 8.2%.

For the 9 months ended September 30, 2017 and 2016, compensation expense was approximately $1,065,600 and $949,800 respectively, an increase of $115,800 or 12.2%.

Compensation expense increased as a result of performance based salary adjustments during the period and stock based compensation paid to certain directors.period.

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Professional Fees

For the 3three months ended September 30, 2017March 31, 2021, and 2016,2020, professional expensesfees were approximately $109,300$127.2 thousand and $111,300$130.5 thousand respectively, a decrease of $2,000$3.3 thousand or 1.9%.

For the 9 months ended September 30, 2017 and 2016, professional expenses were approximately $429,400 and $286,700 respectively, an increase of $142,700 or 49.8%.

The increased expense in the period resulted from hiring of an investment banker, increased investor relations
including managements' attendance at various investor shows, and engaging the services of a sales consultant to support the U.S. sales office marketing effort.2.5 %

Product Development Expenses

For the 3three months ended September 30, 2017 and 2016,March 31, 2021, product development expenses were approximately $81,000 and $127,400 respectively,$26.9 thousand as compared to $51.6 thousand in 2020, a decrease of $46,400$24.7 thousand or 36.4 %.28.6%. During the first quarter 2021 the Company invested $25.3 thousand in product testing and software development for the Smart Mirror project compared to $31.5 thousand in the same period in 2020. Quality control expenses were also reduced by $16.4 thousand as we had eliminated several quality control inspector positions in Hong Kong resulting from the transition of production to Thailand.

For the 9 months ended September 30, 2017 and 2016, product development expenses were approximately $219,500 and $227,600 respectively, a decrease of $8,100 or 3.6 %.

The Company has continued to invest in new product prototype development including testing and product certification. To reduce the initial cost of new product investment, we have been able to negotiate with our factory partners to absorb some of the costs of new product development.45

Other General and Administrative Expenses

For the 3three months ended September 30, 2017 and 2016,March 31, 2021, other general and administrative expenses were approximately $189,800$103.1 thousand as compared to $144.4 thousand in 2020, a reduction of $41.3 thousand or 28.6%. During the period the Company’s cost mitigation plan was in effect and $195,000resulted in a reduction of various discretionary expenses including rent and storage, travel and meals, entertainment and office supplies.

Goodwill Impairment Charge

For the three months ended March 31, 2021, goodwill impairment charge was $0 as compared to $290.1 thousand in the same period 2020. As a result of the impact of COVID-19, we determined that sufficient indicators existed to require an interim goodwill impairment analysis as of March 31, 2021. The analysis concluded that the Company’s fair value of its single reporting unit exceeded its carrying value therefore did not require an impairment charge. In the period end March 31, 2020 the Company recognized $290,059 goodwill impairment charge in the quarter.

Total Operating Expenses

For the three months ended March 31, 2021 and 2020, total operating expenses were approximately $613.5 thousand and $1.205 million, respectively, a decrease of $5,200$591.5 thousand or 2.7%49.0%.

Operating Loss

For the 9three months ended September 30, 2017 and 2016, other general and administrative expenses wereMarch 31, 2021 the operating loss was approximately $572,500 and $501,500 respectively, an increase$484.8 thousand compared to a loss of $71,000$1.171 million in 2020, a decrease of $686.2 thousand or 14.2%58.6%.

The expense increased is the result of higher Sterling Bank processing fees and increased general insurance liability premiums associated with the higher revenue levels and increased travel expenses related to sales activities during the period.

Net Operating Income

For the 3 months ended September 30, 2017 the operating income was approximately $1,450,000 compared to $1,603,900 in 2016. This is a reduction of $153,900 or 9.6% compared to 2016.

For the 9 months ended September 30, 2017 the operating income was approximately $3,176,000 compared to $2,723,900 in 2016. This is an improved performance of $452,100 or 16.6% compared to 2016.

Total Other Income (Expense)

For the 3three months ended September 30, 2017March 31, 2021, and 2016,2020, other income was approximately $10.4 thousand as compared to $0 thousand in 2020, which  resulted from interest income earned on the $574 thousand tax refund received in the quarter.

For the three months ended March 31, 2021, and 2020, other expense was approximately $69,500 and $89,700, respectively, for a reduction of $20,200 or 22.6%$24.0 thousand as compared to 2016.$0 thousand in 2020. This expense relates to the amortized portion of the fair value of 15,000 Series B-1 Preferred Shares issued to Directors S.Wallach and J. Postal as payment of the finance fee related to the $750 thousand working capital loan they established for the Company on January 4, 2021.

For the 9 months ended September 30, 2017 and 2016, other expense was approximately $113,400 and $213,900, respectively, for a reduction of $100,400 or 47.0% as compared to the same period in 2016.

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Despite having a substantial revenue growth during the 9-month period, we have been able to curtail the need for increased borrowing. With the increased cash flow resulting from operational profits in 2017, we have also been able to eliminate the need for purchase order funding, substantially reduce director loans and reduced the daily funding requirements from Sterling National Bank, which has allowed us to substantially reduce the interest expense.

ProvisionBenefit for Income Tax

For the 3 months ended September 30, 2017 and 2016, the provision for income tax was approximately $ 390,000 and $24,400, respectively, an increase of $365,600 as comparedThe CARES Act includes provisions related to last year. As the Company has now offset its previous year's net operating losses,loss carryback periods. The Company was able to carryback the Company must now provide for futureNOL to 2017 tax years and generated an estimate refund of previously paid income taxes at an approximate 34% federal tax expense.rate. This resulted in a net benefit related tax rate differential of approximately $574 thousand recorded in the first quarter 2020.

Net Loss

For the 9three months ended September 30, 2017 and 2016,March 31, 2021 the provision for income taxnet loss was approximately $920,000 and $37,000, respectively, an increase of $883,000 compared to last year.

Net Income

For the 3 months ended September 30, 2017, the Company had a net income of approximately $990,500 as$498.9 thousand compared to a net incomeloss of $1,489,800$597.4 thousand in the same period last year, a reduction of $499,300.

For the 9 months ended September 30, 2017, the Company had a net income of approximately $2,142,600 as compared to a net income of $2,473,100 in the same period last year, a reduction of $ 330,500.

During the 9 months ended September 30, 2017, the Company has achieved record net revenue, record gross profit and record net operating income. This record performance was achieved after the Company provided for approximately $1,287,000 of increased operating expense mainly resulting from higher revenues and further investment for future revenue growth.
 During the 9 months ended September 30, 2017, the Company also provided for increased tax provision of $920,000 which is $883,000 higher than in 2016 and is the main reason why net income for the 9 months ended September 30, 2017 was approximately $330,500 lower than in 2016.2020.

Off-Balance Sheet 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.

Contractual Obligations

There were no material changes to contractual obligations for the 9three months ended September 30, 2017.March 31, 2021.

3046

LIQUIDITY AND CAPITAL RESOURCES

AsThe COVID-19 pandemic has significantly affected U.S. consumer shopping patterns and caused the health of September 30, 2017, the Company had approximately $3,240,700U.S. economy to deteriorate. We cannot foresee when the COVID-19 pandemic will be effectively contained, nor can we predict the severity and duration of cashits impact on hand compared to $1,646,100 on December 31, 2016 an increaseour business and our financial results. If the variants of $1,594,600 or 96.9%. Working capitalCOVID-19 are not effectively and timely controlled, our business operations, financial condition, and liquidity may be materially and adversely affected because of approximately $5,177,700 as of September 30, 2017, increased 85.6% as compared to $2,790,100 at December 31, 2016.

 For the Nine Months Ended 
(In thousands)September 30, 2017 September 30, 2016 
Net cash provided by (used in):    
Operating Activities $2,142  $(3,740)
Investing Activities $(48) $(16)
Financing Activities $(500) $3,751 
Total $1,594  $(5)

With the Company's borrowing capability at Sterling National Bank, positive cashflow from operations, favorable payment terms with suppliers and as needed funding support from certain Company Directors, the Company has the financial resources needed to run operations and reinvestprolonged disruptions in the growth of our business.consumer spending.

Operating Activities

Cash flow provided by operating activities was approximately $2,141,800 in the 9 months ended September 30, 2017 compared with approximately $3,740,200 used in operating activities in 2016.  In the 9 months ended September 30, 2017, the net income of approximately $2,142,600 combined with a $224,300 decrease in inventory and a $731,500 decrease in accounts receivable helped to offset cash usage resulting from a $263,900 decrease in accounts payable, a $135,337 decrease in notes payable interest and an $831,700 decrease in accrued sales allowances. During 2016, the net income of $2,473,100 was offset by a large increase of $6,755,200 in accounts receivable.

The Company's cash flow from operationsOperational cashflow is 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.  Sales aresignificantly influenced significantly by the timing and launch of new products intoas well as favorable payment terms negotiated with overseas suppliers. Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with flexibility in meeting our operating, financing and investing needs in the marketplace.past.

During the period ended March 31, 2021, the Company increased cash by approximately $238 thousand despite having a net operating loss of approximately $499 thousand. As of March 31, 2021, the Company has working capital of approximately $955 thousand and an accumulated deficit of $5.0 million. The Company’s cash balance was approximately $1.5 million, an increase from $1.2 million as of December 31, 2020. With the establishmentreduced revenues and to conserve cash, the Company implemented an expense mitigation plan that reduced discretionary spending including travel, lodging and trade show expenses, deferred executive management compensation, and significantly reduced the cost of ourthe Hong Kong operation we have builtoperation.

Since terminating its factoring agreement with Sterling National Bank last year, the Company has had discussions with alternate funding sources that offer extensive programs that are more in line with the Company’s future business model, particularly a facility that provides funding options that are suitable for the e-commerce business that the Company is transitioning into. The borrowing costs associated with such financing programs are dependent upon market conditions and our credit rating.

On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The term of the loan started January 4, 2021 and ends June 30, 2021 (“Initial Period’). The Company may extend the Initial Period for an operational structure that, through relationships with factory-suppliers combined with our internal expertise, can developadditional six consecutive months, ending December 31, 2021, under the same terms and release quality productsconditions of the Initial Period. The Company may borrow under the agreement up to market substantially quicker than$750,000 and prepay wholly or partially the unpaid principal amount at any time.

The Company had an income tax refundable as of December 31, 2020 of approximately $861 thousand of which approximately $576 thousand was refunded on February 3, 2021.

The Company as of March 31, 2021, and December 31, 2020 was debt free except for accounts payable and accrued liabilities.

In addition, we have been ablein discussions with equity investors in order to accomplish in previous years.raise capital for the procurement of our initial Smart Mirror rollout inventory that will be required to successfully launch the Smart Mirror program.

Investing Activities

Cash used for investing activities for the 9 months ended September 30, 2017 was approximately $47,600 compared to $15,500 in 2016.  The Company continues to invest in new product moldsBased on past performances 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 has the task of negotiating favorable payment terms with factories which will reduce the amounts of upfront cash required to have available when initiating a new project.current expectations, Management believes that our cash flow fromon hand, our availability under the $750,000 credit line, the finalization of the April 5, 2021 an equity investment to five investors will be adequate to meet the Company’s cash needs for our daily operations, capital expenditures and additional borrowing will provideprocurement of the Smart Mirror rollout inventory for these necessary capital expenditures.at least the next six-month period.


47


Summary of Cash Flows
 
For the Three Months ended March 31, 
 2021 2020 
(In thousands)    
Net cash provided by (used in) :    
Operating Activities $238  $(627)
Investing Activities  -   (16)
Financing Activities  -   (36)
Net decrease in cash and cash equivalents $238  $(679)

As of March 31, 2021, the Company’s working capital was approximately $955 thousand. Current assets were approximately $1.99 million of which approximately $1.5 million was cash and current liabilities were approximately $1.0 million and include:

Accounts payable of approximately $352.7 thousand due vendors and service providers.
Accrued expenses of approximately $564.4 thousand for various services and allowances.
Warranty provision for estimated defective returns in the amount of approximately $54.2 thousand.
Operating lease-current portion of approximately $65.0 thousand.

Cash Flows used in Operating Activities

Cash provided by operating activities in the three months ended March 31, 2021 was approximately $238 thousand compared with approximately $627 thousand used in operating activities in the same quarter 2020. During the quarter ended March 31, 2021, the cash provided by operating activities resulted from the net loss of approximately $499 thousand, $24 thousand in non-cash stock issued to Director’s for loan, $47 thousand increase in accounts receivable, which was offset by approximately $576 thousand decrease in income tax refundable resulting from the tax refund received from the Internal Revenue Service, $146 thousand increase in accounts payable and accrued liabilities, and $32 thousand decrease in prepaid expenses. The Company's cash position was approximately $1.5 million at March 31, 2021 compared to $2.6 million at March 31, 2020.

Cash Flows used in Investing Activities

The use of cash in the three months ended March 31, 2021 and 2020 was $0 and $15.7 thousand, respectively.

Cash Flows used in Financing Activities

Cash used in(used in) financing activities for the ninethree months ended September 30, 2017March 31, 2021 and 2020, was approximately $499,600 compared to $3,750,500 provided by financing activities in 2016.$0 and $(36.3) thousand, respectively. During the period ended September 30, 2017,March 31, 2020, the Company repurchased and retired $250,000282,333 shares at a cost of $36.3 thousand. As of March 31, 2021, the Company common stock from Involve, LLC and paid off $257,100 of director's loans outstanding since 2010 and 2013 including all accrued interest. The Company was also able to maintain the Sterling Bank loan at $0 balance. The Company sold some outstanding warrants totaling $7,500.had zero debt outstanding.

31
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.

At September 30, 2017, the Company was in compliance with all agreements pursuant to existing credit facilities.  Management believes that our cash flow from operations, continued support from Sterling National Bank and support of certain of our Directors will provide sufficient financial resources for the Company during 2017.

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.

ImpactExchange Rates

We sell all of Inflation:our products in U.S. dollars and pay for all of our manufacturing costs in U.S. dollars. Our factories are located in mainland China and Thailand. During 2020 the average exchange rate between the U.S. Dollar and Chinese Yuan have been relatively stable approximately RMB 6.90 to U.S. $1.00.

The Company's major expenseaverage exchange rate between the U.S. Dollar and Thai Baht has been the costrelatively stable at approximately Baht 31.25 to U.S. $1.00.

48

Operating expenses 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,are paid in either Hong Kong dollars or U.S. dollars. The exchange rate of the Company expectsHong Kong dollar to the U.S. dollar has been very stable at approximately HK $7.80 to U.S. $1.00 since 1983 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. While exchange rates have been stable for several years, we cannot assure you that pricesthe exchange rate between the United States, Hong Kong, Chinese and Thailand currencies will remain steady through 2017.continue to be stable and exchange rate fluctuations may have a material effect on our business, financial condition or results of operations.

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

The Company's manufacturing is currently conducted in China.China and Thailand. 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;
The possibility of expropriation, confiscatory taxation or price controls.
·Adverse changes in local investment or exchange control regulations;
Adverse changes in local investment or exchange control regulations.
·Political or economic instability, government nationalization of business or industries, government corruption, and civil unrest;
Political or economic instability, government nationalization of business or industries, government corruption, and civil unrest.
·Legal and regulatory constraints;
Legal and regulatory constraints.
·Tariffs and other trade barriers, including trade disputes between the U.S. and China;
Tariffs and other trade barriers, including trade disputes between the U.S. and China.
·Political or military conflict between the U.S. and China, or between U.S. and North Korea, resulting in adverse or restricted access by U.S.-based companies to Chinese manufacturing and markets; and
Political or military conflict between the U.S. and China, or between U.S. and North Korea, resulting in adverse or restricted access by U.S.-based companies to Chinese manufacturing and markets.

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 pressures.

Interest Rate Risk: The Company does not have significant interest rate risk during the period ended September 30, 2017.March 31, 2021.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.


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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.The Company maintains "disclosure

We maintain 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 material information required to be disclosed by us in our periodic reports we filefiled or submitsubmitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the CommissionCommission’s rules and forms,forms. Our disclosure controls and procedures are also designed to ensure that such information required to be disclosed in the reports we file or submit under the Exchange Act 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.

OurDuring the first fiscal quarter of fiscal 2021, we carried out an evaluation, under the supervision and with the participation of our management, including our principalchief executive officer and principalour chief financial officer, evaluatedof the effectiveness of the design and operation of ourthe disclosure controls and procedures, as of December 31, 2016 and concluded that the disclosure controls and procedures were effective underdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and as of June  30, 2017, to ensureAct. Based upon 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's management, including its principalevaluation, our chief executive officer and principalchief financial officer concluded that our disclosure controls and procedures were effective, as appropriate, to allow timely decisions regarding required disclosures.of the end of the quarterly fiscal period covered by this Form 10-Q report (March 31, 2021).


Changes in internal controls:  49

There were no changes in our internal controlscontrol over financial reporting that occurred(as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months covered by this quarterly report on Form 10-Q or "Report"our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

Because the Company is a smaller reporting company, this report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm.

Changes in internal controls over financial reporting.

There are no changes to our internal controlscontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2021, that has materially affected or are reasonable likely to materially affect, our internal control over financial reporting.

The certifications of our Chief Executive Officer and Chief Financial Officer attached as Exhibits 31 and 32 and to this Form 10-Q Report include information concerning our disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with

Inherent Limitations on Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. Internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the information contained in Item 4, includingobjectives of internal control are met. Further, the information incorporated by reference to our annual report on Form 10-K fordesign of internal control must reflect the fiscal year ended December 31, 2016, for a more complete understandingfact that there are resource constraints, and the benefits of the matters covered by such certifications.control must be considered relative to their costs. While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company, have been detected.

PART II — OTHER INFORMATION
Item 1. Legal Proceedings.

The Company is not a party to any materialother 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.

As a "smaller reporting company,"You should carefully consider the "Risk Factors" disclosed under "Item 1A. Risk Factors" in our 2020 Annual Report on Form 10-K. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we are not requiredcurrently deem to provide information required by thisbe immaterial also may materially adversely affect our business, financial condition and/or operating results.

Except as set forth below, there have been no material changes in the Risk Factors as set forth in Item 1A.

1A of our 2020 Annual Report.


3350


Described below and throughout this Form 10-Q report are certain risks that the Company’s management believes are applicable to the Company’s business and the industries in which it operates. If any of the described events occur, the Company’s business, results of operations, financial condition, liquidity, or access to the capital markets could be materially adversely affected. When stated below that a risk may have a material adverse effect on the Company’s business, it means that such risk may have one or more of these effects. There may be additional risks that are not presently material or known. There are also risks within the economy, the industry, and the capital markets that could materially adversely affect the company, including those associated with an economic recession, inflation, a global economic slowdown, political instability, government regulation (including tax regulation), employee attraction and retention, and customers’ inability or refusal to pay for the products and services provided by the company. There are also risks associated with the occurrence of extraordinary events, such as terrorist attacks or natural disasters (such as tsunamis, hurricanes, tornadoes, and floods). These factors affect businesses generally, including the Company, its customers and suppliers and, as a result, are not discussed in detail below, but are applicable to the Company. As a "penny stock" without primary market maker support, and due to the decline in financial performance of the Company in 2020 and into 2021, any investment in our Common Stock is highly risky and should only be considered by investors who can afford to lose their entire investment and do not require immediate liquidity. These risk factors are not the only risks that we or our subsidiaries may face. Additional risks and uncertainties not presently known to us or not currently believed to be important also may adversely affect our business.

Business and Operational Risks

The continuing COVID-19 pandemic resurgence and measures intended to reduce its spread has, and may continue to, adversely affect our business, results of operations and financial condition and may hamper our ability to fund our operations without obtaining adequate, affordable funding, which funding may not be available as needed.

The outbreak of the COVID-19 pandemic has spread across the globe and continues to impact worldwide economic activity, including Southern Florida where the Company offices are located and in China and Thailand where the Company has its products made. The COVID-19 pandemic has prevented our employees, suppliers, logistics services and other partners from conducting business activities at full capacity for a period of time, due to the community spread of the disease or due to shutdowns that were requested or mandated by governmental authorities or businesses. While it is not possible at this time to estimate the full impact that the COVID-19 pandemic could have on our business, the continued spread of COVID-19 pandemic and the measures taken by the governments and businesses in affected areas and in which we operate have disrupted and may continue to disrupt our product development, manufacturing supply chain, the retail marketplace and overall consumer buying confidence. For example, despite the phased reopening of the economy in many U.S. states, the resurgence of COVID-19 pandemic has paused many phased re-openings. Due to social distancing and other mandates implemented by federal, state and local governments, many individuals are working remotely and staying at home resulting in retail stores remaining closed and demand for consumer goods remaining uncertain. As the COVID-19 pandemic continues to remain a serious health threat, the retail marketplace may have continued declines, which has reduced and may continue to reduce revenue and, as a result, could continue to adversely affect our operating results and financial condition. The overall negative impact of the COVID-19 pandemic on the economy has also impacted, and may continue to impact, the number of potential retail customers for our products. The COVID-19 pandemic outbreak and government and business mitigation measures have also had an adverse impact on global economic conditions, which has had and could continue to have an adverse effect on our business and financial condition and could impact our ability to access the capital markets on terms acceptable to us, if at all. In addition, we have taken and may further take temporary precautionary measures intended to help minimize the risk of COVID-19 pandemic to our employees, including closing the corporate office, temporarily requiring employees to work remotely, suspending all non-essential travel for our employees, which could negatively affect our business. The further spread of the COVID-19 pandemic or emergence of vaccine resistant strains of the virus and actions taken to limit and combat the spread will impact our ability to carry out our business as normal, and may materially adversely impact our business, operating results and financial condition. The extent to which the COVID-19 pandemic outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.


51

The adverse financial results from the COVID-19 pandemic on our business and financial performance coupled with our transition in new product focus on Connected Surfaces products places a significant financial strain on our Company. We have secured a $750,000 thousand working capital facility with a term up to one year, on January 4, 2021 and we obtained $1.4 million in equity funding on April 5, 2021. We anticipate available funding will sustain operations in the short-term, in 2021, but this assumption may prove to be incorrect.  However, to sustain future operations and revenue growth we will also need either adequate and affordable additional funding or adequate cash flow from sales of products in fiscal year 2021.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by governments, or that we determine are in the best interest of our employees, customers, partners, suppliers and shareholders. The extent of the adverse impact of the pandemic on the global economy and markets will depend, in part, on the length and severity of the measures taken to limit the spread of the virus and, in part, on the size and effectiveness of the compensating measures taken by governments. To the extent the COVID-19 pandemic continues to adversely affect the U.S. economy, and/or adversely affects our business, operations or financial performance, it may also have the effect of increasing the likelihood and/or magnitude of other risks described herein, including those risks related to market, credit, geopolitical and business operations and cyber, or risks described in our other filings with the SEC. In addition, the COVID-19 pandemic may also affect our business, operations or financial performance in a manner that is not presently known to us. The emergence of new, vaccine resistant strains of the virus could result in a reoccurrence of the economic disruption caused in 2020 by the first wave of COVID-19 pandemic.  Further, if a significant portion of the U.S. population refuses to get vaccinated, and thereby sustain the impact of the COVID-19 pandemic, the COVID-19 pandemic may continue to harm our business and financial performance in 2021 as well as increase the possibility of new, vaccine resistant strains of the virus.

Our operating results are substantially dependent on the acceptance of new products.

The success of the Connected Surfaces product line in 2021 is critical to the ability of the Company to sustain the Company as a going concern beyond 2021. The Company will not be able to assess the results of the new Connected Surfaces product line until later in 2021.  While the Company routinely considers significant corporate actions as part of regular strategic planning, the Company may have to consider and pursue a strategic corporate action, like a merger, sale of operating assets or new business line, in order to sustain operations beyond 2021.

Risk Factors for our Common Stock

Penny Stock and Volatile Market Price.

After the announcement of the $750,000 working capital credit line by two Company directors and announcement of the new Connected Surfaces Smart Mirror product launch, the market price of our common stock rose significantly in first fiscal quarter of 2021. The Company is not promoting its common stock and has not retained any third party to promote the common stock. The Company has no intention of conducting any stock promotional activities in the foreseeable future as of the date of the filing of this Form 10-Q report. As a matter of policy, the Company never recommends any investment in its common stock to public investors.

Due to the factors described below, the Company Common Stock is subject to possible volatile trading, including rapid increases and decreases in market price due to trading in the open market. The Company Common Stock lacks the primary market makers and institutional investors who can protect the market price from volatility in trading and market price. Further, the Company does not have any research analyst issuing recommendations (with exception of an isolated, unsolicited March 2021 rating by Smart Score). The common stock is also a “penny stock” under SEC rules and suffers the limitations and burdens in trading of penny stocks. This lack of market support and penny stock status means that trading, especially by day traders, can cause a rapid increase or decrease in market price of the common stock and makes any investment in the common stock extremely risky and unsuitable for investors who cannot withstand the loss of their entire investment and requires liquidity in the investment. Recent market activity in Company’s Common Stock is not indicative or a trustworthy indicator of future market performance of the Common Stock. An investment in the Common Stock remains an extremely risky investment that is not suitable for investors who cannot afford the loss of investment and can withstand or tolerate a lack of liquidity.

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In March 2021, our Common Stock was approved for DWAC/Fast electronic transfer, which will enhance trading of our Common Stock, but will not eliminate the issues imposed by the lack of market support for the Common Stock or the “penny stock” status of our Common Stock and, as such, will not lessen the volatility in trading and market price of our Common Stock.  Further, restricted stock cannot be DWAC/Fast transferred.

We are also a former shell company under current SEC rules and interpretations thereof. As such, our stock transfer agent requires a legal opinion as well as other paperwork to lift restrictive legends from stock certificates for non-affiliated as well as affiliated shareholders. The restrictive legends can only be lifted for at most a 90 day period for sales under Rule 144 for affiliated and non-affiliated shareholders. Further, our stock transfer agent will not permanently remove restrictive legends on stock certificates held by shareholders. absent registration of the shareholder’s shares of Common Stock under the Securities Act.  This status may make our common stock even more unappealing to investors and potential purchasers and more difficult to sell or trade. “Affiliated shareholders” are generally Company officers, directors and holders of more than 10% of the issued shares of the common stock.

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

ThereOn January 4, 2021, the Company issued  a total of seven thousand five hundred (7,500) shares of Company’s Series B-1 Convertible Preferred Stock, $0.0001 par value per share, to Stewart Wallach, Company’s Chief Executive Officer and Chairman of the Board of Directors,  and Jeffrey Postal, a director of the Company, under a Loan Agreement, dated January 4, 2021, with Stewart Wallach and Jeffrey Postal as joint lenders.  These securities were no unregistered issuancesissued as consideration for the loan and under an exemption from registration under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act.

On April 5, 2021, the Company entered into a Private Equity Placement with five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares (“Shares”) of its Common Stock, $0.0001 par value per share, (“Common Stock”) for an aggregate purchase price $1,498,000. The five investors in the fiscal quarter ending September 30, 2017.Private Placement consisted of four private equity funds and one individual – all being “accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended,(“Securities Act”). The $1,498,000 in proceeds from the Private Placement will be used mostly to purchase start up inventory for the Company’s new Smart Mirror product line, and the remainder for advertising and working capital. Under the SPA, each investor is granted five-year piggyback, ‘best efforts’ registration rights with no penalties. The Shares are ‘restricted securities” under Rule 144 of the Securities Act and are subject to a minimum six month hold period. Based on representations made to the Company, the five investors do not constitute a “group” under 17 C.F.R. §240.13d-3 and have purchased the Shares solely as an investment for each investor’s own account. No individual investor owns more than 2% of the issued and outstanding shares of Common Stock.

The Company engaged Wilmington Capital Securities, LLC, a FINRA and SEC registered broker to act as a placement agent to assist to raise capital through a private placement from one or more accredited investors. As compensation for their services Wilmington was paid 7% of the gross proceeds or $104,860 as a placement fee and in addition on the closing date the Company shall issue to Wilmington warrants equal to 8%  the Securities issued or 199,733 warrants. The Warrants shall be a five (5) year warrant, exercisable at a price per share equal to 110% or $0.66 of the price per share paid by the Investors.

On April 28, 2021, Company issued Common Stock purchase warrants for purchase of 199,733 shares of Common Stock. The warrants were issued under a financial services and placement agreement with a broker-dealer to the broker dealer and affiliated broker-dealer and in connection with the Company’s placement of $1.4 million of restricted shares of Common Stock to five investors on April 5, 2012.  The issuance of these warrants were made an exemption from registration under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act.

Item 3. Defaults Upon Senior Securities

None.


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Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.The Company has no information to disclose that was required to be in a report on Form 8-K during the period covered by this report but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors or make shareholder proposals.

Item 6. Exhibits

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

EXHIBIT #EXHIBIT TITLE
31.1
31.1
Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ^
31.2
Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ^
32.1
Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, ^
32.2
Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, ^



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SIGNATURES

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:  November 14, 2017May 17, 2021



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



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