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 March 31,September 30, 2018
__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)
Florida | 84-1047159 |
(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) 570-8889 extension 313 |
(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. [_]
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 the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of March 31,November 5, 2018, there were 47,046,364 shares of the issuer's Common Stock, $0.0001 par value per share, issued and outstanding.
CAPSTONE COMPANIES, INC.
Quarterly Report on Form 10-Q
Three Months and Nine Months Ended March 31,September 30, 2018
TABLE OF CONTENTS
PART 1 | FINANCIAL INFORMATION | 3 |
| | |
Item 1. | Financial Statements (Unaudited) | 3 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operation | 2123 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 3942 |
Item 4. | Controls and Procedures | 3942 |
| | |
PART II | Other Information | 4144 |
| | |
Item 1. | Legal Proceedings | 4144 |
Item 1A. | Risk Factors | 4144 |
Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds | 4144 |
Item 3. | Defaults of Senior Securities | 4144 |
Item 4. | Mine Safety Disclosures | 4145 |
Item 5. | Other Information | 4245 |
Item 6. | Exhibits | 4245 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | | | | | | |
CONSOLIDATED BALANCE SHEETS | | | | | | |
| | | | | | |
| | September 30, | | | December 31, | |
| | 2018 | | | 2017 | |
Assets: | | (Unaudited) | | | | |
Current Assets: | | | | | | |
Cash | | $ | 3,593,296 | | | $ | 3,668,196 | |
Accounts receivable, net | | | 2,387,590 | | | | 4,367,721 | |
Inventories | | | 8,316 | | | | 140,634 | |
Prepaid expenses | | | 164,345 | | | | 239,150 | |
Income tax refundable | | | 354,912 | | | | - | |
Total Current Assets | | | 6,508,459 | | | | 8,415,701 | |
| | | | | | | | |
Property and Equipment: | | | | | | | | |
Computer equipment and software | | | 56,932 | | | | 9,895 | |
Machinery and equipment | | | 395,601 | | | | 318,801 | |
Furniture and fixtures | | | 12,493 | | | | 5,665 | |
Less: Accumulated depreciation | | | (299,454 | ) | | | (266,997 | ) |
Total Property & Equipment | | | 165,572 | | | | 67,364 | |
| | | | | | | | |
Other Non-current Assets: | | | | | | | | |
Deposit | | | 14,755 | | | | 13,616 | |
Goodwill | | | 1,936,020 | | | | 1,936,020 | |
Total Other Non-current Assets | | | 1,950,775 | | | | 1,949,636 | |
Total Assets | | $ | 8,624,806 | | | $ | 10,432,701 | |
| | | | | | | | |
Liabilities and Stockholders' Equity: | | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 1,801,248 | | | $ | 2,733,516 | |
Income tax payable | | | 11,694 | | | | 624,782 | |
Total Current Liabilities | | | 1,812,942 | | | | 3,358,298 | |
| | | | | | | | |
Long Term Liabilities: | | | | | | | | |
Deferred tax liabilities | | | 283,000 | | | | 251,000 | |
Total Long Term Liabilities | | | 283,000 | | | | 251,000 | |
Total Liabilities | | | 2,095,942 | | | | 3,609,298 | |
| | | | | | | | |
Commitments and Contingencies (Note 4) | | | | | | | | |
| | | | | | | | |
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 | | | 4,704 | | | | 4,704 | |
Additional paid-in capital | | | 7,081,194 | | | | 7,005,553 | |
Accumulated deficit | | | (557,034 | ) | | | (186,854 | ) |
Total Stockholders' Equity | | | 6,528,864 | | | | 6,823,403 | |
Total Liabilities and Stockholders' Equity | | $ | 8,624,806 | | | $ | 10,432,701 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. | | | | | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONSOLIDATED STATEMENTS OF OPERATIONS | |
(Unaudited) | |
| | | | | | | | | | | | |
| | For the Three Months Ended | | | For the Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| | | | | | | | | | | | |
Revenues, net | | $ | 5,726,145 | | | $ | 13,817,909 | | | $ | 11,889,520 | | | $ | 30,789,653 | |
Cost of sales | | | (4,395,761 | ) | | | (10,707,657 | ) | | | (9,179,145 | ) | | | (23,457,070 | ) |
Gross Profit | | | 1,330,384 | | | | 3,110,252 | | | | 2,710,375 | | | | 7,332,583 | |
| | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | |
Sales and marketing | | | 359,715 | | | | 928,321 | | | | 838,323 | | | | 1,869,596 | |
Compensation | | | 359,539 | | | | 351,915 | | | | 1,104,396 | | | | 1,065,621 | |
Professional fees | | | 102,532 | | | | 109,257 | | | | 394,320 | | | | 429,440 | |
Product development | | | 95,661 | | | | 80,991 | | | | 385,994 | | | | 219,464 | |
Other general and administrative | | | 232,888 | | | | 189,780 | | | | 573,852 | | | | 572,461 | |
Total Operating Expenses | | | 1,150,335 | | | | 1,660,264 | | | | 3,296,885 | | | | 4,156,582 | |
| | | | | | | | | | | | | | | | |
Operating Income (Loss) | | | 180,049 | | | | 1,449,988 | | | | (586,510 | ) | | | 3,176,001 | |
| | | | | | | | | | | | | | | | |
Other Income (Expense): | | | | | | | | | | | | | | | | |
Miscellaneous income (expense) | | | (1,960 | ) | | | - | | | | 145,330 | | | | - | |
Interest expense | | | - | | | | (69,459 | ) | | | - | | | | (113,431 | ) |
Total Other Income (Expense) | | | (1,960 | ) | | | (69,459 | ) | | | 145,330 | | | | (113,431 | ) |
| | | | | | | | | | | | | | | | |
Income (Loss) Before Tax Provision (Benefit) | | | 178,089 | | | | 1,380,529 | | | | (441,180 | ) | | | 3,062,570 | |
| | | | | | | | | | | | | | | | |
Provision (Benefit) for Income Tax | | | 6,000 | | | | 390,000 | | | | (71,000 | ) | | | 920,000 | |
| | | | | | | | | | | | | | | | |
Net Income (Loss) | | $ | 172,089 | | | $ | 990,529 | | | $ | (370,180 | ) | | $ | 2,142,570 | |
| | | | | | | | | | | | | | | | |
Net Income (Loss) per Common Share | | | | | | | | | | | | | | | | |
Basic | | $ | 0.004 | | | $ | 0.021 | | | $ | (0.008 | ) | | $ | 0.046 | |
Diluted | | $ | 0.004 | | | $ | 0.021 | | | $ | (0.008 | ) | | $ | 0.045 | |
| | | | | | | | | | | | | | | | |
Weighted Average Shares Outstanding | | | | | | | | | | | | | | | | |
Basic | | | 47,046,364 | | | | 46,660,456 | | | | 47,046,364 | | | | 46,989,940 | |
Diluted | | | 47,046,364 | | | | 47,152,574 | | | | 47,046,364 | | | | 47,462,664 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | |
(Unaudited) | | | | | | |
| | | | | | |
| | For the Nine Months Ended | |
| | September 30, | |
| | 2018 | | | 2017 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| | | | | | |
Net income (loss) | | $ | (370,180 | ) | | $ | 2,142,570 | |
Adjustments necessary to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | |
Depreciation and amortization | | | 32,457 | | | | 55,725 | |
Accrued interest on note receivable | | | - | | | | 26,887 | |
Stock based compensation expense | | | 75,641 | | | | 66,594 | |
Provision for deferred income tax | | | 32,000 | | | | 146,000 | |
Increase (decrease) in accrued sales allowance | | | 153,025 | | | | (831,731 | ) |
Decrease in accounts receivable, net | | | 1,827,100 | | | | 731,532 | |
Decrease in inventories | | | 132,318 | | | | 224,265 | |
(Increase) decrease in prepaid expenses | | | 74,805 | | | | (20,813 | ) |
(Increase) in deposits | | | (1,139 | ) | | | - | |
(Decrease) in accounts payable and accrued liabilities | | | (932,262 | ) | | | (263,912 | ) |
(Decrease) in income tax payable | | | (613,088 | ) | | | - | |
(Increase) in income tax refundable | | | (354,912 | ) | | | - | |
(Decrease) in accrued interest on notes payable | | | - | | | | (135,337 | ) |
Net cash provided by operating activities | | | 55,765 | | | | 2,141,780 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchase of property and equipment | | | (130,665 | ) | | | (47,587 | ) |
Net cash (used in) investing activities | | | (130,665 | ) | | | (47,587 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from notes payable | | | 18,352,018 | | | | 30,559,312 | |
Repayments of notes payable | | | (18,352,018 | ) | | | (30,559,312 | ) |
Repurchase of shares from Involve, LLC | | | - | | | | (250,000 | ) |
Warrant issued | | | - | | | | 7,500 | |
Repayments of notes and loans payable to related parties | | | - | | | | (257,100 | ) |
Net cash (used in) financing activities | | | - | | | | (499,600 | ) |
| | | | | | | | |
Net Increase (decrease) in Cash and Cash Equivalents | | | (74,900 | ) | | | 1,594,593 | |
Cash and Cash Equivalents at Beginning of Period | | | 3,668,196 | | | | 1,646,128 | |
Cash and Cash Equivalents at End of Period | | $ | 3,593,296 | | | $ | 3,240,721 | |
| | | | | | | | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | - | | | $ | 221,881 | |
Income taxes | | $ | 865,000 | | | $ | 371,500 | |
| | | | | | | | |
Non-cash financing and investing activities: | | | | | | | | |
| | | | | | | | |
Shares issued in satisfaction of loan payable to related party | | $ | - | | | $ | 240,900 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. | | | | | | | | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONSOLIDATED STATEMENTS OF OPERATIONS | |
(Unaudited) | |
| | | | | | |
| | For the Three Months Ended | |
| | March 31, | |
| | 2018 | | | 2017 | |
| | | | | | |
Revenues, net | | $ | 4,060,168 | | | $ | 6,752,196 | |
Cost of sales | | | 3,040,897 | | | | 5,172,729 | |
Gross Profit | | | 1,019,271 | | | | 1,579,467 | |
| | | | | | | | |
Operating Expenses: | | | | | | | | |
Sales and marketing | | | 363,061 | | | | 376,756 | |
Compensation | | | 375,110 | | | | 359,802 | |
Professional fees | | | 148,887 | | | | 204,802 | |
Product development | | | 166,566 | | | | 72,025 | |
Other general and administrative | | | 174,288 | | | | 178,619 | |
Total Operating Expenses | | | 1,227,912 | | | | 1,192,004 | |
| | | | | | | | |
Operating Income (Loss) | | | (208,641 | ) | | | 387,463 | |
| | | | | | | | |
Other Income (Expense): | | | | | | | | |
Interest income | | | - | | | | 12,945 | |
Interest expense | | | - | | | | (21,730 | ) |
Total Other (Expense) | | | - | | | | (8,785 | ) |
| | | | | | | | |
Income (Loss) Before Tax Provision (Benefit) | | | (208,641 | ) | | | 378,678 | |
| | | | | | | | |
Provision (Benefit) for Income Tax | | | (18,000 | ) | | | 128,000 | |
| | | | | | | | |
Net Income (Loss) | | $ | (190,641 | ) | | $ | 250,678 | |
| | | | | | | | |
Net Income (Loss) per Common Share | | | | | | | | |
Basic | | $ | (0.004 | ) | | $ | 0.005 | |
Diluted | | $ | (0.004 | ) | | $ | 0.005 | |
| | | | | | | | |
Weighted Average Shares Outstanding | | | | | | | | |
Basic | | | 47,046,364 | | | | 47,621,553 | |
Diluted | | | 47,046,364 | | | | 47,883,977 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Capstone Companies, Inc. ("CAPC", "Capstone" or the "Company"), a Florida corporation (formerly, "CHDT Corporation") and its wholly-owned subsidiaries is presented to assist in understanding the Company's consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently applied in the preparation of the consolidated financial statements.
Organization and Basis of Presentation
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's financial position as of March 31,September 30, 2018 and results of operations and cash flows for the three months and nine months ended March 31,September 30, 2018 and 2017. All significant 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") 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's Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Annual Report").
The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling home LED products through national and regional retailers in North America and in certain overseas markets. The Company's products are targeted for applications such as home indoor and outdoor lighting and will have different functionalities to meet consumer's needs. These products may be offered either under the Capstone brand or licensed brands.
The Company's products are typically manufactured in China by contract manufacturing companies.
The Company's operations consist of one reportable segment for financial reporting purposes: Lighting Products.
Accounts Receivable
For product revenue, the Company invoices its customers at the time of shipment for the sales value of the product shipped. Accounts receivable are recognized at the invoiced amount and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers. As of March 31,September 30, 2018 and December 31, 2017, accounts receivable serves as collateral for the Company's note payable.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table summarizes the components of Accounts Receivable,accounts receivable, net:
| March 31, | | December 31, | | September 30, | | December 31, | |
| 2018 | | 2017 | | 2018 | | 2017 | |
Trade Accounts Receivables at period end | | $ | 2,871,902 | | | $ | 4,561,782 | | |
Trade accounts receivables at period end | | | $ | 2,734,676 | | | $ | 4,561,782 | |
Reserve for estimated marketing allowances, cash discounts and other incentives | | | (173,426 | ) | | | (194,061 | ) | | | (347,086 | ) | | | (194,061 | ) |
Total Accounts Receivable, net | | $ | 2,698,476 | | | $ | 4,367,721 | | | $ | 2,387,590 | | | $ | 4,367,721 | |
TheThe 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, | | | September 30, | | | December 31, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Balance at beginning of the year | | $ | (194,061 | ) | | $ | (1,200,792 | ) | |
Balance at beginning of the period | | | $ | (194,061 | ) | | $ | (1,200,792 | ) |
Accrued allowances | | | - | | | | (921,833 | ) | | | (173,660 | ) | | | (921,833 | ) |
Reversal of prior year accrued allowances | | | 1,749 | | | | 58,867 | | | | 1,749 | | | | 58,867 | |
Expenditures | | | 18,886 | | | | 1,869,697 | | | | 18,886 | | | | 1,869,697 | |
Balance at period-end | | $ | (173,426 | ) | | $ | (194,061 | ) | | $ | (347,086 | ) | | $ | (194,061 | ) |
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.
Inventories
The Company's inventory, recorded at lower of cost (first-in, first-out) or net realizable value, consists of finished goods for resale by Capstone, totaling $62,684$8,316 and $140,634 at March 31,September 30, 2018 and December 31, 2017, respectively.
Prepaid Expenses
The Company's prepaid expenses consist primarily of deposits on inventory purchases for future orders as well as prepaid insurance and trade show expense.
Net Income Per Common Share
Basic earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding as of March 31, 2018 and 2017.for the reporting period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and 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 March 31,September 30, 2018 and 2017, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 950,003993,335 and 5,182,226,0, respectively.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basic weighted average shares outstanding is reconciled to diluted weighted shares outstanding as follows:
| | 3 months ended | | | 3 months ended | | 3 months ended | 3 months ended |
| | March 31, 2018 | | | March 31, 2017 | | September 30, 2018 | September 30, 2017 |
Basic weighted average shares outstanding | | | 47,046,364 | | | | 47,621,553 | | 47,046,364 | 46,660,456 |
Dilutive warrants | | | - | | | | 262,424 | | - | 313,211 |
Dilutive options | | - | 178,907 |
Diluted weighted average shares outstanding | | | 47,046,364 | | | | 47,883,977 | | 47,046,364 | 47,152,574 |
| 9 months ended | 9 months ended |
| September 30, 2018 | September 30, 2017 |
Basic weighted average shares outstanding | 47,046,364 | 46,989,940 |
Dilutive warrants | - | 308,219 |
Dilutive options | - | 164,505 |
Diluted weighted average shares outstanding | 47,046,364 | 47,462,664 |
Revenue Recognition
The Company generates revenue from developing, marketing and selling consumer lighting products through national and regional retailers. The Company's products are targeted for applications such as home indoor and outdoor lighting and will have different functionalities. Capstone currently operates in the consumer lighting products category in the Unites States and in certain overseas markets. These products may be offered either under the Capstone brand or licensed brands.
A sales contract occurs when the customer-retailer submits a purchase order to buy a specific product, a specific quantity, at an agreed-fixedagreed- 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.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table disaggregates net revenue by major source:
| | For the 3 Months Ended September 30, 2018 | | For the 3 Months Ended September 30, 2017 | |
| For the 3 Months Ended March 31, 2018 | | For the 3 Months Ended March 31, 2017 | | Capstone Brand | | License Brands | | Total Consolidated | | Capstone Brand | | License Brands | | Total Consolidated | |
| Capstone Brand | | License Brands | | Total Consolidated | | Capstone Brand | | License Brands | | Total Consolidated | | | | | | | | | | | | | |
Lighting Products- U.S. | | $ | 148,301 | | | $ | 3,594,781 | | | $ | 3,743,082 | | | $ | 716,995 | | | $ | 5,460,918 | | | $ | 6,177,913 | | | $ | 2,697,694 | | | $ | 2,939,613 | | | $ | 5,637,307 | | | $ | 562,606 | | | $ | 13,038,136 | | | $ | 13,600,742 | |
Lighting Products-International | | | 165,894 | | | | 151,192 | | | | 317,086 | | | | 574,283 | | | | - | | | | 574,283 | | | | 65,009 | | | | 23,829 | | | | 88,838 | | | | 217,167 | | | | - | | | | 217,167 | |
Total Revenue | | $ | 314,195 | | | $ | 3,745,973 | | | $ | 4,060,168 | | | $ | 1,291,278 | | | $ | 5,460,918 | | | $ | 6,752,196 | | | $ | 2,762,703 | | | $ | 2,963,442 | | | $ | 5,726,145 | | | $ | 779,773 | | | $ | 13,038,136 | | | $ | 13,817,909 | |
| For the 9 Months Ended September 30, 2018 | | For the 9 Months Ended September 30, 2017 | |
| Capstone Brand | | License Brands | | Total Consolidated | | Capstone Brand | | License Brands | | Total Consolidated | |
| | | | | | | | | | | | |
Lighting Products- U.S. | | $ | 4,539,476 | | | $ | 6,798,866 | | | $ | 11,338,342 | | | $ | 3,855,504 | | | $ | 25,624,349 | | | $ | 29,479,853 | |
Lighting Products-International | | | 261,983 | | | | 289,195 | | | | 551,178 | | | | 1,309,800 | | | | - | | | | 1,309,800 | |
Total Revenue | | $ | 4,801,459 | | | $ | 7,088,061 | | | $ | 11,889,520 | | | $ | 5,165,304 | | | $ | 25,624,349 | | | $ | 30,789,653 | |
We provide our customers with limited rights of return for non-conforming product warranty claims. As a policy, the Company does not accept product returns from customers, however occasionally as part of a customer's in store test for new product, we may receive back residual inventory.
Customer orders received are not long-term orders and are typically shipped within six months of the order receipt, but certainly within a one-year period.
Our payment terms may vary by the type of customer, the customer's credit standing, the location where the product will be picked up from and for international customers, which country their corporate office is located. The term between invoicing date and when payment is due may vary between 30 days and 90 days depending on the customer type. In order to ensure there are no payment issues, overseas customers or new customers may be required to provide a deposit or full payment before the order is delivered to the customer.
The Company selectively supports retailer's initiatives to maximize sales of the Company's products on the retail floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to the customer. The Company recognizes these incentives at the time they are offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to cost of sales, or marketing expenses depending on the type of sales incentives.
Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period the related revenue is recorded.
During the threenine months ended March 31,September 30, 2018 and 2017, Capstone determined that $1,749 and $47,741, respectively of previously accrued allowances were no longer required.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 /warrantydefective/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-
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
conformingnonconforming returns based upon an analysis of historical product warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.
The following table summarizes the changes in the Company's product warranty liabilities which are included in accounts payable and accrued liabilities in the accompanying March 31,September 30, 2018 and December 31, 2017 consolidated balance sheets:
| | March 31, | | | December 31, | |
| | 2018 | | | 2017 | |
Balance at the beginning of the period | | $ | 328,279 | | | $ | 294,122 | |
Amount accrued | | | 11,977 | | | | 940,291 | |
Amount expensed | | | - | | | | (906,134 | ) |
Balance at period-end | | $ | 340,256 | | | $ | 328,279 | |
| | September 30, | | | December 31, | |
| | 2018 | | | 2017 | |
Balance at the beginning of the period | | $ | 328,279 | | | $ | 294,122 | |
Amount accrued | | | 64,060 | | | | 940,291 | |
Expenditures | | | (182,156 | ) | | | (906,134 | ) |
Balance at period-end | | $ | 210,183 | | | $ | 328,279 | |
Advertising and Promotion
Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing expenses. Advertising and promotion expense was $4,918$0 and $20,663$67,497 for the three months and $77,650 and $180,743 for the nine months ended March 31,September 30, 2018 and 2017, respectively.
Product Development
Our research and development team located in Hong Kong working with our designated factories, are responsible for the design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets
ForProduct development expenses were $95,661 and $80,991 for the three months and $385,994 and $219,464 for the nine months ended March 31,September 30, 2018 and 2017, product and development expenses were $166,566 and $72,025 respectively.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $26,353$14,680 and $16,919$48,952 for the three months and $48,538 and $95,290 for the nine months ended March 31,September 30, 2018 and 2017, respectively.
Accounts Payable and Accrued Liabilities
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 for potential warranty claims and various other expenses. As of March 31,September 30, 2018, and December 31, 2017, the Company has $500,090$437,915 and $600,622, respectively, in accrued liabilities.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table summarizes the components of accounts payable and accrued liabilities at March 31,as of September 30, 2018 and December 31, 2017, respectively:
| | March 31, | | | December 31, | | | September30, | | | December 31, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Accounts payable | | $ | 1,389,747 | | | $ | 2,132,894 | | | $ | 1,363,333 | | | $ | 2,132,894 | |
| | | | | | | | | |
Accrued warranty reserve | | | 340,256 | | | | 328,279 | | | | 210,183 | | | | 328,279 | |
Accrued compensation, benefits, commissions and other expenses | | | 159,834 | | | | 272,343 | | | | 227,732 | | | | 272,343 | |
Total accrued liabilities | | | 500,090 | | | | 600,622 | | | | 437,915 | | | | 600,622 | |
Total | | $ | 1,889,837 | | | $ | 2,733,516 | | | $ | 1,801,248 | | | $ | 2,733,516 | |
Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 740 Income Taxes. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries file consolidated income tax returns.
On December 22, 2017, President Trump signed into law the legislation generally known as Tax Cut and Jobs Act of 2017. The tax law includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward and a deemed repatriation transition tax. Refer to Note 6 for additional information on income taxes.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company's consolidated statements of income.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.
In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.
The Company accounts for forfeitures as they occur.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Recent Accounting Standards
To be Adopted in a Future Period
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on effective interest rate method or a straight-line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 will be effective for the Company's fiscal year beginning after December 15, 2018 and subsequent interim periods. The Company is currently evaluating the impact of the adoption of ASU 2016-02 will have on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. ASU 2017-04 will be effective for the Company's fiscal year beginning after December 15, 2019, and subsequent interim periods. The Company is currently evaluating the impact of the adoption of ASU 2017-04 will have on the Company's consolidated financial statements.
Adoption of New Accounting Standards
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, which provided guidance for revenue recognition. The standard's core principle was that a company would recognize revenue when it transferred promised goods or services to customers in an amount that reflected the consideration to which the company expected to be entitled in exchange for those goods or services. In doing so, companies needed to use more judgment and make more estimates than under previous guidance. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 for all entities by one year. Accordingly, public business entities applied the guidance in ASU 2014-09 to annual reporting periods (including interim periods within those periods) beginning after December 15, 2017.