CAPSTONE COMPANIES, INC. - Annual Report: 2016 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

or

[_] 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

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

350 Jim Moran Boulevard, Suite 120

(Address of principal executive offices) (Zip Code)

(Small business issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes _ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes __ No x

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 preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes x 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

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

Large accelerated filer __   Accelerated filer ___   Non-accelerated filer ___   Smaller reporting Company [X]

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity as of March 21, 2017, was approximately $20,215,719.

Number of shares outstanding of the Registrant's Common Stock as of March 21, 2017, is 48,132,664.

DOCUMENTS INCORPORATED BY REFERENCE

None

TABLE OF CONTENTS

DEFINITIONS:

As used in this Annual Report on Form 10-K, the following terms have the stated meaning or 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 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". Unless the context indicates otherwise, "Company" includes in its meaning all of Capstone Companies, Inc.  Subsidiaries.

(5)	"China" means Peoples' Republic of China.

(6)	"W" means 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 Capstone Industries, Inc. (CAPI), Capstone International H.K Ltd., (CIHK), and Capstone Lighting Technologies, Inc. (CLTL).

(11)	Any reference to fiscal year in this Annual Report on Form 10-K means our fiscal year, ending December 31st.

(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.

We may use "FY" to mean "fiscal year" and "Q" to mean fiscal quarter in this Report.  Further, "OEM" means "original equipment manufacturer."

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K ("Report") contains "forward-looking statements" as defined under the Private Securities Litigation Reform Act 1995, as amended.  Those statements appear in a number of places in this Report and include, without limitation, statements regarding the intent, belief and current expectations of the Company, its directors or its officers with respect to: Company's future business and financial prospects; the Company's policies regarding investments, dispositions, financings, conflicts of interest and other matters; and trends affecting the Company's financial condition or results of operations.  Forward looking statements include words like "expect," "anticipate," "hope," "project," "may," "should," "could," or similar words or variants thereof.  Any such forward-looking statement is not a guarantee of future performance and involves several risks and uncertainties, and actual results may differ materially from those results implied in the forward-looking statement as a result of various factors, some factors being beyond the Company's control or ability to foresee.  The accompanying information contained in this Report, including the "Management's Discussion and Analysis of Results of Operations and Financial Condition," identifies important factors that could cause such differences.  With respect to any such forward-looking statement that includes a statement of its underlying assumptions or bases, the Company cautions that, while it believes such assumptions or bases to be reasonable and has formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be significant or "material" depending on the circumstances.  When, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished.  Further, the Company is a "penny stock" company with no primary market makers.  Such a status makes highly risky any investment in the Company securities.  The forward-looking statements in this Report are made as of the date hereof, and, unless required by law or regulation, we do not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof.

PART I

Item 1.  Business

Capstone Companies, Inc. is a public holding company organized under the laws of the State of Florida.  The Company designs and markets consumer oriented LED lighting products for distribution globally with a primary focus on the North American markets.  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 its product development, engineering and factory resource capabilities in Hong Kong. Capstone's LED lighting portfolio consists of stylish, innovative and easy to use consumer LED lighting products, 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 and outdoor LED fixtures.  The Company's products are sold under CAPI brand name, Capstone Lighting® as well as under a nationally recognized licensed brand named Hoover^® Home LED. The Company believes that LED is becoming increasingly more mainstream, and, as such, the Company believes that the component and production costs will continue to lower, which should allow a smaller innovative company like ourselves to capitalize on non-commodity products utilizing LED.  The Company's focus is the integration of LED into most commonly used lighting products in today's home. Capstone is positioned well to participate in these expanded product categories which will 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 supports the Company's growth.  The Company's direct import business model requires shipments 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 highest quality products.  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.

Business Strategy

The global LED lighting market is undergoing a perceived significant transition driven by rapid adoption of energy efficient LED lighting products.  LED lighting products offer numerous advantages for the user which are driving demand (improved light quality, durability, longer life, cooler temperatures, lower cost of operation). These advantages in addition to increased regulatory requirements banning inefficient lights   have accelerated 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, September 2014 the global LED market is forecasted to grow to $42 billion by 2020.

The Company entered the LED consumer market eight years ago. At that time, it was clear to management that there was a significant opportunity for an innovative low cost LED product supplier as the lighting industry was on its transition path from traditional lighting technologies to LED.

Capstone was an early integrator in the introduction of lower cost LED lighting solutions that have distinctive aspects to create greater appeal to consumers.  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.

As the Company initially entered the market with products branded Capstone Lighting^Ò, the Company was able to stay under the radar and avoid direct competition with the larger brands that were focused on light bulbs and commercial lighting.  The strategy was to establish the Company's products in the marketplace, building on retail success and user satisfaction.

Commencing in 2014, Capstone explored and researched branding opportunities that would allow the Company to differentiate from its own Capstone Lighting^Ò 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, Hoover^Ò Home LED became a Capstone success story.  The Company secured the North America trademark license for the Hoover^® brand for LED lighting products.  The Hoover^Ò name is a 100-year-old household iconic brand name. Hoover^® is a registered trademark of Techtronic Floor Care Technology Limited.

Moreover, in 2014 Capstone also acquired 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 August of 2016.  The CPC was developed over a two-year period by a group of MIT PhD Engineers operating as AC Kinetics. This technology can potentially be incorporated into a host of products.

In the latter part of 2014, the Company concluded that conventional retail was going to undergo significant change in 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 confusing 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 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.

Over the course of the next three years, Capstone believes that it has effectively positioned itself in this channel and posted successive revenue growth while delivering strong gross margins.  The Company is currently expanding its distribution into international home improvement centers that accept Capstone's direct import model.  The Company is distributing Capstone Lighting, Hoover^® Home LED and will offer private label programming to international accounts where the Company's brands are less relevant.

Capstone's 2013 investment in AC Kinetic Technologies, an Armonk, New York technology development company, allowed the Company to develop certain innovative concepts that the Company conceived and that are complex and has yielded intellectual property that we believe will further distinguish the Company's products from other off-the-shelf products commonly marketed at the retail level.  The Company will exploit the patented technologies developed and completed by AC Kinetic Technologies within the Company's own products, both labeled under "Capstone" and under the Hoover^® Home LED brand.

Perceived or Essential Strengths.

Capstone's core executive team has been working together for over three decades 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 extensive experience in hardline product manufacturing and marketing prepared the Company for its entry into the LED market.

From a market perspective, Capstone's branding strategy is focused on establishing multiple trusted brands allowing for a broader reach into various channels.  Capstone Lighting® (2008), Hoover^® Home LED (2015) contribute to expanding the Company's retail position.  All two brands are currently available in the marketplace.

The Company's 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 consumer product companies; and

·	Wherever feasible, the products must be unique to the market whether this be accomplished though design techniques, added functionality or some proprietary innovation.

With respect to the Company's goal of sustained profitability, the challenge has been and remains to achieve greater profit margins from our product lines by either innovative 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.

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

The Company has expanded CIHK's operations in Hong Kong, 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 anticipation of   possible Company growth, we have continued our investment in CIHK in an effort to ensure overseas factory performance meets stringent operational tolerances to maintain our competitiveness and operational excellence.

Products and Customers

The Company has expanded its product positioning through the introduction of more indoor and new outdoor lighting programs both under the "Capstone Lighting®" brand and the Hoover^® Home LED brand and other brands as acquired.  Capstone has also expanded hardwired solid state products to its programs in addition to the existing battery and induction powered product lines, through the expansion of bath vanity fixtures and outdoor LED Gooseneck Lanterns.  Such expansion involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits.

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, The Container Store and Wal-Mart. These distribution channels may sell the Company's products through the Internet as well as through retail storefronts and catalogs/mail order.  The Company believes it has developed the scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche product opportunities in our largest consumer markets and growing international market.  While Capstone has traditionally generated the majority of its sales in the domestic 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 expanded its international sales by leveraging relationships with our existing global retailers and by strengthening our international product offerings.  CIHK assists the Company in placing more products into foreign market channels as well.  The Company introduced Capstone brands to markets outside the U.S., including Australia, France, Iceland, Japan, Mexico, New Zealand, South Korea, Spain, Taiwan, Thailand and the United Kingdom.  This continues to be a promising distribution channel with international sales for the year ended December 31, 2016, increasing 100% up to $2.4 million from $1.2 million the same period in 2015 and representing 8% of net revenue in 2016 and 92 % of net revenue originating in the United States.

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

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 broad and 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, 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 serve retailers with a broad 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.

Sales and Marketing

The Company's products are marketed primarily 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.  The Company actively promotes its products to retailers and distributors at North American trade shows, but 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.

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

Capstone depends 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 at https://www.facebook.com/powerfailuresolutions/ and our sales staff may use Social Media from time to time to promote our products and brands.  We have not developed a specific Social Media campaign based on third party sponsors or promoters.  Facebook is a registered trademark of Facebook, Inc.

Competitive 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 is highly recognized in several product categories.  Capstone believes that the specialized nature of its existing niche categories, and 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® and Hoover^® Home LED have both proven successful in meeting expectations at the point of sale.

Capstone's core executive team has been working together for over three decades and has successfully built and managed other consumer product companies.  Operating Management's experience in hardline product manufacturing and marketing prepared the Company for its entry into the LED market.

Working Capital Requirements

In order to more effectively support retailers in the U.S. domestic markets, so that retailers can quickly replenish their stock and reduce the impact 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, 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.

Continued revenue growth and expanded product launches are critical requirements to ensure the Company's continued growth.  Such projects are never held back 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.

The Company's liquidity and cash requirements are discussed more fully in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, below.

Competitive Conditions

The consumer LED products and small electronics businesses are highly competitive and rapidly evolving markets, both in the United States and on a global basis, as large manufacturers with global operations compete for consumer acceptance and, increasingly, limited retail shelf space.  Competition is influenced by brand perceptions, product performance and value perception, customer service and price.  The Company's principal lighting competitors in the U.S. are Amertac, Energizer, and Feit Electric.  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 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 or more of the Company's competitors were to merge, the change in the competitive landscape could adversely affect our customer distribution channel.

With trends and technology continually changing, 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.    Our ability to invest is limited by operational cash flow and funding from third parties, including members of management and the Board of Directors.

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.  Their focus is to introduce product with technology, increasing functionality, enhanced quality, efficient manufacturing processes and cost reductions.  CIHK also establishes strict engineering specifications and product testing protocols for the Company's contract manufacturers' factories and ensure the factories adhere to all Chinese Labor and Social Compliance Laws.  Under the current political regime in China, sudden and unexpected changes in such laws are possible and could impact the Company's business or financial performance by increasing the cost or ease of conducting business.

Capstone's research and development team ensures its proprietary manufacturing expertise by maintaining control over all outsourced production and critical production molds.  In order to ensure the quality and consistency of the Company's products manufactured in China, 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 employs 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 and mainland China.

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.  These costs are expensed when incurred and are included in the operating expenses.

Raw Materials

The principal raw materials used by Capstone are sourced in 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 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 manufacturers internal quality control procedures and performed by Company staff.

·	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.

·	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. 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 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.

Distribution and Fulfillment

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

Seasonality

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

Based on 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.

Intellectual Property

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

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

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

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

·	hurricanes, fire, flood and other natural disasters;

·	power outages

·	internet, telecommunications or data network failure.

Employees

As of December 31, 2016, we employed 7 employees in our U.S. office and 7 employees in our Hong Kong operation.  We consider our relations with our employees to be good with none of our employees being subject to collective bargaining agreements.  We have no part-time workers.

The following table sets forth the number of employees by function:

Prior History

We were incorporated on September 18, 1986 as a Delaware corporation. Our initial public offering under the Securities Act was conducted in 1987.   We started as a blank check company.  From 1986 until the 2006 acquisition of CAPI, we experienced several changes in management, corporate name, and primary business lines, as well as reincorporation from Delaware to Colorado and then from Colorado to Florida in 2004.  We have had a stable management and business line since the acquisition of CAPI in 2006.

Acquisition of CAPI:  on September 15, 2006, we entered into a Stock Purchase Agreement with CAPI and Stewart Wallach, the sole shareholder, a director and a senior executive officer of CAPI.  Under the Stock Purchase Agreement, we acquired 100% of the issued and outstanding shares of CAPI Common Stock in exchange for $750,000 in cash (funded by the previously reported credit line provided by certain directors of CAPC) and $1.25 million in Series B Preferred Stock, $0.01 par value per share, which Series B Preferred Stock is convertible into 1,041,667 "restricted" shares of our Common Stock, $0.0001 par value.   On July 9, 2009, the outstanding Series B Preferred Shares were converted to Series B-1 Preferred Shares.  The Series B-1 shares are convertible into Common Stock; at a rate of 4.444 of common shares for each share of Series B-1. On December 17, 2009, the outstanding Series B-1 shares were converted into common stock.

Available Information

We file our financial information and other materials electronically with the SEC.  These materials can be accessed electronically via the Internet at www.sec.gov.  Such materials and other information about the Company are also available through our website at www.capstonecompaniesinc.com.

Government Regulation

CAPC's operations are subject to regulation by federal and state securities authorities as well as various federal, state, foreign and local laws and regulations governing a consumer products company and a for-profit business.  We are not subject to any U.S. federal, state or local regulation that poses, in our opinion, any special or unusual burden or obstacle to conducting our business and financial affairs.  Our main concern in terms of government regulation is the changing regulatory environment in China and its impact on our ability to access our consumer product manufacturing sources and obtain our consumer products.  While the general trend in China has to be conducive to trade and commerce, China is a still a single-party nation-state in which the central government has the power to dramatically and immediately change its trade and commercial policies and laws.  Political or military conflict between the United States and China, who are rivals for power and influence in Asia and to an increasing extent all along the Pacific Rim as well as being diametrically opposed to one another over the status of Taiwan, could provoke a change in Chinese trade or commercial law that makes it more difficult or expensive for us to obtain consumer products.  Such a development would have a serious impact on our ability to compete in the United States in the niche consumer product market.

Financing

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

As of December 31, 2016, and December 31, 2015, the balance due to Sterling National Bank was $0 and $2,275,534, respectively.

As of December 31, 2016, the maximum amount that can be borrowed on this credit line is $7,000,000.

Item 1A.  Risk Factors.

In addition to other information contained in this Report, the following risk factors should be carefully considered in evaluating our business, because such factors may have a significant impact on our business, operating results, liquidity and financial condition.  As a result of the risk factors set forth below, actual results could differ materially from those mentioned in any forward-looking statements.  Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business, operating results, liquidity and financial condition.  If any of the following risks occur, our business, operating results, liquidity and financial condition, and the price of our common stock, could be materially adversely affected.  As a "penny stock," 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.

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled "Special Note Regarding Forward-Looking Statements" above for a discussion of what types of statements are forward looking statement.

CAPC's inadequate or expensive funding and financing alternatives.

CAPC's current short term debt level as of December 31, 2016, was $1,321,721 as compared to $4,339,568 as of December 31, 2015.  Our current debt structure consists of private placement note agreements from insiders and the Sterling National Bank financing agreement to fund investment, operations, and debt service. Declines in our operating cash flows or earnings performance, foreign currency movements, or other unanticipated events, could negatively impact our ability to reduce outstanding debt as planned. If we have a shortfall in revenues without a corresponding reduction to expenses, operating results may suffer.  We rely on and we may be unable to raise adequate funding or financing to survive unexpected revenue shortfalls, or to reduce operating expenses quickly enough to offset any such unexpected revenue shortfall from our lack of traditional bank financing.  If we are not able to access debt capital markets at competitive rates or terms and conditions, our ability to implement our business plan and strategy will be negatively affected.  Limited access to sufficient bank financing, could force us to seek expensive financing or funding, or forms of financing that require issuance of our securities (such as equity credit lines or PIPE financing).  Such financing would dilute the position of existing shareholders and put negative pressure on the market price of our Common Stock while possibly failing to provide adequate and ongoing working capital for the Company and its operations.

Other adverse consequences could include:

·	a significant portion of CAPC's cash from operations could be dedicated to the payment of interest and principal on our debt, which could reduce the funds available for operations;

·	the level of our debt could leave CAPC vulnerable in a period of significant economic downturn; and

·	CAPC may not be financially able to withstand significant and sustained competitive pressures.

If CAPC cannot continue to develop new products in a timely manner, and at favorable margins, it may not be able to compete effectively.

The power failure and portable lighting products industries have been notable for the pace of innovations in product life, product design and applied technology.  CAPC and our competitors have made, and continue to make, investments in research and development with the goal of further innovation.  The successful development and introduction of new products and line extensions face the uncertainty of retail and consumer acceptance and reaction from competitors, as well as the possibility of cannibalization of sales of our existing products.  In addition, our ability to create new products and line extensions and to sustain existing products is affected by whether we can:

·	develop and fund research and technological innovations;

·	receive and maintain necessary intellectual property protections;

·	obtain governmental approvals and registrations;

·	comply with governmental regulations, and

·	anticipate consumer needs and preferences successfully.

The failure to develop and launch successful new products could hinder the growth of our businesses and any delay in the development or launch of a new product could also compromise our competitive position.  If competitors introduce new or enhanced products that significantly outperform CAPC's products, or if they develop or apply manufacturing technology which permits them to manufacture at a significantly lower cost relative to ours, we may be unable to compete successfully in the market segments affected by these changes.

Competition in CAPC's industries may hinder our ability to execute our business strategy, achieve profitability, or maintain relationships with existing customers.

The industries, in which CAPC operates, including LED lighting products and power failure lighting, are highly competitive, both in the United States and on a global basis, as a limited number of large manufacturers often compete for consumer acceptance and limited retail shelf space.

As product placement, facings and shelf-space are at the sole discretion of our retailer customers, and often impacted by competitive activity, the visibility and availability of our full portfolio of products can be limited.  Our retailer customers have increasingly sought to obtain pricing concessions or better trade terms, and because of the highly competitive environment in which we operate as well as increasing retailer concentration, their efforts can be successful, resulting in either reduction of our margins, or our relative disadvantage to lower cost competitors.  Competitors may also be able to obtain exclusive distribution at particular retailers, or favorable in-store placement, resulting in a negative impact on our sales.

Loss of any of our principal customers could significantly decrease our sales and profitability.

The Company supplies product to the most recognized big box retailers across America and the highest concentration of its business in 2016 was in the flourishing warehouse club channel.  The Company's sales are made pursuant to purchase orders and we do not have supply agreements or guarantees of minimum purchases from them.  As a result, these customers may cancel their purchase orders or reschedule or decrease their level of purchases from us at any time.  Any loss or substantial decrease in the volume of purchases by any of the Company's top customers would harm the Company's sales and profitability.

Changes in foreign, cultural, political, and financial market conditions could impair CAPC's international manufacturing operations and financial performance.

CAPC's manufacturing is currently conducted in China. Consequently, CAPC is subject to a number of significant risks associated with manufacturing in China, including:

·	the possibility of expropriation, confiscatory taxation, or price controls;

·	adverse changes in local investment or exchange control regulations;

·	political or economic instability, government nationalization of business or industries, government corruption, and civil unrest;

·	legal and regulatory constraints;

·	tariffs and other trade barriers; and

·	difficulty in enforcing contractual and intellectual property rights.

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

All of CAPC's sales in 2016 were transacted in U.S. dollars.  The weakening of the U.S. dollar relative to foreign currencies can negatively impact our operating profits, through higher unit costs.  However, as the Company volumes continue to increase, the leveraged buying power has enabled the Company to minimize the impact on costs.  In recent months, the U.S. dollar has appreciated against the Chinese currency.  The recent economic crises revealed that exchange rates can be highly volatile.  Changes in currency exchange rates may also affect the relative prices at which CAPC and our competitors sell products in the same market.  There can be no assurance that the U.S. dollar foreign exchange rates will be stable in the future or that fluctuations in such rates will not have a material adverse effect on our business, results of operations, or financial condition.

If CAPC fails to adequately protect its intellectual property rights, competitors may manufacture and market similar products, which could adversely affect our market share and results of operations.

CAPC relies on trademark, trade secret, patent and copyright laws to protect our intellectual property rights.  In particular, our trademarks are of material importance to our business and are among our most important assets. In 2016, substantially all of our total revenues were from products bearing proprietary trademarks and brand names.  Accordingly, our future success may depend, in part, upon the goodwill associated with our trademarks and brand names.  In addition, CAPC owns a number of patents; patent applications and other technology which CAPC believes are significant to our business.

We cannot be sure that these intellectual property rights will be maximized or that they can be successfully asserted.  There is a risk that CAPC will not be able to obtain and perfect, or maintain our own intellectual property rights or, where appropriate, license intellectual property rights necessary to support new product introductions.  We cannot be certain that these rights, if obtained, will not be invalidated, circumvented or challenged in the future, and CAPC could incur significant costs in connection with legal actions to defend our intellectual property rights.

In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which CAPC's products are or may be sold do not protect intellectual property rights to the same extent as the laws of the United States.  If other parties infringe our intellectual property rights, they may dilute the value of our brands in the marketplace, which could diminish the value that consumers associate with our brands and harm our sales.  The failure to perfect or successfully assert our intellectual property rights could make CAPC less competitive and could have a material adverse effect on our business, operating results, and financial condition.

Our Common Stock

The market price of our Common Stock could be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including:

·	our lack of primary market makers for our Common Stock – we have market makers but none are primary market makers who maintain an inventory of our Common Stock and actively support the Common Stock;

·	general worldwide economic conditions;

·	the lack of research analysts or news media coverage of CAPC or our Common Stock;

·	additions or departures of key personnel;

·	sales of our Common Stock by the Company or insiders;

·	our status as a "penny stock" Company;

·	our ability to execute our business plan;

·	operating results being below expectations;

·	loss of any strategic relationships;

·	industry or product developments;

·	sale of a substantial number of shares may cause the price of our Common Stock to decline;

·	economic and other external factors; and

·	period-to-period fluctuations and the uncertainty in our financial results.

We have not paid and we do not intend to pay dividends on our Common Stock in the foreseeable future.  We currently intend to retain all future earnings, if any, to finance our current and proposed business activities. We may also incur indebtedness in the future that may further prohibit or effectively restrict the payment of cash dividends on our Common Stock.

Item 1B.  Unresolved SEC Staff Letters.

None for the year ended December 31, 2016.

Item 2.  Properties.

Neither the Company nor its operating subsidiaries own any real properties or facilities.  CAPC and Capstone share principal executive offices and operating facilities. 

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

Capstone entered into a new lease agreement for the same office space as currently located. The lease agreement dated January 17, 2014, and effective February 1, 2014, had a 3-year term with a base annual rent of $87,678 paid in equal monthly installments. The Company has the one-time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term. On October 18, 2016, the Company confirmed that it will be exercising the three (3) years renewal option of the lease. Under the lease agreement, Capstone is responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.

CIHK entered into a two-year lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong.  The agreement was for the period from February 17, 2014, to February 16, 2016.  This lease has a base annual rent of $48,000 (HK$ 372,000) paid in equal monthly installments. This lease was extended for a further three (3) months until May 16, 2016. The lease has been further renewed for another (12) months ending May 16, 2017 with a base annual rate of $48,775 paid in equal monthly installments. 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. The monthly rent is $1,290 with total rent for the period costing $7,742.

The future lease obligation under these agreements are as follows:

Rent expense amounted to $144,181 and $140,647 for the years ended December 31, 2016 and 2015, respectively

Item 3.  Legal Proceedings.

We are not a party to any material pending 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 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 our financial position, results of operations or cash flows.

Other Legal Matters

To the best of our knowledge, none of our directors, officers or owner 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 4.  Mine Safety Disclosures (Not Applicable).

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

The Company's Common Stock is quoted on The OTC Markets Group, Inc.'s QB Tier under the trading symbol "CAPC".  The Company's Common Stock commenced quotation on the QB Tier on August 22, 2016.  Prior to August 22, 2016, the Common Stock was quoted on The OTC Markets Group, Inc. Pink Tier under the "CAPC" trading symbol.

On May 24, 2016, the Company's Board and stockholders holding a majority of stockholder's votes approved a reverse split of common stock at a ratio of 15 old for 1 new. The Company effectuated the reverse split on Monday July 25, 2016 and the Company's shares of common stock began trading on a post reverse split basis on July 25, 2016. The par value of the Company's common stock and preferred stock was not adjusted as a result of the reverse split. All issued and outstanding common stock, options for common stock, warrants and per share amounts have been retroactively adjusted to reflect this reverse stock split for all periods presented.

As of December 31, 2016, there were approximately 1,230 holders of record (excluding OBO/Street Name accounts) of our Common Stock and 48,132,664 outstanding shares of the Common Stock.  We have not previously declared or paid any dividends on our Common Stock and do not anticipate declaring any dividends on our Common Stock in the foreseeable future.  The following table shows the high and low bid prices of the Common Stock as quoted on The OTC Markets Group, Inc. by quarter, during each of our last two fiscal years ended December 31, 2016 and 2015.  These quotes reflect inter-dealer prices, without retail markup, markdown, or commissions and may not represent actual transactions. 

The information below was obtained from information provided from The OTC Markets Group, Inc. for the respective periods.

Dividend Policy

We have not declared or paid any cash or other dividends on shares of our Common Stock in the last five years, and we presently have no intention of paying any cash dividends on shares of our Common Stock.  We do not currently anticipate, based on existing financial performance, to be declaring or paying dividends on any series of our preferred stock in the foreseeable future.  Our current policy is to retain earnings, if any, to finance the expansion and development of our business.  The future payment of dividends on shares of our Common Stock are at the sole discretion of our board of directors.

Recent Sales of Unregistered Securities

Except as set forth herein or reported in our Information Statement to be filed within 120 days after the end of our fiscal year ended December 31, 2016, we have no recent sales of unregistered securities that have not been previously reported in filings with the SEC.

Adoption of Stock Repurchase Plan

On August 23, 2016, the Company's Board of Directors authorized the Company to repurchase up to $750,000 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. Any repurchase will have the status of treasury shares. 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 maybe discontinued at any time at the Company's discretion and the continuance of the program will be reviewed by the Board of Directors prior to the end of December 31, 2016.

On December 21, 2016, the Company's Board of Directors approved an extension of the Company's stock repurchase plan through December 31, 2017, subject to an earlier termination at the discretion of the Company's Board of Directors.

Item 6.  Selected Financial Data. (Not Applicable)

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

This Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other parts of this Report contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, that involve risks and uncertainties.  Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact.  Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," and similar terms.  Forward-looking statements are not guarantees of future performance and CAPC's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in this Report under the heading "Risk Factors," which are incorporated herein by reference.  The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this Report.  All information presented herein is based on CAPC's fiscal year 2016 results.  Unless otherwise stated, references to particular years or quarters refer to the CAPC's fiscal years ended in December and the associated quarters of those fiscal years. CAPC assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Executive Overview

 

Capstone Companies, Inc. ("CAPC," "Capstone", "Company," "we" or "us") is a public holding company headquartered in the United States (organized under the laws of the State of Florida) and has its principal executive offices in Broward County, Florida and operating offices in Hong Kong.  The Company is a leading designer, and marketer of diverse LED lighting products which are distributed globally in leading (big box) retailers and home centers internationally including Australia, France, Iceland, Japan, Mexico, New Zealand, South Korea, Spain, Taiwan, Thailand, United Kingdom in addition to North America.

Capstone's core executive team has been working together for over three decades 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 experience in hardline product manufacturing and marketing prepared the Company for its entry into the LED market.  The Company entered the LED consumer market eight years ago, at that time it was clear there was a significant opportunity for an innovative low cost LED product supplier as the lighting industry was on its transition path from traditional lighting technologies to LED.

Capstone was early in the introduction of lower cost LED lighting solutions that have distinctive aspects to create greater appeal to consumers.  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.

As the Company initially entered the market with products branded Capstone Lighting^Ò, the Company was able to stay under the radar and avoid direct competition with the larger brands that were focused on light bulbs and commercial lighting.  The strategy to establish ourselves in the marketplace, building on retail success and user satisfaction.

Commencing in 2014, Capstone explored and researched branding opportunities that would allow the Company to differentiate from its own Capstone Lighting^Ò 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, Hoover^Ò Home LED became a Capstone success based on anticipated results.  The Company secured the North America trademark license for the Hoover^® brand for LED lighting products.  The Hoover^Ò name is a 100-year-old household icon and one of the most trusted brands in America.

Moreover, in 2014 Capstone also acquired 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 patents were issued August of 2016.  The CPC was developed over a two-year period by a group of MIT PhD Engineers operating as AC Kinetics.

Over the course of the next three years, Capstone positioned itself in retail channels and posted successive revenue growth while delivering strong gross margins.  The Company is currently expanding its distribution into international home improvement centers that accept Capstone's direct import model.  The Company is distributing Capstone Lighting and Hoover^® Home LED products and the Company will offer private label programming to international accounts where the Company's brands are less relevant.

To date the Company maintains and supplies 5 core product categories: (1) Rechargeable Handheld Power Failure Lights and Night Lights; (2) Battery Powered Wireless Motion Sensor Lights; (3) Power Failure lights in several styles including handheld and wall fixtures; (4) Wireless Remote Control Accent Lights; and (5) Wireless Remote Control Outlets.

Within these categories, the Company follows a closely defined business strategy to develop and increase market leadership positions in these key product segments.  These product categories are prioritized based on their capacity to maximize the use of the Company's core competencies and to deliver sustainable long-term growth.

The Company's ongoing strategy is to develop and maintain positions of innovative and technical leadership in its chosen markets, and leverage those positions to grow the amount of volume of product sold to those markets. Historically, Capstone sought to find niche product opportunities that may have been overlooked or underexploited by competitors, and were open to new concepts by the buying community.  This approach sought to improve the odds for the Company to win a profitable niche of the market share. 

Consistently management focuses on a variety of key indicators to monitor business health and performance.  These indicators include market share, sales, organic sales growth, gross profit margin, operating profit, and net income, as well as measures used to optimize the management of working capital, capital expenditures, cash flow, and return on capital.  The monitoring of these indicators, and the Company's corporate governance policies help to maintain business health and strong internal controls.  To achieve its business and financial objectives, the Company focuses the organization on initiatives to drive and fund growth.  Capstone seeks to capture significant opportunities for growth by identifying and meeting consumer needs within its core product categories, through its focus on innovation and development of successful new products.  The investments needed to fund this growth are developed through continuous, Company-wide initiatives to lower costs and increase effective asset utilization through which the Company seeks to become even more effective and efficient throughout its businesses.

Looking forward, the Company expects global macroeconomic and market conditions to remain highly challenging for its consumer products.  While the global marketplace in which Capstone operates in has always been highly competitive, the Company has recently experienced heightened competitive activity in certain markets from other large multinational companies, some of which may have greater resources than the Company does.  Such activities have included more aggressive marketing and increased promotional spending.  While the Company has taken, and will continue to take, measures to address the heightened competitive activity, should these conditions persist, they could adversely affect the Company's future results.  The Company believes it is well prepared to meet the challenges ahead due to its, experience operating in challenging environments and continued focus on Capstone's strategic initiatives: effectiveness and efficiency; innovation; and leadership.  This focus, together with the perceived increasing strength of the Company's global brand recognition, should position the Company to provide shareholder value over the long-term.

Enhancement of shareholder value through a higher market price will require sustained fiscal quarters of profitability combined with greater market support for the Company's stock from market makers and long-term investors.  Capstone believes sustained profitability will be required for any such enhanced market support for our Common Stock.  Sustained profitability will require products that command higher profit margins and/or increased sales in existing or new markets without high or lower product development and marketing costs.

The Company operates in a highly competitive industry with aggressive pricing and frequent changes in technology or design.  Capstone may not have sufficient, affordable, or timely funding to respond to some significant changes in technology or design changes in our industry that attract significant consumer demand.  The failure to respond quickly to consumer demand or changes in consumer demand could prove detrimental to our current and future business and financial condition.

Capstone also operates in product lines which have moderate profit margins.  As such, the Company is very selective when planning new product launches in an effort to minimize too many instances of launching or producing products that do not have a perceived appeal to consumers to produce sufficient consumer demand or sales.

As is true for any consumer product company, Capstone's financial and business results could be suddenly and adversely affected by changes in consumer purchasing habits and tastes in any major market.  Further, technological changes can unexpectedly affect such consumer purchasing habits and tastes.  The Company seeks to develop and sell products that serve a basic consumer demand.

Principal Factors Affecting Our Financial Performance

The Company believes that the following factors will continue to affect its financial performance:

-

Economic Conditions in Primary Market of North America.  The Company's products are more of a discretionary than essential consumer purchase and economic conditions, especially consumer uncertainty or worries over economic conditions and growth, affect consumer demand for our products. Uncertainty over global economic conditions that may affect the U.S. economy is not conducive to consumer purchases of our category of consumer products.

-	Weather.  Uncertain or adverse weather conditions makes our products more appealing to or a higher priority for consumers.

-	Profit Margins.  The Company needs product profit margins that produce profitability on a sustained basis and concurrently control the cost of product development and marketing costs to sustain or grow market share.

-

Technology.   The Company needs to find new technologies or new functionality to differentiate its products from competitors' products, increase consumer demand for our products and foster consumer willingness to pay a higher product purchase price.  As is true for most consumer product companies, the Company faces the risk of a significant technological development or change undermining its product niche in its primary industry.

-	Affordable Funding.  The Company needs access to affordable funding to support new product development and new market penetration.  Future funding needs and the adequacy of our available funds will depend on many factors, including:

- The Company's ability to successfully commercialize and further develop its technologies and create innovative products in our markets;

- Need for new product design or technology enhancements;

- Competition in the primary markets; and

- Cash flow from operations and profit margins of products.

The Company does not maintain a litigation reserve for any legal challenge to its intellectual property rights.

CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

CONSOLIDATED OVERVIEW OF OPERATIONS

Net Revenues

In 2016 the Company continued to have a very strong revenue performance in the Accent Light Category in both Capstone Lighting and Hoover^ Home LED brands. For the year ended December 31, 2016, net revenue was $30.6 million, an increase of $14.7 million or 92.4% from $15.9 million in 2015.  This was achieved after the Company provided to retailers, $2.5 million for consumer rebate allowances in 2016 as compared to $.8 million in 2015.  In 2016, the Company also continued to expand international sales. For the years ended December 31, 2016 and 2015, international sales were approximately $2.4 million or 8% of total net revenue as compared to $1.2 million or 8 % of total net revenue in 2015. This represents an increase of $1.2 million or 100 % in international sales as compared to 2015.

Cost of Sales

For the years ended December 31, 2016 and 2015, cost of sales were approximately $23.2 million and $12.1 million, respectively, an increase of $11.1 million or 92.0% from the previous year. This cost represents 75.8% and 76.0% respectively of net revenues.

Despite rising labor costs in China, the combined impact of the lower cost of oil and the appreciation of the U.S. Dollar against the Chinese currency, has resulted in overall material and product costs remaining steady during the year.  This cost stability has also been accomplished through the local presence of our Hong Kong based sourcing team, through strategic and volume materials buying, and through negotiations with our factory-suppliers. The increased cost of sales in 2016, is the result of the increased sales volume.

Gross Profit

For the year ended December 31, 2016, gross profit was approximately $7.4 million, an increase of $3.6 million or 93.5% from the 2015 gross profit of $3.8 million.  Gross profit as a percentage of net sales was 24.2% for 2016 as compared to 24.0% for 2015.

Total Operating Expenses

For the year ended December 31, 2016, total operating expenses were $4.1 million in 2016 as compared to $2.8 million in 2015, an increase of $1.3 million or 44.9% compared to 2015.  Despite the expense increase, as a percent of net revenue total operating expenses were 13.2% as compared to 17.6% in 2015, which was a major factor in the improvement of operating income in 2016.

To support continued future revenue growth, during 2016, we continued to incur strategic and planned expenses in infrastructure, product development and in sales marketing.

Sales and Marketing Expenses

For the years ended December 31, 2016 and 2015, sales and marketing expenses were approximately $1.2 million and $0.3 million respectively, an increase of $0.9 million or 289.7%. During 2016, with the success of the Hoover^® License, royalty payments to TTI Floor Care for the Hoover^® License were $496 thousand, an increase of approximately $443 thousand from 2015 royalty payments.  Sales agent commission was $313 thousand an increase of $253 thousand from 2015 and we incurred $150 thousand in advertising and trade show expense, an increase of $49 thousand compared to $101 thousand in 2015. Domestic U.S. warehousing costs were approximately $96 thousand an increase of $54 thousand from $42 thousand in 2015, as we increased domestic inventory in our Anaheim, California warehouse to support specific retailer sales events so that out of stock stores could be quickly replenished with goods.

Compensation Expenses

For the year ended December 31, 2016, compensation expenses were approximately $1.4 million in 2016, an increase of $100 thousand or 7.6% from $1.3 million expensed in 2015. Expenses in 2016 increased as a result of salary increases in our Hong Kong operation and some yearend bonus payments in the U.S. office.

Professional Fees

For the year ended December 31, 2016, professional fees were approximately $ 365 thousand compared to $270 thousand in 2015, an increase of $95 thousand or 35.5%.   In 2016, consulting fees were approximately $46 thousand higher than 2015 as we engaged a consultant to support sales operations. Professional fees also increased by $49 thousand as compared to 2015, for additional investor relations services during 2016.

Product Development Expenses

For the year ended December 31, 2016, product development expenses were approximately $327 thousand as compared to $295 thousand, an increase of $32 thousand or 10.9% from 2015.  Expenses in 2016 increased as we expanded the number of new products being developed that will be released in 2017. We continued to invest in product design, electrical engineering, product prototyping, testing and regulatory certifications by outside third party testing laboratories.  The Company also incurred additional testing expense in having specific products certified for global markets.

Other General and Administrative Expenses

 For the years ended December 31, 2016 and 2015, other general and administration expenses were approximately $705 thousand and $588 thousand, respectively, an increase of $117 thousand or 19.9%.  With the higher sales volume during 2016, product liability insurance was approximately $96 thousand, an increase of $35 thousand or 57.4% from 2015.  The increased sales volume also resulted in an increase of Sterling Bank fees which were $169 thousand an increase of $89 thousand or 111.3% from $80 thousand in 2015.

Operating Income

For the year ended December 31, 2016 the operating income was approximately $3.3 million compared to $1.0 million in 2015. This is an improved performance of approximately $2.3 million or 226.3% over the same period 2015. Operating Margin was 10.9% of net revenue compared to 6.4% for the year ended December 31, 2015, an operating margin improvement of 4.5%.

Other Income (Expense)

For the year ending December 31, 2016 other expense was approximately $255 thousand a reduction of $62 thousand compared to $317 thousand expensed in 2015. In 2016 part of this expense reduction resulted from the Company earning approximately $27 thousand of interest income associated with an outstanding note receivable , however despite having substantial revenue growth, we have been able to curtail the need for increased borrowing and through a combination of efficient cash flow management and negotiating favorable payment terms with our overseas suppliers, the Company has substantially reduced the need for purchase order funding to complete order fulfilment, resulting in reduced interest expense for the year.

Provision for Income Tax

The effective tax rate was 9% in 2016 and 1% in 2015.

For the years ended December 31, 2016 and 2015, the provision for income tax was approximately $267 thousand and $7.5 thousand, respectively.

Net Income

For the years ended December 31, 2016 and 2015, net income was approximately $2.8 million and $ 0.7 million, respectively. The net income improvement as of December 31, 2016, of approximately $2.1 million or 303.4% compared to 2015, was the result of the significant increase in revenue in both Capstone Lighting and Hoover^® brands and supported with strong international sales. This improved net income was also achieved after the Company provided for $2.5 million of consumer rebate allowances in 2016 compared to $.8 million in 2015. Even though total operating expenses increased over 2015, as percent of net revenue, total expenses dropped from 17.6% of revenue in 2015 down to 13.2% in 2016. This 4.4% of expense reduction added approximately $1.4 million to net income in 2016.

RESULTS OF OPERATIONS AND OUTLOOK

Operating profit, as presented below, is sales less cost of sales and other operating expenses excluding interest expense, corporate expenses and other non-operating revenue and expenses.  Cost of sales and operating expenses are directly attributable to the respective segment. 

It is our intention to continue investing in capabilities and technologies that allow the Company to execute its strategy to increase sales and production volume in all markets that we serve.  The rate of spending on these activities, however, will continue to be driven by market opportunities.

With the continued retail interest in our current product offerings, expansion of international distribution channels, the expansion of the LED Home category products under the Hoover^® brand, the establishment of CIHK and the continued introduction of new products, the Company anticipates its sales volumes to continue to significantly grow in fiscal years 2017-2018.

Off Balance Sheet Arrangements

We do 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

The following table represents contractual obligations as of December 31, 2016:

Notes to Contractual Obligations Table

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

Short Term Debt — See Item 8, Financial Statements and Supplementary Data, Notes 4 and 5 in this report.

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

LIQUIDITY AND CAPITAL RESOURCES

Years ended December 31,

Our borrowing capacity with Sterling National Bank, favorable payment terms with vendors, funding support from certain Company Directors and cash flow from operations provide the Company with the financial resources needed to run operations and reinvest in our business.

Operating Activities

Cash provided by operating activities was approximately $4.2 million in 2016 compared with approximately $1.8 million used in operating activities in 2015.   Net income of approximately $2.8 million, combined with the effective collection of outstanding accounts receivables, substantially improved the Company's cash position, from $365 thousand at December 31, 2015 to $1.6 million at December 31, 2016.  We also negotiated improved payment terms with our main overseas manufacturer resulting in an increase of approximately $508 thousand of operating cashflow.  We increased inventory by approximately $161 thousand at December 31, 2016, in order to have additional inventories available to support a customer's special sales event in the first quarter 2017.

Our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers.  Sales are influenced significantly by the timing and launch of new products into the marketplace. With the establishment of our Hong Kong operation we have built an operational structure that, through relationships with factory-suppliers combined with our internal expertise, can develop and release quality products to market substantially quicker than we have been able to accomplish in previous years.

Investing Activities

Cash used for investing activities in 2016 was approximately $54 thousand compared to $88 thousand in 2015.  The Company has continued to invest in new product molds and tooling.  With the product expansion into new LED home lighting categories, the Company's future capital requirements may increase.  However, we believe that CIHK will be able to negotiate favorable payment terms with factories that may reduce the amounts of upfront cash we will need to have available when initiating a new project.  Management believes that our cash flow from operations and additional borrowing will provide for these necessary capital expenditures.

Financing Activities

Cash used in financing activities for the year ended December 31, 2016 was approximately $2.9 million compared to $2.0 million provided by financing activities 2015.  As of December 31, 2016, we were able to fully pay down the Sterling National Bank note payable from approximately $2.3 million outstanding at December 31, 2015.  The Company was also able to reduce related party notes by approximately $800 thousand from $2.1 million at December 31, 2015 to $1.3 million at December 31, 2016.

At December 31, 2016, the Company was in compliance with all of the covenants pursuant to existing credit facilities.  Management believes that our cash flow from operations, continued support from Sterling National Bank and support of our Directors will provide sufficient financial resources for the Company in 2017.

DIVIDENDS

We have not declared or paid any cash or other dividends on shares of our Common Stock in the last five years and we presently have no intention of paying any cash dividends on shares of our Common Stock.  We do not currently anticipate, based on existing financial performance, to be declaring or paying dividends on any series of our Preferred Stock in the foreseeable future.  Our current policy is to retain earnings, if any, to finance the expansion and development of our business.  The future payment of dividends on shares of our Common Stock will be at the sole discretion of our Board of Directors.

RELATED-PARTY TRANSACTIONS

See Note 5 of the Consolidated Financial Statements at Item 8 of this Report.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Consolidated Financial Statements at Item 8 of this Report.

CRITICAL ACCOUNTING POLICIES

Allowance for Doubtful Accounts

An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings.  The allowance for doubtful accounts is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the receivables.  This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.

Goodwill and Other Intangible Assets

Intangible assets acquired, either individually or with a group of other assets (but not those acquired in a business combination), are initially recognized and measured based on fair value.  Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired. An intangible asset (including goodwill) that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The impairment test consists of a comparison of the fair value of the intangible assets with its carrying amount.  If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.  Goodwill is not amortized. It is the Company's policy to test for impairment no less than annually, or when conditions occur that may indicate impairment.

Revenue Recognition

Product sales are recognized when an agreement of sale exists, product delivery has occurred, pricing is fixed or determinable, and collection is reasonably assured.

Allowances for sales returns, rebates and discounts are recorded as a component of net sales in the period the allowances are recognized.  In addition, accrued liabilities contained in the accompanying consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances which are based on historical authorized returns.

Accrued Liabilities

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.  These estimates could change significantly in the near term.

Income Taxes

The Company accounts for income taxes under the provisions of Financial Accounting Standards Board ("FASB") 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.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk. (Not Applicable)

Item 8.  Financial Statements and Supplementary Data.

The financial statements and financial statement schedules of CAPC as well as supplementary data are listed in Item 15 below and are included after the signature page to this Report.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

There are not and have not been any disagreements between the Company management and its Independent Registered Public Accounting Firm on any matter of accounting principles, practices, financial statements disclosure or auditing scope or procedure.

Item 9A.  Controls and Procedures.

Management's Evaluation of Disclosure Controls and Procedures. Our Chief Financial Officer, assisted by the Corporate Controller, are responsible for establishing and maintaining adequate internal disclosure control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

As of the date of this Report, Stewart Wallach is our Chief Executive Officer and James Gerald McClinton is our Chief Financial Officer and Chief Operating Officer.

Our Chief Financial Officer has reviewed the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) and internal control over financial reporting (as defined in Securities Exchange Act of 1934, as amended, Rules 13a-15(f) and 15d-15(f)) as of the year end of this Report and concluded that our internal disclosure controls and procedures are effective in providing reasonable assurances that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

Management's Annual Report on Internal Control over Financial Reporting.  No matter how well conceived and operated, an internal control system can provide only a certain level of confidence in the ability of the internal controls to identify errors.  In light of the inherent limitations in all internal control systems and procedures, and the limitations of the Company's resources, no evaluation of internal controls can provide absolute assurance that all defects or errors in the operation of our internal control systems will be immediately identified.  These inherent limitations include the realities that subjective judgments in decision-making in this area can be faulty and that a breakdown in internal processes can occur because of a simple, good faith error or mistake.  No design, can, in all instances, immediately accommodate changes in regulatory requirements or changes in the business and financial environment of a Company.  Such inherent limitations in a control system means that inadvertent misstatements due to error or fraud may occur and not be immediately or in a timely manner detected.  Nonetheless, we recognize our ongoing obligation to use our best efforts to design and apply internal controls and procedures that are as effective as possible in identifying errors or breakdowns in the internal controls system and procedures.  Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Jeffrey Guzy, the Chairman of our Audit Committee has also reviewed the internal control reports in detail and has spoken to the external auditors in depth about the audit, the internal controls and the auditors' findings. Mr. Guzy has had detailed discussions with the auditors about these matters, prior to, during, and on completion of the audit.

The framework for our evaluation of the adequacy of our internal disclosure controls and procedures comes from our use of CCH, Inc.'s 2007 SOX for Small, Publicly Held Companies and applicable accounting standards and guidelines as supplemented by guidance from outside legal and accountant advice.

We believe our internal disclosure controls and procedures are effective in providing reasonable assurances that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

This Report does not include an attestation report of CAPC's independent registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by CAPC's independent registered public accounting firm pursuant to rules of the Commission that permit CAPC to provide only management's report in this Report.

 

Item 9B.  Other Information.

 

 

Part III

Item 10.  Directors, Executive Officers and Corporate Governance.

CURRENT BOARD OF DIRECTORS

The background information on the Directors is set forth below under "Item 1. Proposal Two: Election of Directors."  Each Director's term is for one year. The incumbent and current members of the Board of Directors are:

1.	Stewart Wallach.  Mr. Wallach has been a Director since April 2007.

2.	Gerry McClinton.  Mr. McClinton has been a Director since February 2008.

3.	Jeffrey Postal.  Mr. Postal has been a Director since January 2004.

4.	Jeffrey Guzy.  Mr. Guzy was appointed as a Director on May 3, 2007.  Mr. Guzy is deemed an "Independent Director."

5.	Larry Sloven.  Mr. Sloven was appointed as a Director on May 3, 2007.

Company Directors have typically been elected in the past by written consent of stockholders holding more than 50% of the then current voting power.  The Company uses the written consent because a small number of shareholders have sufficient voting power to decide the election of Directors and approval or denial of any other corporate resolution and the cost of conducting an annual stockholders' meeting is significant for a small reporting company.  The Company conducts regular stockholder-investor conference calls to allow stockholders to interact with Company senior management and to ask questions of that management.

Further, stockholders may make inquiries in writing by sending their inquiries to Aimee Gaudet, Secretary, Capstone Companies, Inc., 350 Jim Moran Boulevard, Suite 120, Deerfield Beach, Florida 33442.  The information required in Part III of this Report is set forth in the information statement filed for the written consent approval of nominee slates of Directors and the requirements for stockholders to submit proposed resolutions and Director nominees is set forth in this Report.

POLICY REGARDING BOARD ATTENDANCE

Company Directors are expected to attend all annual and special board meetings per Company policy.  An attendance rate of less than 75% over any 12-month period is grounds for removal from the Board of Directors.  In fiscal year 2016, all Directors attended at least 75% of all (7) seven board meetings.

ROLE OF THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCE

The Board of Directors is responsible for overseeing the Chief Executive Officer and other senior management in order to assure that such officers are competent and ethical in running the Company on a day-to-day basis and to assure that the long-term interests of the stockholders are being served by such management.  The Directors must take a pro-active focus and approach to their obligation in order to set and enforce standards to ensure that the Company is committed to business success through maintenance of the highest standards of responsibility and ethics.

The Company has adopted a Code of Ethics, which is posted on http://capstonecompaniesinc.com.  The contents of the Company Website are not incorporated herein by reference and that Website provided in this Report is intended to be an inactive textual reference only.

AUDIT COMMITTEE

The Audit Committee was established in accordance with Section 3(a)(58) (A) of the Exchange Act. It is primarily responsible for overseeing the services performed by the Company's Independent Registered Public Accounting Firm, evaluating the Company's accounting policies and its system of internal controls and reviewing significant financial transactions.  The members of the Audit Committee in fiscal year 2016 were Jeffrey Guzy and Jeffrey Postal.  The Company believes that Mr. Guzy is an Independent Director under SEC and NASDAQ applicable standards.

The Board of Directors has determined that Mr. Guzy qualifies as an "Audit Committee Financial Expert" as defined under applicable SEC rules and also meets the additional criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.

REPORT OF THE AUDIT COMMITTEE

The material in this section is not deemed filed with the Commission and is not incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date of this Report and irrespective of any general incorporation language in those filings.

The Audit Committee is responsible for providing oversight to Company's accounting and financial reporting processes and the audit of the Company's financial statements.  The Audit Committee monitors the Company's external audit process, including auditor independence matters, the scope and fees related to audits, and the extent to which the Independent Registered Public Accounting Firm may be retained to perform non-audit services.  The Audit Committee also reviews the results of the external audit with regard to the adequacy and appropriateness of our financial, accounting and internal controls over financial reporting.  It also generally oversees the Company's internal compliance programs.  The function of the Audit Committee is not intended to duplicate or to certify the activities of the management and the Independent Registered Public Accounting Firm, nor can the Audit Committee certify that the independent registered public accounting firm is "independent" under applicable rules.  The Audit Committee members are not professional accountants or auditors. Under its Charter, the Audit Committee has authority to retain outside legal, accounting or other advisors as it deems necessary to carry out its duties and to require the Company to pay for such expenditures.

The Audit Committee provides counsel, advice and direction to management and the Independent Registered Public Accounting Firm on matters for which it is responsible, based on the information it receives from management and the independent registered public accounting firm and the experience of its members in business, financial and accounting matters.

The Company's management is responsible for the preparation and integrity of its financial statements, accounting and financial reporting principles, and internal controls and procedures designed to ensure compliance with accounting standards, applicable laws and regulations.

In this context, the Audit Committee hereby reports as follows:

(1)

Company's management has represented to the Audit Committee that the 2016 audited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.  The Audit Committee has reviewed and discussed the audited financial statements for year 2016 with Company's management and the independent registered public accounting firm.

(2)	The Audit Committee has received written disclosures and a letter from the Independent Registered Public Accounting Firm, Mayer Hoffman McCann P.C. required by the PCAOB and has discussed with Mayer Hoffman McCann P.C. their independence.

(3)

Based on the review and discussion referred to above, the Audit Committee recommended to the board, and the board has approved, that the audited financial statements be included in Company's Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Commission on March 27, 2017.

The foregoing report is provided by the undersigned members of the Audit Committee.

/s/Jeffrey Guzy

Jeffrey Guzy, Chairman

March 20, 2017

REPORT OF THE COMPENSATION AND NOMINATING COMMITTEE ("Compensation and Nomination Committee") OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION

The following report of the compensation and nominating committee of the Board of Directors shall not be deemed "soliciting material" or to be "filed" with the Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.

OBJECTIVES

The Compensation Committee is primarily responsible for reviewing the compensation arrangements for the Company's executive officers, including the Chief Executive Officer and Chairman of the Board, and for administering the Company's stock-based compensation plans. The Compensation Committee was established in January 2005.  The Compensation Committee held seven (7) meetings in fiscal year 2016.  Jeffrey Guzy and Jeff Postal were committee members for 2016.  The Company believes that Mr. Guzy is an Independent Director under applicable NASDAQ standards.  Mr. Postal is not deemed to meet those standards because he provides financial support to the Company and as such has many related party transactions.

On February 5, 2008, the Board of Directors changed the Compensation Committee to be the "Compensation and Nominating Committee" with the same membership as stated above.  The charter of the new committee is on the Company's web site. The Company is looking for independent directors to fill the Compensation and Nominating Committee and, until such candidates are found, Mr. Postal was asked to sit as a member of the Compensation and Nominating Committee.

It is the Company's objective to pursue compensation structures in the public stockholders' interests and the Company's business objectives, reward outstanding performance, be externally competitive and internally equitable, and attract and retain best available executive talent.  We seek to achieve this goal through a straightforward compensation package that relies on equity compensation and limits cash compensation and perquisites.

The Company seeks to foster a performance-oriented culture, where individual performance is aligned with organizational objectives. Company performance is the primary measure of success upon which we structure our compensation.

The Compensation and Nominating Committee evaluates and rewards our executive officers and directors based on their contribution to the achievement of short and longer-term goals. Individual and departmental performance is factored into salary increase decisions and stock option (long - term incentive) awards.

The purpose of our Compensation and Nomination Committee is to:

·	discharge the Board's responsibilities relating to compensation of our executive officers;

·	administer our stock option plans, stock purchase plans, restricted stock plans and any other equity incentive plans adopted; and

·	provide disinterested administration of any employee benefit plans in which our executive officers are eligible to participate.

The Compensation and Nominating Committee did not use outside consultants in fiscal year 2016.  It used compensation arrangements by other microcap companies to judge the appropriateness of the Company compensation arrangements.

The Company compensates people with:

Cash Compensation.  Cash compensation consists of base salary and annual bonus potential. Our cash compensation goals for our executive officers are based upon the following principles:  (1) compensation levels are comparable to industry levels as adjusted for experience and skills of individual officers; and (2) pay should retain key personnel.

Discretionary Bonus Program.  In addition to base salary compensation, the Company has a bonus plan covering the executive officers pursuant to which cash bonus payments and equity awards may be made.  Bonuses are calculated based upon actual achievement of pre-established goals.

Incentive Program.  The Company believes that performance is achieved through an ownership culture that encourages ongoing performance by the executive officers.  This is best achieved through the use of stock-based option awards. All employees are eligible to participate in our sole plan, the 2005 Equity Plan.  We also issue non-qualified stock options.  Our equity compensation goals for the executive officers are based upon the following principals: (1) incentive compensation should retain key personnel and reward loyal and productive employees, regardless of rank, and (2) individual awards of stock-based compensation should reflect individual performance as well as the importance of retaining such employee to our goal of achieving the Company's then current strategic goals.

Our sole incentive plan is the 2005 Equity Plan, which allows us to grant stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, and other stock-based awards.  Under our 2005 Equity Plan, the Company can issue options to our officers, directors and employees to purchase shares of our Common Stock at an exercise price equal to the fair market value of such stock on the date of grant.  The date of grant for the executives is typically the date of a regularly scheduled board meeting, of which we have at least six (6) per year, but can be made at the time of job performance reviews.

Our Company does not have a program, plan or practice to select option grant dates (or set board meeting dates) to correspond with the release of material non-public information.

The Company does not have an Employee Stock Purchase Plan that provides employees with the opportunity to purchase shares of the Common Stock.  Our practice was to make periodic annual equity grants to our executives.  In determining equity grants for executives, we considered the importance of each employee to accomplishing our strategic goals.

Benefits.  The Company provides the following benefits to our senior executives generally on the same basis as the benefits provided to all employees: (1) health care and dental insurance; and (2) paid personal and vacation leave.

The Compensation and Nominating Committee believes that these benefits are consistent with those offered by other companies and specifically with those companies with which we compete for employees.

By: _____________________________________________

Jeffrey Guzy, Chairman of Compensation Committee

March 20, 2017

CODE OF ETHICS

The Company has a code of ethics that applies to all of the Company's employees, including its principal executive officer, principal financial officer and principal accounting officer, and its Board.  A copy of this code is available on http://www.capstonecompaniesinc.com.  The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Form 8-K Report.

DIRECTOR MEETINGS IN FISCAL YEAR 2016

The Board of Directors had (7) seven official meetings in year 2016.  During 2016, all of the Directors attended 75% or more of all meetings of the Board, which were held during the period of time that such person served on the Board or such committee.

Board Leadership Structure and Board's Role in Risk Oversight

The Company's Board of Directors endorses the view that one of its primary functions is to protect stockholders' interests by providing independent oversight of management, including the Chief Executive Officer and Chief Operating Officer (who also holds the Chief Financial Officer position).  The Chief Financial Officer is allowed and encouraged to address the Board of Directors on any issues affecting the Company or its stockholders.  The Company also allows outside counsel to participate in some of the board meetings in order to provide legal counsel and an outside perspective on corporate governance and risk issues.

Board Structure.  The Company believes that the Chief Executive Officer or "CEO" should also serve as Chairman of the Board of Directors in order to have the person most knowledgeable about the Company heading the Board of Directors.

The CEO is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board of Directors provides guidance to senior management and sets the agenda for Board of Directors meetings and presides over meetings of the full Board of Directors.

Our CEO serves on our Board of Directors, which we believe helps the CEO serve as a bridge between management and the Board of Directors, ensuring that both groups act with a common purpose.  We believe that the CEO's presence on the Board of Directors enhances his ability to provide insight and direction on important strategic initiatives to both management and the independent directors and, at the same time, ensures that the appropriate level of independent oversight is applied to all decisions by the Board of Directors.

The Chairman of the Board has no greater nor lesser vote on matters considered by the Board than any other director, and neither the Chairman nor any other director votes on any related party transaction. All directors of the Company, including the Chairman, are bound by fiduciary obligations, imposed by law, to serve the best interests of the stockholders.  Accordingly, separating the offices of Chairman and Chief Executive Officer would not serve to enhance or diminish the fiduciary duties of any director of the Company.

Board of Director – 2016 Compensation Table

 

(1)	The individuals listed were appointed to the Board of Directors for 2016;

(2)	Mr. Wallach, Mr. McClinton and Mr. Sloven as Company Employees did not receive compensation for participating as a Director on the Board;

(3)

On August 6th, 2015, Mr. Guzy and Mr. Postal each received 100,000 stock option grants for participating in the Audit and Nomination and Compensation Committees for the year 2015-2016.  The market value using the Binomial Lattice pricing model for each grant was $27,000.  As the grant period covered 2015-2016, the cost impact in 2015 was $10,903 for each grant.

(4)

On August 6th, 2016, Mr. Guzy and Mr. Postal each received 100,000 stock option grants for participating in the Audit and Nomination and Compensation Committees for the year 2016-2017.  The market value using the Binomial Lattice pricing model for each grant was $39,000.  As the grant period covered 2016-2017, the cost impact in 2016 was $10,615 for each grant.

 

 

Independent Directors.  The Board of the Company is currently comprised of five directors, one of whom is an independent director under the listing standards of quotation systems like The NASDAQ Stock Market.  The Company has sought unsuccessfully to recruit qualified independent directors.  Although we have D&O insurance, we believe that our chronic losses and chronically low public stock market price discourages qualified candidates from serving as independent directors.  This is a problem commonly faced by micro-cap, "penny stock" companies like our Company.

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success or survival.

The Company faces a number of risks, including, without limit:  (1) low public stock market price, which hinders our ability to fund and grow our business; (2) reliance on regional and national distributors and retailers to sell  our products in a highly competitive market filled with competitors who possess significantly greater resources and market share than our Company; (3) customary operational risks; (4) reliance on key personnel and the lack of key man insurance that pays for replacements; (5) lack of primary markets and lack of institutional support for our publicly traded Common Stock; (6) low market price of our Common Stock hindering our ability to consummate or attract merger and acquisition candidates; (7) lack of assets (other than accounts receivable) to attain commercially reasonable financing for operations; and (8) the risks faced by any product company in today's challenging environment.

We rely on China for the manufacture of our products.  Any conflict between the U.S. and China could disrupt our product supply and force us to find alternative manufacturers.  From time to time, we research the possibility of using non-Chinese manufacturing sources.

Our senior officers are responsible for the day-to-day management of risks the Company faces, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management.  In its risk oversight role, the Board of Directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.  To do this, the Chairman of the Board and other non-officer directors met quarterly on average with management to discuss strategy and the risks facing the Company.  Senior management, each member being also a director, attends the Board meetings and is available to address any questions or concerns raised by the Board on risk management and any other matters.  The Chairman of the Board and members of the Board work together to provide strong, independent oversight of the Company's management and affairs through its standing committees and, when necessary, special meetings of directors.  Since most of the directors are located in the same area, informal meetings between directors and officers also occur to discuss business risk and appropriate responses.

Director - Minimum Qualifications.  The Compensation and Nominating Committee has adopted a set of criteria that it considers when it selects individuals not currently on the Board of Directors to be nominated for election to the Board of Directors.  A candidate must meet the eligibility requirements set forth in the Company's Bylaws.  A candidate must also meet any qualification requirements set forth in any Board or committee governing documents.

If the candidate is deemed eligible for election to the Board of Directors, the Compensation and Nominating Committee will then evaluate the prospective nominee to determine if he or she possesses the following qualifications, qualities or skills:

·	contributions to the range of talent, skill and expertise appropriate for the Board;

·	financial, regulatory and business experience, knowledge of the operations of public companies and ability to read and understand financial statements;

·	familiarity with the Company's market;

·	personal and professional integrity, honesty and reputation;

·	the ability to represent the best interests of the shareholders of the Company and the best interests of the institution;

·	the ability to devote sufficient time and energy to the performance of his or her duties; and

·	independence under applicable Commission and listing definitions.

The Compensation and Nominating Committee will also consider any other factors it deems relevant.  With respect to nominating an existing director for re-election to the Board of Directors, the Compensation and Nominating Committee will consider and review an existing director's Board and committee attendance and performance; length of Board service; experience, skills and contributions that the existing director brings to the Board; and independence.

Director Nomination Process. The process that the Compensation and Nominating Committee follows when it identifies and evaluates individuals to be nominated for election to the Board of Directors is as follows:

For purposes of identifying nominees for the Board of Directors, the Compensation and Nominating Committee relies on personal contacts of the committee members and other members of the Board of Directors, and will consider director candidates recommended by stockholders in accordance with the policy and procedures set forth above.  The Compensation and Nominating Committee has not used an independent search firm to identify nominees.

In evaluating potential nominees, the Compensation and Nominating Committee determines whether the candidate is eligible and qualified for service on the Board of Directors by evaluating the candidate under the selection criteria, which are discussed in more detail below.  If such individual fulfills these criteria, the Compensation and Nominating Committee will conduct a check of the individual's background and interview the candidate to further assess the qualities of the prospective nominee and the contributions he or she would make to the Board of Directors.

Consideration of Recommendation by Stockholders.  It is the policy of the Compensation and Nomination Committee of the Board of Directors of the Company to consider director candidates recommended by stockholders who appear to be qualified to serve on the Company's Board of Directors.  The Compensation and Nominating Committee may choose not to consider an unsolicited recommendation if no vacancy exists on the Board of Directors and the Compensation and Nomination Committee does not perceive a need to increase the size of the Board of Directors.  To avoid the unnecessary use of the Compensation and Nominating Committee's resources, the Compensation and Nomination Committee will consider only those director candidates recommended in accordance with the procedures set forth below.

Stockholder Proposal Procedures.  To submit a recommendation of a director candidate to the Compensation and Nomination Committee, a stockholder should submit the following information in writing, addressed to the Chairperson of the Compensation and Nomination Committee, care of the Corporate Secretary, at the main office of the Company:

1.	The name of the person recommended as a director candidate;

2.	All information relating to such person that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934;

3.	The written consent of the person being recommended as a director candidate to being named in the proxy statement as a nominee and to serving as a director if elected;

4.

The name and address of the stockholder making the recommendation, as they appear on the Company's books; provided, however, that if the stockholder is not a registered holder of the Company's common stock, the stockholder should submit his or her name and address along with a current written statement from the record holder of the shares that reflects ownership of the Company's common stock; and

5.	A statement disclosing whether such stockholder is acting with or on behalf of any other person and, if applicable, the identity of such person.

In order for a director candidate to be considered for nomination at the Company's annual meeting of stockholders, when and if one is held, or to be considered prior to a written consent vote on director nominees, the recommendation must be received by the Compensation and Nominating Committee at least 30 days before the date of the annual meeting or, in the case of an information statement and no shareholder meeting being held, prior to April 1st.

MANAGEMENT OF THE COMPANY

CURRENT OFFICERS. The current officers of the Company are:

1.	Stewart Wallach, age 65, was appointed as Chief Executive Officer and President of the Company on April 23, 2007.  Mr. Wallach is also the senior executive officer and director of Capstone.

2.	Gerry McClinton, age 61, is the Chief Financial Officer and Chief Operating Officer and a director (appointed as a director on February 5, 2008) of the Company. Mr. McClinton is also a senior executive of Capstone.

3.	Aimee Gaudet, age 38, was appointed on January 16, 2013 as Company Secretary.  She is also Executive Assistant to Stewart Wallach at CAPC.

FAMILY RELATIONSHIP:  There is no family relationship between members of Company management.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of securities ownership and changes in such ownership with the SEC.  Executive officers, directors and greater than ten percent stockholders also are required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file.

Based solely upon a review of the copies of such forms furnished to the Company or other written representations, the Company believes that all of Section 16(a) filing requirements were met during fiscal year 2016 by the Company's directors and officers.

Item 11.  Executive Compensation.

Executive Compensation Philosophy, Strategy and Objectives

The principal objectives of our senior officer compensation are to attract, motivate and retain the services of qualified officers who can lead the Company to achieve its business goals and enhance public stockholder value.  The Company's business goals are to achieve consistent profitability in operations and attain long-term profitability.  Our approach is based on the following compensation philosophy, align stockholder and officer interest.  Besides a base salary sufficient to attract qualified personnel, we provide non-qualified, long term stock options to tie the interests of our officers with the interests of the stockholders in long term profitability of the Company.

Performance Based Compensation:  Our grant of options and stock are designed to reward and encourage officers to achieve Company goals in financial and business performance.

Compensation Benchmark - Competitive Market

We have one Independent Director and also professional advisors who check the compensation level of other microcap companies in consumer goods from time to time to ensure that our compensation levels are reasonable.  In 2016, we did benchmark compensation. Previously, compensation was last benchmarked in 2014.  The Independent Director and outside legal counsel reviewed compensation of executives at several peer companies holding equivalent positions or having similar responsibilities as our senior officers.  The peer companies utilized in the 2016 analysis were engaged in some segment of consumer goods and were microcap companies, some having less or greater resources and operating income than our Company.

The companies used for the 2016 benchmark were:

-	Energie Holdings, Inc.

-	Cyalume Technologies Holdings, Inc.

-	Leatt Corp.

-	Lighting Science Group, Inc.

Role of the Compensation and Nominating Committee

The Compensation and Nominating Committee operates independently of management and currently consists of the sole Independent Director, Jeffrey Guzy, who is independent under applicable SEC standards and is an "Outside Director" for purposes of Section 162(m) of the Internal Revenue Code of 1986 (the "Code") and Dr. Jeffrey Postal.  The Compensation and Nominating Committee receives recommendations from our Chief Executive Officer regarding the compensation of the senior officers (other than the Chief Executive Officer).

The Compensation and Nominating Committee is responsible for establishing and implementing our executive compensation plans as well as continually monitoring adherence to and effectiveness of those plans, including:

·	reviewing the structure and competitiveness of our executive compensation programs to attract and retain superior executive officers, motivate officers to achieve business goals and objectives, and align the interests of executive officers with the long-term interests of our shareholders;

·	reviewing and evaluating annually the performance of officers in light of Company goals and objectives and approving their compensation packages, including base salaries (if at issue or in consideration), long-term incentive and stock based compensation and perquisites;

·	monitoring the effectiveness of the Company's sole incentive stock option plan and approving annual financial targets for officers; and

·

determining whether to award incentive bonuses that qualify as "performance-based compensation" for executive officers whose compensation is covered by Code Section 162(m), the elements of such compensation, whether performance goals have been attained and, if appropriate, certifying in writing prior to payment of such compensation that the performance goals have been met.

Role of Management

The Company believes that it is important to have our Chief Executive Officer's input in the design of compensation programs for his direct reports.  The Chief Executive Officer reviews his direct reports' compensation programs annually with the Committee, evaluating the adequacy relative to the marketplace, inflation, internal equity, external competitiveness, business and motivational challenges and opportunities facing the Company and its executives.  In particular, he considers base salary a critical component of compensation to remain competitive and retain his executives.  All final decisions regarding compensation for the Chief Executive Officer's direct reports listed in the Summary Compensation Table are made by the Compensation Committee.  The Chief Executive Officer does not make recommendations with regard to his own compensation.

Role of the Compensation Consultant

While we may consult industry sources on compensation for executives, we have not engaged a consultant to analyze our compensation levels.

For 2016, the principal components of compensation for each officer were:

·	base salary;

·	annual incentive;

·	long-term incentive compensation (restricted stock awards); and

·	perquisites and other benefits.

Our Company endeavors to strike an appropriate balance between long-term and current cash compensation.  The current executives are key to the ability of the Company to conduct its business because of their individual experience and relationships in our current business line.  Their compensation reflects their individual value to the ability of the Company to conduct its current business.

EXECUTIVE COMPENSATION

 

(1)

On February 5, 2016, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $287,163 per annum.  As part of the agreement, the base salary will be reviewed annually by the Compensation Committee for a potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year.

(2)	An amount of $40,233 had been accrued for deferred wages due Stewart Wallach from 2011. This amount was paid in December 2016.

(3)

On February 5, 2016, the Company entered into a new Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum.  As part of the agreement, the base salary will be reviewed annually by the Compensation Committee for a potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year.

(4)	An amount of $572 had been accrued for deferred wages due James McClinton from 2011. This amount was paid in December 2016.

(5)	Each Employment Agreement provided for an annual minimum salary increase of 5% up to year 2015, however Stewart Wallach earned $287,163 in 2015 and Gerry McClinton earned $191,442 in 2015 the same as amounts earned in 2014.

(6)	Although approved for a salary of $301,521, Stewart Wallach earned $287,163 in 2014.

(7)	Although approved for a salary of $201,014, Gerry McClinton earned $191,442 in 2014.

(8)	Although approved for a salary of $260,465, Stewart Wallach took a voluntary salary reduction and earned $180,000 in 2011.

(9)	Although approved for a salary of $248,060, Stewart Wallach took a voluntary salary reduction and earned $186,923 in 2010.

(10)	Although approved for a salary of $173,643, Gerry McClinton took a voluntary salary reduction and earned $146,250 in 2011.

(11)	Although approved for a salary of $165,375, Gerry McClinton took a voluntary salary reduction and earned $124,615. In 2010.

(12)	The Company has no non-equity incentive plans.

(13)	The Company has no established bonus plan.  Any bonus payments are made ad hoc upon recommendation of Compensation Committee and approval by Board of Directors.  Bonuses are only paid on a performance basis.

EMPLOYMENT AGREEMENTS

Stewart Wallach, Chief Executive Officer and President. The 2008 employment agreement provides for an annual salary of $225,000 with a minimum annual increase in base salary of 5%.  Mr. Wallach may, at his option, elect to receive restricted shares of Common Stock in lieu of cash compensation, which shares are subject to piggyback registration rights. In 2015, Mr. Wallach was entitled to a base salary of $316,597, however he earned $287,163. In 2014, Mr. Wallach was entitled to a base salary of $301,521, however he earned $287,163. In 2013 Mr. Wallach was entitled and earned a base salary of $287,163. Mr. Wallach was entitled to and earned $273,488 in base salary for fiscal year 2012.  Mr. Wallach was entitled to a base salary of $260,465 for fiscal year 2011; however, his actual base salary in fiscal year 2011 was $180,000 because of a voluntary salary reduction for 2011. An amount of $40,233 was accrued and is included in the December 31, 2015 consolidated balance sheet as part of accounts payable and accrued expenses for deferred wages from 2011.  This amount was paid on December 9, 2016.

Mr. Wallach was entitled to a base salary of $248,060 for fiscal year 2010; however, his actual base salary in fiscal year 2010 was $186,923 because of a voluntary salary reduction for 2010.

On March 1^st, 2013, the employment agreements which have a three-year term, have been amended for the second time, to extend the term for an additional 3 years (from February 5, 2013 until February 5, 2016).  These employment agreements can be extended by mutual consent of the parties for up to three (3) additional years.  Previously, on February 1, 2011, the employment agreements for Stewart Wallach and Gerry McClinton were extended to February 5, 2013, unanimously approved by the Board of Directors on February 1, 2011.

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

Gerry McClinton, Chief Operating Officer and Chief Financial Officer. The 2008 employment agreement provides for an annual salary of $150,000 with a minimum annual increase in base salary of 5%.  Mr. McClinton may, at his option, elect to receive restricted shares of Common Stock in lieu of cash compensation, which shares are subject to piggyback registration rights. In 2014, Mr. McClinton was entitled to a base salary of $201,014 but earned $191,442. In 2013, Mr. McClinton was entitled to and earned a base salary of $191,442. In 2012, Mr. McClinton was entitled to and earned $182,326. Mr. McClinton was entitled to a base salary of $173,643 in fiscal year 2011; however, his actual base salary in fiscal year 2011 was $146,250 because of a voluntary salary reduction for 2011. An amount of $572 was accrued and is included in the December 31, 2015 consolidated balance sheet as part of accounts payable and accrued expenses for deferred wages from 2011.  This amount was paid on December 9, 2016.

Mr. McClinton was entitled to a base salary of $165,375 in fiscal year 2010; however, his actual base salary in fiscal year 2010 was $124,615 because of a voluntary salary reduction for 2010.

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

Common Provisions in both new Employment Agreements:  The following provisions are contained in each of the above employment agreements:

If the officer's employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer's estate or the officer, as the case may be an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to (a) the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of "merit" based bonuses earned by the Executive during the prior calendar year of his termination.  Any payments owed by the Company shall be paid from a normal payroll account on a bi-weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be payout bi-weekly over the course of the year but at no time will be no more than twenty (26) installments. The Company will also continue to pay the Executive's health and dental insurance benefits for 12 months starting at the Executives date of termination.  If the Executive had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against the Executive's severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment.

The above summary of the employment agreements is qualified by reference to the actual employment agreements, which are filed as exhibits to the Form 10-K by the Company for fiscal year ended December 31, 2016 (as filed by the Company with the Commission on March 27, 2017.

These amended agreements supersede any existing employment agreements and are the only employment agreements with Company officers:

SUMMARY TABLE OF OPTION GRANTS TO OFFICERS OF COMPANY

As of December 31, 2016

OTHER COMPENSATION ⁽¹⁾

FOOTNOTES: (1) There were no 401(k) matching contributions by the Company and no medical supplemental payments by the Company in any of the years specified.

OUTSTANDING EQUITY AWARDS FOR YEAR END 2016 TABLE

Footnotes:

(1)	The Company does not have any stock awards for the years specified.

(2)	Mr. Wallach acquired 117,648 Company warrants on 10/01/2007 as part of $100,000 investment in the Company's 2007 private placement under rule 506 of restricted shares of common stock.

2016 OPTION EXERCISES AND VESTED OPTIONS

POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT

Indemnification.

CAPC has entered into indemnification agreements with its directors and executive officers. Under these agreements, CAPC has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments CAPC could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the CAPC maintains directors and officer's liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

The sole class of voting Common Stock of the Company as of March 10, 2017, that are issued and outstanding is the Common Stock, $0.0001 par value per share, or "Common Stock".  The table below sets forth, as of March 10, 2017, ("Record Date"), certain information with respect to the Common Stock beneficially owned by (i) each Director, nominee and executive officer of the Company; (i) each person who owns beneficially more than 5% of the Common Stock; and (iii) all Directors, nominees and executive officers as a group. There were 48,132,664 shares of Common Stock outstanding on the Record Date

Notes to Table

(1)   Unless otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

(2)  Total shares include 1,515,556 shares that Mr. Wallach has the current right to acquire under a non-qualified stock option and 117,648 shares of Common Stock issuable under the warrants issued to Mr. Wallach as part of his $100,000 investment in Company's 2007 private placement under Rule 506 of restricted shares of Common Stock. Mr. Wallach was appointed Chief Executive Officer and President of the Company on April 23, 2007.

(3)  Total shares include 2,150,000 shares of Common Stock that Mr. McClinton has the current right to acquire under a non-qualified stock option currently dated April 27, 2007.

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

INDEPENDENT DIRECTORS

The Company is a "controlled company" under typical stock exchange corporate governance rules, that is a company where 50% or more of the voting power is owned by a person or a group, and does not currently have to meet requirements for a board of directors with a majority of "independent directors."  Currently, only Jeffrey Guzy qualifies as an "independent director" under the listing standards of most stock exchanges or quotation systems.  No other director qualifies as an "independent director" under those rules because they are officers of the Company or have business relationships with the Company.

The CAPC Board adopted a written policy for approval of transactions between the Company and its directors, director nominees, executive officers, greater than 5% beneficial owners and their respective immediate family members.  The policy governs transaction in which the value exceeds or is expected to exceed $120,000 in a single calendar year.

The policy provides that the Audit Committee reviews transactions subject to the policy and determines whether or not to approve or ratify those transactions.  The Audit Committee takes into account, among other factors it deems appropriate, the following factors:

·	Benefits derived by the related person from the transaction versus the benefits derived by the Company;

·	Total value of the transaction;

·	Whether the transaction was undertaken in the ordinary course of business of the Company; and

·	Were the terms and conditions of the transaction usual and customary and commercially reasonable.

The Audit Committee does not have any policies on expedited or pre-approval of certain routine related person transactions.

From time to time, the Company borrows working capital on a short-term basis, usually with maturity dates of less than a year, from Company directors and officers.  The Company believes that these working capital loans are commercially reasonable, especially in light of the inability of the Company to obtain such short-term financing from traditional funding sources.  A summary of the current working capital loans from Company officers and directors is set forth below.

On September 19, 2016, the disinterested directors of the Board of Directors of the Company approved the use of up to $750,000 dividend distribution from Capstone Industries, Inc., a Florida corporation and a wholly owned subsidiary of the Company, to pay down working capital loans made by Stewart Wallach and Jeffrey Postal to the Company.  Mr. Wallach is the Chief Executive Officer and Chairman of the Board of Directors of the Company and Mr. Postal is a director of the Company. The proposed use of the cash dividend was also approved by disinterested directors of the Company under the Company's related party transaction guidelines. After the pay down, the remaining loans will have an aggregate outstanding principal balance of $998,000.

Item 14.  Principal Accountant Fees & Services

The following is a summary of the fees billed to us by CBIZ and Mayer Hoffman McCann P.C. for professional services rendered for the years ended December 31, 2016 and 2015:

Audit Fees.  Consists of fees billed for professional services rendered for the audits of our consolidated financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the Commission and related comfort letters and other services that are normally provided by the Independent Registered firm in connection with statutory and regulatory filings or engagements.

Tax Fees.  Consists of fees billed for professional services for tax compliance, tax advice and tax planning.  These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.

MHM has advised us that MHM leases substantially all of its personnel, who work under the control of MHM's shareholders, from wholly-owned subsidiaries of CBIZ, Inc., in an alternative practice structure. Accordingly, substantially all of the hours expended on MHM's engagement to audit our consolidated financial statements for the year ended December 31, 2016 were attributed to work performed by persons other than MHM's fulltime, permanent employees.

AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS

The Audit Committee is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services as allowed by law or regulation.  Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specifically approved amount.  The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval and the fees incurred to date.  The Audit Committee may also pre-approve particular services on a case-by-case basis.

The Audit Committee pre-approved 100% of the Company's 2016 audit fees, audit-related fees, tax fees, and all other fees to the extent the services occurred after the effective date of the SEC's final pre-approval rules.

Part IV

Item 15.  Exhibits, and Reports on Form 8-K

(a) The following documents are filed as part of this Report.

1.  FINANCIAL STATEMENTS

F-1 Report of Independent Registered Public Accountants

F-2 Consolidated Balance Sheets as of December 31, 2016, and 2015

F-3 Consolidated Statements of Income for the Years ended December 31, 2016 and 2015

F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2016 and 2015

F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2016 and 2015

F-6 Notes to Consolidated Financial Statements

2. FINANCIAL STATEMENT SCHEDULES

All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

3. EXHIBITS

Exhibits Required by Item 601 of Regulation S-K. Pursuant to the Instructions to Exhibits, certain instruments defining the rights of holders of long-term debt securities of the Company and its consolidated subsidiaries are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis.  A copy of such instrument will be furnished to the Securities and Exchange Commission upon request.

 

2.1	Stock Purchase Agreement dated September 15, 2006, by and between CHDT Corporation, and Capstone Industries, Inc.
	Incorporated by reference to Exhibit 2.1 to the Form 8-K filed by CHDT Corporation with the Commission on September 18, 2006.
3.1	Articles of Incorporation of CHDT Corp. Incorporated by reference to Annex G to the Special Meeting Proxy Statement, Dated April 15, 2004, filed by CHDT Corporation with the Commission on April 20, 2004.
3.1.1	Amended and Restated Articles of Incorporation of Capstone Companies, Inc. Incorporated by reference to Exhibit 3.1 to Form 8-K filed by Capstone Companies, Inc. with the Commission on July 14, 2009.
3.1.1.1	Amendment to Amended and Restated Articles of Incorporation of Capstone Companies, Inc., as filed with Florida Secretary of State on June 8, 2016.  Incorporated by reference to Exhibit 3.1 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on June 6, 2016.
3.2	By-laws of Capstone Companies, Inc.  Incorporated by reference to Annex H the Special Meeting Proxy Statement, Dated April 15, 2004, filed by CHDT Corporation with the Commission on April 20, 2004.
3.3	Certificate of Designation of the Preferences, Limitations, and Relative Rights of Series B Convertible Preferred Stock of CHDT Corp. Incorporated by reference to Exhibit 99.2 to the Form 8-K filed by CHDT Corp. with the Commission on November 6, 2007.
10.1	Purchase Agreement, dated December 1, 2007, by Capstone Industries, Inc. and Magnet World, Ltd. for sale of operating assets of Souvenir Direct, Inc. Incorporated by reference to Exhibit 99 to the Form 8-K filed by CHDT Corp. with the Commission on December 3, 2007.
10.2	2005 Equity Plan of CHDT Corp. Incorporated by reference to Exhibit 10.6 to the Form 10-K filed by CHDT Corp. for the fiscal year ended December 31, 2007 and filed with the Commission on March 31, 2008.
10.3	2016 Employment Agreement by Stewart Wallach and Capstone Companies, Inc. Incorporated by reference to Exhibit 10.7 to the Form 10-K for fiscal year ended December 31, 2016 and filed by Capstone Companies, Inc. with the Commission on March  23, 2016.
10.4	2016 Employment Agreement by James Gerald (Gerry) McClinton and Capstone Companies, Inc. Incorporated by reference to Exhibit 10.8 to the Form 10-K for fiscal year ended December 31, 2016 and filed by Capstone Companies, Inc. with the Commission on March 23, 2016.

 

 

10.5	Working Capital Loan Agreement, dated April 1, 2012, between Capstone Companies, Inc. and Postal Capital Funding, L.L.C. Incorporated by reference to Exhibit 10.1 to Form 8-K filed by Capstone Companies, Inc. with the Commission on April 6, 2012.
10.6	Option Agreement, dated June 27, 2016, by Capstone Companies, Inc. and Involve, LLC. Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
10.7	Promissory Note, dated June 27, 2016, by Neil Singer in favor of Capstone Companies, Inc. Incorporated by reference to Exhibit 10.2 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
10.8	Subordination Agreement, dated June 27, 2016, by Capstone Companies, Inc. and Koch Minerals, LLC. Incorporated by reference to Exhibit 10.3 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
10.9	Securities Purchase Agreement, dated June 27, 2016, by Capstone Companies, Inc., Neil Singer and AC Kinetics, Inc. Incorporated by reference to Exhibit 10.4 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
10.10	Termination Agreement, dated June 27, 2016, by Capstone Companies, Inc. and AC Kinetics, Inc. Incorporated by reference to Exhibit 10.5 to the Form 8-K filed by Capstone Companies, Inc. with the Commission on July 12, 2016.
14	Code of Ethics Policy, dated December 31, 2006.  Incorporated by reference to Exhibit 14 to the Form 10-KSB for the fiscal year ended December 31, 2006 and filed by CHDT Corp. with the Commission on April 17, 2007.
21.1	Subsidiaries of Capstone Companies, Inc. ^
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Stewart Wallach, Chief Executive Officer^
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Gerry McClinton, Chief Financial Officer and Chief Operating Officer^
32.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Stewart Wallach, Chief Executive Officer. ^
32.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Gerry McClinton, Chief Financial Officer & Chief Operating Officer^

Note:  CHDT Corp. is a prior name of Capstone Companies, Inc.

^	Filed Herein.

(b) Reports on Form 8-K filed.

The following Exchange Act reports were filed during the 2016 year: Form 8-K, filed December 22, 2016; Form 8-K/A, filed November 18, 2016; Form 8-K, filed November 1, 2016; Form 8-K, filed September 20, 2016; Form 8-K, filed August 29, 2016;

Form 8-K, filed August 16, 2016; Form 8-K, filed July 25, 2016; Form 8-K, filed July 12, 2106; Form 8-K, filed June 8, 2016; Form 8-K, filed May 19, 2016; Form 8-K, filed May 18, 2016; Form 8-K/A, filed March 31, 2016; and Form 8-K, filed March 11, 2016.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Capstone Companies, Inc. has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Broward County, Florida on this 27th day of March 2017.

CAPSTONE COMPANIES, INC.

Dated:   March 27, 2017

By:  /s/ Stewart Wallach

Stewart Wallach

Chief Executive Officer and Director

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of Capstone Companies, Inc. and in the capacities and on the dates indicated.

Stewart Wallach

Principal Executive Officer

Director and Chief Executive Officer

March 27, 2017

Gerry McClinton

Chief Financial Officer

Chief Operating Officer and Director

March 27, 2017

Jeffrey Guzy

Director

March 27, 2017

Jeffrey Postal

Director

March 27, 2017

Larry Sloven

Director

March 27, 2017

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

We have audited the accompanying consolidated balance sheets of Capstone Companies, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capstone Companies, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ Mayer Hoffman McCann P.C.

Boca Raton, Florida

March 27, 2017

 

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